Economics, 14th Canadian Edition, Testbank [14 ed.]

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Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements provides the best definition of economics? A) The study of the most equitable distribution of scarce resources. B) The study of the use of scarce resources to satisfy unlimited human wants. C) The study of the production of goods and services. D) The study of the productive capacity of a nation's factors of production. E) The study of production and increasing its efficiency. Answer: B Explanation:

A) B) C) D) E)

2) Society's resources are often divided into broad categories. They are A) goods and services. B) factors of consumption. C) land, labour, and capital. D) population and natural resources. E) tangible commodities and intangible commodities. Answer: C Explanation:

2)

A) B) C) D) E)

3) Consider the following list: a worker with training in video gaming technology, 10 hectares of arable land in southern Ontario, a fishing trawler in Nova Scotia, an ice-cream truck at a park in Quebec. Each of these is an example of A) a factor of production. B) a capital resource. C) a commodity. D) goods and services. E) an economic service. Answer: A Explanation:

1)

A) B) C) D) E)

1

3)

4) A basic underlying point in economics is that A) people have unlimited wants in the face of limited resources. B) there are unlimited resources. C) governments should satisfy the needs of the people. D) people have limited wants in the face of limited resources. E) governments should never interfere in the workings of a market economy. Answer: A Explanation:

A) B) C) D) E)

5) Which of the following best describes the study of economics? A) how to plan an economy B) how to limit human wants so that scarce resources are sufficient C) why resources are scarce D) the allocation of scarce resources among alternative uses E) how to distribute income as equally as possible Answer: D Explanation:

6)

A) B) C) D) E)

7) Scarcity is likely to be A) a problem that will be solved by the proper use of available resources. B) unique to the twentieth century. C) a problem that will always exist. D) a result of the work ethic. E) eliminated with a better understanding of economics. Answer: C Explanation:

5)

A) B) C) D) E)

6) Economics can best be described as A) the study of how a society ought to allocate its resources. B) the study of the use of scarce resources to satisfy unlimited human wants. C) the application of sophisticated mathematical models to address social problems. D) a normative science. E) the study of how to reduce inflation and unemployment. Answer: B Explanation:

4)

A) B) C) D) E)

2

7)

8) The concept of scarcity in economics usually refers to a condition A) where society is not employing all of its available resources in an efficient manner. B) where people's wants can never be satisfied by the available resources. C) that afflicts only poor countries. D) where too many frivolous goods and services are produced at the expense of socially desirable goods and services. E) where production is efficient, but distribution is inefficient. Answer: B Explanation:

A) B) C) D) E)

9) Which of the following statements best describes the underlying feature in most economic problems? A) People have unlimited wants in the face of limited resources. B) There are unlimited resources. C) Our country is rich; we just don't realize it. D) People have limited wants in the face of limited resources. E) Governments should never interfere in the workings of a market economy. Answer: A Explanation:

9)

A) B) C) D) E)

10) Because resources are scarce, individuals are required to A) make choices among alternatives. B) use resources inefficiently. C) sacrifice production but not consumption. D) improve distribution but not production. E) improve production but not distribution. Answer: A Explanation:

8)

A) B) C) D) E)

3

10)

FIGURE 1-1 With a budget of $200 million, the government can choose to purchase 4 helicopters or repair 200 km of highway. 11) Refer to Figure 1-1. For the government, the opportunity cost of one search and rescue helicopter is A) 0 kilometres of highway repair. B) 50 kilometres of highway repair. C) 100 kilometres of highway repair. D) 150 kilometres of highway repair. E) 200 kilometres of highway repair. Answer: B Explanation:

A) B) C) D) E)

12) Refer to Figure 1-1. For the government, the opportunity cost of one kilometre of highway repair is A) 1 search and rescue helicopter. B) 1/2 of a search and rescue helicopter. C) 1/10 of a search and rescue helicopter. D) 1/50 of a search and rescue helicopter. E) 1/100 of a search and rescue helicopter. Answer: D Explanation:

11)

A) B) C) D) E)

4

12)

13) Refer to Figure 1-1. If the government chooses to allocate all $200 million to highway repair, we can say that A) the opportunity cost of the highway repair is uncertain. B) the opportunity cost of the highway repair is $0. C) the opportunity cost of the highway repair is 4 search and rescue helicopters. D) there is no opportunity cost involved because the government has achieved its objectives. E) there is no opportunity cost involved because the government stayed within its budget. Answer: C Explanation:

A) B) C) D) E)

14) Refer to Figure 1-1. Which of the following combinations of kilometres of highway repair and helicopters is unaffordable, given the government's budget of $200 million? A) B B) D C) E D) F E) G Answer: E Explanation:

13)

A) B) C) D) E)

5

14)

With a budget of $500 000, a school board can choose to purchase 20 000 textbooks or 2000 laptop computers (or some intermediate combination) for use in classrooms.

Figure 1-2 15) Refer to Figure 1-2. For the school board, what is the opportunity cost of one additional laptop computer? A) 0 textbooks B) 1/10 of a textbook C) 10 textbooks D) 20 textbooks E) 2000 textbooks Answer: C Explanation:

A) B) C) D) E)

16) Refer to Figure 1-2. For the school board, what is the opportunity cost of one additional textbook? A) 2000 laptops B) 1000 laptops C) 1/100 of a laptop D) 1/1000 of a laptop E) 1/10 of a laptop Answer: E Explanation:

15)

A) B) C) D) E)

6

16)

17) Refer to Figure 1-2. Suppose the school board chooses to allocate all $500 000 to the purchase of laptop computers. What is the opportunity cost of this entire purchase? A) The opportunity cost is 2000 laptops. B) The opportunity cost is 20,000 textbooks. C) The opportunity cost is uncertain. D) The opportunity cost is $0. E) There is no opportunity cost because the purchase was made within the available budget. Answer: B Explanation:

A) B) C) D) E)

18) Refer to Figure 1-2. Which of the following combinations of textbooks and laptops is unaffordable, given the school board's budget of $500 000? A) A B) B C) C D) D E) E Answer: D Explanation:

19) E) $250

A) B) C) D) E)

20) Refer to Figure 1-2. What is the price of a laptop computer in this example? A) $25 B) $40 C) $50 D) $100 Answer: E Explanation:

18)

A) B) C) D) E)

19) Refer to Figure 1-2. What is the price of a textbook in this example? A) $25 B) $40 C) $50 D) $100 Answer: A Explanation:

17)

A) B) C) D) E)

7

20) E) $250

The table below illustrates that, in one day, Tristan can produce either 12 fishing lures or mow 3 lawns, while Thomas can produce either 6 fishing lures or mow 6 lawns. Fishing Lures Mowed Lawns 12 3 6 6

Tristan Thomas TABLE 1-1

21) Refer to Table 1-1. What is Tristan's opportunity cost of producing one fishing lure? A) one mowed lawn B) 3 mowed lawns C) 1/3 of a mowed lawn D) 1/4 of a mowed lawn E) 4 mowed lawns Answer: D Explanation:

A) B) C) D) E)

22) Refer to Table 1-1. What is Thomas's opportunity cost of producing one fishing lure? A) 5 lures B) 1 mowed lawn C) 1/6 of a lure D) 1/6 of a mowed lawn E) there is no opportunity cost Answer: B Explanation:

22)

A) B) C) D) E)

23) Refer to Table 1-1. What is Tristan's opportunity cost of producing one mowed lawn? A) one fishing lure B) 3 fishing lures C) 4 fishing lures D) 6 fishing lures E) 12 fishing lures Answer: C Explanation:

21)

A) B) C) D) E)

8

23)

24) Refer to Table 1-1. What is Thomas's opportunity cost of producing one mowed lawn? A) 0 fishing lures B) 1/6 fishing lure C) one fishing lure D) 6 fishing lures E) 12 fishing lures Answer: C Explanation:

A) B) C) D) E)

25) Refer to Table 1-1. If Tristan and Thomas want to maximize their joint output from one day of work, how should they specialize their production? A) Tristan produces 3 mowed lawns; Thomas produces 6 mowed lawns B) Tristan produces 6 lures; Thomas produces 6 lures C) Tristan produces 6 lures and 3 mowed lawns D) Tristan produces 12 lures; Thomas produces 6 mowed lawns E) Tristan produces nothing, Thomas produces 6 lures and 6 mowed lawns Answer: D Explanation:

25)

A) B) C) D) E)

26) Refer to Table 1-1. Which of the following statements about Tristan's and Thomas's opportunity costs is correct? A) Tristan has a higher opportunity cost of producing mowed lawns. B) Thomas has a higher opportunity cost of producing mowed lawns. C) Tristan has a higher opportunity cost of producing fishing lures. D) Thomas has a higher opportunity cost of producing fishing lures. E) Both A and D are correct. Answer: E Explanation:

24)

A) B) C) D) E)

9

26)

Madeleine allows herself $100 per month for purchasing coffee. The diagram below illustrates the choices available to her.

FIGURE 1-3 27) Refer to Figure 1-3. For Madeleine, the opportunity cost of one regular coffee is A) 1/4 of a regular coffee. B) 20 lattes. C) 4 lattes. D) 1/4 of a latte. E) 80 lattes. Answer: D Explanation:

A) B) C) D) E)

28) Refer to Figure 1-3. For Madeleine, the opportunity cost of one latte is A) 1/4 of a regular coffee. B) 1/4 of a latte. C) 8 regular coffees. D) 80 regular coffees. E) 4 regular coffees. Answer: E Explanation:

27)

A) B) C) D) E)

10

28)

29) Refer to Figure 1-3. If Madeleine chooses to allocate all $100 to buying lattes, we can say that her opportunity cost in one month is A) zero because she bought what she desired. B) zero because she stayed within her budget. C) 80 cups of regular coffee. D) 40 cups of regular coffee. E) 20 cups of regular coffee. Answer: C Explanation:

A) B) C) D) E)

30) Refer to Figure 1-3. Which of the following combinations of regular coffees and lattes is affordable over the one-month period, given Madeleine's budget? A) 15 lattes and 30 coffees B) 16 lattes and 16 coffees C) 8 lattes and 50 coffees D) 4 lattes and 66 coffees E) 20 lattes and 80 coffees Answer: B Explanation:

29)

A) B) C) D) E)

11

30)

The table below shows that, in one day, Claire can complete either 3 chemistry or 2 biology lab reports, while Sam can complete either 4 chemistry or 3 biology lab reports. Chemistry Lab Reports 3 4

Claire Sam

Biology Lab Reports 2 3

TABLE 1-2 31) Refer to Table 1-2. What is Claire's opportunity cost of completing 1 chemistry lab report? 2 A) of a biology lab report 3 B) 1 C)

31)

1 biology lab reports 2

3 of a biology lab report 4

D) 2 biology lab reports E) 3 biology lab reports Answer: A Explanation:

A) B) C) D) E)

32) Refer to Table 1-2. What is Sam's opportunity cost of completing 1 chemistry lab report? A) 4 of a biology lab report B) 3 of a biology lab report 2 C) of a biology lab report 3 D)

4 of a biology lab report 3

E)

3 of a biology lab report 4

Answer: E Explanation:

A) B) C) D) E)

12

32)

33) Refer to Table 1-2. What is Sam's opportunity cost of completing 3 biology lab reports? A) 0 chemistry lab reports B) 1 chemistry lab reports C) 2 chemistry lab reports D) 3 chemistry lab reports E) 4 chemistry lab reports Answer: E Explanation:

A) B) C) D) E)

34) Refer to Table 1-2. What is Sam's opportunity cost of completing 2 biology lab reports? 1 A) 1 chemistry lab reports 3 B)

3 of a chemistry lab report 4

C)

2 of a chemistry lab report 3

D) 2

33)

34)

2 chemistry lab reports 3

E) 4 chemistry lab reports Answer: D Explanation:

A) B) C) D) E)

35) Refer to Table 1-2. Which of the following statements about Claire's and Sam's opportunity costs is correct? A) Claire has a higher opportunity cost for completing 1 biology lab report. B) Sam has a higher opportunity cost for completing 1 biology lab report. C) Claire has a higher opportunity cost for completing 1 chemistry lab report. D) Sam has a lower opportunity cost for completing 1 chemistry lab report. E) Claire and Sam have equal opportunity costs. Answer: A Explanation:

A) B) C) D) E)

13

35)

36) Scarcity arises from limited resources. For this reason, all economic choices involve A) a value judgement. B) pride. C) an opportunity cost. D) complementary ends. E) greed. Answer: C Explanation:

A) B) C) D) E)

37) The opportunity cost of going to college or university for four years is A) equal to the wage rate a person will earn after graduation. B) the least valued alternative one forfeits to attend. C) the cost of tuition and books and four years of lost wages from employment. D) the cost of tuition, residence fees and books. E) zero. Answer: C Explanation:

38)

A) B) C) D) E)

39) The opportunity cost of producing good A is defined to be A) the money cost of the factors of production used in good A. B) the retail price of good A. C) the cheapest method of producing good A. D) what must be sacrificed of other goods to get an additional unit of good A. E) the cost of having to get by using something else in place of good A. Answer: D Explanation:

37)

A) B) C) D) E)

38) Suppose there are only three alternatives to attending a "free" social event: read a novel (you value this at $10), go to work (you could earn $20), or watch videos with some friends (you value this at $25). The opportunity cost of attending the social event is A) $10. B) $20. C) $25. D) $45. E) $55. Answer: C Explanation:

36)

A) B) C) D) E)

14

39)

40) Suppose that one unit of labour can produce either 5 units of wool or 2 pineapples. What is the opportunity cost of producing 1 pineapple? A) 5 units of wool B) 2 units of wool C) 2/5 unit of wool D) 5/2 units of wool E) zero Answer: D Explanation:

A) B) C) D) E)

41) A small landscaping firm purchases a tractor that, in one day, is capable of drilling 60 fence-post holes or removing 12 tree stumps (or some intermediate combination). For this landscaper, what is the opportunity cost of removing one extra tree stump? A) 1/12th of the cost of the tractor B) 1/5 of the cost of the tractor C) drilling 12 fence-post holes D) drilling 5 fence-post holes E) there is no opportunity cost Answer: D Explanation:

42)

A) B) C) D) E)

43) Suppose that a bakeshop with 5 employees can produce both pies and cakes. In one day, if all resources are devoted to baking pies, the shop can produce 125 pies; if all resources are devoted to baking cakes, the shop can produce 50. What is the shop's opportunity cost of producing any one pie? A) 125 pies B) 0.4 cakes C) 2.5 pies D) 0.4 pies E) 50 cakes Answer: B Explanation:

41)

A) B) C) D) E)

42) Suppose that a bakeshop with 5 employees can produce both pies and cakes. In one day, if all resources are devoted to baking pies, the shop can produce 125 pies; if all resources are devoted to baking cakes, the shop can produce 50. What is the shop's opportunity cost of producing any one cake? A) 0.4 pies B) 0.25 pies C) 2.5 pies D) 0.4 cakes E) 2.5 cakes Answer: C Explanation:

40)

A) B) C) D) E) 15

43)

44) Katie and Hugh are producing pies and jars of pickles. Katie can produce either 200 jars of pickles or 100 pies per month. Hugh can produce either 800 jars of pickles or 200 pies per month. Which of the following statements is correct? A) Katie's opportunity cost of producing 1 jar of pickles is 2 pies. B) Katie's opportunity cost of producing 1 jar of pickles is 1/2 of a pie. C) Hugh's opportunity cost of producing 1 jar of pickles is 4 pies. D) Hugh's opportunity cost of producing 1 pie is 1/4 jar of pickles. E) Hugh's and Katie's opportunity costs of producing are the same. Answer: B Explanation:

A) B) C) D) E)

45) Suppose Andrea has a job that pays her $25 000 per year (after taxes). She is considering quitting her job and going to university full time for four years. Tuition fees and books will cost $12 000 per year. Living expenses in either situation will cost $10 000 per year. What is the opportunity cost of Andrea's four-year university degree? A) $88 000 B) $100 000 C) $120 000 D) $148 000 E) $188 000 Answer: D Explanation:

45)

A) B) C) D) E)

46) It has been observed that university enrollment in Canada is higher during periods of high unemployment. A possible explanation for this is that A) when prospects for getting a job are poor, the opportunity cost of getting a job is lower. B) when prospects for getting a job are poor, the opportunity cost of doing nothing is higher. C) during periods of high unemployment, tuition fees are reduced. D) during periods of high unemployment, the opportunity cost is no longer relevant. E) when prospects for getting a job are poor, the opportunity cost of going to university is lower. Answer: E Explanation:

44)

A) B) C) D) E)

16

46)

47) Chantal has a full-time job as a geological engineer and earns an annual after-tax salary of $85 000. She decides to leave her job for 6 months to scuba dive on the Great Barrier Reef in Australia, and incurs costs of $7500 for course equipment and certification, $2500 for airfare, and $12 000 for regular living expenses in Australia (equal to her living expenses at home). What is Chantal's opportunity cost for this 6-month, unpaid leave of absence? A) $12 000 B) $22 000 C) $42 000 D) $52 500 E) $65 000 Answer: D Explanation:

A) B) C) D) E)

48) During economic recessions, the opportunity cost of going to university ________ because the wages a student can expect to earn working in the best alternative ________. A) increases; decrease B) decreases; increase C) increases; increase D) decreases; decrease E) remains the same; remain the same Answer: D Explanation:

48)

A) B) C) D) E)

49) A country's production possibilities boundary shows that A) when a society combines its resources efficiently, it cannot produce more of one good without producing less of the other good. B) when a society combines its resources inefficiently, it cannot produce more of one good without producing less of the other good. C) when a society combines its resources efficiently, it is always possible to produce more of all goods. D) all points inside the boundary are preferred to all points on the boundary. E) the supply for goods always exceeds the demand. Answer: A Explanation:

47)

A) B) C) D) E)

17

49)

50) Consider a production possibilities boundary showing the possible combinations of military goods and civilian goods that a country can produce. Suppose that the country is currently at a point on the boundary. If the production of military goods is increased, the production of civilian goods will necessarily A) decrease. B) remain the same. C) increase. D) increase at a decreasing rate. E) increase at a increasing rate. Answer: A Explanation:

A) B) C) D) E)

51) A point lying inside the production possibilities boundary is one at which A) there is no scarcity. B) the opportunity cost of producing more output is negative. C) it is not possible to produce more output with existing resources. D) the economy has run out of resources. E) more output could be produced with existing resources. Answer: E Explanation:

51)

A) B) C) D) E)

52) If a country's production possibilities boundary is drawn as a straight (downward-sloping) line it indicates A) decreasing opportunity cost of producing more of either good. B) the use of the scarce resources in an economy. C) constant opportunity cost of producing more of either good. D) an unfair distribution of resources in an economy. E) increasing opportunity cost of producing more of either good. Answer: C Explanation:

50)

A) B) C) D) E)

18

52)

The diagram below shows two production possibilities boundaries for Country X.

FIGURE 1-4 53) Refer to Figure 1-4. The production possibilities boundaries are drawn concave to the origin. What does this shape of the PPB demonstrate? A) the decreasing opportunity cost of producing more of either good B) the scarcity of resources in the economy C) the constant opportunity cost of producing more of either good D) the unfair distribution of resources in the economy E) the increasing opportunity cost of producing more of either good Answer: E Explanation:

A) B) C) D) E)

54) Refer to Figure 1-4. If Country X, constrained by the production possibilities boundary PPB1 , is producing the combination of goods indicated at point F, it can produce more consumer goods by moving to one of the points A) A or E. B) D or E C) A, B, or C. D) A or B, but not C. E) A, B, C, D, or E. Answer: C Explanation:

53)

A) B) C) D) E)

19

54)

55) Refer to Figure 1-4. If Country X is currently producing at point A, it could move to point B if A) the cost of producing capital goods were to increase. B) some resources were switched from the capital goods industries to the consumer goods industries. C) the cost of producing consumer goods were to increase. D) some resources were switched from the consumer goods industries to the capital goods industries. E) Country X is no longer able to produce the quantity of capital goods at point A. Answer: B Explanation:

A) B) C) D) E)

56) Refer to Figure 1-4. If Country X were producing at point C, A) the opportunity cost of moving to point B is to give up some consumption goods. B) the opportunity cost of moving to point A is zero. C) the opportunity cost of moving to point A is to give up some capital goods. D) this is the maximum output possible from given resources. E) it is not possible to move to any point on PPB1 or PPB2 without technological progress. Answer: B Explanation:

57)

A) B) C) D) E)

58) Refer to Figure 1-4. If Country X, constrained by the production possibilities boundary PPB1 , is currently producing at point A, it can produce more capital goods by moving to point A) F. B) E. C) D. D) C. E) B. Answer: A Explanation:

56)

A) B) C) D) E)

57) Refer to Figure 1-4. At point B, A) the price of capital goods is higher than the price of consumer goods. B) Country X is producing too many consumer goods and too few capital goods. C) the price of consumer goods is equal to the price of capital goods. D) the opportunity cost of producing an extra unit of capital goods is higher than at point A. E) the opportunity cost of producing an extra unit of consumer goods is higher than at point A. Answer: E Explanation:

55)

A) B) C) D) E)

20

58)

59) Refer to Figure 1-4. Suppose that Country X is currently producing at point E. Country X could achieve production at point D if A) the given resources were fully employed. B) the given resources were more efficiently employed. C) sufficient improvements in technology occurred in either the capital goods industry or the consumer goods industries. D) firms reduced output of capital goods. E) the prices of capital goods and consumption goods fell. Answer: C Explanation:

59)

A) B) C) D) E)

60) Refer to Figure 1-4. A shift of the production possibilities boundary from PPB1 to PPB2 implies

60)

A) a movement from full employment to some unemployment. B) that if point E is the new choice of outputs, productivity has increased in the consumer goods industry. C) that technology in the capital goods industries has improved. D) an inevitable decrease in total output. E) that technology in the consumer goods industry has improved. Answer: C Explanation:

A) B) C) D) E)

61) Refer to Figure 1-4. Growth in the country's productive capacity is illustrated by A) a point like D outside the boundary. B) a movement from a point inside the boundary such as C to the boundary. C) the movement between points on a given boundary. D) a single point such as A on the boundary. E) an outward shift of the boundary, for example from PPB1 to PPB2 . Answer: E Explanation:

A) B) C) D) E)

21

61)

FIGURE 1-5 62) Refer to Figure 1-5. Suppose that the relevant production possibilities boundary is the one labelled B. This boundary implies that A) the concept of opportunity cost is not at work in this economy. B) the opportunity cost of producing either capital goods or consumer goods does not depend on how much of each good is produced. C) consumer goods are preferred to capital goods. D) in this society the resources are not efficiently employed. E) capital goods are preferred to consumer goods. Answer: B Explanation:

A) B) C) D) E)

63) Refer to Figure 1-5. Which production possibilities boundaries are consistent with increasing opportunity costs? A) boundary A only B) boundaries A and B C) boundary C only D) boundaries B and C E) boundaries A, B, and C Answer: C Explanation:

62)

A) B) C) D) E)

22

63)

64) Refer to Figure 1-5. Which production possibilities boundaries exhibit decreasing opportunity costs? A) boundary B only B) boundaries A and C C) boundaries A and B D) boundary A only E) boundary C only Answer: D Explanation:

A) B) C) D) E)

65) If there is always a three-for-one trade-off between the production of goods X and Y, then the production possibilities boundary for X and Y is A) a downward-sloping curve convex to the origin. B) semi-circular. C) a downward-sloping straight line. D) a downward-sloping straight line that is broken at one point. E) a downward-sloping curve concave to the origin. Answer: C Explanation:

65)

A) B) C) D) E)

66) On a diagram of a production possibilities boundary, the concept of scarcity is illustrated by the A) points on the boundary. B) area within the boundary. C) distance from the origin to the boundary. D) negative slope of the boundary. E) unattainable points outside the boundary. Answer: E Explanation:

64)

A) B) C) D) E)

23

66)

67) On a diagram of a production possibilities boundary, the concept of opportunity cost is illustrated by the A) distance from the origin to the boundary. B) negative slope of the boundary. C) boundary being concave to the origin. D) unattainable points outside the boundary. E) area bounded by the two axes and the boundary. Answer: B Explanation:

A) B) C) D) E)

68) A straight-line production possibilities boundary differs from a concave boundary in which of the following ways? A) The straight-line boundary illustrates constant opportunity costs, whereas the concave boundary illustrates increasing opportunity costs. B) The concave boundary illustrates constant opportunity costs, whereas the straight-line boundary illustrates decreasing opportunity costs. C) The straight-line boundary does not show scarcity, whereas the concave boundary does. D) The straight-line boundary shows opportunity cost, whereas the concave boundary does not. E) A straight-line boundary is associated with a command economy, whereas a concave boundary is associated with a free-market economy. Answer: A Explanation:

68)

A) B) C) D) E)

69) Consider Canada's production possibilities boundary. Suppose a scientific breakthrough leads to a lower-cost method of producing battery-operated cars in Canada. The likely effect would be to move Canada's current production A) to a point beyond its new production possibilities boundary. B) to a point inside its new production possibilities boundary. C) possibilities boundary outward. D) possibilities boundary inward. E) above the level of U.S. production. Answer: C Explanation:

67)

A) B) C) D) E)

24

69)

70) Consider Canada's production possibilities boundary. Suppose fire destroys many millions of hectares of valuable Canadian forest. The effect on the Canadian economy would be best illustrated by ________ the production possibilities boundary. A) a movement inside B) a movement along C) a movement to a point beyond D) a shift outward of E) an inward shift of Answer: E Explanation:

A) B) C) D) E)

71) Consider Canada's production possibilities boundary. During the nineteenth and early twentieth centuries, millions of people immigrated to western Canada. The effect on the Canadian economy was to A) move it beyond its new production possibilities boundary. B) move it inside its new production possibilities boundary. C) shift its production possibilities boundary inward. D) shift its production possibilities boundary outward. E) move it along an unchanged production possibilities boundary. Answer: D Explanation:

71)

A) B) C) D) E)

72) In recent years, several large Canadian-owned mining and resource companies have been sold to foreign owners. The immediate effect on Canada's production possibilities boundary is A) a shift outward. B) a shift inward. C) no change. D) a movement along. E) a movement to a point beyond the boundary. Answer: C Explanation:

70)

A) B) C) D) E)

25

72)

73) A move from inside the production possibilities boundary to the boundary itself could be caused by A) the employment of previously idle resources. B) a reallocation of resources from military to civilian goods. C) technological progress. D) an increase in the labour supply. E) an improvement in the government's ability to control its spending. Answer: A Explanation:

A) B) C) D) E)

74) Consider a production possibilities boundary showing the quantity of military goods and the quantity of civilian goods on the two axes. A movement along the production possibilities boundary could be caused by A) the employment of previously idle resources. B) the reallocation of resources between military and civilian goods. C) the growth of productive capacity. D) an increase in the labour supply. E) technological progress. Answer: B Explanation:

73)

A) B) C) D) E)

26

74)

The downward-sloping line in the diagram below shows the combinations of health care and education expenditures that the government can afford with a given amount of tax revenue.

FIGURE 1-6 75) Refer to Figure 1-6. The levels of health and education expenditures at point C A) are less than at point D. B) are equal to those of point A and point B. C) are more cost-effective than those at points A, B, and D. D) could be achieved if the prices of health and/or education increased. E) are not attainable with the government's current budget. Answer: E Explanation:

A) B) C) D) E)

76) Refer to Figure 1-6. If the government's spending on health and education is given by point B, a move to point A must involve A) less spending on health. B) zero opportunity cost. C) less spending on education. D) less spending in total. E) more spending on education. Answer: C Explanation:

75)

A) B) C) D) E)

27

76)

77) Refer to Figure 1-6. Suppose the government's current spending is shown by point D. In this case, A) the government is not spending its total budget. B) more education expenditures can be achieved only by sacrificing some health expenditures. C) more health expenditures can be achieved only by sacrificing some education expenditures. D) the government should spend its total budget so as to get to point B, since more health spending and more education spending are both clearly desirable. E) the prices of education and health care have increased beyond the government's ability to pay. Answer: A Explanation:

A) B) C) D) E)

78) Consider the production possibilities boundary (PPB) of an economy. Economic growth is illustrated by A) the negative slope of the PPB. B) an outward shift of the PPB. C) a movement onto the PPB. D) a movement along the PPB. E) the movement to a point outside of the PPB. Answer: B Explanation:

78)

A) B) C) D) E)

79) Suppose drought destroys many millions of acres of valuable Canadian farmland. The effect on the Canadian economy would be to move A) it along its production possibilities boundary. B) its production possibilities boundary inward. C) it beyond its production possibilities boundary. D) its production possibilities boundary outward. E) None of the above. There would be no change in Canada's production possibilities boundary. Answer: B Explanation:

77)

A) B) C) D) E)

28

79)

80) Suppose there are only two goods produced in our economysnowplows and helicopters. If there is always a two-for-one tradeoff between the production of these two goods (in terms of opportunity cost), then the production possibilities boundary between snowplows and helicopters is A) a downward-sloping curve convex to the origin. B) circular. C) a downward-sloping straight line. D) a downward-sloping straight line with slope equal to -1. E) a downward-sloping curve concave to the origin. Answer: C Explanation:

A) B) C) D) E)

81) A modern economy like Canada's is largely organized by A) governments at all levels coordinating the activities of firms and citizens. B) individuals forming cooperative enterprises and labour unions. C) individuals following their own self interest, doing what seems best for themselves. D) benevolent individuals pursuing the public interest. E) the self-interested behaviour of a small number of individuals. Answer: C Explanation:

81)

A) B) C) D) E)

82) An insight first fully developed by Adam Smith is that A) without benevolence production would not occur. B) all individuals are motivated solely by self-interest. C) self-interest, not benevolence, is the foundation of economic order. D) self-interest undermines effective economic order. E) individual self-interest is the only necessary force for social order. Answer: C Explanation:

80)

A) B) C) D) E)

29

82)

83) In the Canadian economy, most decisions regarding resource allocation are made by A) consumers and producers interacting in the price system. B) the various levels of government. C) negotiation between unions and firms. D) business firms only. E) legal contract. Answer: A Explanation:

A) B) C) D) E)

84) The famous economist who first described the division of labour was A) Karl Marx. B) Milton Friedman. C) David Ricardo. D) John Maynard Keynes. E) Adam Smith. Answer: E Explanation:

85)

A) B) C) D) E)

86) If an economy exhibits the specialization of labour, we know that A) a barter economy is more suitable. B) most production is artisanal in nature. C) each worker is self-sufficient. D) job security is ensured. E) different individuals are producing different products. Answer: E Explanation:

84)

A) B) C) D) E)

85) Which of the following statements about specialization and trade are correct? A) They developed only in the twentieth century. B) They exist only in capitalist economies. C) They arose as humans changed from nomadic and self-sufficient food gatherers to settled food producers. D) They developed only where government and political institutions were stable. E) They occur only in the private sector. Answer: C Explanation:

83)

A) B) C) D) E) 30

86)

87) Which of the following statements best describes a barter system of exchange? A) It involves the trading of goods directly for other goods. B) It requires the use of money. C) It does not involve the double coincidence of wants. D) It developed late in history. E) It is the most efficient form of exchange. Answer: A Explanation:

A) B) C) D) E)

88) Specialization of labour led to greater efficiency in the allocation of resources because of A) greater reliance on self-sufficiency. B) the use of barter. C) the principle of comparative advantage. D) an increase in total work effort. E) the opportunity cost of labour increased. Answer: C Explanation:

89)

A) B) C) D) E)

90) A farmer selling tomatoes and corn at a roadside, and a currency trader in Hong Kong, are each participating in A) barter. B) a market. C) an involuntary transaction. D) flexible manufacturing. E) international trade. Answer: B Explanation:

88)

A) B) C) D) E)

89) A greater specialization of labour leads to which of the following major results? A) the overall output of the economy declines B) there is an increased need for government to intervene in the marketplace C) the circular flow of income contracts D) there is a greater need for trade E) each worker must become more self-sufficient Answer: D Explanation:

87)

A) B) C) D) E) 31

90)

91) Which of the following has most contributed to the globalization of the economy? A) the decreased importance of agriculture B) reductions in transportation and communication costs C) the shift toward a market economy in China D) tariffs and trade barriers E) the decline in the relative importance of manufacturing Answer: B Explanation:

A) B) C) D) E)

92) Which of the following results from the introduction of money for use in transactions? A) exchange becomes easier and this promotes the specialization of labour B) an increased use of barter C) the specialization of labour becomes more difficult D) self-sufficiency is assured E) society is able to satisfy all wants Answer: A Explanation:

92)

A) B) C) D) E)

93) The barter system of exchange is inefficient because A) "fair" values cannot be defined without the use of money. B) bargaining power is unequal between rich and poor. C) the double coincidence of wants may not exist. D) markets do not exist. E) exchange partners need to know each other. Answer: C Explanation:

91)

A) B) C) D) E)

32

93)

94) Which of the point(s) below is (are) true of money? i) Money eliminated the need for barter. ii) Money allowed for specialization of labour and expansion of trade. iii) Money allowed for the development of a market economy. iv) Money allowed one to save current production for future use. A) Only i). B) Only i) and ii). C) Only i) and iv). D) Only i), ii), and iv). E) All of the points are true. Answer: E Explanation:

A) B) C) D) E)

95) Money facilitates trade and specialization by A) allowing an efficient barter system to develop. B) increasing the value of gold. C) eliminating the need for barter. D) reducing the shift of resources between uses. E) providing employment for coin makers. Answer: C Explanation:

95)

A) B) C) D) E)

96) With reference to the circular flow of income, how is the allocation of resources largely decided? A) by central authorities only B) by central authorities and firms only C) by firms and households acting independently D) by political parties and firms only E) by individuals only Answer: C Explanation:

94)

A) B) C) D) E)

33

96)

97) The key decision makers in a market economy are A) households, firms, and government. B) individual citizens, non-profit organizations, and the Bank of Canada. C) governments and all institutions under government control. D) large corporations and labour organizations. E) corporations and governments. Answer: A Explanation:

A) B) C) D) E)

98) Economists usually assume that households and firms, respectively, maximize A) income and sales. B) savings and profits. C) wages and revenues. D) utility and profits. E) expenditures and profits. Answer: D Explanation:

98)

A) B) C) D) E)

99) In general, which of the following statements is an accurate description of economists' assumptions about households? Households A) make consistent decisions, maximize utility, and are the principal owners of the factors of production. B) do not make consistent decisions, maximize satisfaction, and are the principal owners of the factors of production. C) make consistent decisions, maximize profits, and are the principal users of the factors of production. D) do not make consistent decisions, maximize profits, and are the principal users of the factors of production. E) make consistent decisions, maximize savings, and are the principal users of the factors of production. Answer: A Explanation:

97)

A) B) C) D) E)

34

99)

100) Which of the following is illustrated by the circular flow of income? A) the flows of expenditures and income in a household B) that firms own the factors of production C) the interaction of households and firms through the factors and goods markets D) that the flow of payments moves in the same direction as the flow of goods E) that there is no relationship between goods markets and factor markets Answer: C Explanation:

A) B) C) D) E)

101) Which of the following represents a typical "real" flow (as opposed to a financial flow) in the circular flow of income? A) goods going from producers to consumers B) factor services going from producers to consumers C) goods going from consumers to producers D) money payments going from consumers to producers E) money payments going from producers to consumers Answer: A Explanation:

102)

A) B) C) D) E)

103) An economic system that relies primarily upon custom and habit in economic decision making is a A) market system. B) traditional system. C) command system. D) mixed system. E) communist system. Answer: B Explanation:

101)

A) B) C) D) E)

102) If some income earned by households is not spent on output, or if some income earned by firms is not spent on factor services, the circular flow of income will A) stop. B) run over. C) expand. D) contract. E) explode. Answer: D Explanation:

100)

A) B) C) D) E)

35

103)

104) In practice, the term "centrally planned economy" refers to an economy in which A) the government makes ALL production and consumption decisions. B) the mix of market and command principles is heavily weighted towards the latter. C) all commodities are rationed. D) the military is in control of the government. E) economic decisions are made in the geographic centre of the country. Answer: B Explanation:

A) B) C) D) E)

105) Karl Marx argued that A) centrally planned economies could provide a more equitable distribution of total output than capitalist economies. B) technological change was not important in improving living standards. C) a free-market system would produce a low level of total output. D) benevolence, not self-interest, produced an effective economic order. E) the unfettered market system driven by self-interest leads to the best social outcome. Answer: A Explanation:

105)

A) B) C) D) E)

106) When discussing types of economic systems the Canadian economy is best described as A) primarily a public ownership economy. B) primarily free-market decision making. C) traditional. D) a command economy. E) a mixed economic system. Answer: E Explanation:

104)

A) B) C) D) E)

36

106)

107) With regard to various economic systems, most economists agree that A) the mix of market and command principles that exists in Canada is the best. B) the optimal mix of market and command systems remains constant over time. C) most production and consumption decisions are more efficiently coordinated by markets than through central planning. D) government intervention in the economy is only justified in time of war. E) command economies have been very successful in distributing income in socially just ways. Answer: C Explanation:

A) B) C) D) E)

108) Which countries have mostly public ownership of resources? A) United States and Canada B) Cuba and North Korea C) France and Germany D) Sweden and Norway E) Brazil and Argentina Answer: B Explanation:

109)

A) B) C) D) E)

110) In command economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed by individual self interest. D) largely affected by elements of tradition and market incentives. E) random and unpredictable. Answer: A Explanation:

108)

A) B) C) D) E)

109) Behaviour in free-market economies is A) determined by a central authority. B) based primarily on custom and habit. C) mostly directed by self interest. D) mostly affected by elements of tradition and government command. E) random and unpredictable. Answer: C Explanation:

107)

A) B) C) D) E) 37

110)

111) In mixed economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed only by self interest. D) affected by elements of tradition, government command, and market incentives. E) random and unpredictable. Answer: D Explanation:

A) B) C) D) E)

112) In traditional economies, economic behaviour is A) largely determined by a central authority. B) based primarily on custom and habit. C) directed only by self interest. D) affected by elements of tradition, government command, and market incentives. E) random and unpredictable. Answer: B Explanation:

113)

A) B) C) D) E)

114) Most modern economies in the world today A) have pure market exchange. B) are similar to feudal systems. C) are mostly run by government decree. D) have a mix of traditional, command and market elements. E) are complex systems that defy description and analysis. Answer: D Explanation:

112)

A) B) C) D) E)

113) Complex economic plans for many economic sectors are most associated with a A) free-market system. B) mixed market system. C) command economy. D) feudal system. E) traditional economy. Answer: C Explanation:

111)

A) B) C) D) E)

38

114)

115) In the current Canadian economy, the majority of choices on how resources are allocated are made by A) consumers and firms through the price system. B) the various levels of government. C) negotiation between unions and firms. D) business firms only. E) legal contracts. Answer: A Explanation:

A) B) C) D) E)

116) Comparison of economic systems indicates that A) most nations have either a purely socialist economy or a purely capitalist economy. B) most countries have mixed economies. C) socialist economies are clearly superior in producing consumer goods. D) capitalist economies are clearly superior in distributing income. E) all countries have largely traditional economies. Answer: B Explanation:

116)

A) B) C) D) E)

117) Many economies in central and Eastern Europe, including the countries of the former Soviet Union, are still in the process of moving from a command economy to a market economy. In the first years of this transition, most of these countries experienced sharp drops in output and reductions in living standards. Economists generally see this as A) the failure of the market system. B) the triumph of capitalism over communism. C) an indication of the extreme difficulty of transition from one type of economic system to another. D) an indication that these economies should return to being command economies. E) the difficulty of corruption in non-market economies. Answer: C Explanation:

115)

A) B) C) D) E)

39

117)

118) In a pure market economy, the role of government is limited to provision of : i) a basic legal and institutional structure. ii) intervention in the allocation of resources in some areas of the economy. iii) redistribution of income. iv) stabilization of economic conditions generally.

118)

Which of the above points is true? A) Only i). B) Only i) and ii). C) Only i) and iv). D) Only i), ii), and iv). E) All of the points are provided by government in a pure market economy. Answer: A Explanation:

A) B) C) D) E)

119) Income redistribution in a mixed economy A) is supported by all individuals. B) rarely occurs. C) is only accomplished through government intervention. D) risks reducing individual incentives to work and produce. E) is not allowed. Answer: D Explanation:

A) B) C) D) E)

120) In a modern mixed economy the government ensures that key institutions are in place to facilitate voluntary transactions between economic agents. These key institutions are A) labour and capital markets. B) the House of Commons and the Senate. C) the Department of Finance and the Bank of Canada. D) securities regulators and the court system. E) private property and freedom of contract. Answer: E Explanation:

119)

A) B) C) D) E)

40

120)

Answer Key Testname: UNTITLED1

1) B 2) C 3) A 4) A 5) D 6) B 7) C 8) B 9) A 10) A 11) B 12) D 13) C 14) E 15) C 16) E 17) B 18) D 19) A 20) E 21) D 22) B 23) C 24) C 25) D 26) E 27) D 28) E 29) C 30) B 31) A 32) E 33) E 34) D 35) A 36) C 37) C 38) C 39) D 40) D 41) D 42) C 43) B 44) B 45) D 46) E 47) D 48) D 49) A 50) A 41

Answer Key Testname: UNTITLED1

51) E 52) C 53) E 54) C 55) B 56) B 57) E 58) A 59) C 60) C 61) E 62) B 63) C 64) D 65) C 66) E 67) B 68) A 69) C 70) E 71) D 72) C 73) A 74) B 75) E 76) C 77) A 78) B 79) B 80) C 81) C 82) C 83) A 84) E 85) C 86) E 87) A 88) C 89) D 90) B 91) B 92) A 93) C 94) E 95) C 96) C 97) A 98) D 99) A 100) C 42

Answer Key Testname: UNTITLED1

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

A D B B A E C B C A D B C D A B C A D E

43

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Disagreements over positive statements A) cannot arise because positive statements are facts. B) are best handled by an appeal to the facts. C) arise from the failure to distinguish between a positive and a normative statement. D) are basically devoid of any emotion. E) never occur. Answer: B Explanation:

A) B) C) D) E)

2) A positive statement is one that states A) what is, was, or will be. B) what is and what should be. C) what should be but is not. D) what is desirable. E) non-negative numbers. Answer: A Explanation:

2)

A) B) C) D) E)

3) Which is the best description of positive statements? Positive statements A) have been verified by appeal to factual evidence. B) form the basis of all normative arguments. C) are falsifiable in principle by appeal to factual evidence. D) are seldom employed in social sciences like economics. E) have no place in economics because economics deals only with value judgments. Answer: C Explanation:

1)

A) B) C) D) E)

1

3)

4) Which is an example of a positive statement? A) There should be one price for gasoline throughout Canada. B) The higher the price for gasoline, the less of it will be consumed. C) Substitutes for fossil fuels should be developed. D) Canada should reduce its imports of consumer goods. E) Corporations in Canada should pay more taxes. Answer: B Explanation:

A) B) C) D) E)

5) Which is the best description of a normative statement? A normative statement A) can be derived logically from facts. B) concerns what is provable. C) is a statement that is empirically testable. D) is one that involves a value judgment. E) has no place in the study and practice of economics. Answer: D Explanation:

6)

A) B) C) D) E)

7) Which of the following is a normative statement? A) The higher is the level of taxes, the lower is consumption spending. B) The higher is the level of taxes, the higher are wage demands. C) A reduction in export taxes on petroleum would result in higher wages. D) Tuition fees should be waived for low-income students. E) A free-trade agreement between two countries will result in an increase in trade. Answer: D Explanation:

5)

A) B) C) D) E)

6) Which of the following is a normative statement? A) The sun rises in the west and sets in the east. B) A government deficit will reduce unemployment and cause an increase in prices. C) Reducing unemployment is more important than reducing inflation. D) Queen Elizabeth II is the wealthiest woman in the world. E) An increase in the price of lumber is followed by a decrease in the construction of new houses. Answer: C Explanation:

4)

A) B) C) D) E) 2

7)

8) Suppose an economist tells you that the unemployment rate in Canada last year was 7.8%. This is an example of a(n) ________ statement. A) autonomous B) positive C) normative D) induced E) imputed Answer: B Explanation:

A) B) C) D) E)

9) Suppose an economist tells you that, on average, people in Canada have too much personal debt. This is an example of a(n) ________ statement. A) autonomous B) positive C) normative D) independent E) induced Answer: C Explanation:

9)

A) B) C) D) E)

10) Which of the following statements belongs more properly in the field of normative economics than positive economics? A) An increase in the minimum wage leads to more unemployment. B) The price of one Canadian dollar is $0.85 U.S. C) When a drought occurs, the price of vegetables tends to rise. D) Canadian governments should provide assistance to the auto industry. E) Technological change has reduced the cost of cell phone service. Answer: D Explanation:

8)

A) B) C) D) E)

3

10)

11) Which of the following best describes the relationship between positive and normative statements in economics? A) Normative statements are those with which all economists agree; positive statements may give rise to some disagreement. B) Positive and normative statements are alternate ways of describing the desirability of certain economic policies. C) Normative statements evaluate the desirability of certain economic changes; positive statements do not. D) Neither positive nor normative statements are concerned with the desirability of certain economic changes. E) Economists generally agree with each other regardless of whether a question is positive or normative. Answer: C Explanation:

A) B) C) D) E)

12) A theory A) enables one to make prophesies about the future. B) is designed to explain and predict what we observe. C) is used to impose order on the world. D) can only be tested with a controlled experiment. E) assumes definitions for variables. Answer: B Explanation:

12)

A) B) C) D) E)

13) An assertion about the desirability of reducing unemployment by lowering payroll taxes is most likely A) a theory. B) a testable proposition. C) a hypothesis. D) a normative statement. E) a positive statement. Answer: D Explanation:

11)

A) B) C) D) E)

4

13)

14) An economic theory requires, among other things, A) a set of definitions of the variables to be considered. B) a controlled laboratory setting in which the theory can be tested. C) that the set of predictions be correct. D) a set of value judgments to interpret the empirical evidence. E) the use of endogenous variables only. Answer: A Explanation:

A) B) C) D) E)

15) Choose the statement that best describes how endogenous variables differ from exogenous variables. A) An endogenous variable is explained within the theory, while an exogenous variable influences the endogenous variables but is determined outside the theory. B) An endogenous variable is a flow, while an exogenous variable is a stock. C) An endogenous variable is explained outside the theory and influences an exogenous variable while an exogenous variable is explained within the theory. D) An exogenous variable is a function of the endogenous variable, and both are flow variables. E) An endogenous variable is a function of the exogenous variable, and both are stock variables. Answer: A Explanation:

15)

A) B) C) D) E)

16) Suppose there is a theory that several things influence the price of fish in Halifax, one of which is the weather during the fishing season. When examining the determinants of the price of fish, the weather is A) an endogenous variable, as it influences the price of fish. B) an exogenous variable, as it is determined outside the theory. C) a stock, as it influences the quantity of fish caught. D) an act of God and, therefore, has no legitimate connection with the theory. E) an endogenous variable, as it is determined within the theory. Answer: B Explanation:

14)

A) B) C) D) E)

5

16)

17) The statement that a country's rate of economic growth is influenced by its firms' investment behaviour is an example of a(n) A) variable. B) prediction. C) normative statement. D) theory. E) economic law. Answer: D Explanation:

A) B) C) D) E)

18) The statement that a 2% increase in the money supply leads to a 2% increase in the price level is an example of a(n) A) prediction. B) assumption. C) normative statement. D) variable. E) model. Answer: A Explanation:

18)

A) B) C) D) E)

19) The statement that introducing a policy of legislated rent controls will lead to a housing shortage is an example of a(n) A) assumption. B) prediction. C) theory. D) normative statement. E) model. Answer: B Explanation:

17)

A) B) C) D) E)

6

19)

20) Choose the statement that best characterizes an economic theory. A valid theory A) allows one to deduce a normative statement. B) appeals to the law of large numbers. C) generates a hypothesis that can predict future events. D) extrapolates from the past behaviour of a variable to predict its future course. E) allows one to prove irrefutably one's hypothesis. Answer: C Explanation:

A) B) C) D) E)

21) Choose the statement that best characterizes an economic theory. An economic theory A) is only useful if its underlying assumptions are realistic. B) will be useful as long as it is logically consistent. C) must be judged on its ability to explain and predict real-world phenomena. D) will predict more accurately if it contains a greater number of mathematical equations. E) will be useful only if all human behaviour is rational. Answer: C Explanation:

22)

A) B) C) D) E)

23) The statement that a country's rate of GDP growth is influenced by individuals' saving behaviour is an example of a(n) A) variable. B) prediction. C) normative statement. D) theory. E) economic law. Answer: D Explanation:

21)

A) B) C) D) E)

22) Which of the following pairs of words have similar meanings? A) induced and autonomous B) endogenous and autonomous C) independent and exogenous D) dependent and exogenous E) induced and exogenous Answer: C Explanation:

20)

A) B) C) D) E) 7

23)

24) Choose the answer that best explains why economists build models that abstract from the complexities of reality. A) Because the complexities of reality are unimportant. B) Because they believe they gain a greater understanding of reality. C) Because economists are not interested in reality. D) Because this allows economists to conduct controlled experiments to test their theories. E) Because economics deals only in the abstract. Answer: B Explanation:

A) B) C) D) E)

25) Suppose an individual wheat farmer's income is influenced by the region's average daily temperature. When examining the determinants of individual farmer income, the average daily temperature is a(n) ________ variable. A) endogenous B) exogenous C) flow D) dependent E) induced Answer: B Explanation:

25)

A) B) C) D) E)

26) If we seek to explain the number of seats sold on a particular air route, say Toronto to Halifax, over a one-year period, we would consider many variables. Which of the following variables would be endogenous to our theory? A) the average salary of Canadian airline pilots B) the number of airline seats sold on this route C) the price of jet fuel D) the number of fog days in Halifax E) the unemployment rate in Toronto Answer: B Explanation:

24)

A) B) C) D) E)

8

26)

27) When an economist assumes that the owners of firms are motivated only by the desire to maximize profits, the economist most likely believes that A) it doesn't matter whether or not the assumption is descriptively accurate; what matters is whether a theory built on the assumption predicts well. B) the assumption is descriptively accurate, since surveys have been taken and the owners of firms have admitted that their only objective is to maximize profits. C) the assumption is inaccurate, since surveys have been taken and the owners of firms have admitted that they care about more than just profits. D) individuals entering business are quite narrow in their personal objectives. E) all people enter business for their own selfish gain. Answer: A Explanation:

A) B) C) D) E)

28) An economic model that contains a highly realistic set of assumptions is A) useful because there is then very little difference between "theory" and "reality." B) necessarily better able to predict the future. C) certainly superior to a model whose assumptions are highly unrealistic. D) more abstract than a model whose assumptions are further removed from reality. E) not likely to be useful because of its particularized nature and its complexity. Answer: E Explanation:

28)

A) B) C) D) E)

29) Economists build models that abstract from the complexities of reality because A) it is easier to do so. B) they believe they gain a greater understanding of reality. C) economists are not interested in reality. D) economists do not understand the real world. E) the complexities of reality are unimportant. Answer: B Explanation:

27)

A) B) C) D) E)

9

29)

30) Suppose we have data for 1000 students for a period of one year. The data show that those students who spend more hours studying have a higher grade point average (GPA). We can say that A) there is a positive correlation between hours of study time and GPA. B) having a higher GPA leads students to spend more time studying. C) there is a causal relationship between hours of study time and GPA. D) more hours spent studying leads to a higher GPA. E) if hours of study time increase, then GPA will automatically increase. Answer: A Explanation:

A) B) C) D) E)

31) Suppose economists at the World Bank discover a positive correlation between family income and female education levels in developing countries. We can say that A) the correlation is inconsistent with a theory that an increase in female education levels causes an increase in family income. B) an increase in family income causes an increase in female education levels. C) an increase in female education levels causes an increase in family incomes. D) there is a causal relationship between family income and female education. E) the observed correlation is consistent with a theory that an increase in female education levels causes an increase in family income. Answer: E Explanation:

31)

A) B) C) D) E)

32) Suppose economists at the Department of Finance in Ottawa employ an economic model that predicts the effects of an increase in the GST. After implementation of the change, researchers find that the empirical data rejects the prediction. They are likely to A) modify the prediction in light of the new evidence. B) ignore the empirical evidence and continue using the model. C) modify the theory in light of this newly acquired empirical knowledge. D) reject the empirical data as faulty because it did not support the theory. E) modify the data to suit the definitions and assumptions. Answer: C Explanation:

30)

A) B) C) D) E)

10

32)

33) Suppose economists at the World Bank develop a theory with a prediction that increased levels of foreign aid lead to increases in per capita GDP in the recipient developing countries. They find empirical evidence that is consistent with this theory. The economists are able to conclude that A) the evidence fails to reject the theory. B) the theory has been proven correct. C) the theory is always reliable. D) the evidence is rejected by the theory. E) the assumptions used in the theory have been proven correct. Answer: A Explanation:

A) B) C) D) E)

34) When using statistics in economics, the possibility of error A) cannot be eliminated. B) cannot be controlled. C) cannot be evaluated. D) is not considered to be important. E) can be eliminated with more sophisticated statistical techniques. Answer: A Explanation:

34)

A) B) C) D) E)

35) Suppose that a particular theory predicts that on sunny days consumption of ice cream will rise and that on cloudy days consumption of ice cream will fall. If an economist tests this theory and finds that over a six-month period the theory predicts accurately, the economist would likely say A) the theory has been proven correct. B) the theory is always reliable. C) the evidence fails to reject the theory. D) the theory shouldn't be taken seriously. E) that the theory is not useful because consumption involves irrational human behaviour. Answer: C Explanation:

33)

A) B) C) D) E)

11

35)

36) A hypothesis (or a prediction) is a statement about A) how assumptions affect theories. B) those things which we believe to be true, but cannot prove. C) what will happen in the future. D) the relationship between facts explained by the hypothesis. E) how two or more variables are related to each other. Answer: E Explanation:

A) B) C) D) E)

37) A scientific prediction is A) not testable. B) a prophesy of how the future will unfold. C) a causal statement of the following form: A will occur because B occurred. D) a conditional statement of the following form: if A occurs, then B will follow. E) always based on the law of large numbers. Answer: D Explanation:

38)

A) B) C) D) E)

39) The assumptions of a theory A) must be realistic if the theory is to be of any use. B) are not necessary for the scientific approach. C) are indirectly refuted if and when the theory itself is rejected by empirical observation. D) are supposed to be as unrealistic as possible. E) are assumed to be true even when empirical observation rejects the predictions of the theory. Answer: C Explanation:

37)

A) B) C) D) E)

38) Of the following, which is the most important characteristic of a successful theory? A) the theory provides a basis for facts about economic behaviour B) the theory could never be refuted C) the theory adequately explains all economic behaviour D) all assumptions on which the theory is based are true E) the theory allows us to predict behaviour reasonably accurately Answer: E Explanation:

36)

A) B) C) D) E)

12

39)

40) The scientific approach to economic inquiry involves A) choosing data that will support the predictions. B) using only endogenous variables in economic models. C) testing the predictions with empirical data. D) testing the reality of the assumptions of the model. E) using only independent variables. Answer: C Explanation:

A) B) C) D) E)

41) Economics is scientific because A) economists routinely conduct controlled experiments. B) individual behaviour is predictable. C) economists routinely conduct laboratory experiments. D) economists use data. E) economists test hypotheses by appealing to empirical evidence. Answer: E Explanation:

42)

A) B) C) D) E)

43) Economic theories A) cannot be tested because we cannot do economic "experiments." B) must apply to all economies to be true. C) can be used to help explain and predict economic behaviour. D) are not useful because of the unrealistic assumptions they contain. E) cannot help to predict future behaviour. Answer: C Explanation:

41)

A) B) C) D) E)

42) Which of the following statements is NOT correct? A) Economists test their theories by confronting the predictions of their theories with the evidence drawn from the real world. B) An economic model can be useful even if its underlying assumptions are unrealistic. C) Normative statements cannot be tested by the scientific method. D) Positive statements can best be tested by exposing them to empirical evidence. E) Economic predictions cannot be tested because human decisions involve free will. Answer: E Explanation:

40)

A) B) C) D) E) 13

43)

44) Using the scientific method to approach an economic issue involves A) formulating normative statements about it. B) finding the correct data to validate the theory. C) the use of controlled experiments to confirm the evidence presented by the data. D) considering stock and flow variables. E) building a theory to explain the issue and then determining if the theory can be refuted by evidence. Answer: E Explanation:

A) B) C) D) E)

45) In order to test a theory, one must A) develop a better explanation than the one presented. B) present a series of normative statements and positive statements. C) use assumptions that most closely reflect reality. D) develop normative statements from the law of large numbers. E) confront the predictions of the theory with evidence. Answer: E Explanation:

45)

A) B) C) D) E)

46) An economic hypothesis will be rejected when A) one or more of the assumptions on which it is based fails to conform with reality. B) it is rejected by a single empirical observation. C) the probability that it is wrong, based on repeated empirical observations, is judged to be unacceptably high. D) a single empirical observation is encountered in which its predictions fail. E) the possibility of error has been completely eliminated. Answer: C Explanation:

44)

A) B) C) D) E)

14

46)

47) Suppose that a particular theory predicts that on Monday, Wednesday, and Friday the stock market will rise and that on Tuesday and Thursday the stock market will fall. If an economist tests this theory and finds that over a six-month period the theory predicts accurately, the economist would likely say that the theory A) has been proven correct. B) is reliable. C) is not rejected by the evidence. D) shouldn't be taken seriously. E) is not useful because stock markets involve irrational human behaviour. Answer: C Explanation:

A) B) C) D) E)

48) If a theory's prediction is tested and rejected, A) the original data and assumptions should be discarded. B) it is rejected with certainty, because it is not possible to reject a hypothesis that is actually true. C) the statistical tolerance of risk for accepting a false hypothesis should be increased. D) inquiry into the matter should cease. E) a new hypothesis is usually suggested and tested. Answer: E Explanation:

48)

A) B) C) D) E)

49) As a science, economics is disadvantaged in that A) it deals with human behaviour and thus is not open to empirical testing. B) it is usually not possible to conduct controlled experiments in economics, in contrast with certain other sciences. C) economic hypotheses cannot be accepted with complete certainty, by contrast with the other sciences. D) economic variables do not change enough to provide reliable data for testing hypotheses. E) some economic variables are determined within the theory. Answer: B Explanation:

47)

A) B) C) D) E)

15

49)

50) Most economists believe that economic analysis ________ be made completely free of judgement, in part because it is ________ to absolutely refute a theory on the basis of factual evidence. A) can; possible B) can; impossible C) cannot; possible D) cannot; impossible E) will; necessary Answer: D Explanation:

A) B) C) D) E)

51) Suppose a theory predicts that lowering tuition fees at Canadian universities will increase enrollment from low-income households. If empirical evidence consistently rejects this prediction, then we A) need to amend the theory. B) should test the theory again. C) should change the empirical data. D) should increase tuition fees back to their initial level. E) change the exogenous variables in the theory. Answer: A Explanation:

51)

A) B) C) D) E)

52) When studying economic data, and when comparing the magnitude of changes in variables with different scales it is best to A) compare the absolute data on each variable. B) compare the relative data on each variable. C) express each variable as an index number. D) express each variable as a logarithmic number. E) use only time-series data. Answer: C Explanation:

50)

A) B) C) D) E)

16

52)

53) When studying economic data, index numbers are especially valuable when comparing A) relative movements in different variables measured in different units. B) relative movements in real and nominal variables. C) linear and logarithmic data. D) time-series data with cross-sectional data. E) government data with private-sector data. Answer: A Explanation:

A) B) C) D) E)

54) The base year for an index number is A) determined by the year the variable equals exactly 100. B) dependant upon the type of data. C) declared by the federal government. D) chosen arbitrarily by those who construct the data. E) the year in which 2 or more index numbers are equal to 100. Answer: D Explanation:

54)

A) B) C) D) E)

55) For a given year, an index number of average prices across the economy (such as the Consumer Price Index) is the ratio of the A) price of several goods in the given year to that in the base year. B) average price of all goods in the given year to that in the base year. C) average price of several goods in the base year to that in the given year. D) weighted prices of a typical bundle of goods purchased in a given year to that in the base year. E) weighted prices of a typical bundle of goods purchased in the base year to that in the given year. Answer: D Explanation:

53)

A) B) C) D) E)

17

55)

56) An index number expresses the value of a variable in any given period A) as a percentage of its value in the base period. B) as a weighted average. C) as a proportional weighted average. D) as an average of its value in the base period. E) as an absolute compared to the base period. Answer: A Explanation:

A) B) C) D) E)

57) Let 1 stand for "any given period" and 2 stand for "base period." The formula of any index number can be written as: absolute value at 1 A) value of index at 1 = × 100 absolute value at 2 B) value of index at 1 =

absolute value at 2 × 100 absolute value at 1

C) value of index at 1 =

relative value at 1 × 100 relative value at 2

D) value of index at 1 =

absolute value at 1 absolute value at 2

E) value of index at 1 =

relative value at 1 relative value at 2

Answer: A Explanation:

56)

A) B) C) D) E)

18

57)

The table below shows hypothetical tuition costs at a Canadian university. Year 2008 2009 2010 2011 2012

Tuition $5000 $5050 $5100 $5150 $5200

TABLE 2-1 58) Refer to Table 2-1. Assume that 2008 is used as the base year, with the index number = 100. The value of the index number in 2010 is calculated as follows: A) (5000/5100) × 100 = 98 B) 5100/5000 = 1.02 C) 5000/5100 = 0.98 D) 5100/5100 = 100 E) (5100/5000) × 100 = 102 Answer: E Explanation:

A) B) C) D) E)

59) Refer to Table 2-1. Assume that 2008 is used as the base year, with the index number = 100. The value of the index number in 2012 is A) 100 B) 104 C) 1.04 D) 96 E) 0.96 Answer: B Explanation:

59)

A) B) C) D) E)

60) Refer to Table 2-1. The increase in tuition fees from 2008 to 2012 is A) 200. B) 100/5000. C) 4%. D) 0.04%. Answer: C Explanation:

58)

A) B) C) D) E)

19

60) E) 200/5200.

The table below shows hypothetical per-minute cell phone charges for "pay-and-talk" service over several years. 2008 2009 2010 2011 2012

0.55 0.50 0.40 0.35 0.25

TABLE 2-2 61) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. The value of the index number in 2011 is calculated as follows: A) 0.35 × 100 = 35 B) 0.35/0.55 = 0.64 C) 0.55/0.35 = 1.57 D) (0.35/0.55) × 100 = 63.64 E) (0.55/0.35) × 100 = 157.14 Answer: D Explanation:

A) B) C) D) E)

62) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. The value of the index number in 2012 is A) 0.25 B) 2.5 C) 25.0 D) 0.45 E) 45.45 Answer: E Explanation:

62)

A) B) C) D) E)

63) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. The value of the index number in 2010 is A) 100 B) 0.72 C) 72.73 D) 1.375 E) 137.5 Answer: C Explanation:

61)

A) B) C) D) E)

20

63)

64) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. What is the percentage change in the per-minute charge from 2011 to 2012? A) -28.6% B) -10.0% C) -71.4% D) -25.0% E) -35.0% Answer: A Explanation:

A) B) C) D) E)

65) Refer to Table 2-2. Assume that 2008 is used as the base year, with the index number = 100. Which of the following series is the correct set of index numbers for the per-minute cell phone charges from 2008 to 2012? A) 0.55; 0.50; 0.40; 0.35; 0.25 B) 100; 91; 73; 64; 45 C) 55; 50; 40; 35; 25 D) 1.0; 0.91; 0.73; 0.64; 0.45 E) 100%; 91%; 73%; 64%; 45% Answer: B Explanation:

66)

A) B) C) D) E)

67) According to the Bank of Canada's website, Canada's Consumer Price Index (CPI) in August 2009 was 114.7, August 2010 was 116.7, August 2011 was 120.3 and August 2012 was 121.8. Given this set of index numbers, what is the percentage change in the average level of prices between August 2009 and August 2012? A) 121.8% B) 114.7% C) 7.1% D) 6.2% E) 5.8% Answer: D Explanation:

65)

A) B) C) D) E)

66) According to the Bank of Canada's website, Canada's Consumer Price Index (CPI) in August 2009 was 114.7, August 2010 was 116.7, August 2011 was 120.3 and August 2012 was 121.8. Given this set of index numbers, what can we conclude about average prices in Canada between August 2009 and August 2012? A) average prices increased over this time period by 21.8% B) average prices decreased over this time period by 7.1% C) average prices decreased each year D) average prices increased over this time period by 7.1% E) average prices increased each year Answer: E Explanation:

64)

A) B) C) D) E) 21

67)

The table below shows hypothetical data for volumes of e-books and hardcover books sold over a 3-year period in a particular city. E-books 23 000 52 000 106 000

Year 1 Year 2 Year 3

Hardcover Books 72 000 59 000 31 000

TABLE 2-3 68) Refer to Table 2-3. Suppose we choose Year 1 as the base year and construct a series of index numbers with which to analyze the sales data. The index numbers for volumes of e-books sold (starting with Year 1) is: A) 100; 44.2; 21.7 B) 100; 226.1; 460.9 C) 23 000; 52 000; 106 000 D) 100; 126.1; 360.1 E) 1; 0.442; 0.217 Answer: B Explanation:

A) B) C) D) E)

69) Refer to Table 2-3. Suppose we choose Year 1 as the base year and construct a series of index numbers with which to analyze sales data. The index numbers for volumes of hardcover books sold (starting with Year 1) is: A) 431; 819; 100 B) 43.1; 81.9; 100 C) 100; 81.9; 43.1 D) 100; 0.819; 0.431 E) 0.431; 0.819; 100 Answer: C Explanation:

69)

A) B) C) D) E)

70) Refer to Table 2-3. Between Year 1 and Year 3, what is the percentage change in sales of e-books? A) 83 000% B) 460.9% C) 360.9% D) 21.7% E) 83% Answer: C Explanation:

68)

A) B) C) D) E)

22

70)

71) Refer to Table 2-3. Between Year 1 and Year 3, what is the percentage change in sales of hardcover books? A) 0.569% B) 56.9% C) -56.9% D) -0.569% E) -569% Answer: C Explanation:

71)

A) B) C) D) E)

The table below shows hypothetical data for the volume of gold and nickel output across several years. Gold (troy ounces) 1 230 000 1 416 000 1 349 000 947 000 1 012 000 1 321 000 1 450 000 1 510 000

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Index

100

Nickel (lbs)

Index 4500 4551 4623 4791 4802 4867 5002 5117

100

TABLE 2-4 72) Refer to Table 2-4. What is the index number for gold output in Year 1? A) 0.91 B) 109.7 C) 1.097 D) 91.2 Answer: D Explanation:

A) B) C) D) E)

73) Refer to Table 2-4. What is the index number for gold output in Year 8? A) 111.9 B) 111.9% C) 11.9 D) 11.9% Answer: A Explanation:

73) E) 1.119

A) B) C) D) E)

74) Refer to Table 2-4. What is the index number for nickel output in Year 6? A) 108.2 B) 105.3 C) 110.7 D) 95.0 Answer: B Explanation:

72) E) 99.7

A) B) C) D) E) 23

74) E) 95.0%

75) An economist collects data comparing per-capita expenditures on health care across provinces and territories for the year 2012. The best way to illustrate this data is A) a time-series line graph. B) a cross-sectional bar-chart graph. C) a scatter diagram. D) a logarithmic scale diagram. E) a time-series bar chart diagram. Answer: B Explanation:

A) B) C) D) E)

76) An economist has data showing Canadian GDP for the years 1945-2012. The best way to illustrate these data is A) a time-series line graph. B) a cross-sectional bar-chart graph. C) a scatter diagram. D) a logarithmic scale diagram. E) a time-series pie chart. Answer: A Explanation:

76)

A) B) C) D) E)

77) An economist has data showing household income and energy consumption for 10 000 Canadian households. The best way to illustrate these data is A) a time-series line graph. B) a cross-sectional bar-chart graph. C) a scatter diagram. D) a logarithmic scale diagram. E) a time-series bar chart diagram. Answer: C Explanation:

75)

A) B) C) D) E)

24

77)

78) What is the best way to display the unemployment rate in each of the world's developed economies in 2012? A) a time series line graph B) a scatter diagram C) a scatter diagram with two variables D) a cross-sectional graph with time-series data E) a cross-sectional bar chart graph Answer: E Explanation:

A) B) C) D) E)

79) Data collected repeatedly over successive periods of time are called A) cross-sectional data. B) time-analysis data. C) logarithmic data. D) topographic data. E) time-series data. Answer: E Explanation:

80)

A) B) C) D) E)

81) A scatter diagram A) is a graph of a theoretical relationship between two variables. B) relates cross-sectional data only. C) relates time series data only. D) plots a series of observations, showing the relationship between two variables. E) shows the dependence of one variable on another. Answer: D Explanation:

79)

A) B) C) D) E)

80) Data collected of several variables but for the same time period are called A) cross-sectional data. B) time-analysis data. C) logarithmic data. D) topographic data. E) time-series data. Answer: A Explanation:

78)

A) B) C) D) E) 25

81)

82) When it is said that variable A depends on variable B, then A is A) a derivative of B. B) proportional to B. C) partially exclusive of B. D) a function of B. E) independent of B. Answer: D Explanation:

A) B) C) D) E)

83) Consider the following equation: Y = 10 + 5X - X2 . This equation is an expression of A) a functional relation between X and Y. B) two dependent variables in a functional relation. C) two independent variables in a functional relation. D) a functional relation in a schedule format. E) a functional relation in a verbal format. Answer: A Explanation:

83)

A) B) C) D) E)

84) When considering how a family's level of consumption changes in response to changes in its income, A) income is the dependent variable and family consumption is the independent variable. B) consumption is the dependent variable and income is the independent variable. C) both of the variables are independent. D) both of the variables are dependent. E) there is no relationship between the variables. Answer: B Explanation:

82)

A) B) C) D) E)

26

84)

85) The mathematical expression of a relationship between two or more variables is usually known as A) a definition. B) an assumption. C) an observation. D) a function. E) a theory. Answer: D Explanation:

A) B) C) D) E)

86) The statement "Y is a function of X" means that the A) value of Y depends on that of X. B) value of X depends on that of Y. C) values of Y and X are the same. D) values of Y and X are independent. E) values of Y and X are related to some third variable. Answer: A Explanation:

86)

A) B) C) D) E)

87) When an increase in one variable is associated with an increase in a second variable, the two variables are A) proportionally related. B) inversely proportionally related. C) positively related. D) equivalent. E) negatively related. Answer: C Explanation:

85)

A) B) C) D) E)

27

87)

88) When an increase in one variable is associated with a decrease in a second variable, the two variables are A) proportionally related. B) inversely proportionally related. C) positively related. D) equivalent. E) negatively related. Answer: E Explanation:

A) B) C) D) E)

89) Negatively related variables change such that as the value of one variable A) decreases, the value of the other variable remains the same. B) increases, the value of the other variable increases. C) increases, the value of the other variable remains the same. D) decreases, the value of the other variable decreases. E) increases, the value of the other decreases. Answer: E Explanation:

89)

A) B) C) D) E)

90) Positively related variables change such that as the value of one variable A) decreases, the value of the other variable increases. B) decreases, the value of the other variable decreases. C) decreases, the value of the other variable remains the same. D) increases, the value of the other variable decreases. E) increases, the value of the other variable remains the same. Answer: B Explanation:

88)

A) B) C) D) E)

28

90)

91) Suppose we observe that consumption of electricity decreases when the price of electricity rises. We can say that the two variables are related A) positively. B) linearly. C) negatively. D) non-linearly. E) exogenously. Answer: C Explanation:

A) B) C) D) E)

92) Consider the functional relationship between two variables, X and Y. If Y is an increasing function of X, then A) Y increases when X increases. B) Y increases when X decreases. C) X decreases when Y increases. D) Y decreases when X increases. E) X remains constant as Y increases. Answer: A Explanation:

93)

A) B) C) D) E)

94) Suppose that two points on a straight line are (X = 4, Y = 5), and (X = 2, Y = 1). The slope of this line is 1 1 4 A) -2. B) - . C) . D) . E) 2. 2 2 5 Answer: E Explanation:

92)

A) B) C) D) E)

93) The slope of a straight line is necessarily A) zero. B) constant. C) positive. D) negative. E) increasing as one moves up the line. Answer: B Explanation:

91)

A) B) C) D) E)

29

94)

95) If the graph of a function is a horizontal line, the slope of this line is A) undefined. B) 0. C) 1. D) infinity. E) -1. Answer: B Explanation:

A) B) C) D) E)

96) On a coordinate graph, what is the X intercept of the function X = 60 + 3Y? A) -20 B) 20 C) -60 D) 60 Answer: D Explanation:

96) E) 0

A) B) C) D) E)

97) On a coordinate graph, what is the Y intercept of the function X = 60 + 3Y? A) -20 B) 0.1 C) 3.0 D) 20 Answer: A Explanation:

95)

97) E) 60

A) B) C) D) E)

98) Suppose point A represents coordinates (X = 5, Y = 6) and point B represents coordinates (X = 2, Y = 3). Then the slope of the straight line joining points A and B is A) -1. B) 2/3. C) 5/6. D) 1. E) 3/2. Answer: D Explanation:

A) B) C) D) E)

30

98)

99) The slope of a curve is A) always positive. B) always negative. C) positive if the curve rises to the right. D) negative if the curve rises to the right. E) always constant. Answer: C Explanation:

99)

A) B) C) D) E)

100) Consider the line which is the graph of the function Y = 60 - 4X. The slope of this line is A) 4. B) 60. C) -2.5. D) -4.0. E) -40. Answer: D Explanation:

A) B) C) D) E)

101) In a co-ordinate graph, with Y on the vertical axis and X on the horizontal axis, the variable X is positive and the variable Y is negative in the ________ quadrant. A) top, right B) top, left C) bottom, left D) bottom, right Answer: D Explanation:

102)

A) B) C) D) E)

103) Suppose point A represents coordinates (X = 2, Y = 12) and point B represents coordinates (X = 6, Y = 4). The slope of the straight line joining points A and B is 1 1 A) 5. B) - . C) . D) -2. E) 2. 2 2 Answer: D Explanation:

101)

A) B) C) D)

102) Suppose point A represents co-ordinates (X=10, Y=12) and point B represents co-ordinates (X=5, Y=7). The slope of the straight line joining points A and B is A) -1. B) 1. C) 2/3. D) 3/2. E) 5/6. Answer: B Explanation:

100)

A) B) C) D) E) 31

103)

FIGURE 2-1 104) Refer to Figure 2-1. What is the slope of the line in part (i) of the figure? A) -10 B) 5 C) -5 D) -1 Answer: A Explanation:

A) B) C) D) E)

105) Refer to Figure 2-1. What is the slope of the line in part (ii) of the figure? A) 12.5 B) -12.5 C) 1 D) 0.05 Answer: D Explanation:

104) E) 1

105) E) 0.08

A) B) C) D) E)

106) Suppose point A represents co-ordinates (x=2, y=16) and point B represents coordinates (x=10, y=4). What is the slope of the straight line joining points A and B? A) 0.75 B) -0.75 C) 1.5 D) -1.5 E) -0.43 Answer: D Explanation:

A) B) C) D) E)

32

106)

107) Suppose Ahmoud would spend $1200 per year on travel, even if his annual income were zero. As his income rises, he would spend 20% of each additional dollar of income on travel. Choose the correct mathematical equation that describes the functional relation between his travel spending (T) and his income (Y). A) Y = 1200 + 0.2T B) Y = 1200 - 0.2T C) T = 0.2 + 1200Y D) T = 1200 + 0.8Y E) T = 1200 + 0.2Y Answer: E Explanation:

A) B) C) D) E)

108) Suppose that over a 12-month period, Sonali's income (Y) rises from $27 000 to $35 000 per year and, as a result, her spending on travel (T) increases from $1500 to $2500 per year. Assume there is a linear relation between the two variables, Y and T. What is the marginal response in T to a change in Y? A) 8 B) 4 C) 0 D) 0.25 E) 0.125 Answer: E Explanation:

108)

A) B) C) D) E)

109) Suppose there is a linear relationship between the ticket price (P) to a university basketball game and the number of tickets sold (Q). If the ticket price is $20, then 600 tickets are sold; if the ticket price is $8, then $3000 tickets are sold. What is the slope of the function if Q is plotted on the horizontal axis and P is plotted on the vertical axis? A) -0.005 B) -0.05 C) 0 D) 0.05 E) 0.005 Answer: A Explanation:

107)

A) B) C) D) E)

33

109)

FIGURE 2-2 110) Refer to Figure 2-2. The slope of curve A is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) undefined. Answer: B Explanation:

110)

A) B) C) D) E)

111) Refer to Figure 2-2. The slope of curve B is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) undefined. Answer: A Explanation:

111)

A) B) C) D) E)

34

112) Refer to Figure 2-2. The slope of curve C is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) impossible to describe. Answer: C Explanation:

112)

A) B) C) D) E)

113) Refer to Figure 2-2. The slope of curve D is A) positive and constant. B) negative and constant. C) positive and changing. D) negative and changing. E) undefined. Answer: D Explanation:

113)

A) B) C) D) E)

35

FIGURE 2-3 114) Refer to Figure 2-3. The slope of curve A is A) zero. B) negative and variable. C) positive and variable. D) positive from X1 to X2 and negative from X2 to X3 .

114)

E) negative from X1 to X2 and positive from X2 to X3 . Answer: D Explanation:

A) B) C) D) E)

115) Refer to Figure 2-3. The slope of curve B is A) zero at X2.

115)

B) always negative but variable. C) always positive but variable. D) undefined at X2 . E) positive from Y1 to Y2 and negative between Y2 and Y3 . Answer: A Explanation:

A) B) C) D) E)

36

116) Refer to Figure 2-3. At X2 on curve A, the

116)

A) maximum occurs at Y1 . B) minimum occurs at Y4. C) slope of the curve is zero. D) slope is increasing. E) slope is decreasing. Answer: C Explanation:

A) B) C) D) E)

117) Refer to Figure 2-3. On curve A, the maximum value of Y occurs at A) values of X greater than X3 .

117)

B) X3 . C) X2 . D) X1 . E) X = 0. Answer: C Explanation:

A) B) C) D) E)

118) Refer to Figure 2-3. At X2 on curve B, the

118)

A) maximum occurs at Y1 . B) minimum occurs at Y4. C) slope of the curve is zero. D) slope is increasing. E) slope is decreasing. Answer: C Explanation:

A) B) C) D) E)

37

119) At the minimum or the maximum of the graph of a non-linear function (with x on the horizontal axis and y on the vertical axis) the slope of the curve is A) 1. B) -1. C) 0. D) infinite. E) undefined. Answer: C Explanation:

A) B) C) D) E)

120) At the minimum or the maximum of the graph of a non-linear function (with x on the horizontal axis and y on the vertical axis) the marginal response of y to a small change in x is A) 1. B) -1. C) 0. D) infinite. E) undefined. Answer: C Explanation:

119)

A) B) C) D) E)

38

120)

FIGURE 2-4 121) Refer to Figure 2-4. This non-linear function shows that over the range shown, A) as more fertilizer is applied, the marginal response in yield is increasing B) as more fertilizer is applied, the marginal change in yield is diminishing. C) as the yield per acre increases, the amount of fertilizer required per acre is diminishing. D) as the yield per acre increases, the amount of fertilizer required per acre is increasing. E) as more fertilizer is applied, the total yield per acre is diminishing. Answer: B Explanation:

A) B) C) D) E)

122) Refer to Figure 2-4. The functional relation shown between fertilizer applied and wheat yield can be described as a A) constant marginal response. B) increasing partial response. C) decreasing total response. D) diminishing marginal response. E) increasing marginal response. Answer: D Explanation:

121)

A) B) C) D) E)

39

122)

123) Refer to Figure 2-4. The slope of the non-linear function changes as we move along the curve. The slope is A) positive and increasing, indicating an increasing marginal response. B) negative and decreasing, indicating a diminishing marginal response. C) positive and decreasing, indicating a diminishing marginal response. D) negative and increasing, indicating an increasing marginal response. E) constant at all points, indicating a constant marginal response. Answer: C Explanation:

A) B) C) D) E)

124) Refer to Figure 2-4. If we want to know the marginal response of "yield per acre" due to a change in "fertilizer applied per acre of wheat" at point B, then we should determine the A) slope of a straight line tangent to point B. B) slope of a straight line joining points B and C. C) yield per acre at 30 units of fertilizer. D) the slope of a straight line from the origin to point B. E) quantity of fertilizer applied at point B. Answer: A Explanation:

124)

A) B) C) D) E)

125) Refer to Figure 2-4. Suppose we draw a straight line tangent to point B of the non-linear function. The straight line has a slope of 0.075. What information is conveyed to us by this measurement? A) At point B, the marginal response to the application of 30 units of fertilizer per acre is 0.075 tonnes of wheat. B) At point B, if one additional unit of fertilizer is applied per acre, the marginal response is 0.075 tonnes of wheat per acre. C) Because point B is midway between point A and point C, the yield per acre is 0.075 tonnes of wheat when fertilizer applied is between 10 and 60 units per acre. D) At point B, when fertilizer is applied at a rate of 30 units per acre, the yield is 0.075 tonnes per acre. E) At point B, the marginal response to the application of 0.075 units of fertilizer is between 4 and 5 tonnes per acre. Answer: B Explanation:

123)

A) B) C) D) E)

40

125)

Answer Key Testname: UNTITLED2

1) B 2) A 3) C 4) B 5) D 6) C 7) D 8) B 9) C 10) D 11) C 12) B 13) D 14) A 15) A 16) B 17) D 18) A 19) B 20) C 21) C 22) C 23) D 24) B 25) B 26) B 27) A 28) E 29) B 30) A 31) E 32) C 33) A 34) A 35) C 36) E 37) D 38) E 39) C 40) C 41) E 42) E 43) C 44) E 45) E 46) C 47) C 48) E 49) B 50) D 41

Answer Key Testname: UNTITLED2

51) A 52) C 53) A 54) D 55) D 56) A 57) A 58) E 59) B 60) C 61) D 62) E 63) C 64) A 65) B 66) E 67) D 68) B 69) C 70) C 71) C 72) D 73) A 74) B 75) B 76) A 77) C 78) E 79) E 80) A 81) D 82) D 83) A 84) B 85) D 86) A 87) C 88) E 89) E 90) B 91) C 92) A 93) B 94) E 95) B 96) D 97) A 98) D 99) C 100) D 42

Answer Key Testname: UNTITLED2

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125)

D B D A D D E E A B A C D D A C C C C C B D C A B

43

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following best defines quantity demanded? A) The amount an individual purchases at its current price. B) The amount an individual purchases at his or her current income. C) The amount, per time period, that is desired at the most recent price. D) The amount, per time period, an individual desires to purchase at any given price. E) The various amounts that a society desires at all relevant prices. Answer: D Explanation:

A) B) C) D) E)

2) The time period to which quantity demanded refers when constructing demand curves is A) a moment in time. B) a long period of time. C) one year. D) any specified time period. E) a period shorter than one year. Answer: D Explanation:

2)

A) B) C) D) E)

3) The term "quantity demanded" refers to the A) total amount of a good that is actually purchased during a given period of time. B) entire relationship between desired purchases and possible prices. C) total amount of a good that purchasers wish to purchase at a given price during a given period of time. D) product of advertising, and is unrelated to price. E) total amount of a good that people wish to buy, regardless of price. Answer: C Explanation:

1)

A) B) C) D) E)

1

3)

4) Four of the five statements below contain a stock and a flow. Which statement describes ONLY stock variables OR flow variables? A) Chris earns $1500 per month and has $4000 in his savings account at the bank. B) Nancy spends $400 per month on her credit card and has a balance owing of $2567. C) The Transit Authority of Mytown collects $22 000 in fares per day and has an operating budget of $2 million per year. D) Country X spends an average of $1 million per year for flood relief and has an emergency services fund of $20 million. E) The Canadian Federal government has a debt of approximately $450 billion and an annual deficit of over $25 billion dollars. Answer: C Explanation:

A) B) C) D) E)

5) A variable that is a "stock" A) is measured per unit of time. B) has meaning only at a point in time. C) has only to do with products where inventory is kept. D) has the same units as a flow variable. E) is used only in accounting. Answer: B Explanation:

5)

A) B) C) D) E)

6) Ceteris paribus means A) other things being equal. B) and so forth. C) knowledge gained before the study of evidence is made. D) among other things. E) in a historical context. Answer: A Explanation:

4)

A) B) C) D) E)

2

6)

7) The "law of demand" hypothesizes that, other things being equal, A) the lower the price, the greater the demand. B) price and demand vary inversely. C) the higher the price, the lower the quantity demanded. D) the higher the income, the higher the quantity demanded. E) price and quantity demanded are positively related. Answer: C Explanation:

A) B) C) D) E)

8) In a market for a good or service, the quantities demanded and supplied are A) both stock variables. B) both flow variables. C) a flow variable and a stock variable, respectively. D) a stock variable and a flow variable, respectively. E) neither stock nor flow variables. Answer: B Explanation:

9)

A) B) C) D) E)

10) A demand curve is a representation of the relationship, ceteris paribus, between quantity demanded and A) supply. B) wealth. C) price. D) income. E) preferences. Answer: C Explanation:

8)

A) B) C) D) E)

9) For a given commodity, quantity demanded can be represented by A) a demand curve. B) a demand schedule. C) a point on a demand curve. D) the money value of the stock of the commodity held by households. E) the price on the vertical axis. Answer: C Explanation:

7)

A) B) C) D) E) 3

10)

11) Which statement best describes the "law of demand"? Other things being equal, the quantity of tennis rackets demanded will be greater if the A) incomes of tennis players are higher. B) price of tennis rackets is lower. C) price of badminton rackets is higher. D) number of tennis players is higher. E) demand for tennis rackets rises. Answer: B Explanation:

A) B) C) D) E)

12) The "law of demand" describes A) an inverse relationship between the price of a good and the quantity of the good demanded per unit of time, other things being equal. B) a positive relationship between the price of a good and the quantity of the good demanded per unit of time, ceteris paribus. C) an inverse relationship between the price of a good and the demand for the good, per unit of time. D) a direct relationship between the price of a good and the demand for the good. E) any relationship between quantity demanded and demand for a good. Answer: A Explanation:

12)

A) B) C) D) E)

13) Which statement best describes a "demand schedule"? A) a functional statement of the demand relationship B) a graph showing the inverse relationship between quantity demanded and price C) a numerical tabulation showing the quantities demanded at various prices D) a timetable showing the quantity demanded at different time periods E) an abstract concept underlying the graph of a demand curve Answer: C Explanation:

11)

A) B) C) D) E)

4

13)

14) An important assumption underlying a demand schedule is that A) quantity demanded and demand mean the same thing. B) everything else except the product's price is being held constant. C) the numbers are not important; the general relationship between the variables is. D) household tastes rarely change. E) income has little significance to household demand. Answer: B Explanation:

A) B) C) D) E)

15) Which statement best describes a demand curve? A) a functional statement of the demand relationship B) a numerical table showing the inverse relationship between quantity demanded and price, other things being equal C) a graph showing the relationship between quantity demanded and the price of a commodity, other things being equal D) a timetable showing the quantity demanded at different time periods E) an abstract concept underlying the graph of a demand curve Answer: C Explanation:

15)

A) B) C) D) E)

16) A demand curve represents graphically A) a functional statement of the income-quantity relationship. B) the timeless relationship between quantity demanded and price. C) the quantity demanded per unit of time at various prices. D) the available quantities at all possible prices for the product. E) quantity demanded. Answer: C Explanation:

14)

A) B) C) D) E)

5

16)

17) To say that the demand curve for movies is negatively sloped means that A) less quantity will be demanded at lower prices. B) less quantity will be demanded as preferences change. C) less quantity will be demanded at higher prices. D) more quantity will be demanded as consumers' income increases. E) less quantity will be demanded at the same price. Answer: C Explanation:

A) B) C) D) E)

18) A change in demand is said to take place when there is a A) movement along the demand curve. B) shift of the demand curve. C) shift of the supply curve. D) price change. E) quantity change. Answer: B Explanation:

19)

A) B) C) D) E)

20) What is an inferior good? A) a good that everyone normally consumes B) a good that inferior people consume C) a good for which demand varies directly with household income D) a good for which demand varies inversely with household income E) a good for which demand does not vary with household income Answer: D Explanation:

18)

A) B) C) D) E)

19) A normal good is one A) that everyone normally consumes. B) that normal people consume. C) for which demand varies directly with household income. D) for which demand varies inversely with household income. E) for which demand does not vary with household income. Answer: C Explanation:

17)

A) B) C) D) E)

6

20)

21) Consider butter and margarine, which are substitutes. When the price of butter falls, the demand curve for margarine is likely to A) shift to the right. B) shift to the left. C) remain stationary. D) remain stationary, although its price will fall. E) remain stationary, although its price will rise. Answer: B Explanation:

A) B) C) D) E)

22) Goods X and Y are defined to be substitutes in consumption if A) the supply of Y varies inversely with the price of X. B) the two goods are virtually the same. C) the supply of Y varies directly with the price of X. D) the demand for Y varies directly with the price of X. E) the demand for Y varies inversely with the price of X. Answer: D Explanation:

23)

A) B) C) D) E)

24) If goods X and Y are substitutes and the price of X falls, all other things being equal, the demand curve for Y will A) shift to the left. B) shift to the right. C) not shift at all. D) be indeterminate. Answer: A Explanation:

22)

A) B) C) D) E)

23) If the price of tea falls and as a consequence the demand for sugar rises, then tea and sugar are A) substitute goods. B) complementary goods. C) luxury goods. D) neutral goods. E) independent goods. Answer: B Explanation:

21)

A) B) C) D)

7

24)

25) Which of the following pairs of goods are likely to be substitutes for a large group of consumers? A) eggs and toast B) coffee and cream C) green beans and peas D) wieners and buns E) pancakes and syrup Answer: C Explanation:

A) B) C) D) E)

26) Which of the following pairs of goods are likely to be complements for a large group of consumers? A) televisions and radios B) cars and trucks C) tea and coffee D) e-readers and e-books E) tents and tent-trailers Answer: D Explanation:

27)

A) B) C) D) E)

28) Cars and gasoline are likely to be A) complementary goods. B) substitute goods. C) independent goods. D) inferior goods. E) luxury goods. Answer: A Explanation:

26)

A) B) C) D) E)

27) If tastes change so that a particular style of boots is now considered more appealing, the likely result is A) a shift in the demand curve to the right. B) a shift in the demand curve to the left. C) a movement down the demand curve. D) a movement up the demand curve. E) no change in the demand curve. Answer: A Explanation:

25)

28)

A) B) C) D) E) 8

29) Consider cars and gasoline. Other things being equal, when the price of cars decreases, the demand for gasoline is likely to A) remain unchanged because cars and gasoline are produced independently of one another. B) decrease because the two goods are complements. C) remain unchanged. D) increase because the two goods are complements. E) remain unchanged because cars and gasoline are two distinct markets. Answer: D Explanation:

A) B) C) D) E)

30) If goods X and Y are complements and the price of X falls, all other things being equal, the demand curve for Y will A) shift to the left. B) shift to the right. C) not shift at all. D) unable to determine. Answer: B Explanation:

31)

A) B) C) D) E)

32) A variable that is assumed to be constant along an individual's demand curve for good X is the A) price of good X. B) quantity of X demanded per unit of time. C) price of a substitute good, Y. D) amount of X the individual wishes to purchase. E) consumer's real purchasing power. Answer: C Explanation:

30)

A) B) C) D)

31) Ceteris paribus, the position of the demand curve for apples will remain unchanged if there is a change in the A) income of apple eaters. B) price of apples. C) hourly wage rate of most workers. D) price of pears. E) knowledge regarding the health benefits of eating fresh fruit. Answer: B Explanation:

29)

A) B) C) D) E)

9

32)

33) "Demand" in a particular market refers to A) only the quantity demanded by households at current market prices. B) the quantity purchased at the current market price. C) the quantity that is desired but not satisfied by current supply. D) the entire relationship between quantity demanded and price. E) the relationship between demand and supply. Answer: D Explanation:

A) B) C) D) E)

34) A change in which of the following variables will result in NO change in the demand for a given commodity? A) average household income B) the distribution of income C) population D) tastes in favour of the commodity E) the price of the commodity Answer: E Explanation:

34)

A) B) C) D) E)

35) When deriving the market demand curve for a commodity, the only variable(s) that can change is (are) the A) price of a related commodity. B) income of consumers. C) quantity of the commodity demanded. D) price of the commodity. E) both C and D. Answer: E Explanation:

33)

A) B) C) D) E)

10

35)

36) Which of the following would cause a movement along the demand curve for ski-lift tickets, other things being equal? A) a change in tastes in favour of skiing B) an increase in price as the supply curve for lift tickets shifts to the left C) a rise in the price of ski boots and skis D) a rise in average household income E) an increase in population Answer: B Explanation:

A) B) C) D) E)

37) Consider the following two statements. (1) An increase in the price of eggs will cause a decrease in the demand for eggs. (2) An increase in the price of eggs will cause a decrease in the demand for bacon. In which of these two statements is the term "demand" used correctly? A) neither statement B) the first statement only C) the second statement only D) both statements E) more information is needed Answer: C Explanation:

37)

A) B) C) D) E)

38) Suppose new medical research suggests that consuming 200 grams of tofu everyday helps to prevent heart disease. Widespread knowledge of this research, other things being equal, is likely to have what impact on the market for tofu? A) shift the whole demand curve to the right B) shift the whole demand curve to the left C) movement along the demand curve to the right D) movement along the demand curve to the left E) there would likely be no effect. Answer: A Explanation:

36)

A) B) C) D) E)

11

38)

39) Economists say there has been a change in demand when there is A) a movement along the demand curve. B) a shift of the demand curve. C) a shift of the supply curve. D) a price change. E) a quantity change. Answer: B Explanation:

A) B) C) D) E)

40) Which of the following events would result in a change in the quantity demanded for some commodity but NOT a change in the demand for that commodity? A) a change in average household income B) a change in the distribution of income C) a change in population D) a change in tastes in favour of the commodity E) a change in the price of the commodit Answer: E Explanation:

40)

A) B) C) D) E)

41) Quantity demanded is a flow variable, which means that it must be expressed A) as so much at a specific moment in time. B) in units of the good per day. C) in units of the good per week. D) in units of the good per year. E) in units of the good per period of time. Answer: E Explanation:

39)

A) B) C) D) E)

12

41)

FIGURE 3-1 42) Refer to Figure 3-1. If demand is given by the curve D, the ________ energy-efficient light bulbs is 200 000 at a price of $9. A) demand for B) quantity purchased of C) demand schedule for D) quantity demanded of E) quantity sold of Answer: D Explanation:

A) B) C) D) E)

43) Refer to Figure 3-1. The movement along the demand curve, D, from point v to point x, could be caused by A) a change in preferences away from ordinary light bulbs to energy-efficient light bulbs. B) a change in the price of energy-efficient light bulbs. C) an increase in household income, which allows consumers to purchase more light bulbs. D) a change in the price of ordinary light bulbs. E) an expectation that new, government regulations will require the use of energy-efficient light bulbs only. Answer: B Explanation:

42)

A) B) C) D) E)

13

43)

44) Refer to Figure 3-1. A shift of the demand curve for energy-efficient light bulbs from D to D2 could be caused by A) an increase in the price of ordinary light bulbs. B) a change in preferences away from ordinary bulbs to energy-efficient bulbs. C) an expectation that new government regulation will require the use of energy-efficient light bulbs only. D) a decrease in the price of energy-efficient light bulbs. E) a news bulletin stating that energy-efficient light bulbs emit a harmful gas. Answer: E Explanation:

A) B) C) D) E)

45) Refer to Figure 3-1. A shift of the demand curve for energy-efficient light bulbs from D to D1 could be caused by A) a decrease in the price of ordinary light bulbs. B) a news bulletin stating that energy-efficient light bulbs emit a harmful gas. C) a decrease in the price of energy-efficient light bulbs. D) an expectation that government regulation will soon prohibit the use of ordinary light bulbs. E) a change in preferences toward ordinary light bulbs. Answer: D Explanation:

45)

A) B) C) D) E)

46) Suppose that the demand curves for goods A, B, and C have the following functional forms:, where Q denotes quantity demanded and P denotes price: QA = 120 - 3.5 P A - 6PB QB = 100 - 2PB + 3PC QC = 1500 - 0.5PC. Based on these demand curves, which of the following pairs of goods are known to be complements? A) B and C B) A and C C) A and B D) A and C, and B and C E) none of the pairs are complements Answer: C Explanation:

44)

A) B) C) D) E)

14

46)

47) Suppose that the demand curves for goods A, B, and C have the following functional forms:, where Q denotes quantity demanded and P denotes price: QA = 120 - 3.5PA - 6P B QB = 100 - 2P B + 3P C QC = 1500 - 0.5PC. Based on these demand curves, which of the following pairs of goods are known to be substitutes? A) A and C B) A and B C) B and C D) A and C, and B and C E) none of the pairs are substitutes Answer: C Explanation:

A) B) C) D) E)

48) Suppose the demand curves for goods A, B, and C have the following functional forms, where Q denotes quantity demanded, P denotes price, and M denotes income: QA = 120 - 3.5PA - 6P B + 14M QB = 100 - 2P B + 3P C + 1.1M QC = 1500 - 0.5PC - 300M. Based on these demand curves, which of the following goods are known to be normal goods? A) A B) B C) C D) A and B only E) A, B and C Answer: D Explanation:

47)

A) B) C) D) E)

15

48)

49) Suppose the demand curves for goods A, B, and C have the following functional forms, where Q denotes quantity demanded, P denotes price, and M denotes income: QA = 120 - 3.5PA - 6PB + 14M QB= 100 - 2PB + 3PC + 1.1M QC = 1500 - 0.5PC - 300M. Based on these demand curves, which of the following goods are known to be inferior goods? A) A B) B C) C D) A and B only E) A, B and C Answer: C Explanation:

A) B) C) D) E)

50) The positive slope of a supply curve indicates that A) as price goes up, quantity supplied will decrease. B) consumers will want to buy less at higher prices. C) as price goes up, quantity supplied will increase. D) if the costs of production increase, the quantity supplied will increase. E) as price goes up, quantity supplied will remain constant. Answer: C Explanation:

50)

A) B) C) D) E)

51) Which of the following events would cause a change in the quantity supplied of some agricultural commodity but would not cause a change in the supply of that same commodity? A) a change in factor costs B) a technological change C) a change in the price of the commodity D) a change in the number of suppliers of the commodity E) a change in the price of substitute goods Answer: C Explanation:

49)

A) B) C) D) E)

16

51)

52) Suppose that many coal mines are shut for environmental reasons. This will cause A) an increase in the supply of coal (a rightward shift of the supply curve). B) a decrease in the supply of coal (a leftward shift of the supply curve). C) a movement up the supply curve. D) a movement down the supply curve. E) no change in the supply curve, only a change in price. Answer: B Explanation:

A) B) C) D) E)

53) The market supply curve for wooden shipping crates would shift to the right A) if a government subsidy for shipping crates is withdrawn. B) if the prices of inputs fall. C) if a tax is applied to shipping crates. D) if suppliers leave the industry. E) if technological conditions for the production of crates deteriorates. Answer: B Explanation:

54)

A) B) C) D) E)

55) Suppose there is a decrease in the quantity supplied of copper at each price. This change would imply A) a shift to the left of the supply curve. B) a shift to the right of the supply curve. C) a movement up the supply curve. D) a movement down the supply curve. Answer: A Explanation:

53)

A) B) C) D) E)

54) The term "quantity supplied" is the amount of a commodity that A) firms wish to sell at a given price during a given period of time. B) firms actually sell during a given period of time at a given price. C) households wish firms would sell during a given period of time at a given price. D) is exchanged between firms and consumers during a given period of time at a given price. E) is supplied at a fair market price. Answer: A Explanation:

52)

A) B) C) D)

17

55)

56) The term "supply" in a particular market refers to A) the particular quantity supplied at the moment. B) only one point on the supply curve. C) only one entry in a supply schedule. D) the entire relationship between quantity supplied and price. E) the quantity actually sold to consumers. Answer: D Explanation:

A) B) C) D) E)

57) A fall in the price of raw milk (which is used in the production of ice cream) will A) decrease the supply of ice cream, causing the supply curve of ice cream to shift to the left. B) increase the supply of ice cream, causing the supply curve of ice cream to shift to the right. C) decrease the supply of ice cream, causing the supply curve to shift to the right. D) have no effect on the supply curve of ice cream but cause a downward movement along the supply curve of ice cream. E) increase the supply of ice cream, causing the supply curve to shift to the left. Answer: B Explanation:

58)

A) B) C) D) E)

59) A rightward shift in the supply curve indicates A) a decrease in the quantity supplied at each price. B) that an increase in income results in an increase in the quantity demanded at each price. C) that more is demanded at each price. D) an increase in the quantity supplied at each price. E) a shift in the demand curve also (because demand must equal supply). Answer: D Explanation:

57)

A) B) C) D) E)

58) To say that the supply curve is positively sloped means that A) as price goes up, quantity supplied will decrease. B) households will want to buy less at higher prices. C) as price goes up, quantity supplied will increase. D) if the costs of production increase, the quantity supplied will have to increase also. E) as price goes up, quantity supplied will remain constant. Answer: C Explanation:

56)

A) B) C) D) E) 18

59)

60) A "decrease in supply" refers to which of the following? A) the likely result from a decrease in the price of a factor of production B) a downward movement along a supply curve C) a decrease in quantity supplied D) a leftward shift in the supply curve E) a drop in the quantity actually exchanged Answer: D Explanation:

A) B) C) D) E)

61) Suppose that a newer way to produce a good is discovered, which reduces production costs for the good. This will cause A) no change in the supply curve, only a change in price. B) a decrease in supply (a leftward shift of the supply curve). C) a movement up the supply curve. D) a movement down the supply curve. E) an increase in supply (a rightward shift of the supply curve). Answer: E Explanation:

62)

A) B) C) D) E)

63) An improvement in the technology used to produce solar panels will A) lead to a leftward shift in the supply curve. B) lead to a leftward shift of the demand curve. C) lead to a rightward shift of the demand curve. D) have no effect on the supply curve for solar panels. E) lead to a rightward shift in the supply curve. Answer: E Explanation:

61)

A) B) C) D) E)

62) Suppose that some resource X is necessary to produce some good Y. If the price of X falls A) the supply curve of resource X shifts to the left. B) the supply curve of good Y shifts to the right. C) the supply curve of good Y is unaffected. D) there is a movement along the supply curve of good Y. E) the demand curve for X shifts to the right. Answer: B Explanation:

60)

A) B) C) D) E) 19

63)

64) An increase in the number of firms wanting to provide accounting services will cause a ________ for accounting services. A) leftward shift in the supply curve B) rightward shift in the demand curve C) leftward shift in the demand curve D) rightward shift in the supply curve E) simultaneous shift of both the demand and supply curves Answer: D Explanation:

A) B) C) D) E)

65) The supply for some good or service will decrease if A) technology improves. B) the prices of inputs fall. C) the prices of inputs increase. D) technology improves and the price of inputs falls. E) more suppliers enter the industry. Answer: C Explanation:

65)

A) B) C) D) E)

66) In which statement is the term "supply" used correctly? (1) An increase in the price of leather will cause a decrease in the supply of leather. (2) An increase in the price of leather will cause a decrease in the supply of leather boots. A) the second statement only B) neither statement C) the first statement only D) both statements E) not enough information to tell Answer: A Explanation:

64)

A) B) C) D) E)

20

66)

67) A fall in the price of potatoes, which are used in the production of french fries, will A) lead to a decrease in the supply of french fries, causing the supply curve of french fries to shift to the left. B) lead to an increase in the supply of french fries, causing the supply curve of french fries to shift to the right. C) have no effect on the supply of french fries. D) have no effect on the supply of french fries but cause a movement along the supply curve of french fries. E) lead to a decrease in the demand for french fries. Answer: B Explanation:

A) B) C) D) E)

68) A leftward shift in the supply curve indicates A) a decrease in the quantity supplied at each price. B) that an increase in income results in an increase in the quantity demanded at each price. C) that more is demanded at each price. D) an increase in the quantity supplied at each price. E) that more suppliers have entered the industry. Answer: A Explanation:

67)

A) B) C) D) E)

21

68)

FIGURE 3-2 69) Refer to Figure 3-2. If the supply curve is given by S, the ________ energy-efficient light bulbs is 175 000 when the price is $9. A) quantity supplied of B) quantity purchased of C) quantity sold of D) supply schedule for E) supply of Answer: A Explanation:

A) B) C) D) E)

70) Refer to Figure 3-2. The movement along the supply curve, S, from point a to point c, could be caused by A) a decrease in the price of energy-efficient light bulbs. B) a decrease in the price of glass, a major input in the production of energy-efficient light bulbs. C) an increase in the number of suppliers of energy-efficient light bulbs. D) an increase in the price of energy-efficient light bulbs. E) a decrease in the price of ordinary light bulbs. Answer: D Explanation:

69)

A) B) C) D) E)

22

70)

71) Refer to Figure 3-2. A shift of the supply curve from S to S1 could be caused by A) an increase in the price of energy-efficient light bulbs. B) a decrease in the price of energy-efficient light bulbs. C) an expectation that new government regulations will ban the use of energy-efficient light bulbs. D) a change in consumers' preferences away from ordinary light bulbs toward energy-efficient light bulbs. E) a decrease in the price of glass, a major input in the production of energy-efficient light bulbs. Answer: E Explanation:

A) B) C) D) E)

72) Refer to Figure 3-2. A shift of the supply curve for energy-efficient light bulbs from S to S2 could be caused by A) an increase in the price of energy-efficient light bulbs. B) a decrease in the price of energy-efficient light bulbs. C) an increase in the number of suppliers. D) the elimination of existing government subsidies to suppliers of energy-efficient light bulbs. E) a change in consumers' preferences away from ordinary light bulbs. Answer: D Explanation:

72)

A) B) C) D) E)

73) Choose the best description of an "equilibrium price." A) The price in the middle of supply and demand. B) The price at which quantity demanded of the commodity is equal to the quantity supplied. C) The price that consumers are willing to pay. D) The price that producers want to charge. E) The price at which demand for the commodity is equal to supply. Answer: B Explanation:

71)

A) B) C) D) E)

23

73)

74) An equilibrium price can be described as A) the price at which excess demand equals excess supply. B) an aggregate price. C) the final price. D) one at which there is neither excess demand nor excess supply. E) a regulated price Answer: D Explanation:

A) B) C) D) E)

75) "Excess demand" can also be described as A) excess supply. B) the area to the left of the equilibrium price on a supply and demand diagram. C) quantity demanded exceeding quantity supplied. D) quantity supplied exceeding quantity demanded. E) the area to the right of the equilibrium price on a supply and demand diagram. Answer: C Explanation:

76)

A) B) C) D) E)

77) At the market-clearing price for a commodity A) prices will remain unchanged, even if there is excess demand. B) there may be excess demand for a product but not excess supply. C) shifts in the supply or demand curves will not cause price changes. D) the quantity supplied of the commodity equals quantity demanded. E) there will never again be any pressure for prices to change, independent of what happens to demand or supply. Answer: D Explanation:

75)

A) B) C) D) E)

76) A surplus exists in the market when A) the quantity demanded exceeds the quantity supplied. B) supply and demand are equal. C) the quantity demanded is less than the quantity supplied. D) the equilibrium price is too low. E) the supply curve has shifted to the left. Answer: C Explanation:

74)

A) B) C) D) E) 24

77)

The supply and demand schedules for dozens of roses are given below:

Price $10 $20 $30 $40 $50

Quantity Supplied per period 200 300 400 500 600

Quantity Demanded per period 500 450 400 350 300

TABLE 3-1 78) Refer to Table 3-1. The equilibrium price for a dozen roses is A) $10. B) $20. C) $30. Answer: C Explanation:

78) D) $40.

E) $50.

A) B) C) D) E)

79) Refer to Table 3-1. How many dozens of roses would actually be purchased if the price in this market were $10? A) 200 B) 300 C) 350 D) 400 E) 500 Answer: A Explanation:

A) B) C) D) E)

80) Refer to Table 3-1. At a price of ________ there would be an excess ________ of 300 dozen roses. A) $10; supply B) $30; supply C) $10; demand D) $50; demand E) $30; demand Answer: C Explanation:

79)

A) B) C) D) E)

25

80)

The supply and demand schedules for the umbrella market are given below: Price $10 $15 $20 $25 $30

Quantity Supplied 400 500 600 700 800

Quantity Demanded 700 650 600 550 500

TABLE 3-2 81) Refer to Table 3-2. The equilibrium price for umbrellas is A) $10. B) $15. C) $20. Answer: C Explanation:

81) D) $25.

E) $30.

A) B) C) D) E)

82) Refer to Table 3-2. What number of umbrellas would actually be purchased if the price in this market were $10? A) 400 B) 500 C) 550 D) 650 E) 700 Answer: A Explanation:

A) B) C) D) E)

83) Refer to Table 3-2. At a price of ________ there would be an excess ________ of umbrellas. A) $10; supply B) $20; supply C) $10; demand D) $30; demand E) $20; demand Answer: C Explanation:

82)

A) B) C) D) E)

26

83)

The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

Price ($)

Quantity Demanded (millions) Year 1

30 26 22 18 14 10

80 90 100 110 120 130

Year 2

Quantity Supplied (millions) Year 1

Year 2

95 105 115 125 135 145

140 135 130 125 120 115

125 120 115 110 105 100

TABLE 3-3 84) Refer to Table 3-3. The equilibrium price and quantity for overnight parcel delivery in Year 1 is ________ and ________ million parcels. A) $30; 80 B) $14; 120 C) $22; 115 D) $10; 115 E) $22; 130 Answer: B Explanation:

A) B) C) D) E)

85) Refer to Table 3-3. The equilibrium price and quantity for overnight parcel delivery in Year 2 is ________ and ________ million parcels. A) $10; 100 B) $18; 110 C) $18; 125 D) $22; 115 E) $14; 120 Answer: D Explanation:

85)

A) B) C) D) E)

86) Refer to Table 3-3. Which of the following statements describes a likely event in the market for overnight parcel delivery? From Year 1 to Year 2, A) there was a rise in the price of jet fuel. B) there was a decrease in consumers' income. C) there was an improvement in technology for tracking overnight parcels. D) the price of regular parcel delivery decreased. E) the number of suppliers of overnight parcel delivery service increased. Answer: A Explanation:

84)

A) B) C) D) E)

27

86)

87) Refer to Table 3-3. If the price of overnight parcel delivery in Year 2 is $10, how many parcels will actually be delivered? A) 100 B) 115 C) 130 D) 145 Answer: A Explanation:

A) B) C) D)

88) Refer to Table 3-3. Suppose the price of overnight parcel delivery in Year 1 is $22. Which of the following statements is correct? In Year 1 A) there is an excess demand of 15 million deliveries. B) there is an excess demand of 30 million deliveries. C) 115 million parcels will be delivered. D) there is an excess supply of 15 million deliveries. E) there is an excess supply of 30 million deliveries. Answer: E Explanation:

88)

A) B) C) D) E)

89) Refer to Table 3-3. Which of the following events could explain the change in the market for overnight parcel delivery between Year 1 And Year 2? A) there was a decrease in the price of jet fuel B) the price of regular parcel delivery decreased C) consumer preferences changed toward a desire for overnight delivery D) the number of suppliers of overnight parcel delivery service increased E) the government introduced a subsidy for overnight parcel delivery Answer: C Explanation:

87)

A) B) C) D) E)

28

89)

90) Refer to Table 3-3. Which of the following statements best describes the change in equilibrium price and quantity in this market between Year 1 and Year 2? A) The demand curve has shifted to the left, the supply curve has shifted to the right; as a result equilibrium price is lower and equilibrium quantity is higher. B) The demand curve has shifted to the left, the supply curve has shifted to the left; as a result equilibrium price is higher and equilibrium quantity is lower. C) The demand curve has shifted to the right, the supply curve has shifted to the left; as a result equilibrium price is higher and equilibrium quantity is lower. D) The demand curve has shifted to the left, the supply curve has shifted to the right; as a result equilibrium price is higher and equilibrium quantity is lower. E) There is no change in equilibrium price or quantity from Year 1 to Year 2. Answer: C Explanation:

90)

A) B) C) D) E)

FIGURE 3-3 91) Refer to Figure 3-3. At a price of P2 there would be excess demand equal to A) 0. B) Q1 Q5. C) Q2 Q4. D) Q1 Q3. Answer: A Explanation:

A) B) C) D) E)

29

91) E) Q3 Q5.

92) Refer to Figure 3-3. At a price of P1 there would be excess supply equal to A) 0. B) Q1 Q5. C) Q2 Q4. D) Q1 Q2. Answer: C Explanation:

92) E) Q4 Q5.

A) B) C) D) E)

93) Refer to Figure 3-3. At a price of P1 there would be excess demand equal to

93)

A) Q1 Q5. B) Q2 Q4. C) Q1 Q2. D) Q4 Q5. E) There is no excess demand at P1 . Answer: E Explanation:

A) B) C) D) E)

94) Refer to Figure 3-3. At a price of P3 there is excess ________ in the market for X and pressure for the price to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: D Explanation:

A) B) C) D)

95) Refer to Figure 3-3. At a price of P1 there is excess ________ in the market for X and pressure for the price to ________. A) supply; fall B) supply; rise C) demand; fall D) demand; rise Answer: A Explanation:

94)

A) B) C) D)

30

95)

FIGURE 3-4 96) Refer to Figure 3-4. The market for 1-bedroom apartments in Collegetown will be in equilibrium at a price and quantity combination of A) $500; 300 apartments. B) $700; 450 apartments. C) $500; 350 apartments. D) $300; 250 apartments. E) $400; 300 apartments. Answer: E Explanation:

A) B) C) D) E)

97) Refer to Figure 3-4. If the price of 1-bedroom apartments in Collegetown were $300, there would be a ________ of ________ apartments. A) surplus; 100 B) shortage; 50 C) shortage; 100 D) surplus; 50 E) surplus; 150 Answer: C Explanation:

96)

A) B) C) D) E)

31

97)

98) Refer to Figure 3-4. If the price of 1-bedroom apartments in Collegetown were $700, there would be a ________ of ________ apartments. A) surplus; 150 B) shortage; 300 C) shortage; 150 D) surplus; 300 E) surplus; 100 Answer: D Explanation:

98)

A) B) C) D) E)

FIGURE 3-5 99) Refer to Figure 3-5. The price at which there would be a shortage in this market is A) P1 . B) P2 . C) P3 . D) both P1 and P3 . E) both P2 and P3 . Answer: C Explanation:

A) B) C) D) E)

32

99)

100) Refer to Figure 3-5. A price at which there would be a surplus in this market is A) P1 .

100)

B) P2 . C) P3 . D) both P1 and P2 . E) both P1 and P3 . Answer: A Explanation:

A) B) C) D) E)

101) Refer to Figure 3-5. Ceteris paribus, if supply were to increase, this would lead to A) an increase in both equilibrium price and quantity. B) a decrease in both equilibrium price and quantity. C) an increase in equilibrium price and a decrease in equilibrium quantity. D) a decrease in equilibrium price and an increase in equilibrium quantity. E) no change in equilibrium price or quantity. Answer: D Explanation:

A) B) C) D) E)

102) Refer to Figure 3-5. Ceteris paribus, if demand were to decrease, this would lead to A) an increase in equilibrium price and an increase in equilibrium quantity. B) a decrease in equilibrium price and a decrease in equilibrium quantity. C) an increase in equilibrium price and a decrease in equilibrium quantity. D) a decrease in equilibrium price and an increase in equilibrium quantity. E) no change in equilibrium price or quantity. Answer: B Explanation:

102)

A) B) C) D) E)

103) Refer to Figure 3-5. If supply and demand were to increase simultaneously, this would lead to A) an increase in both equilibrium price and quantity. B) a decrease in both equilibrium price and quantity. C) an increase in equilibrium quantity and an indeterminate change in price. D) an increase in equilibrium price and an indeterminate change in equilibrium quantity. E) no change in equilibrium price or quantity. Answer: C Explanation:

101)

A) B) C) D) E) 33

103)

104) Refer to Figure 3-5. If supply were to increase and demand were to decrease simultaneously, this would lead to A) a decrease in equilibrium price and an indeterminate change in quantity. B) a decrease in equilibrium quantity and an indeterminate change in price. C) an increase in equilibrium quantity and a decrease in equilibrium price. D) an increase in equilibrium quantity and an increase in equilibrium price. E) no change in equilibrium price or quantity. Answer: A Explanation:

A) B) C) D) E)

105) Tickets for music concerts that are sold on the Internet are often sold out within minutes and many unsatisfied customers are unable to get tickets (in the legitimate market). One explanation for this is that A) concert goers are not rational. B) prices for purchasing digital music have increased. C) the market price for concert tickets may be set above its equilibrium price. D) the market price for concert tickets may be set below its equilibrium price. E) the market price for concert tickets is at its equilibrium level. Answer: D Explanation:

105)

A) B) C) D) E)

106) The quantity exchanged in the market will be below the equilibrium quantity A) only if there is excess supply. B) only if there is excess demand. C) if there is either excess supply or demand. D) in no imaginable situation. E) only if price is below the equilibrium price. Answer: C Explanation:

104)

A) B) C) D) E)

34

106)

107) The term "comparative statics" describes the A) analysis of the path from one equilibrium to another. B) comparison of one equilibrium point with another. C) comparison of a demand curve with a supply curve. D) analysis of the process of price and quantity adjustments that leads to an equilibrium. E) analysis of excess demand and excess supply. Answer: B Explanation:

A) B) C) D) E)

108) Given a positively sloped supply curve, a rise in the demand for that commodity causes A) a shortage of other goods. B) a fall in sales of that commodity. C) an increase in both the equilibrium price and the equilibrium quantity exchanged. D) a decrease in the equilibrium price and an increase in the equilibrium quantity exchanged. E) a decrease in both the equilibrium price and the equilibrium quantity exchanged. Answer: C Explanation:

108)

A) B) C) D) E)

109) A rise in the quantity demanded of lemons can be attributed to a A) leftward shift in the supply curve of lemons. B) rightward shift in the supply curve of lemons. C) decline in the number of people drinking lemonade. D) decrease in the price of artificial lemon flavouring. E) cold spell which makes people want less lemonade. Answer: B Explanation:

107)

A) B) C) D) E)

35

109)

110) Weekend train travel costs less than weekday train travel. If the supply of train service remains the same between weekdays and weekends, then the most likely explanation for this difference in price is that the weekend A) demand curve is to the left of the weekday demand curve. B) demand curve is to the right of the weekday demand curve. C) demand curve is random. D) supply curve is to the right of the weekday supply curve. E) supply curve is to the left of the weekday supply curve. Answer: A Explanation:

A) B) C) D) E)

111) Suppose that in Montreal in December, 2012, 10 000 ski helmets were sold at a price of $60 each. And in Montreal in December, 2013, 20 000 ski helmets were sold at a price of $80 each. One possible explanation for the change is that from 2012 to 2013 the ________ curve for ski helmets shifted to the ________. A) supply; left B) supply; right C) demand; left D) demand; right E) supply or demand; right Answer: D Explanation:

111)

A) B) C) D) E)

112) Consider a local market for 4-litre containers of windshield-wiper fluid. In January 2012, 100 000 containers were sold at a price of $3 each. In March 2012, 120 000 containers are sold at a price of $8 each. Does this change in equilibrium price and quantity violate the "law of demand"? A) Not necessarily, because the supply curve could have shifted to the right, leading to an increase in equilibrium price and quantity. B) Not necessarily, because the demand curve could have shifted to the right, leading to an increase in equilibrium price and quantity. C) Not necessarily, because the demand curve could have shifted to the left, leading to an increase in equilibrium price and quantity. D) Not necessarily, because the supply curve could have shifted to the left, leading to an increase in equilibrium price and quantity. E) No, because the "law of demand" is not valid. Answer: B Explanation:

110)

A) B) C) D) E)

36

112)

113) Suppose we observe an increase in the price of good A and an increase in the quantity of good A exchanged. Which of the following is a likely explanation? A) The "law of demand" is violated. B) The "law of supply" is violated. C) The supply of good A has increased. D) There is an excess supply of good A. E) The demand for good A has increased. Answer: E Explanation:

A) B) C) D) E)

114) Consider a negatively sloped demand curve for natural gas. If the supply of natural gas increases, the new equilibrium will have A) a lower price and a greater quantity. B) a lower price and a smaller quantity. C) a higher price and a smaller quantity. D) a higher price and a larger quantity. E) the same price and larger quantity. Answer: A Explanation:

114)

A) B) C) D) E)

115) Which of the following statements is correct for a market with an upward-sloping supply curve and a downward-sloping demand curve? A) If the supply curve shifts left and demand remains constant, equilibrium quantity will rise. B) If the supply curve shifts right and the demand curve remains constant, equilibrium price will rise. C) If the demand curve shifts left and the supply curve shifts right, equilibrium price will rise. D) If the demand curve shifts right and the supply curve shifts left, equilibrium price will rise. E) If the demand curve shifts left and the supply curve shifts left, equilibrium price will fall. Answer: D Explanation:

113)

A) B) C) D) E)

37

115)

FIGURE 3-6 116) Refer to Figure 3-6. If the initial demand and supply curves are D1 and S1 , equilibrium price and

116)

quantity are represented by point A) A. B) B. C) C. D) D. E) Not shown in the figure. Answer: A Explanation:

A) B) C) D) E)

117) Refer to Figure 3-6. If the demand curve shifts from D1 to D2 , while supply remains at S1 , one could say that A) the quantity demanded has decreased to Q1 and price has fallen to P2 . B) there has been an increase in demand for X. C) the price of a good which is a substitute for X must have fallen. D) the price increase has caused an increase in quantity demanded. E) there is now an excess demand at the new price of P1 . Answer: B Explanation:

A) B) C) D) E)

38

117)

118) Refer to Figure 3-6. If the initial demand and supply curves are D1 and S1 , and demand shifts to

118)

D2 , then A) a permanent shortage of X will result. B) a surplus of Q1 Q3 will occur. C) a shortage will occur at any price above P3. D) if price remained at P2, a shortage of Q1Q3 would exist. E) all of the above Answer: D Explanation:

A) B) C) D) E)

119) Refer to Figure 3-6. A shift in the supply curve from S2 to S1 might be caused by

119)

A) a rise in the costs of producing good X. B) a decrease in the price of X. C) a decrease in demand for X. D) an improvement in the technology of producing good X. E) additional suppliers entering the industry. Answer: A Explanation:

A) B) C) D) E)

120) With a given upward-sloping supply curve for sirloin steak (a normal good), a rise in household income will cause the A) equilibrium price and equilibrium quantity to both increase. B) equilibrium price to increase and equilibrium quantity to decrease. C) equilibrium price and equilibrium quantity to both decrease. D) equilibrium price to decrease and equilibrium quantity to increase. E) equilibrium price to increase and equilibrium quantity to remain constant. Answer: A Explanation:

A) B) C) D) E)

39

120)

121) If the legal beer-drinking age is raised from 18 to 21, the changes to the equilibrium price and quantity of beer are likely to be that A) price rises and quantity rises. B) price falls and quantity rises. C) price rises and quantity falls. D) price falls and quantity falls. E) no change in price or quantity occurs. Answer: D Explanation:

A) B) C) D) E)

122) Steel is an important input to the production of cars. Tires and cars are used together by consumers. What will occur in the market for tires when there is an increase in the price of steel? A) price rises, quantity rises B) price falls, quantity rises C) price rises, quantity falls D) price falls, quantity falls E) no change in price or quantity occurs Answer: D Explanation:

122)

A) B) C) D) E)

123) Aeronautical engineers are a factor of production for airplanes. What will happen in the world market for airplanes when there is a worldwide shortage of aeronautical engineers? A) price will increase, quantity exchanged will decrease B) price will increase, quantity exchanged will increase C) price will decrease, quantity exchanged will decrease D) price will decrease, quantity exchanged will increase E) there will be no change in price or quantity exchanged Answer: A Explanation:

121)

A) B) C) D) E)

40

123)

124) Assume that apples and oranges are substitute goods. Given the initial supply and demand curves for apples, a reduction in the price of oranges will tend to A) increase the price of apples. B) increase the demand for apples. C) increase the demand for oranges. D) decrease the demand for oranges. E) decrease the price of apples Answer: E Explanation:

A) B) C) D) E)

125) Suppose that supply for some good increases and that simultaneously the demand for the same good decreases. The result would be A) a decrease in P and an indeterminate change in Q. B) a decrease in Q and an indeterminate change in P. C) an increase in Q and a decrease in P. D) an increase in Q and an increase in P. E) no change in either P or Q. Answer: A Explanation:

125)

A) B) C) D) E)

126) Given a positively sloped supply curve, when market demand increases A) the new equilibrium will have a lower price and a greater quantity. B) the new equilibrium will have a lower price and a smaller quantity. C) the new equilibrium will have a higher price and a smaller quantity. D) the new equilibrium will have a higher price and a larger quantity. E) the new equilibrium will have the same price and larger quantity. Answer: D Explanation:

124)

A) B) C) D) E)

41

126)

127) Suppose we observe that movie theatre prices are less during the daytime than in the evening. If the supply of movies does not change between daytime and evening, then the most likely explanation for this difference in price is A) the evening demand curve is to the left of the daytime demand curve. B) the evening demand curve is to the right of the daytime demand curve. C) the evening supply curve is to the left of the daytime supply curve. D) the evening supply curve is to the right of the daytime supply curve. Answer: B Explanation:

A) B) C) D)

128) Consider the global market for some mineral, X. In January, 2011, the equilibrium price and quantity were P = $27 per unit and Q = 140 million units. In January, 2013, the equilibrium price and quantity were P = $45 per unit and Q = 175 million units. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been a decrease in supply of mineral X. B) There has been an increase in demand for mineral X. C) There has been an increase in supply of mineral X. D) There has been a decrease in demand for mineral X. E) There has been a simultaneous decrease in demand for, and increase in supply of, mineral X. Answer: B Explanation:

128)

A) B) C) D) E)

129) Consider the global market for some mineral, X. In January, 2011, the equilibrium price and quantity were P = $27 per unit and Q = 140 million units. In January, 2013, the equilibrium price and quantity were P = $27 per unit and Q = 175 million units. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been a simultaneous increase in demand for, and increase in supply of, mineral X. B) There has been an increase in demand for mineral X. C) There has been an increase in quantity demanded for mineral X. D) There has been an increase in supply of mineral X. E) There has been an increase in quantity supplied of mineral X. Answer: A Explanation:

127)

A) B) C) D) E)

42

129)

130) Consider the global market for some mineral, X. In January, 2011, the equilibrium price and quantity were P = $27 per unit and Q = 140 million units. In January, 2013, the equilibrium price and quantity were P = $35 per unit and Q = 110 million units. Which of the following is the best possible explanation for this change in market equilibrium? A) There has been an increase in demand for mineral X. B) There has been a decrease in supply of mineral X. C) There has been a decrease in global demand for mineral X. D) There has been a simultaneous increase in demand and increase in supply for mineral X. E) there has been a simultaneous increase in supply and decrease in demand for mineral X. Answer: B Explanation:

A) B) C) D) E)

131) If a demand curve and a supply curve can be stated functionally as Qd = 100 - 5P; and Qs = 90 + 5P, respectively, then the equilibrium quantity and price (Q, P) would be A) 95; 1. B) 1; 95. C) 190; 1. D) 95; 10. Answer: A Explanation:

A) B) C) D) E)

0.4P, respectively, then the equilibrium quantity and price (Q, P) would be A) 150; 150. B) 50; 176. C) 150; 485. D) 488; 120.

132)

E) 940; 0.4.

A) B) C) D) E)

133) Suppose that the demand and supply curves in the market for apples have the following functional forms: QD = 250 - 4p and QS = 10 + p. The equilibrium quantity and price would then be A) Q = 48, p = 58. B) Q = 58, p = 48. C) Q = 68, p = 98. D) Q = 68, p = 108. E) Q = 92, p = 48. Answer: B Explanation:

131)

E) 190; 10.

132) If a demand curve and a supply curve can be stated functionally as Qd = 500 - 0.1P and Qs = 440 +

Answer: D Explanation:

130)

A) B) C) D) E)

43

133)

134) Suppose that the demand and supply curves in the market for apples have the following functional form: QD = 250 - 4p and QS = 10 + p. If the prevailing price on the market is 50, then A) the market is clearing. B) the market exhibits an excess supply of 10 units. C) the market exhibits an excess supply of 240 units. D) the market exhibits an excess demand of 10 units. E) the market exhibits an excess demand of 240 units. Answer: B Explanation:

A) B) C) D) E)

135) Suppose the demand and supply curves in the market for apples have the following functional form: QD = 250 - 4p and QS = 10 + p. If the prevailing market price is 40, then A) the market is clearing. B) the market exhibits an excess supply of 50 units. C) the market exhibits an excess supply of 40 units. D) the market exhibits an excess demand of 50 units. E) the market exhibits an excess demand of 40 units. Answer: E Explanation:

135)

A) B) C) D) E)

136) Suppose that the demand and supply curves for green tea are stated functionally as QD = 700 - P and QS = 400 + 2P. Suppose also that a study is released proving that the regular consumption of green tea prolongs life by at least a decade, and the result is that the quantity demanded of green tea doubles at the initial equilibrium price. The equilibrium price in this case will increase by A) 100% B) 140% C) 200% D) 300% E) Insufficient information to compute Answer: C Explanation:

134)

A) B) C) D) E)

44

136)

137) The price of one good divided by the price of another good is called a A) marginal price. B) money price. C) absolute price. D) relative price. E) ceteris paribus price. Answer: D Explanation:

A) B) C) D) E)

138) The relative price of a good A) is always measured in current dollars. B) is a measure of the relative share of the consumer's income devoted to its purchase. C) is its price in terms of money. D) is equal to the average price of the good over the last 5 years. E) reflects its price in terms of units of other goods. Answer: E Explanation:

138)

A) B) C) D) E)

139) Suppose that the price of wheat has fallen from $3 to $2 per bushel and that the price of newsprint has fallen from $200 to $100 per tonne. The relative price of wheat in terms of newsprint A) has fallen. B) has risen. C) remained constant. D) cannot be determined from the above data. E) is completely unrelated. Answer: B Explanation:

137)

A) B) C) D) E)

45

139)

140) Suppose that the price of good X increases from $3.00 to $4.00 while the price of good Y increases from $150 to $200. The relative price of X (in terms of Y) A) has fallen. B) has risen. C) remained constant. D) cannot be determined from the above data. E) is completely unrelated to the price of good Y. Answer: C Explanation:

A) B) C) D) E)

141) If there is no change in the money price of steel during a period of 6% inflation, then the A) relative price of steel has increased. B) relative price of steel has decreased. C) absolute price of steel has increased. D) absolute price of steel has decreased. E) relative price of steel is equal to the absolute price of steel. Answer: B Explanation:

141)

A) B) C) D) E)

142) If a change in tastes has raised the price of tomatoes by 5% when the general price level increased by 2%, the price of tomatoes A) ultimately increased by 7%. B) in fact increased by 3%. C) is not affected by inflation as much. D) increased by 3% relative to the average of all prices. E) is not of interest anymore because it is rendered meaningless by the inflation. Answer: D Explanation:

140)

A) B) C) D) E)

46

142)

143) Suppose an index of average food prices in Canada indicates a decrease in price of 1.7% over a 12-month period. Over the same period, the Consumer Price Index indicates an increase in the general price level of 1.6%. What is the change in food prices relative to the change in the overall price level? A) a decrease of 0.1% B) a decrease of 1.7% C) a decrease of 3.3% D) an increase of 0.1% E) an increase of 3.3% Answer: C Explanation:

A) B) C) D) E)

144) Suppose an index of average prices of imported goods in Canada indicates an increase in price of 2.3% over a 12-month period. Over the same period the Consumer Price Index indicates an increase in the general price level of 2.3%. What is the change in the price of imports relative to the change in the overall price level? A) an increase of 2.3% B) an increase of 4.6% C) a decrease of 2.3% D) a decrease of 4.6% E) no change Answer: E Explanation:

144)

A) B) C) D) E)

145) Suppose the world price of oil rises by 25% over a 12-month period; over the same period the average price level in Canada rises by 1.6% What is the change in the price of oil relative to the change in the average price level? A) an increase of 23.4% B) a decrease of 23.4% C) an increase of 26.6% D) a decrease of 26.6% E) an increase of 25% Answer: A Explanation:

143)

A) B) C) D) E)

47

145)

Answer Key Testname: UNTITLED3

1) D 2) D 3) C 4) C 5) B 6) A 7) C 8) B 9) C 10) C 11) B 12) A 13) C 14) B 15) C 16) C 17) C 18) B 19) C 20) D 21) B 22) D 23) B 24) A 25) C 26) D 27) A 28) A 29) D 30) B 31) B 32) C 33) D 34) E 35) E 36) B 37) C 38) A 39) B 40) E 41) E 42) D 43) B 44) E 45) D 46) C 47) C 48) D 49) C 50) C 48

Answer Key Testname: UNTITLED3

51) C 52) B 53) B 54) A 55) A 56) D 57) B 58) C 59) D 60) D 61) E 62) B 63) E 64) D 65) C 66) A 67) B 68) A 69) A 70) D 71) E 72) D 73) B 74) D 75) C 76) C 77) D 78) C 79) A 80) C 81) C 82) A 83) C 84) B 85) D 86) A 87) A 88) E 89) C 90) C 91) A 92) C 93) E 94) D 95) A 96) E 97) C 98) D 99) C 100) A 49

Answer Key Testname: UNTITLED3

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140) 141) 142) 143) 144) 145)

D B C A D C B C B A D B E A D A B D A A D D A E A D B B A B A D B B E C D E B C B D C E A

50

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The price elasticity of demand measures the responsiveness of A) quantity demanded to changes in the price. B) the price to changes in quantity demanded. C) demand to supply changes. D) supply to demand changes. E) equilibrium changes. Answer: A Explanation:

1)

A) B) C) D) E)

2) Consider two demand curves and the same price change for both. If the resulting percentage change in quantity demanded is greater for one (D1 ) than the other (D2 ), we can conclude

2)

A) that D1 is inelastic and D2 is elastic. B) that D1 is elastic and D2 is inelastic. C) that D2 is more elastic than D1 . D) that D1 is more elastic than D2 . E) nothing about their relative elasticities. Answer: D Explanation:

A) B) C) D) E)

3) When the percentage change in quantity demanded is greater than the percentage change in price that brought it about, demand is said to be A) zero elastic. B) unelastic. C) inelastic. D) unit elastic. E) elastic. Answer: E Explanation:

A) B) C) D) E)

1

3)

4) When the percentage change in quantity demanded is less than the percentage change in price that brought it about, demand is said to be A) zero elastic. B) unelastic. C) inelastic. D) unit elastic. E) elastic. Answer: C Explanation:

A) B) C) D) E)

5) The formula for the price elasticity of demand for a commodity can be written as which of the following? change in quantity demanded A) change in price B)

change in price change in quantity demanded

C)

percentage change in quantity demanded percentage change in price

D)

percentage change in price percentage change in quantity demanded

E)

percentage change in one price percentage change in the other price

Answer: C Explanation:

5)

A) B) C) D) E)

6) If demand is unit elastic at all prices, then the demand curve is A) a straight line. B) a parabola. C) a rectangular hyperbola. D) upward sloping. E) perfectly horizontal. Answer: C Explanation:

4)

A) B) C) D) E)

2

6)

7) A demand curve that is the shape of a rectangular hyperbola A) is elastic over the whole curve. B) is inelastic over the whole curve. C) is unit elastic over the whole curve. D) has the same elasticity as a straight-line demand curve. E) has an elasticity of 100% over the whole curve. Answer: C Explanation:

A) B) C) D) E)

8) If household income increases by 50% and desired household expenditure on vacation travel increases by 15%, the price elasticity of demand for vacation travel is A) elastic. B) inelastic. C) unity. D) positive. E) not determinable from the information given. Answer: E Explanation:

9)

A) B) C) D) E)

10) Suppose that the quantity of a good demanded rises from 90 units to 110 units when the price falls from $1.20 to 80 cents per unit. The price elasticity of demand for this product is A) 0.5 B) 1.0 C) 1.5 D) 2.0 E) 4.0 Answer: A Explanation:

8)

A) B) C) D) E)

9) If the price elasticity of demand is 0.5, then a 10% increase in price results in a A) 50% reduction in quantity demanded. B) 5% increase in quantity demanded. C) 5% decrease in total revenues. D) 5% decrease in quantity demanded. E) 0.5% decrease in quantity demanded. Answer: D Explanation:

7)

A) B) C) D) E)

3

10)

11) Suppose the price elasticity of demand for some good is 1.4. A 10% increase in the price of the good results in A) a 1.4% decrease in the quantity demanded. B) a 1.4% increase in the quantity demanded. C) a 14% increase in the quantity demanded. D) a 14% decrease in the quantity demanded. E) There is not enough information to answer this question. Answer: D Explanation:

A) B) C) D) E)

12) If the value of the price elasticity of demand is 0.6, demand is said to be A) elastic. B) partially elastic. C) inelastic. D) partially inelastic. E) somewhat inelastic. Answer: C Explanation:

13)

A) B) C) D) E)

14) Suppose that the quantity demanded of skipping ropes rises from 1250 to 1750 units when the price falls from $1.25 to $0.75 per unit. The price elasticity of demand for this product is A) 1/3. B) 2/3. C) 1. D) 3/2. E) 2. Answer: B Explanation:

12)

A) B) C) D) E)

13) Suppose that the quantity of lemonade demanded falls from 103 000 litres per week to 97 000 litres per week as a result of a 10% increase in its price. The price elasticity of demand for lemonade is therefore A) 0.6. B) 6.0. C) 1.97. D) 1.03. E) impossible to compute unless we know the before and after prices. Answer: A Explanation:

11)

A) B) C) D) E)

4

14)

The table below shows the demand schedule for museum admissions in a small city. Price (per visit per person) $10 $8 $6 $4 $2

Quantity Demanded (thousands of person-visits per year) 2 4 6 8 10

TABLE 4-1 15) Refer to Table 4-1. The elasticity of demand for museum admissions is A) greater at higher prices than at lower prices. B) elastic at all points on the demand curve. C) inelastic at all points on the demand curve. D) greater at lower prices than at higher prices. E) constant at all points on the demand curve. Answer: A Explanation:

A) B) C) D) E)

16) Refer to Table 4-1. Between the prices of $8 and $10, the elasticity of demand is A) 1/3. B) 2/3. C) 1. D) 2. Answer: E Explanation:

16) E) 3.

A) B) C) D) E)

17) Refer to Table 4-1. Between the prices of $4 and $6 the price elasticity of demand is A) 0.50. B) 0.71. C) 1.00. D) 1.40. Answer: B Explanation:

15)

A) B) C) D) E)

5

17) E) 0.40.

18) If the price elasticity of demand for some good is 2.7, a 10% increase in the price results in A) a 2.7% decrease in the quantity demanded. B) a 2.7% increase in the quantity demanded. C) a 27% increase in the quantity demanded. D) a 27% decrease in the quantity demanded. E) There is not enough information to answer this question. Answer: D Explanation:

A) B) C) D) E)

19) As the price for some product increases from $4.00 to $5.00 per unit, quantity demanded decreases from 400 to 300 units per month. For this segment of the demand curve, the price elasticity of demand is A) 7/9. B) 1. C) 9/7. D) 7. E) 9. Answer: C Explanation:

20)

A) B) C) D) E)

21) Which of the following illustrates elastic demand? A) A 10% increase in price causes a 5% decrease in quantity demanded. B) A 10% increase in price causes a 20% decrease in quantity demanded. C) a price elasticity of 0.8 D) a price elasticity of 1.0 E) A 10% increase in price causes a 10% reduction in quantity demanded. Answer: B Explanation:

19)

A) B) C) D) E)

20) As the price for some product decreases from $4.00 to $3.00 per unit, quantity demanded increases from 400 to 500 units per day. For this segment of the demand curve, the price elasticity of demand is A) 7/9. B) 1. C) 9/7. D) 7. E) 9. Answer: A Explanation:

18)

A) B) C) D) E)

6

21)

22) If per capita income increases by 10% and household expenditure on fur coats increases by 15%, one can conclude that the price elasticity of demand for fur coats is A) elastic. B) inelastic. C) unity. D) positive. E) not determinable from the information given. Answer: E Explanation:

22)

A) B) C) D) E)

FIGURE 4-1 23) Refer to Figure 4-1, which shows two demand curves, one linear and the other a rectangular hyperbola. In diagram 1, the price elasticity of demand A) at point A is equal to that at point C. B) at point A is less than at point C. C) at point A is greater than at point C. D) is equal at points A, B, and C. E) at point A is equal to that at point B. Answer: C Explanation:

A) B) C) D) E)

7

23)

24) Refer to Figure 4-1, which shows two demand curves, one linear and the other a rectangular hyperbola. The price elasticity of demand is equal to one along the entire demand curve in A) diagram 1 only. B) diagram 2 only. C) both diagrams. D) neither diagram. Answer: B Explanation:

A) B) C) D)

25) A perfectly horizontal demand curve shows that the price elasticity of demand is A) zero. B) unity. C) less than one. D) infinite. E) not defined. Answer: D Explanation:

26)

A) B) C) D) E)

27) The price elasticity of demand for a product tends to be greater the A) lower its price. B) more broadly the product is defined. C) fewer close substitutes for it there are. D) more close substitutes for it there are. E) shorter the time span being considered. Answer: D Explanation:

25)

A) B) C) D) E)

26) A vertical demand curve shows that the price elasticity of demand is A) zero. B) unity. C) less than one. D) infinity. E) not defined. Answer: A Explanation:

24)

A) B) C) D) E)

8

27)

28) Which of the following statements would you expect to be true about the demand elasticities for cornflakes and food? A) Compared with food, cornflakes have a lower price elasticity of demand because it is specifically defined. B) Because cornflakes is food, but not all food is cornflakes, cornflakes would have a lower price elasticity of demand. C) Food has a higher price elasticity of demand because it is a necessity. D) Because cornflakes is food, cornflakes would have the same price elasticity of demand as food. E) Food has a lower price elasticity of demand than cornflakes because it is more broadly defined. Answer: E Explanation:

A) B) C) D) E)

29) With a downward-sloping straight-line demand curve, price elasticity of demand is A) rising continuously with price increases. B) decreasing continuously with price increases. C) increasing to the midpoint of the curve and then decreasing. D) constant everywhere on it. E) indeterminate. Answer: A Explanation:

29)

A) B) C) D) E)

30) Which of the following statements about price elasticity of demand is true? A) It is greater than one if the percentage increase in the commodity's price is greater than the percentage decline in quantity demanded. B) It is very small when good substitutes are readily available for the commodity. C) It usually increases over time. D) It is a positive number because price and quantity demanded move in the same direction. E) It is higher for an entire group of related products than it is for a particular product in that group. Answer: C Explanation:

28)

A) B) C) D) E)

9

30)

31) Suppose you are shown two intersecting demand curves that are drawn on the same scale. At the point of intersection, one of the demand curves is steeper than the other. Which of the following could explain the difference in slopes? A) The steeper one has a higher income elasticity of demand. B) The steeper one is probably the demand curve for a luxury good. C) The steeper one applies for the short run whereas the flatter one applies for the long run. D) The flatter one is for a good with no close substitutes. E) It is not possible to compare the slopes of different demand curves. Answer: C Explanation:

A) B) C) D) E)

32) Suppose egg producers succeed in permanently raising the price of their product by 15%, and as a result the quantity demanded falls by 15% in the short run. In the long run we can expect the quantity demanded to fall by A) 0%. B) 15%. C) between 0 and 15%. D) more than 15%. E) 100%. Answer: D Explanation:

32)

A) B) C) D) E)

33) Suppose that the quantity demanded of a good rises from 40 units to 60 units per month when the price falls from $1.05 to 95 cents per unit. The price elasticity of demand for this product is A) 0.5 B) 1.0 C) 1.5 D) 2.0 E) 4.0 Answer: E Explanation:

31)

A) B) C) D) E)

10

33)

34) Which of the following statements would you expect to be true about price elasticities of demand for T-shirts and clothing? A) Compared with clothing, T-shirts have a lower price elasticity of demand because they are specifically defined. B) Because T-shirts are clothing, but not all clothing is T-shirts, T-shirts would have a lower price elasticity of demand than clothing. C) Clothing has a higher price elasticity of demand because it is a necessity. D) T-shirts would have the same price elasticity of demand as clothing. E) Clothing has a lower price elasticity of demand because it is more broadly defined. Answer: E Explanation:

A) B) C) D) E)

35) Which of the following illustrates elastic demand? A) A 5% increase in price causes a 2.5% decrease in quantity demanded. B) A 5% increase in price causes a 10% decrease in quantity demanded. C) a price elasticity of 0.8. D) a price elasticity of 1.0. E) A 10% increase in price causes a 10% reduction in quantity demanded. Answer: B Explanation:

35)

A) B) C) D) E)

36) Suppose that the quantity demanded of paperback novels rises from 80 000 to 120 000 units per month when the price falls from $11 to $9 per unit. The price elasticity of demand for this product is A) 1/3. B) 1. C) 2/3. D) 3/2. E) 2. Answer: E Explanation:

34)

A) B) C) D) E)

11

36)

Demand Schedule for Ski Tickets Quantity Price Demanded ($) (no. of tickets) 120 0 110 100 100 200 90 300 80 400 70 500 60 600 50 700 40 800 30 900 20 1000 10 1100 0 1200 TABLE 4-2 37) Refer to Table 4-2. Using the data provided to plot the demand curve for ski tickets results in a ________ demand curve. Price elasticity along this demand curve is therefore ________ as price is falling. A) horizontal; constant at a value of 8 B) vertical; constant at a value of 0 C) rectangular hyperbola; constant at a value of 1 D) downward sloping and linear; continuously increasing E) downward sloping and linear; continuously decreasing Answer: E Explanation:

A) B) C) D) E)

38) Refer to Table 4-2. Total expenditure for ski tickets reaches a maximum at a price/quantity demanded combination of A) $30/90 B) $60/600 C) $100/200 D) $20/1000 E) $80/400 Answer: B Explanation:

37)

A) B) C) D) E)

12

38)

39) Refer to Table 4-2. The price elasticity of demand over the interval of the demand curve between prices of $40 and $20 is A) 3.0 B) -3.0 C) 1.0 D) 0.33 E) 0 Answer: D Explanation:

A) B) C) D) E)

40) Refer to Table 4-2. Price elasticity over the interval of the demand curve between prices of $90 and $70 is A) 0.5 B) 2.0 C) -0.5 D) 4.0 E) 1.0 Answer: B Explanation:

39)

A) B) C) D) E)

13

40)

FIGURE 4-2 41) Refer to Figure 4-2. In diagram 1, the elasticity of demand over the price range $14 to $16 is A) 0. B) less than 1. C) 1. D) greater than 1. E) infinity. Answer: D Explanation:

A) B) C) D) E)

42) Refer to Figure 4-2. In diagram 1, the elasticity of demand over the price range $12 to $14 is A) 0. B) less than 1. C) 1. D) greater than 1. E) infinity. Answer: D Explanation:

41)

A) B) C) D) E)

14

42)

43) Refer to Figure 4-2. In diagram 1, the elasticity of demand for prices below $10 is A) 0. B) less than 1. C) 1. D) greater than 1. E) infinity. Answer: B Explanation:

A) B) C) D) E)

44) Refer to Figure 4-2. In diagram 1, the elasticity of demand at $10 is A) 0. B) less than 1. C) exactly 1. D) greater than 1. E) infinity. Answer: C Explanation:

45)

A) B) C) D) E)

46) Refer to Figure 4-2. In diagram 3, the elasticity of demand between prices $5 and $10 is A) 0. B) less than 1. C) exactly 1. D) greater than 1. E) infinity. Answer: C Explanation:

44)

A) B) C) D) E)

45) Refer to Figure 4-2. In diagram 3, the elasticity of demand between prices $10 and $20 is A) 0. B) less than 1. C) exactly 1. D) greater than 1. E) infinity. Answer: C Explanation:

43)

A) B) C) D) E)

15

46)

47) Refer to Figure 4-2. In diagram 2, the price elasticity of demand is A) 0. B) less than -1. C) exactly 1. D) greater than 1. E) infinity. Answer: A Explanation:

A) B) C) D) E)

48) Refer to Figure 4-2. The price elasticity of demand is continuously decreasing as the price falls in diagram(s) A) 1. B) 2. C) 1, 2, and 3. D) 2, 3, and 4. E) 1 and 2. Answer: A Explanation:

49)

A) B) C) D) E)

50) Refer to Figure 4-2. The price elasticity of demand is constant as price changes in diagram(s) A) 1. B) 2. C) 1, 2, and 3. D) 2, 3, and 4. E) none of the above Answer: D Explanation:

48)

A) B) C) D) E)

49) Refer to Figure 4-2. The price elasticity of demand is continuously increasing as the price falls in diagram(s) A) 1. B) 2. C) 1, 2, and 3. D) 2, 3, and 4. E) none of the above Answer: E Explanation:

47)

A) B) C) D) E)

16

50)

51) Refer to Figure 4-2. Demand is inelastic A) over the entire demand curve in diagram 1. B) over the entire demand curve in diagram 3. C) over section (a) of the demand curve in diagram 1. D) over section (b) of the demand curve in diagram 1. E) at the midpoint between sections (a) and (b) of the demand curve in diagram 1. Answer: D Explanation:

A) B) C) D) E)

52) Refer to Figure 4-2. There is good reason to suppose that, of the four goods whose demand curves are shown in diagrams 1-4 of the figure, the good that has the fewest close substitutes is shown in A) diagram 1. B) diagram 2. C) diagram 3. D) diagram 4. E) There is not enough information to determine this. Answer: B Explanation:

52)

A) B) C) D) E)

53) Suppose you are advising the government on changes in the gasoline market. The current price is $1.00 per litre and the quantity demanded is 2.5 million litres per day. Short-run price elasticity of demand is constant at 0.3. If the supply of gasoline is reduced so that the price rises to $1.50 per litre, then quantity demanded is predicted to fall in the short run by A) 15%, and total expenditure will rise. B) 15%, and total expenditure will fall. C) 50%, and total expenditure will fall. D) 12%, and total expenditure will rise. E) 13.3%, and total expenditure will rise. Answer: D Explanation:

51)

A) B) C) D) E)

17

53)

54) Suppose you are advising the government on changes in the gasoline market. The current price is $1.00 per litre and the quantity demanded is 2.5 million litres per day. Long-run price elasticity of demand is constant at 0.8. If the supply of gasoline is reduced so that the price rises to $1.50 per litre, then quantity demanded is predicted to fall in the long run by A) 12%, and total expenditure will fall. B) 32%, and total expenditure will rise. C) 15%, and total expenditure will rise. D) 15%, and total expenditure will fall. E) 50%, and total expenditure will rise. Answer: B Explanation:

A) B) C) D) E)

55) Suppose a fast-food chain determines that the price elasticity of demand for its hamburgers is 1.7, and the price of the hamburger is currently $4.00. What will be the effect on quantity demanded and total expenditure on this chain's hamburgers if the price is increased to $6.00? A) Quantity demanded will fall by 68% and total expenditure will decrease. B) Quantity demanded will fall by 11.76% and total expenditure will decrease. C) Quantity demanded will fall by 17% and total expenditure will increase. D) Quantity demanded will fall by 1.7% and total expenditure will increase. E) Quantity demanded will fall by 34% and total expenditure will decrease. Answer: A Explanation:

56)

A) B) C) D) E)

57) Every month Olivier buys exactly 6 take-out pizzas even though the price may fluctuate significantly. Apparently, Olivier's price elasticity of demand for take-out pizza is A) -1. B) 0. C) 1. D) 6. E) infinity. Answer: B Explanation:

55)

A) B) C) D) E)

56) Rania is selling boxes of cookies door to door in her neighbourhood. At a price of $10 per box she sold 40 boxes per day. When the price was reduced to $4 per box she sold 100 boxes per day. Assuming that the demand conditions were unchanged, what is the price elasticity of demand for Rania's cookies? A) -1.7 B) 0 C) 0.85 D) 1 E) 1.17 Answer: D Explanation:

54)

A) B) C) D) E) 18

57)

58) Suppose an analysis of the possible effects of increases in university tuition fees predicts that a 10% increase in tuition fees will result in a 3% decline in enrolment. What is the implied price elasticity of demand for university attendance? A) 0 B) 0.3 C) 3 D) 7 E) 10 Answer: B Explanation:

A) B) C) D) E)

59) Suppose an analysis of the possible effects of increases in university tuition fees predicts that a 10% increase in tuition fees will result in a 3% decline in enrolment. Given the information this provides about price elasticity of demand, what is the predicted effect on total expenditure on tuition fees? A) total expenditure will decrease B) total expenditure will decrease by 7% C) total expenditure will decrease by 3% D) total expenditure will increase E) total expenditure will remain constant Answer: D Explanation:

58)

A) B) C) D) E)

19

59)

FIGURE 4-2 60) Refer to Figure 4-2. As price decreases, total expenditure increases, reaches a maximum, and then decreases for the demand curve in diagram(s) A) 1. B) 2. C) 3. D) 4. E) 1 and 3. Answer: A Explanation:

A) B) C) D) E)

61) Refer to Figure 4-2. As price decreases, total expenditure remains constant in diagram(s) A) 1. B) 2. C) 3. D) 4. E) 2 and 4. Answer: C Explanation:

60)

A) B) C) D) E)

20

61)

62) A demand curve for which any price-quantity combination yields the same total expenditure reveals a price elasticity of demand equal to A) infinity. B) zero. C) one. D) some value greater than one but less than infinity. E) not enough information to know. Answer: C Explanation:

A) B) C) D) E)

63) If price elasticity of demand for good X is equal to 0.4, then an increase in price will cause total expenditure on good X to A) increase. B) remain constant. C) decrease. D) fall to zero. E) be negative. Answer: A Explanation:

63)

A) B) C) D) E)

64) When a product's price has an inverse relationship with total expenditure, then demand has a price elasticity of A) zero. B) less than one. C) greater than one. D) one. E) inverse proportions. Answer: C Explanation:

62)

A) B) C) D) E)

21

64)

65) If total expenditure on a product rises and falls directly with a product's price, then demand for this product has an elasticity of A) zero. B) less than one. C) greater than one. D) one. E) direct proportions. Answer: B Explanation:

A) B) C) D) E)

66) If the total expenditure on photocopiers increases when the price of photocopiers rises, the price elasticity of demand is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) equal to one (demand is unit elastic). D) not determinable from the information given. E) exactly zero. Answer: B Explanation:

66)

A) B) C) D) E)

67) If the total expenditure on perfume increases when the price of perfume falls, the price elasticity of demand is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) unity (demand is unit elastic). D) not determinable from the information given. E) exactly zero. Answer: A Explanation:

65)

A) B) C) D) E)

22

67)

68) If the total expenditure on cars increases when the price of cars rises, the price elasticity of demand for cars is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) equal to one (demand is unit elastic). D) not determinable from the information given. E) exactly zero. Answer: B Explanation:

A) B) C) D) E)

69) Suppose the current level of output of some good is 100 units. If market demand is inelastic at that quantity, total expenditure on this product would be higher if output was A) maximized. B) kept constant. C) greater than 100 units. D) less than 100 units. E) minimized. Answer: D Explanation:

69)

A) B) C) D) E)

70) The president of a major nickel-producing company says that an increase in the price of nickel would have no effect on the total amount spent on nickel. If this is true, the price elasticity of demand for nickel is A) more than one. B) exactly one. C) less than zero. D) infinitely elastic. E) not calculable from the information given. Answer: B Explanation:

68)

A) B) C) D) E)

23

70)

71) Suppose Statistics Canada reports that total income earned by Canadian barley farmers has declined as a result of a partial crop failure that has driven up the Canadian price of barley. We can conclude that the price elasticity of demand for barley in Canada is A) greater than one. B) exactly one. C) less than zero. D) less than one. E) exactly zero. Answer: A Explanation:

A) B) C) D) E)

72) If the total expenditure on clothing decreases when the price of clothing falls, the price elasticity of demand is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) unity (demand is unit elastic). D) not determinable from the information given. E) exactly zero. Answer: B Explanation:

72)

A) B) C) D) E)

73) If household expenditures on electricity remain constant when the price of electricity increases, the price elasticity for electricity is A) greater than one (demand is elastic). B) less than one (demand is inelastic). C) one (demand is unit elastic). D) exactly zero. E) not determinable from the information given. Answer: C Explanation:

71)

A) B) C) D) E)

24

73)

74) If the total revenue of producers rises for an initial cut in the price of their product but falls for further reductions in price, the price elasticity of demand for the product A) declines as price falls. B) is zero. C) is unity. D) rises as price falls. E) rises and then falls. Answer: A Explanation:

A) B) C) D) E)

75) The elasticity of supply for a given commodity is calculated as percentage change in quantity supplied A) percentage change in product price B)

percentage change in quantity supplied percentage change in input prices

C)

percent change in product price percentage change in quantity supplied

D)

percentage change in quantity supplied percentage change in average household income

E)

percentage change in quantity supplied of one good percentage change in average price of a different good

Answer: A Explanation:

75)

A) B) C) D) E)

76) A value of zero for the elasticity of supply of some product implies that A) the supply curve is horizontal. B) supply is highly responsive to price. C) the supply curve is vertical. D) the product will not be supplied at any price. E) there is no supply. Answer: C Explanation:

74)

A) B) C) D) E)

25

76)

77) If the demand for some good fluctuates, but supply is constant, then which of the following combinations would generally yield the greatest price fluctuations? A) small demand fluctuations and elastic supply B) large demand fluctuations and elastic supply C) small demand fluctuations and inelastic supply D) large demand fluctuations and inelastic supply E) small demand fluctuations and a unit elastic supply Answer: D Explanation:

A) B) C) D) E)

78) If the demand for some good fluctuates, but supply is constant, then which of the following combinations would generally yield the greatest quantity fluctuations? A) large demand fluctuations and inelastic supply B) small demand fluctuations and unit elastic supply C) small demand fluctuations and inelastic supply D) small demand fluctuations and elastic supply E) large demand fluctuations and elastic supply Answer: E Explanation:

79)

A) B) C) D) E)

80) The elasticity of supply for some product will tend to be larger A) the higher is the elasticity of demand for the product. B) the lower is the elasticity of demand for the product. C) the harder it is for firms to shift from the production of this product to another. D) the easier it is for firms to shift from the production of this product to another. E) the less time firms have to adjust to price changes. Answer: D Explanation:

78)

A) B) C) D) E)

79) Suppose that as the price of some product increases from $4.00 to $5.00 per unit the quantity supplied rises from 500 to 1000 units per month. The price elasticity of supply for this product is A) 0.33. B) 2.0. C) 2.5. D) 3.0. E) 1.0. Answer: D Explanation:

77)

A) B) C) D) E)

26

80)

81) Consider a firm's price elasticity of supply. If firms' costs rise rapidly as output increases, the A) supply curve will tend to be flat. B) demand curve will tend to be steep. C) elasticity of demand will tend to be low. D) price elasticity of supply will tend to be high. E) price elasticity of supply will tend to be low. Answer: E Explanation:

A) B) C) D) E)

82) An upward-sloping straight-line supply curve through the origin has an elasticity of A) one. B) greater than one. C) less than one. D) infinity. E) zero. Answer: A Explanation:

83)

A) B) C) D) E)

84) Given that elasticity of supply changes over time, in the short run an increase in demand will generally cause A) the price to rise above its long-run equilibrium value. B) the price to rise to a level below its long-run equilibrium value. C) the quantity exchanged to rise above its long-run equilibrium value. D) both price and quantity exchanged to rise above their long-run equilibrium values. E) supply to change. Answer: A Explanation:

82)

A) B) C) D) E)

83) A value of infinity for the elasticity of supply of some product implies that A) the supply curve is horizontal. B) supply is very unresponsive to price. C) the supply curve is vertical. D) the product will be supplied at any price. E) no product will be supplied at any price. Answer: A Explanation:

81)

A) B) C) D) E) 27

84)

FIGURE 4-3 85) Refer to Figure 4-3. The diagram shows a rightward shift in the demand curve for some good, and the short-run and long-run supply curves (SS and SL, respectively). In the new short-run

85)

equilibrium after the increase in demand, producers' revenue A) is unambiguously lower than in the long-run equilibrium at EL. B) could be higher or lower than at E0, depending on the short-run elasticity of supply. C) is unambiguously higher than at E0 . D) is unambiguously lower than at E0 . E) is unambiguously higher than at EL. Answer: C Explanation:

A) B) C) D) E)

86) Refer to Figure 4-3, which shows a demand shift and the short-run and long-run supply curves for some good. The diagram illustrates the general principle that A) supply is less elastic in the long run. B) demand is less elastic in the long run. C) supply is more elastic in the long run. D) both demand and supply are less elastic in the long run. E) demand is more elastic in the long run. Answer: C Explanation:

A) B) C) D) E)

28

86)

87) Refer to Figure 4-3, which shows a demand shift and the short-run and long-run supply curves for some product. In the new long-run equilibrium at EL, producers' revenue

87)

A) is unambiguously lower than at ES. B) could be higher or lower than at ES, depending on the price elasticity of demand. C) is unambiguously lower than at E0 . D) could be higher or lower than at E0, depending on the price elasticity of demand. E) is unambiguously higher than at ES. Answer: B Explanation:

A) B) C) D) E)

88) The imposition of an excise tax usually causes the price paid by consumers to ________, while the price received by sellers ________. A) rise; remains unchanged B) rise; falls C) rise; rises D) fall; remains unchanged E) fall; falls Answer: B Explanation:

A) B) C) D) E)

89) Consumers will bear a larger burden of an excise tax if A) demand is relatively elastic and supply is relatively inelastic. B) demand is relatively inelastic and supply is relatively elastic. C) both demand and supply are relatively inelastic. D) both demand and supply are relatively elastic. E) the tax is collected by firms rather than remitted directly to the government by consumers. Answer: B Explanation:

88)

A) B) C) D) E)

29

89)

90) The imposition of an excise tax will cause the least burden on consumers when demand is A) elastic. B) unit elastic. C) perfectly inelastic. D) perfectly elastic. E) vertical. Answer: D Explanation:

A) B) C) D) E)

91) The "economic incidence" of an excise tax illustrates A) who is legally responsible for paying it to the government. B) the legislative process through which it must be passed. C) the economic costs associated with avoiding the tax. D) who bears the burden of the tax. E) the political process for implementing a tax. Answer: D Explanation:

91)

A) B) C) D) E)

92) Suppose a market is in equilibrium at price P0, and then an excise tax of t dollars per unit of the good is imposed. At a price of (P0 + t) there will be excess ________ for the good unless the demand curve is ________. A) supply; horizontal B) supply; vertical C) demand; horizontal D) demand; vertical E) tax; unit elastic Answer: B Explanation:

90)

A) B) C) D) E)

30

92)

93) Suppose the market supply curve for some good is upward sloping. If the imposition of an excise tax causes no change in the equilibrium quantity sold in the market, the good's demand curve must be ________, meaning that the burden of the tax has fallen completely on the ________. A) vertical; firms B) vertical; consumers C) horizontal; firms D) horizontal; consumers E) unit elastic; government Answer: B Explanation:

A) B) C) D) E)

94) Producers will bear a larger burden of a sales tax if A) demand is relatively elastic and supply is relatively inelastic. B) demand is relatively inelastic and supply is relatively elastic. C) both demand and supply are relatively inelastic. D) both demand and supply are relatively elastic. E) the tax is collected by firms rather than remitted directly to the government by consumers. Answer: A Explanation:

95)

A) B) C) D) E)

96) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P = $15, Q = 100). The city government imposes a tax of $3 per car parked per day. Market equilbirium adjusts to P = $16 and Q = 95. After imposition of the tax, what is the daily after-tax price received by the seller per car parked? A) $1 B) $3 C) $13 D) $15 E) $16 Answer: C Explanation:

94)

A) B) C) D) E)

95) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P = $15, Q = 100). The city government imposes a tax of $3 per car parked per day. Market equilibrium adjusts to P = $16 and Q = 95. How much tax revenue does the city government collect per day? A) $95 B) $100 C) $285 D) $300 E) $1710 Answer: C Explanation:

93)

A) B) C) D) E) 31

96)

97) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P = $15, Q = 100). The city government imposes a tax of $3 per car parked per day. Market equilibrium adjusts to P = $16 and Q = 95. What is the total after-tax revenue received per day by the seller after imposition of the tax? A) $1235 B) $1600 C) $1500 D) $1520 E) $1425 Answer: A Explanation:

A) B) C) D) E)

98) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P = $15, Q = 100). The city government imposes a tax of $3 per car parked per day. Market equilibrium adjusts to P = $16 and Q = 95. Which of the following statements about the burden of the tax is correct? A) Supply is less elastic relative to demand and therefore more of the burden falls on the consumer. B) Supply is more elastic relative to demand and therefore more of the burden falls on the seller. C) Supply is more elastic relative to demand and therefore more of the burden falls on the consumer. D) Supply is less elastic relative to demand and therefore more of the burden falls on the seller. Answer: D Explanation:

98)

A) B) C) D)

99) Consider an excise tax imposed on daily parking charges in the downtown of a small city. Before the imposition of the tax, equilibrium price and quantity are $15 and 100 cars parked. (P = $15, Q = 100). The city government imposes a tax of $3 per car parked per day. Market equilibrium adjusts to P = $18 and Q = 100. Which of the following statements about the burden of the tax is correct? A) Price elasticity of supply is 0 and therefore the entire burden of the tax falls on the consumer. B) Elasticity of demand is 0 and therefore the entire burden of the tax falls on the consumer. C) Elasticity of supply is 1 and therefore the entire burden of the tax falls on the seller. D) Price elasticity of demand is 1 and therefore the entire burden of the tax falls on the seller E) The burden of the tax is shared equally by the seller and the consumer. Answer: B Explanation:

97)

A) B) C) D) E)

32

99)

Recently there have been proposals that a tax be imposed on sugar-laden soft drinks in an attempt to reduce their consumption. Assume for simplicity that all bottled soft drinks are the same size. Suppose the initial market equilibrium is P = $2.00 and Q = 1000.

FIGURE 4-4 100) Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft drink purchased. The price paid by the consumer becomes A) $1.80 B) $2.00 C) $2.20 D) $2.40 E) $2.60 Answer: D Explanation:

A) B) C) D) E)

101) Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft-drink purchased. The after-tax price received by the seller becomes A) $1.80 B) $2.00 C) $2.20 D) $2.40 E) $2.60 Answer: A Explanation:

100)

A) B) C) D) E)

33

101)

102) Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft drink purchased. The change in total expenditure on soft drinks is A) a decrease of $80. B) a decrease of $160. C) an increase of $320. D) an increase of $480. E) No change in total expenditure. Answer: A Explanation:

A) B) C) D) E)

103) Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft drink purchased. Given the change in total expenditure on soft drinks after imposition of the excise tax, what do we know about the price elasticity of demand (η) for soft drinks? A) η is equal to 1 B) η is equal to 0 C) η is greater than 1 D) η is less than 1 E) There is not enough information to determine Answer: C Explanation:

103)

A) B) C) D) E)

104) Refer to Figure 4-4. Suppose the government imposes a tax of $0.60 per soft drink purchased. Which of the following statements most accurately describes the economic incidence of this tax? A) The consumer bears more of the burden because demand is elastic relative to supply. B) The seller bears more of the burden because supply is inelastic relative to demand. C) The consumer bears more of the burden because demand is inelastic relative to supply. D) The seller bears more of the burden because supply is elastic relative to demand. E) The burden is shared equally between consumer and seller because the slopes of the supply and demand curves are the same. Answer: C Explanation:

102)

A) B) C) D) E)

34

104)

105) The formula for income elasticity of demand may be written as which of the following? change in quantity demanded A) change in income B)

change in income change in quantity demanded

C)

percentage change in quantity demanded percentage change in income

D)

percentage change in income percentage change in quantity demanded

E)

percentage change in quantity demanded percentage change in price

Answer: C Explanation:

A) B) C) D) E)

106) Income elasticity measures the change in quantity demanded of some product with respect to changes in A) the demand of the product. B) the price of another related product. C) its price. D) the supply of the product. E) households' income. Answer: E Explanation:

106)

A) B) C) D) E)

107) Income elasticity of demand measures the extent to which A) the price of a good changes when there is a change in income. B) the quantity demanded of a good changes when income changes. C) real household income changes when there is a change in the price of a good. D) one household's income changes when there is a change in the income of another household. E) quantity demanded changes when there is a change in price. Answer: B Explanation:

105)

A) B) C) D) E)

35

107)

108) If a product's income elasticity of demand is -1.7, then we can conclude that A) an increase in income will lead to an increase in demand for the product. B) the product is certainly a necessity. C) the product is a luxury good. D) a decrease in income will lead to an increase in demand for the product. E) the product is a normal good. Answer: D Explanation:

A) B) C) D) E)

109) Nancy's income has just risen from $950 per week to $1050 per week. As a result, she decides to double the number of movies she attends each week. Nancy's demand for movies is A) price elastic. B) income elastic. C) price inelastic. D) income inelastic. E) positively cross inelastic. Answer: B Explanation:

109)

A) B) C) D) E)

110) If the income elasticity of demand for some good is 2.4, a 10% increase in income results in A) a 24% increase in the quantity demanded. B) a 2.4% increase in the quantity demanded. C) a 240% increase in the quantity demanded. D) a 24% decrease in quantity demanded. E) a 240% decrease in quantity demanded. Answer: A Explanation:

108)

A) B) C) D) E)

36

110)

111) When national income falls, sales of vacation packages also fall, even at constant prices. This fact suggests that the ________ elasticity of demand for vacation packages is ________. A) income; positive B) income; negative C) price; positive D) price; negative E) cross; positive Answer: A Explanation:

A) B) C) D) E)

112) For a normal good, the quantity demanded A) responds inversely to changes in income. B) rises when income rises. C) rises when income falls. D) falls when income rises. E) does not change when income rises or falls. Answer: B Explanation:

112)

A) B) C) D) E)

113) Which of the following tends to be true of the income elasticity of demand for food? A) It tends to be well below unity only at low levels of income. B) It tends to be well above unity only at high levels of income. C) At low levels of income, it tends to be fairly high; but as the level of income rises, it tends to fall. D) It tends to remain fairly constant at all levels of income. E) It is usually zero, since we can only eat so much. Answer: C Explanation:

111)

A) B) C) D) E)

37

113)

114) If the demand for a product has an income elasticity of -3.4, we can conclude that A) an increase in income will lead to an increase in demand for the product. B) the product is certainly a necessity. C) the product is a normal good. D) the product has a rising income-consumption curve. E) a decrease in income will lead to an increase in demand for the product. Answer: E Explanation:

A) B) C) D) E)

115) If the income elasticity of demand for a good is 1.25, a 10% increase in income results in A) a 12.5% increase in the quantity demanded. B) a 12.5% decrease in the quantity demanded. C) a 125% increase in the quantity demanded. D) a decrease in quantity demanded. E) There is not enough information to answer this question. Answer: A Explanation:

116)

A) B) C) D) E)

117) We can expect that the income elasticity of demand for gourmet catered meals would be ________ the income elasticity of demand for basic groceries. A) equivalent to B) not comparable to C) less than D) higher than E) lower than Answer: D Explanation:

115)

A) B) C) D) E)

116) An increase in income will A) increase the demand for SUVs if SUVs are inferior goods. B) always increase the demand for SUVs. C) increase the supply of SUVs. D) decrease the demand for SUVs if SUVs have a very low price. E) increase the demand for SUVs if SUVs are normal goods. Answer: E Explanation:

114)

A) B) C) D) E) 38

117)

118) If Vicky's income increases by 8% and she increases her consumption of music downloads by 4%, then her income elasticity of demand for music downloads is A) 4.0. B) -0.5. C) -2.0. D) 2.0. E) 0.5. Answer: E Explanation:

118)

A) B) C) D) E)

Consider the following data for a hypothetical economy.

Year 2012 2013

Average Household Income ($) 78 000 82 000

Price of Gasoline ($/litre) 1.30 1.30

Quantity Demanded of Gasoline (millions of litres) 1940 2060

TABLE 4-3 119) Refer to Table 4-3. The income elasticity of demand for gasoline in this economy is A) 6.0. B) 0.5. C) 0.6. D) 8.3. Answer: E Explanation:

119) E) 1.2.

A) B) C) D) E)

Consider the following data for a hypothetical economy.

Year 2012 2013

Average Household Income ($) 78 000 82 000

Price of Transit Passes ($) 60 60

Quantity Demanded Transit Passes 99 000 101 000

TABLE 4-4 120) Refer to Table 4-4. The income elasticity of demand for transit passes in this economy is A) 0.4. B) 0.5. C) 2.5. D) 2.5%. E) 3.0%. Answer: A Explanation:

A) B) C) D) E)

39

120)

121) Suppose the supply curve for breakfast cereals is upward sloping. Suppose also that as average household income increases we observe a fall in the price of breakfast cereal. We can conclude that breakfast cereal is a(n) A) luxury good. B) substitute good. C) inferior good. D) normal good. E) necessity good. Answer: C Explanation:

A) B) C) D) E)

122) Normal goods A) have positive income elasticity of demand. B) have negative income elasticity of demand. C) have negative elasticity of supply. D) do not have elasticity of demand. E) are sometimes also inferior goods. Answer: A Explanation:

122)

A) B) C) D) E)

123) An inferior good has A) a positive income elasticity of demand. B) a negative income elasticity of demand. C) an income elasticity of demand greater than zero but less than 1. D) a positive income elasticity of demand and a price elasticity of demand greater than 1. E) a negative price elasticity of demand. Answer: B Explanation:

121)

A) B) C) D) E)

40

123)

124) If a producer knew his product to be an inferior good and he also knew average household income was falling, he might A) decrease output because the demand for his product would rise. B) increase output because the demand for his product would rise. C) keep his output the same. D) cut output immediately because the demand for his product would surely fall. E) close down, because inferior goods are the first to be eliminated from household budgets when income falls. Answer: B Explanation:

A) B) C) D) E)

125) Consider the income elasticity of demand for turnips. An increase in income will A) increase the demand for turnips if turnips are inferior goods. B) always increase the demand for turnips. C) increase the supply of turnips. D) decrease the demand for turnips if turnips have a very low price. E) increase the demand for turnips if turnips are normal goods. Answer: E Explanation:

125)

A) B) C) D) E)

126) Suppose national income is rising steadily at 2% per year over a 5-year period. Over the same time period, suppose quantity demanded for iPods and iPhones increases at 5% per year, but no other relevant variables are changing. We can conclude that the income elasticity for these products is ________ and that these products are ________ goods. A) 0.4; inferior B) 4.0; normal C) 2.5; luxury D) 10.0; necessities E) 4.0; necessities Answer: C Explanation:

124)

A) B) C) D) E)

41

126)

127) If the income elasticity of demand for a good is - 3.4, a 25% increase in income results in A) a 4% increase in quantity demanded. B) a 0.85% increase in quantity demanded. C) an 8.5% decrease in quantity demanded. D) an 85% decrease in the quantity demanded. E) There is not enough information to answer this question. Answer: D Explanation:

A) B) C) D) E)

128) Suppose the price elasticity of demand for good X is 1.5. If household income increases by 25%, ceteris paribus, what is the change in quantity demanded for good X? A) a 37.5% increase in quantity demanded B) a 3.75% increase in quantity demanded C) a 0.375% increase in quantity demanded D) no change in quantity demanded E) There is not enough information to answer this question. Answer: E Explanation:

128)

A) B) C) D) E)

129) Cross-price elasticity of demand may be defined as percentage change in quantity demanded of good X A) percentage change in price of good X B)

percentage change in price of good X percentage change in price of good Y

C)

percentage change in quantity demanded of good X percentage change in price of good Y

D)

percentage change in price of good Y percentage change in quantity demanded of good X

E)

percentage change in quantity demanded of good X percentage change in income

Answer: C Explanation:

127)

A) B) C) D) E)

42

129)

130) If two goods, X and Y, have a negative cross elasticity of demand, then we know that they A) are substitutes. B) are complements. C) are both inferior goods. D) each have a price elasticity greater than one. E) are both normal goods. Answer: B Explanation:

A) B) C) D) E)

131) If two goods, X and Y, have a positive cross elasticity of demand, then we know that they A) are both normal goods. B) are complements. C) are both inferior goods. D) each have a price elasticity greater than one. E) are substitutes. Answer: E Explanation:

131)

A) B) C) D) E)

132) Suppose the cross elasticity of demand between two goods, X and Y, is negative. If the price of X decreases, the quantity demanded will A) rise for both goods. B) fall for both goods. C) rise for X and fall for Y. D) fall for X and rise for Y. E) not change. Answer: A Explanation:

130)

A) B) C) D) E)

43

132)

133) Suppose the cross elasticity of demand for two goods, X and Y, is positive. If the price of Y falls, then quantity demanded will A) rise for both goods. B) fall for both goods. C) rise for X and fall for Y. D) fall for X and rise for Y. E) remain the same for both goods. Answer: D Explanation:

A) B) C) D) E)

134) If pizza and beer are complementary goods, we can conclude that A) the income elasticity of demand is positive. B) their cross-elasticity of demand is positive. C) both goods are inferior goods. D) the income elasticity of demand is negative. E) their cross-elasticity of demand is negative. Answer: E Explanation:

134)

A) B) C) D) E)

135) For which of the following pairs of products would we expect the cross elasticity of demand to be negative? A) printers and toner cartridges B) iPhones and BlackBerry smartphones C) butter and margarine D) LCD TVs and plasma TVs E) acetaminophen and ibuprofen Answer: A Explanation:

133)

A) B) C) D) E)

44

135)

136) During the 1970s, OPEC's output restrictions caused gasoline prices to increase sharply. Coincidentally, demand for gas-guzzling cars fell. A likely explanation for these observations is that gasoline and cars had a ________ elasticity of demand that was ________. A) cross; negative B) cross; positive C) income; negative D) income; positive E) price; negative Answer: A Explanation:

A) B) C) D) E)

137) The price of apples at a local market rises from $2.95 to $3.05 per kilogram, and as a result the quantity of oranges that households purchase increases from 3950 to 4050 kilograms per week. The cross-price elasticity is A) -1.33. B) -0.75. C) 0.75. D) 1.33. E) 1.5. Answer: C Explanation:

137)

A) B) C) D) E)

138) Suppose the cross-elasticity of demand for two goods, domestic cheese and imported cheese, is positive. If the price of imported cheese falls, then quantity demanded will A) rise for both domestic and imported cheese. B) fall for both domestic and imported cheese. C) rise for domestic cheese and fall for imported cheese. D) fall for domestic cheese and rise for imported cheese. E) There is not enough information to answer this question. Answer: D Explanation:

136)

A) B) C) D) E)

45

138)

Consider the following data for a hypothetical economy.

Year 2012 2013

Average Household Income ($) 80 000 80 000

Price of Transit Passes ($) 60 60

Quantity Demanded of Transit Passes 99 000 101 000

Price of Gasoline ($/litre) 0.95 1.05

Quantity Demanded of Gasoline (millions of litres) 1940 2060

TABLE 4-5 139) Refer to Table 4-5. The cross-price elasticity of demand for transit passes in terms of the price of gasoline is ________. We can therefore conclude that these two goods are ________. A) 0.5; substitutes B) 0.2; substitutes C) 5.0; complements D) 0.2; complements E) 0.33; substitutes Answer: B Explanation:

A) B) C) D) E)

140) Refer to Table 4-5. The cross-price elasticity of demand for transit passes in terms of the price of gasoline is ________. A rise in the price of gasoline causes the demand curve for transit passes to shift to the ________. A) 5.0; right B) 0.33; right C) 0.33; left D) 0.2; right E) 0.2; left Answer: D Explanation:

139)

A) B) C) D) E)

46

140)

Answer Key Testname: UNTITLED4

1) A 2) D 3) E 4) C 5) C 6) C 7) C 8) E 9) D 10) A 11) D 12) C 13) A 14) B 15) A 16) E 17) B 18) D 19) C 20) A 21) B 22) E 23) C 24) B 25) D 26) A 27) D 28) E 29) A 30) C 31) C 32) D 33) E 34) E 35) B 36) E 37) E 38) B 39) D 40) B 41) D 42) D 43) B 44) C 45) C 46) C 47) A 48) A 49) E 50) D 47

Answer Key Testname: UNTITLED4

51) D 52) B 53) D 54) B 55) A 56) D 57) B 58) B 59) D 60) A 61) C 62) C 63) A 64) C 65) B 66) B 67) A 68) B 69) D 70) B 71) A 72) B 73) C 74) A 75) A 76) C 77) D 78) E 79) D 80) D 81) E 82) A 83) A 84) A 85) C 86) C 87) B 88) B 89) B 90) D 91) D 92) B 93) B 94) A 95) C 96) C 97) A 98) D 99) B 100) D 48

Answer Key Testname: UNTITLED4

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140)

A A C C C E B D B A A B C E A E D E E A C A B B E C D E C B E A D E A A C D B D

49

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Partial-equilibrium analysis considers A) only the existence of a market equilibrium, as if no other markets exist. B) a specific market while ignoring any feedback effects that may come from induced changes in other markets. C) all markets simultaneously, recognizing the interactions among the various markets. D) how government planning can improve upon the results of a free market. E) the induced changes in other markets that result from a partial change in the primary market. Answer: B Explanation:

A) B) C) D) E)

2) General-equilibrium analysis considers A) the existence of a general market equilibrium, as if no specific markets existed. B) a specific market while ignoring any feedback effects that may come from induced changes in other markets. C) all markets simultaneously, recognizing the interactions among the various markets. D) how government planning can improve upon the results of the free-market system. E) the linkages between markets specifically. Answer: C Explanation:

2)

A) B) C) D) E)

3) Consider partial and general equilibrium analysis. If a specific market is quite small relative to the entire economy A) the feedback effects on this market from induced changes in other markets will be very small. B) government intervention is necessary to link it to other markets. C) general-equilibrium analysis will be necessary in order to understand this market. D) changes in this market will have considerable effects on other markets. E) partial-equilibrium analysis is the only tool available to understand this market. Answer: A Explanation:

1)

A) B) C) D) E)

1

3)

4) If an economist is conducting a partial-equilibrium analysis of the market for commuter jets, then he or she is A) accounting for the effects of changes in jet fuel prices in the market for commuter jets. B) assuming that the prices of all other goods are constant. C) assuming that changes in the prices of substitute goods will not affect the market for commuter jets. D) making an equivalent analysis to a general-equilibrium analysis, but for one market only. E) conducting an irresponsible analysis. Answer: B Explanation:

A) B) C) D) E)

5) Partial-equilibrium analysis is a legitimate method of analysis if the market being studied A) is large relative to the entire economy such that the feedback effects are obvious to the analyst. B) is in the financial sector of the economy. C) is small relative to the entire economy, such that feedback effects on the market being studied are small. D) is small relative to the entire economy, such that feedback effects on the market being studied are significant. E) is in the manufacturing sector of the economy. Answer: C Explanation:

5)

A) B) C) D) E)

6) At any disequilibrium price, whether government controlled or not, the quantity actually exchanged is determined by A) the elasticity of supply. B) the elasticity of demand. C) government decree. D) the lesser of quantity demanded and quantity supplied. E) the greater of quantity demanded and quantity supplied. Answer: D Explanation:

4)

A) B) C) D) E)

2

6)

7) Consider a competitive labour market. The likely consequence of a binding minimum wage in this labour market is A) a labour shortage. B) a lower wage for all individuals. C) a higher wage for all individuals. D) excess demand for workers. E) unemployment. Answer: E Explanation:

A) B) C) D) E)

8) Government price controls are policies that attempt to maintain the A) quantity bought at less than the quantity sold. B) quantity sold at less than the quantity bought. C) the price at some disequilibrium value. D) market price at equilibrium. E) price requested by the seller. Answer: C Explanation:

9)

A) B) C) D) E)

10) Which of the following statements about government price controls is most accurate. They A) act as a guideline to producers as to what is a fair price. B) inform consumers what is the maximum price they should pay. C) usually set upper or lower limits on prices. D) ensure that the actual price is at its free-market equilibrium. E) ensure that transactions take place at a fair price. Answer: C Explanation:

8)

A) B) C) D) E)

9) In a market where we observe a disequilibrium, quantity exchanged is determined A) by the quantity demanded. B) by the greater of quantity demanded and quantity supplied. C) by neither quantity demanded nor quantity supplied. D) by the lesser of quantity demanded and quantity supplied. E) by the quantity supplied. Answer: D Explanation:

7)

A) B) C) D) E) 3

10)

11) The price of a good or a service can be determined by free interaction of demand and supply or by a government price regulation. One important difference between these two price-determining methods is A) there are no shortages or surpluses at the free-market equilibrium price. B) regulated prices are fairer since more people can then afford the goods or services. C) that a regulated price above the equilibrium price will always result in shortages. D) the government is in the best position to know the needs of the people. E) one is capitalist and the other is communist. Answer: A Explanation:

A) B) C) D) E)

12) Consider a market in which there is an administered price. If there is excess demand, A) the market is in its free-market equilibrium. B) the market is in disequilibrium. C) there are unsuccessful sellers. D) the product has not reached the point of saturation. E) none of the product will be exchanged. Answer: B Explanation:

12)

A) B) C) D) E)

13) In competitive markets, price floors and price ceilings usually lead to A) shortages. B) a reduction in quantities exchanged. C) surpluses. D) production control by the government. E) more equitable distributions of commodities. Answer: B Explanation:

11)

A) B) C) D) E)

4

13)

14) In free and competitive markets, shortages are eliminated by A) government price controls. B) rationing. C) black markets. D) price increases. E) price decreases. Answer: D Explanation:

A) B) C) D) E)

15) In free and competitive markets, surpluses are eliminated by A) government price controls. B) government purchases. C) black markets. D) price increases. E) price decreases. Answer: E Explanation:

16)

A) B) C) D) E)

17) A minimum permissible price established by the government is called A) the equilibrium price. B) the margin price. C) a price ceiling. D) a price floor. E) the fair price. Answer: D Explanation:

15)

A) B) C) D) E)

16) Suppose the government imposes an administered price in the market for gold, which results in an excess supply. In this situation, A) the market is in equilibrium. B) the market is in disequilibrium. C) there are unsuccessful buyers. D) the gold market has not reached the point of saturation. E) no gold will be exchanged. Answer: B Explanation:

14)

A) B) C) D) E) 5

17)

18) If the government fixes the price of good X above its free-market equilibrium level, we should expect A) a surplus of good X to occur. B) a shortage of good X to occur. C) an excess demand for good X. D) a black market to arise for good X. E) a new free-market equilibrium price to be established. Answer: A Explanation:

A) B) C) D) E)

19) A legally imposed upper limit on a price is called A) a price floor. B) a price support. C) an excise price. D) a price ceiling. E) a government price. Answer: D Explanation:

19)

A) B) C) D) E)

20) A binding price floor is a A) minimum price, below equilibrium, below which price is not allowed to fall. B) maximum price, above equilibrium, which price is not allowed to exceed. C) minimum price, above equilibrium, below which price is not allowed to fall. D) maximum price, below equilibrium, which price is not allowed to exceed. E) any minimum price below which price is not allowed to fall. Answer: C Explanation:

20)

A) B) C) D) E)

21) A legal price floor is a A) price set by the government at which all goods or services must be legally sold. B) maximum price above which sales cannot legally be made. C) minimum price below which sales cannot legally be made. D) price above which there would be no demand. E) price below which there would be no supply. Answer: C Explanation:

18)

A) B) C) D) E) 6

21)

22) In which type of market would a government be most likely to establish a "legal" price floor? A) housing market B) labour market C) diamond market D) electricity market E) natural gas market Answer: B Explanation:

A) B) C) D) E)

23) For a price floor to be binding, it must be set A) very low. B) at the free-market equilibrium price. C) below the free-market equilibrium price. D) at a level such that there exists some unsatisfied demand. E) above the free-market equilibrium price. Answer: E Explanation:

23)

A) B) C) D) E)

24) Consider the market for pulp and paper. Suppose, in an attempt to help this industry, the government sets a price floor above the free-market equilibrium price. The result will be A) a continuation of the market-determined equilibrium price and quantity. B) the quantity demanded will exceed quantity supplied and there will be a shortage in the market. C) the quantity supplied will exceed quantity demanded and there will be a surplus in the market. D) a new free-market equilibrium at a higher price and lower output level. E) increased government revenue. Answer: C Explanation:

22)

A) B) C) D) E)

7

24)

25) Consider the market for iron ore, an important industrial input. Suppose the government sets a price floor below the free-market equilibrium price. The result will be A) a continuation of the free-market equilibrium price and quantity. B) the quantity demanded will exceed quantity supplied and there will be a shortage in the market. C) the quantity supplied will exceed quantity demanded and there will be a surplus in the market. D) a new free-market equilibrium at a lower price and higher output level. E) increased government revenue. Answer: A Explanation:

A) B) C) D) E)

26) An excess supply of some product is the same thing as A) a surplus. B) an excess demand. C) a shortage. D) scarcity. E) price floor. Answer: A Explanation:

26)

A) B) C) D) E)

27) An excess demand for some product is the same thing as A) a surplus. B) an excess supply. C) a shortage. D) black market. E) price ceiling. Answer: C Explanation:

25)

A) B) C) D) E)

8

27)

28) Suppose the government establishes a binding price floor for some product. At the price floor, A) although sellers are selling all of the product that they desire, consumers are not able to buy all that they desire. B) a new free-market equilibrium price and quantity will be established. C) both sellers and buyers are satisfied with the quantity that is being exchanged. D) both sellers and buyers are exchanging the free-market equilibrium quantity. E) although consumers are purchasing all of the product that they desire at this price, the sellers are not selling all that they desire. Answer: E Explanation:

A) B) C) D) E)

29) Suppose the government decides to eliminate a binding price floor that it had previously imposed on a particular good. It can be expected that A) the price would increase, the quantity demanded would decrease and the quantity supplied would increase. B) the price would increase, the quantity demanded would increase and the quantity supplied would decrease. C) the price would decrease, the quantity demanded would decrease and the quantity supplied would increase. D) the price would decrease, the quantity demanded would increase and the quantity supplied would decrease. E) no changes would take place. Answer: D Explanation:

29)

A) B) C) D) E)

30) A binding minimum wage established by the government A) is essentially a price ceiling that creates a shortage of workers. B) will be effective only if the minimum wage is set below the free-market equilibrium wage. C) will have no effect on the quantity of labour employed. D) will affect adversely only those workers whose value of productivity is greater than this minimum wage. E) is a price floor that will create a surplus of workers if the labour market is competitive. Answer: E Explanation:

28)

A) B) C) D) E)

9

30)

31) If the equilibrium wage in a competitive labour market is $9 per hour, and the government raises the minimum wage from $7 to $8 per hour, what will be the effect in this market? A) the level of employment will decrease B) unemployment will increase C) unemployment will decrease D) there will be no effect on employment E) the average wage paid to workers will increase Answer: D Explanation:

A) B) C) D) E)

32) For a legislated minimum wage to be binding in a competitive labour market, it must be set A) below the free-market wage. B) equal to the free-market wage. C) above the free-market wage. D) at or below the free-market wage. E) such that no worker can earn more than the established minimum wage. Answer: C Explanation:

33)

A) B) C) D) E)

34) A price ceiling set below the free-market equilibrium price will result in A) a clearing of the market. B) greater quantity exchanged. C) surpluses. D) excess demand. E) excess supply. Answer: D Explanation:

32)

A) B) C) D) E)

33) A legal price ceiling, if it is binding, is a A) minimum price, below equilibrium, which price is not allowed to fall below. B) maximum price, above equilibrium, which price is not allowed to exceed. C) minimum price, above equilibrium, which price is not allowed to fall below. D) maximum price, below equilibrium, which a price is not allowed to exceed. E) any maximum price which price is not allowed to exceed. Answer: D Explanation:

31)

A) B) C) D) E) 10

34)

35) Suppose the free-market equilibrium price for ice time at privately operated hockey arenas is $250 per hour. If the municipal government imposes a price ceiling of $130 per hour, we can expect to see A) an adjustment of the free-market equilibrium price to $100. B) an excess supply of ice time. C) a black market price below the free-market equilibrium price. D) that neither excess supply nor excess demand is created. E) an excess demand for ice time. Answer: E Explanation:

A) B) C) D) E)

36) In a competitive market, a legal price ceiling set above the free-market equilibrium price will result in A) a continuation of the free-market equilibrium price and quantity. B) the quantity demanded exceeding quantity supplied and thus a shortage in the market. C) the quantity supplied exceeding quantity demanded and thus a surplus in the market. D) a new free-market equilibrium at a higher price and lower output level. E) increased profits to the firms in the industry. Answer: A Explanation:

36)

A) B) C) D) E)

37) In a competitive market, a price ceiling set below the free-market equilibrium price will result in A) a continuation of the free-market equilibrium price and quantity. B) the quantity demanded exceeding quantity supplied and thus a shortage in the market. C) the quantity supplied exceeding quantity demanded and thus a surplus in the market. D) a new free-market equilibrium at a lower price and higher output level. E) excess supply. Answer: B Explanation:

35)

A) B) C) D) E)

11

37)

38) Which of the following statements best differentiates price ceilings and price floors? A) Price ceilings represent minimum prices, while price floors represent maximum prices. B) Binding price ceilings are always set below the equilibrium price, whereas binding price floors are always set above the equilibrium price. C) Price ceilings are always effective, whereas price floors are rarely effective. D) Price floors cause shortages to appear, whereas price ceilings have the opposite effect. E) Price ceilings and price floors have the same effects. Answer: B Explanation:

A) B) C) D) E)

39) Suppose that the free-market equilibrium price of natural gas would be $2.00 per unit, but in an effort to protect consumers the government has fixed the price at $1.50. At this ceiling price the quantity ________ will be greater than the quantity ________, resulting in a ________ of natural gas. A) demanded; supplied; surplus B) supplied; demanded; surplus C) demanded; supplied; shortage D) supplied; demanded; shortage E) demanded; supplied; reduction in equilibrium price Answer: C Explanation:

39)

A) B) C) D) E)

40) If the free-market equilibrium price for some product is $25, then a legal price ceiling set at $15 will bring about A) the same general effects as a price ceiling of $25. B) the same general effects as an equilibrium price of $15. C) no change in the market outcomes. D) a surplus of the good. E) a shortage of the good. Answer: E Explanation:

38)

A) B) C) D) E)

12

40)

41) Which of the following is true of price ceilings? A) Firms must charge the price established as a price ceiling. B) If the ceiling price is set above the free-market equilibrium price it will have no effect on the market. C) A ceiling price below the free-market equilibrium price is not binding. D) With a non-binding ceiling price an excess demand for the product will develop. E) With a binding ceiling price a surplus of the commodity will develop. Answer: B Explanation:

A) B) C) D) E)

42) With respect to some commodity, X, if government objectives are to (1) restrict production and (2) keep prices down to protect consumers, then legislated price ceilings will A) be a dismal failure as neither goal can ever be achieved with price ceilings. B) satisfy both goals but only if a black market develops. C) satisfy only the second goal if a black market develops. D) only have an effect on commodities at the international level. E) satisfy both goals as long as a black market does not develop. Answer: E Explanation:

42)

A) B) C) D) E)

43) Which of the following is an example of a black-market transaction? A) A person buys a hotdog on a street corner. B) A person buys a product at a price greater than the government-imposed ceiling price. C) A person buys a product at a price below the government-imposed ceiling price. D) A person places a bet at a racetrack. E) A person buys a product at a price greater than the government-imposed price floor. Answer: B Explanation:

41)

A) B) C) D) E)

13

43)

44) If the government imposes a price ceiling for some product, and a black market subsequently develops that gains control of all of the reduced output of the product, then A) the black market price will be lower than the ceiling price. B) excess profits will flow back to consumers. C) the quantity demanded will exceed quantity supplied at the black market price. D) the black market price will be higher than the free-market equilibrium price. E) consumers will be better off than they would be in the absence of the black market. Answer: D Explanation:

A) B) C) D) E)

45) If a binding price floor is in place and if the demand curve for the product shifts rightward, one consequence would be A) an increase in the amount of excess demand. B) a decrease in the amount of excess demand. C) an increase in the amount of excess supply. D) a decrease in the amount of excess supply. E) a decrease in the quantity exchanged. Answer: D Explanation:

45)

A) B) C) D) E)

46) If a binding price ceiling is in place and if the demand curve for the product shifts rightward, one consequence would be A) the quantity exchanged would increase. B) the quantity exchanged would remain constant. C) the quantity exchanged would decrease. D) an increase in the amount of excess supply. E) a decrease in the amount of excess demand. Answer: B Explanation:

44)

A) B) C) D) E)

14

46)

47) The surpluses associated with a binding price floor will be the smallest when A) both supply and demand are highly elastic. B) both supply and demand are highly inelastic. C) supply is highly elastic and demand is highly inelastic. D) supply is highly inelastic and demand is highly elastic. E) both supply and demand are unit elastic. Answer: B Explanation:

A) B) C) D) E)

48) The shortages associated with a binding price ceiling will be the smallest when A) both supply and demand are highly elastic. B) both supply and demand are highly inelastic. C) supply is highly elastic and demand is highly inelastic. D) supply is highly inelastic and demand is highly elastic. E) none of the abovethe size of the shortage has nothing to do with demand and supply elasticities. Answer: B Explanation:

49)

A) B) C) D) E)

50) If the equilibrium price for some product is $1000, a price ceiling of $1200 will result in A) the same general effects as a price floor of $1200. B) the same general effects as an administered price of $1200. C) the same general effects as a price ceiling of $600. D) massive surpluses of the good. E) no effects because the price ceiling is not binding at that price. Answer: E Explanation:

48)

A) B) C) D) E)

49) A predictable result of the imposition of binding price floors or price ceilings is A) shortages. B) a reduction in quantities exchanged. C) surpluses. D) production control by the government. E) a more equitable distribution of commodities. Answer: B Explanation:

47)

A) B) C) D) E) 15

50)

51) If the equilibrium price for some product is $1000, a price ceiling of $800 will result in A) the same general effects as a price ceiling of $1200. B) the same general effects as a price floor of $1200. C) the same general effects as a price ceiling of $600. D) massive surpluses of the good. E) no effects because the price ceiling is not binding at that price. Answer: C Explanation:

A) B) C) D) E)

52) If a binding price ceiling is in effect and if the demand for the product increases, one consequence would be A) a decrease in the amount of excess supply. B) a decrease in the amount of excess demand. C) an increase in the amount of excess supply. D) an increase in the amount of excess demand. E) no change in the excess supply or demand for the product. Answer: D Explanation:

51)

A) B) C) D) E)

16

52)

FIGURE 5-1 53) Refer to Figure 5-1. In this market, suppose the government announces that the price must be P2

53)

or higher. This price (P2) is referred to as A) a price ceiling. B) a price floor. C) a non-binding price floor. D) a binding price ceiling. E) an equilibrium price. Answer: B Explanation:

A) B) C) D) E)

54) Refer to Figure 5-1. In this market, suppose the government announces that the price must be P3 or lower. This price (P3 ) is referred to as A) a non-binding price ceiling. B) a binding price floor. C) an equilibrium price. D) a price ceiling. E) a price floor. Answer: D Explanation:

A) B) C) D) E)

17

54)

55) Refer to Figure 5-1. If the government imposes an administered price at P2 , the result will be a

55)

A) surplus of BD. B) shortage of AC. C) shortage of FD. D) surplus of AF. E) surplus of 0D. Answer: A Explanation:

A) B) C) D) E)

56) Refer to Figure 5-1. If the diagram applies to the labour market, and P3 represents a legislated

56)

minimum wage, A) there will be excess demand of AC in the labour market. B) there will be unemployment of AC in the labour market. C) the free-market equilibrium wage is P0 and the labour market is unaffected by the minimum wage. D) the labour market is in disequilibrium. E) the amount of labour employed will rise from quantity F to quantity C. Answer: C Explanation:

A) B) C) D) E)

57) Refer to Figure 5-1. To be binding, a legal price ceiling must lie A) above P0 but below P2 .

57)

B) anywhere above P0 . C) below P0 but above P3 . D) anywhere below P0. E) anywhere above 0. Answer: D Explanation:

A) B) C) D) E)

58) Refer to Figure 5-1. With a price ceiling of P3 , how large will the resulting shortage be? A) FD Answer: C Explanation:

B) AF

C) AC

D) BC

A) B) C) D) E)

18

E) FC

58)

FIGURE 5-2 59) Refer to Figure 5-2. A price floor set at $2.50 will result in A) a shortage of 5 units. B) a shortage of 10 units. C) a surplus of 10 units D) a surplus of 5 units. E) no change to the market outcomes. Answer: C Explanation:

A) B) C) D) E)

60) Refer to Figure 5-2. A price floor set at a price of $1.00 will result in A) a shortage of 10 units. B) a shortage of 20 units. C) a surplus of 10 units D) a surplus of 20 units. E) no change in the market outcomes. Answer: E Explanation:

59)

A) B) C) D) E)

19

60)

61) Refer to Figure 5-2. A price ceiling set at a price of $1.00 per unit will result in A) a shortage of 10 units. B) a shortage of 20 units. C) a surplus of 10 units D) a surplus of 20 units. E) no change to the market outcomes. Answer: B Explanation:

A) B) C) D) E)

62) Refer to Figure 5-2. A price ceiling set at a price of $2.50 per unit will result in A) a shortage of 5 units. B) a shortage of 10 units. C) a surplus of 5 units D) a surplus of 10 units. E) no change in the market outcomes. Answer: E Explanation:

61)

A) B) C) D) E)

20

62)

FIGURE 5-3 63) Refer to Figure 5-3. P2 represents a price imposed by the government. What is the quantity of this good that would be exchanged in the market? A) Q0 B) Q1 C) Q2 D) Q3 E) Q4 Answer: B Explanation:

A) B) C) D) E)

64) Refer to Figure 5-3. To be effective, a price floor must lie A) above P1 but below P2 . B) anywhere above P1 . C) below P1 but above P3 . D) anywhere below P1. E) within the boundaries of P2 and P3. Answer: B Explanation:

63)

A) B) C) D) E)

21

64)

65) Refer to Figure 5-3. Suppose P3 represents a price imposed by the government. The result would be A) excess supply of Q3Q4 . B) excess supply of Q3Q0 . C) excess demand of Q 0Q2 . D) excess demand of Q 1Q2 . E) excess demand of Q 3Q4 . Answer: E Explanation:

65)

A) B) C) D) E)

66) Refer to Figure 5-3. If the government imposes a price floor at P3 , the result would be a price and

66)

quantity combination of A) P3 and Q3 . B) P3 and Q4 . C) P2 and Q1 . D) P1 and Q0 . E) P3 and Q0 . Answer: D Explanation:

A) B) C) D) E)

67) Suppose the demand for eggs is inelastic and that the market-clearing price is $1.50 per dozen. Now suppose the government imposes a minimum price of $2.00 per dozen. Why might the government implement such a policy? A) to make consumers better off B) to increase the incomes of egg farmers C) to increase excess demand in the egg market D) to reduce excess supply in the egg market E) to decrease tax revenues from egg farmers Answer: B Explanation:

A) B) C) D) E)

22

67)

68) Concert promoters often set ticket prices below what they expect the market-clearing price to be. They are effectively imposing a ________ and the result is often ________ at a considerably higher price. A) price ceiling; ticket scalping B) price floor; ticket scalping C) price ceiling; a surplus D) price floor; a shortage E) fair price; excess tickets Answer: A Explanation:

68)

A) B) C) D) E)

Demand and Supply Schedules for Chocolate Bars Price ($) 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40

Quantity Demanded (thousands per week) 1500 1600 1700 1800 1900 2000 2100 2200 2300

Quantity Supplied (thousands per week) 2100 2050 2000 1950 1900 1850 1800 1750 1700

TABLE 5-1 69) Refer to Table 5-1. Suppose that as a public-health measure the government wants to reduce the number of chocolate bars that children consume. To achieve this outcome the government could implement which of the following policies? A) Impose an equilibrium price of $1.80. B) Impose a price floor of $1.80. C) Impose a price ceiling of $1.80. D) Impose an equilibrium price of $1.20. E) Impose a price ceiling of $2.00. Answer: B Explanation:

A) B) C) D) E)

23

69)

70) Refer to Table 5-1. Suppose the government imposed a price of $0.60 per chocolate bar. The result would be A) excess demand of 450 chocolate bars per week. B) excess supply of 450 chocolate bars per week. C) excess supply of 1750 chocolate bars per week. D) excess demand of 2200 chocolate bars per week. E) stockpiling of unsold chocolate bars. Answer: A Explanation:

A) B) C) D) E)

71) Refer to Table 5-1. Suppose the government imposed a price of $1.80 per chocolate bar. A likely result from this policy is A) the development of a black market in chocolate bars. B) the allocation of chocolate bars by sellers preference. C) the allocation of chocolate bars on a first-come, first-serve basis. D) the stockpiling of unsold inventories of chocolate bars. E) the rationing of chocolate bars. Answer: D Explanation:

71)

A) B) C) D) E)

72) Refer to Table 5-1. Suppose the government established a price floor of $1.00 per chocolate bar. How many thousands of chocolate bars would be exchanged per week? A) 2000 B) 1850 C) 1900 D) 1800 E) 2100 Answer: C Explanation:

70)

A) B) C) D) E)

24

72)

FIGURE 5-1 73) Refer to Figure 5-1. If the diagram applies to the market for rental housing and P3 represents the

73)

maximum rent that can be charged, then A) there will be an excess supply of rental units equal to BD. B) units supplied will be reduced relative to the competitive equilibrium by AF rental units. C) windfall profits will be earned by landlords. D) there will be excess demand for rental units equal to FC. E) there will be excess demand for rental units equal to AF. Answer: B Explanation:

A) B) C) D) E)

74) In the presence of binding rent controls, the shortage of housing is smaller A) the higher is the elasticity of demand for housing. B) the lower is the elasticity of supply of housing. C) the longer is the length of time the rent controls are in place. D) the greater is the difference between the equilibrium price and the rent-controlled price. E) the more elastic is the long-run supply of housing. Answer: B Explanation:

A) B) C) D) E)

25

74)

75) Consider the market for rental accommodation. In the short run, the supply of this product tends to be A) infinitely price elastic. B) very price elastic. C) unit price elastic. D) very or completely price inelastic. E) irrelevant to the housing market price. Answer: D Explanation:

A) B) C) D) E)

76) Which of the explanations below best describes why a government might choose to impose binding rent controls? A) To prevent landlords from making excess profits and to protect low-income tenants from increases in the cost of housing. B) To prevent landlords from making excess profits and to reduce the long-term quantity of rental housing. C) To increase the demand for rental housing and to discourage private ownership of low-cost rental housing developments. D) To stabilize volatile rents, and thus to make the investment climate less uncertain for prospective investors in this sector. E) To stimulate employment in the construction industry through the increased demand for new houses. Answer: A Explanation:

76)

A) B) C) D) E)

77) Suppose the government establishes a ceiling on the price of rental accommodation that is lower than the free-market equilibrium price. In this case, A) construction of new rental units will be encouraged. B) the rental housing market will be unaffected. C) those people who obtain rental units at the ceiling price will benefit. D) a surplus of current rental units will develop. E) the current stock of rental housing will be better maintained as there is a shortage of housing. Answer: C Explanation:

75)

A) B) C) D) E)

26

77)

78) Assume that the long-run supply of housing is highly elastic. The imposition of binding rent controls will lead to A) a reduction in the housing shortage over time. B) a worsening of the housing shortage over time. C) no significant change in the housing shortage over time. D) only a temporary housing shortage. E) the price of rental housing to revert back to its free-market equilibrium level. Answer: B Explanation:

A) B) C) D) E)

79) The use of legislated rent controls typically A) has no effect on the distribution of income between tenants and landlords or on the availability of rental accommodations. B) affects the distribution of income between tenants and landlords but does not affect the supply of rental accommodations. C) has no effect on the distribution of income between tenants and landlords but does affect the supply of rental accommodations. D) affects the distribution of income between tenants and landlords and also affects the availability of rental accommodations. E) has much worse effects in the short run than in the long run. Answer: D Explanation:

79)

A) B) C) D) E)

80) Suppose the government imposes a price ceiling on rental housing that is below the market-clearing price. The resulting shortage will be A) greater the more recently the controlled price went into effect. B) smaller the longer the controlled price has been in effect. C) greater the more elastic the demand for rental housing. D) smaller the more elastic the demand for rental housing. E) diminished over time. Answer: C Explanation:

78)

A) B) C) D) E)

27

80)

81) Assuming that the long-run supply of housing is more ________ than the short-run supply, the imposition of binding rent controls will generally ________. A) inelastic; lead to a reduction in the housing shortage over time B) elastic; lead to a worsening of the housing shortage over time C) inelastic; lead to no significant change in the housing shortage D) elastic; lead to only a temporary housing shortage E) elastic; lead the price of rental housing to revert back to its equilibrium level Answer: B Explanation:

A) B) C) D) E)

82) Who are likely to be the biggest beneficiaries of rent controls? A) landlords B) prospective tenants C) current tenants D) construction companies E) no group will benefit from the controls Answer: C Explanation:

81)

A) B) C) D) E)

28

82)

FIGURE 5-4 83) Refer to Figure 5-4. Suppose the government imposes a rent-controlled price of $600 per month on apartments in this city. In the short run we can expect the shortage of apartments to be ________ units. A) 0 B) 200 C) 300 D) 800 E) 1000 Answer: C Explanation:

A) B) C) D) E)

84) Refer to Figure 5-4. Suppose the government imposes a rent-controlled price of $600 per month on apartments in this city. In the long run we can expect the shortage of apartments to be ________ units. A) 0 B) 200 C) 300 D) 800 E) 1000 Answer: D Explanation:

83)

A) B) C) D) E)

29

84)

85) Refer to Figure 5-4. Suppose the government sets a rent ceiling at Price B, $900. In this situation, the rental price for an apartment is A) $600. B) $900. C) any rent above $900. D) the same as the free-market equilibrium rental price. E) any rent below $600. Answer: D Explanation:

A) B) C) D) E)

86) Refer to Figure 5-4. The difference between supply curve S1 and supply curve S2 in this market for apartments is that A) S1 is not affected by a government controlled rental price. B) S2 is not affected by a government controlled rental price. C) S1 is more elastic than S2 . D) S1 is a short-run supply curve and S2 is a long-run supply curve. E) S1 is a long-run supply curve and S2 is a short-run supply curve. Answer: D Explanation:

86)

A) B) C) D) E)

87) The short-run supply for rental housing is quite ________ while the long-run supply for housing is quite ________. A) elastic; inelastic B) inelastic; elastic C) flat; steep D) inelastic; inelastic E) elastic; elastic Answer: B Explanation:

85)

A) B) C) D) E)

30

87)

88) The long-run elasticity of supply of rental housing is greater than the short-run elasticity of supply because A) changes in supply can occur very quickly, especially when rent controls are in place. B) investment in new rental housing has such a short payback period. C) changes in supply occur only after investment decisions are made regarding, for example, new construction or conversion of rental housing to other uses. D) in the long run, landlords have no incentive to alter the supply of rental housing. E) the demand for rental housing is changing continuously. Answer: C Explanation:

88)

A) B) C) D) E)

Demand and Supply Schedules for Chocolate Bars Price ($) 2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40

Quantity Demanded (thousands per week) 1500 1600 1700 1800 1900 2000 2100 2200 2300

Quantity Supplied (thousands per week) 2100 2050 2000 1950 1900 1850 1800 1750 1700

TABLE 5-1 89) Refer to Table 5-1. Suppose that as a public health measure the government wants to reduce the number of chocolate bars consumed by children. If the government imposes a price of $1.60 per chocolate bar, how many fewer chocolate bars will be consumed each week, relative to the competitive equilibrium? A) 200 B) 300 C) 1700 D) 2000 E) 1800 Answer: A Explanation:

A) B) C) D) E)

31

89)

90) Consider the demand curve for a product such as movie tickets, which shows how many tickets consumers wish to purchase at each possible price. Alternatively, we could view this demand curve in the following way: A) for each quantity of movie tickets, the price on the demand curve shows the value that consumers place on that particular movie ticket. B) for each quantity of movie tickets, the demand curve shows the economic surplus generated by the purchase of the tickets. C) for each possible price, the demand curve shows the economic surplus generated by the purchase of the tickets. D) for each quantity of movie tickets, the demand curve shows the extent of market inefficiency and deadweight loss. E) for each quantity of movie tickets, the demand curve shows the additional cost to the producer of supplying that particular movie ticket. Answer: A Explanation:

A) B) C) D) E)

91) Consider the supply curve for a product such as shipping crates, which shows how many crates producers want to sell at each possible price. Alternatively, we could view this supply curve in the following way: A) for each quantity of shipping crates, the supply curve shows the economic surplus generated by the provision of that ticket. B) for each possible price, the supply curve shows the economic surplus generated by the provision of those crates. C) for each quantity of shipping crates, the supply curve shows the extent of market inefficiency and deadweight loss. D) for each quantity of shipping crates, the supply curve shows the value that consumers place on that particular crate. E) for each quantity of shipping crates, the price on the supply curve shows the additional cost to the producer of supplying that crate. Answer: E Explanation:

90)

A) B) C) D) E)

32

91)

92) Suppose a downward-sloping demand curve intersects the horizontal axis at a point where quantity demanded equals 1250 units. What is the "value" that consumers place on the 1250th unit of this good? A) a negative value B) a positive value C) $0 D) $1250 E) it depends on the position of the supply curve Answer: C Explanation:

A) B) C) D) E)

93) Suppose a negatively sloped demand curve and a positively sloped supply curve intersect at a price and quantity combination of $100 and 600 units of the good. But suppose that producers actually produce and sell 610 units. What can we correctly say about market efficiency in this case? A) The value placed on the final 10 units of the good by consumers exceeds the additional costs associated with their production - this market is not efficient. B) The production and consumption of the additional 10 units of the good increases total economic surplus and increases market efficiency. C) This market is efficient because economic surplus is maximized as production and consumption increase simultaneously. D) This market is not efficient because quantity demanded for the good exceeds quantity supplied. E) The value placed on the final 10 units of the good by consumers is less than the additional costs associated with their production - this market is not efficient. Answer: E Explanation:

93)

A) B) C) D) E)

94) When economists describe a market for a specific product as being economically "efficient," what do they mean? A) Production techniques are such that resources are used in the most technologically efficient manner. B) Consumption of the product is such that economic surplus is maximized. C) Production of the product is such that economic surplus is maximized. D) The quantity of the product produced and consumed is such that the economic surplus is maximized. E) There are no price controls in place in that market. Answer: D Explanation:

92)

A) B) C) D) E)

33

94)

95) Consider a competitive market for good X. A binding price floor and a binding price ceiling in this market would be similar to each other in that A) each type of price control will lead to a reduction in deadweight loss and therefore an increase in efficiency in the market for good X. B) the units of good X that will no longer be produced or consumed will not generate any economic surplus. C) each type of price control results in a higher price paid by consumers, and therefore to a reduction in economic surplus. D) each type of price control results in a lower price received by sellers, and therefore to a reduction in economic surplus. E) additional units of good X will be produced and consumed, leading to an increase in economic surplus. Answer: B Explanation:

A) B) C) D) E)

96) Each point on a demand curve shows the ________ price that consumers will pay to consume that quantity. The demand curve therefore shows the ________ to consumers from consuming the product. A) maximum; cost B) minimum; cost C) maximum; value D) minimum; value E) equilibrium; equilibrium price Answer: C Explanation:

96)

A) B) C) D) E)

97) Each point on a supply curve shows the ________ acceptable price to firms for selling that unit; this price reflects ________ to firms from producing that unit. A) minimum; the equilibrium price B) maximum; the additional value C) minimum; the additional value D) maximum; the additional cost E) minimum; the additional cost Answer: E Explanation:

95)

A) B) C) D) E)

34

97)

98) Geoff is willing to pay $13 for a sixth entrance to a mountain bike park. The market price for entrance is $10.50. The bike park is willing to accept $8.75. The total economic surplus generated from Geoff's sixth trip to the bike park is A) $1.75. B) $2.50. C) $13.00. D) $10.50. E) $4.25. Answer: E Explanation:

A) B) C) D) E)

99) Consider a market that is in equilibrium with a market-clearing price. Economic surplus is shown by A) the intersection of the supply and demand curves. B) the area that is both below the demand curve and above the supply curve. C) the area that is both above the demand curve and below the supply curve. D) the area to the right of the market-clearing price and quantity. E) the area below the supply curve up to the equilibrium quantity and below the demand curve beyond the equilibrium quantity. Answer: B Explanation:

99)

A) B) C) D) E)

100) If 10 000 snow tires are produced and purchased in the month of November, we can say that economic surplus is A) the net value that society as a whole receives by producing and consuming those 10 000 snow tires. B) the number of snow tires that are produced in excess of the equilibrium quantity. C) the profit earned by the producers of those 10 000 snow tires. D) the price at which the tires are sold multiplied by 10 000. E) the net value to those consumers who purchased the 10 000 snow tires. Answer: A Explanation:

98)

A) B) C) D) E)

35

100)

FIGURE 5-5 101) Refer to Figure 5-5. At the market-clearing price and quantity of $30 per hour and 4000 hours of gardening services purchased, the economic surplus is A) the sum of the areas below the demand curve, but above the market-clearing price of $30  i.e., areas 1, 2, 6. B) the sum of the areas below the demand curve  i.e., areas 1, 2, 3, 4, 5, 6, 7, 8, 9. C) the sum of the areas above the supply curve, but below the market-clearing price of $30  i.e., areas 3, 4, 7. D) the sum of the areas above the supply curve and below the demand curve  i.e., areas 1, 2, 3, 4, 6, 7. E) the sum of the areas below the demand curve, up to 4000 hours  i.e., areas 1, 2, 3, 4, 5, 6, 7, 8. Answer: D Explanation:

A) B) C) D) E)

36

101)

102) Refer to Figure 5-5. At the market-clearing price and quantity of $30 per hour and 4000 hours of gardening services, we can say that A) economic surplus could be increased at a lower price because there would be more value to consumers. B) economic surplus could be increased at a higher price because firms would generate more revenue. C) economic surplus is maximized and the market is efficient. D) the market is inefficient because there are some consumers who are not purchasing at this price. E) the market is efficient because the government has imposed a market-clearing price and quantity. Answer: C Explanation:

A) B) C) D) E)

103) Refer to Figure 5-5. Suppose this market for gardening services is in a free-market equilibrium. If the government then imposes a price floor of $50 per hour for gardening services, the result would be A) a loss of economic surplus of the areas 6 and 7. B) a loss of economic surplus of the areas 2 and 6. C) a loss of economic surplus of the area 1. D) a loss of economic surplus of the areas 2, 3, 4, 6, and 7. E) a loss of economic surplus of the areas 1, 2, 3, and 4. Answer: A Explanation:

103)

A) B) C) D) E)

104) Refer to Figure 5-5. If production and consumption of gardening services were 5000 hours per month A) the value placed by consumers on the last 1000 hours is less than the additional costs associated with their provision. B) the provision of the last 1000 hours would decrease the amount of economic surplus in this market. C) the resources going into the last 1000 hours of gardening service would be more highly valued elsewhere. D) this market is not achieving efficiency. E) all of the above. Answer: E Explanation:

102)

A) B) C) D) E)

37

104)

105) In general (and in the absence of market failures), economic surplus will be maximized and economic efficiency will be achieved A) when the government is able to impose an equilibrium price. B) when consumers and producers can agree on the most advantageous division of economic surplus. C) when resources are allocated such that production of the good is maximized. D) when the government successfully determines what is best for society as a whole. E) in a competitive market where price is free to achieve its market-clearing equilibrium level. Answer: E Explanation:

A) B) C) D) E)

106) Which of the following statements most accurately describes the concept of deadweight loss? A) the loss of production that occurs when a binding price floor or ceiling is imposed B) the loss of consumption that occurs when a binding price floor or ceiling is imposed C) the overall loss of economic surplus that occurs when a market is inefficient D) the total market value of the goods no longer produced when quantity exchanged is below the equilibrium quantity E) the loss of economic surplus to consumers Answer: C Explanation:

106)

A) B) C) D) E)

107) One measure of the extent of market inefficiency is A) how far market price deviates from equilibrium. B) how far quantity exchanged deviates from equilibrium. C) the size of the economic surplus. D) the size of the deadweight loss. E) the difference between total economic surplus and deadweight loss. Answer: D Explanation:

105)

A) B) C) D) E)

38

107)

FIGURE 5-6 108) Refer to Figure 5-6. The market for good X is in equilibrium at P0 and Q0 . Economic surplus is represented by A) areas 1 and 5. B) areas 2, 3, 4, 6, 7, 8. C) areas 1, 2, 3, 5, 6. D) areas 1, 2, 3, 4, 5, 6, 7, 8. E) areas 2, 3, 4, 6, 7, 8, 9. Answer: C Explanation:

A) B) C) D) E)

109) Refer to Figure 5-6. The market for good X is in equilibrium at P0 and Q0 . Now suppose the government imposes a ________ at P1. One result would be ________. A) price ceiling; an increase in economic surplus represented by areas 5 and 6. B) price ceiling; a deadweight loss represented by areas 5, 6, 7 and 8. C) price floor; a deadweight loss represented by areas 5, 6, 7 and 8. D) price floor; a deadweight loss represented by areas 2, 6 and 7. E) price ceiling; a deadweight loss represented by areas 5 and 6. Answer: E Explanation:

108)

A) B) C) D) E)

39

109)

FIGURE 5-7 110) Refer to Figure 5-7. The market for good X is in equilibrium at P0 and Q0 . Now suppose the government imposes a ________ at P2. One result would be ________. A) price floor; an increase in economic surplus represented by area 1 B) price floor; a deadweight loss represented by areas 5 and 6 C) price ceiling; an increase in economic surplus represented by areas 2 and 5 D) price floor; a deadweight loss represented by area 8 E) price ceiling; a deadweight loss represented by areas 5 and 6 Answer: B Explanation:

A) B) C) D) E)

111) In competitive markets, binding price floors and binding price ceilings lead to A) a reduction in deadweight loss. B) fairer prices for consumers and producers, and therefore are better for society as a whole. C) an overall increase in economic surplus, and therefore to market efficiency. D) a maximization of economic surplus. E) an overall reduction in economic surplus, and therefore to market inefficiency. Answer: E Explanation:

110)

A) B) C) D) E)

40

111)

112) Output quotas are commonly used in markets for A) financial products. B) exported goods. C) imported goods. D) agricultural products. E) textiles. Answer: D Explanation:

112)

A) B) C) D) E)

113) Consider the Canadian market for barley. Suppose a marketing board sets a production quota which is below the equilibrium quantity. The quota will cause the price of barley to ________ and the total revenue earned by Canadian barley farmers to ________. A) rise; rise if demand is inelastic B) rise; rise if demand is elastic C) fall; fall if demand is inelastic D) fall; fall if demand is elastic E) remain unchanged; remain unchanged Answer: A Explanation:

A) B) C) D) E)

114) Consider Canada's east coast lobster fishery. Suppose the government sets a production quota which is below the equilibrium quantity. Relative to the free-market equilibrium, we can expect the result to be A) an increase in price and a decrease in deadweight loss. B) a decrease in price and a decrease in deadweight loss. C) the free-market equilibrium price and quantity because the quota is not binding. D) an increase in price and the introduction of a deadweight loss. E) a decreased price. Answer: D Explanation:

113)

A) B) C) D) E)

41

114)

115) Suppose a binding output quota is imposed in a previously competitive market with free-market equilibrium price and quantity. The result is A) higher price and higher quantity exchanged. B) higher price and lower quantity exchanged. C) lower price and lower quantity exchanged. D) lower price and higher quantity exchanged. E) no change in price or quantity exchanged. Answer: B Explanation:

A) B) C) D) E)

42

115)

The diagram below shows the market for litres of milk.

FIGURE 5-8 116) Refer to Figure 5-8. Suppose that a binding output quota is imposed on this market at quantity Q1 . The loss in economic surplus due to the quota is equal to A) areas 5 and 6. B) areas 5, 6 and 7. C) areas 2 and 5. D) area 1. E) areas 1, 2 and 3. Answer: A Explanation:

A) B) C) D) E)

43

116)

117) Refer to Figure 5-8. After the imposition of a milk quota at quantity Q1 , economic surplus is represented by A) areas 1, 2 and 5. B) areas 3 and 4. C) areas 1, 2 and 3. D) areas 1, 2, 3, 4, 5, 6 and 7. E) areas 2, 3, 5 and 6. Answer: C Explanation:

117)

A) B) C) D) E)

Consider the following demand and supply schedules for some agricultural commodity. Price $10 $30 $50 $70 $90 $110

Quantity Supplied 300 500 700 900 1100 1300

Quantity Demanded 1100 900 700 500 300 100

TABLE 5-2 118) Refer to Table 5-2. Total farmers' revenue under the free-market equilibrium is A) $3000. B) $15 000. C) $35 000. D) $63 000. Answer: C Explanation:

118) E) $75 000.

A) B) C) D) E)

119) Refer to Table 5-2. Consider the market-clearing equilibrium. If the government then imposes a production quota of 500 units, the price of this commodity will ________ relative to the free-market equilibrium price. A) remain unchanged B) rise by $20 C) fall by $20 D) rise by $40 E) fall by $40 Answer: B Explanation:

A) B) C) D) E)

44

119)

120) Refer to Table 5-2. Consider the market-clearing equilibrium. If the government then imposes a production quota of 500 units, the deadweight loss that is created is equal to A) $1000. B) $2000. C) $3000. D) $4000. E) $5000. Answer: D Explanation:

A) B) C) D) E)

121) Refer to Table 5-2. Consider the market-clearing equilibrium. If the government then required that production increase to 900 units, the deadweight loss that is created is equal to A) $1000. B) $2000. C) $3000. D) $4000. E) $5000. Answer: D Explanation:

122)

A) B) C) D) E)

123) Consider the market for any agricultural commodity for which there exists a binding output quota and demand is inelastic. Any individual producer has a clear financial incentive to A) produce a small amount beyond their individual quota amount. B) leave the market. C) give away their quota. D) stop producing. E) limit production of the commodity. Answer: A Explanation:

121)

A) B) C) D) E)

122) Refer to Table 5-2. Suppose we begin in a free-market equilibrium. If the government then imposes a production quota of 500 units, total farmers' income A) increases by $800. B) increases by $500. C) remains unchanged. D) decreases by $500. E) decreases by $700. Answer: C Explanation:

120)

A) B) C) D) E)

45

123)

124) Consider the market for any agricultural commodity for which there exists a binding output quota and demand is inelastic. One outcome of this situation is that A) the price and quantity adjust back to the free-market equilibrium levels. B) producers who were in this industry before the introduction of the quota are harmed. C) producers leave this industry because total revenues fall as a result of the the quota. D) it is difficult for new producers to enter this industry because the quotas are very expensive. E) producers who enter this industry after the introduction of the quota benefit. Answer: D Explanation:

A) B) C) D) E)

125) In Canada we have government intervention in the dairy market in the form of quotas on milk production. What are two predicted economic effects of this policy? A) a redistribution of income from consumers of dairy products to dairy farmers; and a reduction in the total amount of economic surplus in the dairy market. B) a redistribution of income from consumers of dairy products to dairy farmers; and a reduction in deadweight loss in the dairy market. C) a redistribution of income from dairy farmers to consumers of dairy products; a reduction in the total amount of economic surplus in the dairy market. D) a redistribution of income from dairy farmers to consumers of dairy products; and an increase in the total amount of economic surplus in the dairy market. E) an equitable distribution of income between dairy farmers and consumers of dairy products; and a reduction in the total amount of economic surplus in the dairy market. Answer: A Explanation:

124)

A) B) C) D) E)

46

125)

Answer Key Testname: UNTITLED1

1) B 2) C 3) A 4) B 5) C 6) D 7) E 8) C 9) D 10) C 11) A 12) B 13) B 14) D 15) E 16) B 17) D 18) A 19) D 20) C 21) C 22) B 23) E 24) C 25) A 26) A 27) C 28) E 29) D 30) E 31) D 32) C 33) D 34) D 35) E 36) A 37) B 38) B 39) C 40) E 41) B 42) E 43) B 44) D 45) D 46) B 47) B 48) B 49) B 50) E 47

Answer Key Testname: UNTITLED1

51) C 52) D 53) B 54) D 55) A 56) C 57) D 58) C 59) C 60) E 61) B 62) E 63) B 64) B 65) E 66) D 67) B 68) A 69) B 70) A 71) D 72) C 73) B 74) B 75) D 76) A 77) C 78) B 79) D 80) C 81) B 82) C 83) C 84) D 85) D 86) D 87) B 88) C 89) A 90) A 91) E 92) C 93) E 94) D 95) B 96) C 97) E 98) E 99) B 100) A 48

Answer Key Testname: UNTITLED1

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125)

D C A E E C D C E B E D A D B A C C B D D C A D A

49

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In economics, the term "utility" is defined as the A) system of basing the price of a good on its usefulness to society. B) usefulness of a good. C) total consumer satisfaction received from consumption of a good. D) usefulness of a theory to explain price determination. E) a service such as sewer and water or electricity. Answer: C Explanation:

A) B) C) D) E)

2) Economists usually assume that consumers A) are motivated to maximize their profit. B) are poor judges of what is best for them. C) spend all of their current income. D) usually save as much as possible of their income. E) are motivated to maximize their utility. Answer: E Explanation:

2)

A) B) C) D) E)

3) Economists use the term "marginal utility" to describe the A) change in total satisfaction caused by consumption of an additional unit of a good. B) average utility of each unit of a good consumed. C) inverse of the measure of total utility. D) total satisfaction received from consumption of a good. E) price paid for every unit consumed. Answer: A Explanation:

1)

A) B) C) D) E)

1

3)

4) The idea that the utility a consumer derives from successive units of a good diminishes as total consumption of the good increases is known as A) the paradox of value. B) the utility theory of demand. C) utility maximization. D) diminishing marginal utility. E) diminishing total utility. Answer: D Explanation:

A) B) C) D) E)

5) The "law" of diminishing marginal utility implies that the A) first unit of a good consumed will contribute most to the consumer's satisfaction. B) last unit of a good consumed will contribute most to the consumer's satisfaction. C) total utility is negative. D) total utility is constant as more units are consumed. E) marginal utility of a good diminishes over time. Answer: A Explanation:

5)

A) B) C) D) E)

6) If consumption of an extra unit of some good generates a marginal utility of zero, then consumption of that additional unit would mean that total utility would A) also be zero. B) not change. C) be increasing. D) be decreasing. E) be negative. Answer: B Explanation:

4)

A) B) C) D) E)

2

6)

7) If total utility from the consumption of some product is increasing as more units are consumed, then marginal utility must be A) decreasing at an increasing rate. B) negative. C) increasing. D) increasing at an increasing rate. E) positive. Answer: E Explanation:

A) B) C) D) E)

8) If total utility from the consumption of some product is decreasing as more units are consumed, then marginal utility must be A) positive. B) negative. C) decreasing. D) decreasing at an increasing rate. E) increasing at a decreasing rate. Answer: B Explanation:

7)

A) B) C) D) E)

3

8)

FIGURE 6-1 9) Refer to Figure 6-1. The marginal utility of the second unit of the good consumed is A) 10. B) 20. C) 30. D) 40. Answer: B Explanation:

A) B) C) D) E)

10) Refer to Figure 6-1. The total utility from consuming two units of the good is A) 20. B) 40. C) 60. D) 80. Answer: D Explanation:

9) E) 50.

A) B) C) D) E)

4

10) E) 100.

11) Refer to Figure 6-1. The consumer's total utility is A) increasing at an increasing rate. B) increasing at a decreasing rate. C) decreasing at an increasing rate D) decreasing at a decreasing rate. E) constant. Answer: B Explanation:

11)

A) B) C) D) E)

12) Refer to Figure 6-1. If this figure represents the utility obtained from consuming units of a good, how many units would this consumer consume if the good were free? A) 1 B) 2 C) 3 D) 4 E) at least 5 Answer: E Explanation:

A) B) C) D) E)

13) Refer to Figure 6-1. This figure illustrates the law of A) maximizing utility. B) increasing total utility. C) diminishing total utility. D) diminishing marginal utility. E) increasing marginal utility. Answer: D Explanation:

13)

A) B) C) D) E)

14) Refer to Figure 6-1. Marginal utility is zero when total utility is A) equal to zero. B) is decreasing. C) is increasing. D) equal to marginal utility. E) at its maximum. Answer: E Explanation:

12)

A) B) C) D) E)

5

14)

15) Refer to Figure 6-1. Total utility is at its maximum when marginal utility is A) equal to zero. B) negative. C) positive. D) equal to total utility. E) at the maximum. Answer: A Explanation:

A) B) C) D) E)

16) If consumption of an extra unit of a product delivers a positive marginal utility, then consumption of that additional unit would mean A) that total utility is also zero. B) that total utility would not change. C) that total utility would be increasing. D) that total utility would be decreasing. E) that the consumer would no longer receive any satisfaction from any consumption of this good. Answer: C Explanation:

16)

A) B) C) D) E)

17) A basic hypothesis of marginal utility theory is that the utility a consumer derives from successive units of a good diminishes as total consumption of the good increases. This hypothesis is known as A) the paradox of value. B) the utility theory of demand. C) utility maximization. D) the law of diminishing marginal utility. E) the law of diminishing total utility. Answer: D Explanation:

15)

A) B) C) D) E)

6

17)

18) Marginal utility theory is about A) the consumer behaviour that underlies the theory of demand. B) proving that demand curves are always downward sloping. C) the total satisfaction resulting from the consumption of some good by the consumer. D) how producers allocate their scarce resources. E) calculating consumer surplus. Answer: A Explanation:

18)

A) B) C) D) E)

The table below shows the quantities of toffee bars and bags of cashews that a consumer could consume over a 1-week period.

Toffee (bars) Units 1 2 3 4 5 6 7

Marginal Utility 10 8 5 3 1 0 0

Total Utility 10 18 23 26 27 27 27

Cashews (bags) Marginal Utility 12 10 7 5 2 1 0

Total Utility 12 22 29 34 36 37 27

TABLE 6-1 19) Refer to Table 6-1. If this consumer purchases 3 toffee bars and 4 bags of cashews per week, his/her total utility will be A) 7. B) 23. C) 31. D) 54. E) 57. Answer: E Explanation:

A) B) C) D) E)

20) Refer to Table 6-1. The maximum utility that a consumer can obtain from toffee bars and bags of cashews per week is A) 22. B) 54. C) 56. D) 64. E) 74. Answer: D Explanation:

19)

A) B) C) D) E)

7

20)

21) Refer to Table 6-1. If the prices of toffee bars and bags of cashews are both $1 and this consumer has $7 per week to spend on these two snacks, how many of each will he/she purchase to maximize utility? A) 2 toffee bars and 5 bags of cashews B) 3 toffee bars and 4 bags of cashews C) 4 toffee bars and 3 bags of cashews D) 5 toffee bars and 2 bags of cashews E) 6 toffee bars and 1 bag of cashews Answer: B Explanation:

A) B) C) D) E)

22) Refer to Table 6-1. If the price of toffee bars is $1 each, bags of cashews are $2 each, and this consumer has $7 per week to spend on these two snacks, how many of each will he/she purchase to maximize utility? A) 0 toffee bars and 3 bags of cashews B) 1 toffee bars and 3 bags of cashews C) 2 toffee bars and 2 bags of cashews D) 3 toffee bars and 2 bags of cashews E) 7 toffee bars and 0 bags of cashews Answer: D Explanation:

22)

A) B) C) D) E)

23) Refer to Table 6-1. If the prices of toffee bars and bags of cashews are both $1 and this consumer has $11 per week to spend on snacks, how many of each will he/she purchase? A) 3 toffee bars and 8 bags of cashews B) 4 toffee bars and 7 bags of cashews C) 5 toffee bars and 5 bags of cashews D) 5 toffee bars and 6 bags of cashews E) 6 toffee bars and 5 bags of cashews. Answer: D Explanation:

21)

A) B) C) D) E)

8

23)

24) Refer to Table 6-1. If the prices of both toffee bars and bags of cashews are $2 and this consumer has $14 per week to spend on these two snacks, what is the maximum total utility achievable? A) 10 B) 15 C) 33 D) 45 E) 57 Answer: E Explanation:

A) B) C) D) E)

25) A consumer maximizes his or her utility when expenditures are allocated such that A) the total utility from each good is equal. B) the total number of dollars spent on each good is equal. C) the utility received from the last unit of each good is equal. D) the utility received per dollar spent on the last unit of each good is equal. E) the marginal utility is zero for each good consumed utility. Answer: D Explanation:

24)

25)

A) B) C) D) E)

26) The condition required for a consumer to be maximizing utility, for any pair of products, X and Y, is A) PX(MUX) = PY(MUY ).

26)

B) MUX = MUY. C) MUX /PX = MUY/PY. D) MUX /PY = MUY/PX. E) PX = PY. Answer: C Explanation:

A) B) C) D) E)

27) If a consumer is faced with a choice of products A, B, C, ..., and has a given money income, the consumer's utility will be maximized when A) MUA/PA = MUB/PB = MUC/PC = ... B) PA = PB = PC = ... C) MUA = MUB = MUC = ... D) TUA = TUB = TUC = ... E) MUA = PA; MUB = PB; MUC = PC; ... Answer: A Explanation:

A) B) C) D) E) 9

27)

28) If all consumers in an economy have maximized their utility, and they face a given set of market prices, then each consumer will have identical A) total utilities for each good. B) marginal utilities for each good. C) marginal utilities per unit of each good. D) ratios of marginal utility to price for each good. E) consumption of each good. Answer: D Explanation:

28)

A) B) C) D) E)

FIGURE 6-2 29) Refer to Figure 6-2. If the price of X is $2 and the price of Y is $1 and the consumer is buying 4 units of X and 2 units of Y, the consumer's total utility is A) 8. B) 10. C) 52. D) 56. E) 69. Answer: E Explanation:

A) B) C) D) E)

10

29)

30) Refer to Figure 6-2. Suppose the price of X is $2, the price of Y is $1, and the consumer's income is $10. The consumer is currently buying 4 units of good X and 2 units of good Y. In order to maximize his utility, he should A) make no changes—he is already maximizing his total utility. B) buy the same amount of X but less Y. C) buy more of X but the same amount Y. D) buy more of X and less Y. E) buy less of X and more Y. Answer: E Explanation:

A) B) C) D) E)

31) Refer to Figure 6-2. Suppose the price of Y is $1, the consumer's income is $10, and the consumer is currently buying 3 units of good X and 4 units of good Y. If this consumer is maximizing her utility, then the price of X must be A) $1. B) $2. C) $3. D) $4. E) Impossible to tell with the given information. Answer: B Explanation:

31)

A) B) C) D) E)

32) Refer to Figure 6-2. Suppose that the price of X is $2, the price of Y is $1, the consumer's income is $10, and the consumer is buying 3 units of good X and 4 units of good Y. What is the total utility the consumer obtains from this combination of X and Y? A) 18 B) 30 C) 40 D) 60 E) 72 Answer: E Explanation:

30)

A) B) C) D) E)

11

32)

33) Refer to Figure 6-2. Suppose that the price of X is $2, the price of Y is $1, and the consumer's income is $10. The consumer is currently buying 3 units of good X and 4 units of good Y. In order to maximize his/her utility, the consumer should A) not change his/her behaviour. B) buy the same amount of X but less Y. C) buy more of X but the same amount Y. D) buy more of X and less Y. E) buy less of X and more Y. Answer: A Explanation:

A) B) C) D) E)

34) Refer to Figure 6-2. Suppose the price of Y is $1 and the consumer's income is $10. Initially, the price of X is $2 and the consumer is buying 3 units of good X and 4 units of good Y. If the price of X then falls to $1, what quantities of X and Y will he/she now purchase in order to maximize total utility? A) 2 X and 8 Y. B) 3 X and 7 Y. C) 4 X and 6 Y. D) 5 X and 5 Y. E) 6 X and 4 Y. Answer: E Explanation:

34)

A) B) C) D) E)

35) Refer to Figure 6-2. Suppose that the price of Y is $1 and the consumer's income is $10. Initially, the price of X is $2 and the consumer is buying 4 units of good Y. If the price of X then falls to $1, which of the following pairs of quantities of X correctly completes the demand schedule below? Price of X: Quantity Demanded of X: A) 2; 4 Answer: D Explanation:

33)

B) 4; 4

$1 ________

$2 ________ C) 4; 3

D) 6; 3

A) B) C) D) E)

12

E) 6; 4

35)

36) Christine is allocating her household expenditure between cleaning services and gardening services in order to maximize the household's total utility. For the quantities of cleaning and gardening services she has chosen, an increase in the price of cleaning service will, ceteris paribus, A) increase the marginal utility of a unit of cleaning service. B) reduce the marginal utility per dollar spent on cleaning service. C) reduce the marginal utility of a unit of cleaning service. D) increase the marginal utility per dollar spent on cleaning service. E) have no effect on the marginal utility per dollar spent on cleaning service. Answer: B Explanation:

A) B) C) D) E)

37) Consider a consumer who divides his income between spending on good X and good Y. The opportunity cost of good X in terms of good Y is reflected by the A) absolute price of good X. B) absolute price of good Y. C) ratio of the price of X to the price of Y. D) ratio of the price of Y to the price of X. E) price of good X relative to the prices of all other goods. Answer: C Explanation:

37)

A) B) C) D) E)

38) The Smith family is allocating its monthly household expenditure between only two goods, food and clothing. Suppose that the price of food is $5 per unit, and the price of clothing is $10 per unit and that the marginal utility that the family is receiving from its consumption of food is currently 25. What is the family's marginal utility from its consumption of clothing if it is maximizing its utility? A) 5 B) 10 C) 12.5 D) 25 E) 50 Answer: E Explanation:

36)

A) B) C) D) E)

13

38)

39) The Smith family is allocating its monthly household expenditure between only two goods, food and clothing. Suppose that the price of food is $12 per unit, and the price of clothing is $16 per unit and that the marginal utility that the family is receiving from its consumption of clothing is currently 200. What is the family's marginal utility from its consumption of food if it is maximizing its utility? A) 200 B) 150 C) 75 D) 16 E) 12 Answer: B Explanation:

A) B) C) D) E)

40) Bjorn is a student with a monthly budget of $500, which he allocates between transportation services and "all other goods." Suppose the price of transportation is $5 per unit, and the price of "all other goods" is $20 per unit. The marginal utility he currently receives from his consumption of transportation services is 60. What is his marginal utility from the consumption of "all other goods" if he is maximizing his utility? A) 5 B) 20 C) 25 D) 200 E) 240 Answer: E Explanation:

40)

A) B) C) D) E)

41) Bjorn is a student with a monthly budget of $500, which he allocates between transportation services and "all other goods." Suppose the price of transportation is $5 per unit, and the price of "all other goods" is $20 per unit. The marginal utility he currently receives from his consumption of transportation services is 60. How many units of "all other goods" is he consuming if he is maximizing his utility? A) 25 B) 60 C) 200 D) 240 E) There is not enough information to determine Answer: E Explanation:

39)

A) B) C) D) E)

14

41)

42) Laurie spends all of her money buying bread and cheese. The marginal utility she receives from the last loaf of bread is 60 and from the last block of cheese is 30. The price of bread is $3 and the price of cheese is $2. Laurie A) is buying bread and cheese in utility-maximizing amounts. B) should buy more bread and less cheese in order to maximize her utility. C) should buy more cheese and less bread in order to maximize her utility. D) is spending too much money on bread and cheese. E) should buy more bread and more cheese in order to maximize her utility. Answer: B Explanation:

A) B) C) D) E)

43) Marginal utility analysis predicts a downward-sloping demand curve for good X because A) as PX falls, the ratio MUX/PX becomes smaller, causing the consumer to purchase more of good X. B) as PX rises, the consumer increases purchases of X such that MUX/PX is equal to MU/P for all other products. C) utility-maximizing consumers equate marginal utility received for each product consumed. D) all demand curves are downward sloping, regardless of the behaviour of consumers. E) as PX falls, the consumer increases purchases of X until MUX /PX is equal to MU/P for all other products. Answer: E Explanation:

43)

A) B) C) D) E)

44) If John consumes only two goods, A and B, and he is maximizing his utility subject to his budget constraint, A) MUA/MU B is at a maximum. B) MUA/MU B equals the ratio of the total utility of A to the total utility of B. C) MUA/MU B equals 1. D) MUA/MU B equals zero. E) MUA/MU B equals the ratio of the price of A to the price of B. Answer: E Explanation:

42)

A) B) C) D) E)

15

44)

45) The market demand curve is derived from A) the vertical summation of individual demand curves. B) the average quantity demanded of all individuals in the economy. C) a weighted average of the quantity demanded of all individuals in the economy at each price. D) the horizontal summation of individual demand curves. E) market data provided by Statistics Canada. Answer: D Explanation:

45)

A) B) C) D) E)

Diagrams A, B, and C show 3 individual consumers' demand curves for cement. Consumers A, B, and C constitute the entire monthly cement market in this region.

FIGURE 6-3 46) Refer to Figure 6-3. What is the market demand (in cubic metres per month) for cement at a price of $80 per cubic metre? A) 0 B) 1000 C) 2000 D) 3000 E) 4000 Answer: B Explanation:

A) B) C) D) E)

16

46)

47) Refer to Figure 6-3. What is the market demand (in cubic metres per month) for cement at a price of $60 per cubic metre? A) 0 B) 1000 C) 2000 D) 3000 E) 4000 Answer: D Explanation:

A) B) C) D) E)

48) Refer to Figure 6-3. What is the market demand (in cubic metres per month) for cement at a price of $20 per cubic metre? A) 0 B) 4000 C) 5000 D) 10 000 E) 14 000 Answer: E Explanation:

49)

A) B) C) D) E)

50) Refer to Figure 6-3. On the regional market demand curve for cement (not shown), at which price level(s) is there a "kink" in the demand curve? A) $10 B) $20 and $30 C) $30 and $70 D) $40 and $70 E) $80 Answer: C Explanation:

48)

A) B) C) D) E)

49) Refer to Figure 6-3. On the regional market demand curve for cement (not shown), at what level(s) of quantity demanded is there a "kink" in the demand curve? A) 0 cubic metres B) 3000 cubic metres C) 1500 and 3500 cubic metres D) 1500 and 7500 cubic metres E) 12 000 cubic metres Answer: D Explanation:

47)

A) B) C) D) E)

17

50)

51) Consider the income and substitution effects of price changes. The substitution effect is the change in quantity demanded that occurs A) as a result of a change in absolute prices, with real income held constant. B) as a result of a change in relative prices with money income held constant. C) as a result of a change in relative prices, with real income held constant. D) when one good is substituted for another. E) with a change in the relative prices of two or more goods. Answer: C Explanation:

A) B) C) D) E)

52) Consider the income and substitution effects of price changes. The income effect refers to the change in quantity demanded that occurs as a result of a change in A) money income, with relative prices held constant. B) real income, with relative prices held constant. C) relative prices, with real income held constant. D) marginal utility, with real income held constant. E) preferences, with real income held constant. Answer: B Explanation:

52)

A) B) C) D) E)

53) Consider the income and substitution effects of price changes. If the price of a normal good changes, the income effect of the price change will A) always be larger than the substitution effect. B) always be to increase quantity demanded. C) reinforce the substitution effect. D) produce a positively sloped demand curve. E) oppose the substitution effect. Answer: C Explanation:

51)

A) B) C) D) E)

18

53)

54) Suppose a consumer can purchase only two goods, soap and apples. If the price of soap falls and the consumption of apples increases, we can conclude that the increased consumption of apples is due to A) neither the income effect nor the substitution effect. B) both the income effect and the substitution effect. C) the income effect only. D) the substitution effect only. E) the deflation effect. Answer: C Explanation:

A) B) C) D) E)

55) Suppose there are only two goods, A and B, and that consumer income is constant. If the price of good A falls and the consumption of good B rises, we can conclude that A) A is a normal good. B) B is a normal good. C) A is an inferior good. D) B is an inferior good. E) both A and B are normal goods. Answer: B Explanation:

55)

A) B) C) D) E)

56) A demand curve for a normal good is downward sloping due to A) the income effect. B) the substitution effect. C) the combination of income and substitution effects. D) neither the substitution effect nor the income effect. E) the Giffen effect. Answer: C Explanation:

54)

A) B) C) D) E)

19

56)

57) Consider the income and substitution effects of price changes. For a product with an income elasticity greater than one, a price increase will cause the consumer's real income to A) rise and the quantity purchased to fall. B) fall and the quantity purchased to fall. C) rise and the quantity purchased to rise. D) fall and the quantity purchased to rise. E) remain constant. Answer: B Explanation:

A) B) C) D) E)

58) Suppose the price of potatoes falls and we observe a decrease in an individual's purchases of potatoes. Which of the following can we infer? A) The income effect is negative and outweighs the substitution effect. B) The income effect is negative and reinforces the substitution effect. C) The income effect just offsets the substitution effect. D) The income effect is positive and exceeds the substitution effect. E) The substitution effect outweighs the income effect. Answer: A Explanation:

58)

A) B) C) D) E)

59) The substitution effect of a price change A) will result in the consumer buying less of a good at a lower price. B) will result in the consumer buying less of a good at a higher price. C) outweighs the income effect for Giffen goods. D) is equal to the income effect for normal goods. E) is equal to the income effect for inferior goods. Answer: B Explanation:

57)

A) B) C) D) E)

20

59)

60) If the income effect of a price change is negative and larger in absolute terms than the substitution effect, then the demand curve will be A) upward sloping. B) downward sloping. C) vertical. D) horizontal. E) of indeterminate slope. Answer: A Explanation:

A) B) C) D) E)

61) The demand curve for a good with an income elasticity of less than one A) must be downward sloping. B) must be upward sloping. C) will be upward sloping only if the substitution effect outweighs the income effect. D) will be upward sloping only if the income effect outweighs the substitution effect. E) indicates a normal good. Answer: D Explanation:

61)

A) B) C) D) E)

62) The substitution effect is A) the change in quantity demanded that occurs as a result of a change in absolute prices, with real income held constant. B) the change in quantity demanded that occurs as a result of a change in relative prices with money income held constant. C) the change in quantity demanded that occurs as a result of a change in relative prices with real income held constant. D) the change in quantity demanded that occurs when one good is substituted for another. E) the change in the relative prices of two or more goods. Answer: C Explanation:

60)

A) B) C) D) E)

21

62)

63) In which of the following situations will an individual's purchasing power be unaffected? A) money income is cut in half and the prices of all goods and services fall by 50% B) money income falls and the price of one good falls C) money income doubles and the prices of all goods and services are cut in half D) money income doubles and the prices of all goods and services remain constant E) money income is cut in half and prices of all goods and services remain constant Answer: A Explanation:

A) B) C) D) E)

64) Suppose a consumer can purchase only two goods, beef and chicken. If the price of beef falls (with all other variables held constant), and the consumption of chicken increases, we can conclude that the increased consumption of chicken is due to A) neither the income effect nor the substitution effect. B) both the income effect and the substitution effect. C) the income effect only. D) the substitution effect only. E) a change in the consumer's preference toward chicken. Answer: C Explanation:

63)

A) B) C) D) E)

22

64)

FIGURE 6-4 65) Refer to Figure 6-4. For both goods, the price falls from P0 to P1 . The substitution effect is

65)

illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good X is certainly a(n) ________ good. A) normal B) inferior C) luxury D) necessity E) Giffen Answer: B Explanation:

A) B) C) D) E)

66) Refer to Figure 6-4. For both goods, the price falls from P0 to P1 . The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good Y is certainly a(n) ________ good. A) normal B) inferior C) luxury D) necessity E) Giffen Answer: A Explanation:

A) B) C) D) E)

23

66)

FIGURE 6-5 67) Refer to Figure 6-5. For both goods, the price increases from P0 to P1. The substitution effect is

67)

illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good X is certainly a(n) ________ good. A) normal B) inferior C) luxury D) necessity E) Giffen Answer: B Explanation:

A) B) C) D) E)

68) Refer to Figure 6-5. For both goods, the price increases from P0 to P1. The substitution effect is illustrated by the change in quantity demanded from A to B; the income effect is illustrated by the change in quantity demanded from B to C. Good Y is certainly a(n) ________ good. A) inferior B) normal C) luxury D) necessity E) Giffen Answer: B Explanation:

A) B) C) D) E)

24

68)

69) Assume you are consuming two goods, X and Y. X and Y are both normal goods but they are not close complements. The price of good X increases but the price of Y remains unchanged. However, you are given enough additional income to ensure that your utility remains unchanged. What happens to your consumption of good X? A) it increases B) it stays the same C) it increases or decreases D) it decreases E) it increases over the long run Answer: D Explanation:

A) B) C) D) E)

70) Assume you are consuming two goods, X and Y. Suppose that the money prices for X and Y remain unchanged, but your income increases by 20%. What happens to your consumption of good X? A) it increases B) it stays the same C) it increases or decreases, depending on whether it is normal or inferior D) it decreases E) it increases by 20% Answer: C Explanation:

70)

A) B) C) D) E)

71) The substitution effect of a price change leads consumers to ________ their demand for goods whose prices have risen. The income effect leads consumers to buy less of all ________ goods whose prices have risen. A) reduce; normal B) increase; inferior C) increase; normal D) reduce; Giffen E) reduce; complement Answer: A Explanation:

69)

A) B) C) D) E)

25

71)

72) Consumer surplus is A) the sum of the marginal values to the consumer. B) the total value that a consumer receives from the purchase of a particular good. C) a measure of the gains that a consumer forgoes by buying this product rather than another. D) the difference between what the consumer is willing to pay for all the units consumed and what he or she actually paid. E) the consumption of a commodity above and beyond the amount required by the consumer. Answer: D Explanation:

A) B) C) D) E)

73) Consumer surplus is A) the same as Karl Marx's notion of surplus value. B) the same as total utility. C) the sum of the extra value placed on each unit of a commodity above the market price paid for each. D) the total value that consumers place on their purchases. E) the marginal value that consumers place on their purchases. Answer: C Explanation:

73)

A) B) C) D) E)

74) Consider the pizza market, with a downward-sloping demand curve and an upward-sloping supply curve. Suppose 100 pizzas are purchased at the free-market equilibrium price. The consumer surplus on the 100th pizza is A) positive. B) negative. C) non-negative. D) unknown. E) zero. Answer: E Explanation:

72)

A) B) C) D) E)

26

74)

75) Given a typical downward-sloping demand curve in a market that has reached its equilibrium, the consumer surplus A) is measured by the area above the market price and under the demand curve. B) is measured by the area below the market price and under the demand curve. C) is measured by the area immediately above the demand curve. D) is calculated as the product of market price and quantity consumed. E) cannot be measured given the information. Answer: A Explanation:

A) B) C) D) E)

76) Given a particular market demand curve, consumer surplus is A) less the lower the price and the smaller the output. B) less the lower the price and the larger the output. C) greater the higher the price and the smaller the output. D) greater the lower the price and the smaller the output. E) greater the lower the price and the larger the output. Answer: E Explanation:

76)

A) B) C) D) E)

77) Assume a person reveals the following demand conditions. At a price of $10, quantity demanded is zero; and at a price of $1, quantity demanded is 10 units. A) The consumer surplus will be zero at a price of $10. B) The consumer surplus will be the area under the entire demand curve. C) The consumer surplus is zero at a price of $1. D) Demand decreases as the price decreases. E) The lower the price the smaller the consumer surplus. Answer: A Explanation:

75)

A) B) C) D) E)

27

77)

78) An individual's consumer surplus from some product can be eliminated entirely by: 1. raising the price until very few units are bought. 2. charging a price for each unit that is equal to the individual's marginal value for each unit. 3. raising the price until zero units are purchased. A) 1 only B) 2 only C) 3 only D) 2 or 3 E) 1 or 2, but not 3. Answer: D Explanation:

A) B) C) D) E)

79) Assume an individual with a downward-sloping demand curve is paying a single price for each unit of some commodity. He will experience consumer surplus on A) all units that were not bought at that particular price. B) all of the units bought. C) all units bought with the possible exception of the last unit. D) the first unit only. E) none of the units. Answer: C Explanation:

80)

A) B) C) D) E)

81) At a garage sale, Dominique purchases a sewing machine for $30 when she was willing to pay $55. If the sewing machine costs $200 new, Dominique's consumer surplus would be A) $0. B) $25. C) $120. D) $145. E) $170. Answer: B Explanation:

79)

A) B) C) D) E)

80) At a garage sale, Ken purchases a used bicycle for $8 when he was willing to pay $25. If the bicycle costs $75 new, Ken's consumer surplus is A) $0. B) $17. C) $33. D) $50. E) $67. Answer: B Explanation:

78)

A) B) C) D) E)

28

81)

82) The total value that Doug places on his consumption of computer games equals A) the price multiplied by quantity demanded. B) his marginal utility multiplied by quantity demanded. C) price times marginal value. D) the total amount he pays for all the games he purchases. E) his total expenditure on computer games plus his consumer surplus. Answer: E Explanation:

82)

A) B) C) D) E)

FIGURE 6-6 83) Refer to Figure 6-6. Suppose the market price is p*. In this case, consumer surplus is outlined by the area A) ACDE B) ABDF C) ACF D) BCD E) ADE Answer: D Explanation:

A) B) C) D) E)

29

83)

FIGURE 6-7 84) Refer to Figure 6-7. Suppose that price is P0 . Total consumer surplus is then given by the area

84)

A) under the demand curve to the left of Q0. B) below P0 and to the left of Q0. C) under the demand curve to the left of Q0, but above P0 . D) under the entire demand curve. E) above the market price. Answer: C Explanation:

A) B) C) D) E)

85) Refer to Figure 6-7. Suppose that price is P0 . The total value placed on all units of the commodity consumed is given by the area A) under the demand curve to the left of Q0. B) under the demand curve to the left of Q0, but above P0 . C) below P0 and to the left of Q0. D) under the demand curve and above P0 . E) under the demand curve and to the right of Q0 . Answer: A Explanation:

A) B) C) D) E)

30

85)

86) Refer to Figure 6-7. Suppose that price is P0 . The market value of the quantity purchased is given

86)

by the area A) under the demand curve to the left of Q0. B) under the demand curve. C) below P0 and to the left of Q0. D) under the demand curve and above P0 . E) under the demand curve and to the right of Q0 . Answer: C Explanation:

A) B) C) D) E)

Dave's Consumer Surplus on Movie Rentals per Week Number of movies Amount Dave is willing to rented per week pay to rent this movie ($) 1st 2nd 3rd 4th 5th 6th 7th

Dave's consumer surplus on each movie rental if price is $5 each

10.00 8.00 6.50 5.50 5.00 4.50 4.25

TABLE 6-2 87) Refer to Table 6-2. If Dave rents 3 movies in one week, his total consumer surplus is ________ and the total amount he pays is ________. A) $24.50; $24.50 B) $19.50; $15.00 C) $9.50; $15.00 D) $6.50; $5.00 E) $5.50; $5.00 Answer: C Explanation:

A) B) C) D) E)

31

87)

88) Refer to Table 6-2. How many movies will Dave rent per week such that the consumer surplus on the last unit is zero? A) 1 B) 3 C) 5 D) 6 E) 7 Answer: C Explanation:

A) B) C) D) E)

89) Refer to Table 6-2. Assuming Dave maximizes his utility when the price is $5, his consumer surplus (in dollars) on each movie rental in order from 1 through 7 is as follows: A) 10.00, 18.00, 24.50, 30.00, 35.00, 39.50, 43.75. B) 5.00, 3.00, 1.50, 0.50, 0, 0, 0. C) 10.00, 8.00, 6.50, 5.50, 5.00, 4.50, 4.25. D) 5.00 on all units. E) 0 on all units. Answer: B Explanation:

88)

89)

A) B) C) D) E)

The table below shows the total value (in dollars) that Andrew gets from playing 9-hole rounds of golf. Rounds of Golf per Month 0 1 2 3 4 5 6 7

Total Value ($) 0 40 70 92 108 120 130 130

TABLE 6-3 90) Refer to Table 6-3. Andrew values the 4th round of golf at a marginal value of A) $16. B) $92. C) $108. D) $310. Answer: A Explanation:

A) B) C) D) E)

32

90) E) $430.

91) Refer to Table 6-3. If the price of a 9-hole round of golf is $19, then Andrew will play ________ rounds per month. A) 2 B) 3 C) 4 D) 5 E) 6 or more Answer: B Explanation:

A) B) C) D) E)

92) Refer to Table 6-3. If the price of a 9-hole round of golf is $9, then Andrew will play ________ times per month. A) 2 B) 3 C) 4 D) 5 E) 6 Answer: E Explanation:

93)

A) B) C) D) E)

94) Refer to Table 6-3. If the price of a 9-hole round of golf is $22, and Andrew is maximizing his utility, then his consumer surplus will be A) $202. B) $108. C) $92. D) $26. E) $22. Answer: D Explanation:

92)

A) B) C) D) E)

93) Refer to Table 6-3. If the price of a 9-hole round of golf is $16, and Andrew is maximizing his utility, then his consumer surplus will be A) $310. B) $108. C) $92. D) $44. E) $16. Answer: D Explanation:

91)

A) B) C) D) E)

33

94)

95) Since there is a limited supply of diamonds in the world, the consumption of diamonds A) takes place at relatively low marginal value. B) takes priority over some other good. C) is no less important than consumption of water. D) takes place at relatively high marginal value. E) should be regulated by the government. Answer: D Explanation:

A) B) C) D) E)

96) Since there is a relatively plentiful supply of water in Canada (this is not true in many parts of the world), the consumption of water in Canada A) takes place at a relatively low marginal value. B) takes priority over all other goods. C) takes place at a relatively high marginal value. D) should be regulated by the government. E) should be unlimited at a price of $0. Answer: A Explanation:

96)

A) B) C) D) E)

97) The paradox in "the paradox of value" refers to the A) confusion between supply curves and demand curves. B) fact that goods with high total values command high prices. C) fact that goods with low total values command low prices. D) situation where a good that is necessary to sustain life is "more valuable" than a decorative, luxury item. E) situation where a good with a low total value can command a high price, while a good with a high total value can command a low price. Answer: E Explanation:

95)

A) B) C) D) E)

34

97)

98) For your typical consumption levels of water and diamonds, the good with the higher marginal utility is ________; the good with the higher total utility is ________; and the good with the greatest consumer surplus is ________. A) water; diamonds; water B) water; water; water C) water; water; diamonds D) diamonds; water; water E) diamonds; water; diamonds Answer: D Explanation:

A) B) C) D) E)

99) An indifference curve plotted for two different goods on the axes A) shifts when real income changes. B) shows all combinations of the two goods that give the same level of utility. C) changes its slope as the relative prices of the two goods change. D) shows the combinations of the two goods that will just use up a consumer's income. E) shows the different combinations of two goods that the same income can purchase. Answer: B Explanation:

99)

A) B) C) D) E)

100) As a consumer moves along an indifference curve A) the combination of goods will vary but the level of utility remains constant. B) the combination of goods he prefers will remain constant, but the level of satisfaction will vary. C) the combination of goods and the consumer's income level will remain constant. D) his level of utility will vary as the combinations of goods varies. E) the combination of goods will vary, but the level of money income remains constant. Answer: A Explanation:

98)

A) B) C) D) E)

35

100)

101) Given a particular consumer's indifference map, the further the indifference curve is from the origin A) the lower the marginal rate of substitution. B) the higher the marginal rate of substitution. C) the lower the level of satisfaction. D) the higher the level of satisfaction. E) the more goods are included. Answer: D Explanation:

A) B) C) D) E)

102) The marginal rate of substitution A) always has a positive algebraic value. B) is constant as one moves along a particular indifference curve. C) is the amount of one good the consumer is willing to give up in exchange for another so as to keep total satisfaction unchanged. D) is the amount of one good the consumer is willing to give up in exchange for another so as to keep total expenditure unchanged. E) is equal to the price ratio on the budget line. Answer: C Explanation:

102)

A) B) C) D) E)

103) The marginal rate of substitution measures the tradeoff between the A) prices of two goods along a budget line. B) different values that two consumers place on a good. C) amount of one good the consumer is willing to give up in exchange for another good along an indifference curve. D) different indifference curves. E) amount of one good the consumer is willing to purchase and its own price. Answer: C Explanation:

101)

A) B) C) D) E)

36

103)

104) Suppose Arun consumes only 2 goods — books and CDs — and has a set of downward sloping indifference curves. As Arun moves from one point to another on a particular indifference curve, A) the combination of books and CDs will vary, but the level of utility remains constant. B) the combination of books and CDs that Arun prefers will remain constant, but the level of satisfaction will vary. C) the combination of books and CDs and Arun's income level will remain constant. D) Arun's level of satisfaction will vary as the combinations of books and CDs varies. E) Arun is consuming the same combination of goods, but with varying levels of income. Answer: A Explanation:

A) B) C) D) E)

105) Indifference theory is based on the assumption that A) consumers are not able to rank consumption bundles in order of preference. B) consumers can always say which of two consumption bundles they prefer without having to say by how much they prefer it. C) the consumer has equated the marginal utilities of all products, and is therefore indifferent between consumption bundles. D) the consumer is able to quantify the difference in total utility received from two different consumption bundles. E) the consumer receives the same utility and is therefore indifferent between any two consumption bundles. Answer: B Explanation:

105)

A) B) C) D) E)

106) If money income is reduced by half, and the prices of all goods consumed by the household are reduced by half, the household's budget line will A) not change. B) shift inward. C) shift outward. D) become steeper. E) become flatter. Answer: A Explanation:

104)

A) B) C) D) E)

37

106)

107) An equal proportional increase in money income and all money prices will A) shift the budget line to the left parallel to the original budget line. B) shift the budget line to the right parallel to the original budget line. C) leave the position of the budget line unchanged. D) rotate the budget line inward from the vertical axis. E) rotate the budget line inward from the horizontal axis. Answer: C Explanation:

107)

A) B) C) D) E)

The diagram below shows a set of budget lines facing a household.

FIGURE 6-8 108) Refer to Figure 6-8. The movement of the budget line from ab to ac could be caused by A) an increase in money income. B) an increase in the price of food. C) an increase in the price of housing. D) a decrease in the price of food. E) a decrease in the price of housing. Answer: D Explanation:

A) B) C) D) E)

38

108)

109) Refer to Figure 6-8. The movement of the budget line from ab to db could be caused by A) a decrease in money income. B) an increase in the price of housing. C) a decrease in the price of housing. D) an increase in the price of food. E) a decrease in the price of food. Answer: B Explanation:

A) B) C) D) E)

110) Refer to Figure 6-8. The movement of the budget line from ab to ef could be caused by A) a decrease in money income. B) a decrease in the price of either food or housing. C) an equal percentage decrease in the price of both food and housing. D) an equal percentage increase in the price of both food and housing. E) an increase in the price of either food or housing. Answer: C Explanation:

111)

A) B) C) D) E)

112) In indifference curve analysis, a point to the left of the consumer's budget line A) indicates consumption spending beyond current income. B) implies the household is paying above-market prices for the goods in question. C) implies the household is paying below-market prices for the goods in question. D) implies that the household is not spending all of its income on the goods in question. E) shows a combination of goods that are beyond the income of the household. Answer: D Explanation:

110)

A) B) C) D) E)

111) A parallel shift in the consumer's budget line must indicate a change in A) at least one money price. B) money income. C) real income. D) tastes. E) both prices. Answer: C Explanation:

109)

A) B) C) D) E)

39

112)

113) Assume the quantity of good X is measured on the horizontal axis and the quantity of good Y on the vertical axis. Initial prices are PX = $5 and PY = $10. The consumer's income is $100. If PY

113)

increases to $20, then A) the entire budget line shifts parallel to the left. B) the budget line will rotate to the left, slope remaining constant. C) the budget line will rotate to the left with the slope changing from 1/2 to 1/4 (in absolute values). D) the entire budget line shifts parallel to the right. E) the budget line will rotate to the right with the slope changing from 1/4 to 1/2 (in absolute values). Answer: C Explanation:

A) B) C) D) E)

114) Suppose a consumer can purchase only two goods, pasta and cheese. Let the quantity of pasta be measured on the vertical axis and the quantity of cheese be measured on the horizontal axis. If the price of pasta falls, with no change in the price of cheese or in the consumer's money income, then the budget line for the consumer will rotate A) toward the origin and become flatter. B) toward the origin and become steeper. C) away from the origin and become flatter. D) away from the origin and become steeper. E) outward parallel to the existing budget line. Answer: D Explanation:

A) B) C) D) E)

115) Any consumption point that is on the budget line A) indicates consumption spending beyond current income. B) implies the household is paying above-market prices for the goods in question. C) implies the household is paying below-market prices for the goods in question. D) implies that the household is not spending all of its income on the goods in question. E) implies that the household is spending all of its income on the goods in question. Answer: E Explanation:

114)

A) B) C) D) E)

40

115)

116) Suppose a utility-maximizing person consumes only two goods, hamburgers and milkshakes. Suppose the price of milkshakes rises and all other variables remain constant. As a result, this person will certainly A) purchase more milkshakes and fewer hamburgers. B) reduce his/her consumption of both milkshakes and hamburgers. C) consume more hamburgers and the same amount of milkshakes. D) not increase his consumption of both milkshakes and hamburgers. E) increase his/her consumption of milkshakes. Answer: D Explanation:

A) B) C) D) E)

117) When a consumer's marginal rate of substitution between X and Y is equal to the ratio of prices for X and Y, and when the consumer is spending all available income, then A) the budget line is tangent to an indifference curve. B) the consumer is not maximizing his utility. C) a higher indifference curve can be reached given the existing budget line. D) the budget line is tangent to the indifference curve at all quantities of X and Y. E) all budget lines are tangent to all indifference curves. Answer: A Explanation:

117)

A) B) C) D) E)

118) In indifference curve analysis, the consumer's utility-maximizing point is where A) each indifference curve has the same slope as the relevant budget line. B) the indifference curve farthest from the origin intersects with the budget line that is farthest from the origin. C) the consumer's marginal utility curve is tangent to the relevant budget line. D) one indifference curve is tangent to the relevant budget line. E) the price-consumption line is tangent to the budget line. Answer: D Explanation:

116)

A) B) C) D) E)

41

118)

FIGURE 6-9 119) Refer to Figure 6-9. In part (i), the consumer is able to move from point A to point B because of A) a decrease in the price of milk. B) a decrease in the price of bread. C) a decrease in money income. D) an increase in real income. E) a decrease in the price of one good and an increase in money income. Answer: D Explanation:

A) B) C) D) E)

120) Refer to Figure 6-9. In part (ii), the consumer's move from point Z to point Y is caused by A) a change in the consumer's preferences towards milk. B) an increase in the price of milk. C) an increase in the price of bread. D) an decrease in the price of bread. E) a decrease in money income. Answer: C Explanation:

119)

A) B) C) D) E)

42

120)

121) Refer to Figure 6-9. In part (i), the line joining points A, B, and C is known as ________, which shows how ________. A) a price-consumption line; consumption changes as relative prices change, with money income constant B) an income-consumption line; consumption changes as income changes, with relative prices held constant C) a price-consumption line; consumption changes as money income and relative prices change D) an income-consumption line; consumption changes with changing relative prices and constant income E) an indifference map; the value of various combinations of two goods changes Answer: B Explanation:

A) B) C) D) E)

122) Refer to Figure 6-9. In part (ii), the line joining points X, Y, and Z is known as ________, which shows how ________. A) a price-consumption line; consumption changes as relative prices change, with money income constant B) an income-consumption line; consumption changes as income changes, with relative prices held constant C) a price-consumption line; consumption changes as money income and relative prices change D) an income-consumption line; consumption changes with changing relative prices and constant income E) an indifference map; the value of various combinations of two goods changes Answer: A Explanation:

121)

A) B) C) D) E)

43

122)

The figures below show Chris's consumption of specialty coffee per week.

FIGURE 6-10 123) Refer to Figure 6-10. The line connecting points A, B and C is ________. The line connecting points D, E and F is ________. A) the price-consumption line; the demand curve B) the income-consumption line; the demand curve C) the income-consumption line; the budget line D) the budget line; the price-consumption line E) the demand curve; the budget line Answer: A Explanation:

A) B) C) D) E)

44

123)

124) Refer to Figure 6-10. The two diagrams in Figure 6-10 are showing A) the change in Chris's preferences toward specialty coffee. B) that Chris is indifferent between bundles A, B and C. C) the derivation of Chris's demand curve for specialty coffee. D) that Chris is indifferent between points D, E and F. E) the derivation of Chris's indifference curve for specialty coffee. Answer: C Explanation:

A) B) C) D) E)

125) Refer to Figure 6-10. Suppose Chris's income is such that he is able to buy no more than 10 specialty coffees per week. If Chris is maximizing his utility at this level of income, how many specialty coffees is he consuming per week? A) 2 B) 4 C) 5 D) 6 E) 10 Answer: B Explanation:

125)

A) B) C) D) E)

126) Refer to Figure 6-10. In general, the absolute value of the slope of the budget lines is equal to ________, which reflects the ________ of specialty coffees in terms of all other goods. A) the relative price ratio (Pspecialty coffee/Pall other goods); opportunity cost B) the relative price ratio (Pall other goods/Pspecialty coffee); demand C) the quantity of all other goods consumed divided by the quantity of specialty coffees consumed; quantity D) $15/value of all other goods; opportunity cost E) the dollar value of all other goods divided by the number of specialty coffees consumed per week; demand Answer: A Explanation:

124)

A) B) C) D) E)

45

126)

FIGURE 6-11 127) Refer to Figure 6-11. Suppose the consumer begins at E1 . The income and substitution effects of the reduction in the price of X are represented as follows: A) the distance Q1 d shows the substitution effect and the distance Q2 e shows the income effect. B) the distance de shows the income effect and the distance cd shows the substitution effect. C) the distance Q1 Q2 shows the income effect and the distance Q2 Q3 shows the substitution effect. D) the distance Q1 Q2 shows the substitution effect and the distance Q2Q3 shows the income effect. E) the distance Q1 Q3 shows the substitution effect and the distance Q2Q3 shows the income effect. Answer: D Explanation:

A) B) C) D) E)

128) Refer to Figure 6-11. The line joining points E1 and E3 is known as ________, which shows how ________. A) a price consumption line; consumption changes as one price changes, with money income held constant B) an income consumption line; consumption changes as income changes, with relative prices held constant C) a price consumption line; consumption changes as money income and relative prices change D) an income consumption line; consumption changes with changing relative prices and constant income Answer: A Explanation:

127)

A) B) C) D)

46

128)

Sophie consumes two goods  paperback novels and visits to the movies.

FIGURE 6-12 129) Refer to Figure 6-12. Sophie's movement from point A to point B is the A) substitution effect of a decrease in the price of paperback novels. B) total effect of an increase in the price of paperback novels. C) income effect of an increase in the price of paperback novels. D) result of a change in her preferences between movies an paperback novels. E) total effect of a decrease in income. Answer: B Explanation:

A) B) C) D) E)

130) Refer to Figure 6-12. Sophie's movement from point A to point C is A) the income effect of an increase in the price of paperback novels. B) the total effect of a decrease in the price of paperback novels. C) the income effect of a decrease in the price of paperback novels. D) the substitution effect of an increase in the price of paperback novels. E) the total effect of a change in money income. Answer: D Explanation:

129)

A) B) C) D) E)

47

130)

Answer Key Testname: UNTITLED6

1) C 2) E 3) A 4) D 5) A 6) B 7) E 8) B 9) B 10) D 11) B 12) E 13) D 14) E 15) A 16) C 17) D 18) A 19) E 20) D 21) B 22) D 23) D 24) E 25) D 26) C 27) A 28) D 29) E 30) E 31) B 32) E 33) A 34) E 35) D 36) B 37) C 38) E 39) B 40) E 41) E 42) B 43) E 44) E 45) D 46) B 47) D 48) E 49) D 50) C 48

Answer Key Testname: UNTITLED6

51) C 52) B 53) C 54) C 55) B 56) C 57) B 58) A 59) B 60) A 61) D 62) C 63) A 64) C 65) B 66) A 67) B 68) B 69) D 70) C 71) A 72) D 73) C 74) E 75) A 76) E 77) A 78) D 79) C 80) B 81) B 82) E 83) D 84) C 85) A 86) C 87) C 88) C 89) B 90) A 91) B 92) E 93) D 94) D 95) D 96) A 97) E 98) D 99) B 100) A 49

Answer Key Testname: UNTITLED6

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130)

D C C A B A C D B C C D C D E D A D D C B A A C B A D A B D

50

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A single proprietorship is a form of business organization which A) has one owner-manager who is personally responsible for the firm's actions and debts. B) has a single owner but has directors who are responsible for the firm's debts. C) has limited liability. D) has unlimited access to money capital. E) allows easy transferability of ownership by the trading of shares. Answer: A Explanation:

A) B) C) D) E)

2) Which of the following statements describes an advantage to the owner of a single proprietorship? A) The owner's liability is limited to the amount he or she actually invests in the firm. B) He or she has limited liability. C) The owner can readily maintain full and complete control over every aspect of the firm's operation. D) The firm has a legal existence separate from its owner. E) Shares of the firm can be traded on any stock exchange. Answer: C Explanation:

2)

A) B) C) D) E)

3) A firm that has two or more owners who share decision-making power as well as the firm's profits is called A) a single proprietorship. B) a partnership. C) a corporation. D) a non-profit organization. E) a joint-stock company. Answer: B Explanation:

1)

A) B) C) D) E)

1

3)

4) A limited partnership differs from an ordinary partnership by A) having a limited number of partners. B) having a limited number of partners, each with limited liability. C) including some partners whose liability is restricted to the amount that they invested in the firm. D) having limited liability of all partners. E) having unlimited liability for all partners. Answer: C Explanation:

A) B) C) D) E)

5) Which of the following items is part of a firm's financial capital as distinct from its real capital? A) a new bulldozer B) a $500 000 balance in a bank account C) a network of personal computers D) a fleet of delivery trucks E) inventory of goods valued at $1 000 000 Answer: B Explanation:

6)

A) B) C) D) E)

7) A firm can raise financial capital without incurring debt by A) issuing bonds. B) making extra dividend payments. C) issuing new shares. D) increasing its bank loans. E) investing in new capital equipment. Answer: C Explanation:

5)

A) B) C) D) E)

6) Which of the following statements is NOT true of a corporation? A) It can enter into contracts. B) It is an entity separate from the individuals who own it. C) It can incur debt that is an obligation of the corporation but not of its individual owners. D) It has the right to sue and be sued. E) It is legally obliged to distribute all profits to shareholders. Answer: E Explanation:

4)

A) B) C) D) E) 2

7)

8) Which of the following statements about the organization of firms is true? A) Partnerships are the most common form of business organization in Canada. B) Owners of a corporation have unlimited liability. C) Corporations have limited access to money markets. D) Owners of a corporation are not personally liable for the firm's actions, though its directors may be. E) Crown corporations are never interested in increasing profits because they have other goals. Answer: D Explanation:

A) B) C) D) E)

9) Churches, the YMCA, the Salvation Army, and the Nature Conservancy are examples of A) single proprietorship. B) partnership. C) non-profit organizations. D) limited partnership. E) corporations. Answer: C Explanation:

10)

A) B) C) D) E)

11) Real capital includes A) a firm's physical assets. B) corporate bonds. C) corporate stock. D) a firm's balance in its bank account. E) owner's equity. Answer: A Explanation:

9)

A) B) C) D) E)

10) An example of "real" capital is A) shares in a corporation. B) corporate bonds. C) a firm's balance in a bank account. D) a firm's computer systems. E) a firm's retained earnings. Answer: D Explanation:

8)

11)

A) B) C) D) E) 3

12) Undistributed profits of a firm are A) earnings that are used to pay dividends to shareholders. B) earnings that are used to cover the costs of production. C) earnings that are used to cover interest expenses of the firm. D) profits that are paid out to owners of the firm. E) profits that are available to be reinvested in the firm's operations. Answer: E Explanation:

A) B) C) D) E)

13) When a corporation issues a bond A) the purchaser of the bond assumes ownership rights in the corporation. B) it is making a promise to pay interest each year and to repay the principal at a stated time in the future. C) it is called equity capital. D) it is called financing through the stock market. E) it is making a promise to pay interest each year but not repay the principal. Answer: B Explanation:

14)

A) B) C) D) E)

15) It is assumed in standard economic theory that a firm makes decisions in an effort to A) become as large as possible. B) have a highly diversified product. C) be favoured politically. D) maximize its revenue. E) maximize its profits. Answer: E Explanation:

13)

A) B) C) D) E)

14) An example of debt financing for any form of business organization is A) issuing new stock. B) buying back bonds. C) borrowing from a bank. D) using undistributed profits. E) buying back previously issued stock. Answer: C Explanation:

12)

A) B) C) D) E) 4

15)

16) "An objective of firms is to maximize profits." This statement A) has been proven by empirical testing to be always true. B) is an assumption used by economists to predict the behaviour of firms. C) is a normative statement and thus cannot be tested. D) applies only to corporations. E) is an unrealistic assumption, and therefore of little use to economists. Answer: B Explanation:

A) B) C) D) E)

17) The theory of the firm is based on the following two key assumptions: A) Firms seek to become as large as possible, and they seek to maximize total revenue. B) Each firm has a highly diversified product, and this leads to profit maximization. C) Firms seek to maximize profit, and to distribute the maximum value in dividends. D) Firms seek to maximize profits, and the firm is a single, consistent decision-making unit. E) Firms seek to maximize revenues, and to maximize undistributed profits. Answer: D Explanation:

17)

A) B) C) D) E)

18) Which of the following is the best example of an input to production that is an intermediate product? A) 40 acres of farmland B) the skills and training of a web designer C) computer circuit boards D) a textile factory E) a sewing machine Answer: C Explanation:

16)

A) B) C) D) E)

5

18)

19) The relationship between factors of production used in the production process and the resulting output is called a(n) A) consumption possibilities boundary. B) economic function. C) production boundary. D) cost function. E) production function. Answer: E Explanation:

A) B) C) D) E)

20) Economists use the notation Q = f(L,K) to describe A) the flow of labour (L) and capital (K) services that are available when output is (Q). B) the financial relationship between the inputs that a firm uses and the outputs that it produces. C) the arithmetic relationship between the outputs that a firm uses and the inputs that it produces. D) the technological relationship between the inputs that a firm uses and the outputs that it produces. E) the level of output (Q) required to fully employ labour (L) and capital (K). Answer: D Explanation:

20)

A) B) C) D) E)

21) The equation Q = 0.5KL - (0.4)L + 2L2 is an example of A) a factor of production equation. B) an economic input function. C) a technological change equation. D) an arithmetic expression of output quantities. E) a production function. Answer: E Explanation:

19)

A) B) C) D) E)

6

21)

22) Suppose a production function for a firm takes the following algebraic form: Q = 2KL - (0.2)L2, where Q is the output of sweaters per day. Now suppose the firm is operating with 8 units of capital (K=8) and 10 units of labour (L=10). What is the output of sweaters? A) 30 sweaters per day B) 60 sweaters per day C) 80 sweaters per day D) 140 sweaters per day E) 155 sweaters per day Answer: D Explanation:

A) B) C) D) E)

23) Suppose a production function for a firm takes the following algebraic form: Q = (0.5)KL - 40L, where Q is the output of paintbrushes per week. Now suppose the firm is operating with 100 units of capital (K = 100) and 30 000 units of labour (L = 30 000). What is the output of paintbrushes per week? A) 30 000 B) 300 000 C) 1 200 000 D) 1 500 000 E) 3 000 000 Answer: B Explanation:

24)

A) B) C) D) E)

25) The opportunity cost of any factor of production is A) its accounting cost. B) the money actually paid to the factors of production. C) the benefit forgone by not using it in its worst alternative. D) the benefit forgone by not using it in its best alternative. E) its explicit cost. Answer: D Explanation:

23)

A) B) C) D) E)

24) Suppose a production function for a firm takes the following algebraic form: Q = (0.25)K × (1.5)L2 , where Q is the output of garage doors produced per month. Now suppose the firm is operating with 10 units of capital (K = 10) and 8 units of labour (L = 8). What is the output of garage doors per month? A) 24 B) 240 C) 300 D) 2400 E) 3000 Answer: B Explanation:

22)

A) B) C) D) E)

7

25)

26) The choices listed below involve costs to the firm. For which is the implicit cost potentially different than its explicit cost? A) The use of firm-owned assets. B) The services of hired workers. C) The use of rented land. D) The interest paid on borrowed money. E) The purchase of raw materials used in production. Answer: A Explanation:

A) B) C) D) E)

27) The opportunity cost to a firm of using an asset is zero if A) the asset is already owned by the firm. B) no money was spent to acquire the asset. C) the asset has no alternative uses. D) the asset has zero sunk costs associated with it. E) the asset was given to the firm for free. Answer: C Explanation:

27)

A) B) C) D) E)

28) The opportunity cost of money that a firm's owner has invested in the firm is an example of A) direct production costs. B) accounting costs. C) sunk costs. D) implicit costs. E) explicit costs. Answer: D Explanation:

26)

A) B) C) D) E)

8

28)

29) If a firm uses factor inputs that are personally owned by the firm's owner, then economists refer to the opportunity cost of these inputs as A) direct production costs. B) accounting costs. C) sunk costs. D) implicit costs. E) inverted costs. Answer: D Explanation:

A) B) C) D) E)

30) Economic profits are less than accounting profits because the calculation of economic profit A) includes an amount for depreciation. B) includes an explicit charge for risk taking. C) includes the implicit charges for the use of capital owned by the firm and for risk taking. D) includes the implicit charges for the use of capital owned by the firm and for income taxes. E) is stipulated in regulations set forth by the Canada Revenue Agency. Answer: C Explanation:

30)

A) B) C) D) E)

31) We can predict that resources will move into an industry whenever A) accounting profits for firms in that industry are greater than zero. B) accounting profits for firms in that industry are zero. C) economic profits for firms in that industry are zero. D) economic profits for firms in that industry are greater than zero. E) economic losses for firms in that industry are minimized. Answer: D Explanation:

29)

A) B) C) D) E)

9

31)

32) If Michelle used $1000 from her savings account, which was paying 6% interest annually, to invest in her brother's new sporting-goods store, the opportunity cost of her investment on an annual basis would be A) $60. B) $1000. C) $1060. D) her share of the store's profits. E) the dividend paid to her by her brother. Answer: A Explanation:

A) B) C) D) E)

33) Consider the production costs for a firm, one of which is the cost of depreciation. Depreciation costs are A) payments to outside suppliers. B) the cost of money borrowed to buy a durable asset. C) an estimate of the loss of value of the firm's physical capital. D) a measure of the depreciation of financial assets of the firm. E) irrelevant to an accounting of the firm's total costs. Answer: C Explanation:

32)

A) B) C) D) E)

10

33)

The table below provides the annual revenues and costs for a family-owned firm producing catered meals. Total Revenues ($)

500 000

Total Costs ($) - wages and salaries - risk-free return of 6% on owners' capital of 250 000 - rent - depreciation of capital equipment - risk premium of 8% on owners' capital of 250 000 - intermediate inputs - forgone wages of owners in alternative employment - interest on bank loan

200 000 15 000 105 000 25 000 20 000 150 000 80 000 10 000

TABLE 7-1 34) Refer to Table 7-1. The explicit costs for this family-owned firm are A) $115 000. B) $490 000. C) $500 000. D) $505 000. Answer: B Explanation:

A) B) C) D) E)

35) Refer to Table 7-1. The implicit costs for this family-owned firm are A) $35 000. B) $80 000. C) $100 000. D) $115 000. Answer: D Explanation:

E) $490 000.

36) E) $500 000.

A) B) C) D) E)

37) Refer to Table 7-1. The economic profits for this family-owned firm are A) $115 000. B) $10 000. C) $0. D) -$10 000. Answer: E Explanation:

35)

A) B) C) D) E)

36) Refer to Table 7-1. The accounting profits for this family-owned firm are A) -$15 000. B) $0. C) $10 000. D) $30 000. Answer: C Explanation:

34) E) $605 000.

A) B) C) D) E) 11

37) E) -$105 000.

38) Refer to Table 7-1. To an accountant, this family-owned catering company is earning ________.To an economist, the same firm is earning ________. A) zero profit; economic losses B) zero profit; normal profits C) positive profits; economic losses D) economic profits; economic profits E) economic profits; economic losses Answer: C Explanation:

38)

A) B) C) D) E)

The table below provides the total revenues and costs for a small landscaping company in a recent year. Total Revenues ($)

250 000

Total Costs ($) - wages and salaries - risk-free return of 2% on owner's capital of $20 000 - interest on bank loan - cost of supplies - depreciation of capital equipment - additional wages the owner could have earned in next best alternative - risk premium of 4% on owner's capital of $20 000

150 000 400 1500 27 000 8000 30 000 800

TABLE 7-2 39) Refer to Table 7-2. The explicit costs for this firm are A) $178 500. B) $186 500. C) $186 900. Answer: B Explanation:

E) $217 700.

D) $400.

E) $800.

A) B) C) D) E)

40) Refer to Table 7-2. The implicit costs for this firm are A) $31 200. B) $30 800. C) $30 400. Answer: A Explanation:

39) D) $217 300.

A) B) C) D) E)

12

40)

41) Refer to Table 7-2. The accounting profits for this firm are A) $32 300. B) $32 700. C) $63 100. Answer: D Explanation:

E) $71 500.

D) $31 200.

E) $32 300.

A) B) C) D) E)

42) Refer to Table 7-2. The economic profits for this firm are A) $63 500. B) $32 700. C) $33 500. Answer: E Explanation:

41) D) $63 500.

42)

A) B) C) D) E)

43) With regard to economic decision making for firms, the short run is A) a definite number of months. B) a period over which the quantities of all factors of production and technology are variable. C) a period over which the quantity of at least one significant factor of production is fixed. D) a period over which the quantities of all factors of production are variable but technology is fixed. E) less than one year. Answer: C Explanation:

A) B) C) D) E)

44) With regard to economic decision making for firms, the long run is a period in which A) all factors of production are variable but technology is fixed. B) technology is variable. C) only some of the factors of production are variable. D) technology may be variable, but some factors of production are fixed. E) only capital is variable. Answer: A Explanation:

43)

A) B) C) D) E)

13

44)

45) Which of the following is most likely a long-run decision for a firm? A) The hours a store should stay open. B) How many warehouses to build. C) The number of workers to hire. D) The amount of inventory to stock. E) The price at which to sell the product. Answer: B Explanation:

A) B) C) D) E)

46) The period of time over which at least one factor of production is fixed is called the A) very-short run. B) short run. C) long run. D) very-long run. E) immediate run. Answer: B Explanation:

47)

A) B) C) D) E)

48) Which of the following factors of production is most likely to be variable in the short run? A) capital equipment B) land C) labour D) entrepreneurship E) technology Answer: C Explanation:

46)

A) B) C) D) E)

47) The period of time over which the firm can vary any of its inputs for a given production technology is called the A) very-short run. B) short run. C) long run. D) very-long run. E) immediate run. Answer: C Explanation:

45)

A) B) C) D) E) 14

48)

49) The period of time over which all factors of production and technology are variable is known as the A) very-short run. B) short run. C) long run. D) very-long run. Answer: D Explanation:

A) B) C) D)

50) The period of time over which the firm can vary its technology of production is the A) very-short run. B) short run. C) long run. D) very-long run. E) none of the above; technology cannot be varied. Answer: D Explanation:

51)

A) B) C) D) E)

52) Consider a firm in the short run. Average product is at its maximum when A) total product is maximized. B) marginal product is maximized. C) the maximum quantity of the variable input is employed. D) diminishing returns cease to operate. E) average product equals marginal product and marginal product is falling. Answer: E Explanation:

50)

A) B) C) D) E)

51) What information is provided by average, marginal, and total product curves? A) They demonstrate that each of these measures of output increase as more inputs are applied. B) They demonstrate that, in the short run, all inputs are variable. C) They relate the prices of inputs (factors of production) to the prices of products. D) They relate the price of output to the quantity supplied. E) They express relationships between physical inputs and physical outputs. Answer: E Explanation:

49)

A) B) C) D) E)

15

52)

53) Consider a firm in the short run. If total product is at its maximum, then A) average product must equal marginal product. B) average product must be rising and must lie above marginal product. C) marginal product must be greater than zero and must be falling. D) marginal product must be falling and be equal to zero. E) average product must be falling and be equal to zero. Answer: D Explanation:

A) B) C) D) E)

54) Consider a firm in the short run. If the AP curve is rising, then the MP curve A) must lie above the average-product curve over this range and must also be rising. B) must lie above the average-product curve over this range. C) can be either above or below the average-product curve, although it must be rising over the entire range. D) must lie below the average-product curve over this range. E) must be falling. Answer: B Explanation:

55)

A) B) C) D) E)

56) Consider a firm in the short run. When the total-product curve is increasing at an increasing rate A) average product is zero. B) marginal product is positive but declining. C) the marginal-product curve lies below the average-product curve. D) marginal product is positive and increasing. E) average product is falling. Answer: D Explanation:

54)

A) B) C) D) E)

55) Consider a firm in the short run. If AP = MP and both are positive, then total product A) is at a maximum. B) is decreasing as extra units of the variable factor are employed. C) is increasing as extra units of the variable factor are employed. D) may be either increasing or decreasing as extra units of the variable factor are employed. E) is at its minimum. Answer: C Explanation:

53)

A) B) C) D) E) 16

56)

57) Which of the following statements about the relationship between marginal product and average product is correct? A) When average product exceeds marginal product, marginal product must be rising. B) When marginal product is falling, average product is falling. C) When marginal product exceeds average product, average product must be rising. D) Average product equals marginal product at marginal product's lowest point. E) Average product equals marginal product when marginal product is at its maximum. Answer: C Explanation:

A) B) C) D) E)

17

57)

FIGURE 7-1 58) Refer to Figure 7-1. The marginal product of labour curve intersects the average product of labour curve when A) the firm is at its capacity. B) the firm achieves increasing returns. C) average product is at its maximum. D) diminishing returns sets in. E) total product is at its maximum. Answer: C Explanation:

A) B) C) D) E)

18

58)

59) Refer to Figure 7-1. Total product is increasing at an increasing rate A) from 0 to 32 units of output. B) from 0 to 140 units of output. C) between 140 to 200 units of output. D) between 200 to 250 units of output. E) over the whole production range. Answer: B Explanation:

A) B) C) D) E)

60) Refer to Figure 7-1. Total product is increasing at a decreasing rate A) from 0 to 20 units of output. B) from 0 to 32 units of output. C) between 140 to 200 units of output. D) between 140 to 250 units of output. E) over the whole production range. Answer: D Explanation:

61)

A) B) C) D) E)

62) Refer to Figure 7-1. Suppose each unit of labour represents one worker for one month. What is the maximum number of workers the firm could hire so that the final worker hired still raises the average product of the other workers? A) 7 B) 8 C) 9 D) 10 E) 15 Answer: C Explanation:

60)

A) B) C) D) E)

61) Refer to Figure 7-1. If the firm hires the 15th unit of labour, A) the extra output will be zero. B) average product will rise. C) marginal product will be unchanged. D) the firm will reach its capacity. E) output will increase by 2 units of output. Answer: A Explanation:

59)

A) B) C) D) E)

19

62)

63) In the short run, the firm's product curves show A) AP is at its minimum when MP = AP. B) TP is at its maximum when MP = O. C) TP begins to decrease when AP begins to decrease. D) when MP > AP, AP is decreasing. E) when the MP curve cuts the AP curve from below, the AP curve begins to fall. Answer: B Explanation:

A) B) C) D) E)

64) In the short run, the firm's product curves show A) AP is at its minimum when MP = AP. B) TP is at its maximum when MP is at its maximum. C) TP begins to decrease when AP begins to decrease. D) when MP < AP, AP is increasing. E) when the MP curve cuts the AP curve from above, the AP curve begins to fall. Answer: E Explanation:

64)

A) B) C) D) E)

65) Suppose that when a firm hires one additional unit of labour, total product increases from 100 to 110 units of output per month. Marginal product must therefore be A) increasing. B) positive. C) decreasing. D) constant. E) zero. Answer: B Explanation:

63)

A) B) C) D) E)

20

65)

The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 66) Refer to Table 7-3. The marginal product of labour is at its maximum when the firm changes the amount of labour hired from A) 0 to 1 unit. B) 1 to 2 units. C) 2 to 3 units. D) 3 to 4 units. E) 4 to 5 units. Answer: C Explanation:

A) B) C) D) E)

67) Refer to Table 7-3. The average product of labour is highest when the firm hires A) 1 unit of labour. B) 2 units of labour. C) 3 units of labour. D) 4 units of labour. E) 5 units of labour. Answer: D Explanation:

66)

A) B) C) D) E)

21

67)

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 68) Refer to Table 7-4. The marginal product of labour is at its maximum when the firm changes the amount of labour hired from A) 0 to 1 unit. B) 1 to 2 units. C) 2 to 3 units. D) 3 to 4 units. E) 4 to 5 units. Answer: C Explanation:

A) B) C) D) E)

69) Refer to Table 7-4. Diminishing marginal productivity of labour is first observed when the firm changes the amount of labour hired from A) 0 to 1 unit. B) 1 to 2 units. C) 2 to 3 units. D) 3 to 4 units. E) 4 to 5 units. Answer: D Explanation:

69)

A) B) C) D) E)

70) Refer to Table 7-4. The average product of labour is highest when the firm hires ________ units of labour. A) 1 B) 2 C) 3 D) 4 E) 5 Answer: D Explanation:

68)

A) B) C) D) E)

22

70)

71) Refer to Table 7-4. The marginal product of labour curve intersects the average product of labour curve from above when the firm changes the amount of labour per unit of time from A) 0 to 1 units. B) 1 to 2 units. C) 2 to 3 units. D) 3 to 4 units. E) 4 to 5 units. Answer: E Explanation:

A) B) C) D) E)

72) Refer to Table 7-4. Marginal product of labour begins decreasing with the ________ unit of labour hired. Average product of labour begins decreasing with the ________ unit of labour hired. A) 4th; 3rd B) 3rd; 2nd C) 2nd; 3rd D) 3rd; 4th E) 4th; 5th Answer: E Explanation:

72)

A) B) C) D) E)

73) Suppose NHL hockey player Jarome Iginla is averaging three points per game going into the last game of the season in which he collects four points, thereby changing his average for the season. To use an analogy in economics, it could be said that average product increases A) when total product increases. B) when marginal product exceeds average product. C) when average product exceeds marginal product. D) when marginal product increases. E) whenever marginal product is positive. Answer: B Explanation:

71)

A) B) C) D) E)

23

73)

74) Consider a basket-producing firm with fixed capital. If the firm can produce 36 baskets per day with 3 workers and then increases productivity to 44 baskets per day with 4 workers, then which of the following statements is true? A) The marginal product of the fourth worker is 11. B) The firm has passed the point of diminishing average productivity. C) The marginal product is above the average product. D) The firm has not yet reached the point of diminishing marginal productivity. E) With 4 workers, the firm's average product of labour is 13. Answer: B Explanation:

A) B) C) D) E)

75) Consider a basket-producing firm with fixed capital. If the firm can produce 36 baskets per day with 3 workers and then increases production to 44 baskets per day with 4 workers, then which of the following statements is true? A) The marginal product of the fourth worker is 11. B) With 4 workers, the marginal product is above the average product. C) The firm has not yet reached the point of diminishing marginal productivity. D) The firm has passed the point of diminishing marginal productivity. E) With 4 workers, the firm's average product of labour is 8. Answer: D Explanation:

75)

A) B) C) D) E)

76) Consider a basket-producing firm with fixed capital. If the firm can produce 24 baskets per day with 3 workers and then increases production to 36 baskets per day with 4 workers, then which of the following statements is definitely true? A) The firm has passed the point of diminishing marginal productivity. B) The marginal productivity of the fourth worker is 9. C) The firm has passed the point of diminishing average productivity. D) With 4 workers, the average product is greater than the marginal product. E) With 4 workers, the marginal product is greater than the average product. Answer: E Explanation:

74)

A) B) C) D) E)

24

76)

77) Consider a basket-producing firm with fixed capital. If the firm can produce 24 baskets per day with 3 workers and then increases production to 36 baskets per day with 4 workers, then which of the following statements is definitely true? A) Marginal product for this firm is rising. B) The marginal product of the fourth worker is 9. C) Average product for this firm is rising. D) The firm has passed the point of diminishing marginal productivity. E) With 4 workers, the average product is greater than the marginal product. Answer: C Explanation:

A) B) C) D) E)

78) Consider a house-construction firm with fixed capital. The firm can build 8 houses per year with 16 workers and 8.8 houses per year with 17 workers. If it is currently building 8.8 houses per year, which of the following is true? A) Average product is at a maximum with 16 workers. B) Average product is at a maximum with 17 workers. C) The marginal product is below the average product. D) The firm has already passed the point of diminishing marginal productivity. E) The firm has not yet reached the point of diminishing average productivity. Answer: E Explanation:

78)

A) B) C) D) E)

79) If increasing quantities of a variable factor are applied to a given quantity of fixed factors, then the law of diminishing returns tells us that A) the marginal product and the average product of the variable factor will eventually decrease. B) the marginal product will eventually decrease with constant average product. C) the average product will eventually decrease with constant marginal product. D) the average product will eventually decrease, but only if total product is held constant. E) total product will eventually begin to fall. Answer: A Explanation:

77)

A) B) C) D) E)

25

79)

80) When a firm's total-product curve is increasing at a decreasing rate A) average product is zero. B) marginal product is positive but declining. C) the marginal-product curve lies below the average-product curve. D) marginal product is negative and decreasing. E) average product is falling. Answer: B Explanation:

A) B) C) D) E)

81) Diminishing marginal product of labour is said to exist when there is A) an increase in the amount of capital available for each unit of labour. B) a reduction in the level of labour input that causes output to increase. C) an increase in the division and specialization of labour. D) technological advancement. E) a successively smaller increase in output with each successive unit increase in labour input. Answer: E Explanation:

82)

A) B) C) D) E)

83) The point of diminishing marginal productivity is the point where A) marginal product has reached its maximum. B) average product has reached its maximum. C) the marginal product begins to fall at an increasing rate. D) the total product begins to fall. E) the marginal product curve lies below the average product curve. Answer: A Explanation:

81)

A) B) C) D) E)

82) The law of diminishing returns states that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, then A) the MP and the AP of the variable factor will eventually decrease. B) the MP will eventually decrease with constant AP. C) the AP will eventually decrease with constant MP. D) the AP will eventually decrease, but only if TP is held constant. E) TP will eventually begin to fall. Answer: A Explanation:

80)

A) B) C) D) E) 26

83)

84) Sport-fishermen on the Campbell River in British Columbia are catching fewer fish and are having to fish many more hours to catch them. However, the total number of fish caught on the river continues to increase. The river is experiencing A) diminishing total returns. B) constant marginal returns. C) increasing marginal returns. D) diminishing marginal returns. E) increasing average returns. Answer: D Explanation:

A) B) C) D) E)

85) In economics, the term "fixed costs" means A) implicit costs. B) opportunity costs. C) costs that are never accounted for. D) costs incurred in the past that involve no implicit costs. E) costs that do not vary with the level of output produced. Answer: E Explanation:

84)

85)

A) B) C) D) E)

The following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. When answering the questions, you are to assume that the wage per unit of labour is $25 and the cost of the capital is $100. Labour per unit of time 0 1 2 3 4 5

Total output 0 25 75 175 250 305

TABLE 7-4 86) Refer to Table 7-4. Average fixed costs for 305 units of output is approximately A) 33 cents. B) 41 cents. C) 45 cents. D) 74 cents. Answer: A Explanation:

A) B) C) D) E)

27

86) E) 82 cents.

87) Refer to Table 7-4. Average variable costs for 175 units of output is approximately A) 25 cents. B) 32 cents. C) 43 cents. D) 57 cents. Answer: C Explanation:

A) B) C) D) E)

88) Refer to Table 7-4. The average total cost for 250 units of output is approximately A) 33 cents. B) 40 cents. C) 63 cents. D) 80 cents. Answer: D Explanation:

90) E) $1.33.

A) B) C) D) E)

91) Refer to Table 7-4. The total variable cost of producing 305 units of output is A) $100. B) $125. C) $225. D) $305. Answer: B Explanation:

89) E) $350.

A) B) C) D) E)

90) Refer to Table 7-4. The average total cost of producing 75 units of output is A) $1. B) $2. C) $0.80. D) $0.67. Answer: B Explanation:

88) E) $1.00.

A) B) C) D) E)

89) Refer to Table 7-4. The total cost of producing 175 units of output is A) $75. B) $100. C) $150. D) $175. Answer: D Explanation:

87) E) $1.00.

A) B) C) D) E)

28

91) E) $325.

92) Refer to Table 7-4. The total fixed cost of producing 305 units of output is A) $100. B) $125. C) $112.50. D) $225 Answer: A Explanation:

92) E) $305.

A) B) C) D) E)

93) In the short run time horizon for a firm, total fixed costs A) decrease and then increase as output increases. B) decrease as output increases. C) do not vary with output. D) increase and then decrease as output increases. E) are equal to total variable costs. Answer: C Explanation:

A) B) C) D) E)

94) Jodi recently went into business producing widgets. Which of the following would be a fixed cost for her firm? 1. labour costs of $1000 per month 2. raw material costs of $5000 per month 3. a one-year lease on a building of $12 000 A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: C Explanation:

94)

A) B) C) D) E)

95) Marginal cost is defined as the A) change in total cost resulting from an additional unit of output. B) change in fixed cost resulting from an additional unit of output. C) difference between average total cost and average variable cost. D) cost per unit when the firm is operating at capacity. E) cost of an additional unit of a variable factor of production. Answer: A Explanation:

93)

A) B) C) D) E)

29

95)

96) A firm's short-run cost curves, as conventionally drawn, show that A) AFC increases as output increases. B) ATC = TFC + TVC. C) AVC decreases as long as MC > AVC. D) the MC curve intersects the AVC and ATC curves at their maximum points. E) ATC decreases and then increases as output increases. Answer: E Explanation:

A) B) C) D) E)

97) Consider a firm's short-run cost curves. If average total cost is increasing as output rises, then A) total fixed costs must be increasing. B) average fixed costs must be increasing. C) average variable cost must be increasing. D) marginal cost must be below average total cost. E) average total cost is no longer equal to the sum of average variable cost and average fixed cost. Answer: C Explanation:

97)

A) B) C) D) E)

98) Consider a firm's short-run cost curves. Which one of the following types of cost declines over the whole range of output? A) average fixed cost B) marginal cost C) total fixed cost D) average variable cost E) total variable cost Answer: A Explanation:

96)

A) B) C) D) E)

30

98)

99) The vertical distance between the total cost curve and the total variable cost curve is A) marginal cost. B) average fixed cost. C) average total cost. D) total fixed cost. E) average variable cost. Answer: D Explanation:

A) B) C) D) E)

100) Suppose a firm is producing 100 units of output, incurring a total cost of $10 000 and total variable cost of $6000. It can be concluded that average fixed cost is A) $40. B) $60. C) $100. D) $160. E) $4000. Answer: A Explanation:

101)

A) B) C) D) E)

102) Suppose a firm is producing 250 units of output. At this level of output, average fixed costs are $20 per unit and average variable costs are $80 per unit. It can be concluded that total cost is A) $100. B) $0.40 per unit. C) $40 per unit. D) $2500. E) $ 25 000. Answer: E Explanation:

100)

A) B) C) D) E)

101) Suppose a firm is producing 500 units of output, incurring a total cost of $700 000 and total fixed cost of $100 000. It can be concluded that average variable cost is A) $200. B) $600. C) $1200. D) $1400. E) $1600. Answer: C Explanation:

99)

A) B) C) D) E)

31

102)

103) Suppose a firm is producing 10 000 units of output. At this level of output, average total cost is $200 and average fixed cost is $20. It can be concluded that total variable cost is A) $180. B) $1800. C) $18 000. D) $ 180 000. E) $1 800 000. Answer: E Explanation:

A) B) C) D) E)

104) Suppose a firm with the usual U-shaped cost curves is producing a level of output such that its short-run costs are as follows: ATC = $0.37 per unit AVC = $0.32 per unit AFC = $0.05 per unit MC = $0.43 per unit Given these short-run costs, as the firm increases its output, which of the following statements is true? A) Marginal product of the variable factor must be decreasing. B) Marginal product of the variable factor must be increasing. C) The point of diminishing average product of the variable factor has not yet been reached. D) Average product of the variable factor must be increasing. E) Marginal product of the variable factor is at its minimum point. Answer: A Explanation:

104)

A) B) C) D) E)

105) Suppose a firm with the usual U-shaped cost curves is producing a level of output such that its short run costs are as follows: ATC = $0.37 per unit AVC = $0.32 per unit AFC = $0.05 per unit MC = $0.43 per unit Given these short run costs, which of the following statements is true? A) The firm is operating with excess capacity. B) The firm is operating at capacity. C) The firm is operating above capacity. D) The firm has no capacity constraints. E) The firm is producing a level of output where capacity is increasing. Answer: C Explanation:

103)

A) B) C) D) E) 32

105)

106) Consider the short-run costs of a firm. Suppose the firm's total fixed costs are $100 and average variable costs are constant regardless of output. Which of the following is then true? A) Marginal cost will equal average total cost. B) Average total cost will decrease when output is increased. C) Marginal cost will be less than average variable cost. D) Average total costs will be constant. E) Marginal cost will be rising as output rises. Answer: B Explanation:

A) B) C) D) E)

107) Suppose that a firm's capital is fixed and one more unit of labour is hired, thereby increasing the firm's total output. Which of the following statements can be correct? 1. Marginal cost would remain constant. 2. Marginal cost would increase. 3. Marginal cost would decrease. A) 1 only B) 2 only C) 3 only D) Any of 1, 2, and 3 is possible. E) None are possible. Answer: D Explanation:

107)

A) B) C) D) E)

108) A firm's capacity is defined as the level of output where A) the upper limit on what can be produced is reached. B) average total cost is at its maximum. C) marginal cost equals average variable cost. D) average fixed costs are at a minimum. E) short-run average total cost is at its minimum. Answer: E Explanation:

106)

A) B) C) D) E)

33

108)

109) When a plant is operating at the level of output where its short-run average total cost is at its minimum, A) average fixed cost is at a minimum. B) marginal cost is at a minimum. C) average variable cost is at a minimum. D) the plant is operating at its capacity. E) more of the variable factor of production should be employed. Answer: D Explanation:

A) B) C) D) E)

110) Short-run cost curves for a firm are eventually upward-sloping because of the effects of A) the increasing price of variable inputs. B) diminishing marginal product. C) increasing fixed costs. D) increasing marginal productivity of the variable inputs. E) decreasing total product. Answer: B Explanation:

111)

A) B) C) D) E)

112) When a firm's marginal cost is rising, we know that A) average fixed cost must be rising. B) average variable cost must be rising. C) average total cost must be rising. D) marginal product must be zero. E) marginal product must be falling. Answer: E Explanation:

110)

A) B) C) D) E)

111) A firm's short-run marginal cost curve is decreasing when A) average fixed cost is increasing. B) total fixed cost is decreasing. C) marginal product is decreasing. D) marginal product is increasing. E) capacity is reached. Answer: D Explanation:

109)

A) B) C) D) E) 34

112)

113) Consider a firm's short-run cost curves. When capital is a fixed factor, a rise in the cost of labour A) shifts the marginal cost curve upwards. B) shifts the AVC curve down. C) shifts the total product curve downwards. D) leaves the MC curve unchanged. E) leaves the ATC curve unchanged. Answer: A Explanation:

A) B) C) D) E)

114) Suppose Jodi's widget business is using two inputs, labour and capital. If the price of labour increases, which of the following will happen? A) Jodi will shut down her business. B) The firm's average total cost curve will shift upward. C) The firm's marginal cost curve will remain unchanged. D) Jodi will hire more labour. E) The firm's average fixed cost curve will shift upward. Answer: B Explanation:

113)

114)

A) B) C) D) E)

The following data show the total output for a firm when different amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $10 and the cost of the capital is $50. Labour per period 0 1 2 3 4 5

Total output per period 0 10 30 90 132 150

TABLE 7-3 115) Refer to Table 7-3. The average total cost when producing 150 units of output is approximately A) 33 cents. B) 40 cents. C) 67 cents. D) 80 cents. E) $1.50. Answer: C Explanation:

A) B) C) D) E)

35

115)

116) Refer to Table 7-3. The average total cost when producing 90 units of output is approximately A) 27 cents. B) 30 cents. C) 33 cents. D) 89 cents. E) $26.67. Answer: D Explanation:

A) B) C) D) E)

117) Refer to Table 7-3. The average variable cost when producing 132 units of output is approximately A) 24 cents. B) 30 cents. C) 45 cents. D) 68 cents. E) 89 cents. Answer: B Explanation:

118)

A) B) C) D) E)

119) Refer to Table 7-3. If this firm is producing 111 units of output per period, its marginal cost is A) $1.00. B) 16.7 cents. C) 76 cents. D) 24 cents. E) 38 cents. Answer: D Explanation:

117)

A) B) C) D) E)

118) Refer to Table 7-3. If this firm is producing 20 units of output per period its marginal cost is A) $1.00. B) 50 cents. C) $1.67. D) 16.7 cents. E) $10.00. Answer: B Explanation:

116)

A) B) C) D) E)

36

119)

The diagram below shows some short-run cost curves for a firm.

FIGURE 7-2

37

120) Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in part (i) of the figure? A) Curve 1 is the total cost curve. Curve 2 is the total variable cost curve. Curve 3 is the total fixed cost curve. B) Curve 1 is the total fixed cost curve. Curve 2 is the total variable cost curve. Curve 3 is the total cost curve. C) Curve 1 is the total variable cost curve. Curve 2 is the total cost curve. Curve 3 is the total fixed cost curve. D) Curve 1 is the total marginal cost curve. Curve 2 is the total average cost curve. Curve 3 is the total average fixed cost curve. E) Curve 1 is the total cost curve. Curve 2 is the total variable cost curve. Curve 3 is the average fixed cost curve. Answer: A Explanation:

A) B) C) D) E)

121) Refer to Figure 7-2. Which of the following choices correctly identifies the cost curves in part (ii) of the figure? A) Curve 4 is the marginal cost curve. Curve 5 is the average fixed cost curve. Curve 6 is the average variable cost curve. Curve 7 is the average total cost curve. B) Curve 4 is the average total cost curve. Curve 5 is the marginal cost curve. Curve 6 is the average variable cost curve. Curve 7 is the average fixed cost curve. C) Curve 4 is the average fixed cost curve. Curve 5 is the average total cost curve. Curve 6 is the marginal cost curve. Curve 7 is the average variable cost curve. D) Curve 4 is the marginal cost curve. Curve 5 is the average total cost curve. Curve 6 is the average variable cost curve. Curve 7 is the average fixed cost curve. E) Curve 4 is the marginal cost curve. Curve 5 is the average variable cost curve. Curve 6 is the average fixed cost curve. Curve 7 is the average total cost curve. Answer: D Explanation:

120)

A) B) C) D) E) 38

121)

The table below provides information on output per month and short-run costs for a firm producing outdoor wooden lounge chairs. Q 5 10 15 20 25 30

TFC 200 200 200 200 200 200

TVC 200 220 240 260 350 810

TC 400 420 440 460 550 1010

TABLE 7-5 122) Refer to Table 7-5. Given the information in the table about short-run costs, this firm would minimize the average variable cost of production when producing A) 10 chairs. B) 15 chairs. C) 20 chairs. D) 25 chairs. E) 30 chairs. Answer: C Explanation:

A) B) C) D) E)

123) Refer to Table 7-5. Given the information in the table about short-run costs, this firm would minimize the average total cost of production when producing A) 10 chairs. B) 15 chairs. C) 20 chairs. D) 25 chairs. E) 30 chairs. Answer: D Explanation:

123)

A) B) C) D) E)

124) Refer to Table 7-5. At what level of output is this firm at its capacity? A) 10 chairs B) 15 chairs C) 20 chairs D) 25 chairs Answer: D Explanation:

122)

A) B) C) D) E)

39

124) E) 30 chairs

125) Suppose a firm producing digital cameras is operating such that marginal costs are higher than average costs. If the firm produces one more camera, average costs will A) rise. B) fall. C) reach a point of diminishing returns. D) remain constant. E) reach their maximum. Answer: A Explanation:

125)

A) B) C) D) E)

The table below shows output, marginal cost, and average variable cost for the production of pairs of shoes. All costs are in dollars.

Output 50 70 90 110 130 150 170 190 210 230

Marginal Cost 60 45 35 30 35 60 105 180 230 290

Average Variable Cost 140 115 95 80 65 60 65 75 90 110

TABLE 7-6 126) Refer to Table 7-6. The firm's marginal product of its variable factor is maximized when it produces ________ units of output. A) 50 B) 90 C) 100 D) 110 E) 170 Answer: D Explanation:

A) B) C) D) E)

127) Refer to Table 7-6. Suppose there are no fixed costs. The firm reaches it's capacity level of output when its output is equal to ________ units. A) 50 B) 110 C) 150 D) 190 E) 210 Answer: C Explanation:

126)

A) B) C) D) E)

40

127)

128) Refer to Table 7-6. If the firm produces 130 pairs of shoes, and the fixed cost is $550, then the firm's total cost is A) $7000. B) $8000. C) $9000. D) $10 000. E) $12 000. Answer: C Explanation:

A) B) C) D) E)

129) Refer to Table 7-6. Suppose this firm is producing 210 pairs of shoes per time period and that the variable factor of production is labour. Which of the following statements best describes this firm's production? A) Additional units of labour employed will increase the average variable cost of producing shoes. B) Marginal cost is higher than average variable cost, so average product must be rising. C) Marginal cost is higher than average variable cost, so marginal product must be rising. D) Each additional unit of labour employed reduces the average variable cost of the pairs of shoes. E) The firm is producing below its capacity. Answer: A Explanation:

129)

A) B) C) D) E)

130) A firm that is maximizing its profits by producing a certain level of output must also be A) minimizing its cost of producing that output. B) maximizing its sales. C) minimizing its variable costs. D) maximizing its output. E) maximizing its revenue. Answer: A Explanation:

128)

A) B) C) D) E)

41

130)

Answer Key Testname: UNTITLED7

1) A 2) C 3) B 4) C 5) B 6) E 7) C 8) D 9) C 10) D 11) A 12) E 13) B 14) C 15) E 16) B 17) D 18) C 19) E 20) D 21) E 22) D 23) B 24) B 25) D 26) A 27) C 28) D 29) D 30) C 31) D 32) A 33) C 34) B 35) D 36) C 37) E 38) C 39) B 40) A 41) D 42) E 43) C 44) A 45) B 46) B 47) C 48) C 49) D 50) D 42

Answer Key Testname: UNTITLED7

51) E 52) E 53) D 54) B 55) C 56) D 57) C 58) C 59) B 60) D 61) A 62) C 63) B 64) E 65) B 66) C 67) D 68) C 69) D 70) D 71) E 72) E 73) B 74) B 75) D 76) E 77) C 78) E 79) A 80) B 81) E 82) A 83) A 84) D 85) E 86) A 87) C 88) D 89) D 90) B 91) B 92) A 93) C 94) C 95) A 96) E 97) C 98) A 99) D 100) A 43

Answer Key Testname: UNTITLED7

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130)

C E E A C B D E D B D E A B C D B B D A D C D D A D C C A A

44

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. The table below shows the number of units of labour and capital used in 4 alternative production techniques for producing 1000 widgets per month. Technique Labour Capital

A 25 50

B 35 35

C 50 25

D 30 60

TABLE 8-1 1) Refer to Table 8-1. If the price of labour is $5 and the price of capital is $10, which production technique minimizes the costs of producing 1000 units of output? A) A B) B C) C D) D E) Any of the techniques have the same cost. Answer: C Explanation:

A) B) C) D) E)

2) Refer to Table 8-1. If the price of labour is $10 and the price of capital is $5, which production technique minimizes the costs of producing 1000 units of output? A) A B) B C) C D) D E) Any of the techniques have the same cost. Answer: A Explanation:

1)

A) B) C) D) E)

1

2)

3) Refer to Table 8-1. If the price of both labour and capital is $10, which production technique minimizes the costs of producing 1000 units of output? A) A B) B C) C D) D E) Any of the techniques have the same cost. Answer: B Explanation:

A) B) C) D) E)

4) Refer to Table 8-1. Which production technique is obviously technically inefficient? A) A B) B C) C D) D E) All four techniques are inefficient. Answer: D Explanation:

4)

A) B) C) D) E)

5) When there is no other way of producing a given level of output with a smaller total value of inputs, the firm is operating at A) minimum cost. B) maximum output. C) maximum profit. D) optimal output. E) maximum cost. Answer: A Explanation:

3)

A) B) C) D) E)

2

5)

6) Which of the following conditions indicate cost minimization, assuming two inputs, labour (L) and capital (K)? A) PK ∙ MPK = PL ∙ MPL

6)

B) MPL = MPK C) MPK/PK = MPL/PL D) MPK/PL = MPL/PK E) PK = PL Answer: C Explanation:

A) B) C) D) E)

7) By expressing the cost-minimizing condition as MPK/MPL = PK/PL, we are able to see

7)

A) how the firm determines its profit-maximizing output. B) how the firm can adjust the marginal products of the factors of production to the prices of the factors given by the market. C) that the capital-labour ratio is fixed. D) that the ratio of factor prices is constant over time. E) that the firm is producing at a lower cost if the left-hand side of the equation is greater than the right-hand side. Answer: B Explanation:

A) B) C) D) E)

8) For a firm with only two inputs, capital and labour, the condition MPK/MPL = PK/PL guarantees that the firm is A) at its profit-maximizing output but is not necessarily minimizing its costs. B) minimizing its costs but is not necessarily maximizing its profits. C) technically efficient but not economically efficient. D) economically efficient but not technically efficient. E) at its profit-maximizing and cost-minimizing level of output. Answer: B Explanation:

A) B) C) D) E)

3

8)

9) A profit-maximizing firm will increase its use of capital and decrease its use of labour when the A) marginal product of capital is higher than the marginal product of labour. B) marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour. C) average product of capital is higher than the average product of labour. D) total product of capital is higher than the total product of labour. E) marginal product of capital, per dollar spent on capital, is less than the marginal product of labour, per dollar spent on labour. Answer: B Explanation:

A) B) C) D) E)

10) When a firm seeks to minimize costs of producing a given level of output, it does NOT need to know A) the available alternative methods of production. B) the level of output that maximizes its profits. C) the cost of the factors of production it uses. D) its production function. E) how its costs change as its production methods change. Answer: B Explanation:

10)

A) B) C) D) E)

11) A cost-minimizing firm will increase its use of labour and decrease its use of capital when the A) marginal product of capital is higher than the marginal product of labour. B) marginal product of capital, per dollar spent on capital, is greater than the marginal product of labour, per dollar spent on labour. C) average product of capital is higher than the average product of labour. D) total product of capital is higher than the total product of labour. E) marginal product of capital, per dollar spent on capital, is less than the marginal product of labour, per dollar spent on labour. Answer: E Explanation:

9)

A) B) C) D) E)

4

11)

12) The principle of substitution plays a central role in resource allocation because it demonstrates that A) firms will find it profitable to make abundant use of relatively scarce factors. B) methods of producing the same commodity will not differ from one country to another. C) firms can use all factors of production interchangeably with no impact on their costs. D) prices will be relatively low for those factors for which demand is high relative to supply. E) relative factor prices reflect relative scarcities of factors in the economy and so firms will find it profitable to make abundant use of relatively abundant factors. Answer: E Explanation:

12)

A) B) C) D) E)

13) Suppose that a firm is using 100 units of labour and 50 units of capital to produce 200 completed client tax returns per day. The price of labour is $10 per unit and the price of capital is $5 per unit. The MPL equals 2 and the MPK equals 5. In this situation,

13)

A) the firm is minimizing its costs. B) the firm should increase the use of both inputs. C) the firm could lower its production costs by decreasing labour input and increasing capital input. D) the firm could lower its production costs by increasing labour input and decreasing capital input. E) the firm should decrease the use of both inputs. Answer: C Explanation:

A) B) C) D) E)

14) Suppose that a firm is using 100 units of labour and 50 units of capital to produce 200 completed client tax returns per day. The price of labour is $5 per unit and the price of capital is $2 per unit. The MPL equals 5 and the MPK equals 2. In this situation, the firm A) is minimizing its costs. B) should increase the use of both inputs. C) could lower its production costs by decreasing labour input and increasing capital input. D) could lower its production costs by increasing labour input and decreasing capital input. E) should decrease the use of both inputs. Answer: A Explanation:

A) B) C) D) E)

5

14)

15) Consider a firm that uses only labour and capital as inputs. At the present use of labour and capital, the MP of labour is four times the MP of capital, and the price of labour is twice the price of capital. In order to minimize its costs, the firm should A) substitute capital for labour until their marginal products are equal. B) decrease both capital and labour. C) decrease capital and increase labour. D) increase both labour and capital. E) stay at its present factor mix. Answer: C Explanation:

A) B) C) D) E)

16) Consider a firm that uses only labour and capital. At the present use of labour and capital, the MP of labour is two times the MP of capital, and the price of labour is two times the price of capital. In order to minimize its costs, the firm should A) substitute capital for labour until their marginal products are equal. B) decrease both capital and labour. C) decrease capital and increase labour. D) increase both labour and capital. E) not alter its present factor mix. Answer: E Explanation:

16)

A) B) C) D) E)

17) Consider a firm that uses only labour and capital. At the present use of labour and capital, the MP of labour is twice the MP of capital, and the price of labour is four times the price of capital. In order to minimize its costs, the firm should A) increase capital and decrease labour. B) decrease both capital and labour. C) decrease capital and increase labour. D) increase both labour and capital. E) maintain its present factor mix. Answer: A Explanation:

15)

A) B) C) D) E)

6

17)

18) Suppose a firm employs two inputs, X and Y, and that at their current levels of use MPX/PX >

18)

MPY/PY. To minimize the cost of production, the firm should hire A) more input Y and less input X. B) more input X and less input Y. C) more input Y only if its price falls. D) more input X only if its price increases. E) more input X only if its price decreases. Answer: B Explanation:

A) B) C) D) E)

19) When a cost-minimizing firm is faced with an increase in the relative price of labour, it adjusts its factor usage so as to A) increase the marginal product of capital relative to the marginal product of labour. B) increase the marginal product of labour relative to the marginal product of capital. C) use more labour per unit of output than before. D) use more of both capital and labour per unit of output. E) maintain the previous usage of labour. Answer: B Explanation:

A) B) C) D) E)

20) Suppose a firm is employing labour (L) and capital (K) such that MPK/MPL = PK/PL. If the price of labour rises, the cost-minimizing firm should A) employ more labour and less capital because MPK/MPL > PK/PL. B) employ more capital and less labour because MPK/MPL > PK/PL. C) employ more labour and less capital because MPK/MPL < PK/PL. D) employ more capital and less labour because MPK/MPL < PK/PL. E) do nothing. Answer: B Explanation:

19)

A) B) C) D) E)

7

20)

21) Suppose that capital costs $10 per unit and labour costs $5 per unit. For a profit-maximizing firm operating at its optimal factor mix, if the marginal product of capital is 50, the marginal product of labour must be A) 10. B) 20. C) 25. D) 50. E) 100. Answer: C Explanation:

A) B) C) D) E)

22) Suppose that capital costs $6 per unit and labour costs $3 per unit. If the marginal product of capital is 3 and the marginal product of labour is 6, the cost-minimizing firm should A) employ more of both capital and labour. B) employ less of both capital and labour. C) employ more capital and less labour. D) employ less capital and more labour. E) not change its current factor use. Answer: D Explanation:

23)

A) B) C) D) E)

24) Suppose that capital costs $50 per unit and labour costs $20 per unit. If the marginal product of capital is 100 and the marginal product of labour is 30, a cost-minimizing firm should A) employ more of both capital and labour. B) employ less of both capital and labour. C) employ more capital and less labour. D) employ less capital and more labour. E) not change its current factor use. Answer: C Explanation:

22)

A) B) C) D) E)

23) Suppose that capital costs $6 per unit and labour costs $3 per unit. If the marginal product of capital is 12 and the marginal product of labour is 6, the cost-minimizing firm should A) employ more of both capital and labour. B) employ less of both capital and labour. C) employ more capital and less labour. D) employ less capital and more labour. E) not change its current factor use. Answer: E Explanation:

21)

A) B) C) D) E) 8

24)

25) Suppose that capital costs $100 per unit and labour costs $40 per unit. If the marginal product of capital is 200 and the marginal product of labour is 60, a cost-minimizing firm should A) employ more capital and less labour. B) employ more of both capital and labour. C) employ less of both capital and labour. D) employ less capital and more labour. E) not change its current factor use. Answer: A Explanation:

A) B) C) D) E)

26) If a firm is using labour and capital such that the MP of labour is two times the MP of capital, and the price of labour is four times the price of capital, the firm should ________ in order to minimize its costs of producing its output. A) increase capital and decrease labour B) decrease both capital and labour C) decrease capital and increase labour D) increase both labour and capital E) not alter its present factor mix Answer: A Explanation:

26)

A) B) C) D) E)

27) Suppose that capital costs $8 per unit and labour costs $4 per unit. For a profit- maximizing firm operating at its optimal factor mix, if the marginal product of capital is 60, the marginal product of labour must be A) 10. B) 20. C) 30. D) 90. E) 120. Answer: C Explanation:

25)

A) B) C) D) E)

9

27)

28) Suppose that capital costs $10 per unit and labour costs $4 per unit. If the marginal product of capital is 50 and the marginal product of labour is 50, the firm should ________ in order to minimize its costs of producing its output. A) employ more capital and labour B) employ less capital and labour C) employ more capital and less labour D) employ less capital and more labour E) not change its current factor use Answer: D Explanation:

A) B) C) D) E)

29) Suppose a firm employs two kinds of inputs, capital at $100 per unit, and labour at $25 per unit. If the marginal product of capital is 50, then the firm should ________ in order to minimize its production costs. A) employ more capital and less labour B) employ more labour and less capital C) employ more labour and more capital D) not change its current factor use E) There is insufficient information to make a recommendation. Answer: E Explanation:

28)

A) B) C) D) E)

10

29)

The following table shows the marginal products of capital (K) and labour (L) for various methods for Firm ABC to produce 1000 toys per day.

Production Method A B C D E F G

MPK 50 45 40 35 30 25 20

MPL 4 8 12 16 20 24 28

TABLE 8-2 30) Refer to Table 8-2. As this firm switches from production method A to production method G, production is A) moving farther and farther away from cost minimization. B) becoming more capital intensive and less labour intensive. C) becoming more profitable. D) becoming more labour intensive and less capital intensive. E) remaining at a cost-minimizing level of output. Answer: B Explanation:

A) B) C) D) E)

31) Refer to Table 8-2. If capital costs $6 per unit and labour costs $4 per unit, which production method minimizes the cost of producing 1000 toys per day? A) method B B) method C C) method D D) method E E) method F Answer: D Explanation:

30)

A) B) C) D) E)

11

31)

32) Refer to Table 8-2. Suppose capital costs $6 per unit and labour costs $4 per unit and the firm is employing production method A. How should this firm adjust its use of capital and labour to minimize costs? A) employ more capital and less labour B) employ less capital and more labour C) employ more capital and more labour D) employ less capital and less labour E) There is insufficient information to know. Answer: A Explanation:

A) B) C) D) E)

33) Refer to Table 8-2. Suppose the firm is employing production method G. How should this firm adjust its use of capital and labour in order to minimize costs? A) employ more capital and less labour B) employ less capital and more labour C) employ more capital and labour D) employ less capital and labour E) There is insufficient information to know. Answer: E Explanation:

33)

A) B) C) D) E)

34) Refer to Table 8-2. Suppose capital costs $80 per unit and labour costs $24 per unit. Which production method minimizes the cost of producing 1000 toys per day. A) method B B) method C C) method D D) method E E) method F Answer: B Explanation:

32)

A) B) C) D) E)

12

34)

35) Canada has a much lower population density than does Japan. Therefore, the price of land (relative to the price of labour) is lower in Canada than in Japan. Consider a Canadian firm and a Japanese firm, both producing rice, both having access to the same technologies, and both striving to minimize their costs. The Canadian firm will use the two inputs, land and labour, in such a way that its land/labour ratio is A) equal to that of the Japanese firm. B) lower than that of the Japanese firm. C) higher than that of the Japanese firm. D) indeterminate as there is insufficient information to know. E) equal to one. Answer: C Explanation:

A) B) C) D) E)

36) Canada has a much lower population density than does Japan. Therefore, the price of land (relative to the price of labour) is lower in Canada than in Japan. Consider a Canadian firm and a Japanese firm, both producing rice, both having access to the same technologies, and both striving to minimize costs. Now suppose that the relative price of land rises in Canada but remains the same in Japan. The effect on the use of inputs will be to A) increase the land/labour ratio for both the Canadian and the Japanese firms. B) decrease the land/labour ratio for both the Canadian and the Japanese firms. C) increase the land/labour ratio for the Canadian firm. D) decrease the land/labour ratio for the Canadian firm. E) not change the land/labour ratio for either firm. Answer: D Explanation:

36)

A) B) C) D) E)

37) Consider a firm in the long run that is trying to maximize its profits. It should A) select the most technically efficient method of production regardless of the level of production. B) maximize the marginal product of all factors of production. C) charge the highest price. D) minimize the cost of producing whatever level of output it chooses. E) charge the lowest price possible given the minimum possible cost. Answer: D Explanation:

35)

A) B) C) D) E)

13

37)

38) One hundred years ago, in North America and Europe it was commonplace for middle class households to employ housemaids. As you know, this is quite rare today. Most such households now have dishwashers, washing machines and dryers. What is an explanation of this change? A) Over long periods of time, labour is always replaced by capital. B) Over long periods of time, capital is always replaced by labour. C) Households substituted away from a factor whose price was falling (labour) and toward a factor whose price was rising (capital). D) Households substituted away from an increasingly expensive factor (labour) and toward an increasingly inexpensive factor (capital). E) The marginal product of labour was falling over time while the marginal product of capital was rising. Answer: D Explanation:

A) B) C) D) E)

39) Which of the following is unlikely to be a source of increasing productivity? A) better raw materials even if there are no changes in factor quantities or proportions B) better organization of production C) substitution toward labour and away from capital (with constant technology) D) better-trained labour E) increases in technological know-how Answer: C Explanation:

39)

A) B) C) D) E)

40) The long-run average cost (LRAC) curve shows A) the lowest unit cost at which the firm can produce a given output. B) the highest unit costs of producing a given output. C) the operation of the law of diminishing returns. D) what happens to the fixed costs in the long run. E) the same as the short-run average cost curve. Answer: A Explanation:

38)

A) B) C) D) E)

14

40)

41) A firm's long-run average cost curve A) shows the minimum cost of producing each possible level of output with a fixed factor. B) shows the relationship between marginal cost and output given that the economically most efficient method of production is employed. C) is the boundary between attainable and unattainable cost levels, with known production technologies and given factor prices. D) is horizontal in most situations. E) is an envelope of short-run average variable cost curves. Answer: C Explanation:

A) B) C) D) E)

42) In defining a firm's long-run average cost curve, A) factor prices are held constant and technology is assumed to change. B) factor prices are held constant and the quantity of factors of production used is varied. C) factor prices are varied and the quantity of factors of production is held constant. D) technology, factor prices, and the quantity of factors of production are all varied. E) the time period must be longer than one year. Answer: B Explanation:

42)

A) B) C) D) E)

43) Increasing returns to scale for a firm is shown graphically by A) a downward-sloping long-run average cost curve. B) an upward-sloping long-run average cost curve. C) a horizontal long-run average cost curve. D) a vertical long-run average cost curve. E) None of the above; returns to scale have nothing to do with the shape of the long-run average cost curve. Answer: A Explanation:

41)

A) B) C) D) E)

15

43)

44) In the long run, a profit-maximizing firm producing a given level of output chooses the production method that A) produces that output at the lowest possible cost. B) maximizes the marginal product of all factors. C) maximizes the marginal product of labour. D) leads to a flat total cost curve. E) minimizes labour input. Answer: A Explanation:

A) B) C) D) E)

45) What is meant by the term "increasing returns to scale"? A) output rises proportionately less than inputs, increasing per unit cost of production in the short run B) output rises proportionately more than inputs, resulting in increasing per unit costs C) output rises proportionately more than inputs, resulting in lower per unit costs in the long run D) it has the same meaning as increasing costs of production E) it implies that the long-run average cost curve is shifting downward Answer: C Explanation:

45)

A) B) C) D) E)

46) In the long run, the law of diminishing marginal returns A) is not relevant because there are no fixed factors of production. B) sometimes holds, depending on the production process. C) does hold, regardless of production process. D) is exactly the same as in the short run. E) does not hold because technology is a variable. Answer: A Explanation:

44)

A) B) C) D) E)

16

46)

47) Assume a firm is using 10 units of capital and 10 units of labour to produce 10 widgets per hour. By doubling both inputs the result is a doubling of output. This firm is experiencing A) constant returns to scale. B) economies of scale. C) diseconomies of scale. D) increasing costs. E) decreasing returns. Answer: A Explanation:

A) B) C) D) E)

48) Assume a firm is using 10 units of capital and 10 units of labour and is producing 10 widgets per hour. Now it doubles both inputs, resulting in output of 30 widgets per hour. This firm is experiencing A) decreasing returns. B) increasing returns. C) constant returns. D) diseconomies of scale. E) increasing costs. Answer: B Explanation:

48)

A) B) C) D) E)

49) Assume a firm is using 10 units of labour and 10 units of capital and is producing 10 units of output per hour. Now both inputs are doubled, resulting in output rising to 18 units per hour. The firm is experiencing A) constant returns to scale. B) increasing returns to scale. C) decreasing returns to scale. D) economies of scale. E) decreasing costs. Answer: C Explanation:

47)

A) B) C) D) E)

17

49)

50) Assume a firm is using 6 units of capital and 6 units of labour to produce 6 baskets. Now it doubles both inputs resulting in a new total of 16 baskets being produced. This firm is experiencing A) decreasing returns to scale. B) increasing returns to scale. C) constant returns to scale. D) diseconomies of scale. E) increasing costs. Answer: B Explanation:

A) B) C) D) E)

51) Suppose a firm experiences decreasing returns to scale. This is shown graphically by A) a downward-sloping long-run average cost curve. B) an upward-sloping long-run average cost curve. C) a downward-sloping long-run marginal-cost curve. D) a horizontal long-run average cost curve. E) an increasing marginal product curve. Answer: B Explanation:

51)

A) B) C) D) E)

52) "The bigger the volume, the lower the cost, and we pass these savings on to you" is a familiar advertising slogan. It implies essentially that the A) total cost of the firm will remain constant as output expands. B) firm expects to experience increasing returns over the relevant level of output. C) average fixed cost will decline or remain constant over the long run. D) consumer is able to pay less today because the total cost of the firm is expected to decline tomorrow. E) firm is altruistic. Answer: B Explanation:

50)

A) B) C) D) E)

18

52)

FIGURE 8-1 53) Refer to Figure 8-1. Which of the four firms in the figure is displaying decreasing returns to scale at all output levels? A) Firm A B) Firm B C) Firm C D) Firm D E) all firms are displaying increasing returns to scale Answer: C Explanation:

A) B) C) D) E)

54) Refer to Figure 8-1. Which of the four firms in the figure is displaying constant returns to scale at all output levels? A) Firm A B) Firm B C) Firm C D) Firm D E) none of the four firms is displaying constant returns to scale Answer: B Explanation:

53)

A) B) C) D) E)

19

54)

55) Refer to Figure 8-1. For which of the four firms in the figure is output increasing more than in proportion to inputs for all output levels? A) Firm A B) Firm B C) Firm C D) Firm D E) none of the four firms Answer: A Explanation:

A) B) C) D) E)

56) Refer to Figure 8-1. For which of the four firms would the family of short-run average total cost curves lie below the LRAC? A) Firm A B) Firm B C) Firm C D) Firm D E) none of the four firms Answer: E Explanation:

55)

A) B) C) D) E)

20

56)

FIGURE 8-2 57) Refer to Figure 8-2. Increasing returns to scale occur over the output range A) 0 to Q1 only.

57)

B) Q1 to Q2 only. C) Q2 to Q3 only. D) 0 to Q3 only. E) beyond Q3 only. Answer: D Explanation:

A) B) C) D) E)

58) Refer to Figure 8-2. Decreasing returns to scale occur over the output range A) 0 to Q1 only. B) Q1 to Q2 only. C) Q2 to Q3 only. D) 0 to Q3 only. E) beyond Q3 only. Answer: E Explanation:

A) B) C) D) E)

21

58)

59) Refer to Figure 8-2. In the long run, the lowest-cost level of output achievable by this firm is A) Q1 . B) Q2 . C) Q3 . Answer: C Explanation:

D) not shown in the diagram A) B) C) D)

60) Consider the long-run average cost curve for a firm. Any point representing a cost and output combination that is below the LRAC curve A) may represent actual cost and production levels in the short run. B) represents less efficient cost levels than points on the long-run average cost curve. C) is attainable only when all factors are variable. D) represents unattainable cost levels. E) is attainable if the firm minimizes its costs according to the "principle of substitution." Answer: D Explanation:

61)

A) B) C) D) E)

62) Which of the following paired concepts are equivalent to each other? A) constant costs; economies of scale B) decreasing returns; decreasing costs C) increasing returns; increasing costs D) decreasing costs; economies of scale E) increasing returns; diseconomies of scale Answer: D Explanation:

60)

A) B) C) D) E)

61) Which of the following paired concepts are equivalent to each other? A) constant costs; economies of scale B) increasing returns; decreasing costs C) increasing returns; increasing costs D) increasing costs; economies of scale E) increasing returns; diseconomies of scale Answer: B Explanation:

59)

A) B) C) D) E)

22

62)

63) Of the following, which is the least likely to represent a firm's long-run decision? A) What should be the size and design of a firm's new plant? B) Should the firm choose a method of production that uses relatively more capital than labour? C) By how much should output be expanded from existing plants? D) Should the firm invest resources in the development of better technologies? E) What technique (technology) is the best to use under current factor pricing? Answer: C Explanation:

A) B) C) D) E)

64) The long-run average cost curve is an envelope curve, with each point associated with a short-run average cost curve A) tangent at that point. B) crossing that point from above. C) lying below it. D) intersecting that point. E) at its minimum point. Answer: A Explanation:

64)

A) B) C) D) E)

65) The point of tangency between the short-run average total cost (SRATC) curve and the long-run average cost (LRAC) curve occurs A) at the point of minimum SRATC. B) at a point where average total cost is falling but the marginal cost is rising. C) at a point where both the average total cost and the marginal cost are rising. D) at an output level for which the quantity of the fixed factor is optimal. E) only when the LRAC curve is at its minimum. Answer: D Explanation:

63)

A) B) C) D) E)

23

65)

66) In the long run, decreasing returns to scale are likely to be caused by A) diseconomies of scale associated with management problems. B) a decrease in factor prices. C) increasing specialization of labour. D) diminishing returns to the variable factor. E) decreasing costs. Answer: A Explanation:

A) B) C) D) E)

67) Which of the following statements concerning long-run and short-run cost curves is correct? A) A short-run average cost curve can fall below the long-run average cost curve. B) The short-run average cost curve is tangent to the long-run average cost curve for all levels of output of the fixed factor. C) The long-run average cost curve envelops a whole family of short-run marginal cost curves. D) The minimum point of the long-run average cost curve will correspond to the minimum point on a single short-run average cost curve. E) Both the long-run and short-run average cost curves show the lowest cost of producing any output when all factors are variable. Answer: D Explanation:

67)

A) B) C) D) E)

68) A short-run average total cost curve will touch the long-run average cost curve at a level of output only A) where the short-run cost curve is downward sloping. B) where the short-run cost curve is upward sloping. C) when the quantity of the fixed factor being employed is at the optimal level for that level of output. D) where the short-run cost curve is downward-sloping and the quantity of the fixed factor is optimal. E) by coincidence. Answer: C Explanation:

66)

A) B) C) D) E)

24

68)

69) Consider the short-run and long-run cost curves for a firm. If factor prices decrease, A) the firm will move down along both its long-run and short-run average cost curves. B) the firm will move down along its long-run average cost curve only. C) both the long-run and short-run average cost curves will shift downward. D) there will be a downward shift in the long-run average cost curve but not in the short-run average cost curve. E) there will be no change in the cost curves in the long run. Answer: C Explanation:

A) B) C) D) E)

70) A downward-sloping LRAC curve will shift downward because of A) specialization. B) a decrease in factor prices. C) the use of large, specialized machinery as the volume of output increases. D) factor substitution. E) economies of scale. Answer: B Explanation:

70)

A) B) C) D) E)

71) Which of the following cost curves demonstrate increasing returns to scale? A) a downward-sloping long-run average cost curve B) an upward-sloping long-run average cost curve C) a horizontal long-run average cost curve D) a vertical long-run average cost curve E) returns to scale have nothing to do with the shape of the long-run average cost curve Answer: A Explanation:

69)

A) B) C) D) E)

25

71)

72) For many firms the LRAC curve is U-shaped. The downward-sloping portion of the LRAC curve can be explained by A) economies of scale. B) the spreading of overhead. C) both (a) and (b). D) declining prices of the fixed factor E) decreasing short-run marginal cost. Answer: A Explanation:

A) B) C) D) E)

73) Suppose Farmer Smith hires 4 workers and leases 2 tractors and 15 hectares of farmland for one growing season, and produces 120 000 bushels of crop. The next year he hires 8 workers and leases 4 tractors and 30 hectares of farmland, and produces 210 000 bushels of crop. This firm (the farmer) is exhibiting ________ returns to scale. A) decreasing B) increasing C) constant D) marginal E) variable Answer: A Explanation:

73)

A) B) C) D) E)

74) Suppose a shipping company employs 2000 workers, operates 400 delivery trucks and makes 1.5 million domestic shipments in one year. The next year they increase their workforce to 3000 workers, operate 600 trucks and make 2.8 million domestic shipments in one year. This firm is exhibiting ________ returns to scale. A) decreasing B) increasing C) constant D) marginal E) variable Answer: B Explanation:

72)

A) B) C) D) E)

26

74)

75) A short-run average total cost curve and a long-run average cost curve are tangent A) where the short-run cost curve is downward sloping. B) where the short-run cost curve is upward sloping. C) when the plant size is at the optimal level for that level of output. D) where the short-run cost curve is downward sloping and the plant size is optimal. E) by coincidence. Answer: C Explanation:

A) B) C) D) E)

76) Consider the short-run and long-run cost curves for a firm. If there is a fall in all factor prices faced by the firm, A) it will move to a lower point on its existing long-run and short-run average cost curves. B) it will move to a lower point on its existing long-run average cost curve only. C) both the long-run and short-run average cost curves will shift downward. D) there will be a downward shift in the long-run average cost curve but not in the short-run average cost curve. E) there will be no change in the cost curves in the long run. Answer: C Explanation:

76)

A) B) C) D) E)

77) In the long run, a profit-maximizing firm produces any given level of output by choosing the production method that A) maximizes the marginal product of all factors. B) equates the marginal product of all factors. C) equates the average cost per unit of all factors. D) is associated with a flat total cost curve. E) produces that output at the lowest possible cost. Answer: E Explanation:

75)

A) B) C) D) E)

27

77)

The figure below shows a family of cost curves for a firm. The subscripts 1, 2, and 3 for the SRATC curves refer to different plant sizes.

FIGURE 8-3 78) Refer to Figure 8-3. What is the difference between the SRATC curves and the LRAC curve? A) The SRATC curves show the optimal plant size when all factors of production are variable, whereas the LRAC shows the lowest cost attainable associated with each LRAC curve. B) The SRATC curves show the lowest attainable cost of production at each level of output when all factors are variable in the short run, whereas the LRAC curve shows the same in the long run. C) The LRAC is an envelope curve, joining the minimum points on all SRATC curves. D) For the SRATC curves, one or more of the factors of production is fixed, whereas for the LRAC curve, all factors of production are variable. E) The SRATC curves show diseconomies of scales, whereas the LRAC curve shows economies of scale. Answer: D Explanation:

A) B) C) D) E)

79) Refer to Figure 8-3. Each of the three SRATC curves shows A) technically inefficient methods of production, given that they lie above the LRAC. B) the lowest cost attainable, given that the plant size is the largest it can possibly be. C) the output that is possible when all factors of production are fixed. D) the lowest cost attainable, holding the plant size constant. E) optimal plant sizes in the long run. Answer: D Explanation:

78)

A) B) C) D) E)

28

79)

80) Refer to Figure 8-3. The minimum efficient scale is achieved by this firm at output level A) Q1 . B) Q2 . C) Q3 . D) Q4. E) Q5 . Answer: C Explanation:

A) B) C) D) E)

81) Refer to Figure 8-3. If this firm is producing at point B, then A) this firm is producing a level of output that is technically inefficient in the long run. B) this firm is experiencing decreasing returns to scale. C) this firm could produce the same level of output at a lower cost with plant size 2. D) it should employ more of its variable factors of production. E) plant size 1 is optimal. Answer: C Explanation:

82)

A) B) C) D) E)

83) Refer to Figure 8-3. Suppose this firm is producing output level Q3 with plant size 2. Now suppose this firm changes to plant size 3 and is producing output level Q5 . We can say that A) the firm is then operating with the optimal plant size. B) this firm has experienced economies of scale. C) output has increased more than in proportion to the increase in inputs. D) output has increased exactly in proportion to the increase in inputs. E) output has increased less than in proportion to the increase in inputs. Answer: E Explanation:

81)

A) B) C) D) E)

82) Refer to Figure 8-3. Should this profit-maximizing firm ever consider moving from point E (output level Q3 on SRATC2 ) to point F (output level Q5 on SRATC3)? A) No, because they are already producing at their lowest possible cost at point E. B) Yes, because the firm can take advantage of economies of scale. C) Yes, because SRATC3 is the optimal plant size for this firm. D) No, because producing at point F implies a higher cost per unit of output. E) Yes, if the product price rises enough to lead the firm to expand to plant size 3. Answer: E Explanation:

80)

A) B) C) D) E)

29

83)

84) Consider the short-run and long-run cost curves for a firm. If there is an improvement in the firm's technology, A) the firm will move to a lower point on both its long-run and short-run average cost curves. B) the firm will move to a lower point on its long-run average cost curve only. C) both the long-run and short-run average cost curves will shift downward. D) there will be a downward shift in the long-run average cost curve but not in the short-run average cost curve. E) there will be no change in the cost curves in the long run. Answer: C Explanation:

A) B) C) D) E)

85) Economists collect and analyze data on output per worker and output per hour of work. What are they trying to measure by doing so? A) the ratio of marginal products of factors B) the principle of substitution C) diminishing marginal returns D) returns to scale E) productivity Answer: E Explanation:

85)

A) B) C) D) E)

86) A change in the technique for producing an existing product is known as A) product innovation. B) investment. C) invention. D) an increase in productivity. E) process innovation. Answer: E Explanation:

84)

A) B) C) D) E)

30

86)

87) With respect to innovation, which of the following statements is true? A) Government policy cannot influence the rate of innovation. B) Innovation is exogenous to the economic system. C) The utilization rate of existing plant and equipment and its durability are independent of the pace of innovation. D) The principal incentive for innovation does not appear to be related to profits. E) Innovation is often endogenous to the economic system. Answer: E Explanation:

A) B) C) D) E)

88) What is the definition of productivity? A) output produced per unit of input B) output produced by a combination of two or more inputs C) the cost of a unit of output D) a measure of input used E) the efficient use of technology Answer: A Explanation:

88)

A) B) C) D) E)

89) Which of the following factors is most important as a source of sustained growth in material living standards? A) population increase B) changing relative factor prices C) decrease in cost of capital D) technological improvement E) capital-labour substitution Answer: D Explanation:

87)

A) B) C) D) E)

31

89)

90) A very-long-run consideration that could change a firm's production function is A) rising cost of the factors of production. B) increasing returns to scale of operation. C) an improvement in education that increases the quality of the economy's labour force. D) diminishing returns. E) size of the plant. Answer: C Explanation:

A) B) C) D) E)

91) Although capital is a variable factor in the long run, once chosen it becomes a fixed factor for a long time. A profit-maximizing firm must therefore select a method of production that is A) economically efficient at current factor prices. B) technologically advanced beyond methods currently used. C) labour intensive, as labour is always a variable factor. D) economically efficient at current factor prices and sufficiently flexible to adapt to changing factor prices over time. E) adaptable to wide ranges of output over time. Answer: D Explanation:

91)

A) B) C) D) E)

92) The fact that new methods to extract oil are developed as oil prices increase suggests A) that methods of production do not change in response to factor-price changes. B) that invention is exogenous. C) that invention does respond to economic signals and is endogenous. D) that oil has many close substitutes. E) nothing; changes in technology occur regardless of market prices. Answer: C Explanation:

90)

A) B) C) D) E)

32

92)

93) The creation of a new product is called A) process innovation. B) a rise in productivity. C) creative destruction. D) investment. E) product innovation. Answer: E Explanation:

93)

A) B) C) D) E)

94) Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in Northern Quebec, the operation of which requires a great deal of electricity. Suppose also that the price of electricity is predicted to rise significantly in the near future. As a result, the firm decides to build a plant using existing technology that is more expensive but uses less electricity per tonne of aluminum produced. This behaviour is an example of A) short-run profit maximization. B) short-run cost minimization. C) the long-run principle of substitution. D) innovation away from changes in factor prices. E) long-run economies of scale. Answer: C Explanation:

A) B) C) D) E)

95) Suppose RioTintoAlcan is considering the construction of a new aluminum smelter in Northern Quebec, the operation of which requires a great deal of electricity. Suppose also that the price of electricity is predicted to rise significantly in the near future. As a result, the firm decides to embark on new research and development which leads to the development of a new production technique that uses less electricity per tonne of aluminum produced. This is an example of A) the marginal rate of substitution between factors. B) innovation away from increases in factor prices. C) short-run cost minimization. D) short-run profit maximization. E) long-run economies of scale. Answer: B Explanation:

94)

A) B) C) D) E)

33

95)

96) Suppose Commercial Footware Inc. is making a cost-minimizing decision about the level of output to produce with a given technology. Which of the following is a long-run decision? A) Should we build a larger shoe manufacturing facility? B) Should we hire additional labour to work in the existing facility? C) Should we change to a lower-cost leather supplier? D) Should we invest in research for a new, improved technology for shoe production? E) Should we hire more accountants to investigate ways to reduce our corporate tax payments? Answer: A Explanation:

A) B) C) D) E)

97) Which of the following statements most accurately makes the distinction between the long run and the very-long run with respect to the long-run average cost (LRAC) curve? A) In the long run, the LRAC curve is shifting down, whereas in the very-long run the firm is moving along the existing LRAC curve. B) In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long run, the LRAC curve is shifting down. C) In the long run, the LRAC curve is shifting up, whereas in the very-long run the firm is moving along the existing LRAC curve. D) In the long run, the firm is moving along the existing LRAC curve, whereas in the very-long run, the LRAC curve is shifting up. E) There is no distinction between the long run and the very-long run with respect to the LRAC curve. Answer: B Explanation:

97)

A) B) C) D) E)

98) What information is displayed by an isoquant? A) the whole set of technically efficient factor combinations that can produce varying levels of output B) various levels of output that can be produced with different factor combinations C) various levels of output that can be produced with a fixed factor combination D) the whole set of technically efficient factor combinations that can produce a single level of output E) the alternative factor combinations that require the same expenditure Answer: D Explanation:

96)

A) B) C) D) E)

34

98)

99) The slope of an isoquant measures A) the marginal rate of (technical) substitution between factors. B) the average capital/labour ratio. C) the marginal cost of a given level of output. D) the ratio of prices of inputs. E) the ratio of prices of goods. Answer: A Explanation:

A) B) C) D) E)

100) Movement from one point to another along an isoquant implies a change in A) output levels, holding factor combinations constant. B) factor combinations, holding output constant. C) product prices. D) the level of output, independent of what happens to factor combinations. E) money income. Answer: B Explanation:

100)

A) B) C) D) E)

101) The fact that isoquants are downward sloping indicates A) the diminishing marginal productivity of a variable factor. B) the diminishing marginal productivity of a fixed factor. C) that each factor input has a negative marginal productivity. D) a change in relative factor prices, with output held constant. E) that a reduction in the use of one factor requires an increase in the use of the other factor in order to keep output constant. Answer: E Explanation:

99)

A) B) C) D) E)

35

101)

102) Isoquants are usually drawn convex when viewed from the origin, reflecting the standard assumption A) that both factors are subject to the law of diminishing returns. B) that the variable factor is subject to the law of diminishing returns. C) the positive marginal productivity of all factors. D) negative marginal productivity of all factors. E) that both factors are subject to increasing returns. Answer: A Explanation:

A) B) C) D) E)

103) The slope of a firm's isocost line is equal to the ratio of A) the marginal products of its factors. B) the marginal rate of substitution between factors. C) the factor prices. D) total variable cost to total cost. E) product prices. Answer: C Explanation:

104)

A) B) C) D) E)

105) Movement from one point to another along an isocost line implies a change in A) output levels, holding factor combinations constant. B) factor combinations, holding expenditure constant. C) factor prices. D) the level of output, independent of what happens to factor combinations. E) expenditure. Answer: B Explanation:

103)

A) B) C) D) E)

104) A firm's least-cost position for producing a given output level occurs at that point where A) the isocost line intersects the highest isoquant. B) the isocost and isoquant intersect the horizontal axis. C) the isoquant is closest to the origin. D) the isocost line and the isoquant are tangent to each other. E) the isocost and isoquant intersect the vertical axis. Answer: D Explanation:

102)

A) B) C) D) E) 36

105)

106) Isocost lines are downward sloping straight lines, reflecting A) decreasing factor prices. B) increasing factor prices. C) that each factor price has a negative value. D) a change in relative factor prices. E) constant factor prices. Answer: E Explanation:

A) B) C) D) E)

107) A firm operates at its least-cost position for a given level of output by equating A) the marginal product of each factor. B) the marginal product per dollar spent for each factor. C) the price of each input. D) the total expenditure on each input. E) the average product for each factor. Answer: B Explanation:

106)

A) B) C) D) E)

37

107)

FIGURE 8-4 108) Refer to Figure 8-4. A firm that is producing an output of 1000 units will minimize its costs at point A) A. B) B. C) C. D) D. E) halfway between B and D. Answer: B Explanation:

A) B) C) D) E)

109) Refer to Figure 8-4. A firm that is producing an output of 2000 units will minimize its costs at point A) A. B) B. C) C. D) D. E) There is not enough information provided to be sure. Answer: E Explanation:

108)

A) B) C) D) E)

38

109)

110) Refer to Figure 8-4. The firm is initially minimizing the cost of producing 1000 units of output. Suppose the factor prices then change such that the price of capital (K) rises and the price of labour (L) falls. If the firm decides to keep its output unchanged, it will move toward the point A) A. B) B. C) C. D) D. E) Unknown as there is insufficient information to know Answer: C Explanation:

A) B) C) D) E)

111) Refer to Figure 8-4. The firm is initially minimizing the cost of producing 1000 units of output. Suppose the factor prices then change such that the price of capital (K) falls and the price of labour (L) rises. If the firm decides to leave its output unchanged, it will now move toward the point A) A. B) B. C) C. D) D. E) Unknown as there is insufficient information to know Answer: A Explanation:

111)

A) B) C) D) E)

112) Refer to Figure 8-4, with the isoquants and isocost line as shown. A firm that is producing at point A can reduce its costs for producing 1000 units by employing A) less capital and less labour. B) more capital and less labour. C) less capital and more labour. D) more capital and more labour. E) less capital and the same labour. Answer: C Explanation:

110)

A) B) C) D) E)

39

112)

113) Refer to Figure 8-4, with the isoquants and isocost line as shown. A firm that is producing at point C can reduce its costs for producing 1000 units by employing A) less capital and less labour. B) more capital and less labour. C) less capital and more labour. D) more capital and more labour. E) less labour and the same capital. Answer: B Explanation:

A) B) C) D) E)

114) Refer to Figure 8-4. The firm is initially producing 1000 units and minimizing its production cost at point B. Suppose the prices of capital and labour each fall by 20%. If the firm wishes to continue producing the same level of output it will A) move toward point A. B) remain at point B. C) move toward point C. D) move toward point D. E) move to the left of point B. Answer: B Explanation:

114)

A) B) C) D) E)

115) Refer to Figure 8-4. The firm is initially producing 2000 units and minimizing its production cost at point D. Suppose the prices of capital and labour each rise by 10%. If the firm wishes to continue producing the same level of output it will A) move toward point A. B) move toward point B. C) move toward point C. D) remain at point D. E) move to the right of point D. Answer: D Explanation:

113)

A) B) C) D) E)

40

115)

116) Refer to Figure 8-4. The firm is initially operating at point B. If prices of both factors fell by 25% and the firm wished to continue expending the same amount on each resource (while continuing to maintain efficiency) the firm would A) move towards point D. B) move toward point A. C) shift towards the origin. D) move toward point C. E) stay at point B. Answer: A Explanation:

A) B) C) D) E)

117) Refer to Figure 8-4. The firm is initially operating at point B. An improvement in technology would be represented by A) a shift to the curve indicated by Q = 2000. B) a movement toward point D. C) a movement toward the origin. D) a new isoquant map. E) a new isocost curve. Answer: D Explanation:

116)

A) B) C) D) E)

41

117)

The figure below shows the isocost lines facing a firm producing golf tees.

FIGURE 8-5 118) Refer to Figure 8-5. This firm can be a "cost minimizer" by producing on isocost line A) 1 only. B) 2 only. C) 3 only. D) 4 only. E) Not able to determine from the information provided. Answer: E Explanation:

A) B) C) D) E)

42

118)

119) Refer to Figure 8-5. Given the information provided about the isocost lines, we know that the per unit price of capital is ________ and the per unit price of labour is ________. A) $20; $50 B) $50; $20 C) $2; $5 D) $5; $2 E) not determinable; not determinable Answer: D Explanation:

A) B) C) D) E)

120) Refer to Figure 8-5. If the cost-minimizing firm is initially producing at a point on isocost line 1 and then moves to a point on isocost line 3, we can say that A) the per unit prices of capital and labour have each doubled. B) the output of golf tees has doubled. C) the per unit prices of capital and labour have fallen by 50%. D) the firm's level of output has increased. E) the firm is producing more efficiently. Answer: D Explanation:

120)

A) B) C) D) E)

121) Refer to Figure 8-5. The firm that is facing the isocost lines as shown will minimize its cost of production of any given output level if it employs capital and labour such that the ratio of the marginal product of labour to the marginal product of capital (MPL/MPK) is equal to A) 5/2. B) 5. C) 2. D) 2/5. E) Not able to determine from the information provided. Answer: D Explanation:

119)

A) B) C) D) E)

43

121)

The figure below shows the isocost lines and the isoquant map for a firm producing golf tees.

FIGURE 8-6 122) Refer to Figure 8-6. This firm will minimize its costs of producing 2000 golf tees at point A) A. B) B. C) C. D) D. E) E. Answer: C Explanation:

A) B) C) D) E)

123) Refer to Figure 8-6. Suppose this firm is producing 4000 golf tees with 10 units of capital and 25 units of labour (point G). The marginal rate of substitution between capital and labour is A) 2.5. B) 0.4. C) 100. D) 40. E) 0.025. Answer: B Explanation:

122)

A) B) C) D) E)

44

123)

124) Refer to Figure 8-6. At each of points A, C, E and G on the isoquant map we know that A) the firm is at its cost-minimizing position for an output level of 4000 golf tees. B) the firm can adjust its employment of factors to reduce its total cost, with output unchanged. C) the firm has adjusted the factor prices to equate the ratio of marginal products of the factors. D) the ratio of the marginal utilities of capital and labour is equal to the ratio of the prices of capital and labour. E) the ratio of the marginal products of capital and labour is equal to the ratio of the prices of capital and labour. Answer: E Explanation:

A) B) C) D) E)

125) Refer to Figure 8-6. The cost-minimizing factor combination for producing 2000 golf tees is A) 10 units of capital and 25 units of labour. B) 12 units of capital and 30 units of labour. C) 6 units of capital and 15 units of labour. D) 8 units of capital and 20 units of labour. E) 4 units of capital and 10 units of labour. Answer: C Explanation:

125)

A) B) C) D) E)

126) Refer to Figure 8-6. Suppose this firm is producing 3000 golf tees and is at point F on the isoquant map. Which of the following is true? A) MPK/MPL is equal to PK/PL . B) MPK/MPL is greater than 5/2 . C) MPL/MPK is greater than 5/2 . D) MPK/MPL is equal to 2/5 . E) MPK/MPL is equal to 5/2 . Answer: B Explanation:

124)

A) B) C) D) E)

45

126)

127) Refer to Figure 8-6. Suppose this firm is producing 3000 golf tees and is at point F on the isoquant map. In order to maintain its output and minimize costs this firm should A) not change its use of factors. B) move to an isoquant closer to the origin. C) move to an isocost line further from the origin. D) employ more labour and less capital. E) employ more capital and less labour. Answer: E Explanation:

A) B) C) D) E)

128) Refer to Figure 8-6. Suppose there is a change in relative factor prices and the cost-minimizing method of producing 2000 golf tees is now at point D. If the total cost of producing 2000 golf tees is still $60, it must be the case that A) the price of labour fell and the price of capital remained constant. B) the price of labour and capital both fell. C) the price of labour rose and the price of capital fell. D) the price of labour fell and the price of capital rose. E) the price of labour and capital both rose. Answer: D Explanation:

128)

A) B) C) D) E)

129) Refer to Figure 8-6. Suppose the firm is currently producing at point E and the prices of capital and labour each increase by 30%. If the firm wants to minimize the cost of producing the same level of output, the firm's chosen factor combination would be at point A) A. B) C. C) E. D) G. E) not determinable from the information provided. Answer: C Explanation:

127)

A) B) C) D) E)

46

129)

130) Refer to Figure 8-6. As this firm is increasing its production of golf tees, it is experiencing ________ returns to scale. A) constant B) decreasing C) increasing D) diminishing E) Not determinable from the information provided. Answer: C Explanation:

A) B) C) D) E)

47

130)

Answer Key Testname: UNTITLED8

1) C 2) A 3) B 4) D 5) A 6) C 7) B 8) B 9) B 10) B 11) E 12) E 13) C 14) A 15) C 16) E 17) A 18) B 19) B 20) B 21) C 22) D 23) E 24) C 25) A 26) A 27) C 28) D 29) E 30) B 31) D 32) A 33) E 34) B 35) C 36) D 37) D 38) D 39) C 40) A 41) C 42) B 43) A 44) A 45) C 46) A 47) A 48) B 49) C 50) B 48

Answer Key Testname: UNTITLED8

51) B 52) B 53) C 54) B 55) A 56) E 57) D 58) E 59) C 60) D 61) B 62) D 63) C 64) A 65) D 66) A 67) D 68) C 69) C 70) B 71) A 72) A 73) A 74) B 75) C 76) C 77) E 78) D 79) D 80) C 81) C 82) E 83) E 84) C 85) E 86) E 87) E 88) A 89) D 90) C 91) D 92) C 93) E 94) C 95) B 96) A 97) B 98) D 99) A 100) B 49

Answer Key Testname: UNTITLED8

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130)

E A C D B E B B E C A C B B D A D E D D D C B E C B E D C C

50

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is NOT a determinant of market structure? A) The number of sellers. B) The nature of the product. C) The ease of entering the industry. D) The capital-labour ratio of the firm. E) The market share of the sellers. Answer: D Explanation:

A) B) C) D) E)

2) The term "perfect competition" refers to A) rivalrous behaviour. B) ideal economic behaviour. C) a type of market structure. D) cutthroat competition only. E) the most realistic market structure. Answer: C Explanation:

2)

A) B) C) D) E)

3) In economics, perfect competition refers to a market structure where A) firms behave strategically. B) all firms are earning profits. C) firms co-operate with each other. D) each firm has zero market power. E) firms can set the price of their product. Answer: D Explanation:

1)

A) B) C) D) E)

1

3)

4) A firm is said to have "market power" only when A) it has the ability to influence the price of its product. B) it has the ability to choose its own profit-maximizing level of output. C) its demand curve is the market demand curve. D) it is one of 10 or fewer firms in the industry. E) it is one of 25 or fewer firms in the industry. Answer: A Explanation:

A) B) C) D) E)

5) The theory of perfect competition is built on several assumptions, including that A) the individual firm can affect the price of the product it sells. B) the individual firm can influence demand by advertising. C) each firm must earn economic profits to remain in the industry. D) any firm can easily enter or leave the industry. E) there are few producers of an identical product. Answer: D Explanation:

6)

A) B) C) D) E)

7) Which following statement does NOT apply to a perfectly competitive market? A) There is freedom of entry and exit of firms in the industry. B) Consumers can shop for the lowest available price. C) Consumers prefer certain brands over others. D) All firms have realized the possible economies of scale. E) All firms in the industry are price takers. Answer: C Explanation:

5)

A) B) C) D) E)

6) An example of a product that could most closely satisfy the homogeneous product assumption of perfect competition is A) barley. B) cars. C) shampoo. D) personal computers. E) pizza. Answer: A Explanation:

4)

A) B) C) D) E) 2

7)

8) If a firm in a perfectly competitive market were to raise its price, its A) revenue would decrease only if market demand were elastic. B) revenue would increase only if market demand were inelastic. C) total costs would increase. D) revenue would fall dramatically. E) profits would increase as long as costs remained constant. Answer: D Explanation:

A) B) C) D) E)

9) Given the usual assumptions about perfect competition, a perfectly competitive firm A) can set the price it charges. B) can sell as much of its product as it wishes at the market price. C) can affect the market conditions in a significant way. D) is aware of its competitors' costs. E) competes actively with other sellers in the industry. Answer: B Explanation:

10)

A) B) C) D) E)

11) The conditions for a perfectly competitive market include which one of the following? A) Firms behave as price takers. B) Profits are zero in the short run. C) New entrants cannot threaten the position of existing firms. D) Firms can control prices. E) Firms must employ the newest technologies as soon as they are developed. Answer: A Explanation:

9)

A) B) C) D) E)

10) A firm in a perfectly competitive market A) has no power to influence the market price. B) is limited in the amount of product it can sell without affecting the price. C) is dependant upon the behaviour of its competitors. D) is aware of its competitors' costs. E) competes actively with other sellers in the industry. Answer: A Explanation:

8)

A) B) C) D) E)

3

11)

12) In order to decide the appropriate output to produce, the manager of a perfectly competitive firm needs to know A) the industry or market demand. B) the industry or market supply. C) what other firms in the industry are producing. D) the prevailing market price for the firm's output. E) its competitors' market strategies. Answer: D Explanation:

A) B) C) D) E)

13) When economists say that a firm is a "price taker" they mean that A) the firm initially takes price as given and tries to influence it through advertising. B) the firm can alter its rate of production and sales without affecting the market price of the product. C) at the price prevailing in the market, the firm will be willing to sell an infinite quantity. D) the demand curve that the firm faces is perfectly inelastic. E) the firm can alter the market price as it changes its rate of production. Answer: B Explanation:

13)

A) B) C) D) E)

14) Which of the following producers operate in a market structure closely approximated by perfect competition? A) a restaurant in your neighbourhood B) Air Canada C) a Safeway grocery store D) A B.C. peach grower. E) the Bank of Montreal Answer: D Explanation:

12)

A) B) C) D) E)

4

14)

15) Which of the following statements is one of the assumptions of the theory of perfect competition? A) Firms compete with each other by varying their price. B) Firms are price setters. C) Consumers know the prices charged by each firm. D) Firms produce a wide variety of versions of the product. E) A firm's entry to the market is regulated by the federal Competition Bureau. Answer: C Explanation:

A) B) C) D) E)

16) Suppose XYZ Corp. is a profit-maximizing firm that is producing and selling 1 billion disposable wooden chopsticks per month at a price of $0.04 per unit. Further, suppose market demand for this product is 1.5 billion units per month. What can we conclude about market structure in this case? A) This is not a perfectly competitive market because XYZ Corp. is small relative to the size of the industry. B) This is not a perfectly competitive market because XYZ Corp. is selling its product at a price that is not equal to marginal cost. C) This is a perfectly competitive market because there is freedom of entry and exit in the industry. D) This is a perfectly competitive market because the product is homogeneous. E) This is not a perfectly competitive market because XYZ Corp. is large relative to the size of the industry. Answer: E Explanation:

16)

A) B) C) D) E)

17) Why will a perfectly competitive firm not sell its product below the prevailing market price? A) It faces inelastic demand. B) It can sell all it wishes at the market price. C) The sellers in the market have agreed to not sell below a specified price. D) Its costs would increase dramatically. E) This would lead to a price war among sellers. Answer: B Explanation:

15)

A) B) C) D) E)

5

17)

18) The price elasticity of demand faced by an individual wheat farmer would come closest to which following value? A) 0.00007. B) 0.7. C) 1.0. D) 71.0. E) 71 000. Answer: E Explanation:

A) B) C) D) E)

19) Which of the following terms would best describe the price elasticity of demand facing a perfectly competitive firm? A) perfectly inelastic B) inelastic C) unit D) elastic E) perfectly elastic Answer: E Explanation:

20)

A) B) C) D) E)

21) If the demand curve faced by a firm is downward sloping, we can reasonably believe that the A) firm can influence the price of the product it sells. B) firm will have no effect on the price of the product it sells. C) firm must lower prices if it hopes to increase its profits. D) firm's contributions to total output of the product is insignificant. E) firm has no control over the price of the product it sells but can vary the output. Answer: A Explanation:

19)

A) B) C) D) E)

20) The demand curve facing a perfectly competitive firm A) is the same as the industry or market demand curve. B) is almost perfectly elastic at the market price. C) depends on the firm's technology. D) depends on the firm's costs of production. E) depends on the firm's output. Answer: B Explanation:

18)

A) B) C) D) E)

6

21)

22) The market demand curve for a perfectly competitive industry is typically A) identical to the competitive firm's demand curve. B) downward sloping. C) upward sloping. D) infinitely elastic. E) a rectangular hyperbola. Answer: B Explanation:

A) B) C) D) E)

23) Under perfect competition, the demand curve facing an individual firm is A) the same as the industry's demand curve. B) downward sloping. C) upward sloping. D) infinitely price elastic. E) a rectangular hyperbola. Answer: D Explanation:

24)

A) B) C) D) E)

25) The demand curve facing a perfectly competitive firm depends on A) market demand alone. B) market demand and the firm's supply curve. C) market demand and the market supply curve. D) market supply alone. E) the marginal cost of the firm. Answer: C Explanation:

23)

A) B) C) D) E)

24) The perfectly elastic demand curve faced by a competitive firm means that A) it could actually sell an infinite amount of output at the going price. B) the firm could increase total revenue by increasing the price. C) as the firm expands output its marginal revenue will fall. D) total revenue is constant regardless of quantity produced. E) the product's price will be unaffected by any realistic change in the firm's level of output. Answer: E Explanation:

22)

A) B) C) D) E)

7

25)

26) When economists say that a perfectly competitive firm is a "quantity adjuster," they mean that A) it adjusts its output in response to changes in prices. B) it can vary its output by an infinite amount. C) it is not concerned with cost factors. D) its marginal-cost curve coincides with its own demand curve. E) changing the output level does not affect the costs of production. Answer: A Explanation:

A) B) C) D) E)

27) When a firm is referred to as a "price taker," A) the firm initially takes price as given and tries to influence it through advertising. B) the firm can alter its rate of production and sales without affecting the market price of the product. C) the firm will be willing to sell an infinite quantity at the market price. D) the demand curve that the firm faces is perfectly inelastic. E) the firm can alter the market price as it changes its rate of production. Answer: B Explanation:

28)

A) B) C) D) E)

29) Average revenue (AR) for an individual firm in a perfectly competitive market equals A) p × q. B) (p × q)/q. C) △p × △q. D) △q/△p. E) △(p × q)/△q. Answer: B Explanation:

27)

A) B) C) D) E)

28) Total revenue (TR) for an individual firm in a perfectly competitive market equals A) p × q. B) (p × q)/q. C) △p × △q. D) △q/△p. E) △(p × q)/△q. Answer: A Explanation:

26)

A) B) C) D) E) 8

29)

30) For any firm operating in any market structure, marginal revenue is defined as A) total revenue divided by the number of units sold. B) the change in total revenue resulting from the sale of an additional unit of the product. C) the total amount received by the seller from the sale of a product. D) the change in price resulting from the sale of an additional unit of the product. E) price times quantity of the product sold. Answer: B Explanation:

A) B) C) D) E)

31) Any firm's average revenue is defined as A) total revenue divided by the number of units sold. B) the change in total revenue resulting from the sale of an additional unit of the product. C) the total amount received by the seller from the sale of a product. D) the change in price resulting from the sale of an additional unit of the product. E) price times quantity of the product sold. Answer: A Explanation:

32)

A) B) C) D) E)

33) A perfectly competitive firm's demand curve coincides with A) its average-revenue curve and total-revenue curve. B) its total-revenue curve. C) both its marginal and average-revenue curves. D) both its marginal and total-revenue curves. E) the market demand curve. Answer: C Explanation:

31)

A) B) C) D) E)

32) A perfectly competitive firm's total revenue is equal to which of the following? A) average revenue multiplied by price. B) price times quantity of the product sold, divided by quantity of the product sold. C) the revenue received on the last unit sold. D) marginal revenue times quantity of the product sold. E) price multiplied by marginal revenue. Answer: D Explanation:

30)

A) B) C) D) E)

9

33)

34) A perfectly competitive firm's demand curve A) has unit elasticity. B) is identical to the market demand curve. C) yields constant total revenues. D) is a horizontal line where P = AR = MR. E) is downward sloping. Answer: D Explanation:

34)

A) B) C) D) E)

35) For any firm operating in any market structure, marginal revenue (MR) equals A) p × q. B) (p × q)/q C) △p × △q. D) △q/△p E) △(p × q)/△q Answer: E Explanation:

A) B) C) D) E)

36) Firms have several different concepts of revenue: total revenue, average revenue, marginal revenue, and price. For a profit-maximizing perfectly competitive firm, which statement below is true? A) Total revenue, average revenue, marginal revenue, and price are all equal. B) Average revenue, marginal revenue, and price are equal. C) Only marginal revenue and price are equal. D) Only average revenue and price are equal. E) None of these revenues are equal. Answer: B Explanation:

35)

A) B) C) D) E)

10

36)

37) In the short run, the profit-maximizing behaviour for a price-taking firm requires it to operate where A) P = MC, given that P is greater than or equal to ATC. B) P = TR = TC. C) P > MR > MC. D) AVC = AR. E) P = MC, given that P is greater than or equal to AVC. Answer: E Explanation:

A) B) C) D) E)

38) For a given market price, a competitive firm's total-revenue curve A) is a positively sloped straight line, starting from the origin. B) increases to the right and then declines when MC = MR. C) is a straight line that coincides with the market demand curve. D) is the same as the firm's demand curve. E) is the same as the firm's MR curve. Answer: A Explanation:

39)

A) B) C) D) E)

40) For a given market price, a competitive firm's marginal-revenue curve A) is a positively sloped straight line, starting from the origin. B) increases to the right and then declines when MC = MR. C) is a straight line that coincides with the market demand curve. D) is the same as the firm's demand curve. E) is the same as the firm's TR curve. Answer: D Explanation:

38)

A) B) C) D) E)

39) For a given market price, a competitive firm's average-revenue curve A) is a positively sloped straight line, starting from the origin. B) increases to the right and then declines when MC = MR. C) is a straight line that coincides with the market demand curve. D) is the same as the firm's demand curve. E) is the same as the firm's TR curve. Answer: D Explanation:

37)

A) B) C) D) E) 11

40)

41) Farmer Anna is producing tomatoes in a perfectly competitive market. In Year 1 she sells 4000 bushels of tomatoes at a price of $12.00 each. In Year 2 she sells 4800 bushels at $13.00 each. In Year 2, her average revenue is ________ and her marginal revenue is ________. A) $13.00; $1.00 B) $12.50; $12.50 C) $13.00; $13.00 D) $12.00; $12.00 E) $12.00; $1.00 Answer: C Explanation:

A) B) C) D) E)

42) Suppose XYZ Corp. is producing and selling disposable wooden chopsticks in a perfectly competitive market. The market price is $0.04 per unit and the firm is currently producing 1 million units per month. The firm's total revenue is ________ per month. The firm's marginal revenue is ________. A) $25 000; $0.04 B) $40 000; $0.04 C) $15 000; $0.015 D) $40 000; $0.015 E) $40 000; $0.025 Answer: B Explanation:

42)

A) B) C) D) E)

43) Suppose XYZ Corp. is producing and selling disposable wooden chopsticks in a perfectly competitive market. The market price is $0.04 per unit and the firm is selling 1 million units per month. Now suppose the firm increases its stated price to $0.05 per unit. According to the theory of perfect competition, the result will be: A) total revenue for this firm will increase, but by less than $10 000 per month. B) total revenue will increase from $40 000 to $50 000 per month. C) total revenue will decrease from $50 000 to $40 000 per month. D) total revenue for this firm will fall dramatically, perhaps to zero. E) no change in the firm's total revenue. Answer: D Explanation:

41)

A) B) C) D) E)

12

43)

Consider the price and quantity data below for a perfectly competitive firm producing mousetraps. Price ($) 5 5 5 5 5

Quantity 1000 1250 1500 1750 2000

TABLE 9-1 44) Refer to Table 9-1. If this firm is producing 1250 mousetraps, its total revenue is ________, its average revenue is ________ and its marginal revenue is ________. A) $5; $5; $5 B) $6250; $250; $5 C) $1750; $250; $5 D) $5000; $5; $250 E) $6250; $5; $5 Answer: E Explanation:

A) B) C) D) E)

45) Refer to Table 9-1. Suppose this firm is currently selling 1750 mousetraps at the market price of $5. If the firm raises its price to $6, its total revenue will be A) $0. B) greater than or equal to $1750. C) greater than or equal to $6250. D) $10 500. E) greater than $10 500. Answer: A Explanation:

44)

A) B) C) D) E)

13

45)

46) Refer to Table 9-1. Suppose this firm is currently selling 1750 mousetraps at the market price of $5. If the firm raises its price to $6, it's average revenue will be A) $0. B) $5. C) $6. D) between $5 and $6. E) greater than $6. Answer: A Explanation:

46)

A) B) C) D) E)

Assume the following total cost schedule for a perfectly competitive firm. Output 0 1 2 3 4 5 6

TVC ($) 0 40 70 120 180 250 330

TFC ($) 100 100 100 100 100 100 100

TABLE 9-2 47) Refer to Table 9-2. In order to maximize its profits, the firm should continue to produce in the short run even if the market price is less than its ATC as long as the price is greater than or equal to A) AVC. B) MC. C) AFC. D) TVC. E) TC Answer: A Explanation:

A) B) C) D) E)

48) Refer to Table 9-2. The total cost of producing 6 units of output is A) $71.67. B) $100. C) $230. D) $330. Answer: E Explanation:

47)

A) B) C) D) E)

14

48) E) $430.

49) Refer to Table 9-2. If the firm is producing at an output level of 2 units, the ATC is ________ and the AVC is ________. A) $100; $70 B) $70; $35 C) $50; $50 D) $140; $40 E) $85; $35 Answer: E Explanation:

A) B) C) D) E)

50) Refer to Table 9-2. This profit-maximizing firm would shut down in the short run if the market price of its output dropped below A) $35. B) $40. C) $70. D) $90. E) $100. Answer: A Explanation:

51)

A) B) C) D) E)

52) Refer to Table 9-2. If the market price were $71, this competitive firm wishing to maximize its profits would A) produce 2 units of output. B) produce 6 units of output. C) produce 5 units of output. D) not produce because P < minimum of ATC. E) not produce because P < TFC. Answer: C Explanation:

50)

A) B) C) D) E)

51) Refer to Table 9-2. At what price would a profit-maximizing firm earn zero economic profits? A) $40 B) $70 C) $145 D) $220 E) $430 Answer: B Explanation:

49)

A) B) C) D) E)

15

52)

Consider the following total cost schedule for a perfectly competitive firm producing ball-point pens. Output per period 0 10 20 30 40 50

TVC ($) 0 2 3 6 10 15

TFC ($) 5 5 5 5 5 5

TABLE 9-3 53) Refer to Table 9-3. If this firm were producing at an output level of 30 units, the AFC would be ________ and the AVC would be ________. A) $5; $6 B) $6; $5 C) $0.17; $0.20 D) $0.20; $0.17 E) $0.10; $0.30 Answer: C Explanation:

A) B) C) D) E)

54) Refer to Table 9-3. This firm would shut down in the short run if the market price of its output A) dropped below $0.15. B) dropped below $0.20. C) dropped below $0.30. D) dropped below $2.00. E) dropped below $3.00. Answer: A Explanation:

54)

A) B) C) D) E)

55) Refer to Table 9-3. As this firm increases output from 40 units to 50 units per period, its marginal cost rises to A) $0.10. B) $0.17. C) $0.375. D) $0.40. E) $0.50. Answer: E Explanation:

53)

A) B) C) D) E)

16

55)

56) Refer to Table 9-3. Suppose the prevailing market price for this firm's product is $0.40. The profit-maximizing level of output for this firm is between A) 0 and 10 units. B) 10 and 20 units. C) 20 and 30 units. D) 30 and 40 units. E) 40 and 50 units. Answer: D Explanation:

A) B) C) D) E)

57) Refer to Table 9-3. Suppose the prevailing market price for this firm's product is $0.42 and the firm produces its profit-maximizing level of output. At this price A) the firm is earning zero economic profits. B) the firm is earning positive economic profits. C) the firm is suffering economic losses and this firm will exit the industry. D) the firm should increase output. E) the firm should decrease output. Answer: B Explanation:

57)

A) B) C) D) E)

58) Refer to Table 9-3. Suppose the prevailing market price for this firm's product is $0.45. If the firm is producing 20 units of output per period, then its profit per unit is ________ and its total profit per period is ________. A) $9; $180 B) $0.05; $1.00 C) $6; $120 D) $0.01; $2 E) $0.40; $8 Answer: B Explanation:

56)

A) B) C) D) E)

17

58)

59) Refer to Table 9-3. Suppose the prevailing market price for this firm's product is $0.14 and the firm is currently producing 20 units of output. This competitive firm wishing to maximize profits would A) increase output because marginal revenue is greater than marginal cost. B) decrease output because marginal revenue is less than marginal cost. C) increase output because marginal revenue is less than marginal cost. D) decrease output because marginal revenue is greater than marginal cost. E) shut down because price is less than the minimum average variable cost. Answer: E Explanation:

A) B) C) D) E)

60) A firm in a perfectly competitive industry will maximize profits by adjusting A) price until marginal revenue equals marginal cost. B) output until marginal cost equals marginal revenue. C) price until average revenue equals average total cost. D) output until average revenue equals short-run average total cost. E) average total cost until it equals price. Answer: B Explanation:

60)

A) B) C) D) E)

61) Consider a perfectly competitive industry in the short-run. When a firm in this industry is at its profit-maximizing level of output, it A) is doing as well as it can and is making a profit. B) may be making a profit or incurring a loss. C) is producing where P = AVC. D) is producing where MC = AC. E) is producing where price exceeds marginal cost. Answer: B Explanation:

59)

A) B) C) D) E)

18

61)

62) In the short run, a profit-maximizing firm will expand output A) as long as marginal revenue is greater than marginal cost. B) until marginal cost begins to rise. C) until marginal revenue equals average variable cost. D) until total revenue equals total cost. E) as long as marginal cost is greater than marginal revenue. Answer: A Explanation:

A) B) C) D) E)

63) Suppose ABC Corp. is a firm producing newsprint in a perfectly competitive industry. Its output is 1500 tonnes per month, the marginal cost of the last tonne produced is $710, and the average revenue per tonne is $620. In the short run, this firm should A) reduce output. B) increase output until average revenue is equal to marginal cost. C) increase output until marginal revenue is equal to marginal cost. D) definitely shut down. E) The price of the product is not known, so it is not possible to determine. Answer: A Explanation:

63)

A) B) C) D) E)

64) Suppose ABC Corp. is a firm producing newsprint in a perfectly competitive industry. We have the following information about the firm's production: - output (Q) = 1500 tonnes per month - average total cost (ATC) = $627 per tonne - average variable cost (AVC) = $614 per tonne - marginal revenue (MR) = $620 per tonne - marginal cost (MC) = $620 per tonne In the short run, this firm should A) reduce output because the price per tonne is less than ATC. B) shut down because the firm is incurring economic losses. C) maintain production at the current level. D) increase output because MR is greater than AVC. E) Not possible to determine because the price of the product is not known. Answer: C Explanation:

62)

A) B) C) D) E)

19

64)

65) Suppose ABC Corp. is a firm producing newsprint in a perfectly competitive industry. We have the following information about the firm's production: - output (Q) = 1500 tonnes per month - average total cost (ATC) = $627 per tonne - average variable cost (AVC) = $614 per tonne - marginal revenue (MR) = $620 per tonne - marginal cost (MC) = $620 per tonne At the current level of output, this firm is ________ profit and is earning economic profit of ________ per month. A) maximizing; $10 500 B) maximizing; -$10 500 C) not maximizing; -$10 500 D) not maximizing; -$9000 E) maximizing; $9000 Answer: B Explanation:

A) B) C) D) E)

20

65)

FIGURE 9-1 66) Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P1 , the profit-maximizing firm in the short run should

66)

A) produce output A. B) produce output B. C) produce output C. D) produce output D or shut down as it doesn't really matter which. E) definitely shut down. Answer: D Explanation:

A) B) C) D) E)

67) Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P2 , the profit-maximizing firm in the short run should A) produce output B. B) produce output C. C) produce output D. D) produce output E. E) shut down, as it is incurring losses. Answer: D Explanation:

A) B) C) D) E)

21

67)

68) Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P3 , the profit-maximizing firm in the short run should

68)

A) produce output A. B) produce output F or shut down, as it doesn't matter which. C) produce output D. D) shut down because more profits could be earned in another industry. E) produce output F. Answer: E Explanation:

A) B) C) D) E)

69) Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P4 , the profit-maximizing firm in the short run should produce output A) C. Answer: C Explanation:

B) F.

C) G.

D) H.

E) I.

A) B) C) D) E)

70) Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The firm's short-run supply curve starts at output ________ and rises along the marginal cost (MC) curve. A) D B) E C) F D) G E) H Answer: A Explanation:

70)

A) B) C) D) E)

71) Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The short-run shut down price for the firm is A) P1 . B) P2. C) P3 . D) P4 . E) P5 . Answer: A Explanation:

69)

A) B) C) D) E)

22

71)

72) Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The price at which the firm earns zero economic profits is A) P1 . B) P2. C) P3 . D) P4 . E) P5 . Answer: C Explanation:

A) B) C) D) E)

73) Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. The firm would incur economic profit at all market prices above A) P1 . B) P2. C) P3 . D) P4 . E) P5 . Answer: C Explanation:

72)

73)

A) B) C) D) E)

74) Refer to Figure 9-1. The diagram shows cost curves for a perfectly competitive firm. If the market price is P4 and the firm is producing output level F, this firm should

74)

A) expand output to quantity G. B) expand output to quantity I. C) maintain output at quantity F. D) reduce output to quantity C. E) reduce output to quantity D. Answer: A Explanation:

A) B) C) D) E)

75) If a perfectly competitive firm in the short run is producing where P = ATC = MC, this firm is A) at its profit-maximizing output level. B) obliged to shut down. C) on the downward-sloping portion of its demand curve. D) earning economic profits. E) incurring losses. Answer: A Explanation:

A) B) C) D) E)

23

75)

76) A perfectly competitive firm maximizes its profits by A) maximizing total revenue. B) maximizing total sales. C) choosing the optimal level of output. D) choosing the optimal price. E) pricing slightly under its competitors. Answer: C Explanation:

A) B) C) D) E)

77) If a perfectly competitive firm produces at an output level where marginal cost equals marginal revenue, then A) the last unit produced adds the same amount to costs as it does to revenue. B) the firm is maximizing its revenue. C) there is no reason to reduce or expand output, as long as AVC is greater than or equal to price. D) the difference between TR and TC is zero. E) the firm should shut down. Answer: A Explanation:

77)

A) B) C) D) E)

78) Suppose your trucking firm in a perfectly competitive industry is making zero economic profits in the short run. The federal government imposes a new safety regulation that affects all firms, thus shifting the marginal cost curve upward. As a result your firm's profit maximizing short-run output will A) decrease because the new MC curve will intersect the horizontal demand curve at a lower rate of output. B) remain the same because you will pass on the extra costs to the consumers. C) remain the same since the new regulation does not affect ATC. D) increase as firms will leave the industry at the higher costs, thus driving up the market price. E) increase as price rises in the long run. Answer: A Explanation:

76)

A) B) C) D) E)

24

78)

79) If a perfectly competitive firm is faced with average revenue below average variable cost it will shut down so as to reduce its A) costs to below its revenue. B) costs to zero. C) losses to the amount of its fixed costs. D) losses to the amount of its variable costs. E) losses to the amount of its marginal costs. Answer: C Explanation:

A) B) C) D) E)

80) On a graph showing a firm's TC and TR curves, the profit-maximizing level of output is found where A) TC intersects the vertical axis. B) TR becomes vertical. C) TR lies above TC by the greatest amount. D) TR and TC intersect. E) TR is at a maximum Answer: C Explanation:

80)

A) B) C) D) E)

81) Suppose that in a perfectly competitive industry, the market price of the product is $6. A firm is producing the output level at which average total cost equals marginal cost, both of which are $8. Average variable cost is $4. To maximize its profits in the short run, the firm should A) reduce its output. B) expand its output. C) leave its output unchanged. D) shut down. E) There is insufficient information to know. Answer: A Explanation:

79)

A) B) C) D) E)

25

81)

82) Suppose that in a perfectly competitive industry, the market price of the product is $27. A firm is producing the output level at which average total cost equals marginal cost, both of which are $25. Average variable cost is $23. To maximize profits in the short run, the firm should A) reduce its output. B) increase its output. C) leave its output unchanged. D) shut down. E) change the price of the product. Answer: B Explanation:

A) B) C) D) E)

83) Suppose that in a perfectly competitive industry, the market price for the product is $130. A firm is producing the output level at which average total cost equals marginal cost, both of which are $138. Average variable cost is $132. To maximize profits in the short run, the firm should A) reduce its output. B) expand its output. C) leave its output unchanged. D) shut down. E) change the price of the product. Answer: D Explanation:

83)

A) B) C) D) E)

84) A price-taking firm in the short run should not produce any level of output unless A) marginal revenue exceeds marginal cost. B) marginal revenue equals average total cost. C) average revenue equals or exceeds average variable cost. D) average revenue equals or exceeds average total cost. E) it is earning positive profits. Answer: C Explanation:

82)

A) B) C) D) E)

26

84)

85) Suppose a perfectly competitive firm is producing a level of output for which price equals average total cost, and average total cost is less than marginal cost. In order to maximize its profits, the firm should A) reduce its output. B) expand its output. C) shut down. D) increase the market price. E) not change its output. Answer: A Explanation:

A) B) C) D) E)

86) Which of the following statements about a firm in a perfectly competitive industry is true? A) The firm can improve its competitive position and sell more output by advertising its product. B) The firm maximizes its profit by producing where P = ATC. C) The firm maximizes its profit by producing where P = AVC. D) The firm will not produce at all if P < ATC. E) The firm will not produce at all if P < the minimum of AVC. Answer: E Explanation:

86)

A) B) C) D) E)

87) Suppose a perfectly competitive firm is producing a level of output such that its average revenue is less than its lowest average variable cost. The firm should A) reduce its output. B) expand its output. C) shut down. D) increase the market price. E) not change its output. Answer: C Explanation:

85)

A) B) C) D) E)

27

87)

88) Suppose that in a perfectly competitive industry, the market price of the product is $12. Firm A is producing the output level at which average total cost equals marginal cost, both of which are $10. To maximize its profits, Firm A should A) reduce its output. B) expand its output. C) leave its output unchanged. D) increase its advertising. E) change the price of the product. Answer: B Explanation:

A) B) C) D) E)

89) Consider a perfectly competitive firm in the following position: output = 4000 units, market price = $1, fixed costs = $2000, variable costs = $2000, and marginal cost = $1. To maximize profits the firm should A) reduce its output. B) expand its output. C) shut down. D) increase the market price. E) not change its output. Answer: E Explanation:

89)

A) B) C) D) E)

90) Consider a perfectly competitive firm in the following position: output = 4000, market price = $1, fixed costs = $2000, variable costs = $4500, and marginal cost = $1. To maximize profits the firm should A) reduce its output. B) expand its output. C) shut down. D) increase the market price. E) not change its output. Answer: C Explanation:

88)

A) B) C) D) E)

28

90)

91) Consider a perfectly competitive firm in the following position: output = 4000 units, market price = $1, fixed costs = $2000, variable costs = $1000, and marginal cost = $1.10. To maximize profits the firm should A) reduce its output. B) expand its output. C) shut down. D) increase the market price. E) not change its output. Answer: A Explanation:

A) B) C) D) E)

92) A perfectly competitive firm is currently producing an output level where price is $10.00, average variable cost is $6.00, average total cost is $10.00, and marginal cost is $8.00. In order to maximize profits, this firm should A) shut down. B) decrease its output. C) increase its output. D) increase the market price. E) not change its output — this firm is at its profit-maximizing position. Answer: C Explanation:

91)

A) B) C) D) E)

29

92)

Consider the following short-run cost curves for a profit-maximizing firm in a perfectly competitive industry.

FIGURE 9-2 93) Refer to Figure 9-2. If the current market price is $6, the profit-maximizing output for this firm is A) 100 units. B) 200 units. C) 300 units. D) 400 units. E) 500 units. Answer: D Explanation:

A) B) C) D) E)

94) Refer to Figure 9-2. If the price is $6 and the firm is producing at its profit-maximizing output, then total costs for the firm are A) $100. B) $300. C) $1600. D) $2400. E) $3500. Answer: C Explanation:

94)

A) B) C) D) E)

95) Refer to Figure 9-2. If the market price is $1, the firm will produce ________ units of output in the short run. A) 0 B) 100 C) 200 D) 300 E) 400 Answer: A Explanation:

93)

A) B) C) D) E)

30

95)

96) Refer to Figure 9-2. If the market price is $2, the firm will A) shut down and make zero profit. B) shut down and suffer a loss equal to its fixed cost. C) continue operating in the short run and suffer a loss that is less than its fixed cost. D) produce 300 units and make a loss equal to total variable cost. E) produce 200 units and make a loss equal to its total fixed cost. Answer: C Explanation:

A) B) C) D) E)

97) Consider a perfectly competitive firm that is producing a level of output such that price equals average total cost and average total cost is less than marginal cost. In order to maximize its profits, the firm should A) reduce output. B) expand output. C) shut down. D) increase the market price. E) not change output. Answer: A Explanation:

97)

A) B) C) D) E)

98) A perfectly competitive firm facing a price of $4.00 is currently producing an output level where average variable cost is $2.00, average total cost is $4.00, and marginal cost is $3.00. In order to maximize profits, this firm should A) shut down. B) decrease output. C) increase output. D) increase the market price. E) not change output. This firm is at its profit-maximizing position. Answer: C Explanation:

96)

A) B) C) D) E)

31

98)

Consider the following cost curves for two perfectly competitive firms, A and B.

FIGURE 9-3 99) Refer to Figure 9-3. Firms A and B are in the same industry. Choose the statement that best describes the situation facing the two firms. A) Firm A is suffering losses and will be shut down immediately; Firm B will be shut down if the price falls any further. B) Firm A is making losses but remains producing as long as price falls no further; Firm B is producing at lower cost and is earning economic profits. C) Firm A and Firm B are both earning positive economic profits; new firms will likely enter the industry. D) Firm A and Firm B are both suffering economic losses and will soon exit the industry. Answer: B Explanation:

A) B) C) D)

100) Refer to Figure 9-3. If Firm B is producing at output level q2 , and selling its output at p0 , then Firm B should A) remain at this output level because profits are maximized when SRAVC is at its minimum. B) expand output to q1 because profits are maximized when SRATC is at its minimum. C) shut down because at this price and output level the firm is suffering losses. D) expand output to q0 so that profits will be maximized. Answer: D Explanation:

99)

A) B) C) D)

32

100)

Consider the price and quantity data below for a perfectly competitive firm producing mousetraps. Price ($) 5 5 5 5 5

Quantity 1000 1250 1500 1750 2000

TABLE 9-1 101) Refer to Table 9-1. Suppose this firm is producing 1250 mousetraps and its average total cost is $4 per unit. The firm will be A) suffering losses of $5000. B) earning profits of $5000. C) breaking even. D) earning profits of $1250. E) suffering losses of $1250. Answer: D Explanation:

A) B) C) D) E)

102) Refer to Table 9-1. Suppose this firm is producing 1500 mousetraps and its average total cost is $5.10 per unit. The firm will be A) suffering losses of $7650. B) earning profits of $7650. C) breaking even. D) earning profits of $150. E) suffering losses of $150. Answer: E Explanation:

101)

A) B) C) D) E)

33

102)

Consider the total cost and revenue curves shown below, for two perfectly competitive firms, Firm A and Firm B.

FIGURE 9-4 103) Refer to Figure 9-4. Given its total cost and revenue curves, Firm A should A) build another plant to reap scale economies. B) shut down. C) continue production, as it is earning positive profits. D) maximize its profits by producing that level of output such that the slope of the TC curve is equal to the slope of the TR curve. E) maximize its profits by producing that level of output such that the slope of the TVC curve is equal to the slope of the TR curve. Answer: B Explanation:

A) B) C) D) E)

104) Refer to Figure 9-4. Given its total cost and revenue curves, Firm B should A) exit the industry. B) shut down temporarily. C) maximize its profits by producing that level of output such that the slope of the TC curve is equal to the slope of the TR curve. D) maximize its profits by producing that level of output such that the slope of the TVC curve is equal to the slope of the TR curve. E) produce the level of output where the TC curve intersects the TR curve. Answer: C Explanation:

103)

A) B) C) D) E)

34

104)

105) Refer to Figure 9-4. If both Firms A and B are producing a level of output such that the slope of the TC curve is equal to the slope of the TR curve, A) then MC = MR and the firm is maximizing profit (or minimizing losses). B) then the ATC is at a minimum and the firm is maximizing profits. C) then both firms are suffering losses because the distance between TR and TC is the smallest. D) then both firms are earning positive economic profits because the distance between TR and TC is the greatest. E) then MC = MR but the firm may not be maximizing its profits. Answer: E Explanation:

A) B) C) D) E)

106) The short-run supply curve for a perfectly competitive firm is A) its entire marginal-cost curve. B) its rising portion of the average-variable-cost curve. C) its average-revenue curve. D) its marginal-cost curve above the average-variable-cost curve. E) the industry supply curve. Answer: D Explanation:

106)

A) B) C) D) E)

107) Consider a firm in a perfectly competitive industry. The shut-down point is the price at which the firm can just cover its A) marginal costs. B) non-economic costs. C) fixed costs. D) unstated costs. E) variable costs. Answer: E Explanation:

105)

A) B) C) D) E)

35

107)

108) The supply curve for a perfectly competitive industry is the horizontal summation of the individual firms' A) MC curves above ATC. B) MC curves above AVC. C) AVC curves above MC. D) MC curves above AFC. E) short-run average cost curves. Answer: B Explanation:

108)

A) B) C) D) E)

Consider the following short-run cost curves for a profit-maximizing firm in a perfectly competitive industry.

FIGURE 9-2 109) Refer to Figure 9-2. The short-run supply curve for this perfectly competitive firm is its A) ATC curve at and above $3. B) AVC curve at and above $1.50. C) entire marginal cost curve. D) marginal cost curve at and above $3. E) marginal cost curve at and above $1.50. Answer: E Explanation:

A) B) C) D) E)

36

109)

110) Refer to Figure 9-2. The short-run supply curve for the industry in which this firm operates is A) the MC curve at or above a price of $1.50. B) the AVC curve at or above a price of $1.50. C) the entire MC curve. D) the MC curve at or above a price of $3. E) not determinable from the information provided. Answer: E Explanation:

A) B) C) D) E)

111) If a perfectly competitive market is in a short-run equilibrium and each firm has P > SRATC, then A) individual firms in the industry will increase their output. B) new firms will enter the market because existing firms are earning economic profits. C) the market supply curve will become less elastic. D) existing firms will continue to earn economic profits in the long run. E) price will fall in the short run as it is too high and firms are making economic profits. Answer: B Explanation:

111)

A) B) C) D) E)

112) If firms in a competitive industry are earning positive economic profits, in the long run we expect A) the demand curve for the product will shift to the left, so that the price of the product will fall. B) the supply curve for the product will shift to the right as new firms enter the industry, causing industry output to increase and price to fall. C) there would be no change in the industry as long as P = MC for the individual firms. D) the individual firms will lower their price to discourage new firms from entering the industry. E) the government would intervene and force the firms to lower prices. Answer: B Explanation:

110)

A) B) C) D) E)

37

112)

113) If firms in a competitive industry are suffering economic losses, then one would expect that in the long run A) the demand curve for the product will shift to the left, causing equilibrium output and price to decline. B) there would be no change in the number of firms in the industry as long as firms are covering their average variable costs. C) the supply curve for the product will shift to the left as firms leave the industry, causing industry output to fall and price to rise. D) the supply curve for the product will shift to the right as individual firms lower their prices to increase their sales. E) each firm would raise its price until it was breaking even. Answer: C Explanation:

A) B) C) D) E)

114) Consider a perfectly competitive firm when its industry is in long-run equilibrium. Which of the following statements is correct? A) The firm has successfully differentiated its product. B) The firm has successfully established barriers to entry. C) The firm has a strong profit incentive to expand capacity. D) The firm has no ability to affect its product's price. E) The firm is earning positive economic profits. Answer: D Explanation:

114)

A) B) C) D) E)

115) Consider the following statement of equalities: P = MC = minimum SRATC = minimum LRAC. This statement of equalities best applies to which of the following? A) a perfectly competitive firm that is maximizing profits, which will lead other firms to enter this industry B) a perfectly competitive firm when the industry is in long-run equilibrium C) a perfectly competitive firm that is producing the optimal quantity, such that other firms will exit the industry D) a perfectly competitive industry that is in long-run equilibrium E) a perfectly competitive industry that is in short-run equilibrium Answer: B Explanation:

113)

A) B) C) D) E)

38

115)

116) Which of the following statements about a perfectly competitive industry in long-run equilibrium is true? A) In order to stay in the industry each firm is making an economic profit. B) Losses are tolerable because of high fixed costs. C) Individual firms will have no incentive for technological improvement. D) Firms must exhibit economies of scale. E) Each firm is producing at the minimum point on its LRAC curve. Answer: E Explanation:

A) B) C) D) E)

117) If a competitive firm is producing to the left of the minimum point of its long-run average cost curve, then A) it cannot be producing its present output efficiently. B) it can reduce its unit costs by building a larger plant. C) it can still be in long-run equilibrium as long as P = SRATC. D) its profits will decrease if it builds a larger plant. E) it should shut down. Answer: B Explanation:

117)

A) B) C) D) E)

118) Consider a perfectly competitive firm. Which of the following equalities could hold true in a short-run equilibrium but not in a long-run equilibrium? A) TC = TFC + TVC B) P = MC C) P = AR D) P = AVC E) P = MR Answer: D Explanation:

116)

A) B) C) D) E)

39

118)

Consider the following cost curves for Firm X, a perfectly competitive firm.

FIGURE 9-5 119) Refer to Figure 9-5. At output Q2 and price P2, which of the following is FALSE?

119)

A) There are economic profits to attract new entrants. B) The firm producing Q2 is at its long-run profit-maximizing position. C) P = MC = SRATC = LRAC. D) There are no unexploited internal economies of scale. E) Firm X is producing at its minimum efficient scale. Answer: A Explanation:

A) B) C) D) E)

120) Refer to Figure 9-5. If Firm X has a capital stock that generates SRATC1 , then in the long run Firm X will have to A) either expand its plant size or exit from the industry. B) set its output at Q1 with the existing plant size. C) expand its output to Q2 with the existing plant size. D) set its output at Q1 with an expanded plant size. E) maintain its output level at Q1 , because it is maximizing its short-run profits. Answer: A Explanation:

A) B) C) D) E)

40

120)

121) Refer to Figure 9-5. If Firm X is producing output Q1 and the market price is P1 ,

121)

A) there are profits to induce increases in output by Firm X, using its existing plant. B) there is no lower-cost scale of plant which could be built by Firm X. C) Firm X is producing at its minimum efficient scale. D) Firm X is at its long-run profit-maximizing position. E) new firms have a profit incentive to enter the industry, building larger plants. Answer: E Explanation:

A) B) C) D) E)

122) Refer to Figure 9-5. In this industry, which one of the following is FALSE? A) If the price were to fall below P2, firms would leave the industry.

122)

B) If the price were to rise above P2 , new firms would enter the industry. C) If the scale of Firm X at output Q2 and price P2 is large enough that Firm X has an appreciable share of the market, Firm X will no longer be a price taker. D) At output Q2 and price P2 , Firm X is maximizing its long-run profits. E) Only one firm can reach the size of output Q2 . Answer: E Explanation:

A) B) C) D) E)

123) Suppose a typical firm in a competitive industry has the following data in the short run: price = $10; output = 100 units; ATC = $8; AVC = $7. What will likely happen in the long run? A) In the long run the industry will expand because firms are earning economic profits. B) In the long run the industry will contract because firms are suffering losses. C) The size of the industry will remain the same in the long run. D) The typical firm would shut down, until the remaining firms have a higher price. E) There is not enough information to formulate an answer. Answer: A Explanation:

A) B) C) D) E)

41

123)

124) Suppose a typical firm in a competitive industry has the following data in the short run: price = $6; output = 100 units; ATC = $8; AVC = $7. What will likely happen in the long run? A) In the long run the industry will expand because firms are earning economic profits. B) In the long run the industry will contract because firms are suffering losses. C) The size of the industry will remain the same in the long run. D) The typical firm would shut down, until the remaining firms have a higher price. E) There is not enough information to formulate an answer. Answer: B Explanation:

A) B) C) D) E)

125) In the long run it is not possible for a perfectly competitive firm to A) alter its plant size. B) adopt new technology. C) replace its antiquated equipment. D) adjust its output. E) set the product price. Answer: E Explanation:

125)

A) B) C) D) E)

126) In a perfectly competitive market, smaller-than-efficient sized firms can exist in A) the short run. B) the long run. C) both the short and long run. D) the long run, and they will make positive economic profits. E) both the short run and the long run, but they must reduce plant size to remain competitive. Answer: A Explanation:

124)

A) B) C) D) E)

42

126)

127) Comparing the short-run and long-run profit-maximizing positions of a perfectly competitive firm, which statement is true? A) Price will equal marginal cost in the short run, but not necessarily in the long run. B) Economic profit may exist in the short run and in the long run. C) The firm will produce at minimum average cost in both the short and long run. D) Price should equal average cost in the long run, but not necessarily in the short run. E) The firm may have unexploited economies of scale in both the short run and the long run. Answer: D Explanation:

A) B) C) D) E)

128) Consider a perfectly competitive firm when its industry is in long-run equilibrium. In this case, A) price is greater than marginal cost. B) marginal revenue is greater than marginal cost. C) price equals minimum short-run and long-run average total cost. D) economic profits are greater than zero. E) average fixed costs are at the maximum. Answer: C Explanation:

128)

A) B) C) D) E)

129) Consider a competitive industry in which firms are facing a continual decrease in demand for their product. In the long run A) new firms will enter the industry and earn normal profits. B) existing firms will modernize plant and equipment in order to increase efficiency. C) existing firms will expand output as a means of recovering losses. D) firms will begin advertising in order to increase demand for their product. E) capacity in the industry will gradually shrink as plant and equipment is not replaced. Answer: E Explanation:

127)

A) B) C) D) E)

43

129)

130) Long-run equilibrium in a perfectly competitive industry is characterized by A) internal economies of scale. B) an output level at which firms' SRATC curves are tangent to the downward sloping portion of their LRAC curves. C) falling costs. D) rising costs. E) each firm producing at the minimum point on its LRAC curve. Answer: E Explanation:

A) B) C) D) E)

131) If a perfectly competitive firm is producing where its MR=MC, but is operating to the left of the minimum point of its LRAC curve, A) it cannot be optimizing its short-run behaviour. B) it can reduce its average costs by building a larger plant. C) it can still be in long-run equilibrium as long as P = SRATC. D) its profits will decrease if it builds a larger plant. E) it is in a long-run profit maximizing position. Answer: B Explanation:

131)

A) B) C) D) E)

132) Which of the following conditions is true of a perfectly competitive industry when it is in long-run equilibrium? A) Firms are entering the industry. B) Firms are exiting the industry. C) Price equals minimum short-run average total cost for all firms. D) Accounting profits for all firms are zero. E) Firms are experiencing increasing returns to scale. Answer: C Explanation:

130)

A) B) C) D) E)

44

132)

The diagram below shows the short-run cost curves for 3 perfectly competitive firms in the same industry.

FIGURE 9-6 133) Refer to Figure 9-6. Given that Firms A, B and C are in the same industry, is this industry in long-run equilibrium? A) No, because Firm A is not producing at a profit-maximizing level of output. B) No, because if the industry were in equilibrium, all 3 firms would be earning zero economic profits. C) Yes, because all 3 firms are producing at their minimum average total cost. D) Yes, because P = MC = MR for each of the 3 firms. E) Yes, because each of the 3 firms is operating at its minimum efficient scale. Answer: B Explanation:

A) B) C) D) E)

134) Refer to Figure 9-6. Which firm or firms is likely to exit this industry? A) Firm A B) Firm B C) Firm C D) all of Firms A, B, and C E) none of Firms A, B, and C Answer: C Explanation:

133)

A) B) C) D) E)

45

134)

135) Refer to Figure 9-6. Which of the following statements about Firms A, B and C is true? A) Firm A is suffering losses, Firm B is breaking even, and Firm C is earning profits. B) Firm A is breaking even, Firm B is suffering losses, and Firm C is earning profits. C) Firm A is earning profits, Firm B is breaking even, and Firm C is suffering losses. D) Firms A, B and C are breaking even. E) Firms A, B and C are earning profits. Answer: C Explanation:

A) B) C) D) E)

136) Suppose a paper mill in Quebec is shut down by its owner, even though the plant and equipment are in excellent shape and the paper is of top quality. What could explain this? A) The price the firm is receiving for the paper is less than its average variable cost. B) The paper mill must not have been operating at its profit-maximizing level of output. C) The price the firm is receiving is less than the average total cost. D) The price the firm is receiving for the paper is greater than its marginal cost. E) The owner was not minimizing its production costs. Answer: A Explanation:

136)

A) B) C) D) E)

137) Suppose a perfectly competitive industry is in long-run equilibrium. A new one-time cost-saving technology is then developed and new plants are built. Eventually, a new long-run equilibrium will be established where A) new plants employ the new technology, but existing plants continue to produce as long as they cover their fixed costs. B) high-cost and low-cost firms exist side by side and market output will be higher. C) the industry supply curve has shifted to the left and price and output are both higher. D) all plants continue to operate until they are physically worn out as long as price is greater than the the firm's average variable cost. E) all plants use the new technology, and market output will be higher. Answer: E Explanation:

135)

A) B) C) D) E)

46

137)

138) Consider the textile industry, which we assume to be a competitive industry, and which experiences continuous cost-reducing technological change. Which of the following statements best describes this industry? A) High-cost textile mills will co-exist with low-cost mills as long as the revenue for the high-cost mills is covering their variable costs. B) The price of the product is determined by the minimum ATC of the lowest-cost plants. C) All textile mills in the industry will be earning zero economic profits or losses. D) Both A and B E) Both B and C Answer: D Explanation:

A) B) C) D) E)

139) Which of the following assumptions about perfectly competitive markets is primarily responsible for the horizontal demand curve facing the individual firm? A) differentiated product B) consumers are aware of all firms' prices C) each firm is small relative to the size of the industry D) freedom of entry and exit in the industry E) strategic behaviour Answer: C Explanation:

139)

A) B) C) D) E)

140) Which of the following assumptions about perfectly competitive markets is primarily responsible for firms having zero economic profit in long run equilibrium? A) homogeneous product B) consumers are aware of all firms' prices C) each firm is small relative to the size of the industry D) freedom of entry and exit in the industry E) strategic behaviour Answer: D Explanation:

138)

A) B) C) D) E)

47

140)

Answer Key Testname: UNTITLED9

1) D 2) C 3) D 4) A 5) D 6) A 7) C 8) D 9) B 10) A 11) A 12) D 13) B 14) D 15) C 16) E 17) B 18) E 19) E 20) B 21) A 22) B 23) D 24) E 25) C 26) A 27) B 28) A 29) B 30) B 31) A 32) D 33) C 34) D 35) E 36) B 37) E 38) A 39) D 40) D 41) C 42) B 43) D 44) E 45) A 46) A 47) A 48) E 49) E 50) A 48

Answer Key Testname: UNTITLED9

51) B 52) C 53) C 54) A 55) E 56) D 57) B 58) B 59) E 60) B 61) B 62) A 63) A 64) C 65) B 66) D 67) D 68) E 69) C 70) A 71) A 72) C 73) C 74) A 75) A 76) C 77) A 78) A 79) C 80) C 81) A 82) B 83) D 84) C 85) A 86) E 87) C 88) B 89) E 90) C 91) A 92) C 93) D 94) C 95) A 96) C 97) A 98) C 99) B 100) D 49

Answer Key Testname: UNTITLED9

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140)

D E B C E D E B E E B B C D B E B D A A E E A B E A D C E E B C B C C A E D C D

50

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) One similarity between a monopolist and a perfectly competitive firm is that both A) are large relative to their markets. B) may have similarly shaped cost curves. C) choose the price at which to sell their product. D) can make economic profits in the long run. E) need to know the shape of the market demand curve. Answer: B Explanation:

A) B) C) D) E)

2) The marginal revenue curve facing a single-price monopolist A) is the same as the average revenue curve facing the monopolist. B) is the same as the demand curve facing the monopolist. C) shows the change in the profit for the firm. D) lies below the average revenue curve. E) at first falls to a minimum and then rises as output is increased. Answer: D Explanation:

2)

A) B) C) D) E)

3) The demand curve facing a single-price monopolist slopes downward because A) its average revenue equals its marginal revenue. B) its demand curve is the market demand curve, which is generally downward sloping. C) demand is perfectly inelastic. D) it sells typically to only one consumer. E) its supply curve is upward sloping. Answer: B Explanation:

1)

A) B) C) D) E)

1

3)

4) A monopoly is distinguished from a firm operating under any other market structure in the following way: the monopoly A) charges a price higher than its average revenue. B) can choose its output level. C) can choose its level of cost. D) does not produce at a profit-maximizing level of output. E) faces a demand curve which is identical to the market demand curve. Answer: E Explanation:

A) B) C) D) E)

5) A monopolistic firm faces a downward-sloping demand curve because A) there are a large number of firms in the industry, all selling the same product. B) the demand for its product is always inelastic. C) the market price is affected by the amount sold by a monopolistic firm. D) marginal revenue is negative throughout the feasible range of output. E) the monopolistic firm can exploit economies of scale. Answer: C Explanation:

6)

A) B) C) D) E)

7) For a single-price monopolist, marginal revenue falls faster than price (as output rises) because A) in order to sell additional units, the price must be lowered on all units. B) profits are maximized when marginal cost equals marginal revenue. C) the firm has no supply curve. D) the cost of producing extra units of output increases as production is increased. E) none of the above — marginal revenue does not fall faster than price. Answer: A Explanation:

5)

A) B) C) D) E)

6) The average revenue curve for a single-price monopolist A) is a horizontal line, equal to the price of its product. B) lies below its demand curve. C) coincides with its demand curve. D) slopes upward to the right. E) does not exist. Answer: C Explanation:

4)

A) B) C) D) E) 2

7)

8) Marginal revenue is less than price for a single-price monopolist because the A) firm's output decisions do not affect the selling price. B) firm must lower its price for all units if it wants to sell more of the product. C) monopolist charges a price higher than the unit production cost. D) monopolist must worry about how its price setting will lead to entry by other firms. E) monopolist has achieved economies of scale. Answer: B Explanation:

Price $8 $7 $6 $5 $4 $3 $2

8)

A) B) C) D) E)

Quantity Demanded 5 6 7 8 9 10 11

TABLE 10-1 9) Refer to Table 10-1. For a single-price monopolist, the marginal revenue associated with increasing sales from 5 to 6 units is A) -4. B) -2. C) 0. D) 2. E) 4. Answer: D Explanation:

A) B) C) D) E)

10) Refer to Table 10-1. For a single-price monopolist, the marginal revenue associated with increasing sales from 6 to 7 units is A) -4. B) -2. C) 0. D) 2. E) 4. Answer: C Explanation:

9)

A) B) C) D) E)

3

10)

11) Refer to Table 10-1. For a single-price monopolist producing and selling 9 units, the marginal revenue earned by selling the 9th unit is A) -4. B) -2. C) 0. D) 2. E) 4. Answer: A Explanation:

A) B) C) D) E)

12) Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. At what level of output is marginal revenue equal to 0? A) between 6 and 7 units B) between 7 and 8 units C) between 8 and 9 units D) between 9 and 10 units E) between 10 and 11 units Answer: A Explanation:

13)

A) B) C) D) E)

14) Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. Which of the following statements about price elasticity of demand is true? A) demand is unit-elastic at a price of $4 B) demand is elastic at a price of $8 C) demand is elastic at a price of $5 D) demand is inelastic at a price of $8 E) demand is elastic at a price of $3 Answer: B Explanation:

12)

A) B) C) D) E)

13) Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. At what level of output is total revenue maximized for this firm? A) between 6 and 7 units B) between 7 and 8 units C) between 8 and 9 units D) between 9 and 10 units E) between 10 and 11 units Answer: A Explanation:

11)

A) B) C) D) E)

4

14)

15) Refer to Table 10-1, which displays the demand schedule for a single-price monopolist. At what level of demand is the price elasticity of demand equal to 1? A) between 6 and 7 units B) between 7 and 8 units C) between 8 and 9 units D) between 9 and 10 units E) between 10 and 11 units Answer: A Explanation:

15)

A) B) C) D) E)

The figure below shows the demand schedule and demand curve for a product produced by a single-price monopolist.

FIGURE 10-1 16) Refer to Figure 10-1. Suppose this single-price monopolist is initially selling 5 units at $8 each and then reduces the price of the product to $6. By making this change, the firm is giving up revenue of ________ on the original number of units sold and gaining revenue of ________ on the additional units sold. Its marginal revenue is therefore ________. (All figures are dollars.) A) 38; 40; 2 B) 8; 6; 2 C) 10; 12; 2 D) 14; 14; 0 E) 5; 7; -2 Answer: C Explanation:

A) B) C) D) E)

5

16)

17) Refer to Figure 10-1. Suppose this single-price monopolist is initially selling 9 units at $4 each and then reduces the price of the product to $3. By making this change, the firm is giving up revenue of ________ on the original number of units sold and gaining revenue of ________ on the additional units sold. Its marginal revenue is therefore ________. (All figures are dollars) A) 40; 27; -13 B) 30; 36; 6 C) 34; 28; -6 D) 9; 3; -6 E) 3; 9; 6 Answer: D Explanation:

A) B) C) D) E)

18) Refer to Figure 10-1. What is the lowest level of output at which marginal revenue becomes negative? A) 5th unit B) 6th unit C) 7th unit D) 8th unit E) 9th unit Answer: C Explanation:

19)

A) B) C) D) E)

20) Consider a profit-maximizing single-price monopolist that faces a linear demand curve. The firm sets price where the price elasticity of demand is A) zero. B) less than one. C) one. D) greater than one. E) infinite. Answer: D Explanation:

18)

A) B) C) D) E)

19) If a single-price monopolist sets price where the price elasticity of demand exactly equals 1, its A) total profits are at a maximum. B) marginal revenue is always positive. C) total revenue is rising, although marginal revenue is falling. D) total revenue is falling. E) total revenue is at its maximum. Answer: E Explanation:

17)

A) B) C) D) E)

6

20)

Consider the following AR and MR curves for a single-price monopolist.

FIGURE 10-2 21) Refer to Figure 10-2. The price elasticity of demand at Q2 is

21)

A) zero B) greater than 1. C) less than 1. D) equal to 1. E) not determinable from the diagram. Answer: D Explanation:

A) B) C) D) E)

22) Refer to Figure 10-2. The price elasticity of demand at Q1 is A) zero. B) less than 1. C) equal to 1. D) greater than 1. E) not determinable from the diagram. Answer: D Explanation:

A) B) C) D) E)

7

22)

The diagram below shows total revenue for a single-price monopolist.

FIGURE 10-3 23) Refer to Figure 10-3. The firm's marginal revenue at Q1 is

23)

A) zero. B) positive and rising. C) positive but falling. D) negative and falling. E) not determinable from the diagram. Answer: C Explanation:

A) B) C) D) E)

24) Refer to Figure 10-3. The price elasticity of demand at Q3 is A) zero. B) less than 1. C) equal to 1. D) greater than 1. E) not determinable from the diagram. Answer: B Explanation:

A) B) C) D) E)

8

24)

25) A monopolist faces a straight-line demand curve and is currently producing an output level of 2000 units receiving $10 000 in total revenue. At an output of 1000 units the marginal revenue for this firm would be A) 0. B) $2.50. C) $5.00. D) $10.00 E) Impossible to tell with the given information. Answer: E Explanation:

A) B) C) D) E)

26) Consider a single-price monopolist that is operating in the inelastic range of its linear demand curve. This firm A) would be operating where its AR is negative. B) would have a marginal revenue curve that is negative. C) would have a marginal revenue that is negative although its total revenues would be at a maximum. D) could raise its total revenue by lowering its price. E) would be operating at its profit-maximizing position. Answer: B Explanation:

25)

A) B) C) D) E)

9

26)

Consider the following AR and MR curves for a single-price monopolist.

FIGURE 10-2 27) Refer to Figure 10-2. If marginal costs were zero, the profit-maximizing output for this single-price monopolist would be A) 0. B) Q1 . C) Q2 . D) Q3. E) Q4 . Answer: C Explanation:

A) B) C) D) E)

28) Refer to Figure 10-2. If marginal costs were positive and constant but less than A, the profit-maximizing output for this single-price monopolist would be A) 0. B) greater than zero, but less than Q1 . C) greater than zero, but less than Q2 . D) equal to Q2. E) between Q2 and Q4. Answer: C Explanation:

27)

A) B) C) D) E)

10

28)

29) Refer to Figure 10-2. For this single-price monopolist, the profit-maximizing level of output is A) Q1 .

29)

B) Q2 . C) Q3 . D) Q4 . E) not determinable from the diagram. Answer: E Explanation:

A) B) C) D) E)

The diagram below shows total revenue for a single-price monopolist.

FIGURE 10-3 30) Refer to Figure 10-3. The profit-maximizing output for this single-price monopolist is A) Q1 B) Q2 . C) Q3 . D) Q4 . E) not determinable from the diagram. Answer: E Explanation:

A) B) C) D) E)

11

30)

31) If a single-price monopoly is presently producing an output at which marginal revenue is less than marginal cost, it can increase its profits by A) reducing output and raising prices. B) reducing output and holding prices unchanged. C) expanding output and lowering price. D) expanding output and raising price. E) reducing barriers to entry. Answer: A Explanation:

A) B) C) D) E)

32) For a monopolist, the profit-maximizing level of output occurs where A) MR = MC. B) MR = AC. C) MC = 0. D) MC = AR. E) MC = price. Answer: A Explanation:

33)

A) B) C) D) E)

34) At the profit-maximizing level of output for a single-price monopolist, price A) always exceeds average total cost. B) equals marginal cost. C) exceeds marginal cost. D) equals marginal revenue. E) is below marginal revenue. Answer: C Explanation:

32)

A) B) C) D) E)

33) A monopolist will be earning positive economic profits A) at all times, since it controls the market. B) when price equals marginal cost. C) whenever marginal revenue equals marginal cost. D) when price exceeds average total cost. E) whenever marginal revenue is positive. Answer: D Explanation:

31)

A) B) C) D) E) 12

34)

35) Which of the following statements about single-price monopolists is correct? A) The profit-maximizing level of output is the same as the total revenue-maximizing level of output. B) The average revenue curve lies above the demand curve. C) AR is greater than MR. D) Price elasticity of demand will be equal to one if the firm is profit-maximizing. E) Price equals marginal cost at the profit-maximizing level of output. Answer: C Explanation:

A) B) C) D) E)

36) Monopolistic firms do not have supply curves because A) they are not constrained by the marginal costs of production. B) their output is a fixed quantity. C) monopolists get to choose their price-quantity combination along the demand curve. D) monopolists face a given market price. E) their marginal costs cannot be calculated. Answer: C Explanation:

36)

A) B) C) D) E)

37) A single-price monopolist is currently producing an output level where price equals marginal cost, and profits are positive. In order to maximize profits, this monopolist should A) shut down. B) increase production and reduce price. C) decrease production and increase price. D) not change his output level, because he is currently earning profits. E) reduce price and let production adjust to the new price. Answer: C Explanation:

35)

A) B) C) D) E)

13

37)

38) A single-price monopolist is currently producing an output level where P = $20, MR = $13, ATC = $15, and MC = $14. In order to maximize profits, this monopolist should A) shut down. B) increase production and reduce price. C) decrease production and increase price. D) not change the output level, because the firm is currently at the profit-maximizing output level. E) There is insufficient information to make a recommendation. Answer: C Explanation:

A) B) C) D) E)

39) A single-price monopolist is currently producing an output level where P = $320, MR = $260, ATC = $280, and MC = $200. In order to maximize profits, this monopolist should A) shut down. B) increase production and reduce price C) decrease production and increase price. D) not change the output level because the firm is currently at the profit-maximizing output level. E) There is insufficient information to make a recommendation. Answer: B Explanation:

39)

A) B) C) D) E)

40) A single-price monopolist is currently producing an output level where P = $320, MR = $200, AVC = $327, and MC = $200. In order to maximize profits, this firm should A) increase production and reduce prices. B) decrease production and increase prices. C) not change its output level, because the firm is currently at its profit maximizing level. D) shut down. E) There is insufficient information to make a recommendation. Answer: D Explanation:

38)

A) B) C) D) E)

14

40)

41) Economic profit for a monopolistic firm will equal zero when A) average total cost is minimized. B) marginal revenue equals marginal cost. C) marginal revenue equals price. D) price equals marginal cost. E) average total cost equals price. Answer: E Explanation:

A) B) C) D) E)

42) If a monopolist's marginal revenue is MR = 12 - 2Q and its marginal cost is MC = 3, then the profit-maximizing quantity is A) 0. B) 4. C) 4.5. D) 6. E) 12. Answer: C Explanation:

42)

A) B) C) D) E)

43) If a monopolist's marginal revenue is MR = 15 - 2Q and its marginal cost is MC = 5, then the profit-maximizing quantity is A) 0. B) 5. C) 7.5. D) 10. E) 15. Answer: B Explanation:

41)

A) B) C) D) E)

15

43)

Your food-services company has been named as the sole provider of meals at a small university. The cost and demand schedules are:

Sold per Day 0 100 200 300 400 500 600 700

Price per Meal $3.50 $3.25 $3.00 $2.75 $2.50 $2.25 $2.00 $1.75

Total Fixed Cost $150 $150 $150 $150 $150 $150 $150 $150

Total Variable Cost Total Revenue $0 $0 $300 $325 $500 $600 $650 $825 $750 $1000 $830 $1125 $905 $1200 $995 $1225

TABLE 10-2 44) Refer to Table 10-2. The marginal cost between 100 and 200 meals per day is A) $0. B) $1.00. C) $1.50. D) $2.00. Answer: D Explanation:

44) E) $3.00.

A) B) C) D) E)

45) Refer to Table 10-2. Assuming the firm is a single-price monopolist, the marginal revenue at 200 meals per day is A) $1.75. B) $2.25. C) $2.75. D) $3.25. E) $0. Answer: C Explanation:

A) B) C) D) E)

46) Refer to Table 10-2. For a single-price monopolist, the profit-maximizing price and number of meals per day is A) 700 meals at $1.75 per meal. B) 600 meals at $2.00 per meal. C) 500 meals at $2.25 per meal. D) 400 meals at $2.50 per meal. E) 300 meals at $2.75 per meal. Answer: B Explanation:

45)

A) B) C) D) E)

16

46)

47) Refer to Table 10-2, and suppose that the firm is a single-price monopolist. At the profit-maximizing level of output, the firm's total profit per day will be A) $75. B) $100. C) $145. D) $150. Answer: C Explanation:

47) E) $295.

A) B) C) D) E)

48) Refer to Table 10-2, and suppose that the firm is a single-price monopolist. At the profit-maximizing level of output, the price elasticity of demand is A) less than one. B) one. C) greater than one. D) infinite. E) impossible to know with the available information. Answer: C Explanation:

A) B) C) D) E)

49) Refer to Table 10-2, and suppose that the firm is a single-price monopolist. If the firm provided 700 meals per day, total daily profits would be A) -$60. B) $80. C) $150. D) $230. E) impossible to calculate given the information provided. Answer: B Explanation:

49)

A) B) C) D) E)

50) Refer to Table 10-2, and suppose that the firm is a single-price monopolist. The level of output at which profits are zero is between A) 0 and 100 meals. B) 100 and 200 meals. C) 200 and 300 meals. D) 300 and 400 meals. E) 300 and 500 meals. Answer: C Explanation:

48)

A) B) C) D) E)

17

50)

51) Refer to Table 10-2. If the firm were to shut down in the short run its losses per day would be A) zero. B) $150. C) equal to its average variable cost. D) equal to its total revenue. E) equal to its total cost. Answer: B Explanation:

51)

A) B) C) D) E)

Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-4 52) Refer to Figure 10-4. A profit-maximizing single-price monopolist would produce the quantity A) Q0 . B) Q1 . C) Q2 . D) Q3. E) Q4 . Answer: A Explanation:

A) B) C) D) E)

18

52)

53) Refer to Figure 10-4. A profit-maximizing single-price monopolist would charge the price A) P0 . B) P1. C) P2 . D) P3 . E) P4 . Answer: E Explanation:

A) B) C) D) E)

54) Refer to Figure 10-4. The average per unit profit earned by this profit-maximizing single-price monopolist is A) P4 - P0 . B) P4 - P1. C) P4 - P2 . D) P4 - P3 . E) P3 - P2 . Answer: C Explanation:

56)

A) B) C) D) E)

57) Refer to Figure 10-4. If this single-price monopolist is producing at the profit-maximizing level of output, the total profit is represented by the area A) 0P4aQ0. B) P4abP2 . C) P3 ceP2 . D) 0P2 bQ0 . E) 0P0fQ0 . Answer: B Explanation:

55)

A) B) C) D) E)

56) Refer to Figure 10-4. If this single-price monopolist is producing at the profit-maximizing level of output, the total revenue is represented by the area A) 0P4aQ0. B) 0P3 cQ2 . C) 0P1 dQ1 . D) 0P2 bQ0 . E) 0P0gQ5. Answer: A Explanation:

54)

A) B) C) D) E)

55) Refer to Figure 10-4. If the single-price monopolist is producing at the profit-maximizing level of output, the total cost is represented by the area A) 0P4aQ0. B) 0P3 cQ3 . C) 0P1 dQ1 . D) 0P2 bQ0 . E) 0P0gQ5. Answer: D Explanation:

53)

A) B) C) D) E)

19

57)

58) Refer to Figure 10-4. If this single-price monopolist is producing at the profit-maximizing level of output, consumer surplus is represented by the area A) P5 P2b. B) P5P4 a. C) P5 P0 g. D) P5 P1 e. E) P5 Q3 0. Answer: B Explanation:

A) B) C) D) E)

59) Refer to Figure 10-4. This single-price monopolist would maximize total revenue by producing the quantity A) Q1. B) Q2. C) Q3. D) Q4. E) Q5. Answer: C Explanation:

60)

A) B) C) D) E)

61) If a single-price monopolist's price equals marginal cost, the firm A) could increase its profits by lowering output and raising price. B) should maintain its current price because it is a price taker. C) will find it more profitable to produce a greater output. D) is producing where MR = MC and thus is maximizing profits. E) should definitely shut down. Answer: A Explanation:

59)

A) B) C) D) E)

60) Refer to Figure 10-4. Suppose this firm experiences an increase in the demand for its product. In the short run, this profit-maximizing monopolist will A) increase price and output. B) increase price and produce the same output. C) increase price and reduce output. D) neither raise price nor change output. E) lower price and increase output. Answer: A Explanation:

58)

A) B) C) D) E)

20

61)

62) Suppose that a single-price monopolist calculates that at its present output, marginal revenue is $2 and marginal cost is $1. If the price of the product is $3, the monopolist could maximize its profits by A) lowering price and raising output. B) lowering price and leaving output unchanged. C) raising price and leaving output unchanged. D) doing nothing. E) shutting down. Answer: A Explanation:

A) B) C) D) E)

63) Suppose that a single-price monopolist knows the following information: Price $10.00

62)

Quantity 1500

TR

MR Fixed Cost $7.00 $6000

TC

ATC $5.00

63) MC $5.00

The monopolist could maximize profits by A) staying at the current price and output. B) lowering price and increasing output. C) lowering price and leaving output unchanged. D) raising price and leaving output unchanged. E) shutting down. Answer: B Explanation:

A) B) C) D) E)

64) Suppose that a single-price monopolist knows the following information: Price $10.00

Quantity 1500

TR

MR Fixed Cost $7.00 $6000

TC

ATC $5.00

64) MC $5.00

The total profit being earned by this firm at the current level of output is ________ which ________ the maximum profit possible. A) $3000; is not B) $7500; is not C) $15 000; is D) $97 500; is not E) $105 000; is Answer: B Explanation:

A) B) C) D) E)

21

65) Suppose that a single-price monopolist knows the following information: Price $9.00

Quantity 1500

TR

MR Fixed Cost $4.00 $7000

TC

ATC $7.00

65) MC $5.00

The monopolist could maximize its profits by A) staying at the current price and output. B) lowering price and increasing output. C) lowering price and leaving output unchanged. D) raising price and lowering output. E) shutting down. Answer: D Explanation:

A) B) C) D) E)

66) Suppose that a single-price monopolist knows the following information: Price $9.00

Quantity 1500

TR

MR Fixed Cost $4.00 $7000

TC

ATC $7.00

66) MC $5.00

The total profit being earned by this firm at the current level of output is A) $1500. B) $3000. C) $6500. D) $10 500. Answer: B Explanation:

A) B) C) D) E)

67) Suppose that a single-price monopolist knows the following information: Price $5.00

Quantity 2000

TR

MR Fixed Cost $4.00 $2000

TC

The monopolist could maximize profits in the short run by A) staying at the current price and output. B) lowering price and increasing output. C) lowering price and leaving output unchanged. D) raising price and lowering output. E) shutting down. Answer: B Explanation:

E) $13 500.

A) B) C) D) E)

22

ATC $5.00

67) MC $3.00

68) Suppose that a single-price monopolist knows the following information: Price $5.00

Quantity 2000

TR

MR Fixed Cost $4.00 $2000

TC

ATC $5.00

68) MC $3.00

The total profit being earned by this firm at the current level of output is A) -$2000. B) -$1000. C) 0. D) $1000. Answer: C Explanation:

E) $2000.

A) B) C) D) E)

69) Which of the following statements describes a major difference between monopoly and perfect competition? A) Perfectly competitive firms cannot maintain positive economic profits in the long run, whereas monopolists can. B) Monopolists do not consider consumer demand when choosing price and output levels. C) Monopolistic firms tend to maximize revenue while perfectly competitive firms maximize profit. D) Monopolistic firms emphasize cost minimization whereas perfectly competitive firms emphasize profit maximization. E) Perfectly competitive firms can never earn economic profits; monopolistic firms always earn economic profits. Answer: A Explanation:

A) B) C) D) E)

70) Which one of the following is a natural barrier to firms entering an industry? A) decreasing returns to scale B) a positively sloped LRAC curve over the whole range of output C) a negatively sloped LRAC curve over the whole range of output D) threats of punitive price-cutting by existing producers E) licensing and patent restrictions Answer: C Explanation:

69)

A) B) C) D) E)

23

70)

71) Natural barriers to firms to entering an industry include A) control or ownership of the entire supply of an essential raw material. B) large economies of scale in the industry. C) a government-awarded franchise. D) a patent which allows production by only the patent holder. E) increasing-cost production. Answer: B Explanation:

A) B) C) D) E)

72) A likely cause of a natural monopoly occurring in some industry is A) scale economies. B) patents. C) licenses. D) charters. E) sabotage. Answer: A Explanation:

72)

A) B) C) D) E)

73) If an industry's demand conditions allow at most one firm to cover its costs while producing at its minimum efficient scale (MES), this situation is known as A) a discriminating monopoly. B) a natural monopoly. C) declining marginal revenue. D) limited competition. E) natural economic limits. Answer: B Explanation:

71)

A) B) C) D) E)

24

73)

74) Suppose the technology of an industry is such that the typical firm's minimum efficient scale is 8000 units per month at an average long-run cost of $5 per unit. If the total quantity demanded at a price of $5 per unit is 8500 units per month, the likely result would be A) a cartel. B) a concentrated oligopoly. C) a natural monopoly. D) price discrimination. E) perfectly competitive firms. Answer: C Explanation:

A) B) C) D) E)

75) Suppose the technology of an industry is such that the typical firm's minimum efficient scale is 18 units per day at an average long-run cost of $1600 per unit. If the total quantity demanded at a price of $1750 per unit is 16 units per month, the likely result would be A) a competitive industry. B) a cartel. C) price discrimination. D) a natural monopoly. E) a concentrated oligopoly. Answer: D Explanation:

75)

A) B) C) D) E)

76) Suppose the technology of production is such that the typical firm's minimum efficient scale is 1400 units per week at an average long-run cost of $9 per unit. If the total quantity demanded in this market at a price of $9 per unit is 22 million units per week, the likely result will be A) a cartel. B) price discrimination. C) a natural monopoly. D) a concentrated oligopoly. E) a competitive industry. Answer: E Explanation:

74)

A) B) C) D) E)

25

76)

77) If a competing firm is able to overcome an entry barrier of a monopolized industry, the demand curve of the single firm already in the industry will A) shift to the right. B) remain the same in spite of the entry of the other firm. C) shift to the left. D) become less elastic. E) shift to the left and become more elastic. Answer: E Explanation:

A) B) C) D) E)

78) A firm is best described as a natural monopoly if A) there are no competing firms. B) it holds an exclusive charter from the government. C) its ATC curve is upward sloping. D) its MC curve is downward sloping. E) it can supply the entire market while minimizing its average costs. Answer: E Explanation:

78)

A) B) C) D) E)

79) The main argument of Joseph Schumpeter's idea of "creative destruction" is that A) the existence of monopolies leads to destruction of the environment. B) short-run profits created by the existence of monopolies will lead to antitrust legislation, which will force the fragmentation of monopolies into competitive industries. C) perfectly competitive industries are characterized by more productive innovation and productivity growth than monopolistic industries, which Schumpeter regarded as destructive. D) monopoly profits lead to innovation in an effort to sustain those profits. E) monopolies create profits for themselves at the expense of the destruction of consumer surplus. Answer: D Explanation:

77)

A) B) C) D) E)

26

79)

80) A number of firms agreeing together to restrict output and thereby raise prices is known as A) a monopoly. B) a natural monopoly. C) a cartel. D) a barrier to entry. E) an oligopoly. Answer: C Explanation:

A) B) C) D) E)

81) The cartelization of an industry with a homogeneous product usually means that A) member firms have agreed to cooperate in reducing costs. B) member firms have agreed to reduce their joint output. C) the demand curve facing the industry must be linear. D) the demand curve facing the industry must be elastic. E) member firms have agreed to reduce investment. Answer: B Explanation:

82)

A) B) C) D) E)

83) The two characteristic problems for cartels are A) agreeing on the price to be set and preventing new entrants. B) policing members' output restrictions and preventing new entrants. C) coordinating marketing policies and policing members' quotas. D) agreeing on the price to be set and coordinating marketing policies. E) policing members' prices and restricting output. Answer: B Explanation:

81)

A) B) C) D) E)

82) One of the reasons cartels are considered unstable is that A) member firms reduce their investment, thereby becoming uncompetitive over time. B) it is inefficient to manage individual firms collectively. C) there are wide fluctuations in price as cartel members vary their output. D) consumers seek out substitutes to the cartel product. E) individual members of the cartel have an incentive to violate the cartel agreement. Answer: E Explanation:

80)

A) B) C) D) E)

27

83)

84) It is common for a cartel to collapse when one or more firms in the cartel A) exceed its output quota. B) produce more efficiently than other member firms. C) is much larger than other cartel members. D) increase its price above the monopoly price. E) exit the industry. Answer: A Explanation:

A) B) C) D) E)

85) A cartel can only succeed in the long run A) with authorization from the government. B) if there is free entry of new firms. C) if all firms are experiencing decreasing returns to scale. D) if the long-run market supply curve is elastic. E) if member firms cooperate and resist their individual incentives. Answer: E Explanation:

85)

A) B) C) D) E)

86) Suppose all of the firms in a perfectly competitive industry form a cartel and agree to restrict output, thereby raising the price of the product. Individual Firm A will gain the most from the existence of the cartel if A) all firms, including A, cooperate and restrict output. B) Firm A restricts output, while the other firms do not. C) all firms, except Firm A, cooperate and restrict output. D) no firms restrict output. E) all firms revert back to their competitive outputs. Answer: C Explanation:

84)

A) B) C) D) E)

28

86)

87) In November 2012, there was some discussion of several south-Asian countries joining together to restrict the supply of rice to the world market. Between them, these countries' exports of rice account for 40% of the total global trade. What would they be trying to accomplish? A) They are attempting to form a cartel, increase their joint output, and control a larger percentage of the total global trade. B) They are attempting to price discriminate between consumers of their exported rice, thereby increasing their share of the global trade and increasing their joint profits. C) They are attempting to form a cartel, jointly restrict output, and increase the world price of rice. D) They are attempting to act as a bloc to restrict entry of new producers to the world market, and thereby protect their joint profits. E) They are attempting to form a cartel, drive other producers out of the world market and then increase their output of rice. Answer: C Explanation:

A) B) C) D) E)

29

87)

Suppose a monopolist faces the demand curve and cost curves shown below.

FIGURE 10-4 88) Refer to Figure 10-4. In order to maximize its profits, a perfect-price-discriminating monopolist produces the quantity A) Q0 . B) Q1 . C) Q2 . D) Q3. E) Q4 . Answer: C Explanation:

A) B) C) D) E)

89) Refer to Figure 10-4. If the monopolist is practicing perfect price discrimination and is maximizing its profits, the total revenue is represented by the area A) 0P4aQ0. B) 0P5 cQ2 . C) 0P1 dQ1 . D) 0P2 bQ0 . E) 0P3cQ2 . Answer: B Explanation:

88)

A) B) C) D) E)

30

89)

90) Refer to Figure 10-4. If the monopolist is practicing perfect price discrimination and is maximizing its profits, the consumer surplus is represented by the area A) P5 P3c.

90)

B) P5 P4a. C) P5 P0c. D) P5 P2e. E) There is no consumer surplus in this case. Answer: E Explanation:

A) B) C) D) E)

91) Refer to Figure 10-4. Suppose this monopolist is practicing perfect price discrimination. How does this differ from the situation where this firm is charging a single price for its product? A) The firm is producing the same quantity, has successfully identified different segments of the market, and is able to capture some of the consumer surplus. B) The firm is restricting output to a level below that of the single-price monopolist, and thereby raises the price of its product and earns higher profits. C) The firm is producing a smaller quantity, is charging a different price for each unit sold and is earning higher profits. D) The firm is producing the same quantity, but charging a different price for each unit sold and is earning higher profits. E) The firm is producing a higher quantity, is charging a different price for each unit sold and is earning higher profits. Answer: E Explanation:

A) B) C) D) E)

92) Relative to a firm that must charge a single price for all of its output, the ability to charge multiple prices gives a firm with market power the ability to capture some or all of the A) producer surplus. B) consumer surplus. C) fixed costs. D) variable costs. E) marginal costs. Answer: B Explanation:

91)

A) B) C) D) E)

31

92)

93) Price discrimination, if possible, allows a price-setting firm to increase its profits by A) shifting its cost curves downward. B) raising the price above the competitive price. C) charging different prices according to the willingness to pay of each consumer. D) reducing costs through a reduction in output. E) charging different prices according to the different marginal cost on each unit. Answer: C Explanation:

A) B) C) D) E)

94) Suppose the market for some product can be divided into two segments, each with a linear demand curve. A monopolist can set a different price (but only one price) in each segment. The profit-maximizing price discrimination across these two market segments will lead to A) higher output with average revenue higher than the best single price. B) lower output with total revenue higher than the single best price. C) lower output with a higher average revenue than the best single price. D) higher output with average revenue lower than the best single price. E) the same output but higher average revenue than the best single price. Answer: E Explanation:

94)

A) B) C) D) E)

95) One reason movie theatres charge a lower admission price to senior citizens is that A) movie-theatre owners are able to practice perfect price discrimination. B) government sets the price policies. C) senior citizens have a more elastic demand than other movie-goers. D) senior citizens have a less elastic demand than other movie-goers. E) senior citizens have a higher willingness-to-pay than other people. Answer: C Explanation:

93)

A) B) C) D) E)

32

95)

96) Which one of the following cases is NOT an example of price discrimination? A) Airlines charge different fares for business people than tourist travelers. B) Young males are charged higher premiums for car insurance than older males or women. C) A local phone company charges different telephone rates to residential and business users. D) Electric companies charge different rates to commercial and residential users for electricity. E) Theatres charge different rates for different age groups. Answer: B Explanation:

A) B) C) D) E)

97) Which of the following is probably NOT an example of price discrimination? A) A doctor charging for his services according to the income of his patients. B) Train fares that are less expensive for weekend travel than weekday travel. C) A theatre charging children under 12 less for a movie ticket than it charges an adult. D) Universities charging out-of-province students higher tuition fees. E) A supermarket charging more for strawberries in December than in June. Answer: E Explanation:

98)

A) B) C) D) E)

99) If a monopolist is practicing perfect price discrimination, then the following equation is true: A) MR = P for all units. B) MR = 1/2 P for any unit. C) AR = ATC at the profit-maximizing level of output. D) MC = 1/2 MR at the profit-maximizing level of output. E) P = AVC at the profit-maximizing level of output. Answer: A Explanation:

97)

A) B) C) D) E)

98) Which of the following statements about a monopoly practicing perfect price discrimination is correct? A) The profit-maximizing criterion is MR = P, the same as for perfect competition. B) The demand curve is also the marginal-revenue curve. C) It will charge higher prices in those market segments with more elastic demand. D) The output will always be less than that produced by a single-price monopolist. E) Total costs will be lower than that of a single-price monopolist. Answer: B Explanation:

96)

A) B) C) D) E) 33

99)

100) If a monopolist is practicing perfect price discrimination, then A) the producer surplus is zero. B) consumer surplus is zero. C) costs are lower than for the non-price-discriminating monopolist. D) demand must be inelastic. E) the monopolist is not profit maximizing. Answer: B Explanation:

A) B) C) D) E)

101) Which of the following products would most easily lend itself to successful price discrimination by a monopolist? A) cellular phones B) electricity C) pianos D) restaurant meals E) transport trucks Answer: B Explanation:

102)

A) B) C) D) E)

103) One reason airlines charge a higher price to business travellers is that A) business travellers don't profit maximize. B) government sets the price policies. C) business travellers have a relatively higher demand elasticity than other travellers. D) business travellers have a relatively lower demand elasticity than other travellers. E) they are thereby able to minimize costs. Answer: D Explanation:

101)

A) B) C) D) E)

102) If a monopolist is practising perfect price discrimination, we know that A) the firm is facing a perfectly elastic demand curve. B) the firm is facing a perfectly inelastic demand curve. C) marginal cost is rising as output rises. D) the firm is producing a lower output than it would if it were a single-price monopolist. E) the firm is selling each unit at a different price and capturing all consumer surplus. Answer: E Explanation:

100)

A) B) C) D) E) 34

103)

The diagram below shows a pharmaceutical firm's demand curve and marginal cost and marginal revenue curves for a new heart medication for which the firm holds a 20-year patent on its production.

FIGURE 10-5 104) Refer to Figure 10-5. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output it will produce A) Q0 units and charge the perfectly competitive price. B) Q0 units and charge a price of p0. C) Q1 units and charge a price of p1. D) Q0 units and charge a price of p2. E) Q1 units and charge a price greater than its average total variable cost. Answer: B Explanation:

A) B) C) D) E)

105) Refer to Figure 10-5. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output, consumer surplus is represented by A) areas H+I. B) areas C+D+E+F. C) areas D+E. D) There is no consumer surplus generated. E) It is not possible to determine with the information provided. Answer: C Explanation:

104)

A) B) C) D) E) 35

105)

106) Refer to Figure 10-5. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output, it will generate a total profit represented by A) the sum of areas A through K. B) areas A+B+C+F+G. C) areas B+C+F+G+H+I. D) areas D+E. E) It is not possible to determine with the information provided. Answer: E Explanation:

A) B) C) D) E)

107) Refer to Figure 10-5. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output it will produce A) Q1 units and charge a price of p1 on the last unit sold. B) Q1 units and charge a price of p1 on all units. C) Q0 units and charge a price of p0 on the last unit sold. D) Q0 units and charge a price of p0 on all units. E) It is not possible to determine with the information provided. Answer: A Explanation:

107)

A) B) C) D) E)

108) Refer to Figure 10-5. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output, consumer surplus is represented by A) areas C+D+E+F+H. B) areas D+E. C) areas C+F+H. D) There is no consumer surplus. E) It is not possible to determine with the information provided. Answer: D Explanation:

106)

A) B) C) D) E)

36

108)

109) Refer to Figure 10-5. Assume this pharmaceutical firm charges a single price for its drug. At its profit-maximizing level of output, it will generate a deadweight loss to society represented by A) areas H+I. B) areas H+I+J+K. C) areas I+J+K. D) There is no deadweight loss generated. E) It is not possible to determine with the information provided. Answer: A Explanation:

A) B) C) D) E)

110) Refer to Figure 10-5. Assume this pharmaceutical firm is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output, it will generate a deadweight loss to society represented by A) areas H+I. B) areas H+I+J+K. C) areas I+J+K. D) There is no deadweight loss generated. E) It is not possible to determine with the information provided. Answer: D Explanation:

110)

A) B) C) D) E)

111) Refer to Figure 10-5. Assume this pharmaceutical firm has no fixed costs and is practicing perfect price discrimination among its buyers. At its profit-maximizing level of output, it will generate a total profit represented by A) areas B+C+F+G+H+I. B) areas C+F+H. C) areas G+I. D) the area below the demand curve minus the area below the MC curve, up to Q1 . E) It is not possible to determine with the information provided. Answer: D Explanation:

109)

A) B) C) D) E)

37

111)

112) Refer to Figure 10-5. Suppose this pharmaceutical firm is charging a single price for its drug and is maximizing its profits. If it then begins to perfectly price discriminate among its buyers it will A) cause a loss of economic surplus to society as a whole. B) capture consumer surplus equal to areas D+E+C+F+H. C) no longer be equating MR and MC. D) reduce its producer surplus by areas C+F+H. E) decrease its total output. Answer: B Explanation:

A) B) C) D) E)

113) Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $18 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $25 and marginal revenue in segment B is $15. Is this firm maximizing its profit? A) Yes, because it has set a price such that MC is between the MRs of the two market segments. B) No, because it is only possible to equate MR and MC when there is a single MR curve. C) Yes, because since marginal cost is constant, the firm must set a single price. D) No, this firm can increase its profits by price discriminating across the two market segments. Answer: D Explanation:

113)

A) B) C) D)

114) Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $18 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $25 and marginal revenue in segment B is $15. How can this firm maximize its profit? A) increase the output in segment A and decrease the output in segment B B) increase the output in segments A and B C) decrease the output in segment A and increase the output in segment B D) decrease the output in segments A and B E) maintain the current output and its allocation across segments Answer: A Explanation:

112)

A) B) C) D) E)

38

114)

115) Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $100 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $85 and marginal revenue in segment B is $105. Is this firm maximizing its profit? A) Yes, because it has set a price such that MC is between the MRs of the two market segments. B) No, because it is only possible to equate MR and MC when there is a single MR curve. C) Yes, because since marginal cost is constant, the firm must set a single price. D) No, this firm can increase its profits by price discriminating across the two market segments. Answer: D Explanation:

A) B) C) D)

116) Consider a monopolist that is able to distinguish between two distinct market segments, A and B, for its product. Marginal cost is constant at $100 for each unit produced. The firm is currently selling its output at a single price and allocating its output across segments such that marginal revenue in segment A is $85 and marginal revenue in segment B is $105. How can this firm maximize its profit? A) increase the output in segment A and decrease the output in segment B B) increase the output in segments A and B C) decrease the output in segment A and increase the output in segment B D) decrease the output in segments A and B E) maintain the current output and its allocation across segments Answer: C Explanation:

116)

A) B) C) D) E)

117) With regard to price discrimination, we can generally say that a monopolist practicing perfect price discrimination ________ a single-price monopolist in the same market. A) produces a lower level of output compared to B) generates more consumer surplus than C) generates a more efficient outcome for society as a whole compared to D) produces the same output level and charges the same price as E) has the same effects on consumer welfare as Answer: C Explanation:

115)

A) B) C) D) E)

39

117)

118) Many clothing retailers allow you to go to their website and print a coupon that you then present for a discounted price on your next purchase in the store. In economics we refer to this as A) a created entry barrier, a form of price discrimination. B) hurdle pricing, a form of price discrimination. C) sales maximization, a form of market segmentation. D) a loss-leader, a form of advertising. E) arbitrage, a form of price discrimination. Answer: B Explanation:

A) B) C) D) E)

119) Suppose you go to a retailer's website and print a coupon that gives you a discount on your next purchase at their store. But your friend, who also plans to purchase there, can't be bothered. You are revealing to the store that A) you have a lower income than your friend. B) you understand price discrimination and your friend does not. C) you have a lower elasticity of demand than your friend. D) you have a higher elasticity of demand than your friend. E) elasticity of demand changes according to the size of the discount offered. Answer: D Explanation:

119)

A) B) C) D) E)

120) Consider the following statement: "Price discrimination is harmful to society and should not be tolerated under any circumstance." Why is this statement false? A) Price discrimination always leads to lower prices and higher quantities. B) Price discrimination can allow for some consumers to be made better off because they are able to buy a product or service that was otherwise unaffordable. C) Price discrimination leads to higher prices for all consumers and a reduction in consumer surplus. D) Price discrimination reduces total quantity exchanged and therefore reduces the sum of producer and consumer surplus. E) Price discrimination violates the Canadian Charter of Rights and Freedoms. Answer: B Explanation:

118)

A) B) C) D) E)

40

120)

Answer Key Testname: UNTITLED10

1) B 2) D 3) B 4) E 5) C 6) C 7) A 8) B 9) D 10) C 11) A 12) A 13) A 14) B 15) A 16) C 17) D 18) C 19) E 20) D 21) D 22) D 23) C 24) B 25) E 26) B 27) C 28) C 29) E 30) E 31) A 32) A 33) D 34) C 35) C 36) C 37) C 38) C 39) B 40) D 41) E 42) C 43) B 44) D 45) C 46) B 47) C 48) C 49) B 50) C 41

Answer Key Testname: UNTITLED10

51) B 52) A 53) E 54) C 55) D 56) A 57) B 58) B 59) C 60) A 61) A 62) A 63) B 64) B 65) D 66) B 67) B 68) C 69) A 70) C 71) B 72) A 73) B 74) C 75) D 76) E 77) E 78) E 79) D 80) C 81) B 82) E 83) B 84) A 85) E 86) C 87) C 88) C 89) B 90) E 91) E 92) B 93) C 94) E 95) C 96) B 97) E 98) B 99) A 100) B 42

Answer Key Testname: UNTITLED10

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

B E D B C E A D A D D B D A D C C B D B

43

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) An example of a Canadian industry composed of a few large firms is A) the accounting profession. B) clothing retailing. C) gasoline retailing. D) restaurants. E) hair dressers. Answer: C Explanation:

A) B) C) D) E)

2) A Canadian industry composed of many small firms is A) steel manufacturing. B) automobile production. C) gasoline retailing. D) restaurants. E) natural gas transmission. Answer: D Explanation:

2)

A) B) C) D) E)

3) By calculating a concentration ratio, economists measure the A) degree to which a monopolist's output is lower than in perfect competition. B) control of a monopolist over its input prices. C) fraction of total industry sales accounted for by the largest firms. D) degree to which firms in the industry use similar technologies. E) concentration of firms in one geographic location. Answer: C Explanation:

1)

A) B) C) D) E)

1

3)

4) In Canada, concentration ratios are the highest in A) tobacco products. B) petroleum and coal products. C) mining. D) machinery. E) clothing industries. Answer: B Explanation:

4)

A) B) C) D) E)

The table below shows the market shares for the only firms in a domestic cement market. Market Share 45% 22% 10% 8% 7% 5% 2% 1%

Firm A Firm B Firm C Firm D Firm E Firm F Firm G Firm H TABLE 11-1

5) Refer to Table 11-1. The four-firm concentration ratio in this industry is ________%. A) 100 B) 92 C) 85 D) 67 E) 45 Answer: C Explanation:

A) B) C) D) E)

6) Refer to Table 11-1. The eight-firm concentration ratio in this industry is ________%. A) 100 B) 92 C) 85 D) 67 E) 45 Answer: A Explanation:

5)

A) B) C) D) E)

2

6)

7) Suppose the 2-firm concentration ratio (measuring output) in a Canadian manufacturing industry is over 90%. Why might the market power of these 2 firms be less than the concentration ratio suggests? A) The product is purely domestic and there is no international trade. B) A high concentration ratio usually indicates low degrees of market power. C) The product is traded internationally and the two Canadian firms compete with many global rivals. D) The relevant market is regional and so the concentration ratio is not relevant. E) A 2-firm concentration ratio does not provide enough information. Answer: C Explanation:

A) B) C) D) E)

8) Suppose the market for gasoline retailing (gas stations) in an island economy has 12 firms. The two largest firms each account for 30% of sales, the third accounts for 15%, the fourth for 7%, the fifth for 4% and the remaining firms for 2% each. What is the four-firm concentration ratio? A) 8% B) 60% C) 75% D) 82% E) 100% Answer: D Explanation:

9)

A) B) C) D) E)

10) Which of the following products is best considered a differentiated product? A) wheat B) steel C) soap D) topsoil Answer: C Explanation:

8)

A) B) C) D) E)

9) Suppose the market for gasoline retailing (gas stations) in an island economy has 12 firms. The two largest firms each account for 30% of sales, the third accounts for 15%, the fourth for 7%, the fifth for 4% and the remaining firms for 2% each. Which of the following statements best describes the structure of this local industry? A) This industry is an oligopoly. B) This industry is perfectly competitive. C) This industry is a monopoly. D) This industry is monopolistically competitive. E) Either A or D could be correct. Answer: E Explanation:

7)

A) B) C) D) E)

3

10) E) sugar

11) An imperfectly competitive industry is often allocatively inefficient when compared to the performance of a competitive industry, because imperfect competitors A) maximize profits. B) make profits. C) obtain economies of scale. D) operate in the global economy. E) set price above the marginal cost. Answer: E Explanation:

A) B) C) D) E)

12) A characteristic common to most imperfectly competitive markets is A) inelastic market demand curves. B) a homogeneous product. C) non-price competition among firms. D) unexploited economies of scale. E) common pricing among firms. Answer: C Explanation:

12)

A) B) C) D) E)

13) In an imperfectly competitive market, changes in market conditions are often signalled to the individual firms by a change in the A) firm's sales. B) price of the product. C) government policy. D) cost conditions. E) elasticity of supply. Answer: A Explanation:

11)

A) B) C) D) E)

4

13)

14) With respect to imperfectly competitive markets, an "administered" price is a price determined by A) international competition. B) the government. C) solely by market forces. D) the conscious decision of the firm. E) a regulatory agency. Answer: D Explanation:

A) B) C) D) E)

15) A monopolistically competitive firm and a monopoly are similar because A) both firms will earn zero profits in the long run. B) both firms always operate at their point of minimum average total cost. C) each firm can raise its price without losing all of its sales. D) both firms must behave strategically toward other firms in the industry. E) each firm has a large number of small competitors. Answer: C Explanation:

16)

A) B) C) D) E)

17) In imperfectly competitive markets, "administered" prices usually change ________ than prices in perfectly competitive markets, because ________. A) more often; they are more flexible B) more often; perfectly competitive firms are price takers C) more often; price becomes a strategic choice D) less often; changing prices is costly E) less often; changing prices is costless Answer: D Explanation:

15)

A) B) C) D) E)

16) In which market structure are price fluctuations most common? A) price fluctuations occur with the same frequency in all market structures B) monopoly C) oligopoly D) monopolistic competition E) perfect competition Answer: E Explanation:

14)

A) B) C) D) E) 5

17)

18) One difference between a perfectly competitive market and a monopolistically competitive market is that A) there are no barriers to entry in monopolistic competition. B) there are no barriers to exit in monopolistic competition. C) there is no product differentiation in perfect competition. D) there is no product differentiation in monopolistic competition. E) there is strategic interaction among firms in monopolistic competition. Answer: C Explanation:

A) B) C) D) E)

19) Consider the following characteristics of a particular industry: - each firm faces a demand curve with a price elasticity greater than 10 000 - each firm produces at a minimum efficient scale in long-run equilibrium This industry is likely to be A) an oligopoly. B) highly concentrated. C) monopolistically competitive. D) perfectly competitive. E) a cartel. Answer: D Explanation:

19)

A) B) C) D) E)

20) Consider the following characteristics of a particular industry: - the four-firm concentration ratio is 78% (in the relevant market) - each firm produces output where P > MC - the products are highly differentiated This industry is likely to be A) an oligopoly. B) one where each firm has limited market power. C) monopolistic. D) perfectly competitive. E) a cartel. Answer: A Explanation:

18)

A) B) C) D) E)

6

20)

21) Consider the following characteristics of a particular industry: - there is freedom of entry and exit - in long-run equilibrium, each firm is producing a level of output where there are increasing returns to scale This industry is likely to be A) an oligopoly. B) highly concentrated. C) monopolistically competitive. D) perfectly competitive. E) a cartel. Answer: C Explanation:

A) B) C) D) E)

22) Consider the following characteristics of a particular industry: - the firms in the industry are maximizing their joint profits - entry of new firms is restricted This industry is likely to be A) a monopoly. B) one where each firm has limited market power. C) monopolistically competitive. D) perfectly competitive. E) a cartel. Answer: E Explanation:

22)

A) B) C) D) E)

23) Consider the following characteristics of a particular industry: - there are natural barriers to entry - market price exceeds marginal cost of production - there is no strategic behaviour in the industry This industry is likely to be A) an oligopoly. B) a monopoly. C) monopolistically competitive. D) perfectly competitive. E) one where each firm has limited market power. Answer: B Explanation:

21)

A) B) C) D) E)

7

23)

24) A characteristic of a monopolistically competitive market is that A) each firm's marginal revenue curve lies above its demand curve. B) the firms in the industry engage in strategic, non-price competition. C) entry into the industry is difficult. D) each firm faces a downward-sloping demand curve. E) the firms sell an identical product. Answer: D Explanation:

A) B) C) D) E)

25) Which of the following are characteristic of a monopolistically competitive market? A) Firms engage in strategic behaviour. B) There are many small firms in the industry. C) Economic profits are often positive in the long run. D) Each firm faces a horizontal demand curve. E) All firms are price takers. Answer: B Explanation:

25)

A) B) C) D) E)

26) If there are economic profits in a monopolistically competitive industry, they will generally be competed away through the A) introduction of brand name products by existing firms. B) entry of new firms. C) increasing advertising budgets of existing firms. D) manipulation of the demand curve. E) exit of existing firms. Answer: B Explanation:

24)

A) B) C) D) E)

8

26)

27) Suppose there are many independent dry cleaners in your city, each of which is earning economic profits. According to the theory of monopolistic competition, A) existing dry cleaners will cooperate and maximize their joint profits. B) existing dry cleaners will engage in non-price competition and maintain their profits in the long run. C) existing dry cleaners will expand until they reach the quantity associated with minimum long-run average cost. D) existing dry cleaners will cooperate and restrict entry of new firms. E) new dry cleaners will enter this market until each firm is earning zero profits. Answer: E Explanation:

A) B) C) D) E)

28) Suppose there are many independent dry cleaners in your city, each of which provides essentially the same service. However, one offers local delivery, another offers free coffee in the shop, while another offers one-hour dry cleaning. Which of the following statements explains what is happening in this market? A) These firms are perfectly competitive and are attempting to increase sales and maximize their profits. B) These firms are oligopolistic and are engaging in strategic behaviour. C) These firms are perfectly competitive and are engaging in non-price competition. D) These firms are monopolistically competitive and are attempting to differentiate their product. E) These firms are perfectly competitive and are engaging in strategic behaviour. Answer: D Explanation:

28)

A) B) C) D) E)

29) In a monopolistically competitive industry, the freedom of entry and exit leads to A) a negatively sloped demand curve for the industry. B) strategic behaviour with regard to other firms in the industry. C) brand proliferation. D) zero profits in long-run equilibrium. E) deficient capacity in the industry. Answer: D Explanation:

27)

A) B) C) D) E)

9

29)

30) Monopolistic competition is similar to perfect competition in that A) firms in both types of market structures produce a standardized product. B) strategic behaviour is common to both market structures. C) neither has significant barriers to entry. D) each firm faces a horizontal demand curve. E) firms in both types of market structure engage in non-price competition. Answer: C Explanation:

A) B) C) D) E)

31) If entry into a monopolistically competitive industry occurs because of positive profits earned by the existing firms, the A) industry demand curve will shift to the left. B) industry demand curve will shift to the right. C) demand curve for each existing firm will shift to the left. D) demand curve for each existing firm will shift to the right. E) demand curves for the existing firms will remain unchanged. Answer: C Explanation:

32)

A) B) C) D) E)

33) A monopolistically competitive firm maximizes profits in the short run A) by equating MC with price. B) by equating MC with MR. C) when P = AVC. D) when P = ATC. E) by maximizing total revenue. Answer: B Explanation:

31)

A) B) C) D) E)

32) Compared with perfect competition, monopolistic competition results in A) a wider variety of the good produced, but at higher unit costs. B) the same degree of variety of the good, but higher unit costs. C) fewer varieties of the good produced at lower unit costs. D) fewer varieties of the good produced at higher unit costs. E) a clearly more efficient social outcome. Answer: A Explanation:

30)

A) B) C) D) E) 10

33)

34) Suppose that a monopolistically competitive firm decides to raise its price. The theory of monopolistic competition predicts that A) this firm would lose some, but not all of its customers. B) this firm would increase its profits. C) this firm would lose all of its customers. D) increasing the price has no effect on profits. E) a large loss of customers as the demand facing the firm is quite inelastic. Answer: A Explanation:

A) B) C) D) E)

35) The main difference between perfect competition and monopolistic competition is A) there are more firms in perfect competition. B) perfect competition has freedom of entry and exit. C) monopolistic competition has product differentiation. D) firms earn profits in the long run in monopolistic competition. E) monopolistic competition has lower costs. Answer: C Explanation:

35)

A) B) C) D) E)

36) Of the following, which is the best example of a monopolistically competitive firm? A) Apple B) Air Canada C) Burger King D) a PEI potato farmer E) a local hair salon Answer: E Explanation:

34)

A) B) C) D) E)

11

36)

37) The presence of significant scale economies in an industry implies that A) a large share of the market is required by each firm to achieve the lowest possible cost per unit. B) the minimum efficient scale of operation occurs at fairly low output levels. C) barriers to entry in the industry are non-existent. D) this industry is more efficient than others. E) the firms in the industry will behave as perfect competitors. Answer: A Explanation:

A) B) C) D) E)

38) The demand curve facing a monopolistically competitive firm is quite elastic because A) there are many close substitutes to the good the firm is producing. B) goods that are complements to the good the firm is producing also have elastic demand curves. C) of the possibility of entry of new firms. D) the industry is producing a homogeneous product. E) firms are not behaving strategically. Answer: A Explanation:

38)

A) B) C) D) E)

39) Consider an industry that is monopolistically competitive. In such a market, A) only one firm is present in the industry. B) firms set prices without any threat of competition. C) firms set prices and are constrained by the existence of close substitutes for their product. D) firms do not have any price-setting ability because the product is homogeneous. E) firms can charge slightly different prices even though they produce identical goods. Answer: C Explanation:

37)

A) B) C) D) E)

12

39)

40) A good example of a monopolistically competitive firm is 1) The Gap clothing store. 2) a neighbourhood drycleaner. 3) a Prince Edward Island potato farmer. A) 1 only B) 2 only C) 3 only D) 1 and 2 only E) 1 and 3 only Answer: D Explanation:

A) B) C) D) E)

41) Which of the following are products that differ from each other enough that they can be sold at different prices, but are similar enough that they can be considered the same product? A) complementary products B) standardized products C) necessary products D) differentiated products E) inferior products Answer: D Explanation:

41)

A) B) C) D) E)

42) One prediction about monopolistic competition is that it has higher unit costs than perfect competition. But it is unreasonable to conclude that monopolistic competition is therefore bad for consumers because A) consumers benefit from lower prices. B) consumers benefit from an increased variety of products. C) consumers benefit because of an increase in quantity available. D) consumers benefit from products becoming more homogeneous. E) higher production costs means more employment. Answer: B Explanation:

40)

A) B) C) D) E)

13

42)

43) A monopolistically competitive firm is predicted to earn positive profits A) because there are barriers to entry. B) only in the long run. C) only in the short run. D) only if it advertises its own product. E) only if it maintains excess capacity in the production of it product. Answer: C Explanation:

A) B) C) D) E)

44) A monopolistically competitive firm has some degree of market power because A) it always makes positive profits. B) there are few firms in the industry. C) of natural barriers to entry. D) of legal barriers to entry. E) it sells a differentiated product. Answer: E Explanation:

43)

A) B) C) D) E)

14

44)

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-1 45) Refer to Figure 11-1. What price will this profit-maximizing firm set? A) $5 B) $10 C) $15 D) $20 Answer: D Explanation:

45) E) $25

A) B) C) D) E)

46) Refer to Figure 11-1. What quantity of output will this profit-maximizing firm choose to sell? A) 80 units B) 100 units C) 120 units D) 140 units E) 150 units Answer: B Explanation:

A) B) C) D) E)

47) Refer to Figure 11-1. Assuming that this firm is producing its profit-maximizing level of output, what are the profits or losses being earned by this firm? A) - $500 B) - $1000 C) $2000 D) $1000 E) $500 Answer: E Explanation:

46)

A) B) C) D) E)

15

47)

FIGURE 11-2 48) Refer to Figure 11-2. A perfectly competitive firm with zero economic profits is depicted in diagram A) A. B) B. C) C. D) D. E) B or D Answer: C Explanation:

A) B) C) D) E)

16

48)

49) Refer to Figure 11-2. In diagram B, the firm's short-run supply curve is A) ATC above AVC. B) MC above AVC. C) MC above ATC. D) AR. E) MC. Answer: B Explanation:

A) B) C) D) E)

50) Refer to Figure 11-2. In diagram A, the profit-maximizing output for a competitive firm is one where A) ATC is at the minimum. B) P > MC. C) P < MC. D) AR = ATC. E) P = AR = MC. Answer: E Explanation:

51)

A) B) C) D) E)

52) Refer to Figure 11-2. In diagram B, at the short-run profit-maximizing position, the firm A) is making profits. B) should be shut down. C) is losing money. D) should raise its price. E) should increase output. Answer: C Explanation:

50)

A) B) C) D) E)

51) Refer to Figure 11-2. In diagram D, the profit-maximizing output for a single-price monopolist occurs where A) P = MR. B) P > AR. C) P > MC. D) P = MC. E) P < MC. Answer: C Explanation:

49)

A) B) C) D) E)

17

52)

53) Refer to Figure 11-2. Diagram C depicts a typical firm in long-run equilibrium in A) a perfectly competitive industry. B) monopolistic industry. C) monopolistically competitive industry. D) oligopolistic industry. E) an imperfectly competitive industry Answer: A Explanation:

A) B) C) D) E)

54) Refer to Figure 11-2. Diagram D depicts the only possible long-run equilibrium for a typical firm in A) a perfectly competitive industry. B) a monopolistic industry. C) a monopolistically competitive industry. D) an oligopolistic industry. E) None of the above - it is not a long-run equilibrium. Answer: C Explanation:

55)

A) B) C) D)

56) In long-run equilibrium, a monopolistically competitive industry is characterized by A) positive profits for all firms in the industry. B) a perfectly elastic demand curve facing each firm in the industry. C) zero profits for all firms in the industry. D) positive profits as a result of barriers to entry. E) all firms operating at the minimum point of their long-run average cost curves. Answer: C Explanation:

54)

A) B) C) D) E)

55) Refer to Figure 11-2. The position of a typical firm when the industry is in long-run equilibrium with free entry and exit and product differentiation is exhibited in diagram A) A. B) B. C) C. D) D. Answer: D Explanation:

53)

A) B) C) D) E)

18

56)

57) When a monopolistically competitive industry is in long-run equilibrium, each firm will be operating where price is A) greater than average total cost but equal to marginal cost. B) greater than average total cost and greater than marginal cost. C) equal to average total cost and to marginal cost. D) greater than marginal cost but equal to average total cost. E) less than marginal cost and equal to average total cost. Answer: D Explanation:

A) B) C) D) E)

58) When a monopolistically competitive industry is in long-run equilibrium, the excess capacity in an individual firm is indicated by the difference between A) price and marginal cost. B) the output at which ATC is at a minimum and the output at which price equals marginal cost. C) zero and the output at which the demand curve is tangent to the ATC curve. D) price and average cost. E) the output at which ATC is at a minimum and the output at which marginal revenue is equal to marginal cost. Answer: E Explanation:

58)

A) B) C) D) E)

59) In the long run, a monopolistically competitive firm will A) lose money. B) operate where price = marginal cost. C) earn positive economic profits. D) produce where price exceeds the minimum of average costs. E) produce the output where average costs are minimized. Answer: D Explanation:

57)

A) B) C) D) E)

19

59)

The diagram below shows demand and cost curves for a monopolistically competitive firm.

FIGURE 11-3 60) Refer to Figure 11-3. In the long run, a monopolistically competitive firm will A) produce Q2 at Price P1 .

60)

B) produce Q1 at Price P2 . C) produce Q1 at Price P1 . D) produce Q2 at Price P2 . E) produce the output where AC is at its minimum. Answer: C Explanation:

A) B) C) D) E)

61) Refer to Figure 11-3. In the long run, a monopolistically competitive firm will A) make profit by producing at Q2 and charging price P1 . B) lose money by producing at Q1 and charging price P2 . C) maximize profit and make positive profit by producing at Q1 and charging price P1 . D) maximize profit but only break even by producing at Q1 and charging price P1. E) maximize profit by producing output level Q2, the minimum point of its LRAC curve Answer: D Explanation:

A) B) C) D) E)

20

61)

62) Refer to Figure 11-3. A monopolistically competitive firm is allocatively inefficient because in the long-run equilibrium A) LRAC is not at its minimum. B) MC is greater than price. C) price is greater than MC at Q1 .

62)

D) price is greater than LRAC at Q1 . E) None of the above - the long-run equilibrium is allocatively efficient. Answer: C Explanation:

A) B) C) D) E)

63) Refer to Figure 11-3. A monopolistically competitive firm is said to be inefficient because in the long-run equilibrium A) MC is greater than LRAC. B) MC is greater than price. C) price is greater than MC at Q1 .

63)

D) price is greater than LRAC at Q1 . E) LRAC at Q1 is not at its minimum. Answer: E Explanation:

A) B) C) D) E)

64) Refer to Figure 11-3. Which of the following is a demonstration of the excess-capacity theorem? A) P1 = MC with zero profits B) P1 = LRAC with zero profits C) Q1 is less than Q2 D) LRAC at Q1 is not at its minimum. E) Both C and D demonstrate the excess-capacity theorem. Answer: E Explanation:

A) B) C) D) E)

21

64)

65) Refer to Figure 11-3. If an increase in industry demand led to an outward shift in each firm's demand curve, and no change to the firm's costs, the typical firm would A) be making profits and new firms would enter the industry in the long run. B) be making losses and some firms would exit the industry in the long run. C) would expand its output in the long run. D) increase costs in order to break even at P1 and Q1 in the long run.

65)

E) decrease costs in order to break even at P1 and Q1 in the long run. Answer: A Explanation:

A) B) C) D) E)

66) Refer to Figure 11-3. If a decrease in industry demand led to an inward shift of each firm's demand curve, a typical firm would A) be making profits and new firms would enter the industry in the long run. B) be making losses and some firms would exit the industry in the long run. C) exit the industry and the industry would shut down. D) increase costs in order to break even at PL and QL in the long run. E) decrease costs in order to break even at PL and QL in the long run. Answer: B Explanation:

A) B) C) D) E)

22

66)

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.

FIGURE 11-1 67) Refer to Figure 11-1. If this firm is maximizing its profits, does the diagram depict a long-run equilibrium situation? A) Yes, because this firm is producing where MC = MR and is earning zero profits. B) Yes, because this firm is producing where MC = MR and is earning economic profits. C) No, because this firm is earning profits which will attract new firms to this market. D) No, because this firm is suffering losses and firms will exit this market. E) No, because this firm is a natural monopoly. Answer: C Explanation:

A) B) C) D) E)

23

67)

68) With regard to the long-run equilibrium in the two market structures, the higher unit costs in monopolistic competition relative to perfect competition implies that A) society would be better off if there were fewer, and more homogeneous, goods produced at the scale at which average costs are minimized. B) resources are being used inefficiently in perfect competition. C) there is a tradeoff between product variety and the ability to minimize cost per unit. D) firms are restricting output to extract positive economic profits. E) the government should force monopolistically competitive firms to behave like perfectly competitive firms. Answer: C Explanation:

A) B) C) D) E)

69) In long-run equilibrium, a monopolistically competitive industry operates where A) P > LRAC. B) MR > MC. C) LRAC is increasing. D) LRAC > minimum average cost. E) LRAC = MC. Answer: D Explanation:

69)

A) B) C) D) E)

70) If a monopolistically competitive industry is in long-run equilibrium, then for each firm A) the demand curve is tangent to its LRAC curve. B) the MC curve intersects MR at the minimum level of its LRAC curve. C) price equals MC at the minimum level of the firm's LRAC curve. D) the demand curve cuts the MC curve at the minimum level of the LRAC curve. E) positive profits are being earned. Answer: A Explanation:

68)

A) B) C) D) E)

24

70)

71) The excess-capacity theorem predicts that A) when price-taking firms maximize their profits by setting price equal to marginal cost, each firm operates with some excess capacity. B) long-run equilibrium in a monopolistically competitive industry occurs with all firms producing at a lower output level than that which minimizes average total costs. C) profit-maximizing firms will always choose to operate with some degree of excess capacity, in order to be flexible in the face of shifts in demand. D) monopolistic firms will achieve positive economic profits by restricting output below the economically efficient level at which average total costs are minimized. E) all firms in a perfectly competitive industry will produce at a lower output level than that which minimizes average total costs. Answer: B Explanation:

A) B) C) D) E)

72) If firms are able to freely enter and exit a monopolistically competitive industry, then we can predict A) a negatively sloped demand curve for the industry. B) strategic behaviour with regard to other firms in the industry. C) brand proliferation. D) zero profits in long-run equilibrium. E) that exit will occur until no firm has excess capacity. Answer: D Explanation:

71)

A) B) C) D) E)

25

72)

73) Consider the following statement: "A monopolistically competitive market in which there are no entry barriers will have the identical long-run equilibrium as if the market were perfectly competitive." Is this statement correct? A) No, because firms in the monopolistically competitive market will not reach their minimum efficient scale as they would in perfect competition - the result is higher prices and lower output. B) No, because firms in the monopolistically competitive market do not produce at an output level where MC = MR, as in perfect competition, which leads to a different price and output in long-run equilibrium. C) No, firms in the monopolistically competitive market earn economic profits in the long run because they are facing a downward-sloping demand curve, whereas in perfect competition they earn zero profits. D) Yes, in the absence of entry barriers, new firms enter the industry until industry price and output are identical to perfect competition. E) Yes, in the absence of entry barriers, firms in the monopolistically competitive market will expand until they are producing at the minimum of their LRAC curves, just as in perfect competition. Answer: A Explanation:

A) B) C) D) E)

74) One characteristic of oligopolistic markets is A) ease of entry and exit. B) zero profits in the long run. C) mutual interdependence between firms. D) a horizontal demand curve facing each individual firm. E) a large number of firms in the industry. Answer: C Explanation:

74)

A) B) C) D) E)

75) Oligopolists make decisions after taking into account the expected reaction of their competitors. In doing this, oligopolists are exhibiting A) non-strategic behaviour. B) collusive behaviour. C) cooperative behaviour. D) non-cooperative behaviour. E) strategic behaviour. Answer: E Explanation:

73)

A) B) C) D) E)

26

75)

76) Unlike perfectly competitive and monopolistically competitive firms, oligopolists A) operate where MR = MC. B) take account of the likely reactions of their competitors to their actions. C) always make positive profits. D) always have differentiated products. E) earn zero profits in the long run. Answer: B Explanation:

A) B) C) D) E)

77) A duopoly is A) an oligopoly with only two products. B) an oligopoly with only two sellers. C) an oligopoly with only two buyers. D) a monopoly firm that has only two suppliers. E) a monopolist that has two related products. Answer: B Explanation:

77)

A) B) C) D) E)

78) When the firms in an oligopoly are in a cooperative equilibrium and are maximizing their joint profits, which of the following statements is true? A) An individual firm could increase profits by cheating. B) P > MC for each individual firm. C) MR > MC for each individual firm. D) The firms in the industry will jointly be earning monopoly profits. E) All of the above statements are true. Answer: E Explanation:

78)

A) B) C) D) E)

79) For firms in an oligopoly, the main advantage of explicit collusion is that it A) removes much of the uncertainty about rivals' reactions. B) makes all firms more productively efficient. C) leads to greater product differentiation. D) reduces the cost per unit of advertising. E) eliminates the gains from cheating. Answer: A Explanation:

76)

A) B) C) D) E) 27

79)

80) Which of the following is a characteristic of oligopoly? A) Firms compete solely on the basis of price. B) The pricing policies of one firm have no impact on pricing policies of other firms. C) There are large numbers of significantly sized sellers. D) The industry usually has a low concentration ratio. E) Prices are usually above marginal costs. Answer: E Explanation:

A) B) C) D) E)

81) Tacit collusion in an oligopolistic industry A) occurs when firms make an explicit agreement to cooperate. B) results in a non-cooperative equilibrium. C) occurs when firms achieve the cooperative outcome without an explicit agreement. D) results in competitive behaviour. E) is a form of predatory pricing. Answer: C Explanation:

82)

A) B) C) D) E)

83) Suppose Proctor and Gamble introduces a new brand of laundry detergent. Brand proliferation is an example of A) explicit collusion. B) tacit collusion. C) a Nash equilibrium. D) a firm-created barrier to entry. E) a cooperative outcome. Answer: D Explanation:

81)

A) B) C) D) E)

82) Explicit collusion in an oligopolistic industry A) occurs when firms make an explicit agreement to cooperate. B) results in a non-cooperative equilibrium. C) occurs when firms achieve the cooperative outcome without an explicit agreement. D) results in competitive behaviour. E) is a form of predatory pricing. Answer: A Explanation:

80)

A) B) C) D) E) 28

83)

84) If joint profits are to be maximized in an oligopolistic industry with a homogeneous product, the firms A) can produce whatever output they want at the agreed-upon price. B) need to determine the share of output each firm will produce. C) must form a cartel in order to be legal. D) have no individual incentive to cheat on the agreement. E) None of the above — differentiated products are required for joint-profit maximization in oligopoly. Answer: B Explanation:

A) B) C) D) E)

85) An ineffective means of discouraging the entry of new firms by existing firms in an oligopolistic industry is A) producing a wide range of brands of their products. B) carrying out industrial sabotage. C) spending heavily on advertising. D) raising their prices. E) seeking greater patent protection. Answer: D Explanation:

85)

A) B) C) D) E)

86) "Brand proliferation" in an oligopolistic industry A) allows easier entry to a new entrant with small sales. B) can shift the average total cost curve down and raise the overall minimum scale of operation. C) allows new entrants to the industry to gain significant market share. D) will generally reduce the expected market share of new entrants to the industry. E) allows firms to cooperate to maximize their joint profits. Answer: D Explanation:

84)

A) B) C) D) E)

29

86)

87) "Brand proliferation" is an example of A) an economy of scale. B) a firm-created barrier to entry. C) an absolute cost advantage. D) collusive behaviour. E) predatory pricing. Answer: B Explanation:

87)

A) B) C) D) E)

88) Advertising by existing firms in an oligopolistic industry A) will increase the expected market share of new entrants to the industry. B) can be an effective entry barrier to potential entrants to the industry. C) only exists where natural entry barriers are weak. D) allows easy entry to a new entrant with small sales. E) maximizes joint profits for firms in the industry. Answer: B Explanation:

A) B) C) D) E)

89) An oligopolistic firm often detects a change in the demand for its product by first observing a change in A) average cost. B) market price. C) marginal revenue. D) marginal cost. E) sales. Answer: E Explanation:

88)

A) B) C) D) E)

30

89)

90) Which of the following industries in Canada can best be thought of as oligopolies? 1) breweries 2) women's clothing retailers 3) automobile manufacturers A) 1 only B) 2 only C) 3 only D) 1 and 3 only E) 1, 2, and 3 Answer: D Explanation:

A) B) C) D) E)

91) The process of "creative destruction" in an oligopolistic industry suggests that A) profits are driven to zero by the entry of new firms. B) no firm can survive in the long run. C) firms can enter and leave without incurring any sunk costs of entry. D) there are no costs of exit in oligopoly. E) the prospect of keeping the resulting profits provides an incentive for firms to innovate. Answer: E Explanation:

91)

A) B) C) D) E)

92) The theory of oligopoly suggests that A) entry into the industry is an important force preventing the exploitation of market power by existing firms. B) oligopoly may be the best of the feasible alternative market structures when major scale economies exist. C) the tendency toward joint maximization of profits is greater for a large number of sellers than for a small number of sellers. D) game theory is interesting theory but not useful for real corporate managers. E) innovation is weak when there is no price competition. Answer: B Explanation:

90)

A) B) C) D) E)

31

92)

93) Both empirical evidence and everyday observation suggest that oligopolies contribute to economic growth in the very-long-run by A) achieving allocative efficiency. B) consistently producing at full-capacity output. C) achieving technological improvements and innovations through research and development. D) decreasing minimum efficient scale. E) rarely laying off workers. Answer: C Explanation:

A) B) C) D) E)

94) The following statements describe a cooperative equilibrium in an oligopoly where the firms are jointly maximizing profits by restricting output. Which statement is false? A) An individual firm could increase profits by cheating. B) P > MC for each individual firm. C) MR > MC for each individual firm. D) The firms in the industry will jointly be earning monopoly profits. E) No individual firm will have an incentive to change output. Answer: E Explanation:

94)

A) B) C) D) E)

95) In an oligopolistic industry, which of the following is an example of a firm-created entry barrier? A) LRAC curve negatively sloped over a large range of output B) large set-up costs C) brand proliferation D) decreasing demand for the product E) price competition Answer: C Explanation:

93)

A) B) C) D) E)

32

95)

96) In a typical oligopolistic market, there are A) no barriers to entry, but firms sell differentiated products. B) substantial barriers to entry and firms interact strategically with each other. C) no barriers to entry and firms sell homogeneous products. D) substantial entry barriers, and firms are too large to strategically interact with each other. E) no barriers to entry and firms interact strategically with each other. Answer: B Explanation:

A) B) C) D) E)

97) An oligopolistic firm can earn positive profits A) because there are barriers to entry. B) only in the long run. C) only in the short run. D) only if it advertises its own product. E) only if it maintains excess capacity in the production of it product. Answer: A Explanation:

98)

A) B) C) D) E)

99) A special kind of imperfectly competitive market that has only two firms is called A) an incidental monopoly. B) a two-tier competitive structure. C) a duopoly. D) a dublet. E) a natural monopoly. Answer: C Explanation:

97)

A) B) C) D) E)

98) One reason an oligopolistic firm may have market power is that A) it always makes positive profits. B) it produces a significant fraction of total industry output. C) the market may be "contestable." D) it has dis-economies of scale. E) there are many similar producers. Answer: B Explanation:

96)

A) B) C) D) E)

33

99)

100) Consider the three largest cell-phone service providers in Canada - Bell, Telus, and Rogers. If we observe that all three companies increase their monthly service fees simultaneously, we might conclude that A) there is tacit collusion among these firms. B) these firms have monopolized the industry. C) they are perfect competitors and they are unable to set the price. D) they are engaged in predatory pricing. E) they are creating entry barriers to prevent entry by new firms. Answer: A Explanation:

A) B) C) D) E)

101) Assume that the world's largest smart-phone producers (Apple, Nokia, Samsung, etc.) operate in an oligopolistic industry. In the long run, which of the following is the most important form of competition between these firms? A) predatory pricing B) tacit collusion C) product innovation D) brand proliferation E) advertising Answer: C Explanation:

101)

A) B) C) D) E)

102) Suppose there are only five construction companies in a particular region that are each large enough to take on large public infrastructure projects (roads, bridges, sewers, etc.). Representatives of these companies meet regularly for coffee or on the golf course and agree on which company will submit the lowest bid for a particular project. This type of firm behaviour is an example of A) cooperative behaviour that results in higher output and lower prices. B) cooperative behaviour that results in increased consumer welfare. C) tacit collusion, and is legal as long as output is not restricted. D) predatory pricing, and is meant to prevent new entrance to the industry. E) explicit collusion and is illegal. Answer: E Explanation:

100)

A) B) C) D) E)

34

102)

103) The sugar industry in Canada is effectively a duopoly with two large firms competing with each other for market share. Suppose the two firms collude and successfully restrict joint output to that of a profit-maximizing monopolist. As a result, they each realize an increase in their profits. Why would this collusive agreement be difficult to sustain? A) Because each firm has an incentive to break the agreement by further restricting output in order to increase the price, thereby increasing their own profits. B) Because each firm has an incentive to break the agreement by increasing output in order to increase their own profits. C) Because the firm with the lower long-run average costs will be able to capture all sales, driving the second firm out of the market. D) Because a non-cooperative outcome is inevitable in which output is further restricted and each firm's profit is reduced. Answer: B Explanation:

A) B) C) D)

104) In what way can an oligopolistic market structure be beneficial to society? A) Oligopolistic firms compete through advertising, which increases economic efficiency. B) Oligopolistic firms are able to exploit all existing economies of scale and operate at the minimum of long-run average costs, and thereby reduce the use of society's resources. C) An oligopolistic market structure is most conducive to non-competitive behaviour which leads to lower prices for consumers in the long run. D) An oligopolistic market structure is most adaptive to today's rapid rate of technological change. E) Oligopolistic firms compete through innovation, which is a driving force of economic growth and increasing living standards. Answer: E Explanation:

104)

A) B) C) D) E)

105) Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The non-cooperative outcome in this situation is A) both firms bid $100. B) both firms bid $180. C) one firm bids $100, the other firm bids $180. D) both firms bid $50. E) both firms bid $90. Answer: A Explanation:

103)

A) B) C) D) E)

35

105)

106) Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The cooperative outcome in this situation is A) both firms bid $100. B) both firms bid $180. C) one firm bids $100, the other firm bids $180. D) both firms bid $50. E) both firms bid $90. Answer: B Explanation:

A) B) C) D) E)

107) Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a highway-construction contract and each firm is allowed to bid either $100 million or $120 million. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The non-cooperative outcome in this situation is A) both firms bid $50 million. B) both firms bid $60 million. C) one firm bids $100 million, the other firm bids $120 million. D) both firms bid $100 million. E) both firms bid $120 million. Answer: D Explanation:

107)

A) B) C) D) E)

108) Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a highway-construction contract and each firm is allowed to bid either $100 million or $120 million. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The cooperative outcome in this situation is A) both firms bid $50 million. B) both firms bid $60 million. C) one firm bids $100 million, the other firm bids $120 million. D) both firms bid $100 million. E) both firms bid $120 million. Answer: E Explanation:

106)

A) B) C) D) E)

36

108)

109) What is a Nash equilibrium? A) an example of a cooperative equilibrium B) a situation where all players are maximizing their payoffs given the current behaviour of the other players C) a situation where all players are better off than they would be with any other combination of strategies D) is an unstable equilibrium E) will in general produce the greatest payoff for the players Answer: B Explanation:

A) B) C) D) E)

110) Which of the following is an incorrect statement about a Nash equilibrium? A) A Nash equilibrium is an example of a non-cooperative equilibrium. B) In a Nash equilibrium, all players are maximizing their payoffs given the current behaviour of the other players. C) In a Nash equilibrium, all players are better off than they would be with any other combination of strategies. D) A Nash equilibrium is a self-policing equilibrium. E) Once a Nash equilibrium is established, no individual firm has an incentive to depart from it. Answer: C Explanation:

110)

A) B) C) D) E)

111) Which of the following statements is the best description of a Nash equilibrium? A) An equilibrium outcome achieved by cooperation between players in the game. B) An outcome where each player's best strategy is to maintain its present behaviour given the present behaviour of the other players. C) An outcome that is achieved when players in the game have jointly maximized profits and divided those profits according to market share of each player. D) An outcome where each player's strategy depends on the behaviour of its opponents. E) An equilibrium outcome that is achieved by collusion, and no party has an incentive to change their behaviour. Answer: B Explanation:

109)

A) B) C) D) E)

37

111)

Suppose two firms, Allstom from France, and Bombardier from Canada, are bidding on a contract to replace train cars for the subway system in Mexico City. If they bid the same amount, they share the contractotherwise, the low bid wins. The figure below shows the payoff matrix for this contest.

FIGURE 11-4 112) Refer to Figure 11-4. If Allstom and Bombardier co-operated with each other when bidding on the contract, then the likely outcome is that A) each firm bids $35 million, and earns profit of $2.5 million. B) each firm bids $50 million, and earns profit of $10 million. C) Bombardier bids $50 million, and earns profit of $0, while Allstom bids $35 million and earns profit of $5 million. D) Bombardier bids $35 million, and earns profit of $5 million, while Allstom bids $50 million and earns profit of $0. Answer: B Explanation:

A) B) C) D)

113) Refer to Figure 11-4. What is the Nash equilibrium in this bidding contest between Allstom and Bombardier? A) The two firms will co-operate and maximize their joint profits at $10 million each. B) Each firm will bid the high price, expecting a larger total profit. C) Each firm will bid the low price, and each will earn a profit of $2.5 million. D) There is no Nash equilibrium in this bidding contest, because each firm can expect to earn at least $5 million. E) both A and C are Nash equilibrium. Answer: E Explanation:

112)

A) B) C) D) E)

38

113)

114) Refer to Figure 11-4. Given the information provided in the figure, what is the cost to either firm of completing this project on its own? A) $2.5 million B) $5 million C) $10 million D) $20 million E) $30 million Answer: E Explanation:

114)

A) B) C) D) E)

The payoff matrix below shows the payoffs for Firm A and Firm B, each of whom can either "cooperate" or "cheat." The numbers in parentheses are (payoff for A, payoff for B). Firm B Cooperate Cheat Cooperate (30, 30) (10, x) Cheat (x, 10) (20, 20)

Firm A

TABLE 11-2 115) Refer to Table 11-2. Of the choices provided below, what is the minimum value for x in order for both firms' cheating to be a Nash equilibrium? A) 25 B) 40 C) 60 D) 70 E) 80 Answer: B Explanation:

A) B) C) D) E)

116) Refer to Table 11-2. If Firm A is indifferent between cheating or cooperating when Firm B chooses to cooperate, x must be equal to A) 0. B) 10. C) 20. D) 30. E) 40. Answer: D Explanation:

115)

A) B) C) D) E)

39

116)

117) Refer to Table 11-2. If x = 40, what is the Nash equilibrium in this game? A) (Firm A: cooperate, Firm B: cooperate) B) (Firm A: cooperate, Firm B: cheat) C) (Firm A: cheat, Firm B: cooperate) D) (Firm A: cheat, Firm B: cheat) E) there is no Nash equilibrium for this value of x Answer: D Explanation:

117)

A) B) C) D) E)

The payoff matrix below shows the payoffs to Firms A and B from producing different levels of output. The numbers in parentheses are (payoff to A, payoff to B).

TABLE 11-3 118) Refer to Table 11-3. From the payoff matrix we can infer that A) it is optimal for Firm A to produce 1000 units of output regardless of what Firm B is doing. B) both firms are indifferent between an equilibrium (Produce 1000 units, Produce 1000 units) and (Produce 2000 units, Produce 2000 units). C) it is optimal for Firm A to produce 2000 units of output regardless of what Firm B is doing. D) it is optimal for Firm B to produce 1000 units of output regardless of what Firm A is doing. E) there is no Nash equilibrium in the game. Answer: C Explanation:

A) B) C) D) E)

40

118)

119) Refer to Table 11-3. The Nash equilibrium in this game is A) (Firm A: produce 1000 units, Firm B: produce 1000 units). B) (Firm A: produce 2000 units, Firm B: produce 1000 units). C) (Firm A: produce 2000 units, Firm B: produce 2000 units). D) (Firm A: produce 1000 units, Firm B: produce 2000 units). E) non-existent. Answer: C Explanation:

A) B) C) D) E)

120) Suppose there are only two firms in an industry. If they each set a high price, they each earn $5000. If they each set a low price, they each earn $2500. If one firm sets a low price while the other sets a high price, the low-price firm earns $7000 while the high-price firm earns $1000. Does a prisoners' dilemma exist? A) yes, because there is always a prisoner's dilemma in game theory B) it cannot be determined from the information provided C) yes, the Nash equilibrium does not maximize the joint payoff D) no, the Nash equilibrium does not maximize the joint payoff E) no, the Nash equilibrium does not maximize the individual payoff Answer: C Explanation:

119)

A) B) C) D) E)

41

120)

Answer Key Testname: UNTITLED11

1) C 2) D 3) C 4) B 5) C 6) A 7) C 8) D 9) E 10) C 11) E 12) C 13) A 14) D 15) C 16) E 17) D 18) C 19) D 20) A 21) C 22) E 23) B 24) D 25) B 26) B 27) E 28) D 29) D 30) C 31) C 32) A 33) B 34) A 35) C 36) E 37) A 38) A 39) C 40) D 41) D 42) B 43) C 44) E 45) D 46) B 47) E 48) C 49) B 50) E 42

Answer Key Testname: UNTITLED11

51) C 52) C 53) A 54) C 55) D 56) C 57) D 58) E 59) D 60) C 61) D 62) C 63) E 64) E 65) A 66) B 67) C 68) C 69) D 70) A 71) B 72) D 73) A 74) C 75) E 76) B 77) B 78) E 79) A 80) E 81) C 82) A 83) D 84) B 85) D 86) D 87) B 88) B 89) E 90) D 91) E 92) B 93) C 94) E 95) C 96) B 97) A 98) B 99) C 100) A 43

Answer Key Testname: UNTITLED11

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

C E B E A B D E B C B B E E B D D C C C

44

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Productive efficiency for an individual firm requires that A) all resources be fully used. B) MC = P for all goods. C) the firm be on its LRAC curve. D) the firm be allocatively efficient. E) P = ATC for all goods. Answer: C Explanation:

A) B) C) D) E)

2) For an entire economy, allocative efficiency requires that A) goods are allocated equitably across markets. B) marginal cost equals price for all goods. C) MRP is equated for all factors of production. D) price equals average cost for all goods. E) price is greater than marginal cost for all goods. Answer: B Explanation:

2)

A) B) C) D) E)

3) Consider two firms, A and B, that are producing the same product but with different marginal costs. In this case, A) a reallocation of output between the firms can lower the industry's total cost. B) neither firm is producing its output at the lowest attainable cost. C) some resources must be unemployed. D) each firm is being wasteful. E) one firm is not maximizing profits. Answer: A Explanation:

1)

A) B) C) D) E)

1

3)

4) If the total output of some industry is allocated among its individual firms in such a way that the total cost of producing the industry's output is minimized, the industry will achieve 1) full employment of resources; 2) productive efficiency; 3) allocative efficiency. A) 1 only B) 2 only C) 3 only D) both 1 and 3 E) both 2 and 3 Answer: B Explanation:

A) B) C) D) E)

5) All points on a country's production possibilities boundary are A) allocatively efficient. B) points at which P = MC for all goods. C) productively efficient. D) Pareto optimal. E) not productively efficient. Answer: C Explanation:

5)

A) B) C) D) E)

6) Consider two firms, A and B, that are producing the same product but with different average costs. Economists say this situation reflects a problem of A) unemployed resources. B) economic inefficiency. C) productive inefficiency. D) allocative inefficiency. E) Not necessarily any of the above. Answer: E Explanation:

4)

A) B) C) D) E)

2

6)

7) If an economy is productively inefficient, it could improve its situation by A) moving along its production possibilities boundary. B) moving beyond its production possibilities boundary. C) moving onto its production possibilities boundary. D) acquiring more resources. E) trading some of its resources. Answer: C Explanation:

A) B) C) D) E)

8) An economy will be allocatively efficient if A) the economy's resources are fully employed. B) all firms are breaking even. C) the average cost of production is the lowest possible for all goods produced. D) price equals marginal cost for all products. E) the price equals average cost for all goods. Answer: D Explanation:

9)

A) B) C) D) E)

10) If all firms are profit maximizers, then the following is assured: A) allocative efficiency. B) each firm is productively efficient. C) allocative and productive efficiency. D) that the economy reaches the production possibilities boundary. E) that firms attain the lowest possible average costs. Answer: B Explanation:

8)

A) B) C) D) E)

9) An economy will be allocatively efficient if A) least-cost production techniques are employed by all firms. B) the marginal costs of all firms in an industry are equal. C) marginal cost equals price for all goods. D) the economy's resources are fully employed. E) imperfectly competitive markets are regulated. Answer: C Explanation:

7)

A) B) C) D) E)

3

10)

11) Allocative efficiency is actively sought A) by profit-maximizing firms in all market structures. B) only by perfectly-competitive firms. C) only by profit-maximizing imperfectly-competitive firms. D) by none of the firms in any market. E) by all firms in all markets. Answer: D Explanation:

A) B) C) D) E)

12) Productive efficiency (at the level of the firm) is a goal that is sought A) by profit-maximizing firms in all market structures. B) only by perfectly competitive firms. C) only by profit-maximizing imperfectly competitive firms. D) by no firms in any market. E) only by profit-maximizing firms in an oligopolistic market structure. Answer: A Explanation:

13)

A) B) C) D) E)

14) Allocative efficiency concerns A) producing outputs at lowest possible cost. B) the allocation of resources such that total economic surplus is maximized. C) encouraging monopoly if it generates innovation. D) discouraging all monopoly firms. E) the equitable distribution of resources. Answer: B Explanation:

12)

A) B) C) D) E)

13) Allocative efficiency is a property of the behaviour of A) individual firms. B) all firms in an industry. C) perfectly-competitive firms. D) monopolies. E) the overall economy. Answer: E Explanation:

11)

A) B) C) D) E)

4

14)

15) At the level of the industry, the condition for productive efficiency is that A) goods are allocated equitably. B) there are no idle resources in the industry. C) MC = P for all goods. D) MRP = P for all inputs. E) MC is equal for all firms in the industry. Answer: E Explanation:

A) B) C) D) E)

16) We can safely say that each point on a country's production possibilities boundary (PPB) is A) allocatively efficient. B) one at which P = MC for all goods. C) productively efficient. D) Pareto optimal. E) not productively efficient. Answer: C Explanation:

16)

A) B) C) D) E)

17) An economy in which there are no market failures and all industries are in a competitive long-run equilibrium is one where 1. allocative efficiency is achieved; 2. the economy is on the production possibilities boundary; 3. there is no incentive for firms to enter or leave industries. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1, 2, and 3 E) 2 only Answer: D Explanation:

15)

A) B) C) D) E)

5

17)

18) Consider a monopolistically competitive industry in long-run equilibrium. Will this industry be productively efficient? A) Yes. Since the firms are in long-run equilibrium, they will all be producing at the minimum of their LRAC curves. B) Yes. Since the firms are in long-run equilibrium, they will all be operating on their LRAC curves. C) Yes. In long-run equilibrium, each firm is producing at an output level where price is equal to marginal cost. D) No. Firms are selling their output at a level where price exceeds marginal cost and thus, by definition, cannot be productively efficient. E) No. Since firms are selling differentiated products and there is no industry-wide price, we cannot conclude that marginal cost will be equated across all firms. Answer: E Explanation:

A) B) C) D) E)

19) Consider an industry with three profit-maximizing firms producing identical soccer jerseys. At their current levels of output, Firm A has a MC of $22, Firm B has a MC of $26, and Firm C has a MC of $27. Each firm is equating price and marginal cost and is operating on their LRAC curve. Which of the following statements is definitely true? A) Each firm and the industry are productively efficient. B) Each firm is productively efficient but the industry is not. C) The industry is productively efficient but each firm is not. D) Each firm is allocatively efficient but the industry is not. E) Each firm and the industry are allocatively efficient. Answer: B Explanation:

18)

A) B) C) D) E)

6

19)

Consider three firms, A, B and C, all producing kilos of potatoes (per year) in a perfectly competitive market. The diagrams below show marginal cost curves for each of the three firms.

FIGURE 12-1 20) Refer to Figure 12-1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Is this industry productively efficient? A) No, because the marginal cost curve for each firm has a different slope. B) Yes, because output is equated for all firms. C) No, because each firm could easily produce more than 500 kilos. D) No, because marginal costs are not equated for all firms. E) It is not possible to say whether this industry is productively efficient because we do not know the market price of the product. Answer: D Explanation:

A) B) C) D) E)

21) Refer to Figure 12-1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Which of the following statements correctly describes the productive efficiency of this industry? A) Productive efficiency would be achieved if Firm B produced all the output, since it has the lowest MC for the production of 500 kilos. B) It is possible to reduce the total cost of the given output by reallocating production among the three firms. C) The total output of 1500 kilos is the productively efficient output for this industry, so no reallocation is necessary. D) It is not possible to say whether this industry is productively efficient because we do not know the market price of the product. E) It is not possible to say whether this industry is productively efficient because we do not know the average costs for each firm. Answer: B Explanation:

20)

A) B) C) D) E) 7

21)

22) Refer to Figure 12-1. Suppose each of Firms A, B and C are producing 500 kilos of potatoes. Keeping total output unchanged, what level of output should each firm be producing such that the industry is productively efficient? A) Firm A: 200 kilos, Firm B: 500 kilos, Firm C: 800 kilos B) Firm A: 700 kilos, Firm B: 800 kilos, Firm C: 0 kilos C) Firm A: 500 kilos, Firm B: 800 kilos, Firm C: 200 kilos D) Firm A: 500 kilos, Firm B: 500 kilos, Firm C: 500 kilos E) Firm A: 500 kilos, Firm B: 200 kilos, Firm C: 200 kilos Answer: C Explanation:

A) B) C) D) E)

23) Refer to Figure 12-1. Suppose each of Firms A, B, and C are producing 500 kilos of potatoes. Is this industry allocatively efficient? A) It is not possible to say whether this industry is allocatively efficient because we do not know the market price for kilos of potatoes. B) It is not possible to say whether this industry is allocatively efficient because we do not know the average costs for each firm. C) Yes, because output is equated for all firms. D) No, since marginal costs are not equated for all firms, the industry is not productively efficient, and thus cannot be allocatively efficient. E) No, because the marginal cost curve for each firm has a different slope. Answer: D Explanation:

22)

A) B) C) D) E)

8

23)

The production possibilities boundary shows possible combinations of guns and butter that can be produced by a country. The lower diagram shows demand and supply for butter.

FIGURE 12-2 24) Refer to Figure 12-2. Suppose demand and supply for butter are shown by D and S, respectively. And suppose the economy is at point (a) on the production possibilities boundary. Is this output of guns and butter allocatively efficient? A) No, because the marginal value to consumers of the butter produced is greater than the marginal cost to producers. B) No, because the marginal cost to producers of the butter produced is more than the marginal value to consumers. C) Yes, because all points on the production possibilities boundary are allocatively efficient. D) Yes, because the marginal cost of producing the butter equals the marginal value of consuming the butter. E) No, because the marginal costs for guns and butter are not equated. Answer: A Explanation:

A) B) C) D) E)

9

24)

25) Refer to Figure 12-2. Suppose demand and supply for butter are shown by D and S, respectively. And suppose the economy is at point (a) on the production possibilities boundary. How can this economy move toward allocative efficiency? A) expand the production possibilities boundary outward B) increase the supply of guns C) increase the demand for butter D) produce less butter, more guns E) produce more butter, less guns Answer: E Explanation:

A) B) C) D) E)

26) Refer to Figure 12-2. Suppose this economy is allocatively efficient at Q1 units of butter. Now suppose there is an increase in demand for butter from D to D1. After this shift in demand, A) the supply curve will shift up to S1 and allocative efficiency will be maintained. B) the marginal value to consumers of butter is less than the marginal cost to producers; the price of butter (relative to the price of guns) rises; the economy moves to output Q2 of butter and point (c) on the PPB. C) the marginal value to consumers of butter is greater than the marginal cost to producers; the price of butter (relative to the price of guns) rises; the economy moves to output Q2 of butter and point (c) on the PPB. D) the increase in the price of butter (relative to the price of guns) will cause the demand curve to shift back down to D and allocative efficiency will be maintained. E) the price of guns (relative to the price of butter) rises and the economy moves to point (a) on the PPB. Answer: C Explanation:

26)

A) B) C) D) E)

27) The Canadian economy is achieving allocative efficiency if A) price equals average cost in all industries. B) there are no idle resources in the economy. C) marginal product is equal for all factors of production. D) marginal cost equals price in all industries. E) marginal cost is equalized across industries. Answer: D Explanation:

25)

A) B) C) D) E)

10

27)

28) An important defence of oligopoly as a market structure is that A) it involves less allocative inefficiency than monopoly. B) it results in lower prices than perfect competition. C) it is the most efficient available alternative when the minimum efficient scale is large. D) it generates less unused capacity than monopolistic competition. E) it is more productively efficient than monopoly. Answer: C Explanation:

A) B) C) D) E)

29) Consider the efficiency of various market structures and complete the following sentence. The larger the minimum efficient scale of firms, ceteris paribus, the A) more likely we are to have a concentrated market and allocative inefficiency. B) less the tendency toward monopoly inefficiency. C) lower the advantages of large-scale production. D) greater the number of firms comprising an industry. E) more likely firms will display productive efficiency. Answer: A Explanation:

30)

A) B) C) D) E)

31) Monopoly is allocatively inefficient because A) the price exceeds the marginal cost of the last unit produced. B) the opportunity cost exceeds the marginal cost of the last unit produced. C) the marginal cost exceeds the average cost for the last unit produced. D) lower costs could be achieved. E) the firm has no incentive to maximize profits. Answer: A Explanation:

29)

A) B) C) D) E)

30) Traditionally, economists have regarded monopoly as an undesirable market structure because A) of its ability to minimize costs through large output. B) it is allocatively inefficient. C) of its wasteful innovation. D) it is usually characterized by wastefully confrontational labour relations. E) it allows producers to earn large profits. Answer: B Explanation:

28)

A) B) C) D) E) 11

31)

32) Consider the efficiency of various market structures. In the absence of other market failures, allocative efficiency is achieved only under perfect competition because only this market structure results in A) zero long-run profits. B) P = MC. C) complete freedom of entry and exit. D) maximization of profits through competition. E) productive efficiency. Answer: B Explanation:

A) B) C) D) E)

33) If a perfectly competitive industry was suddenly monopolized without any change in cost conditions, A) both price and quantity produced would increase. B) both price and quantity produced would decrease. C) price would increase and quantity produced would decrease. D) price would decrease and quantity produced would increase. E) there would be no change in either price or quantity produced. Answer: C Explanation:

33)

A) B) C) D) E)

34) In principle, a comparison of the long-run equilibrium of competitive and (single-price) monopoly industries leads to the following conclusion: A) both the competitive industry and the monopoly will allocate resources efficiently. B) the competitive industry is consistent with allocative efficiency whereas the monopoly is not. C) neither industry is capable of allocative efficiency. D) the competitive industry will achieve productive efficiency but the monopoly will not. E) both the competitive industry and the monopoly will allocate resources inefficiently. Answer: B Explanation:

32)

A) B) C) D) E)

12

34)

FIGURE 12-3 35) Refer to Figure 12-3. If the diagram is depicting a perfectly competitive industry, the equilibrium price and quantity is A) P1 and q1 . B) P1 and q2 . C) P2 and q1. D) P2 and q2 . E) P3 and q1 . Answer: D Explanation:

A) B) C) D) E)

36) Refer to Figure 12-3. If the diagram is depicting the market situation for a monopoly, the equilibrium price and quantity are A) P1 and q1 . B) P1 and q2 . C) P2 and q1. D) P2 and q2 . E) P3 and q1 . Answer: E Explanation:

35)

A) B) C) D) E)

13

36)

37) When comparing a perfectly competitive firm and a (single-price) monopolist, a major difference is that A) the monopolist produces where MR = MC, but the perfect competitor does not. B) the perfect competitor achieves productive efficiency, but the monopolist does not. C) the perfect competitor produces where P = MC, but the monopolist does not. D) the monopolist achieves allocative efficiency but the perfect competitor does not. E) the perfect competitor minimizes its costs, but the monopolist does not. Answer: C Explanation:

A) B) C) D) E)

38) Choose the statement that best compares the long-run equilibrium of a competitive industry with that in a monopolized industry (with a single price). A) Resources will be allocated efficiently in both the competitive and monopolized industries. B) Allocative efficiency will be achieved in the competitive, but not the monopolized industry. C) Allocative efficiency is not possible in either industry. D) Allocative efficiency will be achieved in the monopolized, but not the competitive industry. E) It is not possible to make this comparison because firms in a competitive industry operate only in the short run. Answer: B Explanation:

38)

A) B) C) D) E)

39) In the absence of other market failures, allocative efficiency is achieved in a perfectly competitive industry because A) firms do not need to maximize profits. B) the industry produces a level of output such that the marginal cost of production is minimized. C) the industry produces a level of output such that there are increasing returns to scale. D) there are barriers to entry. E) the industry produces a level of output such that the marginal cost to producers equals the marginal benefit to consumers. Answer: E Explanation:

37)

A) B) C) D) E)

14

39)

The diagram below shows supply, demand, and quantity exchanged of Monday matinee movie tickets. Assume it is a perfectly competitive market.

FIGURE 12-4 40) Refer to Figure 12-4. What is the total revenue received by the sellers of this product at the allocatively efficient level of output? A) $5 B) $125 C) $250 D) $375 E) $500 Answer: C Explanation:

A) B) C) D) E)

41) Refer to Figure 12-4. What is the value of the consumer surplus generated in this market at the allocatively efficient level of output? A) $0 B) $5 C) $10 D) $125 E) $250 Answer: D Explanation:

40)

A) B) C) D) E)

15

41)

42) Refer to Figure 12-4. What is the value of the producer surplus generated in this market at the free-market equilibrium? A) $0 B) $5 C) $10 D) $125 E) $250 Answer: D Explanation:

A) B) C) D) E)

43) Refer to Figure 12-4. What is the total economic surplus generated in this market at the allocatively efficient level of output? A) $5 B) $10 C) $125 D) $250 E) $500 Answer: D Explanation:

44)

A) B) C) D) E)

45) Refer to Figure 12-4. Suppose a disequilibrium price of $7.50 per movie ticket is imposed on this market. The total economic surplus is now ________, which is ________ than the total economic surplus generated at the allocatively efficient level of output. A) $125; $250 less B) $125; $125 less C) $187.50; $62.50 less D) $62.50; $125 less E) $187.50; $187.50 less Answer: C Explanation:

43)

A) B) C) D) E)

44) Refer to Figure 12-4. Suppose a disequilibrium price of $7.50 per movie ticket is imposed in this market. The consumer surplus becomes ________ and the producer surplus becomes ________. A) $0; $62.50 B) $2.50; $7.50 C) $62.50; $125 D) $62.50; $250 E) $31.25; $156.25 Answer: E Explanation:

42)

A) B) C) D) E)

16

45)

46) Refer to Figure 12-4. If a disequilibrium price of $7.50 per movie ticket were imposed on this market, this market would not be allocatively efficient because 1) the sum of consumer and producer surplus would not be maximized; 2) the marginal benefit to consumers of the last movie consumed would be greater than the marginal cost to the seller; 3) the marginal cost to the seller of the last movie consumed would be more than the marginal benefit to consumers. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: D Explanation:

46)

A) B) C) D) E)

FIGURE 12-3 47) Refer to Figure 12-3. The area representing consumer surplus in a monopoly equilibrium is outlined by A) ACE. B) ABE. C) 0P4 Eq2 . D) P3 P4 C. E) P2 P4E. Answer: D Explanation:

A) B) C) D) E)

17

47)

48) Refer to Figure 12-3. The area representing consumer surplus in a perfectly competitive equilibrium is outlined by A) ACE. B) ABE. C) 0P4 Eq2 . D) P3 P4 C. E) P2 P4E. Answer: E Explanation:

A) B) C) D) E)

49) Refer to Figure 12-3. The area representing producer surplus at the monopoly equilibrium is outlined by A) 0P0Aq1 . B) P0P2 BA. C) P0 AP1. D) P0 P3 CA. E) 0P3Cq1 . Answer: D Explanation:

50)

A) B) C) D) E)

51) Refer to Figure 12-3. Comparing the monopoly equilibrium to the perfectly competitive equilibrium, the area representing the gain in producer surplus due to monopoly is outlined by A) P1 P3CA less ACE. B) P2 P3CB less ABE. C) P0 P3CA less ACE D) P3 P4 less ABE. E) P2 P4E. Answer: B Explanation:

49)

A) B) C) D) E)

50) Refer to Figure 12-3. Comparing the perfectly competitive equilibrium to the monopoly equilibrium, the reduction in consumer surplus due to monopoly is outlined by A) P2 EP4. B) P2ECP3. C) BCE. D) q1CEq2 . E) P2 P3E. Answer: B Explanation:

48)

A) B) C) D) E)

18

51)

52) Refer to Figure 12-3. Comparing the monopoly equilibrium to the perfectly competitive equilibrium, the area P2 P3CB represents

52)

A) the dead-weight loss of monopoly. B) a redistribution of income from consumers to the monopolist. C) the net gain in the monopolist's profits. D) the net loss in the monopolist's profits. E) a redistribution of income from the monopolist to the consumer. Answer: B Explanation:

A) B) C) D) E)

53) Refer to Figure 12-3. Comparing the perfectly competitive equilibrium to the monopoly equilibrium, the deadweight loss of monopoly is given by A) q1 BEq2. B) AP4 E. C) q1 CEq2 . D) ACE. E) P2 P4E. Answer: D Explanation:

A) B) C) D) E)

54) The deadweight loss of monopoly is A) its fixed cost. B) any negative profit due to cyclical decreases in demand. C) the loss of economic surplus due to the low monopoly output level. D) the cost of maintaining effective barriers to entry. E) the extra administrative costs of operating a large firm. Answer: C Explanation:

54)

A) B) C) D) E)

55) Suppose we compare two monopolists with identical cost and demand conditions. Monopolist A charges a single price. Monopolist B engages in price discrimination, charging a different price for different units of the product. Which one of the following statements is correct? A) B will produce less than A, resulting in a larger deadweight loss. B) B will generally produce more than A, resulting in less deadweight loss. C) A will produce less than B, resulting in smaller deadweight loss. D) A will produce more than B, resulting in larger deadweight loss. E) A and B will both produce the same amount. Answer: B Explanation:

53)

A) B) C) D) E) 19

55)

56) Allocative efficiency occurs when A) producer surplus is maximized. B) consumer surplus is maximized. C) the sum of consumer and producer surplus is maximized. D) the economy achieves the frontier of the production possibilities boundary. E) deadweight loss is achieved. Answer: C Explanation:

A) B) C) D) E)

57) In general, the sum of consumer and producer surplus is maximized under the conditions of A) perfect competition. B) monopoly. C) monopolistic competition. D) oligopoly. E) any market structure. Answer: A Explanation:

57)

A) B) C) D) E)

58) Which of the following is the result of a monopolist's pricing and output behaviour, as compared to a perfectly competitive outcome? A) a reduction in producer surplus and increase in consumer surplus B) an increase in both consumer and producer surplus C) a reduction in both consumer and producer surplus D) a reduction in the sum of consumer and producer surplus E) an increase in the sum of consumer and producer surplus Answer: D Explanation:

56)

A) B) C) D) E)

20

58)

59) When comparing a monopoly equilibrium to a competitive market equilibrium, the consumer suffers two types of losses. They are A) the deadweight loss due to the output that is produced beyond the competitive level, and the transfer of consumer surplus to the monopolist B) the loss of both consumer surplus and producer surplus. C) a loss of consumer surplus due to the output that is not produced, and the transfer of consumer surplus to the monopolist. D) the deadweight loss due to the output that is produced and the reduced incentive for innovation by the monopolist. E) the deadweight loss due to the output that is not produced and the transfer of producer surplus to the monopolist. Answer: C Explanation:

59)

A) B) C) D) E)

The diagram below shows the demand and supply curves in a perfectly competitive market.

FIGURE 12-5 60) Refer to Figure 12-5. Allocative efficiency occurs A) at output level Q3 .

60)

B) at output level Q1 . C) at price P1 and output Q3 . D) at price P2 and output Q2 . E) where the areas 1, 2, 3, and 4 are maximized. Answer: D Explanation:

A) B) C) D) E)

21

61) Refer to Figure 12-5. At the free-market equilibrium, consumer surplus is represented by the area A) P2 P3E.

61)

B) P1 P2E. C) P1 P3E. D) 1 +2. E) 1 + 2 + 3 + 4. Answer: A Explanation:

A) B) C) D) E)

62) Refer to Figure 12-5. In the free-market equilibrium, producer surplus is shown by the area A) P3 P2E.

62)

B) P1 P2E. C) P1 P3E. D) 1 +2. E) 1 + 2 + 3 + 4. Answer: B Explanation:

A) B) C) D) E)

63) Refer to Figure 12-5. In the free-market equilibrium, producer plus consumer surplus is maximized and is illustrated by the area A) P3 P2E.

63)

B) P1 P2E. C) P1 P3E. D) 1 + 2. E) 1 + 2 + 3 + 4. Answer: C Explanation:

A) B) C) D) E)

64) Refer to Figure 12-5. If output in this market were Q 1, but the price was still at its free-market level, the loss in consumer surplus relative to the competitive equilibrium would be illustrated by area A) P3 P2E. B) P1P3 E. C) 1. D) 2. E) 1 + 2. Answer: C Explanation:

A) B) C) D) E) 22

64)

65) Refer to Figure 12-5. If output in this market were Q 1 , and the price were still equal to its

65)

free-market level, the loss in producer surplus relative to the competitive equilibrium would be illustrated by area A) P3 P2E. B) P1P3 E. C) 1. D) 2. E) 1 + 2. Answer: D Explanation:

A) B) C) D) E)

66) Refer to Figure 12-5. If output in this market were Q 1, the total loss in economic surplus relative to

66)

the competitive equilibrium would be illustrated by area A) P1 P3E. B) 1. C) 2. D) 1 + 2. E) 1 + 2 + 3 + 4. Answer: D Explanation:

A) B) C) D) E)

67) Refer to Figure 12-5. If output in this market were Q 3, and the price were still P2, the loss in

67)

consumer surplus relative to the competitive equilibrium would be illustrated by area A) 1. B) 2. C) 3. D) 4. E) 3 + 4. Answer: D Explanation:

A) B) C) D) E)

68) Refer to Figure 12-5. If output in this market were Q 3 , and the price was still equal to its free-market level, the loss in producer surplus relative to the competitive equilibrium would be illustrated by area A) 1. B) 2. C) 3. D) 4. E) 3 + 4. Answer: C Explanation:

A) B) C) D) E)

23

68)

69) Refer to Figure 12-5. If output in this market were Q 3, the loss in total economic surplus relative to the competitive equilibrium would be illustrated by area A) 1. B) 2. C) 3. Answer: E Explanation:

D) 4.

E) 3 + 4.

A) B) C) D) E)

70) Which of the following is the definition of producer surplus? A) the total revenue received by the producer for a good minus the total cost of producing that good B) the price of a good minus the marginal cost of producing it, summed over the quantity produced C) the revenue received for a good, minus the cost of producing it D) the price of a good minus the cost of producing it E) quantity produced in excess of the allocatively efficient amount Answer: B Explanation:

70)

A) B) C) D) E)

71) Which of the following is the definition of consumer surplus? A) the difference between the value that consumers place on a good and the payment they make to buy the good, summed over the quantity consumed B) the total value that consumers place on the quantity consumed of some good C) the quantity consumed in excess of the allocatively efficient amount D) the value that consumers place on the last unit consumed of a good E) the marginal value that consumers place on the last unit consumed of a good Answer: A Explanation:

69)

A) B) C) D) E)

24

71)

72) Which of the following is an example of an industry that succeeds in restricting entry, thereby maintaining prices above competitive levels? A) transport trucking B) beef cattle ranching C) window washing D) dentistry E) book publishing Answer: D Explanation:

A) B) C) D) E)

73) In which of the following situations would a natural monopoly exist? A) a firm has a government charter to be the sole producer of some good B) a firm is able to operate at the minimum point of its long-run average total cost curve C) a firm produces a product essential to national security D) only one firm is supplying a natural resource E) one firm can most efficiently supply the entire market demand Answer: E Explanation:

73)

A) B) C) D) E)

74) In general, which of the following statements guides policymakers with respect to a natural monopoly? The firm A) should be broken up into a large number of competitive firms. B) should be taken over by government and run as a crown corporation. C) is the best way to produce a given product and should be left alone. D) generally needs to be regulated in order to reduce allocative inefficiency. E) will not achieve productive efficiency without regulation. Answer: D Explanation:

72)

A) B) C) D) E)

25

74)

75) Consider the case of a natural monopoly with falling long-run average costs. If regulation sets the price equal to marginal cost, then A) the firm would operate at a loss and eventually go out of business. B) shortages would result. C) the demand curve would shift to the left. D) the firm would earn economic profits. E) the outcome would be allocatively inefficient. Answer: A Explanation:

A) B) C) D) E)

76) Consider a natural monopoly that has declining LRAC over the entire range of the market demand curve. If it is regulated and required to charge a price that is equal to MC, the resulting level of output is A) allocatively efficient, and profit is earned. B) allocatively efficient, but the firm must be paid a subsidy or it will eventually go out of business. C) less than the allocatively efficient level, and profit is zero. D) less than the allocatively efficient level, but losses occur. E) greater than the allocatively efficient level, but losses occur. Answer: B Explanation:

76)

A) B) C) D) E)

77) Consider a public utility that is a natural monopoly with falling long-run average costs. If a regulatory agency ordered this firm to price all of its output at marginal cost, then the firm A) would lose money unless it is subsidized. B) could incur profits or losses depending on the position of the demand curve and the LRAC curve. C) would earn profits since the demand curve is perfectly inelastic. D) would incur losses since the demand curve is perfectly elastic. E) would have to shut down. Answer: A Explanation:

75)

A) B) C) D) E)

26

77)

78) If average-cost pricing is imposed on a falling-cost natural monopoly, the result will be A) exit from the industry in the short run. B) zero economic profit. C) economic profits. D) economic losses. E) losses and exit from the industry in the long run. Answer: B Explanation:

A) B) C) D) E)

79) If a regulatory agency imposes a lump-sum tax on a monopolist (i.e., a tax that is independent of the level of output) it will reduce the firm's profits because the tax increases A) the LRAC but not the MC, leaving price and output unchanged. B) both the LRAC and the MC, leaving price and output unchanged. C) all costs as it shifts the demand curve to the left. D) all costs as it shifts the demand curve to the right. E) price whereas quantity demanded falls. Answer: A Explanation:

79)

A) B) C) D) E)

80) Regulation can reduce the profits of a natural monopoly by imposing a per-unit output tax (rather than directly regulating price). Such a tax would cause the monopolist's 1) average total cost curve to shift upward; 2) marginal cost curve to shift upward; 3) demand curve to shift to the left. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: D Explanation:

78)

A) B) C) D) E)

27

80)

81) Suppose a cell-phone service provider has monopoly rights for a geographical region and is earning monopoly profits. If the government then imposes a lump-sum tax of $X on this firm, the effect is A) an increase in consumer surplus due to the tax revenue. B) to increase the firm's marginal costs and reduce its profit by $X. C) to increase the firm's average costs and reduce its profit by $X. D) a reduction in output and an increase in price. E) an increase in output and a decrease in price. Answer: C Explanation:

A) B) C) D) E)

82) The economic efficiency of a natural monopoly can be improved with the use of two-part tariffs because it allows the monopoly to A) charge users according to their willingness to pay. B) charge residential users different rates than business users. C) charge users according to their ability to pay. D) charge users separately for fixed and variable costs. E) lower its total costs. Answer: D Explanation:

82)

A) B) C) D) E)

83) In the long run, the imposition of average-cost pricing in natural monopolies, such as Manitoba Hydro and New Brunswick Power, would generally lead to A) allocative efficiency. B) productive efficiency. C) distorted investment decisions. D) a reduction in the output by these firms. E) both allocative efficiency and productive efficiency. Answer: C Explanation:

81)

A) B) C) D) E)

28

83)

84) Consider a regulated natural monopoly, such as an electricity distribution company, that faces falling long-run average costs. If it is forced to price its output at average cost it will provide A) less output than what is socially optimal. B) more output than what is socially optimal. C) the socially optimal amount of output. D) more output than can be absorbed by the market. E) so little output that there will be a shortage. Answer: A Explanation:

A) B) C) D) E)

85) A regulated monopoly that faces rising long-run costs (at its current level of output) and which is forced to price its output at average cost will provide A) less output than what is socially optimal. B) more output than what is socially optimal. C) the socially optimal amount of output. D) more output than what can be absorbed by the market. E) so little output that there will be a shortage. Answer: B Explanation:

85)

A) B) C) D) E)

86) Consider a natural monopoly that is producing an output level such that it is experiencing decreasing returns to scale. If government policy requires the firm to set price equal to marginal cost, A) the outcome will be allocatively efficient and the firm will be earning profits. B) the outcome will be allocatively inefficient and the firm will be earning profits. C) the outcome will be allocatively efficient and the firm will be incurring losses. D) the outcome will be allocatively inefficient and the firm will be incurring losses. E) the outcome will be allocatively efficient and the firm will be earning zero profits. Answer: A Explanation:

84)

A) B) C) D) E)

29

86)

87) Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve. (Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month - minimum efficient scale = 2 million units - current output = 2.3 million units - LRAC at current output = $10.25 per month If this firm is currently being regulated and is following an average-cost pricing policy, the price of the service is ________ per month. A) less than $9.00 B) $9.00 C) between $9.00 and $10.25 D) $10.25 E) higher than $10.25 Answer: D Explanation:

A) B) C) D) E)

88) Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve. (Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month - minimum efficient scale = 2 million units - current output = 2.3 million units - LRAC at current output = $10.25 per month Suppose the firm is currently being regulated and is required to follow a marginal-cost pricing policy. The price of the service will be ________ per month. A) lower than $9.00 B) $9.00 C) between $9.00 and $10.25 D) $10.25 E) higher than $10.25 Answer: E Explanation:

87)

A) B) C) D) E)

30

88)

89) Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve. (Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month - minimum efficient scale = 2 million units - current output = 1.7 million units - current LRAC = $10.25 per month If this firm is currently being regulated and is following an average-cost pricing policy, the price of service is ________ per month. A) lower than $9.00 B) $9.00 C) between $9.00 and $10.25 D) $10.25 E) higher than $10.25 Answer: D Explanation:

A) B) C) D) E)

90) Consider the following information for a regional cable television service provider that is a natural monopoly and has a U-shaped long-run average cost curve. (Assume the service provided is basic cable and units are household connections.) - minimum LRAC = $9.00 per month - minimum efficient scale = 2 million units - current output = 1.7 million units - current LRAC = $10.25 per month Suppose the firm is currently being regulated and is required to follow a marginal-cost pricing policy. The price of the service will be ________ per month. A) lower than $9.00 B) $9.00 C) lower than $10.25 D) $10.25 E) higher than $10.25 Answer: C Explanation:

89)

A) B) C) D) E)

31

90)

91) According to economist George Stigler, the process of regulating firms with market power becomes suspect over time because A) regulators impose additional costs on regulated firms because they are expected to accomplish other social goals. B) regulators shift from protecting the consumer to protecting the regulated firm from competition. C) regulated firms are allowed to expand into other markets and drive out competing firms. D) regulated firms devise methods to circumvent the regulations. E) regulation leads to corruption of political parties. Answer: B Explanation:

A) B) C) D) E)

92) One method of regulating a natural monopoly is known as average-cost pricing. Using this method, the regulator requires that the price be set equal to A) internal cost. B) marginal cost. C) average variable cost. D) long-run average cost. E) average fixed cost. Answer: D Explanation:

92)

A) B) C) D) E)

93) Choose the statement that best describes the dilemma facing the regulator of a natural monopoly. A) Marginal-cost pricing leads to profit or losses; average-cost pricing results in allocative inefficiency. B) Marginal-cost pricing will result in allocative inefficiency; average-cost pricing leads to profits or losses. C) Marginal-cost pricing will result in productive and allocative inefficiency; average-cost pricing will not. D) Both kinds of regulation have the same implications for allocative efficiency. E) There is no dilemma. Answer: A Explanation:

91)

A) B) C) D) E)

32

93)

94) Suppose your municipality charges your household a flat fee of $100 per year plus $2 per cubic metre of water used. This pricing policy is an example of A) marginal-cost pricing. B) average cost pricing. C) a two-part tariff. D) utility pricing. E) linear pricing. Answer: C Explanation:

94)

A) B) C) D) E)

The diagram below shows the market demand curve and the cost curves for a single firm.

FIGURE 12-6 95) Refer to Figure 12-6. The firm depicted in the figure is A) a perfectly competitive firm. B) a monopolistically competitive firm. C) a natural monopoly. D) an oligopoly. E) a cartel. Answer: C Explanation:

A) B) C) D) E)

33

95)

96) Refer to Figure 12-6. Suppose the firm is being regulated using a policy of average-cost pricing. The resulting price and output would be A) P1 and Q2 . B) P1 and Q1 . C) P2 and Q2 . D) P3 and Q1 . E) P3 and Q2 . Answer: D Explanation:

A) B) C) D) E)

97) Refer to Figure 12-6. Suppose this firm is being regulated using a policy of average-cost pricing. In this case, economic profits to the firm are represented by the area A) P2 P3ad. B) P2 P3ab. C) 0P3 aQ1. D) P1 P2bc. E) There are no economic profits. Answer: E Explanation:

97)

A) B) C) D) E)

98) Refer to Figure 12-6. Suppose this firm is being regulated using a policy of average-cost pricing. In this case, A) the result is allocatively efficient because economic profits are zero. B) the result is allocatively inefficient because price exceeds marginal cost. C) the level of output is too low, but the price is allocatively efficient. D) the result is as close to the competitive outcome as possible. E) the result is allocatively inefficient because the marginal cost curve is downward sloping. Answer: B Explanation:

96)

A) B) C) D) E)

34

98)

99) Refer to Figure 12-6. Suppose this firm is being regulated using the policy of marginal-cost pricing. The resulting price and output would be A) P2 and Q2 . B) P3 and Q1 . C) P1 and Q2 . D) P3 and Q2 . E) P1 and Q1 . Answer: C Explanation:

A) B) C) D) E)

100) Refer to Figure 12-6. Suppose this firm is being regulated using a policy of marginal-cost pricing. In this case, the firm would experience ________ represented by the area ________. A) losses; P1 P2bc B) losses; edbc C) losses; 0P2 bQ2 D) profits; P2 P3ad E) profits; edbc Answer: A Explanation:

100)

A) B) C) D) E)

101) Refer to Figure 12-6. Suppose this firm is being regulated using a policy of marginal-cost pricing. In this case, A) allocative efficiency is achieved because profits are maximized. B) the result is allocatively inefficient because the firm is suffering losses. C) the result is allocatively inefficient because the firm is earning profits. D) the result is allocatively inefficient because the marginal cost curve lies below the ATC curve. E) allocative efficiency is achieved because price equals marginal cost. Answer: E Explanation:

99)

A) B) C) D) E)

35

101)

102) Refer to Figure 12-6. Suppose this firm is being regulated using a policy of marginal-cost pricing. To maintain the resulting level of output A) the government would have to subsidize the firm or it will eventually shut down. B) the regulator would have to allow the firm to keep the monopoly profits at this level of output. C) the government would have to accept the allocative inefficiency associated with this level of output. D) the average total cost curve would have to shift up. E) the demand curve would have to the left. Answer: A Explanation:

A) B) C) D) E)

103) Refer to Figure 12-6. Suppose this firm is a government-owned natural monopoly and imposes a price so as to achieve allocative efficiency in this market. The amount of tax revenue that the government must raise elsewhere in the economy to offset the losses of this firm is represented by the area A) P1 P3ae B) P1P2 bc C) edbc D) Q1dbQ2 E) 0P2 bQ2 Answer: B Explanation:

102)

A) B) C) D) E)

36

103)

The diagram below shows cost and revenue curves for a natural monopoly producing electricity. Price is dollars per kilowatt hour and quantity is kilowatt hours per day.

FIGURE 12-7 104) Refer to Figure 12-7. If this firm were unregulated and profit maximizing, its profit would be ________ per day. A) $0 B) $10 000 C) $60 000 D) $110 000 E) $120 000 Answer: B Explanation:

A) B) C) D) E)

105) Refer to Figure 12-7. Suppose this firm is being regulated using a policy of average-cost pricing. The resulting price and output would be ________ per kwh and ________ kwh per day. A) $0.06; 1 million B) $0.07; 1.5 million C) $0.09; 1.4 million D) $0.11; 1 million E) $0.12; 1 million Answer: C Explanation:

104)

A) B) C) D) E)

37

105)

106) Refer to Figure 12-7. Suppose this firm is being regulated using a pricing policy of average-cost pricing. In this case, economic profits are equal to A) $10 000. B) $6000. C) $126 000. D) $28 000. E) $0. Answer: E Explanation:

A) B) C) D) E)

107) Refer to Figure 12-7. Suppose this firm is being regulated using a policy of marginal-cost pricing. The resulting price and output would be ________ per kwh and ________ kwh per day. A) $0.06; 1 million B) $0.07; 1.5 million C) $0.08; 1.5 million D) $0.09; 1.4 million E) $0.12; 1 million Answer: B Explanation:

108)

A) B) C) D) E)

109) There has been a trend toward less government regulation and ownership in oligopolistic industries in most industrialized countries since the 1980s. One reason for this is A) policymakers came to understand that many oligopolistic firms were operating at their minimum efficient scale, thereby producing an efficient outcome. B) policymakers came to understand that many oligopolistic firms were producing output levels that resulted in allocative efficiency. C) policymakers realized that they did not have effective tools for promoting efficiency. D) Canada's Competition Bureau, and similar agencies in other countries were so successful at promoting competition that such regulation is no longer required. E) domestic firms are now exposed to more international competition due to falling transportation and communication costs. Answer: E Explanation:

107)

A) B) C) D) E)

108) Refer to Figure 12-7. Suppose this firm is being regulated using a policy of marginal-cost pricing. In this case, economic profits are equal to A) -$15 000. B) -$28 000. C) $0. D) $90 000. E) -$50 000. Answer: A Explanation:

106)

A) B) C) D) E)

38

109)

110) In many cases throughout Canadian history, governments have sought to control the behaviour of oligopolistic firms through either ownership or regulation. Policymakers are now skeptical of such practices because 1) many innovations in products and production methods that have led to increases in living standards are attributable to firms in oligopolistic industries; 2) it became clear that oligopolistic industries can achieve both productive and allocative efficiency without government intervention; 3) the regulatory body often ends up protecting the firms from competition. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Explanation:

A) B) C) D) E)

111) The objective of government regulation and competition policy can be described as a means to A) promote economic efficiency. B) make at least one person better off at the expense of others. C) reduce inequality in the economy. D) increase fairness in economic activities. E) make all industries perfectly competitive. Answer: A Explanation:

111)

A) B) C) D) E)

112) A major aim of Canadian competition policy is to A) eliminate oligopolies and the allocative inefficiency that they entail. B) prevent further concentration of industries where such concentration would lessen competition. C) monitor the pricing practices of crown corporations. D) protect Canadian companies from unfair foreign competition. E) achieve a perfectly competitive market structure in all markets in the Canadian economy. Answer: B Explanation:

110)

A) B) C) D) E)

39

112)

113) Prior to the 1986 amendments to the Canadian Competition Act, cases brought against mergers were almost always unsuccessful. The reason most often cited for this is A) that merging firms were always successful in destroying the incriminating evidence. B) that judges were influenced. C) that mergers previously fell under criminal law, rather than civil law, making them particularly hard to prove. D) that mergers previously fell under civil law, rather than criminal law, making them particularly hard to prove. E) the lack of a director responsible for prosecution. Answer: C Explanation:

A) B) C) D) E)

114) An allowable defence for a merger according to Canada's Competition Bureau is that A) merging firms find it easier to decide how they will share the market. B) merging firms are more profitable because they no longer have to compete with one another. C) the gains in efficiency resulting from the merger more than offset any reductions in competition. D) merged and therefore bigger firms are better placed to compete globally. E) larger firms are easier to regulate. Answer: C Explanation:

114)

A) B) C) D) E)

115) In Canada, a significant challenge for the Competition Bureau when reviewing a possible merger between firms in a concentrated industry is to A) determine whether efficiency gains make the merger desirable. B) determine whether monopoly no longer poses a threat to the Canadian economy. C) impose effective entry barriers to the industry. D) determine whether criminal charges are required due to unlawful collusion. E) allow those mergers that lead to larger firms that are easier to regulate. Answer: A Explanation:

113)

A) B) C) D) E)

40

115)

116) In Canada, the Competition Act specifies that in antitrust cases the "watchdog" is the A) Senate. B) Commissioner of the Competition Bureau. C) Supreme Court of Canada. D) minister responsible for Industry Canada. E) prime minister. Answer: B Explanation:

A) B) C) D) E)

117) The administrative agency established to enforce the provisions of the Competition Act is the A) Competition Bureau. B) Federal Free Trade Practices Commission. C) Department of Consumer and Corporate Affairs. D) Competition Tribunal Act. E) Director of Investigations. Answer: A Explanation:

117)

A) B) C) D) E)

118) Canadian governments (federal, provincial and municipal) employ public ownership or regulation of industries in an effort to A) ensure that the goal of profit maximization is being pursued because this ensures allocative efficiency. B) produce a more equitable distribution of income between consumers and producers with monopoly power. C) protect consumers from the high prices and restricted output associated with monopoly power. D) promote productive efficiency in all industries. E) transfer monopoly profits from private firm owners to the government. Answer: C Explanation:

116)

A) B) C) D) E)

41

118)

119) Suppose there are only two firms (Firms A and B) in Canada that produce good X, and the two firms propose a merger to create a single firm (Firm AB). Is there any circumstance under which the authorities enforcing Canadian competition policy might approve of such a merger? A) According to the Competition Act, as long as the revenues of the merged firm are less than $100 million per year. B) According to the Competition Act, if the merged firm enhances the status of a Canadian cultural industry. C) If the market is defined as being within Canada's borders, and the merger allows Firm AB to exploit economies of scale. D) If international trade in good X is such that Firm AB faces a fully competitive environment, both within and outside of Canada's borders. Answer: D Explanation:

A) B) C) D)

120) In Canada, alleged violations of the Competition Act are referred to the ________ for adjudication. A) Commissioner of the Competition Bureau B) Competition Tribunal C) minister responsible for Industry Canada D) RCMP E) provincial Courts of Appeal Answer: B Explanation:

119)

A) B) C) D) E)

42

120)

Answer Key Testname: UNTITLED12

1) C 2) B 3) A 4) B 5) C 6) E 7) C 8) D 9) C 10) B 11) D 12) A 13) E 14) B 15) E 16) C 17) D 18) E 19) B 20) D 21) B 22) C 23) D 24) A 25) E 26) C 27) D 28) C 29) A 30) B 31) A 32) B 33) C 34) B 35) D 36) E 37) C 38) B 39) E 40) C 41) D 42) D 43) D 44) E 45) C 46) D 47) D 48) E 49) D 50) B 43

Answer Key Testname: UNTITLED12

51) B 52) B 53) D 54) C 55) B 56) C 57) A 58) D 59) C 60) D 61) A 62) B 63) C 64) C 65) D 66) D 67) D 68) C 69) E 70) B 71) A 72) D 73) E 74) D 75) A 76) B 77) A 78) B 79) A 80) D 81) C 82) D 83) C 84) A 85) B 86) A 87) D 88) E 89) D 90) C 91) B 92) D 93) A 94) C 95) C 96) D 97) E 98) B 99) C 100) A 44

Answer Key Testname: UNTITLED12

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

E A B B C E B A E E A B C C A B A C D B

45

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) When studying income distribution, the Classical economists were primarily concerned with the distribution of income among A) workers and the government. B) workers and capitalists. C) the government and capitalists. D) workers and landowners. E) workers, capitalists, and landowners. Answer: E Explanation:

A) B) C) D) E)

2) The "functional distribution of income" refers to the distribution of income A) among the various social classes. B) among the major factors of production. C) among the industrial nations. D) between the government and the factors of production. E) between the various economic sectors of a country. Answer: B Explanation:

2)

A) B) C) D) E)

3) The "size distribution of income" refers to the distribution of income A) among different households with reference to the source of the income. B) between capitalists and workers. C) between capitalists and landowners. D) among different households without reference to the source of the income. E) to a particular factor of production in different time periods. Answer: D Explanation:

1)

A) B) C) D) E)

1

3)

4) A Lorenz curve shows the A) degree of inequality across households in the distribution of income. B) ratio of workers' income to capitalists' income. C) level of a country's income relative to its productive capacity. D) level of a country's income relative to its foreign trade. E) functional distribution of income. Answer: A Explanation:

A) B) C) D) E)

5) In a Lorenz curve diagram, the size of the area between the Lorenz curve and the diagonal line represents A) the degree of inequality in the distribution of income. B) the percentage of income received by the bottom 20% of families. C) the dollar incomes of the bottom 40% of families. D) the percentage of income received by the top 5% of families. E) complete income equality. Answer: A Explanation:

5)

A) B) C) D) E)

6) The diagonal line on a Lorenz curve diagram represents A) the degree of inequality in the distribution of income. B) the percentage of income received by the bottom 50% of families. C) the dollar incomes of the bottom 50% of families. D) the percentage of income received by the top 50% of families. E) where the Lorenz curve would be if there were complete income equality. Answer: E Explanation:

4)

A) B) C) D) E)

2

6)

FIGURE 13-1 7) Refer to Figure 13-1. The diagonal line in the diagram A) illustrates the functional distribution of income. B) shows where the Lorenz curve would be if there were complete income equality. C) shows the actual distribution of income. D) has no real purpose. E) shows the distribution of income over time. Answer: B Explanation:

A) B) C) D) E)

8) Refer to Figure 13-1. Which point shows that 100% of families earn 100% of the income? A) A B) B C) C D) D E) E Answer: E Explanation:

8)

A) B) C) D) E)

9) Refer to Figure 13-1. Which point shows that 20% of families earn almost 40% of total income? A) A B) B C) C D) D E) E Answer: D Explanation:

7)

A) B) C) D) E) 3

9)

10) Refer to Figure 13-1. Which point shows that the bottom 60% of families earn just under 40% of total income? A) A B) B C) C D) D E) E Answer: C Explanation:

A) B) C) D) E)

11) Refer to Figure 13-1. On the Lorenz curve shown in the diagram, A) the poorest 20% of families earn almost 90% of total income. B) perfect equality of income distribution occurs. C) the richest 20% of families earn over 60% of total income. D) the functional distribution of income is shown. E) the richest 20% of families earn almost 40% of total income. Answer: E Explanation:

11)

A) B) C) D) E)

12) Suppose all Canadians earned equal incomes. In this case, Canada's Lorenz curve would be A) coincident with the horizontal axis. B) the diagonal line. C) above the diagonal line. D) below the diagonal line. E) non-existent. Answer: B Explanation:

12)

A) B) C) D) E)

13) Median family income (pre-tax) in Canada in 2009 was closest to A) $45 000. B) $55 000. C) $65 000. D) $75 000. Answer: D Explanation:

10)

A) B) C) D) E)

4

13) E) $85 000.

14) For any firm in any market structure, a factor's marginal revenue product is A) the average product of the factor multiplied by the price of the output. B) the change in revenue caused by the sale of the product contributed by an additional unit of input. C) the change in revenue caused by the sale of an additional unit of output. D) the increase in output resulting from the use of an additional unit of the factor multiplied by the cost of that factor. E) marginal revenue multiplied by total product. Answer: B Explanation:

A) B) C) D) E)

15) The marginal revenue product of labour is the change in the value of the firm's output resulting from A) a change in the product's price. B) an increase in the marginal physical product of labour. C) a change in the wage rate paid to labour. D) producing one more unit of output. E) hiring one more unit of labour input. Answer: E Explanation:

15)

A) B) C) D) E)

16) Suppose that the last unit of a factor of production employed has a marginal product of 12. The factor's price is $8, and the product's competitive market price is $6. This factor's marginal revenue product is A) $6. B) $36. C) $48. D) $72. E) $96. Answer: D Explanation:

14)

A) B) C) D) E)

5

16)

17) A condition for the profit-maximizing use of any factor of production is (where MP = marginal product, w = the price of a factor of production, p = price of one unit of the firm's output, MR = marginal revenue, MC = marginal cost, MRP = marginal revenue product): A) MRP = MP × p MRP B) MR = P

17)

C) MC = MR × w D) w = MP × p E) MRP = MR × MC Answer: D Explanation:

A) B) C) D) E)

18) Consider labour that is hired for $18 per hour. If the last hour of labour hired produces 8 units of output which sells for $10 per unit, that labour-hour's marginal revenue product is A) $1.20. B) $4.44. C) $64. D) $80. E) $144. Answer: D Explanation:

A) B) C) D) E)

19) Consider labour that is hired for $18 per hour. If the last hour of labour hired produces 8 units of output which sells for $10 per unit, that labour-hour adds ________ to the firm's profit and so ________ labour should be hired. A) $80; more B) -$80; less C) $62; less D) $62; more E) $0; no Answer: D Explanation:

19)

A) B) C) D) E)

20) Consider labour that is hired for $18 per hour. If the last hour hired produces 8 units of output which sells for $2 per unit, ________ labour should be hired in this situation since the wage is ________ MRP. A) more; greater than B) more; less than C) less; greater than D) less; less than E) no; equal to Answer: C Explanation:

18)

A) B) C) D) E)

6

20)

21) Consider labour that is hired for $18 per hour. If the last hour hired produces 8 units of output which sells for $2 per unit, that labour-hour adds ________ to the firm's profit and so ________ labour should be hired. A) -$128; more B) -$2; less C) $16; less D) $16; more E) $0; no Answer: B Explanation:

A) B) C) D) E)

22) Consider labour hired for $18 per hour. If the last hour of labour hired produces 8 units of output which sells for $10 per unit, ________ labour should be hired in this situation since the wage is ________ MRP. A) more; greater than B) more; less than C) less; greater than D) less; less than E) no; equal to Answer: B Explanation:

22)

A) B) C) D) E)

23) Consider labour hired for $1000 per week. If the last week of labour hired produces 0.25 units of output which sells for $5000 per unit, ________ labour should be hired in this situation since the wage is ________ MRP. A) more; greater than B) more; less than C) less; greater than D) less; less than E) no; equal to Answer: B Explanation:

21)

A) B) C) D) E)

7

23)

24) Consider a small firm that is producing winter jackets. It can lease an additional sewing machine for one month for $750. With this additional machine, the firm can produce an additional 6 jackets during that time period that it sells for $125 each. Hiring the marginal machine adds ________ to the firm's profit and so it should ________ the machine. A) -$750; not lease B) -$750; lease C) $0; be indifferent as to whether to lease D) $750; not lease E) $750; lease Answer: C Explanation:

A) B) C) D) E)

25) Consider a small firm that is producing winter jackets. It can lease an additional sewing machine for one month for $1200. With this additional machine, the firm can produce an additional 7 jackets during that time period that it sells for $250 each. Hiring the marginal machine adds ________ to the firm's profit and so it should ________ the machine. A) -$1200; not lease B) $0; be indifferent as to whether to lease C) $1200; lease D) $550; lease E) $1750; lease Answer: D Explanation:

25)

A) B) C) D) E)

26) Consider a small firm that is producing winter jackets. It can lease an additional sewing machine for one month for $2400. With this additional machine, the firm can produce an additional 4 jackets during that time period that it sells for $550 each. Hiring the marginal machine adds ________ to the firm's profit and so it should ________ the machine. A) -$2400; not lease B) -$200; not lease C) $0; be indifferent as to whether to lease D) $200; lease E) $2400; lease Answer: B Explanation:

24)

A) B) C) D) E)

8

26)

Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Total Number of Units of the Factor Units of Output 10 20 11 44 12 64 13 78 14 84 15 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 27) Refer to Table 13-1. The marginal product of the 15th unit of the factor of production is A) -2. B) 0. C) 2. D) 82. E) 84. Answer: C Explanation:

A) B) C) D) E)

28) Refer to Table 13-1. The marginal product of the 12th unit of the factor of production is A) 4. B) 14. C) 20. D) 44. E) 64. Answer: C Explanation:

29)

A) B) C) D) E)

30) Refer to Table 13-1. The total revenue of the output produced by 15 units of the factor is A) $860. B) $150. C) $640. D) $780. E) $1440. Answer: A Explanation:

28)

A) B) C) D) E)

29) Refer to Table 13-1. The total revenue of the output produced by 12 units of the factor is A) $120. B) $520. C) $640. D) $768. E) $1440. Answer: C Explanation:

27)

A) B) C) D) E)

9

30)

31) Refer to Table 13-1. The marginal revenue product of the 14th unit of the factor is A) -$60. B) $60. C) $140. D) $700. Answer: B Explanation:

A) B) C) D) E)

32) Refer to Table 13-1. The marginal revenue product of the 15th unit of the factor is A) -$20. B) $20. C) $60. D) $150. Answer: B Explanation:

31) E) $840.

32) E) $820.

A) B) C) D) E)

33) Refer to Table 13-1. Diminishing marginal returns are present for which units of the factor of production? A) 10th unit only B) 11th unit only C) 12th unit only D) 13th unit only E) all units shown in the table Answer: E Explanation:

A) B) C) D) E)

34) Refer to Table 13-1. How many units of this factor of production would the profit-maximizing firm choose to hire? A) 11 B) 12 C) 13 D) 14 E) It is not possible to determine with the data provided. Answer: E Explanation:

33)

A) B) C) D) E)

10

34)

Consider the following table for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 2 3 4 5 6 7 8

Total Number of Units of Output 100 110 128 148 162 170 166

TABLE 13-2 35) Refer to Table 13-2. The marginal product of the 7th unit of the factor is A) -8. B) 0. C) 8. D) 162. Answer: C Explanation:

35) E) 170.

A) B) C) D) E)

36) Refer to Table 13-2. Suppose the firm is a perfect competitor and faces a given price of the product equal to $2 per unit. The marginal revenue product of the 5th unit of the factor is A) $128. B) $148. C) $20. D) $40. E) $2. Answer: D Explanation:

A) B) C) D) E)

37) Refer to Table 13-2. This firm begins to experience diminishing marginal productivity when it hires the ________ unit of the factor. A) 3rd B) 4th C) 5th D) 6th E) 7th Answer: D Explanation:

36)

A) B) C) D) E)

11

37)

38) Refer to Table 13-2. Suppose this firm is a perfect competitor and faces a given price of the product equal to $10 per unit. The marginal revenue product of the 3rd unit of the factor is A) $30. B) $100. C) $110. D) $1000. E) $1100. Answer: B Explanation:

38)

A) B) C) D) E)

Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Units of the Factor 2 3 4 5 6 7

Total Number of Units of Output 12 20 26 30 32 32

Price per Unit of Output $10 $9 $8 $7 $6 $5

Total Cost of Production $50 $55 $60 $65 $70 $75

TABLE 13-3 39) Refer to Table 13-3. The marginal product of the 4th unit of the factor of production is A) 4. B) 6. C) 8. D) 26. E) 30. Answer: B Explanation:

A) B) C) D) E)

40) Refer to Table 13-3. The marginal product of the 6th unit of the factor of production is A) -2. B) 2. C) 4. D) 8. E) 32. Answer: B Explanation:

40)

A) B) C) D) E)

41) Refer to Table 13-3. The total revenue obtained if the 5th unit of the factor of production is hired is A) $160. B) $180. C) $192. D) $202. E) $210. Answer: E Explanation:

39)

A) B) C) D) E)

12

41)

42) Refer to Table 13-3. The total revenue obtained if the 7th unit of the factor of production is hired is A) $160. B) $180. C) $192. D) $202. E) $210. Answer: A Explanation:

A) B) C) D) E)

43) Refer to Table 13-3. The rise in total revenue generated by hiring the 4th unit of the factor of production is A) $-11.00. B) $2.00. C) $3.67. D) $7.50. E) $28.00. Answer: E Explanation:

44)

A) B) C) D) E)

45) Refer to Table 13-3. A profit-maximizing firm would never hire more than the ________ unit of this factor of production. A) 3rd B) 4th C) 5th D) 6th E) 7th Answer: B Explanation:

43)

A) B) C) D) E)

44) Refer to Table 13-3. The increase in total revenue generated by hiring the 5th unit of the factor of production is A) -$11.00. B) -$2.00. C) $2.00. D) $7.50. E) $11.00. Answer: C Explanation:

42)

A) B) C) D) E)

13

45)

46) Profit-maximizing firms increase production up to the point at which the last unit of the variable factor employed adds A) nothing to marginal cost. B) nothing to marginal revenue. C) positive economic profits. D) just as much to revenue as to profit. E) just as much to revenue as to cost. Answer: E Explanation:

A) B) C) D) E)

47) If a firm is a perfect competitor in its product market, the marginal product of a factor multiplied by the product's price equals A) marginal cost. B) marginal profit. C) total revenue. D) marginal revenue. E) marginal revenue product. Answer: E Explanation:

47)

A) B) C) D) E)

48) The marginal revenue product curve for a monopolist would be ________ its marginal product curve because ________. A) steeper than; its MR decreases as output increases B) steeper than; its product's price increases as output increases C) flatter than; it must pay a higher wage to labour D) flatter than; its product's price decreases as output increases E) the same as; the MRP curve always has the same shape as the MP curve Answer: A Explanation:

46)

A) B) C) D) E)

14

48)

49) The shape of the marginal revenue product curve for a perfectly competitive firm would be ________ its marginal product curve because ________. A) the same as; MR is constant as output increases B) steeper than; MR decreases as output increases C) steeper than; its product's price increases as output increases D) flatter than; its product's price decreases as output increases E) flatter than; it must pay a higher wage to the variable factor as output increases Answer: A Explanation:

A) B) C) D) E)

50) Which of the following is the best definition of the marginal revenue product (MRP) of a factor of production? A) the average product of the factor multiplied by the price of the output B) the change in revenue generated by the sale of the product produced by an additional unit of input C) the change in revenue caused by the sale of an additional unit of output D) the increase in output resulting from the use of an additional unit of the factor multiplied by the cost of that factor E) marginal revenue multiplied by total product Answer: B Explanation:

49)

A) B) C) D) E)

15

50)

The table below shows the total production for varying numbers of hours worked producing yo-yos. The firm sells its product and hires its workers in competitive markets. Number of Hours Worked 10 11 12 13 14 15

Number of Yo-Yos Produced 60 70 78 84 88 90

Wage Rate per Hour ($) 10 10 10 10 10 10

Price of Yo-Yos ($) 5 5 5 5 5 5

TABLE 13-4 51) Refer to Table 13-4. What is the MRP for the 13th hour worked? A) $78 B) $84 C) $5 D) $30 Answer: D Explanation:

51) E) $10

A) B) C) D) E)

52) Refer to Table 13-4. What is the marginal cost of the variable factor employed by this firm? A) $0 B) $5 C) $10 D) $20 E) $30 Answer: C Explanation:

A) B) C) D) E)

53) Refer to Table 13-4. How many worker-hours should this profit-maximizing firm hire? A) 11 B) 12 C) 13 D) 14 E) 15 Answer: E Explanation:

53)

A) B) C) D) E)

54) Refer to Table 13-4. If the market price of yo-yos drops to $2.50, how many worker-hours should this profit-maximizing firm hire? A) 11 B) 12 C) 13 D) 14 E) 15 Answer: D Explanation:

52)

A) B) C) D) E)

16

54)

55) Refer to Table 13-4. Which of the following statements best describes the situation of this firm when it is employing 12 hours of labour? The 12th hour of labour hired A) adds $10 to revenue and costs $10 to hire, so this firm is maximizing its profit at 12 hours of labour. B) adds $5 to revenue, but costs $10 to hire, so this firm should hire less labour. C) adds $30 to revenue, but only costs $10 to hire, so this firm should hire more labour. D) adds $8 to revenue, but costs $10 to hire, so this firm should hire less labour. E) adds $40 to revenue, but only costs $10 to hire, so this firm should hire more labour. Answer: E Explanation:

A) B) C) D) E)

56) Refer to Table 13-4. Which of the following statements best describes the situation of this firm when it is employing 15 hours of labour? The 15th hour of labour hired A) adds $5 to revenue, but costs $10 to hire, so this firm should hire less labour. B) adds $20 to revenue, but only costs $10 to hire, so this firm should hire more labour. C) adds $10 to revenue and costs $10 to hire, so this firm is maximizing its profit at 15 hours of labour. D) adds $50 to revenue, but only costs $10 to hire, so this firm should hire more labour. E) adds $2 to revenue, but costs $10 to hire, so this firm should hire less labour. Answer: C Explanation:

56)

A) B) C) D) E)

57) Refer to Table 13-4. If plotted on a graph, the marginal revenue product curve for the "number of hours worked" would be the same as A) the firm's marginal product curve, and would be downward sloping and concave to the origin. B) the firm's marginal product curve, and would be downward sloping and convex to the origin. C) the firm's demand curve for hours worked, and would be downward sloping and linear. D) the firm's demand curve for yo-yos, and would be downward sloping and linear. E) the firm's marginal revenue curve, and would be horizontal at $5 because this firm is operating in a competitive labour market. Answer: C Explanation:

55)

A) B) C) D) E)

17

57)

58) In a competitive labour market, an increase in the demand for labour might be due to an increase in the A) supply of labour. B) wage rate. C) supply of the product that labour produces. D) demand for the product that labour produces. E) supply of the other factors. Answer: D Explanation:

A) B) C) D) E)

59) A demand for a factor of production is said to be "derived" because the factor's demand depends A) entirely on the cost of the factor. B) entirely on corporate advertising. C) heavily on government policy. D) heavily on public choice. E) on the demand for the good or services it helps to make. Answer: E Explanation:

60)

A) B) C) D) E)

61) The demand curve for a variable factor is always A) that factor's marginal cost curve. B) that factor's MRP curve. C) that factor's MP curve. D) steeper than that factor's MRP curve. E) flatter than that factor's MRP curve. Answer: B Explanation:

59)

A) B) C) D) E)

60) Which of the following is the best example of a derived demand? A) A decrease in interest rates increases the demand for housing. B) An increase in the wage rate causes firms to substitute capital for labour. C) An increase in demand for cars will increase the demand for auto workers. D) A decrease in the price of internet connection will increase the demand for tablet computers. E) An increase in the price of butter increases the demand for margarine. Answer: C Explanation:

58)

61)

A) B) C) D) E) 18

62) In a perfectly competitive labour market, a profit-maximizing firm will employ labour until the A) MPP = MRP. B) wage = MP. C) MRP = the product's price. D) wage = MRP. E) wage = the product's price. Answer: D Explanation:

A) B) C) D) E)

63) The demand for a factor will be more elastic if A) there is little substitutability between factors. B) it is easier to substitute between this factor and others. C) that factor determines a small percentage of total cost. D) the demand for the good being produced is inelastic. E) the supply of the factor is elastic. Answer: B Explanation:

64)

A) B) C) D) E)

65) Consider a firm's demand curve for labour. If a technological change makes it easier to substitute capital for labour, the demand curve for labour A) shifts parallel to the right. B) shifts parallel to the left. C) becomes more inelastic. D) becomes more elastic. E) is not affected. Answer: D Explanation:

63)

A) B) C) D) E)

64) The demand for a factor will be less elastic A) if there is a high degree of substitutability between factors. B) if marginal physical product decreases slowly as more of the factor is used. C) the larger the extent of diminishing returns for the factor. D) if the demand for the good being produced is elastic. E) if the supply of the factor is elastic. Answer: C Explanation:

62)

A) B) C) D) E) 19

65)

66) Consider a firm's demand curve for labour. If a technological change makes it harder to substitute capital for labour, the demand curve for labour A) shifts parallel to the right. B) shifts parallel to the left. C) becomes less elastic. D) becomes more elastic. E) is not affected. Answer: C Explanation:

A) B) C) D) E)

67) Which of the following is the best example of a derived demand? A) an increase in the wage for yoga instructors causes an increase in the demand for yoga classes B) a decrease in the price of Pilates classes causes an increase in the demand for yoga classes C) an increase in demand for yoga classes causes an increase in demand for yoga instructors D) a decrease in the demand for yoga mats causes a decrease in demand for yoga classes E) an increase in awareness about fitness causes an increase in demand for yoga classes Answer: C Explanation:

66)

A) B) C) D) E)

20

67)

The diagram below shows the MRP curve for a firm producing copper plumbing pipe. The factor of production being considered here is hours of labour.

FIGURE 13-2 68) Refer to Figure 13-2. Assume that the firm is a perfect competitor and the price of the firm's output is fixed. We know that the firm's MRP curve is A) the same shape as the firm's marginal product curve for labour. B) the same shape as the firm's marginal revenue curve. C) horizontal, if the firm is perfectly competitive. D) steeper than the firm's marginal product curve for labour. E) flatter than the firm's marginal product curve for labour. Answer: A Explanation:

A) B) C) D) E)

69) Refer to Figure 13-2. This firm's MRP curve is the firm's A) derived demand for copper plumbing pipe. B) demand curve for labour. C) market demand curve for copper plumbing pipe. D) marginal product of labour curve. E) total product curve for labour. Answer: B Explanation:

68)

A) B) C) D) E)

21

69)

70) Refer to Figure 13-2. Suppose this firm initially has the marginal revenue product curve MRP1 . One reason that the curve could shift to MRP2 is A) a decrease in demand for the firm's output, copper plumbing pipe. B) an increase in the supply of labour. C) a decrease in the wage rate. D) a decrease in the market price of copper plumbing pipe. E) an improvement in workers' human capital. Answer: E Explanation:

A) B) C) D) E)

71) Refer to Figure 13-2. Suppose this firm initially has the marginal revenue product curve MRP1 . One reason that the curve could shift to MRP3 is A) an increase in demand for the firm's output, copper plumbing pipe. B) a decrease in the market price of copper plumbing pipe. C) a decrease in the supply of labour. D) an increase in the wage rate. E) an increase in the marginal product of labour. Answer: B Explanation:

71)

A) B) C) D) E)

72) Refer to Figure 13-2. Suppose this firm has the marginal revenue product curve MRP1 . At a wage rate of $12, the profit-maximizing firm will hire ________ units of labour. A) 100 B) 120 C) 140 D) 160 E) 180 Answer: C Explanation:

70)

A) B) C) D) E)

22

72)

73) Refer to Figure 13-2. Suppose this firm is facing MRP1 , a wage rate of $12 per hour and is employing 150 units of labour. At this level of employment, A) the last unit of labour is adding less to the firm's cost than it is adding to the firm's revenue, so it should increase the use of labour. B) the last unit of labour contributes as much to the firm's costs as to the firm's revenues and so the firm should not change its use of labour. C) the last unit of labour is adding more to the firm's cost than it is adding to the firm's revenue, so it should reduce the use of labour. D) the firm has shifted the MRP curve to MRP2 . E) the firm has shifted the MRP curve to MRP3 . Answer: C Explanation:

A) B) C) D) E)

74) Refer to Figure 13-2. Suppose this profit-maximizing firm is facing MRP1 and a wage rate of $12 per hour. Now suppose there is, simultaneously, an increase in demand for copper plumbing pipe (such that MRP shifts to MRP2 ), and an increase in the wage rate to $16 per hour. The firm should A) employ 20 more units of labour. B) employ 40 more units of labour. C) employ the same number of units of labour. D) employ 40 fewer units of labour E) employ 20 fewer units of labour. Answer: A Explanation:

73)

A) B) C) D) E)

23

74)

The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-3 75) Refer to Figure 13-3. This factor market is in equilibrium at point B. What is the marginal revenue product of the 40th unit of the factor employed? A) $8 multiplied by the price of the product B) $320 C) $8 D) the marginal product of the 40th unit employed multiplied by the wage E) $8 multiplied by the marginal revenue of the 40th unit employed Answer: C Explanation:

A) B) C) D) E)

24

75)

76) Refer to Figure 13-3. If the supply and demand curves for the factor are as shown in the diagram, but the wage being paid is $9, and the market is at point C, A) the wage is higher than the factor's marginal revenue product, and firms will reduce the amount of the factor employed. B) the wage is higher than the factor's marginal product, and firms will reduce the amount of the factor employed. C) the marginal revenue product is not equal to the marginal cost of the factor and firms will increase the amount of the factor employed. D) the demand curve will shift to the right until equilibrium factor price and quantity are re-established. E) the demand curve will shift to the left until equilibrium factor price and quantity are re-established. Answer: A Explanation:

A) B) C) D) E)

77) Other things being equal, if it becomes more difficult to substitute capital for labour in the production of cell phones, the demand curve for labour in that industry A) will shift parallel to the left. B) will shift parallel to the right. C) will remain unchanged. D) will become more elastic. E) will become more inelastic. Answer: E Explanation:

77)

A) B) C) D) E)

78) A monopolist will continue to increase production until the marginal cost of the variable factor is A) greater than the marginal revenue of the firm's output. B) less than the marginal revenue of the firm's output. C) equal to zero. D) equal to the marginal revenue product of the factor. E) equal to the marginal revenue of the firm's output. Answer: D Explanation:

76)

A) B) C) D) E)

25

78)

79) A perfectly competitive firm will continue to increase production until the marginal cost of the variable factor is A) greater than the marginal revenue of the firm's output. B) less than the marginal revenue of the firm's output. C) equal to zero. D) equal to the marginal revenue product of the factor. E) equal to the marginal revenue of the firm's output. Answer: D Explanation:

79)

A) B) C) D) E)

Consider the following production and cost schedule for a firm. The first column shows the number of units of a variable factor of production employed by the firm. Total Number of Total Number of Units of the Factor Units of Output 10 20 11 44 12 64 13 78 14 84 15 86

Price per Unit of Output $10 $10 $10 $10 $10 $10

TABLE 13-1 80) Refer to Table 13-1. How many units of this factor of production would the profit-maximizing firm hire if the price of each unit of the factor was $200? A) 10 B) 11 C) 12 D) 13 E) It is not possible to determine with the data given. Answer: C Explanation:

A) B) C) D) E)

26

80)

81) Refer to Table 13-1. How many units of this factor of production would the profit-maximizing firm hire if the price of each unit of the factor was $140? A) 11 B) 12 C) 13 D) 14 E) It is not possible to determine with the data given. Answer: C Explanation:

A) B) C) D) E)

82) Refer to Table 13-1. How many units of this factor of production would the profit-maximizing firm hire if the price of each unit of the factor was $30? A) 12 B) 13 C) 14 D) 15 E) It is not possible to determine with the data given. Answer: C Explanation:

82)

A) B) C) D) E)

83) Consider the perfectly competitive labour market for video-game designers. Which of the following will shift the demand curve for these workers to the right? 1) an increase in the equilibrium wage rate for video-game designers; 2) a decrease in the market price of video games; 3) new software that speeds the design process. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: C Explanation:

81)

A) B) C) D) E)

27

83)

84) Assume that the market for farmland in the fruit-growing region of southwestern Ontario is perfectly competitive. Which of the following will shift the demand curve for this land to the left? 1) a decrease in demand for Canadian-grown fruit; 2) an increase in the price of fruit; 3) scientific reports that confirm a reduction in water supply to the region. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1 only E) 3 only Answer: C Explanation:

A) B) C) D) E)

85) If a given factor of production is highly mobile across alternative uses, the factor's supply is A) highly price elastic. B) highly price inelastic. C) perfectly inelastic. D) irrelevant to its earnings. E) immobile at the industry level. Answer: A Explanation:

86)

A) B) C) D) E)

87) The elasticity of supply of computer-game programmers will generally be greater if we are analyzing the amount supplied to A) the whole economy in the short run. B) the whole economy in the long run. C) a particular industry in the short run. D) a particular industry in the long run. E) a specific firm. Answer: E Explanation:

85)

A) B) C) D) E)

86) The aggregate quantity of labour supplied will generally rise when there is an increase in 1) immigration; 2) labour-force participation rates; 3) the retirement age. A) 1 and 2 B) 1 and 3 C) 2 and 3 D) 1, 2, and 3 E) 1 only Answer: D Explanation:

84)

A) B) C) D) E)

28

87)

88) Consider computer programmers as a factor of production. Their factor mobility is quite ________, and so to any specific firm the supply of this factor is quite ________. A) low; inelastic B) low; elastic C) high; inelastic D) high; elastic Answer: D Explanation:

A) B) C) D)

89) If small changes in incentives can induce a factor to shift between alternative uses, we say that the factor is A) efficient. B) mobile. C) inelastic. D) declining. E) flighty. Answer: B Explanation:

89)

A) B) C) D) E)

90) Which of the following statements concerning factor mobility is FALSE? A) Land is a mobile resource in an economic sense, because it has many alternative uses. B) Once it is in place, a factory designed and built for a specific purpose is highly mobile. C) The allocation of labour tends to depend more on non-monetary considerations than does the allocation of either land or capital. D) The elasticity of the supply of labour to any particular use is likely to be greater in the long run than in the short run. E) Factor mobility is an important determinant of economic rent. Answer: B Explanation:

88)

A) B) C) D) E)

29

90)

The three diagrams below each show a supply curve for oil tankers over a relatively short period of time.

FIGURE 13-4 91) Refer to Figure 13-4. Consider the supply of oil tankers to an individual Canadian shipping firm, the North American shipping industry, and the world shipping industry. Which diagram best shows the supply of oil tankers that is relevant to the North American shipping industry? A) diagram 1 B) diagram 2 C) diagram 3 D) diagrams 2 or 3 E) diagrams 1 or 2 Answer: C Explanation:

A) B) C) D) E)

92) Refer to Figure 13-4. Consider the supply of oil tankers to an individual Canadian shipping firm, the North American shipping industry, and the world shipping industry. Which diagram best shows the supply of oil tankers that is relevant to an individual Canadian firm? A) diagram 1 B) diagram 2 C) diagram 3 D) diagrams 2 or 3 E) diagrams 1 or 2 Answer: A Explanation:

91)

A) B) C) D) E)

30

92)

93) Refer to Figure 13-4. Consider the supply of oil tankers to an individual Canadian shipping firm, the North American shipping industry, and the world shipping industry. Which diagram best shows the supply of oil tankers that is relevant to the world shipping industry? A) diagram 1 B) diagram 2 C) diagram 3 D) diagrams 2 or 3 E) diagrams 1 or 2 Answer: B Explanation:

A) B) C) D) E)

94) Refer to Figure 13-4. Consider oil tankers as a factor of production (for example, for the production of gasoline). Which diagram shows the most mobility of this factor of production? A) diagram 1 B) diagram 2 C) diagram 3 D) none of the diagrams E) each diagram shows mobility Answer: A Explanation:

94)

A) B) C) D) E)

95) Consider a manufacturing plant as an example of physical capital. Factor mobility with regard to this physical capital refers to A) the ease with which this plant can be relocated to another location. B) the ease with which this plant can be converted to a different use. C) the ease with which the labour employed at the plant can be retrained to produce a different product. D) the elasticity of supply of the labour employed in the plant. E) only the long-run concept of mobility because it is physical capital. Answer: B Explanation:

93)

A) B) C) D) E)

31

95)

96) Which of the following statements about equilibrium factor-price differentials is correct? They A) tend to be self-eliminating. B) may be caused by differences in the intrinsic qualities of factors. C) will be eliminated when the allocation of resources is in long-run equilibrium. D) are unrelated to differences in non-monetary benefits. E) are unrelated to acquired differences in factors. Answer: B Explanation:

A) B) C) D) E)

97) Non-monetary considerations tend to be most important in the allocation of A) land. B) capital. C) labour. D) raw materials. E) natural resources. Answer: C Explanation:

97)

A) B) C) D) E)

98) Factors of production (land, labour, and capital) tend to move between uses so as to A) equalize distribution of wealth. B) equalize the amount of industry in separate regions of a nation. C) maximize the net advantages to the owners of the factors. D) increase the ratio of capital to labour. E) maximize only the monetary advantages to the owners of the factors. Answer: C Explanation:

96)

A) B) C) D) E)

32

98)

99) The difference between temporary factor-price differentials and equilibrium factor-price differentials is that A) temporary differentials are affected by supply and demand whereas equilibrium differentials are not. B) equilibrium differentials lead to, and are eliminated by, factor mobility whereas temporary differentials do not. C) the government can only eliminate equilibrium differentials. D) temporary differentials lead to, and are eliminated by, factor mobility whereas equilibrium differentials do not. E) only equilibrium differentials are interesting for policy purposes. Answer: D Explanation:

A) B) C) D) E)

100) According to the hypothesis of "equal net advantage," A) owners of factors will use their factors in a way that results in the largest financial return. B) in equilibrium, owners of identical factors of production will receive different net returns for different uses of the factors. C) owners of factors will use them in a way that results in the largest combined monetary and non-monetary rewards. D) supply curves for a factor in any particular use are not likely to shift. E) demand curves for a factor in any particular use are not likely to shift. Answer: C Explanation:

100)

A) B) C) D) E)

101) The theory of equal net advantage is a theory concerning A) the demand for factors. B) the supply of factors. C) the marginal product of the factors. D) the production process. E) economic versus accounting profit. Answer: B Explanation:

99)

A) B) C) D) E)

33

101)

102) A temporary factor-price differential is one which A) will tend to be eliminated in the long run. B) will hamper the reallocation of resources from declining to growing industries. C) derives from intrinsic differences in the factors themselves. D) will reflect a permanent state of disequilibrium. E) is seldom self-eliminating. Answer: A Explanation:

A) B) C) D) E)

103) The hypothesis of equal net advantage explains why A) two workers doing the same job in the same office are sometimes paid different wage rates. B) higher wages must be paid to entice workers to accept less desirable occupations or a less desirable location. C) the supply of unskilled labour in Canada is as great as it is. D) a hard-working employee may get paid less than other employees. E) lower wages are paid to workers with less qualifications. Answer: B Explanation:

103)

A) B) C) D) E)

104) When the wage paid to workers in job A increases relative to the wage in job B, then, ceteris paribus,the A) net advantage of job B will increase relative to job A. B) non-monetary advantages of job A will increase. C) non-monetary advantages of job B will decrease. D) net advantage of job A will increase relative to job B. E) monetary advantage of job A will increase, but not its net advantage. Answer: D Explanation:

102)

A) B) C) D) E)

34

104)

105) If at a particular wage rate in a competitive labour market the quantity demanded of labour is less than quantity supplied of labour, then A) some workers will begin to accept lower wages and induce employers to hire more workers. B) there will be a shortage of labour, thereby increasing the equilibrium wage rate. C) the demand curve for labour will shift to the right. D) the supply curve for labour will shift to the right. E) a black market for labour will form, with firms offering workers very high wages. Answer: A Explanation:

A) B) C) D) E)

106) Other things equal, if a particular province has some non-monetary advantages, such as a temperate climate, the wage rate in that province will be A) higher than average and the market will be in equilibrium. B) higher than average and the market will be in disequilibrium. C) lower than average and the market will be in equilibrium. D) lower than average and the market will be in disequilibrium. E) the same as any other province. Answer: C Explanation:

106)

A) B) C) D) E)

107) Suppose the following conditions existed in the Canadian labour market: 1) All labour is mobile and possesses the same skills. 2) Non-monetary advantages are the same across industries and occupations. 3) The demand conditions for labour are the same across industries. In this situation, we expect wage rates to A) be the same in all industries. B) be higher in some industries than in others. C) be the same in most industries. D) differ because of the desirability of the location of the job. E) have equilibrium differentials. Answer: A Explanation:

105)

A) B) C) D) E)

35

107)

108) Suppose that experienced oil-field workers are observed to earn a higher wage in Alberta than in Newfoundland. Economists would likely call this A) an equilibrium differential. B) an intrinsic difference. C) an acquired difference. D) equalization of net advantage. E) a temporary factor-price differential. Answer: E Explanation:

A) B) C) D) E)

109) Suppose a cook at a diamond mining camp in Canada's North earns a much higher wage than a cook with similar training and experience at an office building in Halifax. Economists would likely call this A) a temporary factor-price differential. B) a compensating differential. C) an intrinsic difference. D) an acquired difference. E) an equilibrium differential. Answer: B Explanation:

109)

A) B) C) D) E)

110) Suppose the government decides, in the interest of "fairness," to impose a policy prohibiting factor-price differentials. The likely result would be A) a horizontal factor supply curve. B) a decrease in net factor demands. C) an increase in factor mobility. D) a shortage of factors in uses with low net advantage. E) equilibrium in factor markets. Answer: D Explanation:

108)

A) B) C) D) E)

36

110)

111) All of the following are examples of equilibrium factor-price differentials, EXCEPT A) the prices of two pieces of land, one with a good supply of water and one without. B) the wages earned by labour of varying ability. C) the difference in average wages in Toronto and Dryden, Ontario. D) an income differential that induces increased rates of entry into the higher paid professions. E) higher pay to a dentist than to a dental hygienist. Answer: D Explanation:

A) B) C) D) E)

112) The term "economic rent" refers to A) a payment for use of land. B) transfer earnings plus opportunity cost. C) the opportunity cost of land. D) economic profit. E) factor payments in excess of transfer earnings. Answer: E Explanation:

113)

A) B) C) D) E)

114) Which of the following concepts is most similar to the concept of "transfer earnings"? A) factor mobility B) factor price differentials C) factor payments D) equal net advantage E) opportunity cost Answer: E Explanation:

112)

A) B) C) D) E)

113) Alfred Marshall's concept of "transfer earnings" denotes A) the value of the factor to its user. B) a return to a particular factor which must be the same for all uses of that factor. C) the amount a factor earns over and above what is necessary to keep the factor from transferring to an alternative use. D) the amount that a factor must earn to keep it from transferring to another use. E) the amount the factor earns every time it transfers between locations. Answer: D Explanation:

111)

A) B) C) D) E) 37

114)

Consider the following demand and supply curves in factor markets.

FIGURE 13-5 115) Refer to Figure 13-5. The panel that best illustrates the short-run supply of a factor to the economy as a whole is A) 1. B) 2. C) 3. D) 4. E) 1 or 4. Answer: C Explanation:

A) B) C) D) E)

116) Refer to Figure 13-5. Assume that all four factor markets are labour markets. The total amount paid to the workers is "transfer earnings" in diagram A) 1. B) 2. C) 3. D) 4. E) 1 or 4 Answer: B Explanation:

115)

A) B) C) D) E)

38

116)

117) Refer to Figure 13-5. Assume that all four factor markets are labour markets. The total amount paid to the workers is "economic rent" in diagram A) 1. B) 2. C) 3. D) 4. E) 1 or 4. Answer: C Explanation:

A) B) C) D) E)

118) Refer to Figure 13-5. The panel that best illustrates the supply of a factor to a specific firm in the economy is A) 1. B) 2. C) 3. D) 4. E) 1 or 4. Answer: B Explanation:

119)

A) B) C) D) E)

120) If the supply curve for a factor is perfectly inelastic, the payments to the factor are A) wholly economic rent. B) wholly transfer earnings. C) partly economic rent and partly transfer earnings. D) neither economic rent nor transfer earnings. E) an unnecessary tax on the factor. Answer: A Explanation:

118)

A) B) C) D) E)

119) Refer to Figure 13-5. In diagrams 1 and 4, the marginal worker is earning A) transfer earnings only. B) economic rent only. C) both transfer earnings and economic rent. D) a wage greater than the equilibrium market wage. E) a wage greater than the worker should receive for the product produced. Answer: A Explanation:

117)

A) B) C) D) E)

39

120)

121) If the supply curve for a factor is perfectly elastic, the payments to the factor are A) wholly economic rent. B) wholly transfer earnings. C) partly economic rent and partly transfer earnings. D) neither economic rent nor transfer earnings. E) an unnecessary tax on the factor. Answer: B Explanation:

A) B) C) D) E)

122) The value of a factor in its best alternative use is called A) intrinsic value. B) alternative value. C) transfer earnings. D) economic earnings. E) economic profit. Answer: C Explanation:

123)

A) B) C) D) E)

124) John Smith plays baseball for $500 000 per year, but if he were not a baseball player, his next best alternative would be to earn $35 000 per year as a sales representative. By playing baseball, Smith is earning economic rent of A) $535 000. B) $500 000. C) $465 000. D) $35 000. E) zero. Answer: C Explanation:

122)

A) B) C) D) E)

123) Suppose that the municipal government of Calgary decides to tax economic rent on a highly sought-after piece of land. The result would be A) little or no effect on the supply of the land. B) an increase in the supply of the land. C) a reduction in the supply of land. D) a shift of the entire tax onto the consumer. E) a rise in the price of land. Answer: A Explanation:

121)

A) B) C) D) E)

40

124)

125) Which of the following would be least likely to earn economic rent? A) an owner of land located on Yonge Street, near downtown Toronto B) Celine Dion C) Jim Murray, an auto-plant worker in Oshawa, Ontario D) Robert Bateman, famous wildlife artist E) a university professor who loves every bit of his job Answer: C Explanation:

A) B) C) D) E)

126) Choose the statement that best describes the difference between "economic rent" and other factor payments. A) Economic rent is unearned income of the factor whereas other payments are earned. B) Economic rent is not a cost to the firm but other payments are. C) A reduction in economic rent will not reduce the availability of the factor whereas reducing other payments of factors will reduce their availability. D) There is no difference between economic rent and other factor payments. E) Economic rent is the sum of all factor payments. Answer: C Explanation:

127)

A) B) C) D)

128) Suppose Harrison Ford makes 2 movies per year and earns $10 million per movie. Suppose that if he weren't making movies his next best alternative would be to earn $500 000 per year endorsing shampoo. By making movies, Harrison Ford A) is earning economic rent of $20 500 000 per year. B) is earning economic rent of $20 000 000 per year. C) is earning economic rent of $19 500 000 per year. D) is earning economic rent of $500 000 per year. E) is not earning economic rent. Answer: C Explanation:

126)

A) B) C) D) E)

127) Consider the mobility of any factor of production. The more broadly we define the use of the factor, the ________ is the mobility of the factor and the ________ is the share of the factor payment that is economic rent. A) lower; lower B) lower; higher C) higher; higher D) higher; lower Answer: B Explanation:

125)

A) B) C) D) E) 41

128)

129) Steve Nash is a highly paid professional basketball player in the National Basketball Association. From the perspective of the whole NBA, Steve Nash's economic rent would be ________, while from the perspective of his individual team it would be ________. A) very small; very large B) zero; impossible to calculate C) close to his whole salary; very small D) zero; close to his whole salary E) very large; close to his whole salary Answer: C Explanation:

129)

A) B) C) D) E)

The demand and supply curves shown below apply to a competitive market for a factor used in the production of widgets.

FIGURE 13-3 130) Refer to Figure 13-3. This factor market is in equilibrium at point B. Which of the following statements best describes factor payments at point B? A) total income paid to the factor is $8 B) total factor earnings are $320 C) total factor earnings are $320 and the 40th unit earns zero rent D) total factor earnings are $320 and the 40th unit earns economic rent of $8 E) economic rent to the 40th unit is $320 Answer: C Explanation:

A) B) C) D) E)

42

130)

131) Refer to Figure 13-3. This factor market is initially in equilibrium at point B, but changes occur that cause the equilibrium to shift to point D (S curve shifts left). At the new equilibrium, total factor earnings ________ compared to the initial equilibrium. A) decreased by $30 B) increased by $30 C) remained the same D) increased by $10 E) increased by $330 Answer: D Explanation:

A) B) C) D) E)

132) Refer to Figure 13-3. This factor market is in equilibrium at point B. In equilibrium, the 20th unit of the factor is being paid transfer earnings of ________ and economic rent of ________. A) $120; -$2 B) $16; $2 C) $320; $80 D) $120; $40 E) $6; $2 Answer: E Explanation:

133)

A) B) C) D) E)

134) Refer to Figure 13-3. This factor market is in equilibrium at point B. If a technological change occurs in the production of widgets that allows for increased production from each factor, then A) economic rents to the initial 40 units of the factor will decrease. B) equilibrium will move toward point D and the factor price will rise. C) total factor earnings will rise and economic rent to the 40th unit will be zero. D) equilibrium will move toward point C and economic rent to the initial 40 units will increase. E) total factor earnings will decrease and economic rent to the initial 40 units will increase. Answer: D Explanation:

132)

A) B) C) D) E)

133) Refer to Figure 13-3. This factor market is in equilibrium at point B. In equilibrium, the 30th unit of the factor is being paid transfer earnings of ________ and economic rent of ________. A) $120; -$2 B) $16; $2 C) $7; $1 D) $210; $1 E) $6; $2 Answer: C Explanation:

131)

A) B) C) D) E)

43

134)

135) Refer to Figure 13-3. This factor market is initially in equilibrium at point B. Assume that there is a decrease in the demand for widgets and a new equilibrium is established at point A. Which of the following statements about point A is true? A) Total economic rent is $120. B) The marginal revenue product of the 20th unit of the factor is $6 and economic rent of the 20th unit of the factor is $0. C) The marginal revenue product of the 20th unit of the factor is $120 and economic rent of the 20th unit of the factor is $6. D) Total transfer earnings are $120. E) Transfer earnings for the 20th unit of the factor are $6 and economic rent of the 20th unit of the factor is $2. Answer: B Explanation:

A) B) C) D) E)

44

135)

Answer Key Testname: UNTITLED13

1) E 2) B 3) D 4) A 5) A 6) E 7) B 8) E 9) D 10) C 11) E 12) B 13) D 14) B 15) E 16) D 17) D 18) D 19) D 20) C 21) B 22) B 23) B 24) C 25) D 26) B 27) C 28) C 29) C 30) A 31) B 32) B 33) E 34) E 35) C 36) D 37) D 38) B 39) B 40) B 41) E 42) A 43) E 44) C 45) B 46) E 47) E 48) A 49) A 50) B 45

Answer Key Testname: UNTITLED13

51) D 52) C 53) E 54) D 55) E 56) C 57) C 58) D 59) E 60) C 61) B 62) D 63) B 64) C 65) D 66) C 67) C 68) A 69) B 70) E 71) B 72) C 73) C 74) A 75) C 76) A 77) E 78) D 79) D 80) C 81) C 82) C 83) C 84) C 85) A 86) D 87) E 88) D 89) B 90) B 91) C 92) A 93) B 94) A 95) B 96) B 97) C 98) C 99) D 100) C 46

Answer Key Testname: UNTITLED13

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135)

B A B D A C A E B D D E D E C B C B A A B C A C C C B C C C D E C D B

47

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In a perfectly competitive labour market, all workers would earn the same wage if A) the world was fair. B) workers' education and experience were identical. C) all jobs had the same working conditions. D) regional variables mattered. E) jobs and workers were identical in every way. Answer: E Explanation:

A) B) C) D) E)

2) If labour markets were perfectly competitive, A) all workers would eventually earn the same wage. B) all workers would achieve the same levels of education and experience. C) working conditions would be the same for all jobs. D) wage differentials could still exist because of differences in workers and jobs. E) discrimination could not create wage differentials. Answer: D Explanation:

2)

A) B) C) D) E)

3) One possible reason for wage differentials is that A) there are competitive forces operating in labour markets. B) discrimination affects labour-market outcomes. C) working conditions are the same for most jobs. D) workers have more-or-less equal skills. E) there is only a single national labour market. Answer: B Explanation:

1)

A) B) C) D) E)

1

3)

4) Other things being equal, individuals working in relatively risky working conditions generally A) earn higher wages due to the greater relative demand for these individuals. B) earn higher wages due to the reduced supply of risk-taking individuals. C) earn lower wages because of the scarcity of these jobs. D) do not concern economists as these situations are uncommon. E) work in perfectly competitive labour markets. Answer: B Explanation:

A) B) C) D) E)

5) All of the following are classified as human capital EXCEPT A) education. B) training. C) gender. D) health. E) experience. Answer: C Explanation:

6)

A) B) C) D) E)

7) If you choose to stay in school beyond the compulsory minimum period, you are A) realizing the benefits of your investment in human capital. B) delaying your investment in human capital. C) refusing to invest in your human capital. D) investing further in your human capital. E) wasting your time from an economic standpoint. Answer: D Explanation:

5)

A) B) C) D) E)

6) One attempt to provide some minimum level of human capital for all citizens is a system of A) compulsory and publicly financed education. B) income taxation. C) unionism. D) comparable worth. E) minimum wages. Answer: A Explanation:

4)

A) B) C) D) E)

2

7)

8) During recessions, individual investment in higher education typically ________ due to the relatively ________ opportunity cost of time spent in university. A) rises; high B) rises; low C) falls; high D) falls; low E) stays constant; constant Answer: B Explanation:

A) B) C) D) E)

9) Investment in human capital can be very costly to the individual, but it can also generate large returns. Canadian census data from 2007 show that average employment income for a university graduate is approximately ________ of the average employment income of a worker with no more than a high school diploma. A) 50% B) 125% C) 200% D) 300% E) 400% Answer: C Explanation:

10)

A) B) C) D) E)

11) A typical firm hiring in a perfectly competitive labour market faces a marginal cost curve for labour that is A) horizontal. B) vertical. C) equal to the supply curve of the firm. D) parallel to the firm's marginal cost curve for its product. E) downward sloping. Answer: A Explanation:

9)

A) B) C) D) E)

10) Wage differentials due to cross-worker differences in human capital A) are not justifiable on efficiency grounds. B) will persist in competitive equilibrium. C) are not an important source of observed wage differentials. D) are an example of economic distortions due to monopoly power. E) exist because of distortions in labour markets. Answer: B Explanation:

8)

A) B) C) D) E) 3

11)

12) A typical firm hiring in a perfectly competitive labour market faces a labour supply curve that A) is upward sloping. B) coincides with the firm's marginal cost curve. C) coincides with the firm's marginal cost of labour curve. D) coincides with the firm's demand for labour curve. E) is downward sloping. Answer: C Explanation:

A) B) C) D) E)

13) In terms of human capital, which of the following is the best example of an inherited skill? A) a neurosurgeon who can perform brain surgery after many years of training B) a retail worker who is able to work overtime each week C) a worker who exercises is healthier and therefore more productive D) a salesman doubles his sales after taking a training course E) a music teacher who can carry a tune for the school choir Answer: E Explanation:

13)

A) B) C) D) E)

14) One or two generations ago, fewer Canadians completed post-secondary training and education. One explanation for this is A) a decrease in demand for more education in recent years. B) wage differentials due to formal education have diminished over time. C) a negative relationship between the acquisition of human capital and overall earnings. D) the relative wage of more highly educated people has increased in recent years. E) that the opportunity cost of post-secondary education has increased. Answer: D Explanation:

12)

A) B) C) D) E)

4

14)

15) In recent years, some business schools in Canada have begun charging tuition of close to $35 000 per year for a graduate degree, whereas Arts faculties charge much lower tuition for their graduate degrees. Students are prepared to pay the high tuition in a business school because A) the expected payoff in terms of higher future wages is large. B) the cost of providing the business education is far higher than the cost of the Arts education. C) the marginal revenue product of a business degree is lower than the marginal revenue product of an Arts degree. D) the marginal cost of a business degree is less than the marginal benefit of a business degree. E) they recognize that the investment in human capital is not worthwhile. Answer: A Explanation:

15)

A) B) C) D) E)

The table below shows the labour demand and labour supply schedules in a competitive labour market.

Wage Rate ($/hour) 10 12 14 15 17

Quantity Demanded of Labour (hours/month) 1300 1000 800 400 200

Quantity Supplied of Labour (hours/month) 500 1000 1300 1500 1800

TABLE 14-1 16) Refer to Table 14-1. In a competitive labour market that clears, the equilibrium employment level would be A) 400 units. B) 500 units. C) 800 units. D) 1000 units. E) 1300 units. Answer: D Explanation:

A) B) C) D) E)

5

16)

17) Refer to Table 14-1. If the wage rate is $15 per hour, how many hours per month are supplied to this market but are not actually employed? A) 0 B) 400 C) 1000 D) 1100 E) 1500 Answer: D Explanation:

A) B) C) D) E)

18) Refer to Table 14-1. In this labour market, if the wage rate is $10 per hour, how many hours of labour per month are actually employed? A) 0 B) 500 C) 1000 D) 1300 E) 1850 Answer: B Explanation:

19)

A) B) C) D) E)

20) Labour-market discrimination, which keeps one group of workers out of elite (E) occupations and limits them to ordinary (O) occupations, will have which of the following effects? A) a decrease in supply and higher wages in the E occupations. B) more employment in the E occupations. C) a decrease in supply and lower wages in the O occupations. D) more unemployment in the E occupations. E) a decrease in supply and higher wages in the O occupation. Answer: A Explanation:

18)

A) B) C) D) E)

19) Labour-market discrimination results in a A) lower supply in discriminating occupations and a higher supply in non-discriminating occupations. B) higher supply in discriminating occupations and a lower supply in non-discriminating occupations. C) lower supply in all occupations. D) lower demand in all occupations. E) higher demand in both occupations. Answer: A Explanation:

17)

A) B) C) D) E)

6

20)

21) Labour-market discrimination, which keeps one group of workers out of elite (E) occupations and limits them to ordinary (O) occupations, will have which of the following effects? A) a decrease in supply and lower wages in the O occupations B) an increase in supply and lower wages in the E occupations C) an increase in supply and higher wages in the E occupations D) a decrease in supply and lower wages in the E occupations E) an increase in supply and lower wages in the O occupations Answer: E Explanation:

A) B) C) D) E)

22) If competitive labour market E discriminates against one group of workers and market O does not, we can predict an increase in A) employment in market E. B) wages in market E. C) wages in market O. D) the welfare of the average worker. E) economy-wide wage rates. Answer: B Explanation:

22)

A) B) C) D) E)

23) Suppose market E discriminates against one group of workers and market O does not. Unemployment in market O would result if A) the free-market equilibrium wage in market O is below the legal minimum wage. B) some workers are unwilling to work in E-market jobs. C) there is no statutory minimum wage. D) the supply curve in market O shifts to the left and wages are slow to adjust. E) the demand curve in market O shifts to the right and wages are slow to adjust. Answer: A Explanation:

21)

A) B) C) D) E)

7

23)

24) Evidence suggests that some of the observed average female-male wage differential can be explained by A) the nature of the jobs and differences in acquired human capital. B) differences in the innate abilities between men and women. C) higher marginal revenue product for female workers. D) the labour-force participation rate of adult women being above that of adult men. E) None of the above can explain part of the wage differentials. Answer: A Explanation:

A) B) C) D) E)

25) Some types of discrimination in the labour market will be limited by A) the minimum wage. B) entry of of discriminating firms into the market. C) an increase in the number of individuals discriminated against. D) the desire of firms to maximize profits. E) greater monopoly power in the market. Answer: D Explanation:

25)

A) B) C) D) E)

26) The following statements describe the adverse effects suffered by groups subject to labour-market discrimination. Which of the statements is false? A) They will be more likely to experience spells of unemployment. B) Their children's ability and willingness to invest in human capital will be less on average than those of children of other groups. C) They will receive lower wages on average than other groups. D) Their human capital will increase. E) The discriminatory wage differentials will persist as long as the discrimination exists. Answer: D Explanation:

24)

A) B) C) D) E)

8

26)

27) If there is discrimination against some workers in market A but no discrimination in market B, then we can predict 1) a decrease in supply and higher wages in the A occupations.; 2) more employment in the A occupations.; 3) more unemployment in the B occupations if there is a binding minimum wage. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Explanation:

27)

A) B) C) D) E)

Suppose an island economy has only two labour markets - fishing (high skill) and farming (low skill). There are 1000 males and 1000 females in the labour force. There is an equal distribution of skilled and non-skilled workers among each sex.

FIGURE 14-1 28) Refer to Figure 14-1. The two labour markets are each in a ________ equilibrium at point E. The wage differential between the industries is a(n) ________ wage differential. A) non-competitive; discriminatory B) competitive; temporary C) competitive; equilibrium D) non-competitive; temporary E) competitive; discriminatory Answer: C Explanation:

A) B) C) D) E)

9

28)

29) Refer to Figure 14-1. Suppose the employers in the fishers labour market begin to discriminate against male workers. Which of the following can we expect to occur in the fishers labour market? A) There will be an equal flow of workers between the two markets, equilibrium will remain at point E and the wage at $100 per day. B) The demand for labour curve shifts to the right until a new equilibrium is reached at point B and the wage rises to $120 per day. C) The labour supply curve shifts to the left until a new equilibrium is reached at point A and the wage rises to $120 per day. D) The demand for labour curve shifts to the left until a new equilibrium is reached at point C and the wage falls to $80 per day. E) The labour supply curve shifts to the right until a new equilibrium is reached at point D and the wage falls to $80 per day. Answer: C Explanation:

A) B) C) D) E)

30) Refer to Figure 14-1. Suppose the employers in the fishers labour market begin to discriminate against male workers. Which of the following can we expect to occur in the farmers labour market? A) There will be an equal flow of workers between the two markets, equilibrium will remain at point E and the wage at $80 per day. B) The demand for labour curve shifts to the right until a new equilibrium is reached at point B and the wage rises to $100 per day. C) The labour supply curve shifts to the left until a new equilibrium is reached at point A and the wage rises to $100 per day. D) The demand for labour curve shifts to the left until a new equilibrium is reached at point C and the wage falls to $60 per day. E) The labour supply curve shifts to the right until a new equilibrium is reached at point D and the wage falls to $60 per day. Answer: E Explanation:

30)

A) B) C) D) E)

31) Refer to Figure 14-1. Suppose the employers in the fishers labour market begin to discriminate against male workers, and we move to a new equilibrium in each market. In the absence of any government intervention in these markets, what forces might we expect to see over time? 1) All female workers will migrate to the fishers labour market due to the higher wage. 2) The discriminatory wage differential will tend to be eliminated by the pursuit of profit. 3) Some firm owners in the fishing labour market will find it profitable to hire high-skill males, thus reducing the wage differential. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: E Explanation:

29)

A) B) C) D) E) 10

31)

32) Certain professions limit the number of students who are eligible to enroll in their programs in university - engineering, architecture, dentistry, and law, for example. Other things being equal, what is one predicted effect of such restrictions? A) increased wages across all segments of the labour market B) decreased wages across all segments of the labour market C) decreased wages in the labour market outside of these professions D) increased wages in the labour market outside of these professions E) there will be no effect on any wages Answer: C Explanation:

A) B) C) D) E)

33) If there is only a single buyer in the labour market, that buyer is called A) a monopolist. B) a monopsonist. C) an oligopolist. D) an oligopsonist. E) a single-product firm. Answer: B Explanation:

33)

A) B) C) D) E)

34) As a seller of labour services, a labour union is a form of A) monopoly. B) monopsony. C) oligopoly. D) monopolistic competitor. E) illegal cartel. Answer: A Explanation:

32)

A) B) C) D) E)

11

34)

35) A labour union can most easily raise the wages received by its members by A) increasing the demand for the product. B) decreasing the supply of labour from its members. C) raising employment. D) increasing the demand for labour. E) improving productivity. Answer: B Explanation:

A) B) C) D) E)

36) In the 1950s and 1960s, Arvida, Quebec, was basically a one-company town where Alcan was the sole buyer of labour services. This is a good example of A) pure monopoly. B) monopolistic competition. C) oligopoly. D) monopsony. E) union power. Answer: D Explanation:

36)

A) B) C) D) E)

37) Suppose a labour union enters a competitive labour market and is successful in raising wages above the competitive equilibrium level. In this situation, A) each firm in the industry will face a horizontal supply curve for labour at the union wage, up to the maximum quantity of labour that is prepared to work at that wage. B) those workers already employed will earn a lower wage than before. C) employment in the industry will surely increase. D) the market supply curve for labour will be upward sloping over its entire range. E) the number of firms in the industry will increase and the demand for labour curve will shift to the right, causing a subsequent increase in the wage. Answer: A Explanation:

35)

A) B) C) D) E)

12

37)

38) Suppose that a professional association strengthened the limits to entry into their profession and at the same time lengthened its required apprenticeship program. The likely effect would be that A) the supply curve for labour would shift to the left. B) the supply curve for labour would shift to the right. C) both the demand and supply curves for labour would shift to the left. D) the demand curve for labour would shift to the right. E) there would be an increase in the quantity of labour supplied. Answer: A Explanation:

A) B) C) D) E)

39) Certain professions limit the number of students who are eligible to enroll in their programs in university - engineering, architecture, dentistry, and law, for example. What is the predicted effect of such a policy in each of these professions? A) An increase in supply and a wage that is lower than it otherwise would be. B) A reduction in supply and a wage that is lower than it otherwise would be. C) An increase in supply and a wage that is higher than it otherwise would be. D) A reduction in supply and a wage that is higher than it otherwise would be. E) These professions are a relatively small portion of the labour market and so there will be no detectible change in wages. Answer: D Explanation:

40)

A) B) C) D) E)

41) For a monopsonist in a labour market, the firm's MC curve for labour lies ________ the competitive supply curve for labour; just as the marginal revenue curve for a monopolist lies ________ the demand curve for its product. A) below; below B) below; above C) above; above D) above; below Answer: D Explanation:

39)

A) B) C) D) E)

40) To a monopsonist in a labour market, the average cost curve of labour A) lies above the supply curve of labour. B) lies below the supply curve of labour. C) is the supply curve of labour, which lies below the marginal cost curve for labour. D) is the marginal cost curve of labour when the supply curve is upward sloping. E) coincides with the marginal cost curve of labour only below the profit-maximizing wage rate. Answer: C Explanation:

38)

A) B) C) D) 13

41)

42) For a monopsonist that faces an upward-sloping labour supply curve, the marginal cost of labour curve will be ________ the supply curve because ________. A) below; the increased wage necessary to attract an extra worker is paid to that worker alone B) above; the increased wage necessary to attract an extra worker must be paid to everyone already employed C) above; the average wage exceeds the marginal wage when the average wage is rising D) the same as; the marginal cost of labour equals the average cost of labour E) below; the extra labour supplied is less capable than previous units of labour supplied Answer: B Explanation:

A) B) C) D) E)

43) A profit-maximizing monopsonist in a labour market will continue to hire labour until the A) hourly wage of the labour is equated with its marginal cost. B) hourly wage of the labour is equated with its average cost. C) marginal revenue product of labour equals its marginal cost. D) marginal cost of labour equals its average revenue. E) marginal product of labour is maximized. Answer: C Explanation:

43)

A) B) C) D) E)

44) Suppose your firm is a monopsonist hiring only one variable input. If you want to maximize profits, you will purchase that variable input up to the point where the A) demand curve intersects the supply curve of the input. B) MRP curve for the input intersects the marginal cost curve for the input. C) wage rate is the highest. D) marginal product of that input equals the price of one unit of the input. E) cost of the input equals the profit generated by the employment of that input. Answer: B Explanation:

42)

A) B) C) D) E)

14

44)

45) If we compare the wage rate and the level of employment achieved in a competitive labour market with those in a monopsonistic labour market, the latter will generate A) a lower level of employment and a higher wage rate. B) a higher level of employment and a lower wage. C) a higher level of employment and a higher wage rate. D) a lower level of employment and a lower wage. E) the same outcomes as in a competitive labour market. Answer: D Explanation:

A) B) C) D) E)

46) Consider a monopsonistic labour market. Ten units of labour will be supplied if the wage rate is $12, and 11 units of labour will be supplied if the wage rate is $14. The marginal cost of the eleventh worker is A) $2. B) $12. C) between $12 and $14. D) $14. E) more than $14. Answer: E Explanation:

46)

A) B) C) D) E)

47) Consider a monopsonistic labour market. One hundred units of labour will be supplied if the wage rate is $12, and 101 units of labour will be supplied if the wage rate is $14. The marginal cost of the 101st worker is A) $14. B) $140. C) $214. D) $1414. E) Not enough information to know. Answer: C Explanation:

45)

A) B) C) D) E)

15

47)

48) Consider a small, remote town with only one employer - a gold mining company. Suppose the current work force is 875 workers, each of whom is paid $6000 per month. In order to attract one additional worker, the employer must increase the wage to $6025 per month. The marginal cost of this additional worker is A) $21 875 per month. B) $21 900 per month. C) $27 900 per month. D) $5.25 million per month. E) $5.28 million per month. Answer: C Explanation:

A) B) C) D) E)

49) Suppose that a regional health authority is the only employer of nurses, and further, suppose that nurses are not unionized. The 625 currently employed nurses are paid $27 per hour. To attract an additional nurse, the employer must increase the wage to $28 per hour. The marginal cost of this additional worker is A) $653 B) $28 C) $17 500 D) $17 528 E) $27 Answer: A Explanation:

49)

A) B) C) D) E)

50) Suppose we have a labour market with a monopsony employer in a town. Now suppose that all workers form a union and negotiate a wage that is equivalent to what the wage would have been in a competitive market. What is the profit-maximizing condition for the firm? A) Hire the number of workers such that the MC of the final worker hired equals the union-set wage. B) Hire the number of workers such that the MRP of the final worker hired equals the union-set wage. C) Hire the number of workers such that the MRP of the final worker equals the monopsony equilibrium wage. D) Hire the number of workers such that the MR of the firm's product equals the MC of the final worker hired. E) Hire the number of workers such that the MR of the firm's product equals the MRP of the final worker hired. Answer: B Explanation:

48)

A) B) C) D) E)

16

50)

51) Consider a wage-setting union in an otherwise competitive labour market. If the union sets a wage above the competitive level, the effect will be A) to raise wages for all workers who wish to work in the industry. B) to increase the amount of employment in the industry. C) to create a group of workers who would like to obtain jobs in the industry but cannot do so. D) a level of employment which is the same as that at the competitive equilibrium wage. E) to cause the labour supply curve to shift to the right. Answer: C Explanation:

51)

A) B) C) D) E)

FIGURE 14-2 52) Refer to Figure 14-2. Suppose the labour market is perfectly competitive. If a minimum wage of W5 were then established, the predicted effect would be which one of the following? A) Q2 workers would be employed and unemployment would equal Q2Q3 . B) Employment would fall by the amount Q1 Q4 . C) Employment would remain the same as in a competitive market. D) Q3 workers would now be employed. E) Q4 workers would be employed and there would be no unemployment. Answer: B Explanation:

A) B) C) D) E)

17

52)

53) Refer to Figure 14-2. If the labour market were in a monopsonistic equilibrium, the predicted wage and number of workers employed would be A) W4 and Q4 .

53)

B) W5 and Q4 . C) W2 and Q1 . D) W1 and Q2 . E) W1 and Q3 . Answer: A Explanation:

A) B) C) D) E)

54) Refer to Figure 14-2. Suppose the labour market is perfectly competitive. If a minimum wage of W4

54)

is then established, the predicted change in the wage is A) an increase in the wage paid. B) a decrease in the wage paid. C) no change in the wage paid. D) a decrease equal to W1 - W4 . E) an increase equal to W1 - W4 . Answer: C Explanation:

A) B) C) D) E)

55) Refer to Figure 14-2. Suppose the labour market is initially in a monopsonistic equilibrium. If a strong union is then formed and establishes a minimum wage of W1 , A) employment will decrease to Q2. B) the wage rate and employment will both increase to their competitive levels. C) the wage rate will increase but employment will decrease. D) there will be an effect on either wages or employment but not both. E) the wage rate will decrease but employment will increase. Answer: B Explanation:

A) B) C) D) E)

18

55)

56) Refer to Figure 14-2. In a perfectly competitive labour market, the equilibrium wage rate and the quantity of labour employed would be A) W4 and Q4 .

56)

B) W2 and Q2 . C) W5 and Q5 . D) W1 and Q1 . E) W5 and Q4 . Answer: D Explanation:

A) B) C) D) E)

57) Refer to Figure 14-2. Suppose the labour market is in a monopsonistic equilibrium. If a minimum wage is then imposed at W5, the effect would be to A) increase employment only. B) waste policy effort, as there would be no effect whatsoever in the labour market. C) increase wages and maintain employment but create a pool of unemployed workers. D) increase wages and create a shortage of workers. E) decrease wages but employment would remain the same. Answer: C Explanation:

A) B) C) D) E)

19

57)

The three diagrams below show the supply and demand for teenage babysitters in one local area. The initial supply curve is S0 in all cases.

FIGURE 14-3 58) Refer to Figure 14-3. Suppose all of the teenage babysitters in one local area form an association and set a minimum age of 16 for working as a babysitter. Which diagram illustrates the new supply curve (SA) for babysitters? A) diagram 1 B) diagram 2 C) diagram 3 D) none of the diagrams E) any of the diagrams Answer: B Explanation:

A) B) C) D) E)

59) Refer to Figure 14-3. Suppose all of the teenage babysitters in one local area form an association and set a minimum acceptable wage of $8 per hour. Which diagram illustrates the new supply curve (SA) for babysitters? A) diagram 1 B) diagram 2 C) diagram 3 D) none of the diagrams E) any of the diagrams Answer: A Explanation:

58)

A) B) C) D) E)

20

59)

60) Suppose that the professional association of dentists reduces entry into their profession by lengthening the required training program. The likely effect is that A) the supply curve of dentists will shift to the left. B) the supply curve of dentists will shift to the right. C) both the demand and supply curves for dentists will shift to the left. D) the demand curve for dentists will shift to the right. E) there will be an increase in the quantity of dentists supplied. Answer: A Explanation:

A) B) C) D) E)

21

60)

The diagram below shows the supply and demand for labour in a hypothetical town in northern British Columbia, with only one employer, a logging company.

FIGURE 14-4 61) Refer to Figure 14-4. The wage paid by this monopsonistic firm will be ________ and employment will be ________. A) below $25 per hour; below 750 units of labour B) between $25 and $35 per hour; between 750 and 1000 units of labour C) $30 per hour; 1000 units of labour D) $25 per hour; 750 units of labour E) $35 per hour; 750 units of labour Answer: D Explanation:

A) B) C) D) E)

22

61)

62) Refer to Figure 14-4. Compared to the outcome in a competitive labour market, the wage and employment outcome in this town's monopsonistic labour market are as follows: A) wages are lower by $5 per hour and employment is lower by 250 units of labour. B) wages and employment are both the same as the competitive outcome. C) wages are higher by $10 per hour and employment is lower by 250 units of labour. D) wages are lower by $10 per hour and employment is the same as the competitive outcome. E) wages are the same as the competitive outcome and employment is higher by 250 units of labour. Answer: A Explanation:

A) B) C) D) E)

63) Refer to Figure 14-4. Suppose this labour market is in a monopsonistic equilibrium. Then, suppose the workers form a union and negotiate a higher wage with the firm. In this case the wage will be ________ and the employment will be ________. A) above $35 per hour; less than 750 units of labour B) between $25 and $35 per hour; between 750 and 1000 units of labour C) above $25 per hour; above or below 750 units of labour, depending on the negotiated wage D) $30 per hour; 1000 units of labour E) $35 per hour; 750 units of labour Answer: C Explanation:

63)

A) B) C) D) E)

64) Refer to Figure 14-4. Suppose the workers in this town form a union to negotiate the wage rate with the firm. Economists refer to this situation as A) a monopoly. B) a unionized monopoly. C) a competitive labour market. D) a monopolistic labour market. E) a bilateral monopoly. Answer: E Explanation:

62)

A) B) C) D) E)

23

64)

65) Refer to Figure 14-4. Suppose this labour market is in a monopsonistic equilibrium. Then, suppose the provincial government of British Columbia imposes a minimum wage for employees in this industry of $30 per hour. What will be the effects on wages and employment? A) wages will fall by $5 per hour and employment will increase by 250 units of labour B) wages will not change and employment will increase by 250 units of labour C) wages will rise by $5 per hour and employment will increase by 250 units of labour D) wages will not change and employment will change by between 0 and 250 units of labour E) wages will not change and employment will not change Answer: C Explanation:

A) B) C) D) E)

66) Refer to Figure 14-4. Suppose this labour market is in a monopsonistic equilibrium. Then, suppose the provincial government of British Columbia imposes a minimum wage for employees in this industry of $38 per hour. What will be the effects on wages and employment? A) wages will rise by $8 per hour and employment will fall below 750 units of labour B) wages will rise by $3 per hour and employment will fall by 125 units of labour C) wages will rise by $8 per hour and employment will remain unchanged D) wages will rise by $13 per hour and employment will fall below 750 units of labour E) wages will rise by $8 per hour and employment will fall by between 0 and 250 units of labour Answer: D Explanation:

66)

A) B) C) D) E)

67) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is QD = 1000 - 20(w). The labour supply curve is QS = 400 + 40(w). What is the equilibrium level of employment? A) 20 Answer: D Explanation:

65)

B) 40

C) 400

D) 800

A) B) C) D) E)

24

E) 1000

67)

68) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is QD = 1000 - 20(w). The

68)

labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $11 (but does not affect the demand curve). The number of workers employed after unionization is A) 400. B) 780. C) 880. D) 1000. E) Not determinable from the information provided. Answer: B Explanation:

A) B) C) D) E)

69) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is QD = 1000 - 20(w). The

69)

labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $11 (but does not affect the demand curve). The number of workers who wish to work at the new wage is A) 400. B) 440. C) 780. D) 840. E) 1000. Answer: D Explanation:

A) B) C) D) E)

70) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is QD = 1000 - 20(w). The labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $11 (but does not affect the demand curve). One result is A) an increase in employment of 20 workers. B) an increase in employment of 40 workers. C) a decrease in employment of 20 workers. D) a decrease in employment of 40 workers. E) a decrease in employment of 60 workers. Answer: C Explanation:

A) B) C) D) E)

25

70)

71) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is QD = 1000 - 20(w). The

71)

labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $11 (but does not affect the demand curve). The number of unemployed workers in this mall labour market becomes A) 20. B) 40. C) 60. D) 80. E) 100. Answer: C Explanation:

A) B) C) D) E)

72) Suppose there is a competitive market for retail workers at a large shopping mall that is large enough to constitute its own labour market. The labour demand curve is QD = 1000 - 20(w). The

72)

labour supply curve is QS = 400 + 40(w). Suppose that a union now successfully organizes the workers at this mall and obtains a wage rate of $13 (but does not affect the position of the demand curve). One result is A) an increase in employment of 20 workers. B) an increase in employment of 60 workers. C) a decrease in employment of 100 workers. D) a decrease in employment of 140 workers. E) a decrease in employment of 60 workers. Answer: E Explanation:

A) B) C) D) E)

73) A legislated minimum wage is said to be binding when A) it is below an industry's free-market equilibrium wage. B) an industry is poorly organized and composed largely of unskilled labour. C) it raises wage rates in an industry above the free-market equilibrium level. D) it decreases the turnover rate among employees. E) it is enforced by legal authorities. Answer: C Explanation:

A) B) C) D) E)

26

73)

74) A legislated minimum wage is comparable to A) bilateral monopoly. B) a black-market price. C) a rent control. D) a price ceiling. E) a price floor. Answer: E Explanation:

74)

A) B) C) D) E)

75) If a minimum wage is set above the free-market equilibrium wage in a competitive labour market, the labour market will experience an increase in wages and A) employment will increase. B) employment will decrease. C) there will be no unemployment. D) employment will remain the same. E) there is an unpredictable effect on employment. Answer: B Explanation:

A) B) C) D) E)

76) Which of the following statements about a legislated minimum wage is true? A) In a competitive labour market, (if effective) it may increase wages and will increase employment. B) In a monopsonistic labour market, (if effective) it may increase wage rates but it must decrease employment. C) In a monopsonistic labour market, if set equal to the competitive wage, will increase wages and employment. D) It will have the same wage and employment effects in competitive and monopsonistic labour markets. E) It will have no effect if the market is monopsonistic. Answer: C Explanation:

75)

A) B) C) D) E)

27

76)

FIGURE 14-5 77) Refer to Figure 14-5. If this labour market were perfectly competitive, the predicted wage and employment level would be A) W1 and Q2 .

77)

B) W2 and Q3 . C) W3 and Q2 . D) W3 and Q4 . E) W4 and Q5 . Answer: B Explanation:

A) B) C) D) E)

78) Refer to Figure 14-5. Suppose this labour market is perfectly competitive. If a minimum wage of W1 is then imposed, the quantity of labour hired would be A) Q1 . Answer: C Explanation:

B) Q2 .

C) Q3 .

D) Q4.

A) B) C) D) E)

28

E) Q5 .

78)

79) Refer to Figure 14-5. Suppose this labour market is competitive. If a minimum wage of W3 is then imposed, the quantity of labour hired would be A) Q1 . B) Q2 . C) Q3 . Answer: B Explanation:

D) Q4.

E) Q5 .

A) B) C) D) E)

80) Refer to Figure 14-5. Suppose this labour market is competitive. If a minimum wage of W4 is then imposed, the quantity of labour supplied would be A) Q1 . B) Q2 . C) Q3 . Answer: E Explanation:

D) Q4.

A) B) C) D) E)

imposed, the number of unemployed workers would be A) 0Q1 . B) Q5 - Q1. C) Q3 - Q1 .

D) 0Q3 .

81)

E) 0Q5 .

A) B) C) D) E)

82) Refer to Figure 14-5. Suppose the labour market is competitive. If a minimum wage of W3 is then imposed, the number of unemployed workers would be A) 0Q2 . B) Q3 - Q1. C) Q3 - Q2 . Answer: D Explanation:

80)

E) Q5.

81) Refer to Figure 14-5. Suppose this labour market is competitive. If a minimum wage of W4 is then

Answer: B Explanation:

79)

A) B) C) D) E)

29

D) Q4 - Q2 .

E) 0Q4 .

82)

83) Refer to Figure 14-5. If this labour market is monopsonistic, an increase in the minimum wage from W2 to W3 would

83)

A) have no effect on employment. B) create unemployment where there previously was none. C) increase employment from what would have initially occurred. D) create unemployment in other minimum wage sectors. E) increase employment in this industry but decrease it in other industries. Answer: B Explanation:

A) B) C) D) E)

84) Which of the following statements about minimum-wage laws is most accurate? A) All Canadian provinces have the same minimum wage. B) There is some evidence that minimum-wage laws cause additional unemployment, particularly among youths. C) Minimum-wage laws only affect the income of the higher-skilled, lowest-wage workers. D) Minimum-wage laws are unfair. E) There is some evidence that minimum-wage laws create a lot of jobs, particularly among youths. Answer: B Explanation:

A) B) C) D) E)

85) Canadian studies on the effects of minimum-wage laws A) suggest that they have no effect whatsoever on employment. B) support the evidence from the United States that these laws increase wages and employment. C) support the theoretical predictions that minimum-wage laws increase employment. D) find that employment increases with increases in minimum wages, thus supporting the argument that labour markets are monopsonistic. E) find that they decrease the level of employment, particularly for low-skilled workers. Answer: E Explanation:

84)

A) B) C) D) E)

30

85)

The three diagrams below show the supply and demand for teenage babysitters in one local area. The initial supply curve is S0 in all cases.

FIGURE 14-3 86) Refer to Figure 14-3. Suppose the teenage babysitters in one local area are earning an equilibrium wage of $6 per hour. Now suppose that the local government imposes a minimum wage of $8 per hour for babysitters. Which diagram illustrates the new supply curve (S A) for babysitters? A) diagram 1 B) diagram 2 C) diagram 3 D) none of the diagrams E) any of the diagrams Answer: A Explanation:

A) B) C) D) E)

87) Refer to Figure 14-3. Suppose the teenage babysitters in one local area are earning an equilibrium wage of $6 per hour. Now suppose the local government reduces the minimum age for working as a babysitter from 14 to 12 years of age. Which diagram illustrates the new supply curve (SA) for babysitters? A) diagram 1 B) diagram 2 C) diagram 3 D) none of the diagrams E) any of the diagrams Answer: D Explanation:

86)

A) B) C) D) E)

31

87)

The table below shows the labour demand and labour supply schedules in a competitive labour market.

Wage Rate ($/hour) 10 12 14 15 17

Quantity Demanded of Labour (hours/month) 1300 1000 800 400 200

Quantity Supplied of Labour (hours/month) 500 1000 1300 1500 1800

TABLE 14-1 88) Refer to Table 14-1. In a competitive labour market, a legislated minimum wage imposed at $10 per hour would A) have no effect on the competitive equilibrium level of employment. B) lead to unemployment of 500 hours/month. C) lead to over-employment of 500 hours/month. D) lead to an equilibrium wage higher than the competitive wage. E) lead to an employment level lower than the competitive level. Answer: A Explanation:

A) B) C) D) E)

89) Refer to Table 14-1. In a competitive labour market, a legislated minimum wage imposed at $14 per hour would A) have no effect on the competitive equilibrium level of employment. B) have no effect on the competitive equilibrium wage. C) lead to unemployment of 500 hours/month. D) lead to unemployment of 300 hours/month. E) lead to an equilibrium wage lower than the competitive wage. Answer: C Explanation:

88)

A) B) C) D) E)

32

89)

90) In general, in collective bargaining between a labour union and a firm, the A) union sets the wage and the employer decides how much labour will be hired. B) employer sets the wages and the union decides how many workers will be hired. C) wage is negotiated, whereas the firm is generally free to choose the level of employment. D) wage and the number of workers to be hired is negotiated. E) only the level of employment is negotiated. Answer: C Explanation:

90)

A) B) C) D) E)

FIGURE 14-6 91) Refer to Figure 14-6. The market begins in equilibrium with the curves labelled Demand and Supply. If a labour union negotiates the wage to W2 , the difference between this wage and the competitive equilibrium wage is called A) the industry's wage premium. B) the union wage premium. C) a temporary wage differential. D) a discrimination differential. E) a legislated wage differential. Answer: B Explanation:

A) B) C) D) E)

33

91)

92) Refer to Figure 14-6. The market begins in equilibrium with the curves labelled Demand and Supply. If a labour union negotiates the wage to W2 in an otherwise competitive labour market,

92)

A) the supply of labour will stay the same. B) employers will hire L2 quantity of labour. C) the demand for labour will shift to D2. D) employers will hire L1 quantity of labour. E) equilibrium will occur at W1 and L2 . Answer: D Explanation:

A) B) C) D) E)

93) Refer to Figure 14-6. Suppose a labour union is operating in this labour market. The practice of "feather-bedding" would be illustrated by A) employers hiring L1 units of labour because a union organizes workers.

93)

B) employers hiring L2 units of labour when a union has been able to increase the wage to W2 . C) the supply of labour shifting to S2 . D) advertising causing the demand for labour to shift to D2. E) the union wage premium equal to the difference between W1 and W2 . Answer: B Explanation:

A) B) C) D) E)

94) Economists observe clear evidence of a union wage premium but do not observe the clear union effect on employment levels predicted from theory. One explanation for this is A) that the labour supply curve shifts to the right in the collective bargaining process, thereby eliminating any employment effect. B) that the labour supply curve, in the presence of a union, is very inelastic, which implies only a very small effect on employment. C) that union-based advertising for the product increases demand for the product, shifts the demand curve to the right and eliminates any employment effect. D) the union's ability, through the collective bargaining process, to pressure firms to hire more workers than they otherwise would at the union wage. E) both C and D are correct. Answer: E Explanation:

A) B) C) D) E)

34

94)

95) If a wage-setting union enters a monopsonistic labour market, the union can cause A) wages to rise to what would have been the competitive level but no higher. B) wages to rise above the level set by the monopsonist, but only if it allows employment to fall below the level set by the monopsonist. C) both wages and employment to rise over the monopsonistic level. D) wages or employment to rise above the level set by the monopsonist, but not both. E) the level of non-wage benefits to rise but cannot affect either wages or employment. Answer: C Explanation:

A) B) C) D) E)

96) If a union succeeds in shifting the labour supply curve to the left, it can achieve wages above the A) competitive level and all workers will gain. B) equilibrium level and an increase in employment. C) equilibrium level without affecting employment. D) competitive level but will reduce the level of employment. E) competitive level without a pool of unemployed workers seeking to work at the higher wage. Answer: D Explanation:

97)

A) B) C) D) E)

98) Unions currently represent ________ employed workers in Canada. A) all of the B) half of the C) more than 50% of D) approximately 30% of E) less than 10% of Answer: D Explanation:

96)

A) B) C) D) E)

97) The fundamental dilemma facing labour unions is A) job security versus worker safety. B) wage increases versus employment growth. C) wage increases versus publicly provided pensions. D) members' roles as workers versus their roles as consumers. E) "featherbedding" versus the union-wage premium. Answer: B Explanation:

95)

A) B) C) D) E) 35

98)

99) Unions currently represent ________ government employees in Canada. A) all of the B) approximately half of the C) over 70% of D) less than 30% of E) less than 10% of Answer: C Explanation:

A) B) C) D) E)

100) The average union wage premium in Canada is A) less than 10%. B) between 10 and 15%. C) between 15 and 30%. D) between 30 and 50%. E) more than 50%. Answer: B Explanation:

100)

A) B) C) D) E)

101) The union wage premium refers to the A) portion of a union wage attributable to fees payable to the union. B) trade-off the union faces between the level of the wage and the size of the union. C) higher wage attributable only to the union status of the job. D) wage that a union is able to set unilaterally. E) wage that an employer is able to set unilaterally. Answer: C Explanation:

99)

A) B) C) D) E)

36

101)

102) The purpose of a labour union is to A) maintain a minimum level of employment. B) exploit its labour-market power in the same way a monopolist exploits its market power in product markets. C) exploit its labour-market power in the same way a monopolist exploits its market power in labour markets. D) increase employment in its industry. E) decrease employment in its industry. Answer: B Explanation:

A) B) C) D) E)

103) One of the most unionized industries in Canada is A) agriculture. B) finance and insurance. C) real estate. D) education. E) non-governmental administrative services. Answer: D Explanation:

103)

A) B) C) D) E)

104) An important unanswered question about the role of unions in developed economies is whether the presence of unions affects long-run productivity. There is some evidence to suggest that the presence of a union A) increases the human capital of unionized workers, which leads to increased long-run productivity for the firm. B) reduces the demand for labour and therefore the demand for physical capital. C) decreases the human capital of unionized workers, and therefore reduces long-run productivity. D) reduces the level of employment (because of the union-wage premium) and thus raises the marginal product of labour. E) reduces the expected profitability of installed capital and therefore leads to reduced capital investment by firms. Answer: E Explanation:

102)

A) B) C) D) E)

37

104)

105) The general theme of the "good jobs-bad jobs" debate is the A) increasing concentration of jobs in the high-technology sector at the expense of jobs in the manufacturing sector. B) increase in non-unionized jobs at the expense of union jobs. C) migration of "good jobs" to foreign competitors. D) increase in the share of total employment in the service sector and the decline in the share of total employment in the manufacturing sector. E) increase in the share of total employment in the manufacturing sector and a decline in the share of total employment in the service sector. Answer: D Explanation:

A) B) C) D) E)

106) Given the continuing decline in manufacturing's share of total employment in Canada and other developed economies, which of the following provides a possible explanation that this phenomenon is a genuine problem? A) Real disposable income has continued to rise. B) The decline is partly due to increasing productivity in that sector. C) Many service jobs are low-wage, part-time, jobs, and many are without benefits. D) Consumers have an increased demand for services as real income increases. E) Productivity increases in the service sector are likely underestimated. Answer: C Explanation:

106)

A) B) C) D) E)

107) Some people are concerned that "good" manufacturing jobs are being replaced by "bad" service-sector jobs. Why is this not necessarily a problem? A) Average real per capita income has continued to rise, despite the rise of the service sector. B) The decline in manufacturing employment is partly due to increasing productivity in that sector. C) Productivity increases in the service sector are likely underestimated. D) Consumers have an increased demand for services as real income increases. E) all of the above Answer: E Explanation:

105)

A) B) C) D) E)

38

107)

108) In Canada in 2011, the share of total employment in agriculture was about A) 50%. B) 20%. C) 10% D) 2%. Answer: D Explanation:

108) E) 0.2%.

A) B) C) D) E)

109) In Canada in 2011, the share of total employment in the service sector was A) less than 10%. B) about 25%. C) about 50%. D) over 75%. E) over 90%. Answer: D Explanation:

A) B) C) D) E)

110) With regard to the "good jobs-bad jobs" debate, why is the categorization of manufacturing jobs as "good jobs" and service-sector jobs as "bad jobs" not necessarily accurate? A) Because all service-sector jobs have experienced large gains in productivity over the past two decades and an associated rise in wages. B) Because all manufacturing jobs have experienced a decline in real wages over the past two decades. C) Because many service-sector jobs require highly skilled workers and are highly paid. D) Because all manufacturing jobs have experienced declines in productivity over the past two decades and an associated increase in wages. E) Because all service-sector jobs are preferable to manufacturing jobs. Answer: C Explanation:

109)

A) B) C) D) E)

39

110)

Answer Key Testname: UNTITLED14

1) E 2) D 3) B 4) B 5) C 6) A 7) D 8) B 9) C 10) B 11) A 12) C 13) E 14) D 15) A 16) D 17) D 18) B 19) A 20) A 21) E 22) B 23) A 24) A 25) D 26) D 27) E 28) C 29) C 30) E 31) E 32) C 33) B 34) A 35) B 36) D 37) A 38) A 39) D 40) C 41) D 42) B 43) C 44) B 45) D 46) E 47) C 48) C 49) A 50) B 40

Answer Key Testname: UNTITLED14

51) C 52) B 53) A 54) C 55) B 56) D 57) C 58) B 59) A 60) A 61) D 62) A 63) C 64) E 65) C 66) D 67) D 68) B 69) D 70) C 71) C 72) E 73) C 74) E 75) B 76) C 77) B 78) C 79) B 80) E 81) B 82) D 83) B 84) B 85) E 86) A 87) D 88) A 89) C 90) C 91) B 92) D 93) B 94) E 95) C 96) D 97) B 98) D 99) C 100) B 41

Answer Key Testname: UNTITLED14

101) 102) 103) 104) 105) 106) 107) 108) 109) 110)

C B D E D C E D D C

42

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A firm can finance its purchase of new capital equipment (investment) in the following ways: 1) purchasing financial capital; 2) borrowing from a bank; 3) using its retained earnings. A) 1 only B) 2 only C) 3 only D) 1 and 3 E) 2 and 3 Answer: E Explanation:

A) B) C) D) E)

2) The concepts of stock and flow are involved in firms' demand for labour and for capital. Which of the following statements is correct? A) A firm hires a stock of labour services; and purchases a stock of physical capital, which provides a flow of services. B) Labour and capital are both flow variables because their values change over time. C) A firm hires a flow of labour services; and purchases a stock of physical capital, which provides a flow of services. D) Labour and capital are both stock variables because they are providing service at any given moment in time. E) A firm's demand for both labour and capital is determined by the marginal value each provides to the stock of labour and capital, respectively. Answer: C Explanation:

2)

A) B) C) D) E)

3) Financial intermediaries are often the "middlemen" between households and firms and, as such, A) they reduce the amount of trade by charging high fees for their services. B) they are not essential for the workings of an economy. C) they specialize in assessing the risk of various borrowers. D) are the fundamental determinant of the supply of capital. E) are the fundamental determinant of the demand for capital. Answer: C Explanation:

1)

A) B) C) D) E)

1

3)

4) What is the most fundamental purpose of the "capital market"? A) To connect the savings decisions of households with the borrowing decisions of firms. B) To provide the means by which firms can acquire physical capital. C) To provide the means by which households and firms can invest financial capital. D) To connect firms and households who wish to borrow with financial institutions. E) To connect households who wish to borrow with banks who wish to lend. Answer: A Explanation:

A) B) C) D) E)

5) Consider the physical equipment that a printing company would purchase in order to print glossy magazines. The equipment itself is considered a(n) ________, while the printing services the equipment provides is considered a(n) ________. A) asset; liability B) flow; opportunity cost C) stock; flow D) retained asset; spent asset E) flow; stock Answer: C Explanation:

5)

A) B) C) D) E)

6) A firm must evaluate the value of the services that a piece of capital equipment can deliver to the firm over its lifetime. The firm does this by estimating its A) rate of depreciation. B) marginal product. C) marginal revenue product. D) future value. E) present value. Answer: E Explanation:

4)

A) B) C) D) E)

2

6)

7) The term "present value" refers to the A) value that a capital good will have in the future. B) current interest rate. C) current purchase price of a capital good. D) value today of a payment or receipt to occur in the future. E) value in the future of a payment made today. Answer: D Explanation:

A) B) C) D) E)

8) When we consider any future stream of benefits, and we seek to determine its value today, we ________ that steam of benefits using the market interest rate. A) capitalize B) collateralize C) depreciate D) discount E) appreciate Answer: D Explanation:

8)

A) B) C) D) E)

9) The present value of a given future stream of benefits will be lower when the benefits are ________ and the interest rate is ________. A) nearer in time; lower B) accruing in the first time period only; lower C) more distant in time; higher D) equalized over a ten-year period; zero E) more distant in time; lower Answer: C Explanation:

7)

A) B) C) D) E)

3

9)

10) The textbook presentation of present value involves an important simplification of reality in order to analyze the concept. That simplification is in assuming that A) the future stream of MRPs lasts for one period only. B) the future stream of MRPs of a unit of capital is known with certainty. C) all units of capital generate an identical stream of MRPs. D) the future stream of MRPs is constant over time. E) the interest rate is constant over time. Answer: B Explanation:

A) B) C) D) E)

11) The present value of $100 to be received one year from now, with an annual interest rate of 6%, is A) $94.00. B) $94.34. C) $95.27. D) $102.13. E) $106.00. Answer: B Explanation:

13)

A) B) C) D) E)

14) If the annual rate of interest is 6%, the present value of $100 to be paid every year for three years (beginning one year from now) is A) $83.90. B) $251.88. C) $267.30. D) $283.02. E) $300.00. Answer: C Explanation:

12)

A) B) C) D) E)

13) If the annual interest rate is 10%, the present value of $100 to be received two years from now is A) $75.25. B) $82.64. C) $90.90. D) $94.73. E) $110.00. Answer: B Explanation:

11)

A) B) C) D) E)

12) If the annual interest rate is 5%, the present value of $100 to be received two years from now is A) $87.70. B) $90.70. C) $95.23. D) $97.00. E) $110.00. Answer: B Explanation:

10)

A) B) C) D) E)

4

14)

15) If the annual interest rate is 6%, the present value of $100 paid 3 years from now is A) $15.15. B) $40.00. C) $56.45. D) $83.96. Answer: D Explanation:

15) E) $94.34.

A) B) C) D) E)

16) The formula to calculate the present value of a future payment of $X received t years from now when the annual percentage interest rate is i is A) PV = $X/(1 + i)t.

16)

B) PV = $X/i. C) PV = $X/(1 + i). D) PV = $X(1 + i)t. E) PV = $X(1 + i). Answer: A Explanation:

A) B) C) D) E)

17) A lottery winner receives a $100 000 cheque now, and a second one in two years. If the annual interest rate is 9%, the present value of his total winnings is A) $184 168. B) $200 000. C) $215 832. D) $300 000. E) Not able to determine from the information provided. Answer: A Explanation:

A) B) C) D) E)

18) How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200 one year from now? A) $185.19. B) $216.00. C) $160.00. D) $385.19. E) $200.00 Answer: A Explanation:

17)

A) B) C) D) E)

5

18)

19) How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200 one year from now and still have $200 remaining in the bank? A) $185.19. B) $216.00. C) $370.37. D) $385.19. E) none of the above. Answer: C Explanation:

A) B) C) D) E)

20) The present value of a given future payment is higher the ________ the rate of interest and the ________ distant the payment date. A) higher; more B) higher; less C) lower; more D) lower; less Answer: D Explanation:

22)

A) B) C) D) E)

23) If the annual interest rate is 10%, the present value of $200 paid 3 years from now is A) $20.00. B) $40.00. C) $56.45. D) $150.26. Answer: D Explanation:

21)

A) B) C) D) E)

22) If the annual interest rate is 7%, the present value of $100 to be received at the end of two years is A) $87.34. B) $90.70. C) $93.46. D) $97.00. E) $107.00. Answer: A Explanation:

20)

A) B) C) D)

21) The present value of $100 to be received one year from now, with an annual interest rate of 8%, is A) $85.73. B) $94.34. C) $92.59. D) $102.13. E) $108.00. Answer: C Explanation:

19)

A) B) C) D) E)

6

23) E) $165.28.

24) Economists use the concept of present value to determine A) the amount someone would be willing to pay in the future for a discounted value today. B) the amount someone would be willing to pay today to get a payment or stream of payments in the future. C) the value in the future of a given stock of physical capital. D) the marginal revenue product of a unit of capital. E) the price of a unit of physical capital in the future. Answer: B Explanation:

A) B) C) D) E)

25) Present value is computed by A) evaluating a stream of future sums resulting from a piece of capital. B) summing all future payments. C) multiplying a stream of future sums by the interest rate. D) discounting a stream of future payments by today's purchase price. E) discounting a stream of future sums by the interest rate. Answer: E Explanation:

26)

A) B) C) D) E)

27) How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200 each year for the next 2 years, beginning one year from today? A) $171.47 B) $185.19 C) $356.66 D) $368.00 E) $400.00 Answer: C Explanation:

25)

A) B) C) D) E)

26) Suppose a new piece of capital equipment will deliver a stream of MRPs of $1000 each year for 3 years (beginning one year from today). What is the present value of this stream of benefits, assuming that the annual rate of interest is 5%? A) $863.86 B) $952.38 C) $1000.00 D) $2591.58 E) $2723.25 Answer: E Explanation:

24)

A) B) C) D) E)

7

27)

28) How much would you have to deposit today in a bank account paying 8% annual interest to allow you to withdraw $200, 5 years from now? A) $136.12 B) $142.57 C) $184.17 D) $185.19 E) $293.80 Answer: A Explanation:

A) B) C) D) E)

29) If the annual interest rate is currently 3.5%, Joan is ________ a $1000 payment in exactly two years. A) better off accepting $930 right now than B) better off accepting $950 right now than C) worse off accepting $940 right now than D) indifferent between accepting $932.51 right now and E) indifferent between accepting $935.94 right now and Answer: B Explanation:

28)

29)

A) B) C) D) E)

The table below shows the payments at the end of each year from three different assets.

A B C Interest Rate

Year 1 $1000 $1000 $0 5%

Year 2 $1000 $0 $2000 6%

Year 3 $1000 $2000 $1000 5%

Year 4 $X $Y $Z 7%

TABLE 15-1 30) Refer to Table 15-1. A, B, and C are possible investment opportunities that expire at the end of Year 4, each offering a stream of payments as indicated in the table. The interest rates in each year are also specified in the table. Assuming that X, Y, and Z are zero, which investment is the most valuable if an investor contemplates them at the beginning of Year 1? A) A B) B C) C D) They are equivalent. E) It cannot be determined with the available data. Answer: A Explanation:

A) B) C) D) E)

8

30)

31) Carol can borrow $13 000 to buy a new car from the bank at 8% for five years, or from her friend Eric, who is willing to lend her the money at 7% for five years. If Carol accepts Eric's offer, he can expect a lump-sum repayment in five years of approximately A) $13 544. B) $15 239. C) $17 837. D) $18 233. E) $19 097. Answer: D Explanation:

A) B) C) D) E)

32) To determine an individual profit-maximizing firm's maximum purchase price for a unit of capital it is necessary to A) know what competing firms are prepared to pay. B) compute the present value of the stream of benefits produced by the unit of capital. C) compute the future value of the stream of benefits produced by the unit of capital. D) compute the rental price of the unit of capital and the interest rate. E) know how the interest rate is related to the cost of capital. Answer: B Explanation:

33)

A) B) C) D) E)

34) In general, a profit-maximizing firm will purchase a piece of capital equipment if the A) present value of the stream of future MRPs exceeds the purchase price. B) present value of the stream of future MRPs falls below the purchase price. C) simple sum of the future MRPs exceeds the purchase price. D) simple sum of the future MRPs falls below the purchase price. E) future value of the stream of MRPs exceeds the purchase price. Answer: A Explanation:

32)

A) B) C) D) E)

33) In a competitive market for capital equipment, the purchase price of a piece of capital equipment is predicted to be A) its current-period MRP. B) its current-period MRP divided by the interest rate. C) its last-period MRP divided by the interest rate. D) the present value of its stream of MRPs. E) the future value of its stream of MRPs. Answer: D Explanation:

31)

A) B) C) D) E)

9

34)

35) We can think about the interest rate as the "price" of capital because A) the interest rate determines the MRP of the capital, which determines its price. B) the interest rate determines the equilibrium level of investment demand. C) the interest rate represents the value the firm avoids paying to lenders by purchasing the capital instead. D) firms use financial capital to purchase physical capital and the interest rate is the "price" of financial capital. E) this is the amount the firm earns by purchasing the capital. Answer: D Explanation:

A) B) C) D) E)

36) Consider a firm making a decision to purchase a unit of capital - let's say, a forklift. In terms of capital markets, which of the following would we consider to be the opportunity cost of the forklift ? A) the future stream of MRPs from the forklift B) the resale value of the forklift after one year C) the additional revenue to the firm that the forklift would generate in the future D) the purchase price of the forklift E) the interest the firm could earn by purchasing a bond instead Answer: E Explanation:

36)

A) B) C) D) E)

37) In general, a profit-maximizing firm will purchase a unit of capital as long as its purchase price is A) non-negative. B) equal to the present value of the stream of marginal revenue product generated by the capital. C) no less than the present value of the stream of marginal revenue product generated by the capital. D) no more than the present value of the stream of marginal revenue product generated by the capital. E) less than its present marginal revenue product. Answer: D Explanation:

35)

A) B) C) D) E)

10

37)

38) Suppose a piece of capital equipment will produce an MRP of $100 000 per year for the next three years (beginning one year from now). What is the maximum price a profit-maximizing firm will pay to purchase it if the annual interest rate is 4%? A) $96 154 B) $88 888 C) $277 498 D) $266 664 E) $288 462 Answer: C Explanation:

A) B) C) D) E)

39) Suppose a piece of capital equipment offers its last MRP of $40 000 in one year, after which it is valueless. At an annual interest rate of 8%, a profit-maximizing firm would be willing to buy this unit of capital if its purchase price is A) below $37 037. B) above $37 037. C) below $40 000. D) above $40 000. E) above $40 000, but only at a higher interest rate. Answer: A Explanation:

40)

A) B) C) D) E)

41) The law of diminishing marginal returns tells us that the more capital the firm uses, the A) lower is the firm's interest rate. B) lower is the MRP of the firm's capital. C) higher is the MRP of the firm's capital. D) higher is capital's purchase price. E) lower is capital's rental price. Answer: B Explanation:

39)

A) B) C) D) E)

40) Suppose a piece of capital equipment will produce an MRP of $1000 per year for the next three years (beginning one year from now). What is the maximum price a firm will pay to purchase it today if the annual interest rate is 7%? A) $816.37 B) $1649.81 C) $2624.32 D) $3210.00 E) $3000 Answer: C Explanation:

38)

A) B) C) D) E)

11

41)

42) A decrease in market interest rates will A) increase the amount a firm is willing to pay for a machine that generates future returns. B) decrease the amount a firm is willing to pay for a machine that generates future returns. C) not affect the price a firm is willing to pay for a machine that generates future returns. D) be good for all firms. E) be bad for all firms. Answer: A Explanation:

A) B) C) D) E)

43) An increase in market interest rates will A) increase the amount a firm is willing to pay for a machine that generates future returns. B) decrease the amount a firm is willing to pay for a machine that generates future returns. C) not affect the price a firm is willing to pay for a machine that generates future returns. D) be good for all firms. E) be bad for all firms. Answer: B Explanation:

44)

A) B) C) D) E)

45) A firm's downward-sloping investment demand curve is usually plotted with ________ on the vertical axis. A) the price of capital equipment B) MRP C) the interest rate D) the capital stock E) the general price level Answer: C Explanation:

43)

A) B) C) D) E)

44) The present value of a piece of capital equipment that generates future MRPs will increase if A) the interest rate increases. B) the interest rate decreases. C) the MRP values are received farther in the future. D) the purchase price of the capital asset decreases. E) the productivity of the capital asset falls. Answer: B Explanation:

42)

A) B) C) D) E) 12

45)

46) Under which of the following circumstances will a competitive firm choose to own more capital, assuming that the purchase price of the capital and the interest rate remain unchanged? A) the stock of capital in the entire economy increases B) other firms are increasing their stock of capital C) the lifespan of the capital is reduced D) technological improvement has made the capital more productive E) the price of the product the firm produces declines Answer: D Explanation:

A) B) C) D) E)

47) In any given period, a firm's flow of investment demand is determined by A) the change in the firm's optimal flow of investment. B) the change in the firm's optimal capital stock. C) the rate of change of the firm's investment demand. D) the rate of change of the capital stock in the entire economy. E) Any of the above, as they are all the same. Answer: B Explanation:

47)

A) B) C) D) E)

48) Suppose a dairy farmer is considering the purchase of an additional milking machine at a price of $4000. She expects the discounted MRP of the machine in Year 1 to be $1700, in Year 2 to be $1500 and in Year 3 to be $1200, after which the machine has no value. The farmer should A) buy the machine because its present value is $400 more than its purchase price. B) buy the machine because its marginal revenue is $400 more than its marginal cost. C) be indifferent about the purchase because its present value is approximately equal to its purchase price. D) not buy the machine because its marginal revenue is $400 less than its marginal cost. E) not buy the machine because its present value is $400 less than its purchase price. Answer: A Explanation:

46)

A) B) C) D) E)

13

48)

49) Suppose a roofing contractor is considering the purchase of an additional truck at a price of $35 000. He expects the discounted MRP of the truck in Year 1 to be $7000, in Year 2 to be $6000, in Year 3 to be $5000, after which he can sell the truck at a present value of $14 000. This contractor should A) not buy the truck because its marginal cost is greater than its marginal revenue. B) be indifferent about the purchase because its present value is approximately equal to its purchase price. C) buy the truck because its present value is more than its purchase price. D) not buy the truck because its present value is less than its purchase price. E) buy the truck because its marginal cost is less than its marginal revenue. Answer: D Explanation:

A) B) C) D) E)

50) Suppose a firm producing aircraft engines is considering the purchase of a robotic assembly machine at a price of $4 million. The firm expects the discounted MRP of the machine to be $1 million over each of the first 3 years, and $0.5 million each in years 4 and 5, after which the machine has no value. This firm should A) not buy the machine because its present value is less than its purchase price. B) buy the machine because its present value is more than its purchase price. C) be indifferent about the purchase because its present value is equal to its purchase price. D) not buy the machine because its marginal cost is greater than its marginal revenue. E) buy the machine because its marginal cost is less than its marginal revenue. Answer: C Explanation:

50)

A) B) C) D) E)

51) Consider a firm that places coin-operated coffee machines in university buildings. On January 1, 2007 the firm has 1500 machines in operation, and on January 1, 2008 the firm has 2250 machines in operation. A possible explanation is that 1) there was an increase in productivity of coin-operated coffee machines that reduced the cost per cup of coffee produced; 2) an increase in demand for coffee led to an increase in the price per cup; 3) there was an increase in interest rates. A) 1 only B) 2 only C) 3 only D) 1 or 2 E) 2 or 3 Answer: D Explanation:

49)

A) B) C) D) E)

14

51)

The diagram below shows a firm's demand for its units of capitalcoin-operated coffee machines. The firm places its machines in universities and colleges across Canada.

FIGURE 15-1 52) Refer to Figure 15-1. The downward slope of the firm's investment demand curve can be explained by A) the negative relationship between the interest rate and the present value of a future stream of MRPs generated by each coffee machine. B) the negative relationship between the interest rate and the purchase price of the coffee machines. C) the downward slope of the demand curve for the firm's productcups of coffee. D) the relationship between the MRP of the coffee machine and technology improvements to the coffee machines. E) the downward slope of the marginal cost of capital curve. Answer: A Explanation:

A) B) C) D) E)

15

52)

53) Refer to Figure 15-1. One possible explanation for a shift of the firm's investment demand curve from I0 to I2 is

53)

A) an increase in the interest rate. B) a technological improvement that reduces the cost per cup of coffee. C) a decrease in the interest rate. D) an increase in the expected MRP of the coffee machines. E) demographic changes that lead to a reduction in the growth rate of the student population at universities. Answer: E Explanation:

A) B) C) D) E)

54) Refer to Figure 15-1. One possible explanation for a shift of the firm's investment demand curve from I0 to I1 is A) an increase in the interest rate. B) a technological change that increases the cost per cup of coffee. C) a decrease in the interest rate. D) an increase in the expected MRP of the coffee machines. E) demographic changes that lead to a reduction in the growth rate of the student population at universities. Answer: D Explanation:

A) B) C) D) E)

16

54)

The firm in the table below produces denim jeans and each unit of capital represents one sewing machine. The MRP for each of machines 10 through 14 is provided. Each sewing machine delivers a stream of MRPs beginning one year from now, for a total of 2 years. Assume that after 2 years each sewing machine is worth nothing. Number of Sewing Machines 10 11 12 13 14

Annual MRP $2000 $1800 $1600 $1400 $1200

TABLE 15-2 55) Refer to Table 15-2. If the annual interest rate is 4%, what is the present value of the 11th sewing machine (rounded to the nearest dollar)? Note that the stream of MRPs begins one year from now and lasts 2 years. A) $3600 B) $3531 C) $3328 D) $3395 E) $3772 Answer: D Explanation:

A) B) C) D) E)

56) Refer to Table 15-2. If the interest rate is 4%, what is the present value of the 14th sewing machine (rounded to the nearest dollar)? Note that the stream of MRPs begins one year from now and lasts for 2 years. A) $1400 B) $2800 C) $4200 D) $2641 E) $2263 Answer: E Explanation:

56)

A) B) C) D) E)

57) Refer to Table 15-2. If the interest rate is 4%, and the purchase price of a sewing machine is $3000, what is the optimal capital stock (number of sewing machines) for this firm? A) fewer than 10 B) 10 C) 11 D) 12 E) more than 12 Answer: D Explanation:

55)

A) B) C) D) E)

17

57)

58) Refer to Table 15-2. If the interest rate is 4%, and the purchase price of a sewing machine is $4000, what is the optimal capital stock (number of sewing machines) for this firm? A) fewer than 10 B) 10 C) 11 D) 12 E) more than 12 Answer: A Explanation:

A) B) C) D) E)

59) Refer to Table 15-2. If the interest rate is 4% and the purchase price of a sewing machine is $2000, what is the optimal capital stock (number of sewing machines) for this firm? A) 11 B) 12 C) 13 D) exactly 14 E) at least 14 Answer: E Explanation:

59)

A) B) C) D) E)

60) Refer to Table 15-2. Suppose the interest rate is 4%, the purchase price of a sewing machine is $3000, and the firm is holding its optimal capital stock. If the interest rate rises to 7%, how will this firm adjust its capital stock? A) it will reduce its number of machines from 12 to 11 B) it will reduce its number of machines from 14 to 13 C) it will not change its capital stock D) it will increase its number of machines from 11 to 12 E) it will increase its number of machines from 13 to 14 Answer: A Explanation:

58)

A) B) C) D) E)

18

60)

61) Refer to Table 15-2. Suppose the interest rate is 4%, the purchase price of a sewing machine is $3000, and the firm is holding its optimal capital stock. If the interest falls to 2%, how will this firm adjust its capital stock? A) it will reduce its number of machines from 12 to 11 B) it will reduce its number of machines from 14 to 13 C) it will not change its capital stock D) it will increase its number of machines from 11 to 12 E) it will increase its number of machines from 13 to 14 Answer: C Explanation:

A) B) C) D) E)

62) Refer to Table 15-2. What principle will this firm follow to determine the optimal number of sewing machines to own and operate? A) the marginal revenue products of all the machines should be equal B) the present value of the future MRPs on the last unit of capital is equal to (or greater than) its purchase price C) the annual MRP on the last unit of capital should be equal to (or greater than) its purchase price D) the marginal products of each machine should be equal E) the present value of the future MRPs should be increasing over time Answer: B Explanation:

62)

A) B) C) D) E)

63) It is useful to think of physical capital in terms of a ________ variable, ________. A) flow; because its usefulness lasts over a long period of time B) flow; because it is usually put in place and maintained over a long period of time C) stock; because any flow of investment adds to the current capital stock D) stock; because most equipment is solidly built E) stock; depending on the context Answer: C Explanation:

61)

A) B) C) D) E)

19

63)

64) Consider a manufacturing firm that contemplates buying a lathe with an annual MRP of $1000 (beginning one year from now). Suppose the interest rate is 5% per year. If the lathe is obsolete after the fourth MRP is generated, the maximum the firm is prepared to pay now for the lathe is A) $3019.52. B) $3546.40. C) $3723.24. D) $3910.51. E) $4000. Answer: B Explanation:

A) B) C) D) E)

65) A technological improvement in the physical capital available to the firm has a similar impact on a firm's desired capital stock as A) an increase in the interest rate. B) a decrease in capital's MRP. C) a reduction in the price of capital goods. D) a decrease in the price of the firm's product. E) a shift to the left of the capital's MRP curve. Answer: C Explanation:

65)

A) B) C) D) E)

66) Consider the market for commercial ovens as a factor of production in the commercial bread industry. Assume that all commercial ovens are identical, they have a lifespan of 10 years, and the purchase price is $12 000. The present value of the stream of MRPs from the last oven purchased by each commercial bakery is $16 000. We can expect that A) profit-maximizing firms will reduce their capital stock of ovens until the PV of the stream of MRPs falls to $12 000. B) investment demand by all firms will fall until the PV of the stream of MRPs falls to $12 000. C) investment demand by all firms will rise until all firms have an identical capital stock. D) the purchase price of commercial ovens will fall until the price is equated with the PV of the stream of MRPs. E) investment demand by all firms will increase and there will be a tendency for the price of commercial ovens to rise. Answer: E Explanation:

64)

A) B) C) D) E)

20

66)

67) The firm's investment demand curve shows A) the difference between nominal and real interest rates. B) the equilibrium interest rate. C) how the firm's desired stock of capital varies with changes in MRP. D) how the firm's MRP changes with advances in technology. E) how the firm's desired purchases of new capital vary with the interest rate. Answer: E Explanation:

A) B) C) D) E)

68) Consider the economy's downward-sloping demand for investment curve. A decrease in the interest rate causes ________; an improvement in the marginal productivity of capital causes ________. A) a shift of the curve to the right; a shift of the curve further to the right B) a movement downward along the curve; a shift of the curve to the left C) a movement downward along the curve; a shift of the curve to the right D) a shift of the curve to the left; a movement downward along the curve E) a movement upward along the curve; a shift of the curve to the right Answer: C Explanation:

68)

A) B) C) D) E)

69) Choose the best reason for a rightward shift in the economy's investment demand curve. A) diminishing marginal returns to capital B) changes in technology that improve the productivity of capital C) a decrease in the interest rate D) an increase in the interest rate E) none of the above would shift the investment demand curve Answer: B Explanation:

67)

A) B) C) D) E)

21

69)

70) The economy's supply curve for saving (financial capital) shows A) the difference between nominal and real interest rates. B) the relationship between the flow of saving and the stock of financial assets. C) how the economy's desired flow of saving varies with changes in the interest rate. D) how the economy's flow of saving changes with advances in technology. E) how the economy's stock of capital varies with the interest rate. Answer: C Explanation:

A) B) C) D) E)

71) An economy's upward-sloping supply curve of desired saving is usually plotted with ________ on the vertical axis. A) the price of capital B) capital stock C) the market interest rate D) technology E) the general price level Answer: C Explanation:

72)

A) B) C) D) E)

73) If the interest rate that you could earn on your saving is 4% per year, then your decision to spend $1500 on a big screen TV today "costs" you ________ in potential forgone spending one year from now. A) $0 B) $60 C) $120 D) $1500 E) $1560 Answer: E Explanation:

71)

A) B) C) D) E)

72) A firm's demand for physical capital leads to its ________ and a household's supply of saving leads to its ________. A) demand for financial capital; supply of financial capital B) demand for stocks; supply of stocks C) lending behaviour; borrowing behaviour D) negative effect on the interest rate; positive effect on the interest rate E) demand for bonds; supply of bonds Answer: A Explanation:

70)

A) B) C) D) E)

22

73)

74) Suppose you are working as an intern at a large financial firm with an annual salary of $30 000, but you are guaranteed a salary increase to $85 000 at the end of the internship. In general, we can expect that A) your current level of saving rises in anticipation of the higher future income. B) your current level of saving falls and your supply of financial capital to the economy decreases in anticipation of the higher future income. C) your current level of saving falls and your supply of financial capital to the economy rises in anticipation of the higher future income. D) your current level of saving rises because there is a positive relationship between household saving and future income. E) your current level of saving is certain to be positive. Answer: B Explanation:

A) B) C) D) E)

75) Consider the economy's upward-sloping supply of saving curve. An increase in the interest rate causes ________; an increase in current income causes ________. A) a movement downward along the curve; a shift of the curve to the right B) a shift of the curve to the left; a movement upward along the curve C) a movement upward along the curve; a shift of the curve to the right D) a shift of the curve to the left; a movement downward along the curve E) a movement upward along the curve; a movement downward along the curve Answer: C Explanation:

75)

A) B) C) D) E)

76) Households' supply of financial capital is derived from A) their supply of human capital. B) their supply of physical capital. C) firms' demand for financial capital D) firms' demand for physical capital. E) their supply of saving. Answer: E Explanation:

74)

A) B) C) D) E)

23

76)

77) Suppose the nominal interest rate is 10%. The rate of inflation has been 4% and is expected to continue at 4% in the future. The real interest rate, which determines the firm's decision to purchase capital, is therefore A) 4%. B) 6%. C) 10%. D) 14%. E) indeterminate. Answer: B Explanation:

A) B) C) D) E)

78) Suppose that you lend me $100 for a year, and that I agree to pay you $110 at the end of one year (principal plus interest). Over the intervening year, however, the average price of goods in the economy rises by 3%. The real rate of return that you will earn on your loan to me is therefore equal to A) 3%. B) 7%. C) 10%. D) 13%. E) greater than 13%. Answer: B Explanation:

78)

A) B) C) D) E)

79) Suppose that you lend me $100 for a year, and that I agree to pay you $110 at that time (principal plus interest). Over the intervening year, however, the average price of goods in the economy falls by 4%. The real rate of return that you will earn on your loan to me is therefore equal to A) 4%. B) 6%. C) 10%. D) 14%. E) greater than 14%. Answer: D Explanation:

77)

A) B) C) D) E)

24

79)

80) For the economy as a whole, the equilibrium interest rate is determined by A) the current state of technology. B) the intersection of the aggregate investment demand curve with the aggregate saving supply curve. C) the condition that the MRP of capital equal the purchase price of capital. D) only by the purchase price of capital. E) exclusively by government policy. Answer: B Explanation:

80)

A) B) C) D) E)

FIGURE 15-2 81) Refer to Figure 15-2. The market for financial capital is initially in equilibrium at E1 . A shift of the aggregate investment demand curve from I1 to I2 , all other things constant, would A) shift the supply of saving curve to S2 . B) change the technology of capital use. C) decrease the equilibrium interest rate. D) increase the equilibrium interest rate. E) reduce the marginal product of capital. Answer: D Explanation:

A) B) C) D) E)

25

81)

82) Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. A shift

82)

of the aggregate saving supply curve from S1 to S2 , all other things being equal, would A) shift the investment demand curve to I2 . B) change the technology of capital use. C) decrease the equilibrium interest rate. D) increase the equilibrium interest rate. E) reduce the marginal product of capital. Answer: C Explanation:

A) B) C) D) E)

83) Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. If the

83)

marginal product of capital increases, all other things being equal, the A) investment demand curve will shift to I2 and the new equilibrium will be E4 . B) supply of saving curve will shift to S2 and the new equilibrium will be E2 . C) investment demand curve will shift to I2 , the supply of saving will shift to S2, and the new equilibrium will be E3 . D) the equilibrium will remain at E1 . E) the supply of saving curve will shift to S2 and new equilibrium will be E2 . Answer: A Explanation:

A) B) C) D) E)

84) Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. If the government then institutes a policy that encourages individuals to increase their desired saving, A) the equilibrium interest rate falls and the amount of investment increases. B) the equilibrium interest rate falls but the amount of investment is unchanged. C) the flow of investment and saving both increase in the new equilibrium, but the interest rate is unaffected. D) the flow of investment and saving both increase, and the equilibrium interest rate increases. E) the equilibrium interest rate rises, and the amount of investment decreases. Answer: A Explanation:

A) B) C) D) E)

26

84)

85) Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. If the

85)

government then institutes a policy that encourages firms to increase their desired investment, A) the equilibrium interest rate falls and the amount of investment increases. B) the equilibrium interest rate falls but the amount of investment is unchanged. C) the flow of investment and saving both increase in the new equilibrium, but the interest rate is unaffected. D) the flow of investment and saving both increase, and the equilibrium interest rate increases. E) the equilibrium interest rate rises and the amount of investment decreases. Answer: D Explanation:

A) B) C) D) E)

86) Refer to Figure 15-2. The market for financial capital is initially in equilibrium at point E1. If the

86)

government then institutes a policy that encourages individuals to decrease the fraction of their income that they consume, A) the equilibrium interest rate falls and the amount of investment increases. B) the equilibrium interest rate falls but the amount of investment is unchanged. C) the flow of investment and saving both increase in the new equilibrium, but the interest rate is unaffected. D) the flow of investment and saving both increase, and the equilibrium interest rate increases. E) the equilibrium interest rate rises and the amount of saving increases. Answer: A Explanation:

A) B) C) D) E)

87) Refer to Figure 15-2. Suppose the economy begins at point E1. If technology changes in a way that increases the marginal product of capital, which movement best depicts the change in equilibrium in the market for financial capital? A) E1 to E2 B) E1 to E3 C) E1 to E4 D) E3 to E2 E) E4 to E2 Answer: C Explanation:

A) B) C) D) E)

27

87)

The diagram below shows the market for financial capital for a closed economy.

FIGURE 15-3 88) Refer to Figure 15-3. Suppose the current equilibrium in the market for financial capital is at point A. Which of the following events is likely to move the equilibrium to point B? A) a reduction in the interest rate B) an increase in the interest rate C) an increase in current household income D) an increase in expected future income E) a decrease in the marginal product of capital Answer: C Explanation:

A) B) C) D) E)

89) Refer to Figure 15-3. Suppose the current equilibrium in the market for financial capital is at point A. Which of the following events is likely to move the equilibrium to point D? A) a technological improvement B) an increase in the interest rate C) a decrease in the interest rate D) population growth E) a reduction in the marginal product of capital Answer: E Explanation:

88)

A) B) C) D) E)

28

89)

90) Refer to Figure 15-3. Suppose the current equilibrium in the market for financial capital is at point D. Which of the following events is likely to move the equilibrium to point A? A) an increase in the interest rate B) a decrease in the interest rate C) a technological improvement D) the introduction of a policy that encourages saving E) growth in average household income Answer: C Explanation:

A) B) C) D) E)

91) Refer to Figure 15-3. Suppose the current equilibrium in the market for financial capital is at point A. Which of the following events is likely to move the equilibrium to point C? A) an increase in the interest rate and simultaneous technological improvement B) a decrease in the interest rate C) population growth and a simultaneous increase in the marginal product of capital D) population growth and a simultaneous reduction in the marginal product of capital E) population growth and a technological improvement Answer: D Explanation:

91)

A) B) C) D) E)

92) The Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009, which allows Canadians to earn tax-free investment returns on a limited amount of savings each year. In theory, and all else remaining equal, what do we expect the effect of such a policy to be on the market for financial capital? A) The investment demand curve shifts right, the equilibrium interest rate rises and investment rises. B) The investment demand curve shifts left, the equilibrium interest rate falls and investment falls. C) The supply of savings curve shifts right, the equilibrium interest rate falls and investment increases. D) The supply of saving curve shifts left, the equilibrium interest rate rises and investment decreases. E) There will be no effect on the market for financial capital. Answer: C Explanation:

90)

A) B) C) D) E)

29

92)

93) The Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009, which allows Canadians to earn tax-free investment returns on a limited amount of savings each year. What is the underlying goal of such a government policy? A) to decrease the supply of financial capital to the economy B) to increase government tax revenues C) to maintain upward pressure on the equilibrium interest rate D) to increase investment demand of Canadian firms E) to increase desired saving of Canadian households Answer: E Explanation:

A) B) C) D) E)

94) The Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009, which allows Canadians to earn tax-free investment returns on a limited amount of savings each year. One objective is to increase the total supply of saving in the economy. Why might a policy such as this not have the desired effect on the economy? A) The supply of saving will increase only in response to an increase in the pre-tax interest rate. B) The supply of saving will increase only in response to a decrease in the interest rate. C) The funds deposited to a TFSA could simply be substituted from other saving that would happen anyway. D) The supply of savings in general can increase only by income growth or population growth. E) The introduction of TFSAs will divert financial capital away from saving and toward investment. Answer: C Explanation:

94)

A) B) C) D) E)

95) In recent decades the economy has experienced dramatic technological improvement in many types of capital equipment. All else remaining equal, this change has the effect of shifting the investment demand curve to the ________ and causing an excess ________ capital, and thus a ________ in the equilibrium interest rate. A) right; supply of; rise B) right; demand for; rise C) left; demand for; rise D) left; supply of; fall E) right; demand; fall Answer: B Explanation:

93)

A) B) C) D) E)

30

95)

96) Consider the flow of investment and saving in a small economy. Suppose the equilibrium interest rate is 2.5% and the equilibrium level of saving and investment is $4 billion. Now suppose, all else remaining equal, that there is sustained population growth over several years. What will be the effect in the capital market? A) An increase in the flow of investment and saving and an indeterminate effect on the equilibrium interest rate. B) An increase in the flow of investment and saving and an increase in the equilibrium interest rate. C) An increase in the flow of investment and saving and a decrease in the equilibrium interest rate. D) An indeterminate effect on the flow of investment and saving and a decrease in the equilibrium interest rate. E) An indeterminate effect on the flow of investment and saving and an increase in the equilibrium interest rate. Answer: A Explanation:

A) B) C) D) E)

97) Consider the flow of investment and saving in a small economy. Suppose the equilibrium interest rate is 2.5% and the equilibrium level of saving and investment is $4 billion. Now suppose, all else remaining equal, that there is an increase in per capita income. What will be the effect in the capital market? A) the interest rate will fall below 2.5% and the quantity of investment demanded will increase B) the interest rate will rise above 2.5% and the quantity of saving supplied will increase C) the interest rate will rise above 2.5% and the quantity of investment demanded will decrease D) an indeterminate effect on the interest rate and an increase in the equilibrium level of investment and saving E) the interest rate will fall below 2.5% and the quantity of saving supplied will increase Answer: D Explanation:

96)

A) B) C) D) E)

31

97)

98) Ongoing technological improvement over the past four decades in Canada has led to continual increases in investment demand, and an increase in the flow of investment, but no clear trend in the interest rate. The reason that we have not seen continual increases in the interest rate over this time period is that A) natural forces in the economy cause the investment demand curve to shift left to eliminate the excess demand for capital. B) the supply of saving curve shifts to the left in response to the increases in investment demand. C) the government intervenes in the capital market. D) technological change has also led to rising productivity and rising incomes and therefore an increase in the supply of saving. E) the annual flow of investment is large enough to offset any change in the interest rate. Answer: D Explanation:

A) B) C) D) E)

99) Over the past four decades, Canada's non-residential capital stock has increased at an average annual growth rate of approximately ________%. A) 3 B) 6 C) 9 D) 12 E) 15 Answer: A Explanation:

99)

A) B) C) D) E)

100) The Canadian federal government can encourage a rightward shift of the investment demand curve with which of the following policies: 1) an increase in corporate income-tax rates; 2) providing interest-rate subsidies on loans to firms; 3) decreasing the interest rate. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: B Explanation:

98)

A) B) C) D) E)

32

100)

Answer Key Testname: UNTITLED15

1) E 2) C 3) C 4) A 5) C 6) E 7) D 8) D 9) C 10) B 11) B 12) B 13) B 14) C 15) D 16) A 17) A 18) A 19) C 20) D 21) C 22) A 23) D 24) B 25) E 26) E 27) C 28) A 29) B 30) A 31) D 32) B 33) D 34) A 35) D 36) E 37) D 38) C 39) A 40) C 41) B 42) A 43) B 44) B 45) C 46) D 47) B 48) A 49) D 50) C 33

Answer Key Testname: UNTITLED15

51) D 52) A 53) E 54) D 55) D 56) E 57) D 58) A 59) E 60) A 61) C 62) B 63) C 64) B 65) C 66) E 67) E 68) C 69) B 70) C 71) C 72) A 73) E 74) B 75) C 76) E 77) B 78) B 79) D 80) B 81) D 82) C 83) A 84) A 85) D 86) A 87) C 88) C 89) E 90) C 91) D 92) C 93) E 94) C 95) B 96) A 97) D 98) D 99) A 100) B 34

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following roles of the government is most fundamental to a society's ability to function safely and carry on normal economic and social life? A) provider of health care B) provider of education C) provider of a justice system D) holder of a monopoly of violence E) regulator of free markets Answer: D Explanation:

A) B) C) D) E)

2) The concept of "institution building" is becoming more prominent. Which of the following best describes the aim of institution building? A) In Canada, for example, the strengthening of existing financial institutions is key to the country's economic well-being. B) Canada's aid to developing countries is being focused on creating the economic institutions, such as a central bank, that are key to a country's economic growth. C) The rich, developed countries focus their assistance to developing countries on creating stable political infrastructures. D) The rich, developed countries focus on the success of institutions that are global in nature, such as the United Nations, The World Bank and the International Monetary Fund. Answer: C Explanation:

2)

A) B) C) D)

3) Which of the following statements about free-market economies is false? A) An efficiently functioning market economy will correct temporary shortages and surpluses. B) Markets tend to be impersonal and to decentralize economic power. C) The government has a role to play in correcting market failures. D) In a free-market economy there is no role for government intervention. E) The existence of profits and losses provides signals to other economic agents. Answer: D Explanation:

1)

A) B) C) D) E)

1

3)

4) The essential coordinating mechanism of a free-market economy is A) allocative efficiency. B) productive efficiency. C) profit maximization. D) the price system. E) opportunity cost. Answer: D Explanation:

A) B) C) D) E)

5) The "formal defence" of free markets includes the argument that competitive markets A) lead to allocative efficiency. B) provide automatic coordination of the actions of decentralized decision makers. C) provide a stimulus to innovation and economic growth because of the pursuit of profits. D) permit a decentralization of economic power. E) lead to political freedom. Answer: A Explanation:

6)

A) B) C) D) E)

7) The "informal defence" of free markets includes the argument that competitive markets 1) lead to allocative efficiency; 2) provide automatic coordination of the actions of decentralized decision makers; 3) provide a stimulus to innovation and economic growth because of the pursuit of profits. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: E Explanation:

5)

A) B) C) D) E)

6) The "informal defence" of free markets includes the argument that markets A) provide automatic coordination of the actions of decentralized decision makers. B) achieve the maximum feasible rate of economic growth. C) lead to allocative efficiency. D) permit a centralization of economic power. E) lead to productive efficiency. Answer: A Explanation:

4)

A) B) C) D) E)

2

7)

8) Which of the following statements about market economies is true? A) Most present-day economists advocate extensive government intervention in most parts of market economies. B) Externalities make free-market outcomes socially efficient. C) An important characteristic of the market system is its ability to set in motion forces that tend to correct disequilibrium. D) Market failure means that a market economy is incapable of satisfying human wants. E) Pure market economies provide the best social outcome. Answer: C Explanation:

A) B) C) D) E)

9) In a competitive market economy with no externalities, allocative efficiency would exist if A) prices equal total cost in all markets. B) prices equal marginal revenue in all markets. C) prices equal marginal costs in all markets. D) prices equal average variable cost in all markets. E) stringent government intervention exists. Answer: C Explanation:

9)

A) B) C) D) E)

10) Economic losses in an industry are a signal that A) too few resources are allocated to the industry. B) all of the firms should leave the industry. C) a government subsidy is necessary. D) will lead resources to leave the industry (until the losses disappear). E) the economy is in a recession. Answer: D Explanation:

8)

A) B) C) D) E)

3

10)

11) If typical firms in a competitive industry are earning economic profits, the industry A) is in a long-run equilibrium. B) has too many resources allocated to it. C) must be experiencing an increase in monopoly power D) can be expected to experience the entry of new firms. E) is allocatively efficient. Answer: D Explanation:

A) B) C) D) E)

12) Which of the following statements about the price system is most accurate? The price system A) is automatic and functions perfectly in reallocating economic resources. B) is automatic, although it does not function perfectly. C) depends on planned coordination between firms and governments. D) operates only in a laissez-faire economy. E) is the only feasible method of allocating resources. Answer: B Explanation:

13)

A) B) C) D) E)

14) One part of the "informal defence" of the market system is the argument, made forcefully by the late Milton Friedman, that free markets provide for the A) greatest equality in income distribution. B) decentralization of economic power. C) greatest security for members of society. D) government with the highest tax revenues. E) greatest scope for international trade. Answer: B Explanation:

12)

A) B) C) D) E)

13) Economists describe prices as "signals" in a market economy because A) prices are the only mechanism through which supply and demand will balance. B) changes in these signals bring about changes in economic behaviour. C) changes in these signals bring about changes in market structure. D) they tell consumers how to act to keep the market system functioning well. E) they tell government agents how to act to keep the market system functioning well. Answer: B Explanation:

11)

A) B) C) D) E) 4

14)

15) Profit-motivated product and process innovation is primarily a characteristic of ________ systems. A) market B) centrally planned C) oligopolistic D) socialist E) monopolistic Answer: A Explanation:

A) B) C) D) E)

16) In a free-market economy, A) temporary shortages and surpluses become permanent. B) economic power is centralized. C) market failures are automatically corrected. D) there is no role for government intervention. E) the existence of profits and losses provide signals to other economic agents. Answer: E Explanation:

17)

A) B) C) D) E)

18) In a free-market economy that is continually adjusting toward equilibrium, a primary force driving this adjustment is A) opportunity costs. B) diminishing returns. C) the pursuit of allocative efficiency. D) the scarcity of resources. E) the pursuit of profits. Answer: E Explanation:

16)

A) B) C) D) E)

17) When prices are determined in a free-market system A) changes in the economy can be foreseen by officials. B) resources are allocated without conscious central coordination. C) firms respond to changes in the economy mainly by altering the wage rate. D) demand shifts, caused by price changes, coordinate all necessary changes in the economy. E) supply shifts, caused by price changes, coordinate all necessary changes in the economy. Answer: B Explanation:

15)

A) B) C) D) E) 5

18)

19) In a free-market system, a disequilibrium in one market A) provides evidence that the market system does not work. B) shows that government intervention is always necessary to restore the market to equilibrium. C) suggests that no seller or buyer has an incentive to alter his or her behaviour. D) produces forces that eventually bring that market back to equilibrium. E) means that the economy will fall into chaos. Answer: D Explanation:

A) B) C) D) E)

20) Economists use the term "market failure" to refer to those free-market situations where A) income is not distributed equitably. B) allocatively efficient outcomes are not achieved. C) externalities are present in the economy. D) the economy is not in equilibrium. E) government has intervened in the economy. Answer: B Explanation:

20)

A) B) C) D) E)

21) A free-market economy with perfect allocative efficiency does not exist in reality because A) government intervention in the economy prevents the economic forces that would eventually bring the market to an allocatively efficient outcome. B) the assumption of profit-maximization is not a realistic assumption about the behaviour of firms. C) the assumption of utility maximization is not a realistic assumption about the behaviour of consumers. D) firms in many industries have some degree of market power and face negatively sloped demand curves, and produce a level of output where P > MC. E) the decentralization of economic power in a free-market economy does not allow for allocative efficiency. Answer: D Explanation:

19)

A) B) C) D) E)

6

21)

22) What is meant by the term "market failure"? A) that a small group in society is affected B) that allocative efficiency has not been achieved C) that the market economy is a failure D) that one or more markets are not in equilibrium E) that the free market has failed to achieve desirable social goals Answer: B Explanation:

A) B) C) D) E)

23) The existence of imperfectly competitive firms implies a market failure because A) they do not produce a productively efficient level of output. B) their market power allows them to deceive consumers. C) they lead to a socially undesirable distribution of income. D) there is no way to prevent these firms from abusing their market power. E) those firms will maximize profits by setting price above marginal cost. Answer: E Explanation:

23)

A) B) C) D) E)

24) Government intervention in an effort to promote allocative efficiency in all industries would likely impose a cost in terms of economic growth. One explanation for this is that A) some policies to promote allocative efficiency will lead to increased income inequality. B) some policies to promote allocative efficiency will lead to decreased income inequality. C) correcting externalities inevitably reduces the economy's growth rate. D) firms in perfectly competitive industries that are already allocatively efficient would also be affected by the intervention and become inefficient. E) much of the innovation and productivity growth that leads to economic growth comes from oligopolistic firms. Answer: E Explanation:

22)

A) B) C) D) E)

7

24)

25) Which of the following phenomena is NOT an example of market failure? A) moral hazard B) a positive externality C) asymmetric information D) diminishing marginal returns E) public goods Answer: D Explanation:

A) B) C) D) E)

26) One cause of allocative inefficiency is A) the provision of public goods. B) positive or negative externalities. C) perfect competition. D) regulated monopolies. E) too much information. Answer: B Explanation:

26)

A) B) C) D) E)

27) Government intervention in a particular industry is unnecessary if each of the industry's firms is operating where A) there are no positive externalities. B) there are no negative externalities. C) price is equal to private marginal cost. D) marginal social benefit is equal to marginal social cost. E) the demand curve is perfectly elastic. Answer: D Explanation:

25)

A) B) C) D) E)

8

27)

28) The problem with externalities is essentially one of A) a discrepancy between private and social costs. B) asymmetric information. C) the inability of a firm in an industry characterized by increasing returns to scale to make positive profits if it sets price equal to marginal cost. D) a failure of the market to generate socially valued outcomes. E) the failure of the market to solve social problems. Answer: A Explanation:

A) B) C) D) E)

29) A plausible example of market failure due to an externality is A) the cost of building new highways outside of major cities. B) the despoiling of rivers and lakes by nitrogen run-off from agricultural fertilizers. C) the high salaries enjoyed by professional athletes. D) the line-ups at the theatre when a good movie is playing. E) a farmer with an apple orchard who also keeps bees. Answer: B Explanation:

29)

A) B) C) D) E)

30) A homeowner decides to buy three large dogs that sleep outdoors and howl at the moon. An externality associated with this decision is A) the increased work for the homeowner in yard cleanup. B) the cost of purchasing the dogs. C) the neighbours' lost sleep. D) the homeowner's lost sleep. E) the veterinary costs of keeping the dogs healthy. Answer: C Explanation:

28)

A) B) C) D) E)

9

30)

31) Consider an industry producing good X. The quantity of good X produced in a competitive free market will be greater than the socially optimal level if A) the production of good X generates a positive externality. B) the consumption of good X generates a positive externality. C) the production of good X generates a negative externality. D) the government has imposed a tax on the production of good X. E) good X is a public good. Answer: C Explanation:

A) B) C) D) E)

32) Consider an industry producing good X. The quantity of good X produced in a competitive free market will be less than the socially optimal level if A) the consumption of good X generates a negative externality. B) the consumption of good X generates a positive externality. C) the production of good X generates a negative externality. D) the government is subsidizing the production of good X. E) good X has negative third party effects associated with its consumption. Answer: B Explanation:

31)

A) B) C) D) E)

10

32)

FIGURE 16-1 33) Refer to Figure 16-1. Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC1 and MB0 , respectively, then there exists

33)

A) a negative external benefit. B) a negative external cost. C) a positive external benefit. D) a positive external cost. E) no externalities at all. Answer: B Explanation:

A) B) C) D) E)

34) Refer to Figure 16-1. Suppose the perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC0 and MB0 , respectively, then there exists A) a negative external benefit. B) a negative external cost. C) a positive external benefit. D) a positive external cost. E) no externality whatsoever. Answer: E Explanation:

A) B) C) D) E)

11

34)

35) Refer to Figure 16-1. Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC0 and MB1 , respectively, then there exists

35)

A) an external benefit. B) an external cost. C) an external benefit and an external cost. D) a social cost that exceeds the private cost. E) no external benefits or costs. Answer: A Explanation:

A) B) C) D) E)

36) Refer to Figure 16-1. Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC0 and MB0 , respectively, then

36)

A) the competitive price is too high. B) the competitive price is too low. C) the competitive quantity is too high. D) the competitive quantity is too low. E) the competitive price and quantity are consistent with allocative efficiency. Answer: E Explanation:

A) B) C) D) E)

37) Refer to Figure 16-1. Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC2 and MB0 , respectively, then the competitive equilibrium quantity is A) too low for allocative efficiency. B) too high for allocative efficiency. C) consistent with allocative efficiency. D) not enough information to determine allocative efficiency. Answer: A Explanation:

A) B) C) D)

12

37)

38) Refer to Figure 16-1. Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC0 and MB1 , respectively, then the competitive equilibrium quantity

38)

is A) too low for allocative efficiency. B) too high for allocative efficiency. C) consistent with allocative efficiency. D) not enough information to determine allocative efficiency. Answer: A Explanation:

A) B) C) D)

39) Refer to Figure 16-1. Suppose that the perfectly competitive market with no government intervention achieves equilibrium at point A. If the social marginal costs and social marginal benefits are represented by MC1 and MB0 , respectively, then the competitive equilibrium quantity

39)

is A) too low for allocative efficiency. B) too high for allocative efficiency. C) consistent with allocative efficiency. D) not enough information to determine allocative efficiency. Answer: B Explanation:

A) B) C) D)

40) For a production process that involves a positive externality, it is true that A) a per unit tax could be imposed on the producer to achieve the socially optimal level of production. B) marginal social benefit is less than marginal private benefit. C) marginal social cost is more than marginal private cost. D) without government intervention the market will produce too much of this good. E) a subsidy to producers could increase production to the socially optimal level. Answer: E Explanation:

A) B) C) D) E)

13

40)

41) If a firm produces a good and its consumption generates external benefits, then at the competitive market equilibrium A) the government could subsidize the production of this good to improve efficiency. B) the marginal private benefit is greater than the marginal cost of producing the last unit. C) the output would be more than the socially optimal amount. D) the firm will not produce an additional amount if it can internalize the external benefits. E) the marginal social benefit is less than the marginal cost of producing the last unit. Answer: A Explanation:

41)

A) B) C) D) E)

The diagram below shows demand and supply curves for some perfectly competitive market.

FIGURE 16-2 42) Refer to Figure 16-2. Suppose that the marginal benefit curve (MB) includes all social benefits and that there are no externalities in production. In this case, ________ for allocative efficiency. A) P1 and Q1 are appropriate B) the price P1 is appropriate but the quantity Q1 is too low C) the price P1 is appropriate but the quantity Q1 is too high D) the price P1 is too low but the quantity Q 1 is appropriate E) the price P1 is too high but the quantity Q1 is appropriate Answer: A Explanation:

A) B) C) D) E)

14

42)

43) Refer to Figure 16-2. Suppose that the marginal benefit curve (MB) includes all social benefits and that there is a negative externality in production. In this case, ________ for allocative efficiency. A) P1 and Q1 are appropriate

43)

B) the price P1 is appropriate but the quantity Q1 is too low C) the price P1 is appropriate but the quantity Q1 is too high D) the price P1 is too low and the quantity Q1 is too high E) the price P1 is too high and the quantity Q 1 is too low Answer: D Explanation:

A) B) C) D) E)

44) Refer to Figure 16-2. Suppose that the marginal benefit curve (MB) includes all social benefits and that there is a positive externality in production. In this case, ________ for allocative efficiency. A) P1 and Q1 are appropriate

44)

B) the price P1 is appropriate but the quantity Q1 is too low C) the price P1 is appropriate but the quantity Q1 is too high D) the price P1 is too low and the quantity Q1 is too high E) the price P1 is too high and the quantity Q 1 is too low Answer: E Explanation:

A) B) C) D) E)

45) Consider a product (say, tulip bulbs) that generates positive externalities when it is consumed (other people enjoy looking at them). In this case, A) the government could tax the production of this good to improve efficiency. B) at market equilibrium, the marginal social benefit is less than the marginal cost of producing the last unit. C) at the market equilibrium, the output would be greater than the socially optimal amount. D) firms will produce too little of this product unless they internalize the external benefits. E) at the market equilibrium, the price is too high to be allocatively efficient. Answer: D Explanation:

A) B) C) D) E)

15

45)

46) If a homeowner uses wood to heat his house, A) he may generate an external cost if the smoke bothers his neighbours. B) the price of the wood represents an external cost to the homeowner. C) the price of the wood represents an external cost to the homeowner, unless he harvests the wood himself. D) he may generate an external benefit if the smoke bothers his neighbours. E) he may generate an external benefit if the price of heating oil goes down in his region. Answer: A Explanation:

A) B) C) D) E)

47) A flu vaccine has an associated ________ externality. In the absence of government intervention, the quantity of flu vaccines purchased will be ________ the socially optimal quantity. A) positive; the same as B) negative; the same as C) negative; less than D) positive; less than E) positive; more than Answer: D Explanation:

46)

A) B) C) D) E)

16

47)

The diagram below shows the supply and demand diagrams for the competitive market for honey in one region. MC0 represents private marginal cost and MB0 represents private marginal benefit.

FIGURE 16-3 48) Refer to Figure 16-3. Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. In the absence of any government intervention, the equilibrium price and quantity in the honey market are A) $5 and 60 kg. B) $5 and 100 kg. C) $7 and 80 kg. D) $9 and 60 kg. E) $11 and 80 kg. Answer: C Explanation:

A) B) C) D) E)

17

48)

49) Refer to Figure 16-3. Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. We can say that there is a ________ externality in the production of honey. The curve ________ represents the ________ marginal benefit of honey. A) positive; MB1 ; social

49)

B) negative; MB1 ; private C) negative; MB2 ; social D) positive; MB2 ; social E) positive; MB2 ; private Answer: D Explanation:

A) B) C) D) E)

50) Refer to Figure 16-3. Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. If the government subsidizes the beekeepers so as to fully internalize the externality, the equilibrium price of honey would be ________ and the allocatively efficient output would be ________. A) 3; 80 B) 5; 100 C) 7; 100 D) 9; 60 E) 11; 80 Answer: B Explanation:

A) B) C) D) E)

51) Refer to Figure 16-3. Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. If MB2 represents the social marginal benefit of honey, the external benefit associated with producing one unit of honey is A) $1. B) $2. C) $3. Answer: D Explanation:

50)

A) B) C) D) E)

18

D) $4.

E) $5.

51)

52) Refer to Figure 16-3. Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches. The bees provide a benefit to the orchard keepers by pollinating their peach trees. If the external marginal benefit is $4 per unit of honey, then what is the allocatively efficient output? A) 40 kg B) 60 kg C) 80 kg D) 100 kg E) 120 kg Answer: D Explanation:

A) B) C) D) E)

53) An example of a common-property resource is A) a congested toll highway. B) a national park with an entrance fee. C) privately owned ranch land. D) a sport-fishing river in BC. E) privately owned cattle grazing land in Alberta. Answer: D Explanation:

54)

A) B) C) D) E)

55) An example of a rivalrous good is A) toxic emissions from a factory smokestack. B) an empty toll highway. C) an uncrowded beach. D) a visit to the dentist. E) the weather forecast. Answer: D Explanation:

53)

A) B) C) D) E)

54) Which of the following best describes the reason for over fishing in Canadian offshore fisheries? A) Fishing has depleted fish stocks leading to smaller catches. B) The private marginal cost incurred by current fishermen is less than the social marginal cost. C) The private marginal cost incurred by future generations of fishermen is greater than the private marginal cost incurred by current fishermen. D) The Canadian government encourages foreign fishing within the Canadian offshore boundary. E) None of the above can explain overfishing. Answer: B Explanation:

52)

55)

A) B) C) D) E) 19

56) Consider an ordinary rivalrous good, provided in a competitive market. At the socially optimal level of provision of this good, the marginal A) cost of production of this good is zero. B) cost of production of the last unit of the good is equal to the consumers' marginal willingness to pay. C) sacrifice society needs to make to supply the last unit of the good is more than each consumer's marginal willingness to pay. D) cost of production of the last unit of the good is more than all consumers' combined marginal willingness to pay. E) cost of production of the last unit of the good is equal to all consumers' combined marginal willingness to pay. Answer: B Explanation:

A) B) C) D) E)

57) Consider a non-rivalrous good, like national defence, provided by the government. At the socially optimal level of provision of this good, the marginal A) cost of production of this good is zero. B) cost of production of the last unit of the good is equal to the consumers' marginal willingness to pay. C) sacrifice society needs to make to supply the last unit of the good is more than each consumer's marginal willingness to pay. D) cost of production of the last unit of the good is more than all consumers' combined marginal willingness to pay. E) cost of production of the last unit of the good is equal to all consumers' combined marginal willingness to pay. Answer: E Explanation:

57)

A) B) C) D) E)

58) The price charged for access to an uncongested, excludable non-rivalrous good should be ________ because ________. A) positive; consumers receive a positive marginal benefit from consuming the good B) positive; marginal cost and marginal benefit for this good are both positive C) positive; more than one person can consume this good at the same time D) zero; it is inefficient to exclude people from consuming this good once it has been supplied E) zero; the marginal benefit of the last unit consumed is zero Answer: D Explanation:

56)

A) B) C) D) E)

20

58)

59) Which of the following best explains why it is sometimes efficient to charge a positive price for the use of some products such as museums, beaches, and roads? A) Since these products are non-excludable, it is sometimes efficient to charge a positive price. B) Once these products become congested they become rivalrous, marginal cost is positive, and a positive price is then efficient. C) Each person consuming the product has a positive marginal benefit and should therefore pay a positive price. D) Since these products are excludable, marginal cost is always positive, and a positive price is appropriate. E) Since these products are excludable and non-rivalrous, it is always efficient to charge a positive price. Answer: B Explanation:

A) B) C) D) E)

60) Why might it be economically efficient to offer access to an uncongested art gallery or museum at a price of zero? A) because they are non-rivalrous and non-excludable and therefore should be provided at a price of zero B) because the marginal benefit received by the visitor is zero, and marginal benefits and marginal cost should be equal C) because the marginal cost of providing access to one more visitor is zero, while the visitor has a positive marginal benefit D) because it is good for society if more people visit art galleries and museums E) because they are public goods, which would not be provided by the free market Answer: C Explanation:

60)

A) B) C) D) E)

61) Economists consider a product such as a university education to be ________, whereas a product such as your local library is generally considered to be ________. A) non-rivalrous and non-excludable; rivalrous and non-excludable B) rivalrous and non-excludable; rivalrous and excludable C) rivalrous and excludable; non-rivalrous and excludable D) rivalrous and excludable; rivalrous and non-excludable E) non-rivalrous and excludable; non-rivalrous and excludable Answer: C Explanation:

59)

A) B) C) D) E)

21

61)

62) Common-property fishing grounds are A) often underexploited because non-excludability means there is little investment in the resource. B) always efficiently exploited because fishermen now understand the dangers of over-fishing. C) often overexploited because individual fishermen have no incentive to leave fish for the "next" fisherman. D) often overexploited because fishing grounds are rivalrous and excludable. E) often overexploited because fishermen are concerned with preserving fish stocks for future fishermen. Answer: C Explanation:

A) B) C) D) E)

63) Consider a remote village with a limited, freely available water supply and no government intervention in the allocation of water. In this case, each individual has an incentive to use water until their A) private marginal benefit is zero. B) private marginal cost is zero. C) social marginal benefit is maximized. D) social marginal cost is minimized. E) private and social marginal costs are equal. Answer: A Explanation:

63)

A) B) C) D) E)

64) Consider a remote village with a limited, freely available water supply and no government intervention in the allocation of water. Economic theory predicts that the water will be A) allocated efficiently because users will tend to use the water until marginal cost and marginal benefit are both equal to zero. B) overexploited because users will tend to use the water until the marginal cost of providing the water is zero. C) allocated efficiently because users will tend to use the water until the supply and demand are in equilibrium. D) overexploited because users will tend to use the water until their marginal benefit is zero. E) allocated efficiently because users will tend to use the water as though it were a public good. Answer: D Explanation:

62)

A) B) C) D) E)

22

64)

65) Consider a remote village with a limited, freely available water supply and no government intervention in the allocation of water. In economics, the resulting outcome of a situation such as this is often referred to as A) the Coase theorem. B) the tragedy of the commons. C) moral hazard. D) adverse selection. E) asymmetric information. Answer: B Explanation:

A) B) C) D) E)

66) A common-property resource is one that is A) rivalrous and excludable. C) non-rivalrous and excludable. Answer: D Explanation:

66) B) non-rivalrous and non-excludable. D) rivalrous and non-excludable.

A) B) C) D)

67) If you consume some good, and by doing so you diminish other people's possible use of that good, we say that the good is A) rivalrous. B) excludable. C) a common resource. D) not productively efficient. E) a public good. Answer: A Explanation:

67)

A) B) C) D) E)

68) In economics, the term "public good" refers to a product A) that only private producers will provide. B) which consumers cannot be excluded from using. C) that is produced by a publicly owned corporation. D) that is widely advertised. E) that has a very low marginal cost of production. Answer: B Explanation:

65)

A) B) C) D) E)

23

68)

69) A public good is a product that is A) produced by the government. B) excludable but nonrivalrous C) nonexcludable and nonrivalrous. D) rivalrous but nonexcludable. E) excludable and rivalrous. Answer: C Explanation:

69)

A) B) C) D) E)

70) A good example of a product that is both nonexcludable and nonrivalrous is A) grazing land. B) public information. C) electricity. D) food. E) natural gas. Answer: B Explanation:

A) B) C) D) E)

71) Which of the following statements about public goods is true? A) They cannot be publicly provided. B) They are unlikely to be provided by private, profit-seeking firms. C) They are essentially negative externalities. D) They respond to market signals. E) The firms producing them must be listed on a public stock exchange. Answer: B Explanation:

71)

A) B) C) D) E)

72) A good example of a public good is A) a municipal swimming pool. B) a seat on an airplane flight. C) light from a lighthouse. D) a school bus. E) a publicly owned subway system. Answer: C Explanation:

70)

72)

A) B) C) D) E)

24

73) An example of a public good is A) apples on a tree in a public park. B) insurance. C) street lighting. D) air travel. E) municipal transit service. Answer: C Explanation:

73)

A) B) C) D) E)

74) One reason that national defence is a classic example of a public good is that A) all citizens want national defence. B) society deems it to be too important to be provided by the private sector. C) the benefits of national defence cannot be kept from those who do not pay. D) military technology is too expensive for private firms to provide. E) it would be immoral for private firms to provide this essential commodity. Answer: C Explanation:

A) B) C) D) E)

75) One reason that national defence is a classic example of a public good is that A) all citizens want national defence. B) society deems it to be too important to be provided by the private sector. C) the benefits that accrue to one person do not diminish the benefits available to others. D) military technology is too expensive for private firms to provide. E) it would be immoral for private firms to provide this essential commodity. Answer: C Explanation:

75)

A) B) C) D) E)

76) An efficient amount of a public good is unlikely to be produced in a free market because A) there is no way to prevent a person who is not willing to pay for the good from receiving benefits from the good. B) of the high cost of producing the public good. C) social benefits exceed social costs. D) of the existence of moral hazard. E) of the existence of adverse selection. Answer: A Explanation:

74)

A) B) C) D) E) 25

76)

77) Private markets will always provide too few public goods because A) the private marginal cost is less than the social marginal cost. B) it is unlawful for private firms to provide public goods. C) of the negative externalities associated with these goods. D) private markets will never provide goods at a price of zero, which is the efficient price. E) private markets will never provide goods that they know the government could provide. Answer: D Explanation:

A) B) C) D) E)

78) An efficient level of provision of a public good is achieved when A) the cost of providing an extra unit of the good is equal to the valuation of each consumer of the extra unit. B) the cost of providing an extra unit of the good is equal to the sum of the valuations of all consumers for that unit. C) the cost of providing an extra unit of the good is equal to the price of the good. D) the valuation of each consumer for the last unit of the good produced is zero. E) voters are satisfied that an adequate amount of the good is being produced. Answer: B Explanation:

78)

A) B) C) D) E)

79) The fact that it is difficult to prevent people from using public goods once they are produced, even if they have not paid, is known as A) the easy-rider problem. B) the over-consumption problem. C) moral hazard. D) the free-rider problem. E) adverse selection. Answer: D Explanation:

77)

A) B) C) D) E)

26

79)

80) Consider a childhood vaccination program that is fully effective if all children are vaccinated. Now suppose that all children except one are vaccinated - and as a result that one child will not contract the disease. In economics, we can compare this situation to A) moral hazard. B) adverse selection. C) the free-rider problem. D) asymmetric information. E) common property problem. Answer: C Explanation:

A) B) C) D) E)

81) Which of the following is the best description of a "free rider"? Someone who A) pays for a good but does not receive any benefit from the good. B) receives the benefit of a good without having to pay for it. C) does not produce any goods but is able to consume them. D) consumes a good until the marginal benefit received from the last unit is zero. E) consumes a good until the marginal benefit received from the last unit is equal to the marginal cost of producing the good. Answer: B Explanation:

81)

A) B) C) D) E)

82) Because of the free-rider problem, A) the private market will generally produce the efficient amount of a public good. B) too many people will over-consume a public good. C) government will not be able to produce an efficient amount of a public good. D) it is difficult to make people pay for a public good, and thus private markets will tend not to produce it. E) people need to pay a government user fee to pay for the good's production. Answer: D Explanation:

80)

A) B) C) D) E)

27

82)

83) It is inefficient for the government to charge a price for consuming public health information because A) too much of the information will be produced. B) the price cannot be set to cover all research costs. C) no one will be willing to pay to use this information. D) the cost of providing this information to an additional person is essentially zero. E) the marginal costs of producing it exceed the marginal benefits of using it. Answer: D Explanation:

A) B) C) D) E)

84) The efficient price to charge consumers for their use of a public good is A) equal to the average per-person cost of providing this good. B) equal to the cost of providing the good to one additional consumer. C) equal to the highest individual marginal benefit from consuming a unit of the good. D) that price that prevents free riding by some consumers. E) equal to the price that the free market would achieve. Answer: B Explanation:

83)

A) B) C) D) E)

28

84)

The diagram below shows the marginal benefit and marginal cost of a public good. This economy has 3 individuals, A, B and C. The diagram shows the MB for each individual and a summation of their marginal benefits.

FIGURE 16-4 85) Refer to Figure 16-4. What is the optimal provision of this public good? A) Q B) Q1 C) Q2 D) Q3 Answer: E Explanation:

85) E) Q4

A) B) C) D) E)

86) Refer to Figure 16-4. The curve MBABC is derived by A) a vertical summation of the marginal benefits of all individuals at each level of output. B) observation of the consumption of public goods at a price of zero. C) observation of the consumption of public goods at the optimal price. D) a horizontal summation of the marginal benefits of all individuals at each given price level. E) determining the private marginal cost of the public good. Answer: A Explanation:

A) B) C) D) E)

29

86)

87) Refer to Figure 16-4. Suppose the optimal amount of this good is provided, but that Individual B was only consuming Q2 units of the good. What would be the marginal cost of Individual B

87)

consuming an extra unit of this good? A) P2 . B) P4 . C) P4 -P2 . D) MB. E) approximately zero. Answer: E Explanation:

A) B) C) D) E)

88) Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If the

88)

government was able to require consumers to pay a price of P4 , then A) the market would clear, although not enough would be produced. B) the inefficient quantity would be being produced. C) the appropriate price would be achieved, although not enough would be consumed. D) consumers would not use the public good at all, and this would be socially optimal. E) consumers would not use the public good at all, and this would not be an efficient outcome for society. Answer: E Explanation:

A) B) C) D) E)

89) Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If the government was able to require consumers to pay a price of P1 , then A) the market would clear, although not enough would be produced. B) an inefficient quantity would be being produced. C) consumers would use too little of the public good, and the outcome would be inefficient for society. D) consumers would not use the public good at all, and this would be socially optimal. E) the appropriate price would be achieved, although not enough would be consumed. Answer: C Explanation:

A) B) C) D) E)

30

89)

90) Refer to Figure 16-4. Suppose the government provides Q4 units of the public good. If consumers

90)

were then required to pay a price of zero for the good, A) the market would clear, although not enough would be produced. B) the inefficient quantity would be being produced. C) consumers would use too little of the public good, and the outcome would be inefficient for society. D) consumers would use the public good until their marginal benefit was zero, and this would be socially optimal. E) the appropriate price would be achieved, although not enough would be consumed. Answer: D Explanation:

A) B) C) D) E)

91) Refer to Figure 16-4. Once some quantity of this public good is provided, the efficient price to charge for its use is A) approximately zero. B) P1 .

91)

C) P2 . D) P3 . E) P4 . Answer: A Explanation:

A) B) C) D) E)

92) Why would it be inefficient for the government to charge a price for consuming a public good such as national defence? A) Too much defence will be provided. B) The price cannot be set to cover all defence costs. C) No one will be willing to pay to consume any national defence. D) The marginal cost of providing national defence is zero. E) Too little national defence will be provided. Answer: D Explanation:

A) B) C) D) E)

31

92)

93) Moral hazard is said to exist when one party to a transaction A) is not able to take advantage of the other party. B) has the incentive to, and is able to, shift costs to another party in the transaction. C) is subject to a hostile corporate takeover. D) purchases insurance because they know they are involved in risky activities. E) has no morals. Answer: B Explanation:

A) B) C) D) E)

94) Moral hazard often arises in the case of insurance because A) people generally underestimate the amount of insurance coverage needed. B) insured people will not take sufficient care to reduce risks because the private benefit of reducing risks exceeds the private cost of reducing risks. C) insured people will not take sufficient care to reduce risks because the private cost of reducing risks exceeds the private benefit of reducing risks. D) insurance companies have no incentive to investigate fraudulent claims. E) people who are in the most need of insurance have the most trouble obtaining insurance coverage. Answer: C Explanation:

94)

A) B) C) D) E)

95) The concept of moral hazard was publicly discussed in the context of the 2007-2008 financial crisis because A) it was claimed that moral hazard was necessary to prevent large U.S. financial institutions from going bankrupt. B) it was argued that the U.S. government should invoke moral hazard to sustain the financial sector. C) it was feared that government bailouts of financial institutions would encourage the institutions to continue their risky behaviour. D) it was feared that government bailouts of financial institutions would reduce competition in financial markets. E) it was feared that the U.S. government was taking advantage of its special knowledge in the financial markets. Answer: C Explanation:

93)

A) B) C) D) E)

32

95)

96) Adverse selection is said to exist when an individual A) is not able to take advantage of another individual. B) has the incentive to, and is able to, shift costs to another individual. C) selects a product which has adverse externalities. D) purchases a lot of insurance because he/she knows that he/she is at high risk. E) is averse to certain products. Answer: D Explanation:

A) B) C) D) E)

97) An example of adverse selection is A) asking a private pilot about the safety of his plane. B) asking a doctor if you are sick. C) purchasing more dental insurance when you know your teeth are especially bad. D) asking your lawyer if you should sue your doctor for malpractice. E) purchasing the required homeowner's insurance when you buy a condo. Answer: C Explanation:

97)

A) B) C) D) E)

98) Suppose an advertising firm purchases additional insurance against theft, and as a result, the partners are not very careful about locking their office doors when they leave. This is an example of A) the free-rider problem. B) adverse selection. C) a public good. D) a common property resource. E) moral hazard. Answer: E Explanation:

96)

A) B) C) D) E)

33

98)

99) Export Development Canada (EDC) provides insurance to Canadian exporters for their accounts receivable from foreign buyers. If EDC charges an insurance premium that reflects the average level of risk of the exporting firms, it is only the most risky firms that will tend to purchase insurance. This is an example of A) the free-rider problem. B) adverse selection. C) a public good. D) a common property resource. E) moral hazard. Answer: B Explanation:

A) B) C) D) E)

100) Which of the following proposals could be an example of an effort to correct for an adverse selection problem? A) The government imposes a tax on factory-emissions of a toxic substance. B) The government subsidizes the consumption of fitness activities. C) An employer requires all employees to submit to drug testing. D) The government subsidizes the development of eco-friendly production methods. E) An employer that requires all employees to purchase the employer-sponsored dental insurance program. Answer: E Explanation:

100)

A) B) C) D) E)

101) Services such as those within the justice system are usually provided by the government. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) policies for economic growth Answer: B Explanation:

99)

A) B) C) D) E)

34

101)

102) Governments usually provide a system of unemployment insurance. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) policies for economic growth Answer: A Explanation:

A) B) C) D) E)

103) The Canadian government operates a progressive personal income-tax system. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) policies for economic growth Answer: A Explanation:

103)

A) B) C) D) E)

104) All Canadian provincial governments have legislated minimum wages. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) policies for economic growth Answer: A Explanation:

102)

A) B) C) D) E)

35

104)

105) The government has seatbelt and airbag requirements in cars, and laws requiring individual drivers to use them. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) policies for economic growth Answer: C Explanation:

A) B) C) D) E)

106) In the context of government intervention in the economy, an example of paternalism is A) taxation law. B) regulation to reduce pollution. C) economic regulation of monopolies. D) the provision of public goods. E) laws requiring the use of bicycle helmets. Answer: E Explanation:

106)

A) B) C) D) E)

107) The government prohibits individuals from paying someone else to replace them when they are selected to perform jury duty. What broader social goal is being met in this case? A) income distribution B) preference for public provision C) protecting individuals from others or themselves D) social responsibility E) policies for economic growth Answer: D Explanation:

105)

A) B) C) D) E)

36

107)

108) The construction of the TransCanada highway is an example of government intervention through A) public provision. B) redistribution. C) regulation. D) restructuring of economic incentives. E) subsidization. Answer: A Explanation:

A) B) C) D) E)

109) Providing subsidies to for-profit firms that offer day-care services represents government intervention through A) public provision. B) the influencing of economic incentives. C) regulation. D) merit-goods allowances. E) progressive taxation. Answer: B Explanation:

109)

A) B) C) D) E)

110) Provincial laws that mandate a minimum drinking age (for alcohol) are an example of government intervention through A) public provision and price control. B) redistribution and reorganization. C) regulation. D) communism. E) merit-goods control. Answer: C Explanation:

108)

A) B) C) D) E)

37

110)

111) Which of the following statements concerning cost-benefit analysis is true? A) Large potential benefits, regardless of their time horizon, always justify government intervention. B) Large potential costs, regardless of their time horizon, always preclude government intervention. C) Though benefits from a government policy can be accurately measured, costs are usually impossible to quantify. D) Cost-benefit analysis can be used effectively by private firms but should not be used in the public sector. E) Though it is often difficult to estimate costs and benefits with precision, cost-benefit analysis can be useful in determining whether to implement a given government policy. Answer: E Explanation:

A) B) C) D) E)

112) The direct resource costs of government intervention include the A) increased costs of production arising from compliance with regulations. B) resulting loss of productivity in the private sector. C) opportunity costs of forgone investment. D) salaries of government regulators. E) rent seeking. Answer: D Explanation:

112)

A) B) C) D) E)

113) The total costs of government intervention in the market economy include A) compliance costs. B) direct resource costs, such as the salaries of civil servants. C) the costs of rent seeking. D) extra costs arising from regulation. E) all of the above. Answer: E Explanation:

111)

A) B) C) D) E)

38

113)

114) Examples of direct costs of government intervention include A) the production cost of meeting new emission standards on new cars. B) the regulatory affairs departments of many Canadian corporations. C) the time spent by Canadians completing their income-tax forms. D) the government's administrative costs of conducting the Census. E) costs of complying with provincial sales taxes. Answer: D Explanation:

A) B) C) D) E)

115) "Rent-seeking" is a problem of A) pure free-market economies. B) centrally planned economies. C) all economies, given the existence of government. D) private organizations in which ownership is not identical to management. E) landlords and tenants. Answer: C Explanation:

115)

A) B) C) D) E)

116) Attempts by professional lobbyists in Ottawa to influence the government's subsidy to the shipbuilding industry, even when such a subsidy is not in the national interest, represents A) an inefficient public choice. B) the government acting like a monopolist. C) rent seeking. D) an externality. E) asymmetric information. Answer: C Explanation:

114)

A) B) C) D) E)

39

116)

117) Most economists who study "public choice theory" now agree that an important possible source of "government failure" is A) that it is not possible for civil servants to determine the allocatively efficient provision of government services. B) that most civil servants are incompetent. C) that politicians and civil servants have their own objectives that may conflict with the national interest. D) governments govern undemocratically. E) politicians are incompetent or corrupt. Answer: C Explanation:

A) B) C) D) E)

118) Which of the following is the best example of the phenomenon of "rational ignorance"? A) The ignorance of a profit-maximizing firm on the location and shape of its long-run average cost curve, which is extremely difficult to determine. B) The ignorance of most voters with regard to the position of the economy's production possibilities boundary. C) The theory of perfect competition assumes that consumers have full knowledge of all prices, while in reality they know the prices of only the goods and services they purchase. D) Consumers are unaware of the quantity supplied by producers, and producers are unaware of the quantity demanded by consumers. E) You choose not to become informed about an important government policy because the benefits of doing so are outweighed by the costs of doing so. Answer: E Explanation:

118)

A) B) C) D) E)

119) Economists generally agree that government intervention in the economy is appropriate A) whenever there is a market failure. B) whenever the costs of market failure are greater than the benefits of the existence of markets. C) whenever the benefits of the correction of the market failure through intervention are greater than the costs of the intervention itself. D) only when the market fails to provide a socially useful good. E) whenever the costs of the intervention are greater than the value of the correction of the market failure. Answer: C Explanation:

117)

A) B) C) D) E)

40

119)

120) The main point about public choice theory is that A) most politicians are corrupt. B) most civil servants act solely in the public interest. C) there is adverse selection in the selection of elected officials. D) elected officials never compromise the public interest in order to gain votes. E) the choices of public officials may be governed more by their own self-interest than the public interest. Answer: E Explanation:

A) B) C) D) E)

41

120)

Answer Key Testname: UNTITLED16

1) D 2) C 3) D 4) D 5) A 6) A 7) E 8) C 9) C 10) D 11) D 12) B 13) B 14) B 15) A 16) E 17) B 18) E 19) D 20) B 21) D 22) B 23) E 24) E 25) D 26) B 27) D 28) A 29) B 30) C 31) C 32) B 33) B 34) E 35) A 36) E 37) A 38) A 39) B 40) E 41) A 42) A 43) D 44) E 45) D 46) A 47) D 48) C 49) D 50) B 42

Answer Key Testname: UNTITLED16

51) D 52) D 53) D 54) B 55) D 56) B 57) E 58) D 59) B 60) C 61) C 62) C 63) A 64) D 65) B 66) D 67) A 68) B 69) C 70) B 71) B 72) C 73) C 74) C 75) C 76) A 77) D 78) B 79) D 80) C 81) B 82) D 83) D 84) B 85) E 86) A 87) E 88) E 89) C 90) D 91) A 92) D 93) B 94) C 95) C 96) D 97) C 98) E 99) B 100) E 43

Answer Key Testname: UNTITLED16

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

B A A A C E D A B C E D E D C C C E C E

44

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists generally view pollution as A) an economic "bad" that must be eliminated entirely. B) a negative economy. C) a negative externality. D) a positive externality. E) a non-excludable good. Answer: C Explanation:

A) B) C) D) E)

2) When firms in an industry have fully internalized a production externality, A) they produce at less than the optimal level of output. B) they produce at more than the optimal level of output. C) it is not possible to achieve allocative efficiency. D) the marginal social cost is zero. E) they bear the entire social marginal cost of production. Answer: E Explanation:

2)

A) B) C) D) E)

3) If pollution is associated with the production of some good, then A) the marginal social cost is less than the marginal social benefit. B) the price of the good is equal to firms' marginal private cost. C) marginal social cost minus marginal private cost is negative. D) marginal social cost minus marginal private cost is positive. E) too little of the good is being produced by the firm. Answer: D Explanation:

1)

A) B) C) D) E)

1

3)

The figure below shows the marginal benefit to consumers, MB, the marginal cost to private firms, MCP, and the marginal cost to society, MCS, at each level of output of some good.

FIGURE 17-1 4) Refer to Figure 17-1. A negative externality is depicted because the A) marginal social cost is greater than the marginal social benefit. B) marginal social cost is greater than the marginal private cost. C) marginal social benefit to consumers is diminishing with greater output. D) optimal level of output occurs where marginal private cost is positive. E) optimal level of output occurs where marginal private benefit is positive. Answer: B Explanation:

A) B) C) D) E)

5) Refer to Figure 17-1. The price that leads consumers to demand the socially optimal quantity of output is A) zero. B) P1 . C) P2 . D) P3 . E) not possible to know from the information given. Answer: D Explanation:

4)

A) B) C) D) E)

2

5)

6) Refer to Figure 17-1. The price that would occur in a competitive market in the absence of government intervention is A) P1 .

6)

B) P2 . C) P3 . D) P4 . E) not possible to know from the information given. Answer: B Explanation:

A) B) C) D) E)

7) Refer to Figure 17-1. The equilibrium output that would occur in a competitive market in the absence of government intervention is A) zero. B) Q1 .

7)

C) Q2 . D) Q3 . E) none of the above; there is no equilibrium output level. Answer: D Explanation:

A) B) C) D) E)

8) Refer to Figure 17-1. The socially optimal level of output is A) zero. B) Q1 . C) Q2 . D) Q3 . E) none of the above; there is no optimal output level. Answer: C Explanation:

A) B) C) D) E)

3

8)

9) When an external cost associated with the production of some good has been internalized, it means that A) the opportunity cost of production is passed on to the consumer. B) the private cost of production is borne by the producer. C) the producer must bear the external costs imposed by production. D) the consumer must bear the net social benefits imposed by the producer. E) the firm is ignoring social costs. Answer: C Explanation:

A) B) C) D) E)

10) The social marginal cost of the production of snowmobiles A) is less than the marginal external cost of production. B) is greater than the sum of the private marginal cost and external cost. C) does not include the carbon emissions from snowmobiles. D) includes the noise pollution imposed on those living near snowmobile trails. E) does not include the increased risk of accidents caused by the operation of snowmobiles. Answer: D Explanation:

10)

A) B) C) D) E)

11) When a farmer in Manitoba produces fertilizer run-off that pollutes the local water system, A) the amount of farm output will not be profitable. B) the amount of farm output produced will not be cost-effective. C) the amount of farm output produced will be less than the efficient level. D) the farm should stop producing agricultural products altogether. E) the amount of farm output produced will exceed the efficient level. Answer: E Explanation:

9)

A) B) C) D) E)

4

11)

12) A paper mill discharges chemicals into a river which washes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q, MCS = 10 + 2Q, and MB =

12)

35 - 0.5Q. A competitive free market will produce output of ________ units, and this amount is ________ than the allocatively efficient level of output. A) 5; less B) 10; less C) 15; more D) 20; more E) 25; more Answer: D Explanation:

A) B) C) D) E)

13) A paper mill discharges chemicals into a river which washes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q, MCS = 10 + 2Q, and MB = 35 - 0.5Q. The marginal external cost at the competitive free-market equilibrium is A) 5. B) 10. C) 15. D) 20 Answer: E Explanation:

E) 25.

A) B) C) D) E)

14) A paper mill discharges chemicals into a river which washes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q, MCS = 10 + 2Q, and MB = 35 - 0.5Q. The allocatively efficient level of output is ________ units. A) 0 B) 10 C) 15 D) 25 Answer: B Explanation:

14)

E) 30

A) B) C) D) E)

15) A paper mill discharges chemicals into a river which washes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q, MCS = 10 + 2Q, and MB = 35 - 0.5Q. The marginal external cost at the allocatively efficient level of output is A) 0. B) 5. C) 10. D) 15. Answer: D Explanation:

13)

A) B) C) D) E)

5

E) 20.

15)

16) A paper mill discharges chemicals into a river which washes the shores of a downstream resort area. The private marginal cost, social marginal cost, and marginal benefit associated with the production of paper are given by the following equations: MCP = 5 + Q, MCS = 10 + 2Q, and MB =

16)

35 - 0.5Q. The marginal external cost is ________ throughout the output range. A) zero B) constant C) increasing D) decreasing E) negative Answer: C Explanation:

A) B) C) D) E)

17) Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant. The private marginal cost, social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: MCP = 5 + 2Q

17)

MCS = 10 + 3Q MB = 50 - Q A competitive free market will produce ________ units, at a price of ________ per unit. A) 20; $25 B) 20; $40 C) 15; $40 D) 15; $35 E) 10; $35 Answer: D Explanation:

A) B) C) D) E)

18) Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant. The private marginal cost, social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: MCP = 5 + 2Q MCS = 10 + 3Q MB = 50 - Q The marginal external cost at the competitive equilibrium is ________ per unit. A) $5 B) $10 C) $15 D) $20 Answer: D Explanation:

A) B) C) D) E)

6

E) $25

18)

19) Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant. The private marginal cost, social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: MCP = 5 + 2Q MCS = 10 + 3Q MB = 50 - Q The allocatively efficient level of output is ________ units. A) 0 B) 5 C) 10 Answer: C Explanation:

D) 15

E) 20

A) B) C) D) E)

20) When the marginal costs of pollution abatement equal the marginal benefits of pollution abatement, A) any further reductions in pollution will lower net social benefits. B) pollution has been entirely eliminated. C) any further reductions in pollution will continue to increase net social benefits. D) then firms are likely to increase output. E) then firms are likely to decrease output. Answer: A Explanation:

20)

A) B) C) D) E)

21) Zero pollution is almost surely NOT a desirable social goal because A) the marginal benefit is equal to zero. B) the marginal cost is equal to zero. C) the totals costs of complete pollution elimination will be far greater than the total benefits. D) the total benefits of complete pollution elimination will be far greater than the total costs. E) society benefits by employing people in the "pollution fighting" industry. Answer: C Explanation:

19)

A) B) C) D) E)

7

21)

22) A downward-sloping marginal benefit curve for pollution abatement means that A) the costs of pollution decrease as further amounts are abated. B) the marginal cost of pollution reduction will always exceed the marginal benefit. C) it is impossible to know the benefits from additional increments of pollution abatement. D) society views additional increments of pollution abatement as unnecessary. E) there are decreasing incremental benefits to be realized from additional increments of pollution abatement. Answer: E Explanation:

A) B) C) D) E)

23) An upward-sloping marginal cost curve for pollution abatement means that A) it is impossible to know the benefits from additional increments of pollution reduction. B) additional increments of pollution abatement will yield decreasing benefits. C) society views additional increments of pollution reduction as absolutely necessary. D) the cost of an extra unit of pollution abatement will increase as the total amount of abatement rises. E) the marginal benefit of pollution reduction will increase with additional increments of pollution reduction. Answer: D Explanation:

23)

A) B) C) D) E)

24) The marginal benefit of reducing pollution in some industry may be expected to A) rise as the level of pollution gets closer to zero. B) remain constant for all levels of pollution control. C) exceed the marginal cost of pollution reduction for all positive levels of pollution. D) fall as the amount of pollution abatement undertaken rises. E) be always greater than the marginal cost of pollution reduction. Answer: D Explanation:

22)

A) B) C) D) E)

8

24)

25) The optimal amount of pollution abatement is generally less than 100%. Complete (100% ) abatement would be optimal if A) the marginal cost of abatement is positive but less than the marginal benefit of abatement. B) the marginal cost of abatement is always zero. C) the marginal cost of abatement exceeds the marginal benefit of abatement at all levels of abatement. D) the marginal benefit of abatement is zero. E) none of the above — we cannot even imagine a situation in which complete abatement would be optimal. Answer: B Explanation:

A) B) C) D) E)

26) Suppose a local meat packing company dumps waste into a river, causing a firm located downstream that uses the water to incur costs to restore the water quality. An efficient solution to this problem might involve: 1) forcing the meat-packing company to relocate near a different river; 2) forcing the meat-packing company to buy the downstream firm; 3) permitting the downstream firm to charge the meat-packing company. A) 1 only B) 2 only C) 3 only D) 2 or 3 only E) 1 or 3 only Answer: D Explanation:

26)

A) B) C) D) E)

27) In general, the economist's view on allocating resources to reduce pollution is that A) all forms of water and air pollution should be eliminated. B) government policies to reduce pollution have zero opportunity cost. C) the reduction of pollution should proceed up to the point where the marginal cost of pollution reduction equals the marginal benefit to society. D) the extent of pollution reduction should be based only on a comparison of total costs and total benefits to the environment. E) it is not allocatively efficient to reduce pollution. Answer: C Explanation:

25)

A) B) C) D) E)

9

27)

28) The socially optimal level of output of any good is the quantity where all marginal costs of production, private plus external, equal the A) marginal cost of production. B) marginal benefit to society. C) average benefit to society. D) total benefit to society. E) marginal benefit to the firm. Answer: B Explanation:

A) B) C) D) E)

29) Zero environmental damage is probably A) technologically possible and economically efficient. B) technologically possible but not economically efficient. C) economically efficient but not technologically possible. D) neither technologically possible nor economically efficient. E) necessary if the human race is to survive. Answer: D Explanation:

29)

A) B) C) D) E)

30) The optimal amount of pollution abatement is such that A) the total benefit of reducing pollution is equal to the total cost of reducing pollution. B) the marginal social cost of reducing pollution is just equal to the marginal social benefits from doing so. C) the marginal private cost of reducing pollution is just equal to the profit of the polluting firms. D) there is no remaining pollution. E) none of the above; there is no optimal amount of pollution abatement. Answer: B Explanation:

28)

A) B) C) D) E)

10

30)

31) When considering an entire industry, the marginal benefit of reducing pollution is expected A) to rise as the level of pollution gets closer to zero. B) to remain constant for all levels of pollution control. C) to exceed the marginal cost of pollution abatement for all positive levels of pollution. D) to fall as the amount of pollution abatement rises. E) to be always greater than the marginal cost of pollution reduction. Answer: D Explanation:

A) B) C) D) E)

32) Consider an oil company extracting oil from the Tar Sands in Northern Alberta. The production process generates greenhouse-gas emissions. At the socially efficient level of oil extraction, A) the level of emissions will be zero. B) the marginal cost of the emissions will be equal to the social marginal benefit derived from the extracted oil. C) the marginal cost of the emissions will be more than the social marginal benefit derived from the extracted oil. D) the social marginal cost of the oil extraction will be equal to its social marginal benefit. E) the social marginal cost of the oil extraction will exceed its social marginal benefit. Answer: D Explanation:

31)

A) B) C) D) E)

11

32)

The diagram below shows the private and social marginal costs (MCP and MCS) and the social marginal benefits (MBS) of producing disposable diapers.

FIGURE 17-2 33) Refer to Figure 17-2. The allocatively efficient level of production and use of disposable diapers is A) Q0 , because that is where MCS exceeds MCP. B) Q0 , because that is where MCS equals MBS. C) Q1 , because that is where MCP equals MBS. D) Q1 , because that is where MCS equals MBS. E) Q2 , because that is where the externality is internalized. Answer: B Explanation:

A) B) C) D) E)

12

33)

34) Refer to Figure 17-2. The net social benefit derived from the production and use of disposable diapers is A) at a minimum at Q0 , because MCS exceeds MCP. B) at a maximum at Q 0, because that is where MCS equals MBS. C) at a maximum at Q 1, because that is where MCS equals MBS. D) zero at Q0 , because that is where MCS equals MBS. E) zero at Q2 , because that is where the externality is internalized. Answer: B Explanation:

A) B) C) D) E)

35) Refer to Figure 17-2. The net social benefit derived from the production and use of the last unit of disposable diapers is A) at a minimum at Q0 , because MCS exceeds MCP. B) at a maximum at Q 0, because that is where MCS equals MBS. C) at a maximum at Q 1, because that is where MCS equals MBS. D) zero at Q0 , because that is where MCS equals MBS. E) zero at Q2 , because that is where the externality is fully maximized. Answer: D Explanation:

34)

A) B) C) D) E)

13

35)

The figure below shows the demand and supply curves for pollution abatement.

FIGURE 17-3 36) Refer to Figure 17-3. The MB curve in this diagram is downward sloping because A) the marginal benefit from a given amount of abatement will be lower, the lower the level of pollution. B) the marginal cost of additional units of pollution abatement is decreasing. C) the marginal damage generated by additional units of pollution is decreasing. D) the marginal benefit from a given amount of abatement will be higher, the higher the level of pollution abated. E) the marginal cost of additional units of pollution abatement increases as pollution abatement increases. Answer: A Explanation:

A) B) C) D) E)

14

36)

37) Refer to Figure 17-3. The MC curve in this diagram is upward sloping because A) the marginal benefit from a given amount of abatement will be lower, the lower the level of pollution. B) the marginal cost of additional units of pollution abatement is decreasing. C) the marginal damage generated by additional units of pollution is decreasing. D) the marginal benefit from a given amount of abatement will be higher, the higher the level of pollution abated. E) the marginal cost of additional units of pollution abatement increases as the total amount of remaining pollution declines. Answer: E Explanation:

A) B) C) D) E)

38) Refer to Figure 17-3. On the horizontal axis, the label "Qt(100% abatement)" refers to A) the maximum pollution abatement that is cost effective. B) the maximum pollution abatement attainable at the lowest cost. C) the maximum pollution abatement attainable with given technology. D) zero remaining pollution. E) zero pollution abatement. Answer: D Explanation:

38)

A) B) C) D) E)

39) Refer to Figure 17-3. The socially optimal amount of pollution is A) Q* + Qt. B) Qt - Q*. C) Q*. D) Qt. Answer: B Explanation:

39) E) 0.

A) B) C) D) E)

40) The marginal benefit of reducing pollution and the marginal cost of reducing pollution are given by the following equations: MB = -2U2 + 18, and MC = 2U2 + 2, where U is the number of units of pollution abatement. What is the optimal level of pollution abatement? A) 0 B) 1 C) 2 D) 3 E) 4 Answer: C Explanation:

37)

A) B) C) D) E)

15

40)

41) The marginal benefit of reducing pollution and the marginal cost of reducing pollution are given by the following equations: MB = -2U2 + 18, and MC = 2U2 + 2, where U is the number of units of pollution abatement. What is the level of pollution abatement after which there is no benefit whatsoever in reducing pollution? A) 0 B) 1 C) 2 D) 3 E) 4 Answer: D Explanation:

A) B) C) D) E)

42) The marginal benefit of reducing pollution and the marginal cost of reducing pollution are given by the following equations: MB = -2U2 + 18, and MC = 2U2 + 2, where U is the number of units of pollution abatement. What is the net marginal benefit (MB - MC) of abating the first unit of pollution (U = 1)? A) 10 B) 12 C) 14 D) 16 E) 18 Answer: B Explanation:

41)

A) B) C) D) E)

16

42)

The table below shows the marginal benefit and marginal cost of pollution abatement for an economy. Units of Pollution Abatement 1 2 3 4 5 6 7 8

MB 120 115 105 90 70 45 15 0

MC 5 15 30 50 70 95 125 155

TABLE 17-1 43) Refer to Table 17-1. Suppose a public authority has the mandate to maximize social welfare by choosing the appropriate amount of pollution abatement. The optimal amount of pollution abatement is ________ units and implies a ________ amount of pollution remaining. A) 8; 0 B) 120; negative C) 5; positive D) 70; positive E) 5; negative Answer: C Explanation:

A) B) C) D) E)

44) Refer to Table 17-1. Suppose a public authority has the mandate to maximize social welfare by choosing the appropriate amount of pollution abatement. The marginal cost of reducing pollution by one unit is ________ at a(n) ________ rate. A) increasing; constant B) increasing; decreasing C) increasing; increasing D) decreasing; decreasing E) decreasing; reduced Answer: C Explanation:

43)

A) B) C) D) E)

17

44)

45) Refer to Table 17-1. Suppose a public authority has the mandate to maximize social welfare by choosing the appropriate amount of pollution abatement. The total net benefit from the optimal amount of pollution abatement is A) 0. B) 120. C) 155. D) 275. E) 330. Answer: E Explanation:

A) B) C) D) E)

46) Refer to Table 17-1. Suppose a public authority has the mandate to maximize social welfare by choosing the appropriate amount of pollution abatement. Compared to the optimal level of abatement, pollution abatement of 7 units would ________ total social welfare by ________. A) increase; 15 B) increase; 110 C) decrease; 110 D) decrease; 125 E) decrease; 160 Answer: E Explanation:

46)

A) B) C) D) E)

47) Suppose a farm that is polluting an underground water supply faces the following marginal costs for abating units of pollution: 1st unit abated, MC = $250 2nd unit abated, MC = $400 3rd unit abated, MC = $650 4th unit abated, MC = $950 The marginal benefit to society from this farm abating units of pollution are as follows: 1st unit abated, MB = $1000 2nd unit abated, MB = $800 3rd unit abated, MB = $650 4th unit abated, MB = $300 What is the socially optimal amount of pollution abatement for this farm? A) 0 units B) 1 units C) 2 units D) 3 units E) 4 units Answer: D Explanation:

45)

A) B) C) D) E)

18

47)

48) Suppose a farm that is polluting an underground water supply faces the following marginal costs for abating units of pollution: 1st unit abated, MC = $250 2nd unit abated, MC = $400 3rd unit abated, MC = $650 4th unit abated, MC = $950 The marginal benefit to society from this farm abating units of pollution are as follows: 1st unit abated, MB = $1000 2nd unit abated, MB = $800 3rd unit abated, MB = $650 4th unit abated, MB = $300 What is the total net benefit to society if this farm engages in the socially optimal amount of pollution abatement? A) $0 B) $650 C) $1150 D) $1300 E) $2250 Answer: C Explanation:

A) B) C) D) E)

49) Suppose a farm that is polluting an underground water supply faces the following marginal costs for abating units of pollution: 1st unit abated, MC = $250 2nd unit abated, MC = $400 3rd unit abated, MC = $650 4th unit abated, MC = $950 The marginal benefit to society from this farm abating units of pollution are as follows: 1st unit abated, MB = $1000 2nd unit abated, MB = $800 3rd unit abated, MB = $650 4th unit abated, MB = $300 If this farm abates 4 units of pollution, what is the net benefit to society of the final unit of pollution abated? A) $0 B) -$650 C) $1150 D) $650 E) -$1150 Answer: B Explanation:

48)

A) B) C) D) E)

19

49)

50) Suppose a farm that is polluting an underground water supply faces the following marginal costs for abating units of pollution: 1st unit abated, MC = $250 2nd unit abated, MC = $400 3rd unit abated, MC = $650 4th unit abated, MC = $950 The marginal benefit to society from this farm abating units of pollution are as follows: 1st unit abated, MB = $1000 2nd unit abated, MB = $800 3rd unit abated, MB = $650 4th unit abated, MB = $300 Why would it not be optimal for this farmer to abate four units of pollution? A) because abating the 4th unit adds more to social costs than to social benefits B) because the total net benefit of abating the 4th unit is greater than the total cost C) because the total cost of abating 4 units is greater than the total benefits D) because it is not productively efficient E) because the farmer has no way to charge a price for the units of pollution abated Answer: A Explanation:

A) B) C) D) E)

51) Direct pollution controls can be inefficient because, for any given amount of pollution reduction, they A) create new pollution as they eliminate existing pollution. B) take into account differing marginal costs among firms. C) do not minimize the total cost of pollution abatement. D) cost too much to enforce. E) are not complied with by firms. Answer: C Explanation:

51)

A) B) C) D) E)

52) An important reason that direct controls are usually inefficient in reducing pollution is that A) they create new pollution as they eliminate existing pollution. B) different firms have different marginal costs of pollution abatement. C) it costs too much to make sure that firms comply with the regulations. D) they generally garner little political support and thus eventually fail. E) firms have little incentive to comply with them. Answer: B Explanation:

50)

A) B) C) D) E)

20

52)

53) All of the following are examples of direct pollution controls EXCEPT A) auto emissions standards. B) legislation requiring scrubbers on coal-fired power stations. C) legislation imposing per-unit taxes on harmful emissions from a pulp and paper plant. D) a ban on wood stoves in some communities. E) a monetary fine in some communities for littering. Answer: C Explanation:

A) B) C) D) E)

54) Federal regulation aimed at reducing greenhouse-gas emissions by setting some maximum level of emissions from each firm A) is the best approach because the costs of reducing emissions are different for each firm. B) is the best approach because firms will quickly reduce air pollution. C) will usually not produce the desired reduction in emissions at the lowest possible cost. D) will achieve the largest but not the most efficient reduction in emissions. E) will achieve the least reduction in emissions but be the most efficient. Answer: C Explanation:

54)

A) B) C) D) E)

55) Direct controls for reducing pollution can be criticized from an economic viewpoint as A) being ultimately unsuccessful in reducing pollution. B) not being efficient in allocating the costs of pollution reduction among various firms and plants. C) being inequitable in their application. D) being easy to circumvent. E) still allowing firms to pollute when a policy of "zero tolerance" is more appropriate. Answer: B Explanation:

53)

A) B) C) D) E)

21

55)

56) Direct controls for reducing pollution are likely to be inefficient because A) the cost of reducing pollution is greater than the benefit. B) direct controls are impossible to monitor. C) firms with different pollution abatement costs are facing identical regulations. D) firms are not likely to comply with this method of government intervention. E) firms' output will rise above the socially optimal amount. Answer: C Explanation:

A) B) C) D) E)

57) Automobile emissions standards are an example of A) direct pollution controls. B) emissions taxes. C) tradable emissions standards. D) market power. E) a market-based environmental policy. Answer: A Explanation:

57)

A) B) C) D) E)

58) The banning of wood-burning stoves and fireplaces is an example of A) safety regulations. B) emissions taxes. C) tradable emissions standards. D) direct pollution controls. E) a market-based environmental policy. Answer: D Explanation:

56)

A) B) C) D) E)

22

58)

59) Which of the following environmental problems would be best addressed through the use of direct controls? A) emissions from coal-fired electric generating stations that cause acid rain B) CO2 emissions from ocean-going cruise ships

59)

C) sulfur dioxide discharged from pulp and paper mills D) the greenhouse gas emissions associated with residential home heating E) a chemical additive in animal feed that pollutes groundwater and is toxic to humans Answer: E Explanation:

A) B) C) D) E)

60) Consider two firms, A and B, that must engage in pollution abatement. If Firm A has a lower marginal cost of pollution abatement than Firm B, then A) regardless of costs, it is equitable for both firms to face the same direct controls on their pollution. B) reallocating all abatement activity to Firm A will reduce pollution and reduce the total cost of abatement. C) reallocating some of Firm A's abatement activity to Firm B will keep total abatement constant but will reduce the total cost of abatement. D) reallocating some of Firm B's abatement activity to Firm A can keep total abatement constant but reduce the total cost of abatement. E) Firm B should lower its costs. Answer: D Explanation:

A) B) C) D) E)

23

60)

The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-4 61) Refer to Figure 17-4. Ignore the horizontal line at t. Suppose the government requires each firm to reduce pollution by the same amount, QR. The result will be

61)

A) fair and just because both firms are facing the same requirements. B) economically inefficient because Firm X is not producing as much pollution as Firm Y and therefore should not be faced with the same requirements. C) economically efficient because even though their marginal costs of abatement differ, the marginal cost for the last unit of abatement is equal. D) economically inefficient because Firm Y is then abating pollution at a higher marginal cost than Firm X. E) economically efficient because the maximum amount of pollution will be abated. Answer: D Explanation:

A) B) C) D) E)

62) Refer to Figure 17-4. Ignore the horizontal line at t. Suppose Firms X and Y are each abating QR units of pollution. If Firm X then reduces pollution by one unit and Firm Y increases pollution by one unit, then A) total pollution remains the same but the total cost of abatement falls. B) total pollution remains the same but the total cost of abatement increases. C) the total cost of abatement remains the same but pollution falls. D) the total cost of abatement remains the same but pollution increases. E) the total costs of abatement and the amount of pollution do not change. Answer: A Explanation:

A) B) C) D) E)

24

62)

63) Refer to Figure 17-4. Ignore the horizontal line at t. The optimal amount of pollution abatement for these two firms together is A) QR for X + QR for Y.

63)

B) QR for X + Qy for Y. C) Qx for X + QR for Y. D) Qx + Qy. E) impossible to tell without the marginal benefit of abatement curve. Answer: E Explanation:

A) B) C) D) E)

The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2.

FIGURE 17-5 64) Refer to Figure 17-5. If the government requires each firm to abate Q3 units of pollution, the social costs of this abatement A) would be minimized. B) could be reduced further if each firm was required to abate more. C) could be reduced further if Firm 1 increased its abatement and Firm 2 reduced its abatement by the same amount. D) could be reduced further if Firm 2 increased abatement and Firm 1 reduced its abatement by the same amount. E) could be reduced further if each firm was allowed to pollute more. Answer: C Explanation:

A) B) C) D) E)

25

64)

65) Refer to Figure 17-5. Suppose the government requires that each firm abate pollution to the level Q3 . The outcome would be efficient because A) the marginal costs of abatement are equated for the two firms. B) the maximum amount of pollution is being abated at the lowest cost. C) the marginal cost and marginal benefit of pollution abatement are equated. D) all of the above. E) none of the above; the outcome would be inefficient. Answer: E Explanation:

A) B) C) D) E)

66) Two firms, A and B, are legally required to reduce their toxic emissions. If Firm A's marginal cost of abatement is $5 and Firm B's marginal cost of abatement is $3, A) their joint total cost of abatement is at a minimum. B) their joint total cost of abatement is at a maximum. C) the socially optimal joint level of abatement is not being achieved. D) Firm A should abate more and Firm B should abate less in order to reduce total abatement costs. E) Firm B should abate more and Firm A should abate less in order to reduce total abatement costs. Answer: E Explanation:

66)

A) B) C) D) E)

67) Two firms, A and B, are legally required to reduce their toxic emissions. If Firm A's marginal cost of abatement is $5 and Firm B's marginal cost of abatement is $5, A) their joint total cost of abatement is at a minimum. B) their joint total cost of abatement is at a maximum. C) the socially optimal joint level of abatement is not being achieved. D) Firm A should abate more and Firm B should abate less. E) Firm B should abate more and Firm A should abate less. Answer: A Explanation:

65)

A) B) C) D) E)

26

67)

68) Direct pollution controls are usually inefficient because they A) do not minimize the total cost of a given amount of abatement. B) lead all firms to abate more pollution than the socially optimal amount. C) lead all firms to abate less pollution than the socially optimal amount. D) do not achieve the targeted amount of pollution abatement. E) are controlling quantities of pollution abatement as opposed to prices. Answer: A Explanation:

68)

A) B) C) D) E)

The diagram below shows the marginal cost of pollution abatement for two firms, Firm X and Firm Y.

FIGURE 17-4 69) Refer to Figure 17-4. Ignore the horizontal line at t. If the government wanted to impose an emissions tax, efficiency requires that it A) levy a tax at the same rate to both firms. B) choose a different tax rate for each firm so that each firm abates QR units of pollution. C) impose the same tax on both firms and also fix the amount of pollution abatement at QR for each firm. D) tax only the high-cost firm (Firm Y) and fix the amount of pollution abatement for the low-cost firm (Firm X). E) tax only the low-cost firm (Firm X) and fix the amount of pollution abatement for the high-cost firm (Firm Y). Answer: A Explanation:

A) B) C) D) E)

27

69)

70) Refer to Figure 17-4. Firms X and Y have an emissions tax of $t imposed on each unit of pollution they produce. Firm X will choose to abate pollution of ________ units and Firm Y will choose to abate pollution of ________ units. A) QX ; QY B) 0; 0 C) QR; QR D) QX; QR E) QR; QY Answer: A Explanation:

70)

A) B) C) D) E)

71) Refer to Figure 17-4. Firms X and Y have an emissions tax of $t imposed on each unit of pollution they produce. If Firm X chooses to abate QX units of pollution, the total cost of its abatement is

71)

A) tax amount t multiplied by the maximum possible level of pollution abatement. B) area beneath the marginal cost of pollution abatement curve. C) area below the horizontal line at t and above the MC of pollution abatement curve. D) tax amount t multiplied by the level of pollution abatement, QX. E) area beneath the marginal cost of pollution abatement curve up to QX. Answer: E Explanation:

A) B) C) D) E)

72) Refer to Figure 17-4. There is an emissions tax of $t per unit of pollution. Which of the following statements regarding the pollution abatement activities by the two firms is correct? A) It is not socially optimal to have Firm X doing pollution abatement of QX while Firm Y does the lesser amount, QY . B) It is efficient for Firm Y to do less pollution abatement than Firm X because Firm Y faces higher costs of abatement. C) The emissions tax causes no change in the firms' polluting activity. D) The shaded areas in the two graphs depict the social costs of pollution caused by Firms X and Y. E) The emissions tax causes an optimal level of pollution. Answer: B Explanation:

A) B) C) D) E)

28

72)

73) Refer to Figure 17-4. There is an emissions tax of $t per unit of pollution. The resulting amount of pollution abatement is socially optimal if A) Firm X abates QX and Firm Y abates QY.

73)

B) each firm abates at QR. C) the emissions tax causes no change in firms' polluting activity. D) the emissions tax is equal to the marginal social cost of pollution. E) each firm pays the maximum amount of tax. Answer: D Explanation:

A) B) C) D) E)

74) A pollution-control policy that, in principle, can perfectly internalize pollution externalities is A) emission limits. B) fines for firms that pollute over a certain amount. C) an emissions tax. D) moral suasion. E) None of the above can internalize the externality. Answer: C Explanation:

A) B) C) D) E)

75) Suppose the government imposes a tax for each unit of pollution that a firm produces. The firm will A) stop producing altogether. B) reduce emissions until the marginal cost of any further reduction in pollution is equal to or greater than the tax. C) reduce emissions until the marginal cost of any further reduction in pollution is equal to the price of the firm's product. D) increase output such that the additional revenue can offset this additional tax payment. E) ignore the tax and continue to produce the same amount of output. Answer: B Explanation:

74)

A) B) C) D) E)

29

75)

76) The use of emissions taxes as a method of reducing pollution 1) is more efficient than direct controls; 2) allows firms to select the most efficient abatement techniques; 3) forces firms to internalize the pollution externality. A) 1 only B) 1 and 2 only C) 1 and 3 only D) 2 and 3 only E) 1, 2, and 3 Answer: E Explanation:

A) B) C) D) E)

77) Suppose a per-unit tax is imposed on a firm's output which makes the marginal private cost of production equal to the marginal social cost. In this case, we can then say that A) the externality has been fully internalized for that firm. B) the firm will make losses as its costs have increased. C) the internality has been externalized for that firm. D) the firm will be forced by the extra cost burden to leave the industry. E) the firm will not make any changes to its output decision. Answer: A Explanation:

77)

A) B) C) D) E)

78) If residential garbage collection were financed by charging households a fee per unit of garbage collected, rather than through general property taxation or a flat fee, you would expect A) less concern about recycling and more concern about the high cost of garbage collection. B) more recycling as households seek to minimize their garbage-collection bill. C) higher costs for the municipality providing the garbage-collection service. D) the administration cost to outweigh any other savings, thus rendering this idea inefficient. E) inadequate revenue to pay for the garbage collection. Answer: B Explanation:

76)

A) B) C) D) E)

30

78)

79) A potential disadvantage of emissions taxes versus direct pollution controls is that A) emissions taxes do not specify how the pollution is to be controlled, which leads to economic inefficiency in the implementation of the pollution restraint. B) pollution becomes a part of each firm's profit-maximizing calculations, encouraging firms to find more efficient ways to pollute. C) the authorities might have a better idea of the socially optimal level of pollution than of the optimal tax rate that would achieve it. D) emissions taxes introduce distortions to the price system, whereas direct controls do not. E) emissions taxes are more expensive to administer. Answer: C Explanation:

A) B) C) D) E)

80) Private and competitive markets could produce efficient levels of pollution if A) left alone by government regulators. B) regulated by government through direct controls. C) the appropriate tax per unit of pollution were administered and enforced. D) the producers were made aware of the pollution externality. E) the worst polluting firms were closed down. Answer: C Explanation:

79)

A) B) C) D) E)

31

80)

The diagram below shows the marginal costs of pollution abatement for two firms, Firm 1 and Firm 2.

FIGURE 17-5 81) Refer to Figure 17-5. Suppose Firm 1 and Firm 2 are each abating Q 3 units of pollution. If the

81)

government imposed an emissions tax of $40 per unit of emissions, A) each firm would abate to Q3 . B) each firm would abate to the same level. C) Firm 1 would increase abatement beyond Q3 and Firm 2 would abate less than Q3 . D) Firm 2 would increase abatement beyond Q3 and Firm 1 would abate less than Q3 . E) the level of pollution would be optimal. Answer: C Explanation:

A) B) C) D) E)

82) Refer to Figure 17-5. Suppose Firm 1 and Firm 2 are each abating Q 3 units of pollution. If the government imposed an emissions tax of $40 per unit of emissions, and this tax rate was known to equal the social marginal cost of pollution, then we can predict with confidence that A) each firm would abate to Q3 . B) each firm would abate to the same level. C) the resulting level of pollution would be optimal. D) Firm 2 would increase abatement beyond Q3 and Firm 1 would abate less than Q3 . E) Firm 2 would increase its emissions and this would not be socially optimal. Answer: C Explanation:

A) B) C) D) E)

32

82)

83) Refer to Figure 17-5. Suppose Firm 1 and Firm 2 are each abating Q 3 units of pollution. If the

83)

government imposes an emissions tax of $20 per unit of emissions, A) Firm 1 will abate less than Q 3 , and Firm 2 will not abate any pollution at all. B) neither firm will abate any pollution. C) the level of pollution abatement will be optimal. D) Firm 1 will increase abatement beyond Q3 and Firm 2 will abate less than Q3. E) Firm 1 and Firm 2 will each increase abatement beyond Q3. Answer: A Explanation:

A) B) C) D) E)

84) Suppose the government imposes an emissions tax of $t on each unit of pollution produced by a firm. Under which of the following circumstances would the tax rate be set too high to achieve allocative efficiency? A) the firm could not afford to pay the tax B) the tax rate causes the firm's ATC curve to shift up C) the tax rate is less than the marginal external cost of the pollution D) the tax rate is greater than the firm's private marginal cost of production E) the tax rate is greater than the marginal external cost of the pollution Answer: E Explanation:

A) B) C) D) E)

85) An emissions tax (imposed on each unit of pollution produced) that is set too high to achieve allocative efficiency will cause A) too few resources to be devoted to pollution abatement and too little of the product to be produced. B) too few resources to be devoted to pollution abatement and too much of the product to be produced. C) no change in the polluting firm's behaviour. D) too many resources to be devoted to pollution abatement and too little of the product to be produced. E) new firms to enter the industry. Answer: D Explanation:

84)

A) B) C) D) E)

33

85)

86) A paper mill discharges chemicals into a river which washes the shores of a downstream resort area. The private cost, social cost, and marginal benefit associated with the production of paper are given by the following equations: PMC = 5 + Q, SMC = 10 + 2Q, and MB = 35 - 0.5Q. What level of emissions tax (dollars per unit of output produced) would provide the paper mill with the incentive to produce at the allocatively efficient level of output? A) 5 B) 10 C) 15 D) 20 E) 25 Answer: C Explanation:

86)

A) B) C) D) E)

87) Suppose a firm producing roof shingles imposes a negative externality on the surrounding area due to the noxious fumes emitted from the plant. The private marginal cost, social marginal cost and marginal benefit associated with the production of the shingles are given by the following equations: MCp = 5 + 2Q

87)

MCs = 10 + 3Q MB = 50 - Q What level of emissions tax (dollars per unit of output produced) would provide this firm with the incentive to produce at the allocatively efficient level of output? A) $15 B) $25 C) $10 D) $40 E) $30 Answer: A Explanation:

A) B) C) D) E)

88) Given that different firms typically have different costs of pollution reduction, A) tradable pollution permits will help to reduce the total costs of pollution abatement. B) tradable pollution permits will help to reduce the marginal costs of pollution. C) it is clear that only a moral solution can actually achieve pollution reduction. D) there is a role for government to establish absolute limits on pollution. E) the optimal emissions tax is thus easier to compute. Answer: A Explanation:

A) B) C) D) E)

34

88)

89) One promising strategy for efficiently addressing the market failure that leads to environmental pollution is A) to develop widespread direct pollution controls. B) the introduction by government of tradable pollution permits. C) forcing polluters to clean up polluted water, earth, and air. D) government legislation banning pollution. E) the elimination of government involvement. Answer: B Explanation:

A) B) C) D) E)

90) As a method of pollution control, tradable emissions permits, or "cap and trade," A) are an example of paternalistic social regulation. B) allow pollution to continue unabated, but only at a huge price to polluting firms. C) are more effective than emissions taxes when pollution is hard to measure. D) have the advantage of decentralized decision making (like emissions taxes) while also setting the maximum permissible level of pollution (like direct controls). E) are not a morally acceptable method of pollution control. Answer: D Explanation:

90)

A) B) C) D) E)

91) If emissions permits are traded freely between profit-maximizing firms in the private market, A) there will be more than the optimal amount of pollution. B) the amount of pollution abatement will be identical to that which the firms would have willingly undertaken on their own. C) each firm will face identical costs of pollution abatement. D) all firms will use identical pollution abatement technologies. E) marginal abatement costs will be equalized across firms. Answer: E Explanation:

89)

A) B) C) D) E)

35

91)

92) Economists often argue that a system of tradable pollution permits is cost-effective because A) firms facing a high marginal cost of abatement will not abate at all. B) firms facing a low marginal cost of abatement will not abate at all. C) firms facing a marginal cost of abatement lower than the permit price will not abate at all. D) firms with a marginal cost of abatement lower than the permit price will buy permits and abate less. E) firms will choose their abatement so that their marginal cost of abatement equals the price of a permit, which is the same for all firms. Answer: E Explanation:

A) B) C) D) E)

93) Consider a coal-fired electric-power plant that is operating under a cap-and trade-system. If its marginal cost of pollution abatement is $5 per unit and the price of the permit is $3 per unit, this firm will A) not abate at all. B) not buy any permits, since that would push up its costs. C) buy permits and abate more pollution. D) buy permits and abate less pollution. E) sell permits and abate more pollution. Answer: D Explanation:

93)

A) B) C) D) E)

94) Consider a coal-fired electric-power plant that is operating under a system of tradable pollution permits (and the firm currently owns permits). If its marginal cost of pollution abatement is $100 per unit and the price of the permit is $150 per unit, this firm will A) not abate at all. B) not buy any permits, since that would push up its costs. C) buy more permits and abate more pollution. D) buy more permits and abate less pollution. E) sell permits and abate more pollution. Answer: E Explanation:

92)

A) B) C) D) E)

36

94)

The diagram below shows the marginal cost of abatement for each of two firms, A and B. Each firm is initially abating Q0 units of pollution.

FIGURE 17-6 95) Refer to Figure 17-6. Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*. The effect will be that A) there will be no change in the quantity of abatement by each firm. B) Firm A will abate less pollutionthe amount Q2 , and Firm B will abate more pollutionthe amount Q1 . C) Firm B will abate less pollutionthe amount Q2 , and Firm A will abate more pollutionthe amount Q1 . D) Firms A and B will each abate Q2 units of pollution. E) Firms A and B will each abate Q0 units of pollution. Answer: C Explanation:

A) B) C) D) E)

37

95)

96) Refer to Figure 17-6. Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*. The effect will be that A) Firm B will sell permits to Firm A, pollute less, and reduce its costs by the area 1; Firm A will buy permits from Firm B, pollute more, and increase its costs by the area 4. B) Firm B will sell permits to Firm A, pollute more, and reduce its costs by the area 1; Firm A will buy permits from Firm B, pollute less, and increase its earnings by area 4. C) Firm B will buy permits from Firm A, pollute less, and increase its costs by the areas 2+3; Firm A will sell permits to Firm B, pollute more, and reduce its earnings by areas 4+5. D) Firm B will buy permits from Firm A, pollute more, and reduce its costs by the area 1; Firm A will sell permits to Firm B, pollute less, and increase its earnings by area 5. Answer: D Explanation:

A) B) C) D)

97) Refer to Figure 17-6. Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p*. Firm B will buy permits from Firm A because A) its total cost of abating less (areas 1+2+3) exceeds the cost of buying the permits (areas 2+3). B) its total savings from abating less (areas 1+2+3) exceed the cost of buying the permits (areas 2+3). C) Firm B has lower costs of pollution abatement than Firm A. D) its total savings from abating less (areas 1+2+3) exceed the total costs of Firm A abating more (area 6). E) Firm B can buy the permits at a lower price than Firm A. Answer: B Explanation:

97)

A) B) C) D) E)

98) Refer to Figure 17-6. Suppose that a system of tradable pollution permits is introduced into this market and the equilibrium permit price is p∗ . Firm A will sell permits to Firm B because A) Firm A's total cost of abating more pollution (areas 5 + 6) is less than the revenue it earns from selling the permits (areas 4 + 5 + 6). B) Firm B has lower costs of pollution abatement than Firm A. C) Firm A can buy the permits at a lower price than Firm B. D) the revenue Firm A earns from selling permits (areas 5 + 6) is greater than the cost it incurs from abating more pollution (area 6). E) Firm A's total cost of abating more pollution (area 6) is less than the revenue it earns from selling the permits (area 4 + 5). Answer: D Explanation:

96)

A) B) C) D) E)

38

98)

99) In a competitive market for tradable pollution permits, the quantity of permits (for a given amount of pollution) is set by ________ and the equilibrium price is determined by ________. A) market forces; government policy B) government policy; the average cost of pollution abatement C) government policy; market forces D) market forces; market forces E) government policy; government policy Answer: C Explanation:

A) B) C) D) E)

100) Suppose a competitive market for tradable pollution permits is in equilibrium at p*, with the quantity of permits being set by government policy at Q*. If technological advances reduce the marginal cost of pollution abatement, then A) the equilibrium price of permits will fall below p*. B) the equilibrium price of permits will rise above p*. C) the equilibrium quantity of permits will fall below Q*. D) the equilibrium quantity of permits will fall above Q*. E) there will be no change in p* or Q*. Answer: A Explanation:

99)

A) B) C) D) E)

39

100)

The diagram below shows a market for tradable pollution permits.

Figure 17-7 101) Refer to Figure 17-7, which depicts a market for tradable pollution permits. Improvements in firms' abatement technology will be expected to A) shift the supply curve to the right. B) shift the supply curve to the left. C) shift the demand curve to the right. D) shift the demand curve to the left. E) not have any impact on the equilibrium. Answer: D Explanation:

A) B) C) D) E)

102) Refer to Figure 17-7, which depicts the market for tradable pollution permits. If there is an increase in firms' marginal cost of pollution abatement, A) firms decide to abate more pollution. B) the price of pollution permits will fall. C) firms will demand more pollution permits. D) firms will demand fewer pollution permits. E) firms require exactly Q* permits. Answer: C Explanation:

101)

A) B) C) D) E)

40

102)

103) Refer to Figure 17-7, which depicts the market for tradable pollution permits. If the environmental organization called "Friends of the Earth" buys a large quantity of pollution permits and permanently decides not to use them, then A) the demand curve shifts to the left, and the equilibrium price falls. B) the supply curve shifts to the right, and the equilibrium price falls. C) the supply curve shifts to the left, and the equilibrium price rises. D) allocative efficiency is lost. E) there is no impact on the equilibrium. Answer: C Explanation:

A) B) C) D) E)

104) Refer to Figure 17-7, which depicts the market for tradable pollution permits. The amount of permits Q* is determined by A) market forces. B) large corporations. C) the level of abatement technology. D) the World Environmental Organization. E) the relevant government. Answer: E Explanation:

104)

A) B) C) D) E)

105) Refer to Figure 17-7, which depicts the market for tradable pollution permits. The equilibrium price p* A) equals the average abatement cost for firms. B) equals the marginal abatement cost for each profit-maximizing firm. C) is imposed by the government. D) is not a function of the abatement technology. E) is always equal to the subsidy provided by the government. Answer: B Explanation:

103)

A) B) C) D) E)

41

105)

106) The main advantage of using market-based schemes for reducing pollution is that they A) lead to greater fairness in the distribution of resources. B) improve the moral fibre of producers and consumers. C) lead to a more efficient use of scarce resources. D) maximize the difference between marginal cost and marginal benefit. E) minimize the difference between total cost and total benefit. Answer: C Explanation:

106)

A) B) C) D) E)

107) When comparing a system of emission taxes to a system of tradable pollution permits, the same amount of pollution could be abated in each as long as A) the marginal cost of abatement was equal across all firms. B) the marginal benefit of abatement curve was horizontal. C) the emission tax rate, t, was applied equally to all firms. D) the cap on emissions was chosen such that the equilibrium price of the permits, p ∗ , could rise

107)

over time. E) the cap on emissions was chosen such that the equilibrium price of the permits, p ∗ , was equal to the emissions tax rate, t. Answer: E Explanation:

A) B) C) D) E)

108) When designing a policy to reduce polluting emissions, policymakers are unlikely to know with certainty what the marginal cost of abatement is for each firm. If an emissions tax ($t per unit of emissions) is imposed, then policymakers A) know what the reduction in emissions will be but do not know at what cost. B) know with certainty what the reduction in emissions will be and at what cost. C) know the per-unit cost imposed on firms but do not know what the reduction in emissions will be. D) are uncertain about both the amount of emission reduction and the cost. E) know with certainty what their tax revenues will be from the emissions tax. Answer: C Explanation:

A) B) C) D) E)

42

108)

109) When designing a policy to reduce polluting emissions, policymakers are unlikely to know with certainty what the marginal cost of abatement is for each firm. If policymakers set an emissions cap of X units, and issue tradable permits for this amount, then they A) know what the reduction in emissions will be but do not know at what cost. B) know with certainty what the reduction in emissions will be and at what cost. C) know the per-unit cost imposed on firms but do not know what the reduction in emissions will be. D) are uncertain about both the amount of emission reduction and the cost. E) know with certainty what the equilibrium permit price will be. Answer: A Explanation:

109)

A) B) C) D) E)

110) In 2006, Professor Nicolas Stern of the United Kingdom stated "Climate change is the greatest market failure the world has ever seen." Which of the following statements describes the biggest challenge to efforts to begin correcting this market failure? A) We do not have precise estimates of the costs of reducing greenhouse gas emissions. B) We do not have precise estimates of the costs of increased levels of CO2e in the atmosphere.

110)

C) Policy design must be coordinated among all major governments of the world, as the problem is truly a global one. D) Each government around the world must choose its own level of emissions. E) Climate change is too large a problem to be compared to a market failure. Answer: C Explanation:

A) B) C) D) E)

111) The countries that signed the Kyoto Protocol (which aimed to reduce greenhouse-gas emissions by an aggregate 5% below 1990 levels by 2012) represented approximately what fraction of global greenhouse gas emissions? A) approximately 10% B) approximately 33% C) approximately 75% D) approximately 80% E) approximately 98% Answer: B Explanation:

A) B) C) D) E)

43

111)

112) Which of the following groupings of major countries did not sign the Kyoto Protocol of 1997? A) Canada, China, India B) Russia, United Kingdom, Australia C) Germany, Canada, Indonesia D) Canada, United States, France E) United States, Australia, China Answer: E Explanation:

A) B) C) D) E)

113) Between 1990 and 2009, Canada's greenhouse gas emissions ________ by ________%. A) decreased; 6 B) decreased; 1 C) increased; 6 D) increased; close to 20 E) increased; almost 30 Answer: E Explanation:

113)

A) B) C) D) E)

114) Consider the following equation: GHG Energy GHG = × × GDP, Energy GDP

114)

where GHG = world annual emissions of greenhouse gases Energy = world annual amount of energy consumed GDP = world's annual gross domestic product The ratio GHG/Energy describes A) the units of greenhouse gases emitted per unit of energy consumed. B) greenhouse gas emissions expressed as a percentage of carbon-based energy consumed. C) the total units of greenhouse gases emitted annually. D) the units of energy consumed per unit of greenhouse gases emitted. E) the energy efficiency of greenhouse gas emissions. Answer: A Explanation:

112)

A) B) C) D) E)

44

115) Consider the following equation: GHG Energy GHG = × × GDP, Energy GDP

115)

where GHG = world annual emissions of greenhouse gases Energy = world annual amount of energy consumed GDP = world's annual gross domestic product The ratio Energy/GDP describes A) the energy efficiency of greenhouse gas emissions. B) the number of units of carbon-based energy produced as a fraction of GDP. C) the amount of energy per unit of GDP required to stabilize greenhouse gas emissions. D) the number of units of energy used per dollar of GDP produced. E) the amount of energy used per unit of output in the energy-intensive sector of the economy. Answer: D Explanation:

A) B) C) D) E)

116) Consider the following equation: GHG Energy GHG = × × GDP, Energy GDP

116)

where GHG = world annual emissions of greenhouse gases Energy = world annual amount of energy consumed GDP = world's annual gross domestic product Suppose GHG emissions increased by 10% between 2009 and 2013, a period when GDP increased by 5% and Energy/GDP was constant. We can conclude that GHG/Energy over the same period A) increased by 5%. B) decreased by 5%. C) was unchanged. D) increased by 10%. E) decreased by 10%. Answer: A Explanation:

A) B) C) D) E)

45

117) Consider the following equation: GHG Energy GHG = × × GDP, Energy GDP

117)

where GHG = world annual emissions of greenhouse gases Energy = world annual amount of energy consumed GDP = world's annual gross domestic product Suppose GHG emissions decreased by 6% between 2012 and 2014, a period when GDP increased GHG by 4% and Energy/GDP decreased by 2%. We can conclude that over the same period Energy A) remains unchanged. B) decreased by 4%. C) increased by 4%. D) decreased by 8%. E) decreased by 6%. Answer: D Explanation:

A) B) C) D) E)

118) A policy that puts a price on greenhouse-gas (GHG) emissions will help to reduce emissions because A) it will shift firms' marginal cost of abatement curves upward. B) it will shift firms' marginal cost of abatement curves downward. C) world energy intensity will increase. D) it provides incentives for firms and consumers to switch to cleaner energy sources. E) energy intensity of GDP will increase. Answer: D Explanation:

A) B) C) D) E)

119) Global greenhouse-gas (GHG) emission reductions are unlikely to be achieved through GDP reductions because A) GDP cannot be reduced. B) the rise in GDP in rich countries will be greater than the reductions in GDP in poor countries. C) ongoing population growth and per capita income growth are likely to drive GDP upward. D) the rise in GDP in poor countries will be greater than the reductions in GDP in rich countries. E) the growth rate of world GDP is negative. Answer: C Explanation:

118)

A) B) C) D) E)

46

119)

120) Consider global greenhouse-gas emissions. Suppose that in 2012, greenhouse gases emitted per unit of energy consumed decreased by 2%, energy use per unit of GDP decreased by 2%, and world GDP increased by 4%. What will be the approximate change in global greenhouse gas emissions in 2012? A) increase by 4% B) increase by 16% C) decrease by 4% D) decrease by 16% E) no change Answer: E Explanation:

A) B) C) D) E)

47

120)

Answer Key Testname: UNTITLED17

1) C 2) E 3) D 4) B 5) D 6) B 7) D 8) C 9) C 10) D 11) E 12) D 13) E 14) B 15) D 16) C 17) D 18) D 19) C 20) A 21) C 22) E 23) D 24) D 25) B 26) D 27) C 28) B 29) D 30) B 31) D 32) D 33) B 34) B 35) D 36) A 37) E 38) D 39) B 40) C 41) D 42) B 43) C 44) C 45) E 46) E 47) D 48) C 49) B 50) A 48

Answer Key Testname: UNTITLED17

51) C 52) B 53) C 54) C 55) B 56) C 57) A 58) D 59) E 60) D 61) D 62) A 63) E 64) C 65) E 66) E 67) A 68) A 69) A 70) A 71) E 72) B 73) D 74) C 75) B 76) E 77) A 78) B 79) C 80) C 81) C 82) C 83) A 84) E 85) D 86) C 87) A 88) A 89) B 90) D 91) E 92) E 93) D 94) E 95) C 96) D 97) B 98) D 99) C 100) A 49

Answer Key Testname: UNTITLED17

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

D C C E B C E C A C B E E A D A D D C E

50

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A tax that takes a higher percentage of income as income rises is called a(n) A) proportional tax. B) regressive tax. C) progressive tax. D) excise tax. E) value-added tax. Answer: C Explanation:

A) B) C) D) E)

2) The sometimes proposed "flat tax," such as one that takes 15% of income at all levels of income, is an example of a(n) A) proportional tax. B) regressive tax. C) progressive tax. D) excise tax. E) value-added tax. Answer: A Explanation:

2)

A) B) C) D) E)

3) Which of the following statements suggests that property taxes might be progressive? A) The proportion of income spent on housing tends to decline as income rises. B) Higher-income people live in more expensive houses than do low-income people. C) A large part of the property tax is shifted to renters, who typically have lower incomes than owners. D) Inner city neighbourhoods often have higher property taxes than do the more affluent suburbs. E) Elderly pensioners often live in their family homes after children have left. Answer: B Explanation:

1)

A) B) C) D) E)

1

3)

4) A mandatory health-insurance premium of a given amount payable by all residents is an example of a(n) A) proportional tax. B) regressive tax. C) progressive tax. D) value-added tax. E) invisible tax. Answer: B Explanation:

A) B) C) D) E)

5) An income tax is progressive if, as income increases, A) its average tax rate is increasing. B) its marginal tax rate is falling. C) its average tax rate is falling, but total taxes are increasing. D) its average tax rate and marginal tax rate are constant while income is increasing. E) its average tax rate is falling, but the marginal tax rate is increasing. Answer: A Explanation:

5)

A) B) C) D) E)

6) A tax that takes a smaller percentage of income as the income increases is called A) a regressive tax. B) a progressive tax. C) a proportional tax. D) an efficient tax. E) an excise tax. Answer: A Explanation:

4)

A) B) C) D) E)

2

6)

7) Which of the following is required to achieve progressivity for a particular tax? A) A marginal tax rate equal to the average tax rate (implying that the average tax rate is rising with income) B) A marginal tax rate equal to the average tax rate (implying that the average tax rate is falling with income) C) An average tax rate above the marginal tax rate (implying that the average tax rate is falling with income) D) A marginal tax rate above the average tax rate (implying that the average tax rate is rising with income) E) A constant tax rate for all incomes Answer: D Explanation:

A) B) C) D) E)

8) Consider an income-tax system that requires all individuals to pay exactly 3% of their income. This income-tax system is A) proportional. B) progressive, because the higher the individual's income, the greater the amount of tax paid. C) regressive, since 3% is harder to pay for a low-income taxpayer. D) fair, since everyone pays the same amount. E) a lump-sum system, sometimes called a poll tax. Answer: A Explanation:

8)

A) B) C) D) E)

9) Suppose taxes are levied in the following way. No individual pays any taxes on the first $10 000 of their income. And for every dollar earned above this amount, all individuals pay 20% in taxes. This income-tax system is A) regressive. B) progressive. C) indexed. D) proportional. E) an accurate description of the Canadian system. Answer: B Explanation:

7)

A) B) C) D) E)

3

9)

10) Suppose taxes are levied in the following way. All individuals pay a tax equal to $2000 no matter what income they earn. In addition, all individuals pay 20% of all their earned income in taxes. This income-tax system is A) regressive. B) progressive. C) indexed. D) proportional. E) an accurate description of the Canadian system. Answer: A Explanation:

A) B) C) D) E)

11) If a tax system contains some important taxes that are regressive, substantial progressivity in other taxes would be required in order to achieve A) proportionality in the overall tax system. B) a negative income tax. C) a flat-rate tax. D) equity in the overall tax system. E) efficiency in the overall tax system. Answer: A Explanation:

11)

A) B) C) D) E)

12) Suppose an income tax is levied in the following way: All individuals pay 10% of their income up to an income of $30 000. On all income above $30 000, individuals pay 20% of their income. Such a tax is A) regressive. B) progressive. C) indexed. D) proportional. E) unrealistic. Answer: B Explanation:

10)

A) B) C) D) E)

4

12)

13) Some important taxes are regressive, such as provincial sales taxes. In an effort to achieve proportionality in the overall tax system it is therefore necessary to impose A) substantial progressivity in income taxes. B) a negative income tax. C) a flat-rate tax. D) consumption taxation. E) efficiency in the tax system. Answer: A Explanation:

13)

A) B) C) D) E)

FIGURE 18-1 14) Refer to Figure 18-1. A regressive tax is illustrated by curve(s) A) A and B. B) B and C. C) C and D.

14) D) A only.

E) C only.

15) Refer to Figure 18-1. A progressive tax is illustrated by curve(s) A) A and B. B) B and C. C) C and D. D) A only.

E) C only.

Answer: C Explanation:

Answer: D Explanation:

A) B) C) D) E)

A) B) C) D) E)

5

15)

16) Refer to Figure 18-1. A proportional tax is illustrated by curve(s) A) A and B. B) B and C. C) C and D. D) B only. Answer: D Explanation:

A) B) C) D) E)

17) Refer to Figure 18-1. A lump-sum tax is illustrated by curve(s) A) A and B. B) B and C. C) C and D. D) B only. Answer: E Explanation:

16) E) D only.

17) E) D only.

A) B) C) D) E)

18) Tax and other revenues collected by all levels of government amounted to approximately what proportion of Canada's Gross Domestic Product (GDP) in 2009? A) 8% B) 18% C) 28% D) 40% E) 48% Answer: D Explanation:

A) B) C) D) E)

19) As a proportion of Gross Domestic Product (GDP), Canadian governments' tax revenues, as compared to other industrialized countries, are A) the very lowest. B) among the lowest. C) roughly in the middle of the group. D) among the highest. E) the very highest. Answer: C Explanation:

18)

A) B) C) D) E)

6

19)

20) In Canada, taxes are levied and collected by A) the federal government only. B) the provincial governments only. C) local governments only. D) federal and provincial governments only. E) all levels of government. Answer: E Explanation:

20)

A) B) C) D) E)

21) The tax that generates the greatest proportion of government revenue in Canada is A) the income tax. B) the goods and services tax. C) the property tax. D) the provincial sales tax. E) the payroll tax. Answer: A Explanation:

A) B) C) D) E)

22) In 2012, the federal income-tax rate was graduated in ________ steps, with the top rate applying to incomes above approximately ________. A) eight; $40 000 B) eight; $120 000 C) three; $81 000 D) three; $100 000 E) four; $132 000 Answer: E Explanation:

21)

A) B) C) D) E)

7

22)

The table below shows 2012 federal income-tax rates in Canada. Taxable Income $0 - $42 707 $42 708 - $85 414 $85 415 - $132 406 $132 407 and over

Marginal Tax Rate 15% 22% 26% 29%

TABLE 18-1 23) Refer to Table 18-1. If an individual had a taxable income of $70 000, how much federal tax would be due? A) $6004 B) $6406 C) $10 500 D) $12 411 E) $15 400 Answer: D Explanation:

A) B) C) D) E)

24) Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the portion of earnings taxed at the maximum rate of 29%? A) $0 B) $1817 C) $8003 D) $23 621 E) $34 800 Answer: A Explanation:

25)

A) B) C) D) E)

26) Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due? A) $6109 B) $8959 C) $31 200 D) $24 794 E) $28 020 Answer: D Explanation:

24)

A) B) C) D) E)

25) Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the earnings taxed at the minimum rate of 15%? A) $0 B) $6406 C) $8003 D) $18 000 E) $34 800 Answer: B Explanation:

23)

A) B) C) D) E)

8

26)

27) Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the earnings taxed at the rate of 22%? A) $1629 B) $17 004 C) $9396 D) $26 400 E) $28 020 Answer: C Explanation:

A) B) C) D) E)

28) Refer to Table 18-1. If an individual had a taxable income of $120 000, how much federal tax would be due from the earnings taxed at the rate of 26%? A) $497 B) $5639 C) $8960 D) $8992 E) $31 200 Answer: D Explanation:

29)

A) B) C) D) E)

30) An example of a regressive tax in Canada is A) any one of the provincial sales taxes. B) the federal income tax. C) the corporate income tax. D) the provincial income taxes. E) the typical property taxes in Canadian cities and towns. Answer: A Explanation:

28)

A) B) C) D) E)

29) Refer to Table 18-1. If an individual had a taxable income of $132 406, how much total federal tax would be due? A) $497 B) $5639 C) $24 794 D) $28 020 E) $34 426 Answer: D Explanation:

27)

A) B) C) D) E)

9

30)

31) From the perspective of individuals, the goods and services tax (GST) applies to A) additional income earned. B) expenditure rather than income. C) profits for self-employed individuals. D) saving rather than expenditure. E) total taxable income. Answer: B Explanation:

A) B) C) D) E)

32) The goods and services tax (GST) in Canada is an example of a(n) A) proportional tax. B) invisible tax. C) progressive tax. D) excise tax. E) value-added tax. Answer: E Explanation:

33)

A) B) C) D) E)

34) Suppose a firm buys $1000 worth of inputs from other firms, hires $1000 worth of labour services, and has sales revenue of $2500. The firm's resulting profit is $500. According to a value-added tax such as the GST, this firm would pay taxes on A) $500. B) $1000. C) $1500. D) $2500. E) $4500. Answer: C Explanation:

32)

A) B) C) D) E)

33) The most important source of revenue for the Canadian federal government is ________ taxes; the most important source of revenue for Canadian municipal governments is ________ taxes. A) income; excise B) property; payroll C) corporate; sales D) sales; property E) income; property Answer: E Explanation:

31)

A) B) C) D) E)

10

34)

35) Suppose a firm buys $3000 worth of inputs from other firms, hires $2000 worth of labour services, and has sales revenue of $7500. The firm's resulting profit is $2500. If the GST (a value-added tax) rate is 5%, this firm will pay ________ in GST. A) $0 B) $125 C) $225 D) $375 E) $2500 Answer: C Explanation:

A) B) C) D) E)

36) The Canadian federal income tax is progressive because it has A) marginal and average rates that rise and are equal at most levels of income. B) marginal rates that are higher than average rates at most levels of income. C) average rates that rise but marginal rates that are constant at most levels of income. D) marginal rates that are lower than average rates at most levels of income. E) average and marginal rates that are constant at most levels of income. Answer: B Explanation:

37)

A) B) C) D) E)

38) The federal corporate income tax in Canada is A) a proportional tax on profits. B) a progressive tax on revenues. C) a proportional tax on revenues. D) a flat tax on revenues. E) a progressive tax on profits. Answer: A Explanation:

36)

A) B) C) D) E)

37) In Canada, the corporate income tax is integrated with the ________, so that ________ are not taxed twice on the firm's earnings. A) sales tax; consumers B) property tax; corporations C) personal income tax; corporations D) sales tax; shareholders E) income; shareholders Answer: E Explanation:

35)

38)

A) B) C) D) E)

11

39) The various provincial sales taxes are mildly regressive because A) richer households spend more in total and therefore pay more sales tax. B) poorer households tend to spend a larger proportion of their incomes than richer households. C) they are indirect taxes. D) they are value added taxes. E) richer households can avoid paying sales taxes while poorer households cannot. Answer: B Explanation:

A) B) C) D) E)

40) Interest earnings from accumulated savings are subject to personal income tax in Canada. As a result, A) total national saving is higher than it otherwise would be. B) there will be more capital accumulated for the economy. C) the interest paid on savings accounts increases. D) individuals have a reduced incentive to save. E) taxes applied to this income are regressive. Answer: D Explanation:

40)

A) B) C) D) E)

41) The Goods and Service Tax (GST) taxes A) the retail value of all goods. B) the value of a firm's inputs in its production process. C) each firm's contribution to the value of final output. D) the total value of a firm's output. E) the total value of a good at each step of the production process. Answer: C Explanation:

39)

A) B) C) D) E)

12

41)

The figure below show a simplified version of the current (2012) Canadian federal income-tax system. The marginal income-tax rates for the four ranges of income are 15.5%, 22%, 26%, and 29%, respectively.

FIGURE 18-2 42) Refer to Figure 18-2. An individual with a taxable income of $39 500 will pay ________ in income taxes. A) $0 B) $6122 C) $5925 D) $6109 E) $8690 Answer: C Explanation:

A) B) C) D) E)

43) Refer to Figure 18-2. An individual with a taxable income of $98 125 will pay $________ in income taxes. A) 15 209 B) 19 107 C) 22 513 D) 25 513 E) 28 456 Answer: B Explanation:

42)

A) B) C) D) E)

13

43)

44) Refer to Figure 18-2. This income-tax system can be characterized as A) cumbersome. B) fair. C) progressive. D) regressive. E) proportional. Answer: C Explanation:

A) B) C) D) E)

45) Refer to Figure 18-2. What must be true of the four marginal income-tax rates in order for the tax to be considered a "flat" tax? A) they need to be zero B) they need to be the same C) they need to be constant D) they need to gradually level out E) they need to be smaller Answer: B Explanation:

45)

A) B) C) D) E)

46) Refer to Figure 18-2. What needs to be true about the four marginal income-tax rates in order for this tax system to be considered regressive? A) they need to be smaller than they are now B) they need to be larger than they are now C) they need to be constant D) they need to decrease as income increases E) they need to increase as income increases Answer: D Explanation:

44)

A) B) C) D) E)

14

46)

47) A marginal tax rate of 47% on taxable income over $150 000 implies that A) an individual with this taxable income would pay $70 000 in income tax. B) the average tax rate is also 47%. C) the income tax payable on any dollar earned above $150 000 is 47 cents. D) the tax system is progressive. E) the tax system is horizontally equitable. Answer: C Explanation:

A) B) C) D) E)

48) When assessing a tax system, "vertical equity" refers to A) equity within a given income group. B) equity across income groups. C) equity between corporate entities. D) unequal treatment of persons with unequal incomes. E) equity across different periods of time. Answer: B Explanation:

49)

A) B) C) D) E)

50) If there were "horizontal equity" between all households in Canada, then A) households of the same size would share the same tax burden. B) individuals in the same age group would share the same tax burden. C) households with identical abilities to pay would bear the same tax burden. D) there would be equity between different income classes. E) all households would pay the same percentage of income as tax. Answer: C Explanation:

48)

A) B) C) D) E)

49) The concept of vertical equity is derived from A) the benefit principle. B) the ability-to-pay principle. C) fiscal federalism. D) the proportionality of the income-tax system. E) the understanding that taxes generate distortions in the economy. Answer: B Explanation:

47)

A) B) C) D) E)

15

50)

51) Consider the concept of equity in taxation. What is the "benefit principle"? A) the main principle on which all tax systems are based B) the main principle on which the Canadian tax system is based C) the principle that users of public goods are taxed in proportion to their use of them D) the principle that users of public goods are taxed in proportion to their ability to pay E) the main principle on which horizontal equity is based Answer: C Explanation:

A) B) C) D) E)

52) If one was concerned only with satisfying the "benefit principle," the ideal tax would be a(n) A) income tax. B) surcharge tax. C) sales tax. D) user charge. E) proportional income tax. Answer: D Explanation:

53)

A) B) C) D) E)

54) Suppose a Canadian Member of Parliament suggests that people with the ability to pay higher taxes should do so. This refers to the concept of A) equality of outcomes. B) horizontal equity. C) vertical equity. D) proportionality. E) the benefit principle. Answer: C Explanation:

52)

A) B) C) D) E)

53) Which of the following is an example of a tax that is designed according to the "benefit principle"? A) a metered water tax B) school tax (based on property value) C) a provincial sales tax D) value-added tax E) federal income tax Answer: A Explanation:

51)

A) B) C) D) E) 16

54)

55) Suppose a Canadian Member of Parliament suggests that people with the same total income should pay the same taxes, no matter the source of their income. This refers to the concept of A) equality of outcomes. B) horizontal equity. C) vertical equity. D) proportionality. E) the benefit principle. Answer: B Explanation:

A) B) C) D) E)

56) Consider two families, each of whom earn total income of $80 000, but that are different in many other respects. If each family is assessed income tax payable of $14 749, then it is very likely that the principle of ________ is being violated. A) progressivity B) horizontal equity C) vertical equity D) ability to pay E) proportionality Answer: B Explanation:

56)

A) B) C) D) E)

57) The direct burden of a tax is A) directly proportional to average income. B) always progressive. C) always regressive. D) a tax-deductible expense for the person who pays the tax. E) the total revenue collected by the tax. Answer: E Explanation:

55)

A) B) C) D) E)

17

57)

58) The excess burden of a tax A) is the incidence of a tax. B) is the deadweight loss created by the tax. C) increases economic efficiency by eliminating distortions in the economy. D) is always progressive. E) is always regressive. Answer: B Explanation:

A) B) C) D) E)

59) The two main competing goals in the design of a tax system are A) efficiency and productivity. B) efficiency and equity. C) efficiency and the elimination of distortions. D) applying the direct and excess burden of taxes evenly. E) growth and productivity. Answer: B Explanation:

59)

A) B) C) D) E)

60) An important objective in designing a tax system is to A) design a system that minimizes inefficiency for a given amount of revenue raised. B) design a system that raises the revenue required for the government's debt-service obligations. C) raise the maximum possible revenue. D) not intervene in the market economy because this only causes inefficiencies. E) eliminate all deadweight loss. Answer: A Explanation:

58)

A) B) C) D) E)

18

60)

FIGURE 18-3 61) Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P1 . If an excise tax raises the price from P1 to P4 , the excess burden of the tax is

61)

A) the area P3 AP4 . B) the area P1 Cq1 0. C) the area P1 CP4 . D) the area BFC. E) impossible to calculate from the given information. Answer: C Explanation:

A) B) C) D) E)

62) Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P1 . If an excise tax raises the price from P1 to P2 , the excess burden of the tax is area A) P3 AP4 . Answer: D Explanation:

B) P2BP3 .

C) P1 CBP2 .

A) B) C) D) E)

19

D) BFC.

E) P1 FBP2 .

62)

63) Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P3 . If an excise tax raises the price from P3 to P4 , the direct burden of the tax is

63)

A) the area P3 AP4 . B) the area P2 BP3 . C) the area P1 CP4. D) the area BFC. E) zero. Answer: E Explanation:

A) B) C) D) E)

64) Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P3 . If an excise tax raises the price from P3 to P4 , the excess burden of the tax is

64)

A) the area P3 AP4 . B) the area P2 BP3 . C) the area P1 CP4 . D) the area BFC. E) zero. Answer: A Explanation:

A) B) C) D) E)

65) Refer to Figure 18-3. Suppose that supply is perfectly elastic and the price of this good is initially P1 . If an excise tax raises the price from P1 to P2 , the direct burden of the tax is A) the area DEFB. B) the area P1 FBP2. C) the area P1 CBP4 . D) the area BFC. E) zero. Answer: B Explanation:

A) B) C) D) E)

20

65)

The diagram below shows supply and demand diagrams (S and D) for some product. The government then imposes an excise tax. The new supply curve is ST.

FIGURE 18-4 66) Refer to Figure 18-4. What is the producers' revenue before the imposition of the tax? A) $450 B) $500 C) $540 D) $600 E) $630 Answer: D Explanation:

A) B) C) D) E)

67) Refer to Figure 18-4. What is the producers' net revenue after the imposition of the tax? A) $450 B) $500 C) $540 D) $600 E) $630 Answer: A Explanation:

67)

A) B) C) D) E)

68) Refer to Figure 18-4. What is the value of the tax imposed on this product, in dollars per unit? A) $1 B) $2 C) $3 D) $4 E) $5 Answer: B Explanation:

66)

A) B) C) D) E)

21

68)

69) Refer to Figure 18-4. What is the dollar value of the direct burden of this tax? A) -$30 B) $30 C) $90 D) $180 Answer: D Explanation:

A) B) C) D) E)

70) Refer to Figure 18-4. What is the dollar value of the excess burden of this tax? A) $1 B) $2 C) $5 D) $10 Answer: D Explanation:

69) E) $450

70) E) $40

A) B) C) D) E)

71) A Laffer curve A) relates the marginal tax rate to the average tax rate. B) relates the government's total income-tax revenue to the average rate across all taxes. C) relates the government's sales-tax yield to the marginal tax rate. D) shows that, for any tax, tax revenues reach a maximum at some tax rate below 100%. E) shows that tax revenues reach a maximum when the marginal tax rate is zero. Answer: D Explanation:

A) B) C) D) E)

72) Which of the following best describes the policy implications of a Laffer curve? A) Policymakers should eliminate tax deductions and maximize revenue at any given tax rate. B) Policymakers should eliminate tax loopholes and maximize revenue at any given tax rate. C) Policymakers should carefully consider whether a given increase in tax rates would increase or decrease tax revenues. D) Policymakers should avoid imposing taxes on income as they decrease the work incentive. E) Policymakers should set the tax rate as low as possible to maximize tax revenue. Answer: C Explanation:

71)

A) B) C) D) E)

22

72)

73) Consider a monopolist that is earning profits in the long run. If the government imposes a lump-sum tax on this monopolist (that is less than its profits), then A) output would decrease and price to consumers would increase. B) neither output nor price would change. C) the output would remain the same while price increased. D) the monopolist would cease production. E) new firms would enter the industry. Answer: B Explanation:

A) B) C) D) E)

74) An excise tax causes ________ because it distorts the relationship between ________. A) allocative inefficiency; prices and marginal costs B) allocative inefficiency; pre-tax price and the tax price C) productive inefficiency; costs and output D) market inefficiencies; prices of similar goods E) voter resentment; income and ability to pay Answer: A Explanation:

74)

A) B) C) D) E)

75) The direct burden of a tax is ________. The excess burden reflects the ________. A) the deadweight loss of the tax; the inefficiency of the tax B) the amount paid by taxpayers; the amount paid by taxpayers in excess of the free-market price. C) the costs of administering the tax; the amount paid by taxpayers D) the costs of administering the tax; amount paid by taxpayers in excess of the free-market price. E) the amount paid by taxpayers; allocative inefficiency of the tax Answer: E Explanation:

73)

A) B) C) D) E)

23

75)

76) The excess burden of a tax reflects a reduction of A) allocative inefficiency. B) total tax revenues. C) total economic surplus. D) both equilibrium price and quantity. E) economic profits generated in the economy. Answer: C Explanation:

76)

A) B) C) D) E)

77) Since corporate income taxes are levied on accounting profits and not economic profits, they tend to A) favour the accounting profession as it boosts demand of their services. B) introduce double taxation as individual shareholders also pay income tax on dividend income. C) be efficient since economic profits are hard to assess. D) be inefficient since they will affect the allocation of resources. E) be inefficient since they fail to contribute substantially to federal revenues. Answer: D Explanation:

A) B) C) D) E)

78) Possible implications of corporate income taxes being levied on accounting profits include 1) underinvestment in new machinery and equipment; 2) a lower rate of adoption of the latest technologies; 3) faster productivity growth. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: D Explanation:

78)

A) B) C) D) E)

79) The excess burden of an excise tax A) is the price the consumer must pay above the free-market price. B) reflects the allocative efficiency of the tax. C) is the deadweight loss created by the tax. D) is the administrative cost of collecting the tax. E) is the total cost imposed on the producer by the tax. Answer: C Explanation:

77)

A) B) C) D) E)

24

79)

80) Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $9 and 850 visits per week. Now suppose the government imposes a tax such that the new equilibrium price and quantity are $10.50 and 780 visits per week. What is the direct burden of this tax? A) $0 B) $105 C) $1170 D) $1275 E) There is not enough information to know. Answer: E Explanation:

A) B) C) D) E)

81) Suppose there is only one movie theatre in a town and the equilibrium price and quantity for movie admissions is $7 and 940 visits per week. Now suppose the government imposes a tax of $3 per movie admission, and the new equilibrium price and quantity are $8.75 and 750 visits per week. What is the direct burden of this tax? A) $937.50 B) $1312.50 C) $1645 D) $2250 E) There is not enough information to know. Answer: D Explanation:

81)

A) B) C) D) E)

82) Suppose an additional "special" tax of $0.10 per litre is imposed on the sale of gasoline in one province. Prior to the tax the price was $1.30 per litre and 10 million litres of gasoline are sold per day. After imposition of the tax, the new equilibrium price and quantity are $1.38 per litre and 9.6 million litres per day. What is the direct burden of this "special" tax? A) $40 000 per day B) $768 000 per day C) $192 000 per day D) $ 960 000 per day E) There is not enough information to know. Answer: D Explanation:

80)

A) B) C) D) E)

25

82)

83) Consider a 10% excise tax that is similarly applied to good X, which has a price elasticity of 2.7, and to good Y, that has a price elasticity of 0.6. We can predict that the excess burden of this tax in the market for good X will be ________ the excess burden in the market for good Y. A) no larger than B) equal to C) smaller than D) larger than E) 2.1 times the size of Answer: D Explanation:

A) B) C) D) E)

84) In 2009, public expenditure by all levels of government (federal, provincial, and municipal) combined accounted for approximately what percentage of Canadian GDP? A) 16 B) 26 C) 36 D) 40 E) 56 Answer: D Explanation:

85)

A) B) C) D) E)

86) Which of the following expenditures by Canada's federal government is considered a government purchase? A) employment-insurance payments B) Old Age Security payments C) equalization payments D) child tax benefit E) payment of the Prime Minister's salary Answer: E Explanation:

84)

A) B) C) D) E)

85) An example of a government expenditure that is a transfer payment is A) employment-insurance (EI) payments. B) construction costs of a new government-owned airport. C) salaries of welfare case workers. D) education payments. E) payments made to the Canadian International Development Agency (CIDA). Answer: A Explanation:

83)

A) B) C) D) E)

26

86)

87) One of the guiding principles in Canada's system of "fiscal federalism" is that A) only provinces that are "federalist" should receive fiscal assistance from the federal government. B) each province is an independent fiscal entity. C) the tax base should be approximately equal in each of the provinces and territories. D) the true cost of provision of public goods to the various provinces of Canada should be recovered in tax revenue from the province receiving the benefit. E) individuals should have approximately the same access to public services, at broadly comparable tax rates, no matter where they live. Answer: E Explanation:

A) B) C) D) E)

88) Which of the following best explains the essence of Canada's system of fiscal federalism? A) the constitutional delegation of fiscal responsibilities between federal, provincial, territorial and municipal governments B) the law that determines the formula for Canada's system of equalization payments C) the coordination on taxing and spending that is necessary between the federal, provincial, territorial and municipal governments to meet the needs of all Canadian residents D) the division of powers between the federal government and the provincial governments E) the coordination necessary for joint collection of federal and provincial income taxes Answer: C Explanation:

88)

A) B) C) D) E)

89) Consider two provinces in Canada - Province A and Province B. Province A has a per capita income of $67 000 per year while Province B has a per capita income of $38 000 per year. In the absence of any coordination on taxing and spending, could these two provinces provide equivalent public services? A) Yes - if the government of Province B supplemented the incomes of all residents by $29 000 per year. B) Yes - if Province B had much higher taxes than Province A. C) Yes - if residents in Province A had less need for services than those in Province B. D) No - the costs of services would be higher in Province A. E) No - the costs of services would be higher in Province B. Answer: B Explanation:

87)

A) B) C) D) E)

27

89)

90) The Canadian federal government's system of "equalization payments" A) are made out of the federal government's general revenues to provinces with below-average tax capacity. B) are made by provinces with above-average tax capacity to the federal government. C) are made to provinces with inadequate "tax room." D) are made by richer provinces to poorer provinces in the form of no-interest loans. E) were established in 1867 between the original provinces of Canada as a means of equalizing living standards across the country. Answer: A Explanation:

A) B) C) D) E)

91) The Canada Health Transfer (CHT) and the Canada Social Transfer (CST) refer to transfer payments made by the federal government to A) the Medicare program. B) individuals. C) specific social programs. D) municipal governments. E) provincial governments. Answer: E Explanation:

91)

A) B) C) D) E)

92) Which of the following areas of spending account for the largest portion of total Canadian government expenditures? A) equalization payments B) defence spending C) subsidies to Canadian businesses D) social services E) interest payments on public debt Answer: D Explanation:

90)

A) B) C) D) E)

28

92)

93) Which of the following statements about the Canada Health Transfer (CHT) and the Canada Social Transfer (CST) is correct? A) The federal government makes the CHT and the CST annually to the provinces, who are legally bound to spend on the funds for their intended purposes. B) The federal government makes the CHT and CST annually to the provinces, who in turn make transfers to individuals according to need. C) The federal government makes the CHT and CST annually to the provinces for spending on health and social programs, but the provinces are free to spend the funds as they wish. D) The CHT and CST are both components of equalization payments from the federal to provincial governments. E) The CHT and CST are demogrants that are transferred annually from the federal government to individuals residing in regions of Canada that lack adequate access to health and education programs. Answer: C Explanation:

A) B) C) D) E)

94) The Canada Health Transfer (CHT) and the Canada Social Transfer (CST) are allocated to provinces A) according to the tax base of the province. B) on an equal per capita basis. C) according to the tax base and age structure of the province and its population. D) on an equal per capita basis after subtracting any equalization payments payable to the province. E) according to the different health and social needs of each province. Answer: B Explanation:

94)

A) B) C) D) E)

95) The Canada Health Transfer (CHT) is scheduled to grow at a(n) ________% annual rate until 2017, and after 2017 at an annual rate ________. A) 6; equal to GDP growth B) 4; of 2% C) 4; equal to the rate of increase of provincial health-care expenditures D) 8; of 6% E) 8; of 4% Answer: A Explanation:

93)

A) B) C) D) E)

29

95)

96) In Canada, post-secondary education is A) a provincial responsibility, funded by property taxes. B) a form of transfer payment. C) a provincial responsibility not funded by the federal government. D) a form of equalization payment across geographic boundaries. E) a provincial responsibility, funded almost completely from provincial budgets. Answer: E Explanation:

A) B) C) D) E)

97) In Canada, publicly provided health care is A) purely a public good. B) a form of transfer payment across regions. C) an externality. D) funded through equalization payments across geographic boundaries. E) a provincial responsibility, funded partially by the federal government. Answer: E Explanation:

97)

A) B) C) D) E)

98) In Canada, public primary and secondary education A) are exclusive federal responsibilities. B) are funded by provincial governments, but managed by local school boards. C) have eliminated illiteracy in Canada. D) are funded by government as an income redistribution plan. E) are purely public goods. Answer: B Explanation:

96)

A) B) C) D) E)

30

98)

99) If all university students had to pay the full cost of their education, A) the federal debt could be eliminated. B) they would probably choose less education than what is socially optimal. C) the economic efficiency of the higher education system would be greatly enhanced. D) vertical equity would be enhanced, since university students would internalize the externalities of their educations. E) horizontal equity would be worsened because university students in general come from the lowest-income families. Answer: B Explanation:

A) B) C) D) E)

100) One equity-based argument against government subsidies for post-secondary education is that A) the subsidy is essentially a transfer from lower-income, non-university-trained taxpayers to potentially higher-income-earning university students. B) few externalities are involved. C) relative to the federal contribution, the provincial contribution to higher education is too high. D) they would encourage people not to seek employment. E) only the individual achieves economic advantages from his or her education. Answer: A Explanation:

100)

A) B) C) D) E)

101) One efficiency-based argument in favour of government subsidies for post-secondary education is that A) the subsidy is essentially a transfer from lower-income, non-university-trained taxpayers to potentially higher-income-earning university students. B) there are positive externalities involved in the consumption of education. C) relative to the federal contribution, the provincial contribution to higher education is too low. D) they would encourage people not to seek employment. E) very few benefits from an individual's education accrue to society as a whole. Answer: B Explanation:

99)

A) B) C) D) E)

31

101)

102) In Canada, students' tuition fees for post-secondary education account for about A) 12% of total costs. B) 16% of total costs. C) 20% of total costs. D) 50% of total costs. E) 54% of total costs. Answer: C Explanation:

A) B) C) D) E)

103) Taking all federal and provincial expenditures into account, Canada's single most expensive social program is A) the public health-care system. B) the basic education system. C) employment-insurance payments. D) post-secondary education programs. E) social-assistance payments. Answer: A Explanation:

104)

A) B) C) D) E)

105) According to Statistics Canada's definition, the percentage of families living below the poverty line in Canada in 2009 was about A) 25%. B) 20%. C) 13%. D) 10%. E) 4%. Answer: D Explanation:

103)

A) B) C) D) E)

104) Statistics Canada defines the poverty line as the level of income at which a household A) earns less than $8850 during a calendar year. B) spends more than 87% of its income on the three basic necessities of food, shelter, and clothing. C) spends more than 63% of its income on the three basic necessities of food, shelter, and clothing. D) is in the bottom 10% of income groups. E) adjusted for family size earns less than the average family income in Canada. Answer: C Explanation:

102)

A) B) C) D) E)

32

105)

106) A "poverty trap" refers to the situation where A) low-income persons whose only income for a period of 5 or more years has been welfare benefits. B) tax-generated disincentives exist for middle-income persons to increase their earned income. C) low-income persons whose only income for a period of 2 or more years has been welfare benefits. D) tax-generated disincentives exist for very-low-income persons to increase their earned income. E) the government has imposed a negative income tax. Answer: D Explanation:

A) B) C) D) E)

107) Consider the following statement: "In Canada, there will always be some families living in poverty." Which of the following statements best explains why this statement may be true? A) If the definition of poverty is an absolute one, then a certain percentage of families will always be poor. B) Economic growth will never be high enough to lift all families above the low-income cut off. C) If the definition of poverty is an absolute one, then an absolute number of families will be defined as living in poverty. D) If the definition of poverty is a relative one, then some families will always be defined as poor relative to richer families. E) If the definition of poverty is a relative one, then a constant number of families will always be defined as living in poverty. Answer: D Explanation:

107)

A) B) C) D) E)

108) The Employment Insurance (EI) system operates whereby A) Canadians contribute during their working years and then receive payments when they are retired. B) the federal government transfers funds to provincial governments. C) any unemployed worker is paid while searching for employment. D) the federal and provincial governments allow income-tax deductions for contributions made to special retirement funds. E) eligible unemployed workers are paid while searching for new employment. Answer: E Explanation:

106)

A) B) C) D) E)

33

108)

109) Registered Retirement Savings Plans (RRSPs) operate whereby A) Canadians contribute during their working years and then receive payments when they are retired. B) the federal government transfers funds to provincial governments. C) any unemployed worker is paid while searching for employment. D) the federal and provincial governments allow income-tax deductions for contributions made to special retirement funds. E) eligible unemployed workers are paid while searching for new employment. Answer: D Explanation:

A) B) C) D) E)

110) The Canada (and Quebec) Pension Plans (CPP and QPP) operate whereby A) Canadians contribute during their working years and then receive payments when they are retired. B) the federal government transfers funds to provincial governments. C) any unemployed worker is paid while searching for employment. D) the federal and provincial governments allow income-tax deductions for contributions made to special retirement funds. E) eligible unemployed workers are paid while searching for new employment. Answer: A Explanation:

110)

A) B) C) D) E)

111) Because government benefits paid by most universal programs are taxable, their net after-tax yield depends on the income of the recipient. Hence A) gross payments may be universal, but net benefits are not. B) gross payments may not be universal, but net benefits are. C) gross payments may not be universal, and net benefits are not. D) gross payments and net benefits are universal. E) only higher-income households can benefit fully from such programs. Answer: A Explanation:

109)

A) B) C) D) E)

34

111)

112) Social and economic policies often involve a tradeoff between efficiency and equity because A) income redistribution increases incentives for efficient behaviour of economic units. B) economic units who are efficient completely dislike equity. C) income redistribution often reduces incentives for efficient behaviour of economic units. D) the economy can achieve efficient allocation of resources by starting with unequal allocation of resources. E) it is not possible to improve efficiency with economic policies. Answer: C Explanation:

A) B) C) D) E)

113) Welfare recipients are sometimes faced with a withdrawal of welfare benefits and an increase in income tax as their earned income rises. This creates a problem because A) firms become unwilling to hire people that are currently unemployed. B) of the powerful disincentives to work for low-income individuals. C) of the incentives for workers to shirk and/or retire early. D) of the incentives for firms to lay off workers more frequently for short periods. E) it is administratively difficult to track these individuals. Answer: B Explanation:

113)

A) B) C) D) E)

114) What is a demogrant? A) A federal transfer to individuals that is administered through the tax system. B) A federal transfer to provincial governments that is adjusted annually based on demographic shifts in the province. C) A social benefit that is paid to individuals according to their demographic group (race, age or income group, for example). D) A social benefit that is paid to individuals depending on their income. E) A social benefit that is paid to individuals, regardless of their income. Answer: E Explanation:

112)

A) B) C) D) E)

35

114)

115) The five pillars of Canadian social policy are A) education, health care, foreign aid, agricultural support, and retirement benefits. B) education, health care, agricultural support, research and development, and retirement benefits. C) education, health care, foreign aid, employment insurance and welfare payments. D) education, health care, welfare payments, foreign aid, and employment insurance. E) education, health care, income support, employment insurance and retirement benefits. Answer: E Explanation:

A) B) C) D) E)

116) An efficiency argument for public provision of basic education is that A) many poor families could not afford to educate their children if they had to pay for it themselves. B) society as a whole benefits when all of its citizens have the basic skills and knowledge acquired from kindergarten to grade 12. C) the government is best able to assess the level of provision for which marginal cost equals marginal benefit. D) the government can best provide education up to that point where marginal benefit is zero. E) education cannot be efficiently provided by private firms. Answer: B Explanation:

116)

A) B) C) D) E)

117) The efficiency argument for government provision of health care is that A) many poor people could not afford health care if they had to pay for it. B) the government is best able to assess the level of provision for which marginal cost equals marginal benefit. C) the government can provide health care up to that point where marginal benefit is zero. D) a healthy population is important to the smooth functioning of a country and its economy. E) health care cannot be efficiently provided by private firms. Answer: D Explanation:

115)

A) B) C) D) E)

36

117)

118) The debate about the appropriate balance between the public and private sectors A) has been solved in Canada. B) is about the marginal benefits of public spending versus the marginal benefits of private spending, received for the last dollar spent. C) was solved by John Kenneth Galbraith in his book The Affluent Society. D) was solved by James Buchanan, a Nobel laureate. E) should be decided by economists because they know the right balance. Answer: B Explanation:

A) B) C) D) E)

119) Consider the allocation of a nation's resources between additional public-sector spending versus additional private spending. John Kenneth Galbraith argued that A) the value of the marginal dollar spent by government is less than the value of that dollar left in the hands of households or firms. B) public sector spending is always subject to corruption and is therefore not as valuable as private spending. C) the marginal utility of an additional dollar's worth of spending on public goods is higher than an additional dollar's worth of spending on private goods. D) compared to public spending, private spending leads to more sustained long-run economic growth. E) compared to private spending, public spending leads to more sustained long-run economic growth. Answer: C Explanation:

119)

A) B) C) D) E)

120) Consider the allocation of a nation's resources between additional public-sector spending versus additional private spending. James Buchanan argued that A) given the current size of government, the value of the marginal dollar spent by government is less than the value of that dollar left in the hands of households or firms. B) public sector spending is always subject to corruption and is therefore not as valuable as private spending. C) the marginal utility of an additional dollar's worth of spending on public goods is higher than an additional dollar's worth of spending on private goods. D) compared to public spending, private spending leads to more sustained long-run economic growth. E) compared to private spending, public spending leads to more sustained long-run economic growth. Answer: A Explanation:

118)

A) B) C) D) E)

37

120)

Answer Key Testname: UNTITLED18

1) C 2) A 3) B 4) B 5) A 6) A 7) D 8) A 9) B 10) A 11) A 12) B 13) A 14) C 15) D 16) D 17) E 18) D 19) C 20) E 21) A 22) E 23) D 24) A 25) B 26) D 27) C 28) D 29) D 30) A 31) B 32) E 33) E 34) C 35) C 36) B 37) E 38) A 39) B 40) D 41) C 42) C 43) B 44) C 45) B 46) D 47) C 48) B 49) B 50) C 38

Answer Key Testname: UNTITLED18

51) C 52) D 53) A 54) C 55) B 56) B 57) E 58) B 59) B 60) A 61) C 62) D 63) E 64) A 65) B 66) D 67) A 68) B 69) D 70) D 71) D 72) C 73) B 74) A 75) E 76) C 77) D 78) D 79) C 80) E 81) D 82) D 83) D 84) D 85) A 86) E 87) E 88) C 89) B 90) A 91) E 92) D 93) C 94) B 95) A 96) E 97) E 98) B 99) B 100) A 39

Answer Key Testname: UNTITLED18

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

B C A C D D D E D A A C B E E B D B C A

40

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Macroeconomics is mainly concerned with the study of A) individual households and how they deal with problems like inflation and unemployment. B) large economic units such as General Motors or Molson Breweries. C) fluctuations and trends in disaggregated data. D) fluctuations and trends in aggregated data. E) governments and their intervention in individual markets. Answer: D Explanation:

A) B) C) D) E)

2) The economic problems studied in macroeconomics include: 1) the level of economic activity; 2) competition policy; 3) the rate of unemployment. A) 1 only B) 2 only C) 3 only Answer: E Explanation:

2)

D) 1 and 2

E) 1 and 3

A) B) C) D) E)

3) An example of a topic outside the scope of macroeconomics is A) changes in the price of a particular good in a specific market. B) changes in the unemployment rate. C) the aggregate growth rate of the economy. D) the overall level of unemployment. E) the level of productivity, as compared with that in the United States. Answer: A Explanation:

1)

A) B) C) D) E)

1

3)

4) An equivalent term for "real national income" is A) nominal national income. B) current-dollar national income. C) constant-dollar national income. D) actual national income. E) potential national income. Answer: C Explanation:

4)

A) B) C) D) E)

5) A nation's real national income in a given year measures the A) dollar income earned by the nation's producing sector. B) value of output produced by the economy, measured in constant dollars. C) level of national income that is subject to taxation by the federal government. D) market value of national output produced by the economy. E) opportunity cost of the economy's national output. Answer: B Explanation:

A) B) C) D) E)

6) Real national income A) always equals nominal national income. B) changes by the same amount and in the same direction as does nominal national income. C) changes only when the underlying quantities change. D) refers to national income with no adjustment for changes in prices. E) refers to national wealth but is not an indicator of current production. Answer: C Explanation:

6)

A) B) C) D) E)

7) In macroeconomics, the term "national income" refers to A) all sales of both current production and used goods. B) only those sales of currently produced goods sold to other nations. C) the value of a nation's total wealth. D) the value of the income generated by the production of total output. E) total current spending by all households. Answer: D Explanation:

5)

A) B) C) D) E)

2

7)

8) An upward trend in real national income over an extended period of time is called A) an inflationary boom. B) aggregate output. C) constant-dollar national income. D) potential national income. E) economic growth. Answer: E Explanation:

A) B) C) D) E)

9) Suppose that in 2013 Canada's automobile manufacturers produced 2 million cars priced at $20 000 each. And in 2014 they produced 1 million cars priced at $40 000 each. Ceteris paribus, the change in nominal national income is A) a decrease because fewer cars were produced. B) an increase because the price of each car increased. C) insufficient information to know. D) no change in nominal national income. E) an increase because of inflation. Answer: D Explanation:

9)

A) B) C) D) E)

10) Suppose Honest Rob's Used Cars buys a used car for $2000 and resells it for $3000. The result of Honest Rob's transactions is to A) decrease the value of national income by $3000. B) decrease the value of national income by $1000. C) leave the value of national income unchanged. D) increase the value of national income by $1000. E) increase the value of national income by $3000. Answer: D Explanation:

8)

A) B) C) D) E)

3

10)

11) To compare the economy's aggregate output in two different time periods, economists compare the A) nominal national income for the two periods. B) potential national incomes for the two periods. C) real national income for the two periods. D) unemployment rates for the two periods. E) inflation rates for the two periods. Answer: C Explanation:

A) B) C) D) E)

12) In determining the economy's real GDP growth rate between two time periods, A) nominal national income should be used because it compares actual output in each time period. B) real national income, which is equal to nominal national income corrected for price-level changes, should be used. C) potential national income should be used. D) we should ignore prices completely, in order to examine output alone. E) only the real national product from the latest time period is relevant. Answer: B Explanation:

12)

A) B) C) D) E)

13) In macroeconomics, if the value of the national product increases, there is A) an even larger increase in the value of income claims on that output, due to value added. B) a decrease in value of income claims on that output, due to taxation. C) a decrease in the value of income claims on that output, due to importing. D) a decrease in the value of income claims on that output, due to household saving. E) an equal increase in the value of income claims on that output. Answer: E Explanation:

11)

A) B) C) D) E)

4

13)

14) Suppose Appliance Mart buys a used refrigerator for $100, repairs it, and resells it for $250. The result of this transaction is to A) increase the value of national product by $250. B) leave the value of national product unchanged. C) increase the value of national product by $150. D) decrease the value of national product by $100. E) There is insufficient information to know. Answer: C Explanation:

A) B) C) D) E)

15) Real GDP measures A) the constant-dollar value of the potential output of the nation's economy over the period of one year. B) the quantity of total output produced by the nation's economy over the period of one year. C) the fluctuations of national income around its long-term trend. D) the annual growth rate of real national income. E) the long-term trend in total output produced by the nation's economy. Answer: B Explanation:

15)

A) B) C) D) E)

16) Consider a small economy with 3 individuals where each individual produces and sells $1000 worth of final goods and services. The national income for this economy is A) $3000. B) less than $3000 if some of the income is saved. C) more than $3000 if some of the income is invested. D) less than $3000 if there are taxes in this economy. E) more than $3000 if the individuals are earning profits. Answer: A Explanation:

14)

A) B) C) D) E)

5

16)

17) Consider a small economy with 3 individuals. Individual A produces 100 chickens that sell for $8 each. Individual B produces 50 bags of corn that sell for $10 each. Individual C produces 40 bushels of apples that sell for $20 each. National product in this economy is A) 100 chickens plus 50 bags of corn plus 40 bushels of apples. B) 190 units of goods produced. C) $2100. D) $2470 E) Not determinable from the information provided. Answer: C Explanation:

A) B) C) D) E)

18) Which of the following is the best description of the business cycle? A) the normal cycle of profits and losses by producers in the economy B) the short-run fluctuations of national income around its trend value C) a five-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods D) a ten-year period designed for national accounting purposes to capture the normal cycle of recession periods and boom periods E) the fluctuations of one country's national income in comparison to another country's national income Answer: B Explanation:

18)

A) B) C) D) E)

19) Potential or full-employment output is A) the maximum GDP that an economy actually achieves throughout its entire history. B) achieved during periods when all of the labour force is employed. C) a goal that can never be achieved by the economy. D) the GDP that would be produced if the economy's resources were fully employed at a normal intensity of use. E) the GDP that could be produced if the economy's resources were fully employed at their maximum intensity of use. Answer: D Explanation:

17)

A) B) C) D) E)

6

19)

20) In macroeconomics, the "output gap" is the difference between A) output in the current year and output in the base year. B) output and employment. C) potential real national income and actual real national income. D) real GNP and real GDP. E) real and nominal national income. Answer: C Explanation:

A) B) C) D) E)

21) The output gap is the A) measure of output that could have been produced if the economy were fully employed. B) dead-weight loss of inflation. C) difference between nominal and real output. D) percentage change in real GDP. E) difference between Y and Y*. Answer: E Explanation:

21)

A) B) C) D) E)

22) An output gap with Y < Y* A) is desirable because it keeps wage costs low. B) represents a loss of output due to unemployed resources. C) tends to force prices up. D) occurs when there is excess demand. E) is known as an inflationary boom. Answer: B Explanation:

20)

A) B) C) D) E)

7

22)

23) Suppose actual output is less than potential output. If the output gap measures the output loss due to the failure to achieve full employment, it can generally be concluded that the larger this output gap, the A) greater is the employment rate. B) greater is the unemployment rate. C) lower is frictional unemployment. D) lower the deadweight loss of unemployment. E) more upward pressure there is on prices. Answer: B Explanation:

A) B) C) D) E)

24) Economic booms can cause problems as well as create benefits because they are often accompanied by A) deflationary pressures. B) excessive labour-force participation. C) inflationary pressures. D) pressure on the government budget deficit to rise. E) rising real interest rates. Answer: C Explanation:

24)

A) B) C) D) E)

25) In the study of short-run fluctuations in national income, potential income (output) is usually assumed to be A) falling at its average growth rate. B) moving together with potential output in neighbouring countries. C) constant. D) equal to actual income. E) irrelevant, as the economy is rarely there. Answer: C Explanation:

23)

A) B) C) D) E)

8

25)

26) Short-run fluctuations in real GDP around its trend value are A) generally ignored by economists, because these fluctuations do not affect behaviour of other variables such as the unemployment rate. B) generally ignored by economists, because these fluctuations are constant and predictable. C) referred to in economics as "background noise." D) referred to in economics as "the business cycle." E) unimportant to the study of macroeconomics. Answer: D Explanation:

A) B) C) D) E)

27) Consider an economy in which existing capital is being used at a high degree, shortages in labour and goods markets are developing, and costs are rising. Which of the following terms best describes this stage of the business cycle? A) trough B) recovery C) peak D) recession E) slump Answer: C Explanation:

28)

A) B) C) D) E)

29) On a graph showing real national income on the vertical axis and time on the horizontal axis, the fluctuations of real national income around the trend-line would indicate the A) business cycle. B) distribution of income. C) inflation rate. D) path of potential output. E) unemployment rate. Answer: A Explanation:

27)

A) B) C) D) E)

28) On a graph showing real national income on the vertical axis and time on the horizontal axis, the trend-line would probably be a good approximation of the A) business cycle. B) distribution of income. C) inflation rate. D) path of potential output. E) unemployment rate. Answer: D Explanation:

26)

A) B) C) D) E) 9

29)

30) When macroeconomists use the term "recession" they usually define it as a fall in real GDP that lasts for at least A) one quarter. B) two quarters. C) three quarters. D) one year. E) two years. Answer: B Explanation:

30)

A) B) C) D) E)

The table below provides macroeconomic data for a hypothetical economy. Dollar amounts are all in constant-dollar terms. Actual Output (billions of $) 402 408 415 420 422 420 425

Year 2006 2007 2008 2009 2010 2011 2012

Potential Output (billions of $) 404 411 415 418 420 423 425

Unemployment Rate (% of labour force) 7.1 7.2 6.3 5.9 6.0 7.0 6.3

TABLE 19-1 31) Refer to Table 19-1. In which years was this economy experiencing a recessionary gap? A) 2009, 2010 B) 2006, 2007, 2011 C) 2008, 2012 D) 2006, 2007, 2008 E) 2010, 2011, 2012 Answer: B Explanation:

A) B) C) D) E)

10

31)

32) Refer to Table 19-1. In which years was this economy experiencing an inflationary gap? A) 2009, 2010 B) 2006, 2007 C) 2010, 2011 D) 2008, 2012 E) 2006, 2007, 2011 Answer: A Explanation:

A) B) C) D) E)

33) Refer to Table 19-1. What is the unemployment rate when this economy is at "full employment"? A) 5.9% B) 6.0% C) 6.3% D) 7.0% E) 7.1% Answer: C Explanation:

34)

A) B) C) D) E)

35) Refer to Table 19-1. What is the output gap in 2007? A) $408 billion B) $411 billion C) $7.1 billion D) $3 billion E) -$3 billion Answer: E Explanation:

33)

A) B) C) D) E)

34) Refer to Table 19-1. In which years are the factors of production in this economy said to be "fully employed"? A) 2006, 2007, 2011 B) 2008, 2012 C) 2009, 2010 D) all years E) none of the years Answer: B Explanation:

32)

A) B) C) D) E)

11

35)

36) Refer to Table 19-1. In the year 2009, it is probably the case that workers are ________ and factories are ________. A) facing cyclical unemployment; facing temporary shut downs B) working longer than normal hours; facing temporary shutdowns C) experiencing zero unemployment; operating extra shifts D) experiencing zero unemployment; operating beyond their normal capacity E) working longer than normal hours; operating beyond their normal capacity Answer: E Explanation:

A) B) C) D) E)

37) Women entered the labour force in large numbers in the 20th century and increased the economy's GDP. This change A) created inflationary gaps. B) created recessionary gaps. C) raised potential output. D) was only possible in an economy operating above normal rates of utilization. E) was only possible in an economy operating below normal rates of utilization. Answer: C Explanation:

37)

A) B) C) D) E)

38) A worker is considered unemployed if that worker has no job, is legally eligible to work, A) and is actively searching for employment. B) and is not collecting unemployment insurance. C) whether the worker is looking for a job or is not looking for a job. D) but only if they previously held a job. E) but only if they were previously employed for at least three consecutive months. Answer: A Explanation:

36)

A) B) C) D) E)

12

38)

39) Consider the growth in Canada's labour force and employment. Over the last 50 years, A) the labour force has grown much more rapidly than employment. B) both the labour force and employment have remained roughly constant. C) the number of unemployed persons has been a much larger fraction of the labour force than it was during the first half of the 20th century. D) the main trend of the economy has been one of growth in employment that roughly matches the growth in the labour force. E) the main trend of the economy has been to have employment grow more rapidly than the growth in output. Answer: D Explanation:

A) B) C) D) E)

40) How is Canada's unemployment rate determined? A) The rate is determined by Canada Census data. B) The rate is determined by a survey of Canadian employers. C) The federal government department HRSDC (Human Resources and Skills Development Canada) conducts a monthly survey of the labour force. D) Statistics Canada conducts a Labour Force Survey each month. E) An estimate is produced by HRSDC based on the previous month's unemployment rate adjusted by the current month's job losses and job gains. Answer: D Explanation:

41)

A) B) C) D) E)

42) If a country's labour force is 15 million people, and 1 million of those are unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 7.1%. Answer: D Explanation:

40)

A) B) C) D) E)

41) Canada's unemployment rate has been as low as ________ in the 1960s and as high as ________ during the recession in the early 1980s. A) 4.6; 14 B) 2.0; 15 C) 5.5; 17 D) 2.4; 10 E) 3.4; 12 Answer: E Explanation:

39)

A) B) C) D) E)

13

42)

43) If a country's population is 15 million people, and 1 million of those are unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 6.7%. D) 7.1% E) There is not enough information to know. Answer: E Explanation:

A) B) C) D) E)

44) If a country's labour force is 15 million people, and 1.35 million of those are unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 9.0%. Answer: E Explanation:

45)

A) B) C) D) E)

46) Suppose that a country's population is 30 million and it has a labour force of 15 million people. If 14.5 million people are employed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 9.0%. Answer: B Explanation:

44)

A) B) C) D) E)

45) Suppose that a country's population is 30 million and it has a labour force of 15 million people. Assuming it has 1.35 million people unemployed, the country's unemployment rate is A) 2.5%. B) 3.3%. C) 4.5%. D) 6.7%. E) 9.0%. Answer: E Explanation:

43)

A) B) C) D) E)

14

46)

47) Suppose the city of Calgary has a population of 1 million, a labour force of 575 000, and employment equal to 545 000. We can conclude that for legal and various other reasons ________ people are excluded from the labour force. A) 30 000 B) 420 000 C) 425 000 D) 445 000 E) 450 000 Answer: C Explanation:

A) B) C) D) E)

48) Suppose the city of Calgary, Alberta has a population of 1 million, a labour force of 575 000, and employment is equal to 545 000. The unemployment rate in Calgary is approximately A) 3.0%. B) 5.2%. C) 5.5%. D) 54.5%. E) 57.5%. Answer: B Explanation:

49)

A) B) C) D) E)

50) Suppose a small city has a population of 100 000 and a labour force of 60 000. Employment is 55 000 and 5000 workers are unemployed. How many people are not in the labour force? A) 40 000 B) 35 000 C) 30 000 D) 5000 E) 0 Answer: A Explanation:

48)

A) B) C) D) E)

49) Suppose a country has an unemployment rate of 20%. If we know that the population is 38 million and the labour force is 25 million, then the number of people unemployed is A) 5 million. B) 13 million. C) 20 million. D) 7.6 million. E) 2.6 million. Answer: A Explanation:

47)

A) B) C) D) E)

15

50)

51) If 27 million people are employed and 3 million people are unemployed, what is the unemployment rate? A) 11% B) 89% C) 10% D) 90% E) Not able to determine from the information provided Answer: C Explanation:

A) B) C) D) E)

52) Which of the following is the best example of frictional unemployment? A) A worker is laid off because his firm has to reduce production due to reduced demand. B) A worker quits her current job to search for a better one. C) An ironworker cannot find a job in Ottawa because all job vacancies are in Alberta. D) Bank tellers are unable to find jobs due to technological advances in the banking system. E) Inflationary pressures have led to higher wages for all jobs. Answer: B Explanation:

52)

A) B) C) D) E)

53) Which of the following is the best example of cyclical unemployment? A) A worker is laid off because his firm had to reduce production due to reduced demand. B) A worker quits her current job to search for a better one. C) An ironworker cannot find a job in Ottawa because all job vacancies are in Alberta. D) Bank tellers are unable to find jobs due to technological advances in the banking system. E) Inflationary pressures have led to higher wages for all jobs. Answer: A Explanation:

51)

A) B) C) D) E)

16

53)

54) Economists expect some unemployment to exist even at times of "full employment" for, among others, the following reasons: 1) actual GDP is rarely equal to potential GDP; 2) as the economy changes, the structure of the existing labour force is not the same as the structure of labour demand; 3) people entering the labour force typically take some time to find a job. A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1 and 2 Answer: D Explanation:

A) B) C) D) E)

55) The unemployment rate will understate the true amount of unemployment if A) the unemployment rate is rising. B) crime, divorce, and social unrest are all positively correlated with unemployment. C) the official unemployment figure excludes discouraged workers who have stopped actively looking for work. D) the labour force has grown more rapidly than output. E) the actual unemployment rate is greater than the natural rate of unemployment. Answer: C Explanation:

55)

A) B) C) D) E)

56) Cyclical unemployment is associated with A) changes to the economy's industrial structure resulting from growth in some industries and decline in others. B) an output level different from the economy's potential output. C) differences between the characteristics of the supply of labour and the demand for labour. D) people entering the labour force typically take some time to find a job. E) people quitting their present jobs to look for other jobs. Answer: B Explanation:

54)

A) B) C) D) E)

17

56)

57) Workers with experience and skills sometimes lose their jobs and become unemployed due to changing technology or market conditions, even while firms in other industries or regions are looking to hire more workers. This type of unemployment is called A) cyclical unemployment. B) frictional unemployment. C) historical unemployment. D) natural rate of unemployment. E) structural unemployment. Answer: E Explanation:

A) B) C) D) E)

58) Workers with marketable skills sometimes quit a job and become unemployed, with the expectation of soon finding a better job. This type of unemployment is called A) cyclical unemployment. B) frictional unemployment. C) historical unemployment. D) overly-optimistic unemployment. E) structural unemployment. Answer: B Explanation:

59)

A) B) C) D) E)

60) If the cyclical unemployment rate is negative, then the A) economy is operating beyond full employment. B) economy is operating at less than full employment. C) frictional unemployment rate is negative. D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative. Answer: A Explanation:

58)

A) B) C) D) E)

59) Suppose the unemployment rate is 8.5% and we know that frictional and structural unemployment together account for 5.5%. The cyclical unemployment rate is then A) 14%. B) 8.5%. C) 5.5%. D) 3.0%. E) -3.0%. Answer: D Explanation:

57)

A) B) C) D) E)

18

60)

61) If the cyclical unemployment rate is greater than zero, then the A) economy is operating beyond full employment. B) economy is operating at full employment. C) economy is operating at less than full employment. D) frictional unemployment rate is greater than the structural unemployment rate. E) real-wage unemployment rate is negative. Answer: C Explanation:

A) B) C) D) E)

62) As the banking industry becomes more and more automated, tellers find themselves with unneeded skills and some of them become unemployed. At the same time, computer programmers are in high demand. These unemployed tellers would be classified as A) cyclically unemployed. B) frictionally unemployed. C) naturally unemployed. D) structurally unemployed. E) underemployed. Answer: D Explanation:

62)

A) B) C) D) E)

63) The three main reasons that Canada's real GDP has increased steadily for many years are A) rising employment, increasing levels of education of the labour force and the increase in the participation rate of women in the labour force. B) an increasing stock of physical capital, increasing exports and rising employment. C) the increase in life expectancy, the rise in employment and increasing productivity. D) rising employment, increasing stock of physical capital and increasing productivity. E) increasing productivity of labour, increasing productivity of land and increasing productivity of the capital stock. Answer: D Explanation:

61)

A) B) C) D) E)

19

63)

64) In some macroeconomic analyses, it is common to treat the level of productivity as roughly constant. This is a justifiable assumption in A) the long run. B) the short run. C) both the long run and the short run. D) neither the long run nor the short run. E) macroeconomics but not microeconomics. Answer: B Explanation:

A) B) C) D) E)

65) In general, productivity is a measure of A) the economy's ability to increase real GDP per capita. B) the amount of output that the economy produces per unit of input. C) real GDP as a function of total employment. D) the total amount of output that the economy is capable of producing. E) potential output. Answer: B Explanation:

65)

A) B) C) D) E)

66) The most common measure of productivity is ________, which can be measured as real GDP divided by ________. A) indexed productivity; per capita output B) factor productivity; the total number of factors employed in the economy C) capital productivity; the number of units of capital employed in the economy D) potential productivity; the total number of factors that would be employed in the economy at full employment. E) labour productivity; the number of units of work effort Answer: E Explanation:

64)

A) B) C) D) E)

20

66)

67) Consider a small economy with real GDP of $1 billion and the total number of hours worked equal to 5 million. Which of the following is the best measure of labour productivity in this economy? A) real GDP per hour worked = $20 B) real GDP per employed worker = $20 C) real GDP per hour worked = $200 D) real GDP per employed worker = $200 E) Not able to determine from the information provided. Answer: C Explanation:

A) B) C) D) E)

68) Consider a small economy with real GDP of $1 billion and the number of workers employed equal to 2500. Which of the following is the best measure of labour productivity in this economy? A) real GDP per hour worked = $200 B) real GDP per employed worker = $200 000 C) real GDP per hour worked = $400 D) real GDP per employed worker = $400 000 E) Not able to determine from the information provided Answer: D Explanation:

68)

A) B) C) D) E)

69) Consider a small economy with 2500 employed workers who worked a total of 5 million hours at an average wage of $40 per hour. Which of the following is the best measure of labour productivity in this economy? A) real GDP per hour worked = $40 B) real GDP per employed worker = $80 000 C) real GDP per hour worked = $80 D) real GDP per employed worker = $125 000 E) Not able to determine from the information provided Answer: E Explanation:

67)

A) B) C) D) E)

21

69)

70) Most economists believe that the single largest cause of rising material living standards over long periods of time is A) productivity growth. B) rising employment. C) growth in the capital stock. D) real GDP growth. E) rising real wages. Answer: A Explanation:

A) B) C) D) E)

71) Changes in productivity can be analyzed by looking at how GDP per employed worker changes over time or how GDP per hour worked changes over time. Why might one measure be more preferable than the other? A) GDP per hour worked is preferable because it eliminates the need to adjust for variations in productivity between employed workers. B) GDP per employed worker is more accurate because the data available on the number of employed workers is more accurate than the data available on the number of hours worked. C) GDP per hour worked is more accurate because the average number of hours worked per employed worker has changed over time. D) GDP per employed worker is preferable because the number of employed workers has risen significantly over time. E) Both measures are equally good. Answer: C Explanation:

71)

A) B) C) D) E)

72) What is the approximate measure (2011 data) of Canada's productivity in terms of real GDP per hour worked (expressed in 2012 dollars)? A) $10 B) $92 C) $200 D) $475 E) $45 Answer: E Explanation:

70)

A) B) C) D) E)

22

72)

73) Why is real income for an average Canadian today so much higher than it was for an average Canadian 100 years ago? A) Because of the increase in the labour force due to rising population, immigration and the increase in female labour-force participation. B) Primarily because productivity per worker is so much higher today than in the past. C) Because inflation has been maintained at relatively low levels throughout that time. D) Because free-trade agreements have vastly increased real incomes. E) Because the life span of the average worker has increased from about 55 years to about 80 years over that time period. Answer: B Explanation:

A) B) C) D) E)

74) A change in the Consumer Price Index measures A) a change in a specific absolute price. B) a change in quantities of commodities sold. C) a change in relative prices. D) a change in a broad average price over some particular time span. E) the change in gross domestic product. Answer: D Explanation:

74)

A) B) C) D) E)

75) Inflation, the rate of change of average prices in the economy, generally A) benefits creditors if it is unanticipated. B) has no real effects if it is unanticipated. C) increases the purchasing power of money. D) reduces the real value of existing nominal debt. E) increases the real value of fixed money incomes. Answer: D Explanation:

73)

A) B) C) D) E)

23

75)

76) Suppose an employer and its employees enter into a wage contract specifying a wage increase of 2%. But suppose that the price level rises by 3% over the course of the contract. In this case, A) the employees' purchasing power will rise. B) the employees' purchasing power will fall. C) the employer will experience a greater fall in purchasing power than would have occurred if the price level had held steady. D) both employer and employees will benefit from increased purchasing power. E) both employer and employees will experience a loss of purchasing power. Answer: B Explanation:

A) B) C) D) E)

77) If nominal national income increased by 10% over a certain period of time while real national income increased by 20%, then A) everybody in the economy became worse off. B) inflation has occurred during this time period. C) the labour force increased by 10%. D) the price level has declined by about 10%. E) the price level has increased by approximately 10%. Answer: D Explanation:

77)

A) B) C) D) E)

78) If nominal national income increased by 20% over a certain period of time while real national income increased by 10%, then A) everybody in the economy became worse off. B) inflation has decreased during this time period. C) the labour force increased by 10%. D) the price level has declined by about 10%. E) the price level has increased by approximately 10%. Answer: E Explanation:

76)

A) B) C) D) E)

24

78)

79) If a country is experiencing inflation, the change in the nominal national product will A) equal the change in the real national product. B) overstate the inflation rate. C) overstate the change in the real value of production. D) understate the value of national income. E) be negative and will be falling faster than the rate of inflation. Answer: C Explanation:

A) B) C) D) E)

80) Economic theory argues that there will be fewer real effects from inflation as long as the A) actual rate of inflation is less than 5%. B) anticipated rate of inflation is more than the actual rate of inflation. C) anticipated rate of inflation is less than the actual rate of inflation. D) inflation is fully anticipated and no one changes their behaviour. E) whole private sector is unaware that it is happening. Answer: D Explanation:

81)

A) B) C) D) E)

82) If the Consumer Price Index changes from 120 in year one to 122 in year two, the rate of inflation in the intervening year is A) 22%. B) 20%. C) 2.0%. D) 1.67%. E) 0%. Answer: D Explanation:

80)

A) B) C) D) E)

81) The group that tends to be most hurt by unexpected inflation is A) banks. B) individuals with unindexed pensions. C) employers. D) fixed-income earners. E) both B and D are correct. Answer: E Explanation:

79)

A) B) C) D) E)

25

82)

83) If the Consumer Price Index changes from 120 in year one to 144 in year two, the rate of inflation in the intervening year is A) 10%. B) 12.5%. C) 20%. D) 25%. E) 30%. Answer: C Explanation:

A) B) C) D) E)

84) If the Consumer Price Index changes from 120 in the year 2012 to 126 in the year 2014, the average rate of inflation per year over this two-year period is approximately A) 6%. B) 5%. C) 3%. D) 2.5%. E) 1.5%. Answer: D Explanation:

83)

84)

A) B) C) D) E)

85) If the price index is P1 in one year and P2 in the next year, the inflation rate from one year to the

85)

next is calculated as A) (P2 - P1 ) × 100 B) (P2/P1) × 100 C) (P1/P2) × 100 D) [(P2 - P1 )/P1 ] × 100 E) [(P1 - P2 )/P2 ] × 100 Answer: D Explanation:

A) B) C) D) E)

86) If the price index is P1 in year 1 and P2 in year 3, the average inflation rate per year over this period is calculated as A) (P2 - P1 ) × (100/2) B) [(P2 - P1 )/P1 ] × 100 C) [(P2 - P1 )/P1 ] × [100/2] D) [(P1 - P2 )/P2 ] × 100 E) [(P1 - P2 )/P2 ] × [100/2] Answer: C Explanation:

A) B) C) D) E)

26

86)

87) Suppose that a price index for a certain basket of goods and services has a value of 150 in 2012 and a value of 156 in 2013. This index suggests that the cost of the market basket of goods and services A) was 4% higher in 2013 than in 2012. B) was 6% lower in 2013 than in 2012. C) was 6% higher in 2013 than in 2012. D) was 156% higher in 2013 than in 2012. E) was approximately the same in 2013 and 2012. Answer: A Explanation:

A) B) C) D) E)

88) Which of the following statements is logically valid? A) If the rate of inflation is high, the nominal rate of interest must be low. B) If the rate of inflation is less than the nominal interest rate, the real interest rate is positive. C) If the real interest rate is less than the nominal interest rate, inflation must be zero. D) If the real interest rate is less than the nominal interest rate, inflation must be negative. E) If the nominal interest rate is high, the real interest rate must be high. Answer: B Explanation:

88)

A) B) C) D) E)

89) A worker currently earning $3000 per month has negotiated a 4% wage increase in anticipation of a 4% inflation rate in the next year. Under what scenario will the worker have a higher purchasing power? A) if next year's inflation rate is 4% B) if next year's inflation rate is 3% C) if next year's inflation rate is 5% D) if next year some prices increase by only 4% E) if next year some prices increase by only 5% Answer: B Explanation:

87)

A) B) C) D) E)

27

89)

90) Suppose that at the end of a given year there has been unanticipated inflation of 4%. Who is better off at the end of the year? A) a bank that lent money at the beginning of the year B) a bank that lent money at the end of the year C) a consumer who borrowed money at the beginning of the year D) a consumer who borrowed money at the end of the year E) a consumer who lent money at the end of the year Answer: C Explanation:

A) B) C) D) E)

91) If constant-dollar national income decreased by $6 billion over a one-year period, then it must be true that A) output of every product decreased. B) the price level decreased. C) aggregate output decreased. D) aggregate output decreased and the price level increased. E) aggregate output increased and the price level decreased. Answer: C Explanation:

91)

A) B) C) D) E)

92) Since 1960, in Canada the price level has ________, while the rate of inflation has ________. A) fluctuated widely; been relatively stable B) fluctuated widely; also fluctuated widely C) been rising steadily; been quite volatile D) been rising steadily; been relatively stable E) been quite volatile; been rising steadily Answer: C Explanation:

90)

A) B) C) D) E)

28

92)

93) Since 1960 in Canada, the rate of inflation has ranged (approximately) between A) .0 and 12%. B) -5 and 5%. C) 2 and 4%. D) 2 and 20%. E) 1 and 24%. Answer: A Explanation:

A) B) C) D) E)

94) The real interest rate must be A) high if the nominal interest rate is high. B) high if the inflation rate is greater than the nominal interest rate. C) low if the nominal interest rate is high. D) positive if the nominal rate of interest is greater than the rate of inflation. E) negative if the nominal rate of interest is greater than the rate of inflation. Answer: D Explanation:

95)

A) B) C) D) E)

96) Suppose the Bank of Montreal wants a 5% real rate of return on all its loans, and anticipates an annual inflation rate of 4%. It should therefore lend its money at a nominal interest rate of A) 10%. B) 9%. C) 5%. D) 4%. E) 1%. Answer: B Explanation:

94)

A) B) C) D) E)

95) The real rate of interest is equal to the nominal interest rate A) divided by the price level. B) minus the rate of inflation. C) multiplied by the rate of inflation. D) plus the risk ratio. E) plus the price level. Answer: B Explanation:

93)

A) B) C) D) E)

29

96)

97) Suppose the Bank of Montreal wants a 4% real rate of return on all its loans, and anticipates an annual inflation rate of 6%. It should therefore lend its money at a nominal interest rate of A) 10%. B) 9%. C) 5%. D) 4%. E) 1%. Answer: A Explanation:

A) B) C) D) E)

98) Assume that Sarah agrees to lend $100 to Sam for one year. Sam agrees to pay Sarah $110 at the end of the year. If inflation over that one year is 7%, what real rate of interest does Sarah earn on her $100? A) 10% B) 7% C) 3% D) 13% E) 17% Answer: C Explanation:

98)

A) B) C) D) E)

99) Consider the situations of a lender of money and a borrower of money. Which of the following situations is least burdensome for the borrower? A) nominal interest rate of 15% and an inflation rate of 8% B) nominal interest rate of 10% and an inflation rate of 1% C) nominal interest rate of 8% and an inflation rate of 2% D) nominal interest rate of 4% and an inflation rate of 4% E) nominal interest rate of 29% and an inflation rate of 21% Answer: D Explanation:

97)

A) B) C) D) E)

30

99)

100) Consider the situations of a lender and a borrower of money. Which of the following situations is most advantageous to the lender? A) inflation rate of 0% nominal interest rate of 2% B) inflation rate of 2% nominal interest rate of 7.5% C) inflation rate of -1% nominal interest rate of 3% D) inflation rate of 2% nominal interest rate of 4% E) inflation rate of 3% nominal interest rate of 7.5% Answer: B Explanation:

A) B) C) D) E)

101) During the 1970s, Canada experienced an unusual pattern of interest rates. During this period A) the nominal interest rate was less than the real interest rate. B) the inflation rate was negative, implying a real interest rate that was higher than the nominal interest rate. C) the inflation rate exceeded the nominal interest rate, implying a negative real interest rate. D) the inflation rate was negative, implying a nominal interest rate higher than the real interest rate. E) the nominal and real interest rates were equal to each other. Answer: C Explanation:

101)

A) B) C) D) E)

102) Which of the following groups would benefit most in real terms from a period of high and unanticipated inflation, as was experienced in Canada in the early 1970s? A) mortgage companies and banks who issued fixed-rate mortgages to clients B) banks with outstanding loans to their customers C) seniors whose income is largely interest earnings on past savings D) firms that maintain large cash balances for the operation of their business E) homeowners who had long-term fixed-rate mortgages Answer: E Explanation:

100)

A) B) C) D) E)

31

102)

103) The Canadian exchange rate is defined to be the A) number of Canadian dollars needed to buy one unit of foreign currency. B) number of ounces of gold it takes to buy one hundred Canadian dollars. C) system of quotas imposed on the international exchange of goods. D) term for foreign currencies or claims on foreign currencies. E) value of one Canadian dollar in terms of foreign currencies. Answer: A Explanation:

A) B) C) D) E)

104) If the Canadian dollar exchange rate increases, the A) Canadian dollar depreciates relative to foreign currencies. B) internal value of the dollar falls. C) Canadian dollar appreciates relative to foreign currencies. D) internal value of the dollar rises. E) external value remains unaffected. Answer: A Explanation:

105)

A) B) C) D) E)

106) If 0.75 U.S. dollars can be exchanged for one Canadian dollar, we say that the Canadian-U.S. exchange rate is A) 0.75. B) 75. C) 1.0. D) 1.33. E) 1.25. Answer: D Explanation:

104)

A) B) C) D) E)

105) If one Canadian dollar can be exchanged for 0.5 euros, we say that the Canadian-euro exchange rate is A) 0.5. B) 2.0. C) 5.0. D) 20. E) 1.0. Answer: B Explanation:

103)

A) B) C) D) E)

32

106)

107) Suppose Canada's exchange rate with the euro rises from 1.2 to 1.4. This rise indicates a(n) ________ of the Canadian dollar, which means it takes ________ Canadian dollars to purchase one euro. A) appreciation; more B) appreciation; fewer C) depreciation; more D) depreciation; fewer Answer: C Explanation:

A) B) C) D)

108) Suppose Canada's exchange rate with the U.S. dollar falls from 1.21 to 1.13. This fall indicates a(n) ________ of the Canadian dollar, which means it takes ________ Canadian dollars to purchase one U.S. dollar. A) appreciation; more B) appreciation; fewer C) depreciation; more D) depreciation; fewer Answer: B Explanation:

109)

A) B) C) D) E)

110) It is important for policy makers to recognize that most macroeconomic variables are characterized by A) long-run trends and short-run fluctuations. B) gradual increases over long periods of time. C) short-run fluctuations that need to be smoothed for a well-functioning economy. D) long-run economic growth. E) the impacts of the business cycle. Answer: A Explanation:

108)

A) B) C) D)

109) Suppose Canada's exchange rate with the U.S. dollar increases from 1.14 to 1.22. Which of the following is likely to happen? A) More Canadians will cross the border to shop in the U.S. B) It is less expensive for Canadians to shop online from U.S. retailers. C) Fewer Canadians will cross the border to shop in the U.S. D) The Canadian dollar value of Canada's imports from the U.S. will fall. E) The Canadian dollar value of Canada's exports to the U.S. will fall. Answer: C Explanation:

107)

A) B) C) D) E)

33

110)

Answer Key Testname: UNTITLED19

1) D 2) E 3) A 4) C 5) B 6) C 7) D 8) E 9) D 10) D 11) C 12) B 13) E 14) C 15) B 16) A 17) C 18) B 19) D 20) C 21) E 22) B 23) B 24) C 25) C 26) D 27) C 28) D 29) A 30) B 31) B 32) A 33) C 34) B 35) E 36) E 37) C 38) A 39) D 40) D 41) E 42) D 43) E 44) E 45) E 46) B 47) C 48) B 49) A 50) A 34

Answer Key Testname: UNTITLED19

51) C 52) B 53) A 54) D 55) C 56) B 57) E 58) B 59) D 60) A 61) C 62) D 63) D 64) B 65) B 66) E 67) C 68) D 69) E 70) A 71) C 72) E 73) B 74) D 75) D 76) B 77) D 78) E 79) C 80) D 81) E 82) D 83) C 84) D 85) D 86) C 87) A 88) B 89) B 90) C 91) C 92) C 93) A 94) D 95) B 96) B 97) A 98) C 99) D 100) B 35

Answer Key Testname: UNTITLED19

101) 102) 103) 104) 105) 106) 107) 108) 109) 110)

C E A A B D C B C A

36

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Total value added in an economy is equal to the value of A) all final goods produced. B) all final and intermediate goods produced. C) all inputs and outputs in the economy. D) all profits of all firms in the economy. E) the sum of the value of primary, intermediate and final goods. Answer: A Explanation:

A) B) C) D) E)

2) Suppose national accounting was done by adding up the market values of all outputs of all firms. This approach would A) accurately reflect the value of production in the economy. B) obtain gross domestic product. C) obtain gross national product. D) underestimate the value of production in the economy. E) overestimate the value of production in the economy. Answer: E Explanation:

2)

A) B) C) D) E)

3) In national-income accounting, "double counting" A) occurs when the value of some output is omitted in the calculation of national income. B) means that pre-tax and after-tax GDP will be different. C) occurs when the value of output is counted more than once in the calculation of national income. D) means that consumption will always be less than GDP. E) leads to an underestimation of GDP in any given period. Answer: C Explanation:

1)

A) B) C) D) E)

1

3)

4) All goods and services produced by one firm but used as inputs into a further stage of production are called A) value added. B) intermediate goods. C) national income goods. D) final goods. E) consumption goods. Answer: B Explanation:

A) B) C) D) E)

5) In national-income accounting, the value of intermediate products A) should always be counted as part of GDP in the expenditure approach. B) should be subtracted from the value of final goods in determining a firm's total value added. C) should be added to the value of other inputs in determining a firm's contribution to GDP. D) must equal the value added by the firm. E) is counted as factor income in the calculation of GDP from the income side. Answer: B Explanation:

6)

A) B) C) D) E)

7) In Shoetown, a rancher takes $0 worth of inputs and produces animal skins, which he sells to the tanner for $400. The tanner then sells leather to the shoemaker for $700, and the shoemaker then sells $1200 worth of shoes. The value added by the tanner is A) $0. B) $300. C) $400. D) $500. E) $1200. Answer: B Explanation:

5)

A) B) C) D) E)

6) In Shoetown, a rancher takes $0 worth of inputs and produces animal skins, which he sells to the tanner for $400. The tanner then sells leather to the shoemaker for $700, and the shoemaker then sells $1200 worth of shoes. The value added from these transactions is A) $ 800. B) $1000. C) $1200. D) $2300. E) $2500. Answer: C Explanation:

4)

A) B) C) D) E)

2

7)

8) Suppose a Canadian firm imports $5000 worth of frisbees from China and sells them for $10 000. The effect on GDP would be A) to decrease the value of GDP by $15 000. B) to increase the value of GDP by $15 000. C) to increase the value of GDP by $10 000. D) to increase the value of GDP by $5000. E) No effect on GDP since the frisbees were produced outside of Canada. Answer: D Explanation:

A) B) C) D) E)

9) Consider a firm producing skateboards in one factory. In determining this firm's value added, we would start with its total revenue and subtract the cost of (among other things) 1) salaries to the firm's cleaning staff; 2) electricity used in the factory; 3) the wood used for the base of the skateboards. A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1 only E) 3 only Answer: B Explanation:

9)

A) B) C) D) E)

10) In Canada, the measurement of national income and national product is conducted by A) the Department of Finance. B) the Bank of Canada. C) the Treasury Board. D) statisticians in universities. E) Statistics Canada. Answer: E Explanation:

8)

A) B) C) D) E)

3

10)

11) Which of the following statements about national-income accounting is correct? A) The total value added in the economy is equal to the sum of all components in the circular flow of expenditure and income. B) The value of the expenditure on a nation's output is equal to the total income claims generated by producing that output. C) GDP on the expenditure side is calculated by adding up all the income claims generated by the act of production. D) GDP on the income side is calculated by adding up total expenditure for each of the main components of final output. E) GDP from the expenditure side and GDP from the income side differ by the amount of investment in the economy. Answer: B Explanation:

A) B) C) D) E)

12) A farmer raises free-range chickens, which he sells to a company for $1000. That company sells the "processed" chickens to a grocery store for $1600, which in turn produces roasted chickens which are sold to the public for $2400. Based on this information, the value of total output is equal to A) $1400 B) $1600 C) $2400 D) $4000 E) $5000 Answer: C Explanation:

12)

A) B) C) D) E)

13) When adding up the value of all goods produced in the economy, double counting can be avoided if only the ________ is included. A) value of final good and services B) value of intermediate goods and services C) cost of intermediate goods and services D) revenue of all goods and services E) revenue of intermediate goods and services Answer: A Explanation:

11)

A) B) C) D) E)

4

13)

14) In Lumberville, the lumberjack cuts trees and sells them to the local mill for $500. The local mill processes these trees into wood planks and sells them to the carpenter for $800. Finally, the carpenter uses these wood planks to make tables which he sells for $1400 to Lumberville's residents. If we allowed double counting, the total value of Lumberville's output would be calculated as ________. But if we correctly compute the total value added, the value of the total output in Lumberville would be ________. A) $1400; $1400 B) $2200; $2700 C) $2200; $4200 D) $2700; $1400 E) $4200; $2700 Answer: D Explanation:

A) B) C) D) E)

15) The "value added" for an individual firm can be calculated by A) adding the cost of the intermediate goods used by the firm. B) subtracting the payments made to the factors of production used by the firm from the firm's revenue. C) calculating the revenue generated by the firm. D) calculating the profit generated by the firm. E) adding up the payments made to the factors of production used by the firm. Answer: E Explanation:

15)

A) B) C) D) E)

16) Jodie's Bakery generates a yearly revenue of $6000. Throughout the year Jodie spends $1500 on flour, $1000 on fruit, $500 on sugar & spices, $1500 on butter, and employs an assistant whom she pays $1000. Calculate the value of the annual output produced by Jodie's Bakery using the value added method. A) $1000 B) $1500 C) $4500 D) $5000 E) $6000 Answer: B Explanation:

14)

A) B) C) D) E)

5

16)

17) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow? A) imports B) taxes C) saving D) consumption E) investment Answer: E Explanation:

A) B) C) D) E)

18) Consider the circular flow of expenditure and income in the Canadian economy. Which of the following is an injection into the circular flow? A) Bombardier imports machine parts from Germany. B) Bombardier exports subway cars to Mexico. C) Safeway pays corporate income tax to the federal government. D) You put $500 into your TFSA (tax-free savings account). E) You make an online purchase from a U.S. retailer. Answer: B Explanation:

18)

A) B) C) D) E)

19) Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow? A) investment B) consumption C) saving D) exports E) government purchases Answer: C Explanation:

17)

A) B) C) D) E)

6

19)

20) Consider the circular flow of income and expenditure in the Canadian economy. Which of the following is a withdrawal from the circular flow? A) Your family buys weekly groceries. B) Bombardier exports subway cars to Mexico. C) You put $500 into your TFSA (tax-free savings account). D) The B.C. provincial government builds a new hospital. E) Canadian farmers sell wheat to China. Answer: C Explanation:

A) B) C) D) E)

21) The term "investment" in macroeconomics means A) the total amount of capital goods in the country. B) the production of goods for immediate consumption. C) the same thing as profits. D) the production of goods not for immediate consumption use. E) money spent in markets for financial capital. Answer: D Explanation:

21)

A) B) C) D) E)

22) To calculate GDP from the expenditure side, one must add together A) wages, profits, government purchases and net exports. B) consumption, government purchases, and interest. C) wages, rent, interest, and profits. D) consumption, investment, government purchases, and net exports. E) consumption, investment, government purchases, and exports. Answer: D Explanation:

20)

A) B) C) D) E)

7

22)

23) GDP from the expenditure side is equal to the sum of A) Ca + Ia + Ga + (IMa - Xa ).

23)

B) Ca + Ia + Ga - net exports. C) Ca + Ia + Ga + (Xa - IMa ). D) Ca + Ia + Ga . E) Ca + Ia + net exports. Answer: C Explanation:

A) B) C) D) E)

24) Which of the following purchases by households is considered as consumption expenditure for the purposes of national-income accounting? A) legal services B) a new house C) a Government of Canada Treasury bill D) tractors for use on a family farm E) the purchase of company stock Answer: A Explanation:

A) B) C) D) E)

25) Which of the following would be included in the consumption expenditure component of GDP? A) export sales of snowmobiles B) government expenditure for highway construction C) the increase in inventories at lumber mills D) expenditure by a firm for architectural services E) a municipal government's purchase of new desks for city council chambers Answer: D Explanation:

24)

A) B) C) D) E)

8

25)

26) When calculating GDP from the expenditure side, Ga comprises

26)

A) only expenditures made by the federal government. B) government purchases of goods and services, excluding transfer payments. C) only purchases of goods and not services. D) only expenditures made by provincial and local governments. E) government expenditures on goods and services, including transfer payments. Answer: B Explanation:

A) B) C) D) E)

27) In national-income accounting, a rise in Ga will be recorded (other things being equal) if

27)

A) labour productivity in the government sector rises. B) output of government-produced goods and services increases. C) the total salaries paid to civil servants rise. D) wages in the government sector fall. E) the government's purchases of office furniture falls. Answer: C Explanation:

A) B) C) D) E)

28) In national-income accounting, a fall in Ga (other things being equal) will be recorded if A) labour productivity in the government sector falls. B) the true market value of government-produced goods and services decreases. C) wages in the government sector rise. D) the Canadian armed forces reduces the size of the army. E) the number of employed civil servants increases, but total government salaries remains unchanged. Answer: D Explanation:

A) B) C) D) E)

9

28)

29) Suppose a government collects $12 billion in various tax revenues, and pays $2.5 billion in debt interest, $9 billion in social security benefits, and $0.5 billion in government employee wages. What is the direct contribution to GDP coming from this government's fiscal actions? A) $0.5 billion B) $2.5 billion C) $3.0 billion D) $11.5 billion E) $12.0 billion Answer: A Explanation:

A) B) C) D) E)

30) In macroeconomics, the term "capital goods" refers to A) the financial resources necessary to start a firm. B) man-made factors of production, such as tools, machines, and factory buildings. C) money. D) stocks and bonds. E) all factors of production. Answer: B Explanation:

30)

A) B) C) D) E)

31) In national-income accounting, "depreciation" refers to A) a term used in accounting, not economics. B) the amount by which the capital stock is depleted during the accounting period. C) net investment. D) the increase in the economy's stock of capital per year. E) the decrease in the economy's stock of capital per year. Answer: B Explanation:

29)

A) B) C) D) E)

10

31)

32) In national-income accounting, a reduction of inventories counts as A) consumption. B) depreciation. C) negative investment. D) positive investment. E) saving. Answer: C Explanation:

A) B) C) D) E)

33) To calculate the change in the value of inventories for the investment component of GDP, one should use their A) cost of production at the time they were produced. B) cost of production minus the costs of labour and capital. C) current market value. D) market value at the time they were produced. E) value at the time the goods are sold and removed from inventory. Answer: C Explanation:

34)

A) B) C) D) E)

35) In national-income accounting, the term "fixed investment" refers to A) total gross investment minus depreciation. B) the existing capital stock. C) the creation of new plant and equipment. D) investment in stocks and bonds. E) capital stock that has been repaired. Answer: C Explanation:

33)

A) B) C) D) E)

34) In national-income accounting, replacement investment is the investment that A) is used in the calculation of GDP from the expenditure side. B) maintains the existing capital stock at a constant level. C) is equal to all existing capital stock in the country. D) when added to gross investment is equal to total saving. E) is done by the government. Answer: B Explanation:

32)

A) B) C) D) E) 11

35)

36) Which of the following statements regarding investment is correct? A) The capital stock includes investment in stocks and bonds. B) The accumulation of inventories does not count as current investment. C) Rental payments are included as investment expenditures. D) Depreciation refers to funds used to increase the existing stock of capital. E) Housing construction is classified as investment expenditure rather than consumption expenditure. Answer: E Explanation:

A) B) C) D) E)

37) Which of the following statements about depreciation is correct? A) Depreciation includes net additions to the economy's total stock of capital. B) The total amount of capital goods in a country is called depreciation. C) Net investment is equal to gross investment minus depreciation. D) Net investment is equal to gross investment plus depreciation. E) Depreciation is equal to net investment. Answer: C Explanation:

37)

A) B) C) D) E)

38) When calculating GDP using the expenditure approach, the investment component includes A) net investment only. B) net investment minus depreciation. C) gross investment plus depreciation. D) net investment plus depreciation. E) fixed investment minus depreciation. Answer: D Explanation:

36)

A) B) C) D) E)

12

38)

39) Consider investment as a component of GDP. The change in the country's capital stock during a year is equal to A) gross investment. B) capital consumption allowance. C) net investment. D) net change in inventories plus capital consumption allowance. E) gross fixed investment. Answer: C Explanation:

A) B) C) D) E)

40) Which of the following statements regarding housing expenditures in the national accounts is correct? A) Owner-occupied housing is counted as investment by imputing the value of the housing services enjoyed by the owner. B) Rental payments for houses are counted as part of consumption. C) The provision of new public housing by the government is classified as private investment. D) New residential construction is classified as consumption. E) The cost of a home purchased from its previous occupant is part of investment. Answer: B Explanation:

40)

A) B) C) D) E)

41) In national-income accounting, government expenditures on the salaries of civil servants are included at A) their imputed market value. B) the market value of the goods and services they produce. C) their after-tax salaries. D) their pre-tax salaries, or factor incomes. E) opportunity cost. Answer: D Explanation:

39)

A) B) C) D) E)

13

41)

42) Transfer payments are excluded from the government component in the calculation of GDP because A) they do not represent the purchase of a good or a service. B) they are not counted as income by any economic agent. C) they do not generate additional income in the economy. D) it is difficult to assess the market value of a transfer payment. E) they are small enough to ignore when computing the national accounts. Answer: A Explanation:

A) B) C) D) E)

43) Consider Canada's national accounts. An example of a transfer payment is A) government payments of salaries to schoolteachers. B) government spending on military equipment. C) pensions paid from the Canada Pension Plan. D) private firms' payments of dividends. E) government payments of salaries to Members of Parliament. Answer: C Explanation:

44)

A) B) C) D) E)

45) When calculating GDP from the expenditure side, "actual consumption expenditures" includes A) a tractor purchased by an Ontario farmer. B) fees paid by Google Canada to a Toronto law firm. C) robotic paint equipment purchased by Bombardier. D) snow-plow equipment purchased by the City of Montreal. E) Canadian fashion designs purchased by a Swiss department store. Answer: B Explanation:

43)

A) B) C) D) E)

44) When calculating GDP from the expenditure side, "actual consumption expenditures" includes A) the purchase of a new house. B) American tourists travelling to and spending in Canada. C) increases in automobile inventories. D) the construction of an apartment building. E) the monthly rental of an apartment. Answer: E Explanation:

42)

A) B) C) D) E) 14

45)

46) Which of the following would be classified as "investment" in the national income and product accounts? A) the purchase of a government bond B) the purchase of Telus stock C) the construction of a new factory D) the payment of real-estate fees E) the holding of money Answer: C Explanation:

A) B) C) D) E)

47) Suppose that in 2012, ABC Corporation produced $6 million worth of natural gas pipes but was able to sell only $5 million worth. Is the remaining $1 million of unsold pipes part of GDP for 2012? A) Yes, since changes in inventories are part of consumption expenditures. B) Yes, since they are part of the economy's output in 2012. C) No, since changes in inventories are part of actual investment. D) No, since they are part of the economy's output only when sold. E) No, since they are added to existing inventories. Answer: B Explanation:

47)

A) B) C) D) E)

48) Suppose that in 2012, Canada Cars Corporation produced $20 million worth of cars and trucks but was able to sell only $16 million worth. Is the remaining $4 million increase in inventories part of GDP for 2012? 1. Yes, since changes in inventories are part of consumption expenditures. 2. Yes, since they are part of the economy's output in 2012. 3. Yes, since changes in inventories are part of actual investment. A) 1 only B) 2 only C) 3 only D) both 1 and 2 E) both 2 and 3 Answer: E Explanation:

46)

A) B) C) D) E)

15

48)

49) In national-income accounting, changes in inventories are A) classified as part of current actual investment. B) included under actual consumption expenditures. C) referred to as intermediate goods. D) described as actual fixed investment. E) not included in the national accounts. Answer: A Explanation:

A) B) C) D) E)

50) When computing GDP from the expenditure side, which of the following items is excluded from the government component? A) employment-insurance benefits B) salaries to Canadian Forces officers C) costs of Parliamentary Committees D) rental of office space by the government E) operating costs of the Canadian Coast Guard Answer: A Explanation:

50)

A) B) C) D) E)

51) An example of an item that would be excluded from a measure of GDP from the expenditure side is A) the purchase of windows by an automobile assembly plant. B) fertilizer purchased by Farmer Jones to increase crop yields. C) the purchase of a tattoo for Mary Smith's ankle. D) government pension payments to a retired person. E) a new truck purchased by a furniture-delivery company. Answer: D Explanation:

49)

A) B) C) D) E)

16

51)

52) In national-income accounting, what does the term Ia represent? A) actual net investment B) actual net investment minus depreciation C) actual gross investment (including depreciation) D) actual inventory investment E) actual fixed investment minus depreciation Answer: C Explanation:

A) B) C) D) E)

53) When calculating GDP from the expenditure side, how do net exports enter the equation? A) They are NOT included because they do not represent an expenditure by Canadians. B) They may or may not be included depending on whether they are for final or intermediate goods. C) They are included as a separate category. D) They are included but as part of C, I, or G. E) They are included only if it is a positive number. Answer: C Explanation:

53)

A) B) C) D) E)

54) Suppose a Canadian firm imports $1000 worth of bananas and sells them for $2000. The effect on Canadian GDP would be A) to decrease the value of GDP by $3000. B) to increase the value of GDP by $3000. C) to increase the value of GDP by $2000. D) to increase the value of GDP by $1000. E) no effect on GDP since the bananas were produced outside Canada. Answer: D Explanation:

52)

A) B) C) D) E)

17

54)

55) When calculating GDP from the expenditure side, which of the following is true of the investment component, Ia? A) it excludes expansions of existing factories B) it only includes business fixed investment C) it includes the transfer of houses between individuals D) it includes changes in inventories E) it only includes decumulation of inventories Answer: D Explanation:

A) B) C) D) E)

56) When calculating GDP from the expenditure side, which of the following is true of the government purchases component, Ga? A) it excludes government investment expenditure B) it is based on the government's planned spending C) it includes employment insurance and employment benefits D) it excludes transfer payments E) it only includes federal government expenditures Answer: D Explanation:

55)

56)

A) B) C) D) E)

The table below includes data for a one-year period required to calculate GDP from the expenditure side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Government purchases Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $486.80 $94.00

TABLE 20-1 57) Refer to Table 20-1. What is the value of GDP from the expenditure side? A) $1982.60 B) $1986.00 C) $2010.00 D) $2285.20 Answer: D Explanation:

A) B) C) D) E)

18

57) E) $2584.40

The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Depreciation Consumption expenditure Government subsidies to firms Business profit Imports Interest and investment income Government purchases

3029 107 32 537 82 2808 51 423 35 276 524

TABLE 20-2 58) Refer to Table 20-2. What is the value of GDP, as calculated from the expenditure side? A) $3936 B) $3904 C) $3866 D) $3784 E) $3708 Answer: C Explanation:

A) B) C) D) E)

59) If a firm's depreciation exceeds its gross investment, then its A) capital stock will be shrinking. B) capital stock will be growing. C) gross investment will be negative. D) net investment will be positive. E) depreciation cannot exceed gross investment. Answer: A Explanation:

59)

A) B) C) D) E)

60) In national-income accounting, which of the following transactions by households is considered to be an investment expenditure? A) the purchase of an iPhone B) the purchase of a government bond C) the purchase of a Guaranteed Investment Certificate (GIC) D) payment for the construction of a custom-built new home E) the purchase of an imported car Answer: D Explanation:

58)

A) B) C) D) E) 19

60)

61) Which one of the following government expenditures is an example of "government purchases"? A) $2000 paid to a retiree B) $1000 paid to a poor person for income support C) $4000 spent for services provided by a private consultant D) $100 000 paid as interest on the national debt E) $600 paid to an unemployed worker for employment insurance Answer: C Explanation:

61)

A) B) C) D) E)

62) When measuring actual gross domestic product from the expenditure side, we use the following simple equation: A) GNP = C + I + G + X B) GDP = C + I + G + (X - IMa )

62)

C) GDP = Ca + Ia + Ga + (Xa - IM a) D) GNP = Ca + Ia + Ga + (Xa - IMa ) E) GDP = C + I + (G - transfers) + (X - IM) Answer: C Explanation:

A) B) C) D) E)

63) To calculate GDP from the income side, one must add together wages, A) consumption and depreciation. B) interest, rent, depreciation, profits and indirect taxes net of subsidies. C) investment, rent, depreciation, profits and indirect taxes net of subsidies. D) government income, interest, and profits. E) net exports, depreciation, and profits. Answer: B Explanation:

A) B) C) D) E)

20

63)

64) In national-income accounting, the concept of net domestic income is useful because it A) does not include inventory investment. B) includes government transfer payments. C) includes all goods produced but not exchanged in markets. D) excludes the value of output that is used as replacement investment. E) represents national income plus depreciation. Answer: D Explanation:

A) B) C) D) E)

65) Gross domestic product is the sum of factor incomes ________ indirect business taxes, ________ subsidies, ________ depreciation. A) plus; plus; plus B) plus; plus; minus C) plus; minus; minus D) plus; minus; plus E) minus; plus; plus Answer: D Explanation:

65)

A) B) C) D) E)

66) How does net domestic income differ from gross domestic product? Net domestic income is GDP minus A) that part of it not actually paid to households, plus transfer payments to households. B) that part of it not actually paid to households, minus personal income taxes paid by households. C) that part of it not actually paid to households, plus transfer payments to households, minus personal taxes paid by households. D) replacement investment. E) the sum of corporate, personal and sales taxes paid to the government. Answer: D Explanation:

64)

A) B) C) D) E)

21

66)

67) When calculating GDP from the income side, which of the following is included in non-factor payments? A) wages and salaries B) GST C) income tax D) bond interest E) business profits Answer: B Explanation:

67)

A) B) C) D) E)

The table below includes data for a one-year period required to calculate GDP from the income side for a teeny-tiny economy. Gross investment expenditure Wages and salaries Consumption expenditure Interest and investment income Business profits Depreciation Indirect taxes less subsidies Net exports

$402.00 $1741.00 $1302.40 $99.40 $70.40 $199.20 $175.20 $94.00

TABLE 20-3 68) Refer to Table 20-3. What is the value of GDP? A) $1982.60 B) $1986.00 C) $2010.00 Answer: D Explanation:

68) D) $2285.20

E) $2584.40

A) B) C) D) E)

69) Refer to Table 20-3. When calculating GDP from the income side, we need to add together the following items from the data provided: A) interest and investment income, business profits, depreciation, indirect taxes less subsidies. B) wages and salaries, business profits, indirect taxes less subsidies. C) investment expenditure, consumption expenditure, net exports. D) interest and investment income, business profits, depreciation. E) wages and salaries, interest and investment income, business profits, depreciation, indirect taxes less subsidies. Answer: E Explanation:

A) B) C) D) E)

22

69)

70) Refer to Table 20-3. What is the value of net domestic income (at factor cost)? A) $1711.60 B) $1811.40 C) $1840.40 D) $1910.80 Answer: D Explanation:

70) E) $2004.80

A) B) C) D) E)

The table below includes data for a one-year period required to calculate GDP for this economy. All figures are in billions of dollars. Wages and salaries GST remittances Exports Gross investment Depreciation Consumption expenditure Government subsidies to firms Business profit Imports Interest and investment income Government purchases

3029 107 32 537 82 2808 51 423 35 276 524

TABLE 20-2 71) Refer to Table 20-2. What is the value of GDP, as calculated from the income side? A) $3866 B) $3590 C) $3968 D) $3784 Answer: A Explanation:

E) $3708

A) B) C) D) E)

72) Refer to Table 20-2. What is the value of net domestic income at factor cost? A) $3626 B) $3869 C) $3936 D) $3728 Answer: D Explanation:

71)

A) B) C) D) E)

23

72) E) $3904

73) Of the following possibilities, the best measure of the average material living standards of domestic residents is A) GDP. B) GNP. C) per capita GDP. D) per capita GNP. E) per capita net exports. Answer: D Explanation:

A) B) C) D) E)

74) Which of the following pairs are conceptually identical? A) gross domestic product and gross domestic expenditure B) gross national product and gross domestic product C) gross domestic product and personal disposable income D) personal income and labour income E) personal income and personal disposable income Answer: A Explanation:

74)

A) B) C) D) E)

75) If the amount of income generated in Canada that is remitted to foreigners is greater than the amount of income generated abroad that is remitted to Canadian residents, then A) GNP is negative. B) GNP is less than disposable personal income. C) GDP is equal to GNP. D) GNP is lower than GDP. E) GDP is lower than GNP. Answer: D Explanation:

73)

A) B) C) D) E)

24

75)

76) The principle difference between GDP and GNP is that GNP measures ________, while GDP measures ________. A) total income generated by Canadians, both domestic and abroad; total income generated by Canadians, domestic only B) total factor incomes in the economy; total expenditure in the economy C) the total amount of income received by Canadian residents; the value of total output produced in Canada D) the value of total output produced by Canada; wages and salaries received by Canadian residents E) wages and salaries, plus world-wide investment income received by Canadian residents; the value of total output produced in Canada Answer: C Explanation:

A) B) C) D) E)

77) As a measure of Canadian economic activity GDP is ________ to GNP. As a measure of the income accruing to Canadian residents, GDP is ________ to GNP. A) inferior; superior B) superior; equivalent C) equivalent; inferior D) inferior; equivalent E) superior; inferior Answer: E Explanation:

77)

A) B) C) D) E)

78) In recent years, several large Canadian mining companies have been bought by foreign companies. If some of the profits generated at these Canadian mines which previously flowed to Canadian owners are now remitted to foreign owners, then which of the following statements best describes the impact of the change in ownership? A) Canadian GNP remains constant and Canadian GDP falls. B) Canadian GNP falls and Canadian GDP is unaffected. C) There is no change in either Canadian GDP or GNP. D) The gap between Canadian GNP and GDP becomes smaller. E) Canadian GNP is larger than Canadian GDP by an increased amount. Answer: B Explanation:

76)

A) B) C) D) E)

25

78)

79) If you are analyzing fluctuations in Canadian unemployment you would be most interested in studying changes in A) GNP. B) disposable personal income. C) value added. D) GDP. E) the GDP deflator. Answer: D Explanation:

A) B) C) D) E)

80) In the national-income accounts, disposable personal income A) includes capital consumption allowances. B) includes undistributed corporate profits. C) equals personal income, minus personal income taxes, plus transfer payments and interest on public debt. D) is the part of national income that is available to households to spend or save. E) is equal to wages. Answer: D Explanation:

80)

A) B) C) D) E)

81) In the national-income accounts, disposable personal income is calculated as A) GNP minus that part of it not actually paid to households, minus transfer payments to households. B) GNP minus that part of it not actually paid to households, plus personal income taxes paid by households. C) GNP minus that part of it not actually paid to households, plus transfer payments, minus personal income taxes. D) equal to the gross wages plus salaries received by the household. E) equal to the gross wages plus interest received by the household. Answer: C Explanation:

79)

A) B) C) D) E)

26

81)

82) A government transfer payment to a person is A) an important component of national income. B) considered a consumption expenditure. C) included in disposable income measures but not national income. D) considered a component of G in the calculation of GDP. E) evidence that government expenditures are too high. Answer: C Explanation:

A) B) C) D) E)

83) Suppose you are hired as a consultant to estimate the increase in consumer demand for automobiles for the coming year. Which measure of aggregate income would be most useful to you for this type of forecasting? A) Gross Domestic Product B) Net National Product C) GDP Deflator D) Disposable Income E) Gross National Product Answer: D Explanation:

83)

A) B) C) D) E)

84) The best measure of total income received by Canadian citizens is A) net domestic income at factor cost. B) nominal GDP. C) real GDP. D) disposable personal income. E) GNP. Answer: E Explanation:

82)

A) B) C) D) E)

27

84)

85) Which of the following is the most appropriate measure for evaluating the average material living standards of Canadian residents? A) disposable income B) per capita Net National Product C) Net Domestic Income at Factor Cost D) per capita Gross Domestic Product E) per capita Gross National Product Answer: E Explanation:

85)

A) B) C) D) E)

The table below provides national-income data for an economy for a one-year period (billions of dollars). Gross domestic product (GDP) Depreciation Retained earnings Personal income taxes Sales taxes Foreign-generated income received by Canadians Canadian-generated income going to foreigners Transfers to households

500 22 7 200 30 24 30 85

TABLE 20-4 86) Refer to Table 20-4. What is the gross national product (GNP) for this economy? A) $270 billion B) $300 billion C) $355 billion D) $494 billion E) $506 billion Answer: D Explanation:

A) B) C) D) E)

28

86)

87) Refer to Table 20-4. What is the value of personal disposable income in this economy? A) $234 billion B) $240 billion C) $320 billion D) $326 billion E) $333 billion Answer: C Explanation:

A) B) C) D) E)

88) Refer to Table 20-4. Assume that consumption expenditure in this economy over the one-year period is $290 billion. What is the level of saving during that year? A) - $56 billion B) - $50 billion C) $30 billion D) $36 billion E) $43 billion Answer: C Explanation:

88)

A) B) C) D) E)

89) Historically, nominal GDP has increased faster than real GDP because A) the general price level has fallen. B) improvements in product quality have not been reflected in prices. C) exports have risen more rapidly than imports. D) imports have risen more rapidly than exports. E) the general price level has increased. Answer: E Explanation:

87)

A) B) C) D) E)

29

89)

90) Real GDP is equivalent to A) the money value of all goods and services produced in an economy per year plus imports. B) the market value of all goods and services produced in an economy per year. C) personal disposable income plus depreciation. D) the value of all goods and services produced in an economy per year adjusted for price changes. E) the nominal value of GNP multiplied by the GDP deflator. Answer: D Explanation:

A) B) C) D) E)

91) Suppose that nominal national income in some country fell from $100 billion to $95 billion during the year. Over the same period, inflation was 5%. Therefore the real national income in this country A) fell by 10%. B) fell by 5%. C) was unaffected. D) rose by 5%. E) rose by 10%. Answer: A Explanation:

91)

A) B) C) D) E)

92) Suppose that nominal national income in some country increased by 10% during the year, when inflation was 5%. Therefore the real national income A) fell by 10%. B) fell by 5%. C) was unaffected. D) rose by 5%. E) rose by 10%. Answer: D Explanation:

90)

A) B) C) D) E)

30

92)

The table below shows total output for an economy over 2 years. 2012 Good A Good B Good C

Price $1.00 $2.00 $5.00

Quantity 100 units 200 units 100 units

2013 Good A Good B Good C

Price $2.00 $3.00 $10.00

Quantity 120 units 200 units 98 units

TABLE 20-5 93) Refer to Table 20-5. The nominal Gross Domestic Product in 2013 was A) $ 700. B) $ 840. C) $ 980. D) $1740. Answer: E Explanation:

A) B) C) D) E)

94) Refer to Table 20-5. The real GDP in 2013, expressed in 2012 prices, was A) $ 700. B) $ 840. C) $ 970. D) $1010. Answer: D Explanation:

93) E) $1820.

94) E) $1740.

A) B) C) D) E)

95) Refer to Table 20-5. The implicit GDP deflator in 2013, when 2012 is used as the base year, was approximately A) 105. B) 160. C) 180. D) 193. E) 203. Answer: C Explanation:

A) B) C) D) E)

96) Refer to Table 20-5. If the output of all three goods is consumed in the country, and if 2012 is used as the base year, then the consumer price index (CPI) in 2013 was approximately A) 102. B) 180. C) 179. D) 193. E) 418. Answer: B Explanation:

95)

A) B) C) D) E) 31

96)

97) Refer to Table 20-5. If 2012 is the base year, the GDP deflator in 2012 was A) 100. B) 102. C) 180. D) 193. Answer: A Explanation:

97) E) 1000.

A) B) C) D) E)

The table below shows the total output and prices for an economy that produces only two goods, potatoes and oil. Data is provided for the years 2000 and 2010.

2000 2010

Quantities Produced Potatoes Oil (kilograms) (barrels) 1000 50 1100 65

Prices Potatoes Oil ($/kilogram) ($/barrrel) 4 55 6 60

TABLE 20-6 98) Refer to Table 20-6. What is the real GDP for 2010 if 2000 is the base year? A) $6750 B) $7975 C) $9000 D) $10 500 Answer: B Explanation:

A) B) C) D) E)

99) Refer to Table 20-6. What is the real GDP for 2000 if 2010 is the base year? A) $6750 B) $7975 C) $9000 D) $10 500 Answer: C Explanation:

98) E) $20 100

A) B) C) D) E)

32

99) E) $20 100

The table below shows total output for an economy over 3 years. Year 2010 2011 2012

Money GDP* $ ________ $820 000 $855 000

Deflator 105 106 ________

Real GDP** $760 000 $________ $800 000

* millions of dollars ** real GDP measured in millions of 2002 dollars TABLE 20-7 100) Refer to Table 20-7. The nominal Gross Domestic Product in 2010 was A) $700 000. B) $724 000. C) $774 000. D) $798 000. Answer: D Explanation:

A) B) C) D) E)

101) Refer to Table 20-7. The real GDP in 2011, expressed in 2002 prices, was A) $773 585. B) $798 000. C) $800 000. D) $869 200. Answer: A Explanation:

102) E) 110.

A) B) C) D) E)

103) Refer to Table 20-7. The growth rate of nominal output from 2010 to 2011 is A) 2.76%. B) 3.36%. C) 4.09%. D) 4.27%. Answer: A Explanation:

101) E) $900 000.

A) B) C) D) E)

102) Refer to Table 20-7. The implicit GDP deflator for 2012 is approximately A) 94. B) 107. C) 108. D) 109. Answer: B Explanation:

100) E) $820 000.

A) B) C) D) E)

33

103) E) 5.00%.

104) Refer to Table 20-7. The growth rate of real output from 2011 to 2012 is A) 1.03%. B) 1.84%. C) 3.25%. D) 3.41%. Answer: D Explanation:

104) E) 4.27%.

A) B) C) D) E)

The table below shows total output for an economy over 2 years. 2011 coconuts bananas pineapples

Price $1.00 $3.00 $6.00

Quantity 100 units 200 units 100 units

2012 coconuts bananas pineapples

Price $2.00 $4.00 $8.00

Quantity 120 200 90

TABLE 20-8 105) Refer to Table 20-8. The nominal Gross Domestic Product in 2012 was A) $1760. B) $1500. C) $1300. D) $1260. Answer: A Explanation:

A) B) C) D) E)

106) Refer to Table 20-8. The real GDP in 2012, expressed in 2011 prices, was A) $1760. B) $1500. C) $1300. D) $1260. Answer: D Explanation:

105) E) $410.

106) E) $410.

A) B) C) D) E)

107) Refer to Table 20-8. The implicit GDP deflator in 2012 (using 2011 as the base year) is A) 71.59. B) 100. C) 103.4. D) 114.6. E) 139.7. Answer: E Explanation:

A) B) C) D) E)

34

107)

108) Refer to Table 20-8. The implicit GDP deflator in 2012 (using 2012 as the base year) is A) 71.59. B) 100. C) 103.4. D) 114.6. E) 139.7. Answer: B Explanation:

108)

A) B) C) D) E)

FIGURE 20-1 109) Refer to Figure 20-1. Which of the following years was used as the base year for constructing real GDP? A) 1990 B) 1995 C) 2000 D) 2003 E) 2005 Answer: D Explanation:

A) B) C) D) E)

110) Refer to Figure 20-1. Nominal GDP increased by approximately ________% between 1995 and 2000. A) 20 B) 45 C) 65 D) 85 E) 100 Answer: B Explanation:

109)

A) B) C) D) E)

35

110)

111) Refer to Figure 20-1. Real GDP increased by approximately ________% between 1995 and 2000. A) 9 B) 17 C) 35 D) 52 E) 75 Answer: B Explanation:

A) B) C) D) E)

112) If nominal GDP in some year is $3800 and the GDP deflator for the same year is 152, then the real GDP for that year is A) $2280. B) $2500. C) $3500. D) $3800. E) $5776. Answer: B Explanation:

113)

E) 2 and 3

A) B) C) D) E)

114) Consider Canada's GDP deflator and Consumer Price Index (CPI). Now suppose the prices of the following goods and services increased. Which is likely to have a larger effect on the GDP deflator than the CPI? A) bananas B) chocolate C) Hollywood movies D) consumer electronics E) forest products Answer: E Explanation:

112)

A) B) C) D) E)

113) A country's computed GDP deflator 1) excludes the changes in the price of imported goods; 2) is less relevant than the measured CPI for the typical consumer; 3) is set to be equal to 100 in its base year. A) 1 only B) 2 only C) 1, 2, and 3 D) 1 and 3 Answer: C Explanation:

111)

A) B) C) D) E)

36

114)

115) Consider Canada's GDP deflator and Consumer Price Index (CPI). Now suppose the prices of the following goods and services increased. Which is likely to have a larger effect on the CPI than the GDP deflator? A) consumer electronics B) lumber C) car parts D) aircraft engines E) engineering services Answer: A Explanation:

A) B) C) D) E)

116) One major reason that GDP is an inaccurate measure of the true level of economic activity is that A) people frequently buy things they do not want. B) it is statistically very inaccurate. C) it does not include non-market activities. D) it cannot be adjusted for changes in prices. E) it includes net exports. Answer: C Explanation:

116)

A) B) C) D) E)

117) One major reason that GDP is an inaccurate measure of the "quality of life" is that A) people frequently buy things they do not want. B) it does not include the value of leisure. C) it is statistically very inaccurate. D) it cannot be adjusted for changes in prices. E) it includes net exports. Answer: B Explanation:

115)

A) B) C) D) E)

37

117)

118) One reason that real GDP tends to overstate the economic well-being of the country's residents is that it ignores A) the costs of increased leisure time. B) the market-based activity done from the home. C) the economic "bads" associated with production, such as pollution. D) non-market activities, such as teenaged-babysitting services. E) illegal activities, such as the drug trade. Answer: C Explanation:

A) B) C) D) E)

119) Measures of GDP may understate the economic well-being of people in developing countries if those countries tend to A) import much more than they export. B) have a high degree of foreign direct investment. C) emphasize agricultural and resource-based production. D) have very high rates of pollution. E) have a large share of nonmarket activities. Answer: E Explanation:

119)

A) B) C) D) E)

120) Which of the following statements about the underground economy and how it relates to GDP is correct? A) Activity in the underground economy is Canada is estimated at over 25% of the value of GDP, which therefore significantly understates total output. B) Transactions in the underground economy are not legal, are not reported for tax purposes, and therefore not included in GDP. C) Transactions in the underground economy are legal but are not reported for tax purposes, and therefore not included in GDP. D) Activity in the underground economy is illegal and therefore should not be included in any measure of legitimate economic activity. E) Transactions in the underground economy are legal and therefore an estimate of their total value is included in GDP. Answer: C Explanation:

118)

A) B) C) D) E)

38

120)

121) Which of the following is included in current calculations of GDP? A) computers produced here and exported to Europe B) the value of a vintage automobile purchased from the previous owner C) volunteer work D) the value of vegetables consumed by the home gardener E) welfare payments Answer: A Explanation:

A) B) C) D) E)

122) Statistics Canada excludes from GDP the value of goods and services exchanged "under the counter" because A) Statistics Canada is responsible for making an ethical decision about which activities to exclude from national income measures. B) satisfactory methods for their measurement have not been developed. C) their production has zero opportunity cost. D) these goods are all intermediate goods. E) these goods do not contribute to well-being. Answer: B Explanation:

122)

A) B) C) D) E)

123) Why are illegal activities, unreported activities, and non-market activities excluded from GDP? A) They do not contribute to human welfare. B) They do not have an opportunity cost. C) They are difficult to measure. D) The do not contribute to the true national output of goods and services. E) They are morally repugnant. Answer: C Explanation:

121)

A) B) C) D) E)

39

123)

124) Which of the following is excluded from GDP? A) the labour services provided by a police officer in the narcotics squad B) the purchase of new computers by a police department C) the repairs to a police car after damage as a result of a high speed chase D) the labour supplied by a lawyer to defend a suspect charged with a criminal offense E) the purchase price of illegal drugs sold by a drug dealer Answer: E Explanation:

A) B) C) D) E)

125) Using GDP as a measure of the economic well-being of a country can be criticized for ignoring non-market and other activities. However, it remains useful because A) GDP is the best measure we have of the effects of economic "bads" on the well-being of the country. B) the change in GDP from one year to the next is a good indication of what rates of inflation and unemployment will be. C) it provides a good indication of household income distribution when measured from the income side. D) the change that is measured in GDP from one year to the next is a good indication of the change in economic activity. E) it is simply not possible to reform the current measure of GDP. Answer: D Explanation:

124)

A) B) C) D) E)

40

125)

Answer Key Testname: UNTITLED20

1) A 2) E 3) C 4) B 5) B 6) C 7) B 8) D 9) B 10) E 11) B 12) C 13) A 14) D 15) E 16) B 17) E 18) B 19) C 20) C 21) D 22) D 23) C 24) A 25) D 26) B 27) C 28) D 29) A 30) B 31) B 32) C 33) C 34) B 35) C 36) E 37) C 38) D 39) C 40) B 41) D 42) A 43) C 44) E 45) B 46) C 47) B 48) E 49) A 50) A 41

Answer Key Testname: UNTITLED20

51) D 52) C 53) C 54) D 55) D 56) D 57) D 58) C 59) A 60) D 61) C 62) C 63) B 64) D 65) D 66) D 67) B 68) D 69) E 70) D 71) A 72) D 73) D 74) A 75) D 76) C 77) E 78) B 79) D 80) D 81) C 82) C 83) D 84) E 85) E 86) D 87) C 88) C 89) E 90) D 91) A 92) D 93) E 94) D 95) C 96) B 97) A 98) B 99) C 100) D 42

Answer Key Testname: UNTITLED20

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125)

A B A D A D E B D B B B C E A C B C E C A B C E D

43

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) With respect to consumption, investment, government purchases and net exports, the national-income and product accounts measure A) desired expenditures in each of the categories. B) both actual and desired expenditures, since actual expenditure must equal desired expenditure in each category. C) the flow of saving at any income. D) neither actual nor desired expenditures. E) actual expenditures in each of the categories. Answer: E Explanation:

A) B) C) D) E)

2) For firms or individual households, desired expenditure is A) always greater than planned expenditure. B) always greater than actual expenditure. C) not relevant because human wants are unlimited. D) what they plan on spending, given the resources at their command. E) not a useful concept because it cannot be measured. Answer: D Explanation:

2)

A) B) C) D) E)

3) In the simple macroeconomic model, "autonomous expenditures" are A) dependent on national income. B) not dependent on national income. C) induced expenditures. D) those which are constant. E) non-domestic expenditures. Answer: B Explanation:

1)

A) B) C) D) E)

1

3)

4) Undesired or unplanned inventory accumulation is likely to occur when A) consumption exceeds investment. B) investment exceeds consumption. C) autonomous expenditure exceeds induced expenditure. D) desired aggregate expenditure exceeds actual aggregate expenditure. E) actual aggregate expenditure exceeds desired aggregate expenditure. Answer: E Explanation:

A) B) C) D) E)

5) Undesired or unplanned inventory decumulation is likely to occur when A) consumption exceeds investment. B) investment exceeds consumption. C) autonomous expenditure exceeds induced expenditure. D) desired aggregate expenditure exceeds actual aggregate expenditure. E) actual aggregate expenditure exceeds desired aggregate expenditure. Answer: D Explanation:

5)

A) B) C) D) E)

6) In each of the four expenditure categories, national income accounts measure ________ expenditures, while the theoretical model of the economy deals with ________ expenditures. A) actual; autonomous B) desired; actual C) induced; exogenous D) endogenous; exogenous E) actual; desired Answer: E Explanation:

4)

A) B) C) D) E)

2

6)

7) Consider the equation: AE = C + I + G + (X - IM). Which of the following statements correctly describes this sum? A) It is a summation of the desired expenditures on domestically produced output. B) It is a summation of actual expenditures and is equivalent to GDP. C) It is a summation of planned expenditures and is equal to nominal GDP. D) It is a summation of planned expenditures and is always equal to real GDP. E) It is a summation of the desired expenditures of domestic households, firms and government. Answer: A Explanation:

A) B) C) D) E)

8) In macroeconomics, the consumption function A) and the aggregate expenditure function are the same. B) describes the relationship between desired consumption expenditure and the factors that determine it, like national income. C) refers to the relationship between consumption expenditure and relative prices. D) refers to the relationship between an individual's consumption and his/her wealth. E) is relatively unimportant in macroeconomics, because consumption is such a small component of aggregate expenditure. Answer: B Explanation:

8)

A) B) C) D) E)

9) The consumption function is based on the assumption that as real disposable income rises, aggregate desired consumption A) will fall and desired saving will rise. B) will rise and desired saving will fall. C) and desired saving will both rise. D) remains constant and desired saving will rise. E) remains constant and desired saving will fall. Answer: C Explanation:

7)

A) B) C) D) E)

3

9)

10) In a simple macro model, an increase in households' wealth is generally assumed to A) cause no change in desired consumption because consumption is a function of disposable income only. B) cause no change in desired consumption because the increase is always expected. C) cause a downward shift in the aggregate consumption function. D) cause an upward shift in the aggregate consumption function. E) affect only desired saving, not desired consumption. Answer: D Explanation:

A) B) C) D) E)

11) In a simple macro model, a decrease in households' wealth is generally assumed to A) cause no change in consumption because consumption is a function of disposable income only. B) cause no change in consumption because the decline is always expected. C) cause a downward shift in the consumption function. D) cause an upward shift in the consumption function. E) affect only saving, not consumption. Answer: C Explanation:

11)

A) B) C) D) E)

12) Consider the consumption function in a simple macro model with no taxes. At the level of national income where APC = 1, the nation's households are A) consuming all of their disposable income. B) allocating their income equally between saving and consumption. C) saving a portion of their income, but saving is less than consumption. D) spending more than their current income. E) saving all of their disposable income. Answer: A Explanation:

10)

A) B) C) D) E)

4

12)

FIGURE 21-1 13) Refer to Figure 21-1. The APC will be equal to one (1.0) when disposable income is equal to A) 0. B) Y1 .

13)

C) Y2 . D) Y3 . E) desired saving. Answer: C Explanation:

A) B) C) D) E)

14) Refer to Figure 21-1. If disposable income is equal to Y3 , desired consumption expenditure is equal to A) Y3 E. Answer: B Explanation:

B) Y3 D.

C) Y 3F.

A) B) C) D) E)

5

D) Y3 .

E) DE.

14)

15) Refer to Figure 21-1. The marginal propensity to consume is equal to A) EF/Y2 Y3 . B) EF/DF. C) ED/CF. D) DF/Y 2Y 3. Answer: D Explanation:

15) E) ED/Y 2Y 3.

A) B) C) D) E)

16) Refer to Figure 21-1. If disposable income is Y3 , the level of desired saving is A) DE. Answer: A Explanation:

B) FD.

C) Y 3F.

D) Y3 D.

A) B) C) D) E)

17) Refer to Figure 21-1. The marginal propensity to save can be expressed as A) DE/Y 1Y 3. B) DE/Y2 Y3. C) DF/Y2 Y3. D) FE/Y1 Y3. Answer: B Explanation:

16) E) Y2 Y3 .

17) E) FE/Y2 Y3.

A) B) C) D) E)

18) Refer to Figure 21-1. Desired consumption expenditures will equal disposable income at an income level of A) zero. B) Y1 . C) Y2 . D) Y3 . E) more than Y 3. Answer: C Explanation:

A) B) C) D) E)

6

18)

19) Refer to Figure 21-1. If disposable income is zero, then A) autonomous desired consumption is 0A. B) autonomous desired consumption is 0Y1 .

19)

C) desired consumption must also be zero. D) the level of desired saving will be 0A. E) autonomous desired saving will be 0A. Answer: A Explanation:

A) B) C) D) E)

FIGURE 21-2 20) Refer to Figure 21-2. If disposable income is $3000, desired consumption expenditure is equal to A) $0. B) $500. C) $1000. D) $1500. E) $2000. Answer: E Explanation:

A) B) C) D) E)

7

20)

21) Refer to Figure 21-2. The APC will be equal to one (1.0) when disposable income is A) $0. B) $1000. C) $2000. D) $3000. E) Not enough information to determine. Answer: B Explanation:

21)

A) B) C) D) E)

22) Refer to Figure 21-2. Which of the following is the correct equation for the consumption function depicted in the figure? A) C = 500 + (2/3)YD B) C = (0.5)YD C) C = 1000 + (2/3)YD D) C = 500 + (0.5)YD E) C = 2000 + (2/3)YD Answer: D Explanation:

A) B) C) D) E)

23) Refer to Figure 21-2. The slope of the consumption function in the figure is equal to A) the marginal propensity to consume. B) the average propensity to consume. C) the marginal propensity to save. D) the average propensity to save. E) the slope of the 45-degree line. Answer: A Explanation:

23)

A) B) C) D) E)

24) Refer to Figure 21-2. The slope of the consumption function in the figure is equal to A) 1.0. B) 0.67. C) 0.5. D) -0.5. Answer: C Explanation:

22)

A) B) C) D) E)

8

24) E) -1.0.

25) Refer to Figure 21-2. The amount of desired consumption expenditure that is unrelated to the level of disposable income is A) $0. B) $500. C) $1000. D) $1500. E) $2000. Answer: B Explanation:

A) B) C) D) E)

26) Consider a consumption function of the following form: C = 50 + (0.6)YD. At what level of disposable income will desired savings be equal to zero? A) 31.25 B) 50 C) 83.33 D) 125 E) 208.33 Answer: D Explanation:

27)

A) B) C) D) E)

28) If the consumption function coincides with the 45-degree line, then we know that A) desired consumption is constant at all levels of disposable income. B) the marginal propensity to consume is less than one. C) the marginal propensity to consume is greater than one. D) desired consumption equals desired saving at all levels of disposable income. E) desired saving is zero at all levels of disposable income. Answer: E Explanation:

26)

A) B) C) D) E)

27) On a graph of a consumption function, what is the significance of the 45-degree line? A) It connects all points where desired consumption equals desired expenditure. B) It connects all points where desired consumption equals actual disposable income. C) It shows the slope of the average consumption function, against which we measure other consumption functions. D) It connects all points where desired consumption equals desired saving. E) Desired consumption is zero at all points along the 45-degree line. Answer: B Explanation:

25)

A) B) C) D) E)

9

28)

29) Consider a consumption function that is upward sloping but flatter than the 45-degree line. When real disposable income rises A) desired consumption will fall and saving will rise. B) desired consumption will rise and saving will fall. C) desired consumption and saving will both rise. D) desired consumption remains constant. E) saving remains constant. Answer: C Explanation:

A) B) C) D) E)

30) If a family's annual disposable income rose from $60 000 to $65 000 and their desired consumption expenditures rose from $50 000 to $54 000, it can be concluded that the family's A) marginal propensity to consume is $800. B) average propensity to consume is 0.8. C) marginal propensity to consume is 0.8. D) average propensity to save is 0.8. E) marginal propensity to save is 0.8. Answer: C Explanation:

Disposable Income 0 50 150 300

29)

30)

A) B) C) D) E) Desired Consumption 10 30 70 130

TABLE 21-1 31) Refer to Table 21-1. The marginal propensity to consume is equal to A) 0.8. B) 0.67. C) 0.6. D) 0.4. Answer: D Explanation:

A) B) C) D) E)

10

31) E) 0.2.

32) Refer to Table 21-1. The marginal propensity to save is equal to A) 0.2. B) 0.4. C) 0.6. D) 0.67. Answer: C Explanation:

Disposable Income 0 30 70 130

32) E) 0.8.

A) B) C) D) E)

Desired Consumption 10 34 66 114

TABLE 21-2 33) Refer to Table 21-2. The marginal propensity to save is equal to A) 0.8. B) 0.67. C) 0.6. D) 0.4. Answer: E Explanation:

A) B) C) D) E)

34) Refer to Table 21-2. The marginal propensity to consume is equal to A) 0.2. B) 0.4. C) 0.6. D) 0.67. Answer: E Explanation:

34) E) 0.8.

A) B) C) D) E)

35) Desired consumption divided by disposable income is called the A) average propensity to consume. B) average propensity to save. C) average propensity to spend. D) marginal propensity to save. E) total propensity to save. Answer: A Explanation:

33) E) 0.2.

A) B) C) D) E)

11

35)

36) Desired consumption expenditure divided by disposable income is called the A) consumption function. B) marginal propensity to consume. C) average propensity to consume. D) average propensity to save. E) relative consumption ratio. Answer: C Explanation:

A) B) C) D) E)

37) The "marginal propensity to consume" refers to the additional A) desired saving that occurs out of an additional dollar of disposable income. B) desired consumption that occurs out of an additional dollar of disposable income. C) desired consumption that occurs out of an additional dollar of investment. D) desired consumption caused by a change in tastes. E) desired consumption that occurs over time. Answer: B Explanation:

38)

A) B) C) D) E)

39) The marginal propensity to consume is defined to be A) the change in desired consumption divided by the change in saving. B) the change in desired consumption divided by total disposable income. C) the change in desired consumption divided by the change in disposable income. D) total desired consumption divided by total disposable income. E) total desired consumption divided by the change in disposable income. Answer: C Explanation:

37)

A) B) C) D) E)

38) The change in desired consumption divided by the change in disposable income that brought it about is called the A) average propensity to consume. B) average propensity not to consume. C) consumption function. D) marginal propensity to consume. E) marginal propensity not to spend. Answer: D Explanation:

36)

A) B) C) D) E) 12

39)

40) If the marginal propensity to consume (MPC) is equal to 0.9, an increase in household income causes desired consumption expenditure to A) rise by more than the increase in income. B) rise by the full increase in income. C) rise by less than the full increase in income. D) fall, as an increase in income will increase saving. E) remain constant, because the MPC is also constant. Answer: C Explanation:

A) B) C) D) E)

41) The consumption function is based on a number of assumptions. Given these assumptions, which of the following statements is true? A) Below a certain level of income, APC > 1 and MPC < 0. B) The MPC and APC are always less than unity. C) As income rises, the MPC falls and the APC rises. D) The MPC is greater than zero and less than one, and the APC falls as income rises. E) The APC is greater than zero and less than one, and the MPC falls as income rises. Answer: D Explanation:

41)

A) B) C) D) E)

42) The Smith family's disposable income rose from $40 000 per year to $42 000 and their desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that their A) average propensity to consume is 0.8. B) average propensity to save is 0.8. C) marginal propensity to consume is $800. D) marginal propensity to consume is 0.8. E) marginal propensity to save is 0.8. Answer: D Explanation:

40)

A) B) C) D) E)

13

42)

43) Jean Tremblay's disposable income rose from $40 000 per year to $42 000 and his desired consumption expenditure rose from $38 000 to $39 600. It can be concluded that his A) average propensity to consume decreased from 0.950 to 0.943. B) average propensity to save decreased from 0.950 to 0.943. C) marginal propensity to consume is 0.050. D) marginal propensity to consume increased from 0.050 to 0.058. E) marginal propensity to save is 0.80. Answer: A Explanation:

A) B) C) D) E)

44) Bob Tetley's disposable income rose from $40 000 per year to $42 000 and his desired consumption expenditure rose from $38 000 to $39 500. It can be concluded that his A) average propensity to consume is constant. B) average propensity to save is always 0.25. C) marginal propensity to consume decreased. D) marginal propensity to consume is 0.25. E) marginal propensity to save is 0.25. Answer: E Explanation:

44)

A) B) C) D) E)

45) Which of the following statements must be true in the simple macro model ? A) APC increases as income rises. B) APS decreases as income rises. C) MPS and MPC are both negative. D) MPC is negative below a certain level of income. E) The sum of MPC and MPS is one. Answer: E Explanation:

43)

A) B) C) D) E)

14

45)

46) If the Jones family's disposable income increases from $1200 to $1700 and their desired saving increases from -$100 to +$100, then the family's A) average propensity to consume is 0.60. B) average propensity to consume is 0.40. C) marginal propensity to consume is 0.40. D) marginal propensity to consume is 0.60. E) marginal propensity to save is 1. Answer: D Explanation:

A) B) C) D) E)

47) Total desired saving divided by total income is called the A) average propensity to consume. B) average propensity to save. C) average propensity to spend. D) marginal propensity to save. E) total propensity to save. Answer: B Explanation:

47)

A) B) C) D) E)

48) The marginal propensity to save refers to the A) additional saving that occurs out of an additional dollar of income. B) additional saving that occurs out of an additional dollar of investment. C) total saving divided by a change in income. D) change in saving divided by total income. E) additional saving that occurs over time. Answer: A Explanation:

46)

A) B) C) D) E)

15

48)

49) In a simple model of the economy, without government or taxes, a shock that causes an upward shift of the aggregate consumption function also causes ________ shift of the saving function. A) an equal upward B) a less-than-equal upward C) an equal downward D) a less-than-equal downward E) no Answer: C Explanation:

A) B) C) D) E)

50) When desired consumption exceeds disposable income, desired saving is ________; when desired consumption is less than the disposable income, desired saving is ________. A) negative; negative B) positive; negative C) negative; positive D) positive; positive E) zero; positive Answer: C Explanation:

50)

A) B) C) D) E)

51) Desired investment expenditure will generally fall as a result of which of the following changes? A) a decrease in business confidence B) a decrease in interest rates C) an increase in government purchases D) an increase in sales volume E) an increase in business confidence Answer: A Explanation:

49)

A) B) C) D) E)

16

51)

52) In the simple macro model, desired investment is assumed to be autonomous with respect to national income. Which of the following will cause a shift of the investment function? 1) a decrease in interest rates 2) an increase in firms' optimism about the economy 3) an expectation of a downturn in future economic activity A) 1 and 2 B) 2 and 3 C) 1 and 3 D) 1, 2, and 3 E) 1 only Answer: D Explanation:

A) B) C) D) E)

53) Investment expenditure is the ________ volatile component of GDP, and changes in investment are ________ associated with business-cycle fluctuations. A) most; strongly B) most; weakly C) least; strongly D) least; weakly E) least; not Answer: A Explanation:

53)

A) B) C) D) E)

54) A rise in the real rate of interest ________ the opportunity cost of holding an inventory of a given size, and therefore ________ desired investment expenditure. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; leaves unaffected E) decreases; decreases Answer: B Explanation:

52)

A) B) C) D) E)

17

54)

55) In Canada, as in many other countries, the largest component of domestic investment expenditure is A) plant and equipment. B) residential housing. C) inventories. D) financial assets. E) savings. Answer: A Explanation:

A) B) C) D) E)

56) Other things being equal, higher real interest rates tend to A) increase every component of desired investment expenditure. B) reduce every component of desired investment expenditure. C) reduce every component of desired investment expenditure except residential housing. D) reduce every component of desired investment expenditure except inventories. E) reduce every component of desired investment expenditure except plant and equipment. Answer: B Explanation:

56)

A) B) C) D) E)

57) In the simplest macroeconomic model, with a closed economy and no government, the aggregate expenditure (AE) function is the sum of A) saving and desired investment. B) consumption and disposable income. C) desired consumption and desired investment. D) consumption and saving. E) actual consumption and actual investment. Answer: C Explanation:

55)

A) B) C) D) E)

18

57)

58) Consider the simplest macroeconomic model, with a closed economy and no government. If we assume that desired investment is autonomous with respect to national income, then the investment function (which graphs desired investment against actual national income) will be A) negatively sloped. B) positively sloped and relatively steep. C) positively sloped and relatively flat. D) vertical. E) horizontal. Answer: E Explanation:

A) B) C) D) E)

59) The schedule that relates the level of desired total expenditures to the level of actual national income is called the A) consumption function. B) desired aggregate demand function. C) aggregate expenditure function. D) dissaving function. E) equilibrium function. Answer: C Explanation:

59)

A) B) C) D) E)

60) The increase in aggregate planned expenditures divided by the change in national income that brought it about is called the A) average propensity to consume. B) average propensity to save. C) marginal propensity to spend. D) marginal propensity to save. E) marginal propensity to consume. Answer: C Explanation:

58)

A) B) C) D) E)

19

60)

61) Suppose there is an increase in the marginal propensity to spend out of national income. The result will be A) a movement to the right along the AE curve. B) a movement to the left along the AE curve. C) an increase in the slope of the AE curve. D) a decrease in the slope of the AE curve. E) a parallel upward shift in the AE curve. Answer: C Explanation:

A) B) C) D) E)

62) A decrease in the marginal propensity to spend out of national income will cause A) a movement to the right along the AE curve. B) a movement to the left along the AE curve. C) an increase in the slope of the AE curve, which rotates it upward. D) a decrease in the slope of the AE curve, which rotates it downward. E) a parallel downward shift in the AE curve. Answer: D Explanation:

61)

A) B) C) D) E)

20

62)

FIGURE 21-3 63) Refer to Figure 21-3. Assuming AE0 is the prevailing aggregate expenditure function, the distance 0A is a measure of A) aggregate expenditure at equilibrium national income. B) autonomous desired expenditures. C) induced expenditures. D) desired saving. E) desired investment. Answer: B Explanation:

A) B) C) D) E)

21

63)

64) Refer to Figure 21-3. Assuming AE0 is the prevailing aggregate expenditure function, at a level of

64)

national income equal to Y3 we can state that A) consumption is greater than desired aggregate expenditure. B) consumption is less than desired aggregate expenditure. C) desired aggregate expenditure is greater than output. D) desired aggregate expenditure is less than output. E) desired saving is less than zero. Answer: D Explanation:

A) B) C) D) E)

65) Refer to Figure 21-3. In this demand-determined model of the macro economy, the price level is A) measured by Y 2/0B.

65)

B) measured by Y 1Y 2/AB. C) increasing as the economy moves from E0 to E1. D) assumed to be constant. E) derived from the slope of the AE function. Answer: D Explanation:

A) B) C) D) E)

66) Refer to Figure 21-3. If national income is Y 1 and the aggregate expenditure function is AE1 , then desired aggregate expenditure A) exceeds income and income will rise. B) exceeds income and income will fall. C) is less than income and income will rise. D) is equal to income and income will not change. E) is less than income and income will fall. Answer: A Explanation:

A) B) C) D) E)

22

66)

67) Refer to Figure 21-3. If national income is Y 3 and the aggregate expenditure function is AE1 ,

67)

A) the economy is in equilibrium. B) there is unintended inventory accumulation and income will rise. C) there is unintended inventory accumulation and income will fall. D) there is unintended inventory decumulation and income will rise. E) there is unintended inventory decumulation and income will fall. Answer: C Explanation:

A) B) C) D) E)

68) Refer to Figure 21-3. If national income is Y 1 and the aggregate expenditure function is AE1 ,

68)

A) the economy is in equilibrium. B) there is unintended inventory accumulation and income will rise. C) there is unintended inventory accumulation and income will fall. D) there is unintended inventory decumulation and income will rise. E) there is unintended inventory decumulation and income will fall. Answer: D Explanation:

A) B) C) D) E)

69) The aggregate expenditure (AE) function is an upward-sloping curve that describes A) the amount spent on an economy's output at each national income. B) what firms and households would like to spend at each level of national income. C) what an economy would like to spend, in the absence of income constraints, at each level of output. D) what is actually spent on an economy's output at each level of output. E) what is actually spent at each level of national income. Answer: B Explanation:

A) B) C) D) E)

23

69)

70) In general, the marginal propensity to spend is the change in total desired expenditure induced by a change in ________ whereas the marginal propensity to consume is the change in desired consumption expenditure induced by a change in ________. In the case of the simplest macro model with no government and no international trade, however, the marginal propensity to spend is ________ the marginal propensity to consume. A) national income; disposable income; greater than B) national income; disposable income; equal to C) disposable income; national income; equal to D) disposable income; national income; greater than E) national income; disposable income; smaller than Answer: B Explanation:

A) B) C) D) E)

71) Consider the following aggregate expenditure function: AE = $300 billion + (0.87)Y. Assuming that we have no government, no international trade and desired investment is autonomous and is equal to $56 billion, then which of the following is the correct statement of the consumption function? A) C = $356 billion + (0.87)Y B) C = $356 billion + (0.13)Y C) C = $244 billion + (0.87)Y D) C = $244 billion + (0.13)Y E) C = $300 billion + (0.13)Y Answer: C Explanation:

70)

A) B) C) D) E)

24

71)

FIGURE 21-3 72) Refer to Figure 21-3. All points along the 45-degree line represent A) combinations of desired aggregate expenditure and actual national income where consumption expenditure equals saving. B) the equilibrium condition that desired aggregate expenditure equals actual national income. C) levels of actual national income where desired AE is equal to the sum of desired consumption and desired investment. D) levels of actual national income that occur when autonomous expenditure is increasing at a constant (linear) rate. E) levels of actual national income where desired saving is equal to zero. Answer: B Explanation:

A) B) C) D) E)

25

72)

73) Refer to Figure 21-3. Consider the simplest macro model with no government and no foreign trade, and the aggregate expenditure function AE = C + I. If there was zero autonomous expenditure and the marginal propensity to consume was equal to one, then the AE function would be A) steeper than the 45-degree line. B) above the 45-degree line at all points. C) below the 45-degree line at all points. D) coincident with the 45-degree line. E) flatter than the 45-degree line. Answer: D Explanation:

A) B) C) D) E)

74) Consider the simplest macro model with demand-determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $920 billion. We can expect that A) firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income. B) firms will decrease autonomous investment by $20 billion until equilibrium national income is reached at $900 billion. C) firms will increase autonomous investment by $20 billion until equilibrium national income is reached at $920 billion. D) firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income. E) actual national income will decrease until equilibrium national income is reached at $900 billion. Answer: D Explanation:

73)

A) B) C) D) E)

26

74)

75) Consider the simplest macro model with demand-determined output, where AE = C + I. Suppose that actual national income is $900 billion and desired consumption plus desired investment is $890 billion. We can expect that A) firms will see a decrease in inventories, and they will respond by increasing output, thereby increasing actual national income. B) firms will decrease autonomous investment by $10 billion until equilibrium national income is reached at $890 billion. C) firms will increase autonomous investment by $10 billion until equilibrium national income is reached at $900 billion. D) actual national income will increase until equilibrium national income is reached at $900 billion. E) firms will see an increase in inventories, and they will respond by decreasing output, thereby decreasing actual national income. Answer: E Explanation:

75)

A) B) C) D) E)

Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. the equilibrium condition is Y = C + I the marginal propensity to consume is 0.90 the autonomous part of C is $300 investment is autonomous and is $100

1. 2. 3. 4. TABLE 21-3

76) Refer to Table 21-3. The equilibrium level of national income will be A) $3000. B) $3600. C) $3900. D) $4000. Answer: D Explanation:

76) E) $4400.

A) B) C) D) E)

77) Refer to Table 21-3. At the equilibrium level of national income, desired consumption expenditure will be A) $300. B) $400. C) $3900. D) $3600. E) $4000. Answer: C Explanation:

A) B) C) D) E)

27

77)

78) Refer to Table 21-3. At the equilibrium level of national income, desired investment is A) $100. B) $4000. C) $3900. D) $400. E) $1000. Answer: A Explanation:

A) B) C) D) E)

79) Refer to Table 21-3. At the equilibrium level of national income, desired saving is A) $100. B) $300. C) $4000. D) $3900. Answer: A Explanation:

79) E) $1000.

A) B) C) D) E)

80) Refer to Table 21-3. Suppose this economy is in equilibrium. There is then a significant decline in house prices across the country. The likely effect is A) autonomous consumption will rise above $300 and equilibrium national income will therefore rise. B) autonomous saving will fall and equilibrium national income will therefore fall. C) autonomous saving will rise and equilibrium national income will therefore rise. D) autonomous investment will rise and equilibrium national income will therefore rise. E) autonomous consumption will fall below $300 and equilibrium national income will therefore fall. Answer: E Explanation:

78)

80)

A) B) C) D) E)

Consider the following information describing a closed economy with no government and where aggregate output is demand determined. All dollar figures are in billions. the equilibrium condition is Y = C + I the marginal propensity to save = 0.25 the autonomous part of C is $30 investment is autonomous and is $40

1. 2. 3. 4. TABLE 21-4

81) Refer to Table 21-4. The equilibrium level of national income will be A) $ 70. B) $ 93. C) $120. D) $160. Answer: E Explanation:

A) B) C) D) E) 28

81) E) $280.

82) Refer to Table 21-4. At the equilibrium level of national income, desired consumption expenditure will be A) $ 30. B) $ 70. C) $210. D) $240. E) $280. Answer: D Explanation:

A) B) C) D) E)

83) Refer to Table 21-4. At the equilibrium level of national income, desired saving will be A) zero. B) $ 40. C) $ 70. D) $200. E) $240. Answer: B Explanation:

84)

A) B) C) D) E)

85) In a simple macro model with no government and no foreign trade, the equilibrium level of national income is the level of income at which A) aggregate desired expenditure is greater than actual national income. B) aggregate desired expenditure equals actual national income. C) aggregate desired expenditure equals consumer spending. D) saving equals income. E) saving equals consumer spending. Answer: B Explanation:

83)

A) B) C) D) E)

84) Consider a simple macro model with demand-determined output. At the equilibrium level of national income, A) consumers' purchases of goods and services equal firms' purchases of investment goods. B) firms will hold no inventories of raw materials or final goods. C) desired aggregate expenditures will equal total output. D) desired aggregate expenditures will equal total output minus inventory holdings. E) consumers' purchases of goods and services equals their saving. Answer: C Explanation:

82)

A) B) C) D) E)

29

85)

86) In a simple model of the economy with demand-determined output, the equilibrium level of national income is at an income A) to the right of the point where the AE curve intersects the 45-degree line. B) to the left of the point where the AE curve intersects the 45-degree line. C) where aggregate desired expenditure equals the value of total output. D) where aggregate desired expenditure equals consumption. E) where saving equals consumption. Answer: C Explanation:

A) B) C) D) E)

87) In a simple macro model with demand-determined output, the equilibrium level of national income is at an income A) to the left of the point where the AE curve intersects the 45-degree line. B) where the AE curve intersects the 45-degree line. C) to the right of the point where the AE curve intersects the 45-degree line. D) where saving equals consumption. E) where saving equals income. Answer: B Explanation:

87)

A) B) C) D) E)

88) Consider the simplest macro model with a constant price level and demand-determined output. If desired aggregate expenditure is less than actual national income, then A) inventories begin to fall, causing firms to increase production. B) actual national income is below the equilibrium level. C) actual national income must be above the equilibrium level. D) actual national income must be at equilibrium. E) inventories begin to fall, causing national income to fall. Answer: C Explanation:

86)

A) B) C) D) E)

30

88)

89) Consider the simplest macro model with demand-determined output. If desired aggregate expenditure is greater than actual national income, then A) inventories will likely begin to fall, causing firms to increase production. B) actual national income must be less than the equilibrium level. C) actual national income must be greater than the equilibrium level. D) inventories will likely begin to rise, causing firms to reduce production. E) both A and B are correct. Answer: E Explanation:

A) B) C) D) E)

90) In a simple macro model with the price level assumed to be constant, a change in firms' level of desired investment is predicted to influence equilibrium national income by A) shifting the saving function. B) shifting the consumption function. C) shifting the aggregate expenditure function. D) causing movement along the investment function. E) shifting the 45-degree line. Answer: C Explanation:

90)

A) B) C) D) E)

91) Consider a simple macro model with a constant price level and demand-determined output. In such a model, the level of national income will A) tend to rise if desired aggregate expenditure is less than actual national income. B) remain constant if savings equals consumption. C) be in equilibrium if all of the resources of the economy are fully employed. D) remain constant if firms are accumulating inventories. E) tend to rise if firms have unplanned decumulation of inventories. Answer: E Explanation:

89)

A) B) C) D) E)

31

91)

92) If national income is demand-determined, the condition for national income to be in equilibrium can be stated as A) unemployment must equal the natural unemployment rate. B) AE must be greater than Y. C) desired saving equals actual investment. D) actual saving equals actual investment. E) desired aggregate expenditure equals the actual level of national income. Answer: E Explanation:

A) B) C) D) E)

93) Consider the simplest macro model with a constant price level and demand-determined output. If national income is less than its equilibrium level, it is likely that firms' inventories are ________, and so national income tends to ________. A) accumulating; rise B) accumulating; fall C) being depleted; rise D) being depleted; fall E) constant; fall Answer: C Explanation:

93)

A) B) C) D) E)

94) Consider a simple macro model with a constant price level and demand-determined output. If national income is above its equilibrium level, it is likely that inventories are ________, and so national income tends to ________. A) accumulating; rise B) accumulating; fall C) being depleted; rise D) being depleted; fall E) constant: fall Answer: B Explanation:

92)

A) B) C) D) E)

32

94)

Consider the following information describing an economy with demand-determined output. There is no government or foreign trade. All dollar figures are in billions. equilibrium condition is Y = C + I marginal propensity to save = 0.20 the autonomous part of C is $50 investment is autonomous and equals $25

1. 2. 3. 4. TABLE 21-5

95) Refer to Table 21-5. The equilibrium level of national income is A) $375. B) $249. C) $155. D) $75. Answer: A Explanation:

95) E) $93.75.

A) B) C) D) E)

96) Refer to Table 21-5. At the equilibrium level of national income, what is the level of desired consumption expenditures? A) $68.75 B) $125 C) $150 D) $350 E) $375 Answer: D Explanation:

A) B) C) D) E)

97) Refer to Table 21-5. At the equilibrium level of national income, the level of desired saving will be A) equal to consumption expenditures. B) $375. C) $50. D) $25. E) $0 Answer: D Explanation:

96)

A) B) C) D) E)

33

97)

98) Consider a simple macro model with a constant price level and demand-determined output. Suppose the level of actual national income is less than desired aggregate expenditure. In this case, A) inventories will build up, causing national income to rise. B) national income will fall, because desired expenditures are less than actual expenditures. C) shortages of goods and reductions in inventories will cause producers to increase output and national income to rise. D) national income may increase or decrease, depending on the relative sizes of the average propensity to consume and the average propensity to save. E) there will be no change in national income because only actual expenditure is relevant. Answer: C Explanation:

A) B) C) D) E)

99) Consider a simple macro model with a constant price level and demand-determined output. Suppose desired aggregate expenditures are less than the current level of national income. The vertical distance between the AE curve and the 45-degree line represents A) desired accumulation of inventories. B) desired decumulation of inventories. C) the amount by which output exceeds desired expenditures. D) the output gap. E) the amount by which desired expenditures exceeds output. Answer: C Explanation:

99)

A) B) C) D) E)

100) Consider a simple macro model with a constant price level and demand-determined output. If the simple multiplier is 3 and there is a $2 million increase in autonomous investment spending, then the equilibrium level of income will increase by A) $1.2 million. B) $2 million C) $3 million. D) $4.5 million. E) $6 million. Answer: E Explanation:

98)

A) B) C) D) E)

34

100)

101) Consider an exogenous increase in the real interest rate in the simple macro model. This will tend to cause ________ in desired consumption and ________ in desired investment. A) an increase; an increase B) an increase; a decrease C) a decrease; a decrease D) a decrease; no change E) a decrease; an increase Answer: C Explanation:

A) B) C) D) E)

102) Consider a simple macro model with a constant price level and demand-determined output. In such a model, a downward shift of the saving function causes equilibrium national income to A) fall because the AE function shifts downward simultaneously. B) rise because the AE function shifts upward simultaneously. C) remain constant but consist of more consumption and less investment. D) remain constant but consist of less consumption and more investment. E) remain constant because it does not affect desired aggregate expenditure. Answer: B Explanation:

102)

A) B) C) D) E)

103) Consider the simplest macro model with a constant price level and demand-determined output. In such a model, an upward shift of the saving function causes equilibrium national income to A) fall because the AE function shifts downward simultaneously. B) rise because the AE function shifts upward simultaneously. C) remain constant but consist of more consumption and less investment. D) remain constant but consist of less consumption and more investment. E) remain constant because it does not affect desired aggregate expenditure. Answer: A Explanation:

101)

A) B) C) D) E)

35

103)

FIGURE 21-3 104) Refer to Figure 21-3. A shift in the aggregate expenditure function from AE0 to AE1 could be

104)

caused by A) a rise in the multiplier. B) a fall in the marginal propensity to consume. C) a rise in the marginal propensity to consume. D) an increase in desired investment expenditures. E) a decrease in desired investment expenditures. Answer: D Explanation:

A) B) C) D) E)

105) Refer to Figure 21-3. A shift in the aggregate expenditure function downward from AE1 to AE0 could be caused by A) a rise in the multiplier. B) a fall in the marginal propensity to consume. C) a rise in the marginal propensity to consume. D) an increase in autonomous desired saving. E) a decrease in autonomous desired saving. Answer: D Explanation:

A) B) C) D) E) 36

105)

106) Refer to Figure 21-3. The simple multiplier could be measured by the ratio A) Y1 /0A.

106)

B) Y2 /0B. C) Y1 Y2 /AB. D) BA/Y 1. E) 1/(Y2 - Y1 ). Answer: C Explanation:

A) B) C) D) E)

107) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the increase in expenditure in this economy during the initial first round of spending? A) $75 million B) $25 million C) $100 million D) $400 million E) $500 million Answer: C Explanation:

A) B) C) D) E)

108) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the increase in expenditure in this economy during the second round of spending? A) $25 million B) $100 million C) $400 million D) $75 million E) $500 million Answer: D Explanation:

107)

A) B) C) D) E)

37

108)

109) Consider the simplest macro model with demand-determined output. Suppose an increase in business confidence leads firms to increase investment in new equipment by $100 million. The marginal propensity to spend in this economy is 0.75. What is the eventual total new expenditure in this economy due to the increase in investment? A) $75 million B) $100 million C) $25 million D) $500 million E) $400 million Answer: E Explanation:

A) B) C) D) E)

110) The simple multiplier, which applies to short-run situations in which the price level is constant, describes changes in A) investment induced by changes in equilibrium income. B) saving caused by changes in investment. C) the equilibrium level of national income caused by changes in autonomous expenditure. D) the rate of interest caused by increased demand for credit. E) employment induced by changes in equilibrium income. Answer: C Explanation:

110)

A) B) C) D) E)

111) Consider a simple macro model with a constant price level and demand-determined output. Using this model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the A) average propensity to save. B) marginal propensity to save. C) equilibrium level of national income. D) simple multiplier. E) reciprocal of the marginal propensity to spend. Answer: D Explanation:

109)

A) B) C) D) E)

38

111)

112) The simple multiplier applies to short-run situations in which the price level is constant. The simple multiplier can be defined as A) national income divided by aggregate expenditure. B) the change in equilibrium national income divided by the initial change in autonomous expenditure that brought it about. C) the change in national income resulting from a change in expenditure, multiplied by the number of years since the initial change. D) a change in aggregate expenditures multiplied by the equilibrium level of national income. E) the change in national income resulting from a change in saving. Answer: B Explanation:

A) B) C) D) E)

113) In a simple macro model with demand-determined output, the simple multiplier is equal to 1/(1-z), where z equals the A) average propensity to spend. B) average propensity not to spend. C) level of autonomous expenditure. D) marginal propensity to spend. E) marginal propensity not to spend. Answer: D Explanation:

113)

A) B) C) D) E)

114) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is zero, the simple multiplier is A) zero. B) a positive number between zero and one. C) one. D) a positive number greater than one but less than infinity. E) infinitely large. Answer: C Explanation:

112)

A) B) C) D) E)

39

114)

115) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is one, the simple multiplier is A) zero. B) a positive number between zero and one. C) one. D) a positive number greater than one but less than infinity. E) infinitely large. Answer: E Explanation:

A) B) C) D) E)

116) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is between zero and one, the simple multiplier is A) zero. B) a positive number between zero and one. C) one. D) a positive number greater than one but less than infinity. E) infinitely large. Answer: D Explanation:

117)

A) B) C) D) E)

118) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is 0.4, the simple multiplier is A) 0. B) 0.4. C) 1.67. D) 2.5. E) 4.0. Answer: C Explanation:

116)

A) B) C) D) E)

117) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is 0.6, the simple multiplier is A) 0. B) 0.6. C) 1.67. D) 2.5. E) 6.0 Answer: D Explanation:

115)

A) B) C) D) E)

40

118)

119) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend in such a model is 0.8, the simple multiplier is A) 0. B) 0.8. C) 1.25. D) 5.0. E) 8.0. Answer: D Explanation:

A) B) C) D) E)

120) Consider a simple macro model with demand-determined output. If z is the marginal propensity to spend out of national income, Y is national income and A is autonomous expenditure, then the simple multiplier is equal to A) z. B) 1 - z. C) 1/z. D) 1/(1-z). E) Y/(1-z). Answer: D Explanation:

121)

A) B) C) D) E)

122) Consider a simple macro model with demand-determined output. In such a model, the smaller the marginal propensity to spend, the A) smaller the MPS. B) smaller the simple multiplier. C) larger is investment. D) larger the MPC. E) larger the simple multiplier. Answer: B Explanation:

120)

A) B) C) D) E)

121) Consider a simple macro model with demand-determined output. In such a model, the larger the marginal propensity to spend, the A) larger the MPC. B) smaller the MPS. C) smaller the simple multiplier. D) larger the simple multiplier. E) greater is investment. Answer: D Explanation:

119)

A) B) C) D) E)

41

122)

123) Consider a simple macro model with demand-determined output. In such a model, the multiplier is larger, the A) higher the level of autonomous expenditures. B) steeper is the AE function. C) flatter is the AE function. D) lower the APC. E) lower the level of autonomous expenditures. Answer: B Explanation:

A) B) C) D) E)

124) Consider a simple macro model with demand-determined output. Using such a model, if economists want to estimate the effect of a given change in desired investment on equilibrium national income, they would multiply the change in desired investment by the reciprocal of one minus A) the average propensity to save. B) the marginal propensity to save. C) the equilibrium level of national income. D) the marginal propensity not to spend. E) the marginal propensity to spend. Answer: E Explanation:

125)

A) B) C) D) E)

126) Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $20 billion, the marginal propensity to spend must be A) 2/5. B) 1/3. C) 1/2. D) 2/3. E) 4/5. Answer: E Explanation:

124)

A) B) C) D) E)

125) Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $12 billion, the marginal propensity to spend must be A) 2/5. B) 1/3. C) 1/2. D) 2/3. E) 4/5. Answer: D Explanation:

123)

A) B) C) D) E)

42

126)

127) Suppose aggregate output is demand-determined. If the business community decreases its planned investment expenditures by $4 billion, causing equilibrium national income to fall by $8 billion, the marginal propensity to spend must be A) 2/5. B) 1/3. C) 1/2. D) 2/3. E) 4/5. Answer: C Explanation:

A) B) C) D) E)

128) Consider the simplest macro model in which aggregate output is demand-determined. If autonomous consumption increases by $2 billion causing equilibrium national income to rise by $4 billion, the marginal propensity to save must be A) 1.0. B) 0.5. C) 0.2. D) 0.8. E) 2.0. Answer: B Explanation:

129)

A) B) C) D) E)

130) Suppose aggregate output is demand-determined. If the simple multiplier is 4 and there is a $10 billion increase in planned investment spending, then equilibrium income will ________ and the marginal propensity to spend must equal ________. A) decrease by $40 billion; 0.75 B) decrease by $10 billion; 0.25 C) increase by $40 billion; 0.25 D) increase by $40 billion; 0.75 E) increase by $10 billion; 4.0 Answer: D Explanation:

128)

A) B) C) D) E)

129) Consider a simple macro model with a constant price level. If the AE function is horizontal, then we know the simple multiplier is A) less than zero. B) zero. C) between zero and one. D) exactly one. E) greater than one. Answer: D Explanation:

127)

A) B) C) D) E)

43

130)

131) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the marginal propensity to spend is 0.7, the simple multiplier is A) 0.33. B) 0.70. C) 1.00. D) 1.42. E) 3.33. Answer: E Explanation:

A) B) C) D) E)

132) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the consumption function is C = (2/3)Y, then the simple multiplier is A) 2/3. B) 1. C) 2. D) 3. E) Insufficient information to know. Answer: D Explanation:

133)

A) B) C) D) E)

134) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the saving function is S = -100 + (0.2)Y, the simple multiplier is A) 0.2. B) 1. C) 2.5. D) 5. E) Insufficient information to know. Answer: D Explanation:

132)

A) B) C) D) E)

133) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the consumption function is C = (1/2)Y, the simple multiplier is A) 2/3. B) 1. C) 2. D) 3. E) Insufficient information to know. Answer: C Explanation:

131)

A) B) C) D) E)

44

134)

135) Suppose the price level is constant, output is demand-determined, and the economy is closed with no government. If the saving function is S = -100 + (0.4)Y, the simple multiplier is A) 0.2. B) 1. C) 2.5. D) 5. E) Insufficient information to know. Answer: C Explanation:

135)

A) B) C) D) E)

Consider the following information describing a closed economy with no government. Aggregate output is demand determined and the price level is constant. 1. 2. 3.

Y=C+I C = 100 + 0.6Y I = 200

TABLE 21-6 136) Refer to Table 21-6. This economy's equilibrium level of national income is A) 500. B) 600. C) 750. D) 1000. Answer: C Explanation:

A) B) C) D) E)

137) Refer to Table 21-6. The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. Answer: B Explanation:

136) E) 1500.

A) B) C) D) E)

45

137) D) 4.0.

E) 5.0.

Consider the following information concerning an economy with demand-determined output. There is no government or foreign trade. Y=C+I C = 100 + 0.5Y I = 200

1. 2. 3. TABLE 21-7

138) Refer to Table 21-7. This economy's equilibrium level of national income is A) 500. B) 600. C) 750. D) 1000. Answer: B Explanation:

A) B) C) D) E)

139) Refer to Table 21-7. The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. Answer: A Explanation:

138) E) 1500.

139) D) 4.0.

E) 5.0.

A) B) C) D) E)

Consider the following information for an economy with demand-determined output and a constant price level. There is no government or foreign trade. 1. 2. 3.

Y=C+I C = 100 + 0.8Y I = 200

TABLE 21-8 140) Refer to Table 21-8. This economy's equilibrium level of national income is A) 500. B) 600. C) 750. D) 1000. Answer: E Explanation:

A) B) C) D) E)

141) Refer to Table 21-8. The simple multiplier in this economy is A) 2.0. B) 2.5. C) 3.0. Answer: E Explanation:

140) E) 1500.

A) B) C) D) E) 46

141) D) 4.0.

E) 5.0.

142) Consider a simple macro model with a constant price level and demand-determined output. If the marginal propensity to spend is 0.9, the simple multiplier is A) 0.1. B) 0.9. C) 1.0. D) 1.1. E) 10.0. Answer: E Explanation:

A) B) C) D) E)

143) Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The simple multiplier is equal to A) -2.5. B) -0.6. C) 0.4. D) 0.6. E) 2.5. Answer: E Explanation:

144)

A) B) C) D) E)

145) Suppose aggregate output is demand-determined. The simple multiplier will increase as a result of A) an increase in the marginal propensity to consume. B) a decrease in the marginal propensity to consume. C) a decrease in autonomous consumption. D) an increase in autonomous consumption. E) an increase in investment. Answer: A Explanation:

143)

A) B) C) D) E)

144) Suppose aggregate output is demand-determined. Suppose a decrease in autonomous investment expenditure of $20 million reduces equilibrium national income by $50 million. The marginal propensity to spend is equal to A) -0.6. B) 0.4. C) 0.6. D) 2.5. E) -2.5. Answer: C Explanation:

142)

A) B) C) D) E)

47

145)

Answer Key Testname: UNTITLED21

1) E 2) D 3) B 4) E 5) D 6) E 7) A 8) B 9) C 10) D 11) C 12) A 13) C 14) B 15) D 16) A 17) B 18) C 19) A 20) E 21) B 22) D 23) A 24) C 25) B 26) D 27) B 28) E 29) C 30) C 31) D 32) C 33) E 34) E 35) A 36) C 37) B 38) D 39) C 40) C 41) D 42) D 43) A 44) E 45) E 46) D 47) B 48) A 49) C 50) C 48

Answer Key Testname: UNTITLED21

51) A 52) D 53) A 54) B 55) A 56) B 57) C 58) E 59) C 60) C 61) C 62) D 63) B 64) D 65) D 66) A 67) C 68) D 69) B 70) B 71) C 72) B 73) D 74) D 75) E 76) D 77) C 78) A 79) A 80) E 81) E 82) D 83) B 84) C 85) B 86) C 87) B 88) C 89) E 90) C 91) E 92) E 93) C 94) B 95) A 96) D 97) D 98) C 99) C 100) E 49

Answer Key Testname: UNTITLED21

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140) 141) 142) 143) 144) 145)

C B A D D C C D E C D B D C E D D C D D D B B E D E C B D D E D C D C C B B A E E E E C A

50

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Government's transfer payments to individuals affect desired aggregate expenditure A) directly. B) through the consumption function. C) through the investment function. D) through net exports. E) through the government's budget deficit. Answer: B Explanation:

A) B) C) D) E)

2) Why are government expenditures such as Old Age Security payments, employment insurance payments, or welfare benefits paid to individuals not considered part of G, the government component of aggregate expenditure? A) These are transfer payments and place no direct demand on Canada's total output. B) These payments are directly included as part of C, consumption, because they become consumption expenditure for the recipient. C) Since the revenues from which these payments are made did not originate from tax collection, they are not considered part of G. D) Since these expenditures are transfers from recipients to taxpayers, they are not included in G. E) These payments are included in G only when the payments are made directly by the federal government. Answer: A Explanation:

2)

A) B) C) D) E)

3) The G and T components in the national-income accounts measure purchases and net taxes collected by A) all levels of government. B) only provincial governments and the federal government. C) only the federal government. D) only provincial governments. E) only local governments. Answer: A Explanation:

1)

A) B) C) D) E)

1

3)

4) When economists use the term "budget surplus" they are referring to A) net tax revenues minus government purchases. B) national income minus transfer payments. C) national income minus consumption. D) disposable income minus consumption. E) net tax revenues minus transfer payments. Answer: A Explanation:

A) B) C) D) E)

5) Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is equal to 0.14Y. When Y = 2000, the government is running a budget A) deficit of 20. B) surplus of 20. C) balance. D) deficit of -20. E) surplus of 40. Answer: A Explanation:

6)

A) B) C) D) E)

7) Consider the government's budget balance. Suppose G = 400 and the government's net tax revenue is 20% of national income (Y). Government saving is negative for all values of Y A) above 10 000. B) above 8000. C) above 2000. D) below 8000. E) below 2000. Answer: E Explanation:

5)

A) B) C) D) E)

6) Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is equal to 0.12Y. The government budget is balanced when Y equals A) 350. B) 1000. C) 2000. D) 2500. E) 3600. Answer: D Explanation:

4)

A) B) C) D) E)

2

7)

8) Consider the government's budget balance. Suppose G = 600 and the government's net tax revenue is 10% of Y. The government budget is balanced when Y equals A) 660. B) 1320. C) 3000. D) 4500. E) 6000. Answer: E Explanation:

A) B) C) D) E)

9) Consider the government's budget balance. Suppose G = 300 and the government's net tax revenue is 0.3Y. The government budget is in surplus only when Y is A) less than 350. B) less than 1000. C) greater than 1000. D) greater than 2500. E) greater than 3000. Answer: C Explanation:

10)

A) B) C) D) E)

11) Suppose that real national income (Y) is equal to 800 and that government purchases are equal to 200. If the government's net tax revenues are equal to tY, where t is the net tax rate, then what is the value of t necessary for the government to have a balanced budget? A) 20% B) 25% C) 30% D) 35% E) 40% Answer: B Explanation:

9)

A) B) C) D) E)

10) Transfer payments made by the government affect its net tax revenues A) directly. B) indirectly through government purchases. C) indirectly through net exports. D) indirectly through the investment function. E) indirectly through the consumption function. Answer: A Explanation:

8)

A) B) C) D) E)

3

11)

12) Suppose Y=400 and the government's net tax rate is 10%. If we are told that the government has a budget surplus, then government purchases must be A) greater than 30. B) less than 30. C) greater than 40. D) less than 40. E) Not enough information to know. Answer: D Explanation:

A) B) C) D) E)

13) If the government's net tax rate increases, then for a given level of national income disposable income will ________ and net tax revenue will ________. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease E) not change; increase Answer: B Explanation:

13)

A) B) C) D) E)

14) Consider a simple macro model with a constant price level and demand-determined output. The inclusion of government in such a model affects desired aggregate expenditure directly through ________ and indirectly through ________. A) the net taxes; the government purchases of goods and services B) the net taxes; its affect on disposable income C) the government purchases of goods and services; its effect on net exports D) the government purchases of goods and services; its effect on disposable income E) the government purchases of goods and services; its effect on investment Answer: D Explanation:

12)

A) B) C) D) E)

4

14)

15) In a simple macro model, it is generally assumed that a country's exports A) and imports are autonomous. B) and imports are induced. C) are autonomous whereas imports are induced. D) are induced whereas imports are autonomous. E) are always equal to investment. Answer: C Explanation:

A) B) C) D) E)

16) When determining the AE function for an open economy with government, it is generally assumed that as real national income A) increases, exports will decrease. B) increases, net exports will decrease. C) increases, imports will decrease. D) decreases, net exports will decrease. E) decreases, exports will decrease. Answer: B Explanation:

16)

A) B) C) D) E)

17) In a simple macro model, the net export (NX) function indicates a ________ relationship between ________ and domestic national income. A) positive; exports B) positive; net exports C) negative; imports D) negative; net exports E) negative; exports Answer: D Explanation:

15)

A) B) C) D) E)

5

17)

18) A movement along the net export (NX) function can be caused by a change in A) domestic national income. B) foreign national income. C) domestic prices. D) the exchange rate. E) foreign prices. Answer: A Explanation:

A) B) C) D) E)

19) A parallel upward shift in the net export (NX) function can be caused by A) an increase in domestic national income. B) an increase in foreign national income. C) an increase in domestic prices relative to foreign prices. D) a decrease in the Canadian-dollar price of foreign currency. E) a decrease in foreign prices relative to domestic prices. Answer: B Explanation:

20)

A) B) C) D) E)

21) An upward shift and flattening of the net export (NX) function can be caused by A) an increase in domestic national income. B) a decrease in foreign national income. C) a decrease in domestic prices relative to foreign prices. D) an increase in the Canadian-dollar price of foreign currency. E) both C and D are correct Answer: E Explanation:

19)

A) B) C) D) E)

20) A parallel downward shift in the net export (NX) function can be caused by A) an increase in domestic national income. B) a decrease in foreign national income. C) a decrease in domestic prices. D) an increase in the Canadian-dollar price of foreign currency. E) a decrease in foreign prices. Answer: B Explanation:

18)

A) B) C) D) E)

6

21)

22) A downward shift and steepening of the net export (NX) function can be caused by A) an increase in domestic national income. B) a decrease in foreign national income. C) an increase in domestic prices relative to foreign prices. D) a decrease in the Canadian-dollar price of foreign currency. E) both C and D are correct. Answer: E Explanation:

A) B) C) D) E)

23) The net export (NX) function crosses the horizontal axis at a level of national income where the A) X and IM curves intersect. B) X curve reaches the horizontal axis. C) IM curve reaches the horizontal axis. D) X and IM curves are at their farthest distance apart. E) X curve reaches its maximum. Answer: A Explanation:

23)

A) B) C) D) E)

24) A rise in domestic prices relative to foreign prices, other things being equal, causes the net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: E Explanation:

22)

A) B) C) D) E)

7

24)

25) A fall in domestic prices relative to foreign prices, other things being equal, causes the net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: A Explanation:

A) B) C) D) E)

26) A rise in the Canadian-dollar price of foreign currency, other things being equal, causes Canada's net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: A Explanation:

26)

A) B) C) D) E)

27) A fall in the Canadian-dollar price of foreign currency, other things being equal, causes Canada's net export (NX) function to shift ________ and ________. A) upward; become flatter B) upward; become steeper C) downward; become flatter D) downward; keep the same slope E) downward; become steeper Answer: E Explanation:

25)

A) B) C) D) E)

8

27)

28) A decrease in domestic national income will cause a ________ the net exports (NX) function. A) movement to the left along B) parallel downward shift of C) parallel upward shift of D) rotation upward in E) rotation downward in Answer: A Explanation:

A) B) C) D) E)

29) An increase in foreign income, other things being equal, is assumed to cause the net export (NX) function to A) shift parallel upward. B) shift parallel downward. C) pivot downward. D) pivot upward. E) remain stationary. Answer: A Explanation:

30)

A) B) C) D) E)

31) Suppose exports are $200 and imports are given by IM = 0.2Y. At what level of national income will net exports equal zero? A) $0 B) $200 C) $250 D) $1000 E) $1250 Answer: D Explanation:

29)

A) B) C) D) E)

30) Consider the net export function. An increase in domestic national income, other things being equal, is assumed to cause A) the net export function to shift upward. B) the net export function to pivot upward. C) movement to the right along the net export function. D) the net export function to pivot downward. E) no effect on net exports. Answer: C Explanation:

28)

A) B) C) D) E)

9

31)

The diagrams below show the import, export, and net export functions for an economy.

FIGURE 22-1 32) Refer to Figure 22-1. The function for desired imports for this economy can be expressed as A) NX = 450 - Y B) IM = 450 - 0.5(Y) C) NX = 0.5(Y) D) IM = 0.5(Y) E) IM = 0.2(Y) Answer: E Explanation:

A) B) C) D) E)

10

32)

33) Refer to Figure 22-1. The net export function for this economy can be expressed as A) NX = 2250 - 450(Y) B) NX = 450 - 0.2(Y) C) NX = 2250 - 450 D) NX = 0.2Y E) NX = 2250 - .2(IM) Answer: B Explanation:

A) B) C) D) E)

34) Refer to Figure 22-1. If actual national income in this economy is equal to $1000, then net exports are equal to A) $90. B) $200. C) $250. D) $375. E) $400. Answer: C Explanation:

34)

A) B) C) D) E)

35) Refer to Figure 22-1. If actual national income is equal to $2000, then imports are equal to A) $0 B) $200 C) $400 D) $450 E) $1000 Answer: C Explanation:

33)

A) B) C) D) E)

11

35)

The table below shows national income and imports. The level of exports is fixed at $300. All figures (in table and questions) are in millions of dollars. Income (Y) 2000 3000 4000 5000

Imports (IM) 150 250 350 450

Net Exports (NX) a b c d

TABLE 22-1 36) Refer to Table 22-1. What are the correct values for the level of net exports (a, b, c, and d) at each level of national income? A) a = $150, b = $50, c = -$50, d = -$150 B) a = -$150, b = -$50, c = $50, d = $150 C) a = $150, b = $250, c = $350, d = $450 D) a = $300, b = $300, c = $300, d = $300 E) not enough data to determine Answer: A Explanation:

A) B) C) D) E)

37) Refer to Table 22-1. What is the marginal propensity to import? A) 0.01 B) 0.10 C) 1.0 D) 10.0 E) not enough data to determine Answer: B Explanation:

37)

A) B) C) D) E)

38) Refer to Table 22-1. The net export function can be expressed as A) NX = 300 - 0.1Y B) NX = 350 - 0.1Y C) 0 = 300 - IM D) 0 = 300 - 0.5Y E) NX = 350 - 0.5Y Answer: B Explanation:

36)

A) B) C) D) E)

12

38)

39) Refer to Table 22-1. On a graph of the net export function for this economy, at what level of Y would the NX function intersect the horizontal axis? A) at $0 B) at $2000 C) at $3500 D) at $4000 E) at $5000 Answer: C Explanation:

A) B) C) D) E)

40) Refer to Table 22-1. In this economy, if actual national income increases by $600, the level of imports will A) rise by $30. B) rise by $60. C) rise by $100. D) fall by $100. E) not change. Answer: B Explanation:

41)

A) B) C) D) E)

42) Suppose exports (X)=100, Y=500, and imports are equal to mY, where m is the marginal propensity to import. Net exports would be equal to zero if the marginal propensity to import were A) 1%. B) 5%. C) 10%. D) 20%. E) 50%. Answer: D Explanation:

40)

A) B) C) D) E)

41) Consider an open economy that has a marginal propensity to import equal to 0.30. If national income rises by $2500, imports will rise by A) $30. B) $300. C) $750. D) $7500. E) $8333. Answer: C Explanation:

39)

A) B) C) D) E)

13

42)

43) When compared to a simple macroeconomic model (with only consumption and investment), adding government and foreign trade to the AE function causes A) the autonomous component of AE to increase. B) the autonomous component of AE to fall. C) the AE function to become downward sloping. D) the AE function to become perfectly horizontal. E) no change in the AE function. Answer: A Explanation:

A) B) C) D) E)

44) The AE function for an open economy with government can be written as A) AE = C + I - G + (X-IM). B) AE = C + I + G - (X-IM). C) AE = C + I - G - (X+IM). D) AE = C + I + S + (X+IM). E) AE = C + I + G + (X-IM). Answer: E Explanation:

44)

A) B) C) D) E)

45) Consider the general form of the consumption function in a simple macro model. Once government and taxes are included in the model, desired consumption can be expressed as ________, where a = autonomous consumption, t = net tax rate, Y = national income, YD = disposable income, and MPC = marginal propensity to consume. A) C = a + MPC(1 - t)Y D B) C = a - (1 - t)YD C) C = a + MPC ∙ Y D) C = a + MPC ∙ t ∙ Y D E) C = a + MPC(1 - t)Y Answer: E Explanation:

43)

A) B) C) D) E)

14

45)

46) In our simple macro model with government, which statement is correct regarding the following equation: T = (0.2)Y? A) Total tax revenues are equal to 20% of disposable income. B) Total tax revenues are equal to 20% of real GDP. C) Net tax revenues are equal to 20% of disposable income. D) If national income increases by $1.00, then net tax revenue increases by $0.20. E) If total tax revenue increases by $0.20, then national income increases by $1.00. Answer: D Explanation:

46)

A) B) C) D) E)

47) In our simple macro model with government, which statement is correct regarding the following equation: YD = (0.75)Y?

47)

A) If disposable income increases by $0.75, then national income increases by $1.00 and total tax revenue rises by $0.75. B) Net tax revenue is equal to 75% of national income. C) If national income increases by $1.00, then disposable income increases by $0.75 and net tax revenue increases by $0.25. D) Net tax revenue is equal to 25% of disposable income. E) If national income increases by $1.00, then disposable income increases by $0.25 and net tax revenue increases by $0.75. Answer: C Explanation:

A) B) C) D) E)

48) In our simple macro model with government and foreign trade, the marginal propensity to consume out of disposable income is ________ whereas the marginal propensity to consume out of national income is ________. A) MPC; MPC(1 - t) B) MPC(1 - t); MPC C) MPC(1 - t) - m; MPC(1 - t) D) MPC; MPC(1 - t) - m E) MPC(1 - t); MPC(1 - t) - m Answer: A Explanation:

A) B) C) D) E)

15

48)

49) Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.9 and a net tax rate of 10% of national income, the marginal propensity to consume out of national income is A) 0.09. B) 0.72. C) 0.81. D) 0.90. E) 1.00. Answer: C Explanation:

A) B) C) D) E)

50) Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.8 and a net tax rate of 20% of national income, the marginal propensity to consume out of national income is A) 0.36. B) 0.64. C) 0.80. D) 0.90. E) 1.00. Answer: B Explanation:

51)

A) B) C) D) E)

52) Consider a simple macro model with a constant price level and demand-determined output. The marginal propensity to spend out of national income, z, can be expressed as ________ (where t = net tax rate and m = marginal propensity to import). A) z = MPC(1 - t - m) B) z = tY - mY C) z = MPC - (1 - t- m)Y D) z = MPC - (1 - t - m) E) z = MPC(1 - t) - m Answer: E Explanation:

50)

A) B) C) D) E)

51) Consider a consumption function in a simple macro model with government and taxes. Given a marginal propensity to consume out of disposable income of 0.7 and a net tax rate of 30% of national income, the marginal propensity to consume out of national income is A) 0.49. B) 0.58. C) 0.70. D) 0.90. E) 1.00. Answer: A Explanation:

49)

A) B) C) D) E)

16

52)

53) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. The marginal propensity to spend on national income, z, is A) 0.655. B) 0.760. C) 0.773. D) 0.840. E) 0.920. Answer: B Explanation:

A) B) C) D) E)

54) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. Total autonomous spending in this model is A) 120.0. B) 1120.0. C) 420.0. D) 600.0. E) 828.8. Answer: B Explanation:

55)

A) B) C) D) E)

56) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. A national income of 2400 results in desired aggregate expenditure of A) 1120 B) 1776 C) 2896 D) 3184 E) 3472 Answer: C Explanation:

54)

A) B) C) D) E)

55) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. The vertical intercept of the AE function is A) 120.0. B) 420.0. C) 600.0. D) 828.8. E) 1120.0. Answer: E Explanation:

53)

A) B) C) D) E)

17

56)

57) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The vertical intercept of the AE function is A) 60.0. B) 210.0. C) 300.0. D) 414.4. E) 560.0. Answer: E Explanation:

A) B) C) D) E)

58) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. A national income of 1200 results in desired aggregate expenditure of A) 560. B) 926. C) 1004. D) 1016. E) 1148. Answer: C Explanation:

59)

A) B) C) D) E)

60) Consider the simplest macro model with demand-determined output. The equations are: C = 150 + 0.8Yd, Yd = Y-T, I = 400, G = 700, T = .2Y, X = 130, and IM = 0.14Y. Autonomous expenditures in this model are A) 1120. B) 1350. C) 1380. D) 2700. E) 5400. Answer: C Explanation:

58)

A) B) C) D) E)

59) Consider the simplest macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The marginal propensity to spend on national income, z, is A) 0.06. B) 0.37. C) 0.43. D) 0.49. E) 0.63. Answer: B Explanation:

57)

A) B) C) D) E)

18

60)

61) Consider the simplest macro model with demand-determined output. The equations are: C = 150 + 0.8Yd, Yd = Y -T, I = 400, G = 700, T = .2Y, X = 130, and IM = 0.14Y. The marginal propensity to spend on national income in this model is A) 0.50. B) 0.54. C) 0.64. D) 0.84. E) 0.86. Answer: A Explanation:

61)

A) B) C) D) E)

The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: ∙ marginal propensity to consume (mpc) = 0.75 ∙ net tax rate (t) = 0.20 ∙ no foreign trade ∙ fixed price level ∙ all expenditure and income figures are in billions of dollars.

FIGURE 22-2 62) Refer to Figure 22-2. What is the level of autonomous consumption? A) $0 B) $75 C) $100 D) $175 Answer: B Explanation:

A) B) C) D) E)

19

62) E) $250

63) Refer to Figure 22-2. What is total autonomous expenditure? A) $0 B) $75 C) $100 Answer: E Explanation:

63) D) $175

E) $250

A) B) C) D) E)

64) Refer to Figure 22-2. Which of the following correctly describes the consumption function for this economy? A) C = (0.75)YD B) Y = 250 + (0.75)YD C) C = 75 + (0.75)YD D) Y = 250 + (0.75)Y E) C = 250 + (0.75)Y Answer: C Explanation:

A) B) C) D) E)

65) Refer to Figure 22-2. Which of the following equations describes the aggregate expenditure function for this economy? A) AE = 250 + (0.6)Y B) AE = 225 + (0.75)Y C) AE = 250 +(0.15)Y D) AE = 75 + (0.75)Y + (0.2)YD E) AE = 250 +(0.75)Y + (0.2)YD Answer: A Explanation:

65)

A) B) C) D) E)

66) Refer to Figure 22-2. What is the marginal propensity to spend (z) in this economy? A) 0.15 B) 0.20 C) 0.40 D) 0.60 Answer: D Explanation:

64)

A) B) C) D) E)

20

66) E) 0.75

FIGURE 22-3 67) Refer to Figure 22-3. The rotation from AE0 to AE1 could be caused by

67)

A) a higher net tax rate. B) a lower net tax rate. C) a balanced budget. D) lower government purchases. E) higher government purchases. Answer: B Explanation:

A) B) C) D) E)

68) Refer to Figure 22-3. The rotation from AE1 to AE0 could be caused by A) an increase in the marginal propensity to consume out of disposable income. B) a decrease in the marginal propensity to import. C) an increase in the marginal propensity to import. D) a decrease in the net tax rate. E) a decrease in government purchases. Answer: C Explanation:

A) B) C) D) E)

21

68)

69) Refer to Figure 22-3. Autonomous expenditures ________ as the AE curve rotates from AE1 to AE0

69)

and equilibrium national income ________. A) decrease; decreases B) increase; decreases C) remain constant; increases D) remain constant; decreases E) remain constant; remains constant Answer: D Explanation:

A) B) C) D) E)

70) In a simple macro model with a constant price level, an increase in the net tax rate causes the AE curve to A) shift parallel downward. B) shift parallel upward. C) rotate downward. D) rotate upward. E) remain stationary. Answer: C Explanation:

A) B) C) D) E)

71) In a simple macro model with a constant price level, a decrease in the net tax rate causes the AE curve to A) shift parallel downward. B) shift parallel upward. C) rotate downward. D) rotate upward. E) remain stationary. Answer: D Explanation:

70)

A) B) C) D) E)

22

71)

72) Suppose that the marginal propensity to consume out of disposable income is 0.6 and the marginal propensity to import is 0.14. If the net tax rate is 0.1, then what is the marginal propensity to spend in this economy? A) 0.30 B) 0.40 C) 0.46 D) 0.50 E) 0.60 Answer: B Explanation:

A) B) C) D) E)

73) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. Equilibrium national income is A) 1816. B) 5750. C) 7307. D) 7935. E) 17 250. Answer: B Explanation:

74)

A) B) C) D) E)

75) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. The trade balance at equilibrium national income is a A) deficit of 504.8. B) deficit of 460.0. C) deficit of 330.0. D) surplus of 125.0. E) surplus of 15.3. Answer: C Explanation:

73)

A) B) C) D) E)

74) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, G = 700, T = 0, X = 130, IM = 0.08Y. Desired consumption expenditure at equilibrium national income is A) 1675.44. B) 4060.04. C) 4830.00. D) 4980.00. E) 6815.40. Answer: D Explanation:

72)

A) B) C) D) E)

23

75)

76) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 150 + 0.84Y, I = 400, X = 130, IM = 0.08Y, T = 0. Equilibrium national income is 5000 when G is equal to A) -40. B) 520. C) 580. D) 740. E) 812. Answer: B Explanation:

A) B) C) D) E)

77) Consider a simple macro model with a constant price level and demand-determined output. When national income falls short of desired aggregate expenditures, unplanned inventory ________ will induce firms to ________ the rate of output production. A) depletion; lower B) depletion; raise C) buildup; lower D) buildup; raise E) at zero; maintain the current Answer: B Explanation:

78)

A) B) C) D) E)

79) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. Equilibrium national income is A) 560.00. B) 888.89. C) 1142.85. D) 1302.33. E) 1513.50. Answer: B Explanation:

77)

A) B) C) D) E)

78) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 120 + 0.86Y, I = 300, G = 520, T = 0, X = 180, IM = 0.12Y. Equilibrium national income is A) 2037.48. B) 3615.24. C) 4000.00. D) 4307.70. E) 8000.00. Answer: D Explanation:

76)

A) B) C) D) E)

24

79)

80) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The trade balance at equilibrium national income is A) a deficit of 36.67. B) a deficit of 21.43. C) zero. D) a surplus of 21.43. E) a surplus of 36.67. Answer: E Explanation:

A) B) C) D) E)

81) Consider a macro model with demand-determined output. The equations are: C = 150 + 0.8Yd, Yd = Y-T, I = 400, G = 700, T = 0.2Y, X = 130, and IM = 0.14Y. Equilibrium national income in this model is A) 1120. B) 1350. C) 2240. D) 2760. E) 5400. Answer: D Explanation:

81)

A) B) C) D) E)

82) Consider the following macro model with demand-determined output: C = 150 + 0.9Y d, Yd= 0.8Y, I = 400, G = 700, T = (0.2)Y, X = 130, IM = (0.08)Y. Equilibrium national income is A) 1380.00. B) 1916.67. C) 2156.25. D) 3833.33. Answer: D Explanation:

80)

A) B) C) D) E)

25

E) 4928.57.

82)

The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: ∙ marginal propensity to consume (mpc) = 0.75 ∙ net tax rate (t) = 0.20 ∙ no foreign trade ∙ fixed price level ∙ all expenditure and income figures are in billions of dollars.

FIGURE 22-2 83) Refer to Figure 22-2. What is the equilibrium national income in this economy? A) $187.50 B) $294 C) $333.34 D) $625 Answer: D Explanation:

A) B) C) D) E)

26

83) E) $1666.67

84) In an open economy with government and demand-determined output, an increase in the equilibrium level of national income could be caused by A) an increase in taxes at all levels of income. B) an increase in the desired level of imports at all levels of income. C) a decrease in desired consumption at all levels of income. D) a decrease in the desired level of saving at all levels of income. E) a decrease in government purchases. Answer: D Explanation:

A) B) C) D) E)

85) In an open economy with government and demand-determined output, a decrease in the equilibrium level of national income could be caused by A) a decrease in taxes at all levels of income. B) a decrease in the desired level of imports at all levels of income. C) a decrease in desired consumption at all levels of income. D) a decrease in the desired level of saving at all levels of income. E) an increase in government purchases. Answer: C Explanation:

85)

A) B) C) D) E)

86) In an open economy with government and demand-determined output in the short run, a specific "target" level of national income A) cannot be achieved by any of the government's fiscal policy tools. B) can be achieved by changing G, but not T. C) can be achieved by changing T, but not G. D) can be achieved by changes in G, T, or both. E) can be achieved only by changing both G and T at the same time. Answer: D Explanation:

84)

A) B) C) D) E)

27

86)

87) Consider the following news headline: "Minister of Defence announces $2 billion purchase of military helicopters." Assuming that aggregate output is demand-determined, and that the helicopters are purchased domestically, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income? A) The AE function will shift down parallel to itself and equilibrium national income will fall. B) The AE function will rotate upward (become steeper) and equilibrium national income will rise. C) The AE function will rotate downward (become flatter) and national income will fall. D) The AE function will shift up parallel to itself and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: D Explanation:

A) B) C) D) E)

88) Consider the following news headline: "Finance minister announces that the federal income-tax rate will rise by three percentage points." Assuming that aggregate output is demand-determined, what will be the effect of this action, all other things equal, on the AE function and equilibrium national income? A) The AE function will shift down parallel to itself and equilibrium national income will fall. B) The AE function will rotate upward (become steeper) and equilibrium national income will rise. C) The AE function will rotate downward (become flatter) and national income will fall. D) The AE function will shift up parallel to itself and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: C Explanation:

88)

A) B) C) D) E)

89) Consider the following news headline: "Business community gloomy about the economy investment plans axed." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself and equilibrium national income will fall. B) The AE function will rotate upward (become steeper) and equilibrium national income will rise. C) The AE function will rotate downward (become flatter) and national income will fall. D) The AE function will shift up parallel to itself and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: A Explanation:

87)

A) B) C) D) E)

28

89)

90) Consider the following news headline: "Canadian exporters hurt by foreign recession." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself and equilibrium national income will fall. B) The AE function will rotate upward (become steeper) and equilibrium national income will rise. C) The AE function will rotate downward (become flatter) and national income will fall. D) The AE function will shift up parallel to itself and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: A Explanation:

A) B) C) D) E)

91) Consider the following news headline: "Canadians develop a greater taste for foreign vacations." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself and equilibrium national income will fall. B) The AE function will rotate upward (become steeper) and equilibrium national income will rise. C) The AE function will rotate downward (become flatter) and national income will fall. D) The AE function will shift up parallel to itself and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: C Explanation:

91)

A) B) C) D) E)

92) Consider the following news headline: "Government follows through on election promisecuts income-tax rate by 5 percentage points." Assuming that aggregate output is demand-determined, what will be the effect of this action, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself and equilibrium national income will fall. B) The AE function will rotate upward (become steeper) and equilibrium national income will rise. C) The AE function will rotate downward (become flatter) and national income will fall. D) The AE function will shift up parallel to itself and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: B Explanation:

90)

A) B) C) D) E)

29

92)

93) Consider the following news headline: "China signs deal to buy more Canadian wheat." Assuming that aggregate output is demand-determined, what effect will this have, all other things equal, on the AE function and on equilibrium national income? A) The AE function will shift down parallel to itself and equilibrium national income will fall. B) The AE function will rotate upward (become steeper) and equilibrium national income will rise. C) The AE function will rotate downward (become flatter) and national income will fall. D) The AE function will shift up parallel to itself and equilibrium national income will rise. E) There will be no change in the AE function or in equilibrium national income. Answer: D Explanation:

A) B) C) D) E)

94) Consider a simple macro model with demand-determined output. Suppose the level of exports decreases unexpectedly by $6 billion. If the government wants to restore the initial equilibrium level of output it could, all other things equal, ________ by ________. A) increase its purchases; more than $6 billion B) increase its net tax revenues; $6 billion C) increase its net tax revenues; less than $6 billion D) increase its purchases; $6 billion E) decrease its purchases; $6 billion Answer: D Explanation:

93)

A) B) C) D) E)

30

94)

The diagram below shows desired aggregate expenditure for a hypothetical economy. Assume the following features of this economy: ∙ marginal propensity to consume (mpc) = 0.75 ∙ net tax rate (t) = 0.20 ∙ no foreign trade ∙ fixed price level ∙ all expenditure and income figures are in billions of dollars.

FIGURE 22-2 95) Refer to Figure 22-2. What is the value of the multiplier in this economy? A) 1.33 B) 1.67 C) 2.0 D) 2.5 Answer: D Explanation:

E) 6.67

A) B) C) D) E)

96) A decrease in the value of the simple multiplier can be caused by A) a decrease in the net tax rate. B) a decrease in the marginal propensity to import. C) an increase in the marginal propensity to consume. D) an increase in the marginal propensity to save. E) an increase in the marginal propensity to spend. Answer: D Explanation:

95)

A) B) C) D) E) 31

96)

97) An increase in the value of the simple multiplier can be caused by A) a decrease in the marginal propensity to consume. B) an increase in the marginal propensity to import. C) an increase in the net tax rate. D) an increase in the marginal propensity to save. E) a decrease in the net tax rate. Answer: E Explanation:

A) B) C) D) E)

98) In a macro model where the marginal propensity to consume out of disposable income is 0.8, the net tax rate is 0.25, and the marginal propensity to import is 0.12, the simple multiplier will be A) 0.480. B) 1.471. C) 1.923. D) 2.083. E) 2.110. Answer: C Explanation:

99)

A) B) C) D) E)

100) Consider a model in which output is demand-determined. If the marginal propensity to spend out of national income is 0.4, then a $0.6 billion decrease in government purchases will cause equilibrium national income to ________ by approximately ________. A) decrease; $1.50 billion B) decrease; $1.00 billion C) decrease; $0.24 billion D) increase; $1.00 billion E) increase; $1.50 billion Answer: B Explanation:

98)

A) B) C) D) E)

99) Consider a simple macro model with a constant price level and demand-determined output. The equations of the model are: C = 60 + 0.43Y, I = 150, G = 260, T = 0, X = 90, IM = 0.06Y. The value of the simple multiplier in this model is A) 0.37. B) 1.59. C) 2.04. D) 2.32. E) 2.70. Answer: B Explanation:

97)

A) B) C) D) E)

32

100)

101) Consider a model with demand-determined output and a constant price level. A decrease in the net tax rate causes ________ in autonomous spending and a ________ in the simple multiplier. A) a rise; rise B) a rise; fall C) no change; rise D) no change; fall E) a fall; fall Answer: C Explanation:

A) B) C) D) E)

102) Suppose output is demand determined. An increase in the net tax rate ________ the marginal propensity to spend and thus ________ the simple multiplier. A) raises; raises B) raises; lowers C) causes no change in; raises D) lowers; lowers E) lowers; raises Answer: D Explanation:

102)

A) B) C) D) E)

103) Suppose aggregate output is demand determined. If the marginal propensity to spend is 0.5, and the MPC is 0.7, a $1 billion reduction in government purchases will cause equilibrium national income to ________ by ________. A) decrease; $3.33 billion B) decrease; $2.00 billion C) decrease; $1.50 billion D) increase; $2.00 billion E) increase; $3.33 billion Answer: B Explanation:

101)

A) B) C) D) E)

33

103)

104) In a simple macro model with government and demand-determined output, to raise equilibrium national income by $100 billion, G must be A) raised by $100 billion. B) raised by $100 billion times the simple multiplier. C) raised by $100 billion divided by the simple multiplier. D) lowered by $100 billion times the simple multiplier. E) lowered by $100 billion divided by the simple multiplier. Answer: C Explanation:

A) B) C) D) E)

105) Consider a simple macro model with government and demand-determined output. If the government wants to reduce equilibrium national income by $20 billion, G must be A) raised by $20 billion times the simple multiplier. B) raised by $20 billion divided by the simple multiplier. C) lowered by $20 billion times the simple multiplier. D) lowered by $20 billion divided by the simple multiplier. E) lowered by $20 billion. Answer: D Explanation:

104)

A) B) C) D) E)

34

105)

FIGURE 22-3 106) Refer to Figure 22-3. The rotation from AE0 to AE1 implies that the marginal propensity to spend

106)

________ and the value of the simple multiplier ________. A) increases; decreases B) increases; increases C) remains the same; increases D) decreases; increases E) decreases, decreases Answer: B Explanation:

A) B) C) D) E)

107) Consider a macro model with a constant price level and demand-determined output. A rise in the net tax rate ________ the simple multiplier and ________ equilibrium national income. A) lowers; has no effect on B) lowers; lowers C) lowers; raises D) raises; raises E) raises; has no effect on Answer: B Explanation:

A) B) C) D) E)

35

107)

108) Consider a simple macro model with government and foreign trade and where the price level is taken as given. The simple multiplier is equal to A) 1/(1-MPC). B) 1/MPC. C) 1/(1- MPS - t). D) 1/(1 - (MPC(1 - t)- m )). E) 1/(1- (MPS(1 - t)- m )). Answer: D Explanation:

A) B) C) D) E)

109) Consider a simple macro model with demand-determined output and the following specific parameter values: a) Marginal propensity to consume out of disposable income = 0.6 b) Marginal propensity to consume out of national income = 0.48 c) Marginal propensity to import = 0.23 The simple multiplier without government and foreign trade in this economy is ________ and the simple multiplier with government and foreign trade in this economy is ________. A) 1.67; 1.33 B) 1.67; 4 C) 2.5; 1.33 D) 2.5; 2.5 E) 2.5; 4 Answer: C Explanation:

109)

A) B) C) D) E)

110) Consider the simplest macro with demand-determined output. If the marginal propensity to consume out of disposable income (MPC) is equal to the marginal propensity to spend out of national income (z), then A) the marginal propensity to import (m) is larger than the tax rate (t). B) the marginal propensity to import (m) is smaller than the tax rate (t). C) the simple multiplier is smaller in a closed economy with no government. D) the simple multiplier is larger in a closed economy with no government. E) there is no effect on the simple multiplier from imports or tax rates. Answer: E Explanation:

108)

A) B) C) D) E)

36

110)

111) Fiscal policy involves the government's use of ________ to affect economic outcomes. A) exchange rate changes B) interest rate changes C) price level changes D) private investment expenditures E) expenditures and taxation Answer: E Explanation:

111)

A) B) C) D) E)

FIGURE 22-4 112) Refer to Figure 22-4. Diagram 1 illustrates an economy that is experiencing a(n) ________ gap. The goal of stabilization policy would be to ________ national income until it is equal to ________. A) recessionary; increase; actual national income B) inflationary; reduce; potential GDP C) inflationary; reduce; actual national income D) inflationary; increase; potential GDP E) recessionary; increase; potential GDP Answer: B Explanation:

A) B) C) D) E)

37

112)

113) Refer to Figure 22-4. Diagram 2 illustrates an economy that is experiencing a(n) ________ gap. The goal of stabilization policy would be to ________ national income until it is equal to ________. A) recessionary; increase; actual national income B) inflationary; reduce; potential GDP C) inflationary; reduce; actual national income D) inflationary; increase; potential GDP E) recessionary; increase; potential GDP Answer: E Explanation:

A) B) C) D) E)

114) Refer to Figure 22-4, Diagram 1. Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output, Y*)? A) reduce government spending B) increase transfer payments C) reduce taxes D) increase government spending E) increase disposable income Answer: A Explanation:

114)

A) B) C) D) E)

115) Refer to Figure 22-4, Diagram 2. Which of the following fiscal policy measures could the government implement to return national income to the full-employment level of GDP (potential output, Y*)? A) reduce government spending B) reduce transfer payments C) increase taxes D) increase government spending E) decrease disposable income Answer: D Explanation:

113)

A) B) C) D) E)

38

115)

116) If the price level is taken as given in a simple macro model with demand-determined output, it is implicitly being assumed that A) net exports are positive. B) net exports are negative. C) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income. D) all resources in the economy are fully employed. E) producers can provide whatever output is demanded of them without requiring higher prices to offset any higher costs. Answer: E Explanation:

A) B) C) D) E)

117) Consider a macro model in which output is assumed to be demand-determined. One situation which may justify this assumption is when A) net exports are positive. B) net exports are negative. C) the marginal propensity to consume out of disposable income is equal to the marginal propensity to spend out of national income. D) all resources in the economy are fully employed. E) the economy is operating with some unemployed resources. Answer: E Explanation:

117)

A) B) C) D) E)

118) We would expect real national income to be "demand determined" when 1) there is large-scale unemployment of resources in the economy; 2) firms are price setters; 3) firms have excess capacity. A) 1, 2, and 3 B) 1 and 2 C) 2 and 3 D) 1 only Answer: A Explanation:

116)

A) B) C) D) E)

39

118)

E) 3 only

119) The simple macro model that is considered in Chapters 21 and 22 of the textbook is characterized by A) a given (constant) price level, and equilibrium national income determined by demand and supply. B) an endogenous price level, and national income that is solely demand determined. C) a given (constant) price level, and national income that is solely demand determined. D) an endogenous price level, and equilibrium national income determined by demand and supply. E) an open economy with an endogenous exchange rate. Answer: C Explanation:

A) B) C) D) E)

120) In the simple macro model that is considered in Chapters 21 and 22 of the textbook, A) the economy is always in equilibrium. B) there is no government or foreign trade. C) the price level is determined within the model. D) there are no supply-side influences on national income. E) the simple multiplier is always equal to 1. Answer: D Explanation:

119)

A) B) C) D) E)

40

120)

Answer Key Testname: UNTITLED22

1) B 2) A 3) A 4) A 5) A 6) D 7) E 8) E 9) C 10) A 11) B 12) D 13) B 14) D 15) C 16) B 17) D 18) A 19) B 20) B 21) E 22) E 23) A 24) E 25) A 26) A 27) E 28) A 29) A 30) C 31) D 32) E 33) B 34) C 35) C 36) A 37) B 38) B 39) C 40) B 41) C 42) D 43) A 44) E 45) E 46) D 47) C 48) A 49) C 50) B 41

Answer Key Testname: UNTITLED22

51) A 52) E 53) B 54) B 55) E 56) C 57) E 58) C 59) B 60) C 61) A 62) B 63) E 64) C 65) A 66) D 67) B 68) C 69) D 70) C 71) D 72) B 73) B 74) D 75) C 76) B 77) B 78) D 79) B 80) E 81) D 82) D 83) D 84) D 85) C 86) D 87) D 88) C 89) A 90) A 91) C 92) B 93) D 94) D 95) D 96) D 97) E 98) C 99) B 100) B 42

Answer Key Testname: UNTITLED22

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

C D B C D B B D C E E B E A D E E A C D

43

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Other things being equal, a rise in the domestic price level A) causes a decrease in real saving. B) lowers the real value of all assets denominated in money units. C) makes domestic goods more attractive to foreigners. D) makes foreign goods less attractive to domestic residents. E) raises the real burden of repaying a fixed money value debt. Answer: B Explanation:

A) B) C) D) E)

2) Other things being equal, a fall in the domestic price level leads to a rise in private-sector wealth and thus A) an increase in the average propensity to save. B) an increase in autonomous desired consumption. C) a downward shift in the AE curve. D) a downward shift in net exports. E) domestic goods appearing less attractive to foreigners. Answer: B Explanation:

2)

A) B) C) D) E)

3) Other things being equal, an exogenous rise in the domestic price level will A) have no effect on the level of desired real expenditure. B) increase the level of desired real expenditure. C) decrease desired real expenditure only if it is accompanied by a change in the current income of households. D) decrease desired real expenditure because it will affect the real value of wealth. E) cause net exports to rise. Answer: D Explanation:

1)

A) B) C) D) E)

1

3)

4) Other things being equal, when the domestic price level falls exogenously, A) Canadian goods become more expensive relative to foreign goods. B) the net export function shifts upward. C) the aggregate expenditure function shifts downward. D) imports of foreign goods rise. E) the net export function shifts downward. Answer: B Explanation:

A) B) C) D) E)

5) Other things being equal, when the domestic price level rises exogenously, A) Canadian goods become more expensive relative to foreign goods. B) the net export function shifts upward. C) the aggregate expenditure function shifts upward. D) imports of foreign goods fall. E) the desired investment function shifts upward. Answer: A Explanation:

5)

A) B) C) D) E)

6) Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the domestic price level changes equilibrium real GDP A) in the same direction. B) in the opposite direction. C) by the same amount in the same direction. D) by the same amount in the opposite direction. E) by a lesser amount in either direction. Answer: B Explanation:

4)

A) B) C) D) E)

2

6)

7) Other things being equal, when the price level rises, the real value of money holdings ________; when the domestic price level falls, the real value of money holdings ________. A) rises; falls B) falls; is not affected C) falls; rises D) is not affected; falls E) is not affected; rises Answer: C Explanation:

A) B) C) D) E)

8) An exogenous fall in the domestic price level causes an increase in real wealth and A) a fall in desired investment. B) a rise in desired consumption. C) a downward shift in the AE curve. D) a downward shift of the net export function. E) a fall in government purchases. Answer: B Explanation:

8)

A) B) C) D) E)

9) Consider a simple macro-model with demand-determined output. An exogenous increase in the domestic price level will ________ the real value of the private sector's wealth, which leads to ________ in autonomous consumption and thus ________ shift in the AE function. A) increase; a decrease; a downward B) increase; an increase; a downward C) increase; an increase; an upward D) reduce; a decrease; a downward E) reduce; an increase; an upward Answer: D Explanation:

7)

A) B) C) D) E)

3

9)

10) Consider a simple macro model with demand-determined output. An exogenous increase in the domestic price level will A) shift both the net export function and the AE curve upward. B) shift the net export function upward and the AE curve downward. C) shift both the net export function and the AE curve downward. D) shift the net export function downward and the AE curve upward. E) pivot the net export function and the AE curve upward. Answer: C Explanation:

A) B) C) D) E)

11) Consider a simple macro model with demand-determined output. Other things being equal, the price level and desired aggregate expenditure are related to each other A) positively. B) proportionally. C) progressively. D) exponentially. E) negatively. Answer: E Explanation:

11)

A) B) C) D) E)

12) Consider a simple macro model with demand-determined output. An exogenous change in the price level shifts the AE curve because the change affects desired ________ and desired ________. A) consumption; investment B) consumption; imports C) investment; consumption D) government purchases; net exports E) consumption; net exports Answer: E Explanation:

10)

A) B) C) D) E)

4

12)

13) Suppose there is an exogenous increase in the domestic price level. Which of the individuals listed below would experience an increase in wealth? A) a person with a 25-year home mortgage B) a person with cash under the mattress C) a person with deposits in a bank savings account D) a person with a government bond that promises to pay the holder $1000, 5 years hence E) a person with a corporate bond that promises to repay the face value of the bond in the future Answer: A Explanation:

A) B) C) D) E)

14) Other things being equal, a rise in the price level will imply ________ in wealth for the bondholder and ________ in the wealth of the issuer of the bond. A) a decline; an increase B) a decline; a decline C) a decline; no change D) an increase; a decline E) an increase; an increase Answer: A Explanation:

14)

A) B) C) D) E)

15) Other things being equal, an exogenous increase in the price level causes the aggregate wealth of holders and issuers of private-sector bonds to A) decrease. B) increase. C) not change since the changes in the wealth of bondholders and bond issuers offset each other. D) either increase or decrease depending on other factors. E) rise in nominal terms, but fall in real terms. Answer: C Explanation:

13)

A) B) C) D) E)

5

15)

16) Which of the following events would cause the AE function to shift upwards in a parallel way? A) an increase in the MPC B) a decrease in the net tax rate C) a decrease in the business confidence of firms D) a decrease in foreign income E) a decrease in the aggregate price level Answer: E Explanation:

A) B) C) D) E)

17) Other things being equal, as the price level rises exogenously, the aggregate expenditure (AE) function shifts A) down and the economy will move upward to the left along the AD curve. B) down and the economy will move downward to the right along the AD curve. C) upward and the economy moves upward to the left along the AD curve. D) upward and the economy moves downward to the right along the AD curve. E) to the right and the AD curve will also shift to the right. Answer: A Explanation:

17)

A) B) C) D) E)

18) Other things being equal, as the price level falls exogenously, the aggregate expenditure (AE) function shifts A) down and the economy will move upward along the AD curve. B) down and the economy will move downward along the AD curve. C) upward and the economy moves upward along the AD curve. D) upward and the economy moves downward along the AD curve. E) to the left, as does the AD curve. Answer: D Explanation:

16)

A) B) C) D) E)

6

18)

19) The AD curve relates the price level to A) desired aggregate expenditure. B) desired consumption. C) equilibrium real GDP if output is demand determined. D) equilibrium nominal GDP if output is demand determined. E) equilibrium savings and wealth. Answer: C Explanation:

A) B) C) D) E)

20) All points on an economy's AD curve A) correspond to a particular point on industry demand curves for a particular product. B) relate a particular price level to the total demand for output at that price level. C) show only changes in relative prices and quantities. D) show the direct relationship between the price level and net exports. E) show the direct relationship between the price level and the demand for consumer goods. Answer: B Explanation:

20)

A) B) C) D) E)

21) In a macro model with a constant price level, an increase in autonomous desired consumption will cause the AE curve to shift A) downward and the AD curve to shift to the left. B) downward and the AD curve to shift to the right. C) upward and the AD curve to shift to the left. D) upward and the AD curve to shift to the right. E) upward and a movement to the right along the AD curve. Answer: D Explanation:

19)

A) B) C) D) E)

7

21)

22) In a macro model with a constant price level, an increase in government purchases will cause the AE curve to shift A) downward and the AD curve to shift to the right. B) downward and the AD curve to shift to the left. C) downward and a movement to the right along the AD curve. D) upward and the AD curve to shift to the left. E) upward and the AD curve to shift to the right. Answer: E Explanation:

A) B) C) D) E)

23) On a graph that shows the derivation of the AD curve, an exogenous change in the price level causes A) a shift in the AE curve and a movement along the AD curve. B) a shift in both the AE and AD curves. C) a movement along the AE curve and a shift in the AD curve. D) a movement along the AE curve but not along the AD curve. E) a movement along both the AE and AD curves. Answer: A Explanation:

23)

A) B) C) D) E)

24) Which of the following would likely cause an upward parallel shift in the AE curve and a rightward shift in the AD curve? A) an increase in the business confidence of firms B) a reduction in government purchases C) an increase in the MPC D) a decrease in the price level E) an increase in the price level Answer: A Explanation:

22)

A) B) C) D) E)

8

24)

25) Which of the following would likely cause a downward shift in the AE curve and a movement upward along the AD curve? A) a decrease in the business confidence of firms B) a reduction in government purchases C) a decrease in the MPC D) a decrease in the price level E) an increase in the price level Answer: E Explanation:

A) B) C) D) E)

26) Which of the following would likely cause a downward parallel shift in the AE curve and a leftward shift in the AD curve? A) an increase in the business confidence of firms B) a reduction in government purchases C) an decrease in the MPC D) a decrease in the price level E) an increase in the price level Answer: B Explanation:

25)

A) B) C) D) E)

9

26)

FIGURE 23-1 27) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . The corresponding point on the aggregate demand curve is point A) A. B) B. Answer: B Explanation:

C) C.

D) D.

A) B) C) D) E)

10

E) E.

27)

28) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . Other things being equal,

28)

exogenous changes in the price level will cause A) movement along the aggregate expenditure curve AE0 and shifts of the AD curve. B) movement along the aggregate expenditure curve AE0 and movement along the aggregate demand curve AD0 . C) shifts of the AE curve and shifts of the AD curve. D) shifts of the AE curve and movement along the aggregate demand curve AD0. E) no change in either the AE curve or the AD curve. Answer: D Explanation:

A) B) C) D) E)

29) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . Now, suppose there is an exogenous rise in the price level to P1 . Which of the following statements describes the likely macroeconomic effects? A) The AE curve shifts to AE1 , a new equilibrium is established at point U, and the AD curve shifts from AD0 to AD1 , and equilibrium from point B to point D. B) The AE curve shifts to AE2 , a new equilibrium is established at point W, and the economy moves from point B to point C along AD0 . C) The AE curve shifts to AE1 , a new equilibrium is established at point U, and the economy moves from point B to point A along AD0 D) The AE curve shifts to AE2 , a new equilibrium is established at point W, and the AD curve shifts from AD0 to AD1 , and equilibrium moves from point B to point D. Answer: C Explanation:

A) B) C) D)

11

29)

30) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . Now, suppose there is an increase

30)

in desired investment and no change in the price level. Which of the following statements describes the likely macroeconomic effects? A) The AE curve shifts up to AE2, the AD curve shifts to AD2 , and a new equilibrium is established at point C, with real GDP at Y 2. B) The AE curve shifts down to AE1 , the AD curve shifts to AD1 , and a new equilibrium is established at point F, with real GDP at Y1 . C) The AE curve shifts to AE1 , the AD curve shifts to AD1 , and a new equilibrium is established at point E, with real GDP at Y2 . D) The AE curve shifts to AE2 , the AD curve shifts to AD1 , and a new equilibrium is established at point F, with real GDP at Y2 . E) The AE curve shifts to AE2 , the AD curve shifts to AD2 , and a new equilibrium is established at point E, with real GDP at Y2 . Answer: E Explanation:

A) B) C) D) E)

31) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . Now, suppose the AE curve shifts to AE1 and we move to a new equilibrium level of GDP at Y1 and point A on AD0 . A possible cause of this change in equilibrium is A) an exogenous rise in the price level. B) a decrease in desired investment. C) a decrease in autonomous consumption. D) a decrease in desired net exports. E) an increase in government purchases. Answer: A Explanation:

A) B) C) D) E)

12

31)

32) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . Now, suppose the AE curve shifts to

32)

AE1 and we move to a new equilibrium level of GDP at Y1 and point F on AD1 . A possible cause of this change in equilibrium is A) an exogenous rise in the price level. B) an exogenous fall in the price level. C) an increase in autonomous consumption. D) a decrease in desired net exports. E) an increase in government purchases. Answer: D Explanation:

A) B) C) D) E)

33) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . Now, suppose the AE curve shifts to

33)

AE2 and we move to a new equilibrium level of GDP at Y2 and point E on AD2 . A possible cause of this change in equilibrium is A) an increase in government purchases. B) an increase in the net tax rate. C) a decrease in desired investment. D) a decrease in desired net exports. E) an exogenous fall in the price level. Answer: A Explanation:

A) B) C) D) E)

34) Refer to Figure 23-1. Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point V. The price level is P0 . Now, suppose the AE curve shifts to AE2 and we move to a new equilibrium level of GDP at Y2 and point C on AD0. A possible cause of this change in equilibrium is A) an increase in autonomous consumption. B) an increase in desired investment. C) an exogenous fall in the price level. D) an exogenous rise in the price level. E) an increase in desired net exports. Answer: C Explanation:

A) B) C) D) E)

13

34)

35) Consider a simple macro model with a given price level and demand-determined output. An exogenous change in the price level causes a A) shift in both the AE and AD curves. B) movement along the AE curve and a shift in the AD curve. C) movement along both the AE and AD curves. D) shift in the AE curve and a movement along the AD curve. E) movement along AE but does not affect the AD curve. Answer: D Explanation:

A) B) C) D) E)

36) Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income A) shifts the AD curve to the left. B) shifts the AD curve to the right. C) causes a movement along the AD curve. D) causes a movement along the AE curve. E) causes a shift of the AE curve but no movement of the AD curve. Answer: B Explanation:

36)

A) B) C) D) E)

37) Consider the relationship between the AE curve and the AD curve. A fall in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income A) shifts the AD curve to the left. B) shifts the AD curve to the right. C) causes a movement along the AD curve. D) causes a movement along the AE curve. E) causes a shift of the AE curve but no movement of the AD curve. Answer: A Explanation:

35)

A) B) C) D) E)

14

37)

38) A leftward shift of the aggregate demand (AD) curve could result from a fall in A) autonomous government purchases. B) induced imports. C) the net tax rate. D) autonomous desired saving. E) the price level. Answer: A Explanation:

A) B) C) D) E)

39) A leftward shift in the aggregate demand (AD) curve could result from a rise in A) autonomous exports. B) autonomous government purchases. C) government transfer payments to households. D) desired investment. E) autonomous desired savings. Answer: E Explanation:

40)

A) B) C) D) E)

41) A rightward shift in the aggregate demand (AD) curve could result from a rise in A) induced imports. B) desired investment. C) the net tax rate. D) desired saving. E) the price level. Answer: B Explanation:

39)

A) B) C) D) E)

40) A leftward shift of the aggregate demand (AD) curve could result from a rise in A) desired exports. B) government purchases. C) government transfer payments to households. D) the net tax rate. E) desired investment. Answer: D Explanation:

38)

A) B) C) D) E)

15

41)

42) Consider the basic AD/AS macro model. The simple multiplier is reflected by the A) horizontal distance between initial macroeconomic equilibrium and the new intersection of AD and AS in response to a change in autonomous expenditure. B) downward movement along the AD curve in response to a change in autonomous expenditure. C) size of the rightward shift of the AD curve in response to a change in autonomous expenditure. D) upward movement along the AD curve in response to a change in autonomous expenditure. E) size of the leftward shift of the AD curve in response to a rise in autonomous expenditure. Answer: C Explanation:

A) B) C) D) E)

43) Consider the basic AD/AS model in the short run. When there is a change in autonomous desired expenditure, the simple multiplier is equal to the A) product of the horizontal shift of the AD curve times the change in autonomous expenditure. B) product of the vertical movement along the AD curve times the change in autonomous expenditure. C) ratio of the horizontal shift of the AD curve to the change in autonomous expenditure. D) ratio of the vertical movement along the AD curve to the change in autonomous expenditure. E) ratio of the vertical shift of the AD curve to the change in autonomous expenditure. Answer: C Explanation:

43)

A) B) C) D) E)

44) One reason why the aggregate demand (AD) curve slopes downward is that A) aggregate expenditure increases as the price level rises. B) increases in the price level cause consumers to substitute foreign goods for domestic goods. C) increased production results in lower production costs. D) when the price level falls firms must be more competitive when output increases. E) when the price level falls consumers increase their saving rate. Answer: B Explanation:

42)

A) B) C) D) E)

16

44)

45) One reason why the aggregate demand (AD) curve slopes downward is that A) aggregate expenditure increases as the price level rises. B) decreases in the price level cause increases in private-sector wealth which lead to increases in desired consumption. C) increased production results in lower production costs. D) when the price level falls firms must be more competitive when output increases. E) when the price level falls consumers increase their saving rate. Answer: B Explanation:

A) B) C) D) E)

46) The AD curve shows the relationship between A) the price level and the equilibrium level of demand-determined national income. B) AS and real national income. C) real national income and AE. D) AS and AE. E) the price level and desired consumption. Answer: A Explanation:

46)

A) B) C) D) E)

47) Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired investment expenditure at each level of national income A) shifts the AD curve to the left. B) shifts the AD curve to the right. C) causes a movement along the AD curve. D) causes a movement along the AE curve. E) causes a shift of the AE curve but no movement of the AD curve. Answer: B Explanation:

45)

A) B) C) D) E)

17

47)

48) Consider the relationship between the AE curve and the AD curve. A decline in the amount of desired net exports at each level of national income A) shifts the AD curve to the right. B) shifts the AD curve to the left. C) causes a movement up along the AD curve. D) causes a movement down along the AD curve. E) causes an upward shift of the AE curve but no movement of the AD curve. Answer: B Explanation:

A) B) C) D) E)

49) Consider the AD/AS model. Suppose there is an increase in autonomous desired consumption at a given price level. The result is A) the AE curve shifts downward and the AD curve shifts to the left. B) the AE curve shifts downward and the AD curve shifts to the right. C) the AE curve shifts upward and the AD curve shifts to the left. D) the AE curve shifts upward and the AD curve shifts to the right. E) no change in either the AE or the AD curve. Answer: D Explanation:

49)

A) B) C) D) E)

50) Other things being equal, a ________ marginal propensity to spend will lead to a ________ AD curve. A) lower; flatter B) higher; flatter C) higher; steeper D) lower; rightward shift of the E) lower; leftward shift of the Answer: B Explanation:

48)

A) B) C) D) E)

18

50)

51) Other things being equal, a closed economy will have a ________ marginal propensity to spend and thus a ________ AD curve compared to an open economy with foreign trade. A) lower; flatter B) higher; flatter C) higher; steeper D) lower; rightward shift of the E) lower; leftward shift of the Answer: B Explanation:

A) B) C) D) E)

52) Consider two economies, A and B. Economy A has a marginal propensity to consume of 0.9, a net tax rate of 0.1 and a marginal propensity to import of 0.1. Economy B has a marginal propensity to consume of 0.6, a net tax rate of 0.2 and a marginal propensity to import of 0.2. Suppose there is a decrease in autonomous investment of $5 billion in each of these economies. Which of the following statements is true? A) The AD curve shifts farther to the left in Economy A than Economy B. B) The AD curve shifts farther to the right in Economy A than Economy B. C) The AD curve shifts to the left the same amount in both economies. D) The AD curve shifts to the right the same amount in both economies. E) The simple multiplier is larger in Economy B. Answer: A Explanation:

52)

A) B) C) D) E)

53) Consider the simple multiplier when the price level is constant. We can say that national income is ________ and that the simple multiplier measures the horizontal shift in ________ in response to a change in autonomous desired expenditure. A) demand determined; the AS curve B) unit-cost determined; the AD curve C) constant; the AD curve D) demand determined; the AD curve E) constant; the AE curve Answer: D Explanation:

51)

A) B) C) D) E)

19

53)

54) Aggregate supply refers to the A) decisions of firms to decrease inputs in order to produce outputs. B) effects of increases in input prices on output. C) economy's potential output at each possible labour force. D) supply of labour inputs in the economy. E) total output firms wish to produce at each price level. Answer: E Explanation:

A) B) C) D) E)

55) The economy's aggregate supply (AS) curve shows the relationship between the A) equilibrium real GDP and marginal cost. B) equilibrium real GDP and desired consumption. C) price level and the marginal propensity to consume (MPC). D) price level and the total output that firms wish to produce and sell, with technology and input prices held constant. E) price level and the total output that firms wish to produce and sell, as technology and input prices vary. Answer: D Explanation:

55)

A) B) C) D) E)

56) The economy's aggregate supply (AS) curve shows the relationship between the price level and the total A) investment that firms wish to make, with input prices given. B) investment that firms wish to make, as input prices vary. C) output that firms wish to produce and sell, with input prices given. D) output that firms wish to produce and sell, as input prices vary. E) wealth accumulated by households, with national income given. Answer: C Explanation:

54)

A) B) C) D) E)

20

56)

57) The aggregate supply (AS) curve is drawn with which variables on the axes of the graph? A) the price level on the vertical axis and MPC on the horizontal axis B) national income on the vertical axis and total desired consumption on the horizontal axis C) the price level on the vertical axis and real national income on the horizontal axis D) national income on the vertical axis and marginal cost on the horizontal axis E) the price level on the vertical axis and real disposable income on the horizontal axis Answer: C Explanation:

A) B) C) D) E)

58) The aggregate supply curve relates the price level to the quantity of output that firms would like to produce and sell, given the assumption that A) technology and the prices of all factors of production remain constant. B) unit costs remain constant. C) all firms are price takers. D) all firms are price setters. E) technology and the prices of all factors of production do not remain constant. Answer: A Explanation:

58)

A) B) C) D) E)

59) In the short run, the aggregate supply curve has a positive slope because, as the price level rises, producers can A) accumulate inventories. B) be compensated for the extra costs incurred to produce more output. C) experience rising factor prices. D) produce less in response to falling profits. E) increase output at unchanged unit costs. Answer: B Explanation:

57)

A) B) C) D) E)

21

59)

60) In building a macro model with an AS curve, it is assumed that producers will A) increase prices without changing their output. B) decrease their prices without changing output. C) decrease their prices when they expand output. D) produce as much as possible at the existing price level. E) produce more output only if prices rise. Answer: E Explanation:

A) B) C) D) E)

61) The economy's aggregate supply (AS) curve is assumed to slope upward because A) inputs become more expensive at higher levels of output. B) inputs become less expensive at higher levels of output. C) firms' unit costs rise as output increases. D) firms' unit costs fall as output increases. E) aggregate demand increases at higher levels of national income. Answer: C Explanation:

62)

A) B) C) D) E)

63) A decrease in aggregate supply in the short run is A) shown by a shift to the left of the AS curve. B) shown by a shift to the right of the AS curve. C) interpreted to mean that more national output will be supplied at any given price level. D) caused by a decrease in the price level. E) caused by an increase in the price level. Answer: A Explanation:

61)

A) B) C) D) E)

62) The economy's aggregate supply curve is drawn under two main assumptions. They are A) firms' unit costs are constant; prices of all factors of production are constant. B) firms' unit costs are constant; the state of technology is constant. C) firms will produce more output only if prices rise; technology improves only if prices rise. D) the prices of all factors of production are constant; the state of technology is constant. E) the prices of all factors of production are constant; productivity improves as the price level rises. Answer: D Explanation:

60)

A) B) C) D) E) 22

63)

64) A decrease in aggregate supply in the short run is A) reflected in a movement to the left along the AS curve. B) reflected in a shift to the right in the AS curve. C) interpreted to mean that less total output will be supplied at any given price level. D) caused by a decrease in the price level. E) caused by an increase in the price level. Answer: C Explanation:

A) B) C) D) E)

65) Consider the basic AD/AS model. If there is a decrease in the cost of non-labour inputs to production, the result will be to A) shift the AD curve to the left. B) shift the AD curve to the right. C) shift the AS curve to the left. D) shift the AS curve to the right. E) cause a movement to the left along the AS curve. Answer: D Explanation:

65)

A) B) C) D) E)

66) Consider the basic AD/AS model. If major labour unions succeed in increasing wages across the economy, the AS curve will shift A) downward (to the right), reducing the price level. B) downward (to the right) and then return immediately to its original position. C) upward (to the left) and then return immediately to its original position. D) upward (to the left), increasing the price level. E) None of the above; there will no effect on the AS curve. Answer: D Explanation:

64)

A) B) C) D) E)

23

66)

67) A movement along the economy's AS curve could be caused by a change in A) labour productivity. B) the cost of capital. C) the price level, caused in turn by an AD shock. D) technology. E) the wage rate. Answer: C Explanation:

A) B) C) D) E)

68) The economy's AS curve will shift upward in the short run if there is A) an improvement in technology. B) a decrease in the cost of capital. C) an increase in the price level. D) a decrease in nominal wages. E) an increase in nominal wages. Answer: E Explanation:

69)

A) B) C) D) E)

70) Other things being equal, the AS curve will shift downward if there is A) a decrease in labour productivity. B) a decrease in the cost of capital inputs. C) a decrease in the price level. D) an increase in the price level. E) an increase in nominal wages. Answer: B Explanation:

68)

A) B) C) D) E)

69) The economy's AS curve will shift upward in the short run if there is A) a deterioration in technology. B) a decrease in the cost of capital. C) a decrease in nominal wages. D) a decrease in the price level. E) an improvement in technology. Answer: A Explanation:

67)

A) B) C) D) E)

24

70)

71) A rightward shift in the economy's AS curve implies that A) at any given price level, a lower level of output will be supplied. B) at any given price level, a higher level of output will be supplied. C) there is a decrease in aggregate supply. D) there is a demand shock. E) the same output will be produced, but only at a higher price level. Answer: B Explanation:

A) B) C) D) E)

72) A leftward shift in the economy's AS curve implies that A) at any given price level, a lower level of output will be supplied. B) at any given price level, a higher level of output will be supplied. C) there is an increase in aggregate supply. D) there is a demand shock. E) the same output will be produced in equilibrium, but at a lower price level. Answer: A Explanation:

72)

A) B) C) D) E)

73) The economy's AS curve is often assumed to be relatively flat at low levels of real GDP. The underlying reasoning is that A) consumer demand for most goods tends to be non-responsive to price when output is low. B) consumer demand for most goods tends to be very responsive to price when output is low. C) at low levels of output, firms are faced with unused capacity and thus can increase output without significantly increasing their costs. D) the price level is constant. E) profits are normally high in this section of the AS curve, so firms are willing to expand output. Answer: C Explanation:

71)

A) B) C) D) E)

25

73)

74) Consider the economy's aggregate supply curve. Other things being equal, unit costs will tend to increase if A) there is a rise in the price of oil. B) the government reduces payroll taxes. C) wage increases exceed productivity increases. D) wages rise. E) wage and price controls are in effect. Answer: C Explanation:

A) B) C) D) E)

75) Consider the economy's aggregate supply curve. Other things being equal, unit costs will tend to fall if A) there is a fall in the price of oil. B) the government increases payroll taxes. C) wage increases are less than productivity increases. D) wages fall. E) wage and price controls are in effect. Answer: C Explanation:

75)

A) B) C) D) E)

76) Consider the basic AD/AS model. When wage rates rise faster than the increase in labour productivity, the A) AD curve shifts left. B) AS curve shifts upward. C) output gap falls. D) output gap increases. E) AS curve shifts downward. Answer: B Explanation:

74)

A) B) C) D) E)

26

76)

77) Suppose there is a drop in the price of an important factor input. What will be the effect on the aggregate supply curve? A) There will be movement to the left, along the AS curve. B) The AS curve will shift to the left. C) There will be movement to the right, along the AS curve. D) The AS curve will shift to the right. E) There will be no change in the AS curve. Answer: D Explanation:

A) B) C) D) E)

78) Consider the basic AD/AS model. Suppose that a rising percentage of high-school graduates are illiterate, resulting in a decrease in average labour productivity. This change will A) shift the AD curve to the left. B) shift the AD curve to the right. C) shift the AS curve to the left. D) shift the AS curve to the right. E) cause a movement to the right along the AS curve. Answer: C Explanation:

78)

A) B) C) D) E)

79) Consider the basic AD/AS model. Suppose that high-school graduates have better computing skills than did graduates in the past, resulting in an increase in average labour productivity. This change will A) shift the AS curve to the left. B) shift the AS curve to the right. C) shift the AD curve to the left. D) shift the AD curve to the right. E) cause a movement along the AS curve to the right. Answer: B Explanation:

77)

A) B) C) D) E)

27

79)

80) Consider the basic AD/AS model. If their unit costs rise as output increases, price-taking firms will be prepared to produce ________ only if ________. A) more; prices decrease B) more; the economy is in equilibrium C) their current output; prices increase D) less; prices increase E) more; prices increase Answer: E Explanation:

A) B) C) D) E)

81) The aggregate supply curve will shift as a result of a change in 1) the wage rate; 2) the price level; 3) technology. A) 1 only B) 2 only C) 3 only Answer: D Explanation:

81)

D) 1 and 3

E) 2 and 3

A) B) C) D) E)

82) The aggregate supply curve tends to be relatively steep when GDP is above potential output because firms are operating above ________ and ________ are rising rapidly. A) equilibrium output; unit costs B) profit-maximizing output; total costs C) capacity; unit costs D) equilibrium output; total costs E) equilibrium output; average costs Answer: C Explanation:

80)

A) B) C) D) E)

28

82)

83) The aggregate supply curve is usually assumed to get progressively steeper at relatively higher levels of output because A) of increasing factor prices. B) of increasing productivity of the factors of production. C) of diminishing marginal productivity of the factors of production. D) of rising competition among price setters. E) of excess capacity at higher levels of output. Answer: C Explanation:

A) B) C) D) E)

84) Consider the basic AD/AS model. If firms' unit costs remained constant as firms increased their output levels, this would lead to a A) vertical AD curve. B) horizontal AD curve. C) vertical AS curve. D) horizontal AS curve. E) horizontal AE curve. Answer: D Explanation:

84)

A) B) C) D) E)

85) The concept of "demand-determined output" requires ________ to remain constant as output increases. A) technology of production B) government purchases C) firms' unit costs D) labour productivity E) the ratio of price setters to price takers Answer: C Explanation:

83)

A) B) C) D) E)

29

85)

FIGURE 23-2 86) Refer to Figure 23-2. Which of the following events could cause the upward shift of the AS curve? A) a decrease in the price of raw materials B) a decrease in the world supply of oil as a result of a major hurricane C) improved quality of the national education system D) rapid technological advances in mass production E) an increase in consumption Answer: B Explanation:

A) B) C) D) E)

87) Refer to Figure 23-2. Which of the following events could cause the upward shift of the AS curve? A) improvements in communications technology B) a decrease in business confidence that reduces desired investment C) a recession in the U.S. that reduces our net exports D) a major discovery of new oil reserves that will increase the world supply E) a massive drought that reduces agricultural output Answer: E Explanation:

86)

A) B) C) D) E)

30

87)

88) Refer to Figure 23-2. The shift from AS1 to AS2 shown in the diagram is referred to as a(n)

88)

A) increase in aggregate supply. B) increase in unit costs. C) negative aggregate supply shock. D) positive aggregate supply shock. E) decrease in unit costs. Answer: C Explanation:

A) B) C) D) E)

89) Macroeconomic equilibrium is described as the combination of A) potential output and price level that is on both the AD curve and AS curve. B) real GDP and price level that is on both the AD curve and 45-degree line. C) real GDP and price level that is on both the AD curve and AS curve. D) all individual demand curves and all individual supply curves. E) all individual demand curves and potential GDP. Answer: C Explanation:

A) B) C) D) E)

90) Consider the nature of macroeconomic equilibrium. If, at a particular price level, aggregate output demanded is less than that supplied by producers, then A) the price level will rise toward its equilibrium value. B) the price level will decline toward its equilibrium value. C) the aggregate demand curve will shift to the right, re-establishing an equilibrium. D) the aggregate supply curve will shift to the left, re-establishing an equilibrium. E) the aggregate supply curve will shift to the right, re-establishing an equilibrium. Answer: B Explanation:

89)

A) B) C) D) E)

31

90)

91) Consider the nature of macroeconomic equilibrium. If, at a particular price level, the total output demanded is greater than that supplied by producers, then A) the price level will decline toward its equilibrium value. B) the price level will rise toward its equilibrium value. C) the aggregate demand curve will shift to the left, re-establishing an equilibrium. D) the aggregate supply curve will shift to the right, re-establishing an equilibrium. E) the aggregate supply curve will shift to the left, re-establishing equilibrium. Answer: B Explanation:

A) B) C) D) E)

92) If the AS curve is vertical and there is a decrease in aggregate demand, the result is A) a decrease in the price level with no change in real GDP. B) an equal decrease in national income. C) an increase in the price level. D) an increase in national income. E) no change in either price level or real GDP. Answer: A Explanation:

92)

A) B) C) D) E)

93) Consider the AD/AS model. An increase in government purchases will have no impact on equilibrium real GDP if A) the AS curve slopes upward. B) the AS curve is vertical. C) the AS curve is horizontal. D) the marginal propensity to spend is very small. E) the simple multiplier is very small. Answer: B Explanation:

91)

A) B) C) D) E)

32

93)

94) Consider the basic AD/AS model. Real GDP is demand determined along the A) upward-sloping portion of the AS curve. B) downward-sloping portion of the AS curve. C) vertical portion of the AS curve. D) horizontal portion of the AS curve. E) None of the above - real GDP cannot be demand determined. Answer: D Explanation:

A) B) C) D) E)

95) Over the horizontal range of the economy's AS curve (assuming such a range exists), a rightward shift of the AD curve will result in A) an increase in prices and no change in real GDP. B) an increase in real GDP and no change in prices. C) an increase in both real GDP and prices. D) a decrease in both real GDP and prices. E) a decrease in real GDP but no change in prices. Answer: B Explanation:

96)

A) B) C) D) E)

97) Which of the following will cause a negative aggregate demand shock? A) an increase in the price of raw materials B) a decrease in the domestic price level C) an increase in the domestic price level D) an increase in government expenditures E) an increase in tax rates Answer: E Explanation:

95)

A) B) C) D) E)

96) If the economy's AS curve is upward sloping, a negative shock to aggregate demand will result in A) an increase in prices and no change in real GDP. B) a decrease in prices but no change in real GDP. C) an increase in real GDP and no change in prices. D) an increase in both real GDP and prices. E) a decrease in both real GDP and prices. Answer: E Explanation:

94)

A) B) C) D) E) 33

97)

FIGURE 23-3 98) Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy A in its current equilibrium position? A) Unit costs are rising, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level. B) Firms are producing well below their capacity and are willing to produce more only if prices rise. C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase. D) Firms are producing well below their capacity and are willing to produce more output with no increase in price. E) Unit costs are rising, but firms are able to produce more output because there is excess capacity in the economy. Answer: C Explanation:

A) B) C) D) E)

34

98)

99) Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy B? A) Unit costs are rising rapidly, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level. B) Firms are producing well below their capacity and are willing to produce more only if prices rise. C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase. D) Firms are producing well below their capacity and are willing to produce more output with no increase in price. E) Firms are not able to produce more output because there is no excess capacity in the economy. Answer: D Explanation:

99)

A) B) C) D) E)

100) Refer to Figure 23-3. Suppose the price level in Economy A is above P0 . Which of the following

100)

statements describes what would occur? A) The AD curve would shift to the right until macro equilibrium is reached. B) Real GDP would be above its equilibrium level which would put downward pressure on the price level until it reaches macro equilibrium at P0. C) The amount of output supplied by firms is greater than total desired expenditure; excess supply will put downward pressure on the price level until it reaches macro equilibrium at P0 . D) Real GDP would be below its equilibrium level which would put upward pressure on the price level until it reaches macro equilibrium. E) The AS curve would shift to the left until macro equilibrium is reached. Answer: C Explanation:

A) B) C) D) E)

101) Aggregate demand shocks have a large effect on real GDP and a small effect on the price level A) the steeper the AS curve. B) on the downward-sloping portion of the AS curve. C) the flatter the AS curve. D) when the AS curve is vertical. E) if the AD curve is steep. Answer: C Explanation:

A) B) C) D) E)

35

101)

102) If the economy's AS curve is upward sloping, a positive aggregate demand shock will result in A) an increase in prices but not output. B) an increase in output but not prices. C) an increase in both output and prices. D) a decrease in both output and prices. E) a decrease in output and an increase in prices. Answer: C Explanation:

A) B) C) D) E)

103) Consider the basic AD/AS model with an upward-sloping AS curve. A positive aggregate demand shock will cause A) a decrease in the price level. B) the equilibrium point to move rightward along the AS curve. C) a movement along the AD curve to the right. D) a shift to the right in the AS curve. E) the unemployment rate to remain constant. Answer: B Explanation:

103)

A) B) C) D) E)

104) If the economy's AS curve is very steep and there is a negative aggregate demand shock, the result will be A) an increase in the price level and a decrease in real national income. B) an increase in both the price level and real national income. C) a decrease in the price level with almost no change in real national income. D) a decrease in the price level and an increase in real national income. E) no change in either price level or output. Answer: C Explanation:

102)

A) B) C) D) E)

36

104)

105) Consider the basic AD/AS model. Suppose firms are currently producing beyond their normal capacity. A change in AD leads to a relatively A) large change in price level and a large change in real GDP. B) large change in price level and a small change in real GDP. C) small change in price level and a large change in real GDP. D) small change in price level and a small change in real GDP. E) no change in both price and output. Answer: B Explanation:

A) B) C) D) E)

106) Suppose firms are currently producing output at a level beyond their normal capacity. In this situation, the AS curve will be relatively ________ and a positive AD shock will result in ________. A) steep; an increase in the price level with a small increase in real GDP B) flat; an equal increase in the price level and in real GDP C) flat; a very small increase in prices but a large increase in real GDP D) flat; a very small decrease in the price level and a decrease in real GDP E) steep; a decrease in the price level and a very small decrease in real GDP Answer: A Explanation:

106)

A) B) C) D) E)

107) In the basic AD/AS model, the effect of an aggregate demand shock is divided between a change in output and a change in the price level. How the effect is divided depends on the A) amount of inflation in the economy. B) position of the AE curve. C) size of the simple multiplier. D) slope of the AD curve. E) slope of the AS curve. Answer: E Explanation:

105)

A) B) C) D) E)

37

107)

108) Which of the following would cause a positive aggregate demand shock, but leave the aggregate supply curve unaffected? A) A free trade agreement between Canada and the United States that leads Canadian businesses to increase investment expenditures. B) A severe drought lasting for six months that destroys agricultural and forestry production. C) A medical report confirming that improved health for Canadian workers caused fewer lost days of production. D) An improvement in the computer literacy of workers. E) A substantial increase in world oil prices. Answer: A Explanation:

A) B) C) D) E)

109) If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand increases, we expect the AE function to shift to a A) higher level and stay there. B) higher level, but then shift part of the way down to its original position as the price level rises. C) higher level but then return to its original position as the price level rises. D) lower level and stay there. E) lower level, but then return to its original position as the price level rises. Answer: C Explanation:

109)

A) B) C) D) E)

110) If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand decreases, we expect the AE function to shift to a A) higher level and stay there. B) higher level, but then shift part of the way down to its original position as the price level falls. C) higher level but then return to its original position as the price level falls. D) lower level and stay there. E) lower level, but then return to its original position as the price level falls. Answer: E Explanation:

108)

A) B) C) D) E)

38

110)

111) Aggregate demand (AD) shocks have a smaller effect on real GDP and a larger effect on the price level A) the steeper the AS curve. B) on the downward-sloping portion of the AS curve. C) the flatter the AS curve. D) on the upward-sloping portion of the AS curve. E) if the AD curve is flatter. Answer: A Explanation:

A) B) C) D) E)

112) Which of the following represents a positive aggregate supply shock? A) an outbreak of war among oil-exporting countries B) a general labour strike across the country C) bad weather which cripples telecommunications for one month D) improved computer literacy for the typical worker E) an increase in exports Answer: D Explanation:

113)

A) B) C) D) E)

114) Aggregate supply shocks cause the price level and real GDP to change in A) the same direction with price changing by more than output. B) the same direction and by the same amount. C) opposite directions with price changing by less than output. D) opposite directions but not necessarily by the same amount. E) opposite directions but by the same amount. Answer: D Explanation:

112)

A) B) C) D) E)

113) Which of the following will cause a positive aggregate supply shock? A) an increase in the price of raw materials B) a decrease in the price of foreign output C) an increase in the price of foreign output D) a decrease in the price of oil E) a decrease in productivity Answer: D Explanation:

111)

A) B) C) D) E) 39

114)

115) Consider the basic AD/AS macro model. A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level A) and real GDP are higher than in the initial equilibrium. B) and real GDP are lower than in the initial equilibrium. C) is lower and real GDP higher than in the initial equilibrium. D) is higher and real GDP remained the same as in the initial equilibrium. E) is higher and real GDP lower than in the initial equilibrium. Answer: E Explanation:

A) B) C) D) E)

116) Consider the basic AD/AS model. A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium, which in comparison to the original equilibrium, has a price level that is A) higher and a real GDP that is higher. B) higher and a real GDP that is lower. C) higher and a real GDP that is the same. D) lower and a real GDP that is higher. E) lower and a real GDP that is lower. Answer: B Explanation:

116)

A) B) C) D) E)

117) Consider the AD/AS macro model. Suppose there is an increase in aggregate demand and, simultaneously, a decrease in aggregate supply. The result will be a A) rise in real GDP but price level changes will be indeterminate. B) rise in real GDP and a rise in the price level. C) rise in real GDP and a fall in the price level. D) an indeterminate change in real GDP and a rise in the price level. E) an indeterminate change in real GDP and a fall in the price level. Answer: D Explanation:

115)

A) B) C) D) E)

40

117)

118) Consider the AD/AS model. Suppose there is a decrease in aggregate demand and, simultaneously, an increase in aggregate supply. The result will be a A) rise in real GDP but price level changes will be indeterminate. B) rise in real GDP and a rise in the price level. C) rise in real GDP and a fall in the price level. D) an indeterminate change in real GDP and a rise in the price level. E) an indeterminate change in real GDP and a fall in the price level. Answer: E Explanation:

A) B) C) D) E)

119) Consider the following news headline: "World commodity prices rise sharply." Choose the statement below that best describes the likely macroeconomic effects in Canada. (Remember that Canada is both a producer and a consumer of commodities.) A) there is no change in either the AD or the AS curves B) the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate C) the AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP decreases D) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP increases E) the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate Answer: E Explanation:

119)

A) B) C) D) E)

120) Consider the following news headline: "Governments plan massive hospital construction programs across the country." Choose the statement below that best describes the likely macroeconomic effects. A) the AD curve shifts to the left; the price level falls and real GDP falls B) the AD curve shifts to the right; the price level rises and real GDP rises C) the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate D) the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate E) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises Answer: B Explanation:

118)

A) B) C) D) E)

41

120)

121) Consider the following news headline: "Information technology costs for Canadian firms continue to drop." Choose the statement below that best describes the likely macroeconomic effect. A) the AD curve shifts to the right; the price level rises and real GDP rises B) the AD curve shifts to the left; the price level falls and real GDP falls C) the AS curve shifts to the left; the price level rises and real GDP falls D) the AS curve shifts to the right; the price level falls and real GDP rises E) the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises Answer: D Explanation:

A) B) C) D) E)

122) Consider the following news headline: "Threat of widespread labour unrest leads to generous wage increases in several industries." Choose the statement below that best describes the likely macroeconomic effects. A) The AS curve shifts to the left; the price level rises and real GDP falls. B) The AS curve shifts to the right; the price level falls and real GDP rises. C) The AD curve shifts to the left; the price level falls and real GDP falls. D) The AD curve shifts to the right; the price level rises and real GDP rises. E) The AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP falls. Answer: A Explanation:

122)

A) B) C) D) E)

123) Consider the following two headlines appearing in the same day: "Federal government announces major new infrastructure investments" and "New technology drives down transport costs." Choose the statement below that best describes the likely macroeconomic effects. A) The AS curve shifts to the left; the price level rises and real GDP falls. B) The AS curve shifts to the right; the price level falls and real GDP rises. C) The AD curve shifts to the left; the price level falls and real GDP falls. D) The AD curve shifts to the right; the price level rises and real GDP rises. E) The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises. Answer: E Explanation:

121)

A) B) C) D) E)

42

123)

124) Suppose the economy is hit by a shock and we observe that the price level has decreased whereas real GDP has increased. We can conclude that this shock was A) a positive AD shock. B) a negative AD shock. C) a positive AS shock. D) a negative AS shock. E) a negative technology shock. Answer: C Explanation:

124)

A) B) C) D) E)

FIGURE 23-4 125) Consider Figure 23-4. Initially the economy is in equilibrium at point A. An unexpected shock then shifts both the AD and the AS curves as shown and results in a new equilibrium represented by point B. Which of the following events could cause such a shock? A) an increase in the net tax rate B) a decrease in firms' desired investment expenditures C) an increase in factor prices D) a decrease in labour productivity E) a decrease in the world price of oil Answer: E Explanation:

A) B) C) D) E)

43

125)

126) If the economy's AS curve is completely horizontal, the multiplier in the AD/AS model is A) infinitely large. B) equal to the simple multiplier. C) smaller than the simple multiplier. D) is zero. E) negative. Answer: B Explanation:

A) B) C) D) E)

127) When the economy's AS curve is positively sloped, the multiplier in the AD/AS model is A) constant. B) equal to one. C) equal to the simple multiplier. D) smaller than the simple multiplier. E) larger than the simple multiplier. Answer: D Explanation:

128)

A) B) C) D) E)

129) Suppose the government embarks on an infrastructure program, spending $8 billion on the construction of new roads and bridges. What is the size of the multiplier if the AS curve is vertical? A) 0 B) greater than 1 C) less than 1 D) infinity E) insufficient information to solve Answer: A Explanation:

127)

A) B) C) D) E)

128) If the economy's AS curve is vertical, the multiplier in the AD/AS model is A) infinitely large. B) equal to the simple multiplier. C) smaller than the simple multiplier. D) zero. E) negative. Answer: D Explanation:

126)

A) B) C) D) E) 44

129)

130) When the price level varies, the multiplier is ________ the simple multiplier. A) larger than B) smaller than C) definitionally the same as D) not comparable to E) equal to Answer: B Explanation:

130)

A) B) C) D) E)

FIGURE 23-5 131) Refer to Figure 23-5. Suppose that an increase in government purchases by 50 causes the AD curve to shift to the right, as shown. The simple multiplier is ________ and the multiplier is ________. A) 6; 1.2 B) 2.8; 1.2 C) 4; 1.2 D) 4; 2.8 E) 4; 3.2 Answer: C Explanation:

A) B) C) D) E)

45

131)

132) Refer to Figure 23-5. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 5, then how much was the increase in government purchases? A) 30 B) 40 C) 50 D) 12 E) not enough information to know Answer: B Explanation:

A) B) C) D) E)

133) Refer to Figure 23-5. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then what is the value of the multiplier? A) 1.2 B) 1.4 C) 4 D) 2.8 E) 3.2 Answer: A Explanation:

132)

A) B) C) D) E)

46

133)

FIGURE 23-3 134) Refer to Figure 23-3. Which of the two economies, A or B, will experience more volatile fluctuations in national income in response to aggregate demand shocks? A) Economies A and B will experience similar volatility because the slopes of the AD curves are the same. B) Economy A because the large fluctuations in the price level lead to large fluctuations in national income. C) Economy A because the multiplier is much larger than in Economy B. D) Economy B because the multiplier is much smaller than in Economy A. E) Economy B because output is purely demand determined, and there is no offsetting effect from a price level increase. Answer: E Explanation:

A) B) C) D) E)

135) Refer to Figure 23-3. Which of the following statements correctly describes the difference between the multipliers (in response to an increase in autonomous expenditure) in Economy A and Economy B? The multiplier in Economy A is ________ while the multiplier in Economy B is ________. A) almost zero; equal to one B) almost zero; equal to the simple multiplier C) equal to the simple multiplier; almost zero D) equal to one; almost zero E) equal to one; equal to the simple multiplier Answer: B Explanation:

134)

A) B) C) D) E)

47

135)

Answer Key Testname: UNTITLED23

1) B 2) B 3) D 4) B 5) A 6) B 7) C 8) B 9) D 10) C 11) E 12) E 13) A 14) A 15) C 16) E 17) A 18) D 19) C 20) B 21) D 22) E 23) A 24) A 25) E 26) B 27) B 28) D 29) C 30) E 31) A 32) D 33) A 34) C 35) D 36) B 37) A 38) A 39) E 40) D 41) B 42) C 43) C 44) B 45) B 46) A 47) B 48) B 49) D 50) B 48

Answer Key Testname: UNTITLED23

51) B 52) A 53) D 54) E 55) D 56) C 57) C 58) A 59) B 60) E 61) C 62) D 63) A 64) C 65) D 66) D 67) C 68) E 69) A 70) B 71) B 72) A 73) C 74) C 75) C 76) B 77) D 78) C 79) B 80) E 81) D 82) C 83) C 84) D 85) C 86) B 87) E 88) C 89) C 90) B 91) B 92) A 93) B 94) D 95) B 96) E 97) E 98) C 99) D 100) C 49

Answer Key Testname: UNTITLED23

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135)

C C B C B A E A C E A D D D E B D E E B D A E C E B D D A B C B A E B

50

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following are the defining assumptions of the short run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are changing. B) Factor prices adjust to output gaps, and technology and factor supplies are constant. C) Factor prices are exogenous, and technology and factor supplies are constant. D) Factor prices adjust to output gaps, and technology and factor prices are changing. E) Factor prices are exogenous, technology and factor prices are endogenous. Answer: C Explanation:

A) B) C) D) E)

2) Which of the following are the defining assumptions of the long run in macroeconomics? A) Factor prices are exogenous, and technology and factor supplies are changing. B) Factor prices adjust to output gaps, and technology and factor supplies are constant. C) Factor prices are exogenous, and technology and factor supplies are constant. D) Factor prices adjust to output gaps, and technology and factor supplies are changing. E) Factor prices are exogenous, technology and factor prices are exogenous. Answer: D Explanation:

2)

A) B) C) D) E)

3) In macroeconomic analysis, the assumption that potential output (Y*) is changing is a characteristic of A) the short run. B) the adjustment process. C) the national accounts model. D) the long run. E) the business cycle model. Answer: D Explanation:

1)

A) B) C) D) E)

1

3)

4) Which of the following is a defining assumption of the AD/AS macro model in the short run? A) factor supplies are assumed to be flexible B) technology used in production is endogenous and variable C) the level of potential output fluctuates with the price level D) factor prices are assumed to be exogenous E) firms cannot operate near their normal capacity Answer: D Explanation:

A) B) C) D) E)

5) In the basic AD/AS model, which of the following is a defining assumption of the adjustment process that takes the economy from the short run to the long run? A) factor supplies are assumed to be varying B) technology used in production is endogenous C) the level of potential output fluctuates with the price level D) factor prices are assumed to respond to output gaps E) firms cannot operate near their normal capacity Answer: D Explanation:

6)

A) B) C) D) E)

7) The economy's output gap is defined as the A) difference between actual GDP and potential GDP. B) level of total output that would be produced if capacity utilization is at its normal rate. C) difference between actual national income and desired aggregate expenditure. D) result of economic growth. E) difference between nominal GDP and real GDP. Answer: A Explanation:

5)

A) B) C) D) E)

6) Which of the following is a defining assumption of the AD/AS macro model in the long run? A) factor supplies are assumed to be fixed B) technology used in production is constant C) the level of potential output is constant D) factor prices are assumed to be fixed E) changes in real GDP are determined by the changes in potential output Answer: E Explanation:

4)

A) B) C) D) E) 2

7)

8) Which of the following best describes the concept of potential output? A) The total output that can be produced when all factors of production (land, labour, and capital) are fully employed. B) The total output that can be produced when the economy is in short-run economic equilibrium. C) The total output that can be produced when all productive resources (land, labour, and capital) are used at their maximum capacity. D) The total output that could be produced in the future when technological advances allow for a higher level of output. E) The total output that could be produced if no productive resource (land, labour, and capital) was ever left idle. Answer: A Explanation:

A) B) C) D) E)

9) An inflationary output gap occurs when A) actual GDP exceeds potential GDP. B) nominal GDP exceeds real GDP. C) demand for labour services is very low. D) equilibrium national income is below potential national income. E) potential GDP exceeds actual GDP. Answer: A Explanation:

9)

A) B) C) D) E)

10) An inflationary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs at real GDP below potential output. C) the economy's resources are being used beyond their normal capacity. D) there is a pressure for wages to decrease. E) there is excess supply of most factors of production. Answer: C Explanation:

8)

A) B) C) D) E)

3

10)

11) A recessionary output gap implies that A) the demand for all factor services will be relatively low. B) the intersection of AD and AS occurs where real GDP exceeds potential output. C) the economy's resources are being used at more than their normal capacity. D) there is upward pressure on wages. E) there is excess demand for most factors of production. Answer: A Explanation:

A) B) C) D) E)

12) An inflationary output gap would generate which of the following conditions in the economy? A) Firms are making low profits. B) Workers have a relatively large amount of bargaining power with employers. C) There is an unusually small demand for labour. D) There is downward pressure on wages. E) There is much idle capacity. Answer: B Explanation:

13)

A) B) C) D) E)

14) A recessionary output gap is characterized by A) rising prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output. Answer: E Explanation:

12)

A) B) C) D) E)

13) An inflationary output gap is characterized by A) falling prices. B) constant prices. C) real output that varies one-for-one with aggregate demand. D) real GDP exceeding potential output. E) real GDP falling below potential output. Answer: D Explanation:

11)

A) B) C) D) E)

4

14)

15) Which of the following will occur as part of the automatic adjustment process in an economy with an inflationary gap? A) falling prices B) increasing investment C) declining government purchases D) rising wages E) increasing tax rates Answer: D Explanation:

A) B) C) D) E)

16) Which of the following would occur as part of the automatic adjustment process in an economy with a recessionary gap? A) rising prices B) decreasing investment C) increasing government purchases D) falling tax rates E) decreasing wages Answer: E Explanation:

16)

A) B) C) D) E)

17) If the short-run macroeconomic equilibrium occurs with real GDP less than Y*, the economy is A) at its full-employment level of output. B) experiencing a recessionary gap. C) experiencing an inflationary gap. D) threatened with an acceleration of inflation. E) operating at full capacity. Answer: B Explanation:

15)

A) B) C) D) E)

5

17)

18) If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is A) at its full-employment level of output. B) experiencing a recessionary output gap. C) experiencing an inflationary output gap. D) threatened with a demand shock. E) operating at full capacity. Answer: C Explanation:

A) B) C) D) E)

19) If wages rise faster than increases in labour productivity, then unit labour costs will A) fall and the AS curve will shift left. B) fall and the AS curve will shift right. C) rise and the AS curve will shift left. D) rise and the AS curve will shift right. E) not change because only total labour costs change. Answer: C Explanation:

19)

A) B) C) D) E)

20) A common assumption among macroeconomists is that when real GDP exceeds potential output, factor prices adjust and the A) AS curve shifts to the left fairly rapidly. B) AS curve shifts to the left only very slowly. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) none of the above— the AS curve remains unchanged. Answer: A Explanation:

18)

A) B) C) D) E)

6

20)

21) A common assumption among macroeconomists is that when real GDP is less than potential output, factor prices adjust and the A) AS curve shifts to the left fairly rapidly. B) AS curve shifts to the right only very slowly. C) AS curve shifts to the right very rapidly. D) AD curve shifts to the left rapidly. E) None of the above - the AS curve remains unchanged. Answer: B Explanation:

A) B) C) D) E)

22) If the economy is experiencing an inflationary output gap, the adjustment process operates as follows: A) wages do not adjust, but the AD curve shifts to the right. B) wages fall, unit costs fall, and the AD curve shifts rightward. C) wages rise, unit costs rise, and the AS curve shifts leftward. D) wages rise, unit costs rise, and the AS curve shifts rightward. E) wages fall, unit costs fall, and the AS curve shifts rightward. Answer: C Explanation:

22)

A) B) C) D) E)

23) If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by A) the aggregate supply curve shifting to the left. B) the aggregate demand curve shifting to the left. C) the aggregate expenditure curve shifting upward. D) the intersection of the AD and AS curves at potential output. E) a point to the right of the aggregate supply curve at potential GDP. Answer: D Explanation:

21)

A) B) C) D) E)

7

23)

FIGURE 24-1 24) Refer to Figure 24-1. If the economy is currently in a short-run equilibrium at Y0 , the economy is

24)

experiencing A) a recessionary output gap. B) an inflationary output gap. C) a labour shortage. D) a long-run equilibrium. E) potential output growth. Answer: A Explanation:

A) B) C) D) E)

25) Refer to Figure 24-1. If the economy is currently producing output of Y0, the economy's automatic adjustment process will have the A) AS curve shifting to the right until point A is reached. B) vertical line at Y* shifting to the left until it gets to Y0 . C) AD curve shifting to the right until point B is reached. D) economy remaining where it is. E) level of potential output falling. Answer: A Explanation:

A) B) C) D) E)

8

25)

26) Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky

26)

downwards, then the A) economy will eventually move to point B. B) economy will only move gradually toward point A as wages slowly adjust. C) economy will quickly move to point A. D) level of output will decrease below Y0 . E) AD curve will eventually shift to the right and return the economy to its full-employment level of output. Answer: B Explanation:

A) B) C) D) E)

FIGURE 24-2 27) Refer to Figure 24-2. If the economy is currently in a short-run equilibrium at Y1 , the economy is experiencing A) potential output growth. B) a long-run equilibrium. C) an excess supply of labour. D) an inflationary output gap. E) a recessionary output gap. Answer: D Explanation:

A) B) C) D) E)

9

27)

28) Refer to Figure 24-2. Suppose the economy is in equilibrium at Y1 . The economy's automatic

28)

adjustment process will restore potential output, Y*, through A) wage increases and a leftward shift of the AS curve. B) wage increases and a rightward shift in the AS curve. C) wage decreases and a rightward shift of the AD curve. D) an increase in potential GDP to intersect both the AD and AS curves at B. E) a leftward shift of the AD to intersect both the AS and potential GDP at A. Answer: A Explanation:

A) B) C) D) E)

29) The Phillips curve describes the relationship between A) aggregate expenditure and aggregate demand. B) the money supply and interest rates. C) unemployment and the rate of change of wages. D) inflation and interest rates. E) the output gap and potential GDP. Answer: C Explanation:

A) B) C) D) E)

30) The Phillips curve provides a theoretical link between A) the liquidity preference and investment demand schedules. B) labour markets and foreign-exchange markets. C) the goods market and productivity. D) the goods market and the labour market. E) inflation and the demand for money. Answer: D Explanation:

29)

A) B) C) D) E)

10

30)

31) Which of the following describes the distinction between the Phillips curve and the AS curve? A) The AS curve has the price level on the vertical axis whereas the Phillips curve has the interest rate on the vertical axis. B) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of change in the interest rate on the vertical axis. C) The AS curve has the price level on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. D) The AS curve has the rate of price inflation on the vertical axis whereas the Phillips curve has the rate of wage changes on the vertical axis. E) There is no distinction: the two curves are essentially the same thing. Answer: C Explanation:

A) B) C) D) E)

32) If the economy in the short run is experiencing a recessionary gap, we are likely to see A) severe and widespread labour shortages. B) quickly rising output prices. C) many workers receiving employment-insurance benefits. D) the number of employment-insurance recipients the lowest ever. E) consumers optimistic about the future. Answer: C Explanation:

32)

A) B) C) D) E)

33) Which of the following statements about output gaps is true? A) When actual GDP is below potential GDP, there is upward pressure on wages. B) When actual GDP is below potential GDP, there is upward pressure on output prices. C) When actual GDP is above potential GDP, there is downward pressure on wages. D) When actual GDP is above potential GDP, there is downward pressure on output prices. E) When actual GDP is above potential GDP, there is upward pressure on wages. Answer: E Explanation:

31)

A) B) C) D) E)

11

33)

34) Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output ________ have adjusted to output gaps. A) demanded by households after all factor prices B) supplied by firms after all factor prices C) demanded by households before all factor prices D) supplied by firms before all factor prices E) supplied by firms after all output prices Answer: B Explanation:

A) B) C) D) E)

35) As the macro economy adjusts from the short run to the long run, A) wages and other factor prices adjust to close output gaps. B) potential output is adjusting to close inflationary or recessionary gaps. C) wages and other factor prices remain constant. D) aggregate demand shocks cause deviations from potential output. E) aggregate supply shocks cause deviations from potential output. Answer: A Explanation:

35)

A) B) C) D) E)

36) Following any AD or AS shock, economists typically assume that the adjustment process continues until A) the AD and AS curves intersect each other at the correct price level. B) real GDP returns to Y*. C) factor prices have returned to their levels previous to the shock. D) Y* adjusts to its long-run equilibrium level. E) the output gap is at a stable level. Answer: B Explanation:

34)

A) B) C) D) E)

12

36)

The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion.

Economy A Economy B Economy C Economy D Economy E

Real GDP 300 320 340 360 380

Rate of Wage Change -1.0% -0.5% 0% +3.5% +6.0%

TABLE 24-1 37) Refer to Table 24-1. Which of the economies is operating at its long-run equilibrium? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E Answer: C Explanation:

A) B) C) D) E)

38) Refer to Table 24-1. Which of the economies are experiencing an inflationary gap? A) Economies A and B B) Economies B and C C) Economies C and D D) Economies D and E E) none of the economies Answer: D Explanation:

37)

A) B) C) D) E)

13

38)

39) Refer to Table 24-1. Which of the following statements best describes the situation facing Economy B? A) There is a recessionary gap of $40 billion and wages are falling slowly. B) There is an inflationary gap of $40 billion and wages are rising. C) There is a recessionary gap of $20 billion and wages are falling slowly. D) There is no output gap and wages are stable. E) There is an output gap of $20 billion and wages are rapidly adjusting. Answer: C Explanation:

A) B) C) D) E)

40) Refer to Table 24-1. Consider Economy E. Which of the following best describes the positions of the aggregate demand and aggregate supply curves in this economy? A) The AD curve has shifted to the right and the economy is in a short-run disequilibrium position. B) The AS curve has shifted to the left and the economy is in a short-run disequilibrium position. C) The intersection of the AD and AS curves is to the right of Y*. D) The intersection of the AD and AS curves is to the left of Y*. E) The intersection of the AD and AS curves coincide with the long-run aggregate supply curve. Answer: C Explanation:

40)

A) B) C) D) E)

41) Refer to Table 24-1. How is the adjustment asymmetry demonstrated when comparing Economy A to Economy E? A) The size of the output gap is the same in Economies A and E, but wages are rising in A and falling in E. B) The output gap is larger in Economy A, yet wages are changing more slowly. C) The output gap is much larger in Economy E, so wages are changing at a faster rate. D) The size of the output gap is the same in Economies A and E but wages are falling more slowly in A than they are rising in E. E) There is insufficient data with which to observe the adjustment asymmetry. Answer: D Explanation:

39)

A) B) C) D) E)

14

41)

42) Refer to Table 24-1. Which of the following statements explains why wages are rising in Economy E? A) The inflationary gap generates lower profits for firms because workers are demanding higher wages. B) The inflationary gap generates excess demand for labour, which causes wages to rise. C) The aggregate supply curve is shifting to the right, which is causing wages to rise. D) The aggregate demand curve is shifting to the right, causing wages to rise. E) Potential output is rising, putting upward pressure on wages. Answer: B Explanation:

A) B) C) D) E)

43) Refer to Table 24-1. In which economy is there the most unused capacity? A) Economy A B) Economy B C) Economy C D) Economy D E) Economy E Answer: A Explanation:

43)

A) B) C) D) E)

44) Suppose that the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases. We can conclude that ________ has increased and there is now a(n) ________ gap. A) aggregate supply; inflationary B) aggregate demand; recessionary C) aggregate supply; recessionary D) aggregate demand; inflationary Answer: D Explanation:

42)

A) B) C) D)

15

44)

45) Suppose the following conditions are present in the economy: - firms are increasing output to meet strong demand for their goods - workers are able to demand higher wages as firms try to bid workers away from other firms Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) There is an inflationary output gap; aggregate demand will continue to increase, causing the AD curve to shift to the right. The price level will rise until equilibrium is restored at Y*.

45)

B) The economy is in equilibrium at Y*, but wages are rising. The AS curve will shift to the left until a new equilibrium is reached at a higher price level. C) There is a recessionary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at Y*. D) There is an inflationary output gap; wages and other factor prices will rise; the AS curve will shift to the left until equilibrium is restored at Y*. E) There is a recessionary output gap; aggregate demand will rise, causing the AD curve to shift to the right until equilibrium is restored at Y*. Answer: D Explanation:

A) B) C) D) E)

46) Suppose the following conditions are present in the economy: - firms are facing lower-than normal sales and have reduced output -there is an excess supply of labour and firms are starting to reduce their workforces Which of the following statements describes the adjustment that will happen in the AD/AS macro model? A) Output is below potential; aggregate demand will fall, causing the AD curve to shift to the left. The price level will fall until equilibrium is restored at Y*. B) The economy is in equilibrium at Y*, but wages are falling. The AS curve will shift to the right until a new equilibrium is reached at a lower price level. C) Output is below potential; wages will eventually fall; the AS curve will slowly shift to the right until equilibrium is restored at Y *. D) Output is above potential; wages will fall, causing the AS curve to shift to the right until equilibrium is restored at Y*. E) Output is above potential; aggregate demand will fall, causing the AD curve to shift to the left until equilibrium is restored at Y*. Answer: C Explanation:

A) B) C) D) E)

16

46)

47) Consider the adjustment of factor prices to output gaps in the basic AD/AS macro model. The experience of many economies suggests that A) downward pressure on wages during slumps results in sharply increased labour costs. B) upward pressures on wages are largely ineffective in booms. C) downward pressure on wages during slumps is not as intense as upward pressure on wages during booms. D) unit labour costs fall quickly during booms. E) slumps and booms are not common; the economy is usually in equilibrium at potential output. Answer: C Explanation:

A) B) C) D) E)

48) An important asymmetry in the behaviour of the AS curve is that A) prices are sticky but wages are not. B) positive output gaps can persist for a long time without causing increases in wages and prices, whereas negative output gaps lead to immediate reductions in wages and prices. C) negative output gaps can persist for a while without causing large decreases in wages and prices, whereas positive output gaps lead more quickly to increases in wages and prices. D) wages are very flexible in the downward direction, but not in the upward direction. E) wages and prices are equally sticky in both directions. Answer: C Explanation:

48)

A) B) C) D) E)

49) The wage-adjustment process is asymmetrical because A) factor prices fluctuate more frequently than goods prices. B) goods prices rise more quickly than factor prices. C) employers delay wage increases in a boom but lay off workers quickly during a slump. D) taxes rise quickly in a boom but do not fall during a slump. E) wages rise quickly in a boom but fall slowly during a slump. Answer: E Explanation:

47)

A) B) C) D) E)

17

49)

50) An important asymmetry in the behaviour of aggregate supply is the A) changing slope of the aggregate demand curve. B) difference between actual and potential output. C) different relative sizes of inflationary versus recessionary gaps. D) economy's path of potential output as a result of labour force growth. E) different speeds at which factor prices adjust to positive and negative output gaps. Answer: E Explanation:

A) B) C) D) E)

51) An economy may not quickly and automatically eliminate a recessionary output gap because wages A) never change in response to changes in the demand for labour. B) have a tendency to be sticky downward. C) have a tendency to fall too quickly. D) have a tendency to rise too quickly. E) are flexible but prices have a tendency to be sticky downward. Answer: B Explanation:

51)

A) B) C) D) E)

52) An adjustment "asymmetry" in aggregate supply is A) the concave shape of the AS curve. B) the convex shape of the AS curve. C) the difference in speed of a rightward shift versus a leftward shift (when wages adjust to output gaps). D) the difference in speed of increases in factor prices versus wage rates. E) the difference in speed of decreases in output levels. Answer: C Explanation:

50)

A) B) C) D) E)

18

52)

53) Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will A) allow a stable expansion of real income over time. B) always reverse itself. C) be negated in the long run, through the economy's adjustment process. D) result in a price level lower than that preceding the demand shock. E) set off an endless cycle of price rises and increases in unemployment. Answer: C Explanation:

A) B) C) D) E)

54) Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, will be eliminated if A) wages rise quickly. B) the AS curve shifts upward. C) wages and other factor prices fall sufficiently. D) real national income decreases. E) prices rise quickly. Answer: C Explanation:

54)

A) B) C) D) E)

55) Consider an economy with a relatively steep AS curve. If there is a shift to the right in the AD curve, there will be a ________ in the price level and ________ in national output. A) small increase; a large increase B) small increase; a large decrease C) large increase; a small increase D) large increase; a small decrease E) large increase; no change Answer: C Explanation:

53)

A) B) C) D) E)

19

55)

56) Consider an economy with a relatively steep AS curve. If the AD curve shifts to the left, then the price level will ________ and national output will ________. A) increase slightly; significantly increase B) increase slightly; significantly decrease C) increase sharply; increase slightly D) fall sharply; will not change. E) fall sharply; decrease slightly. Answer: E Explanation:

A) B) C) D) E)

57) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in world demand for Canada's goods. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is below its original level with a lower price level B) real GDP and the price level both rise; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Answer: C Explanation:

57)

A) B) C) D) E)

58) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is at its original level with a lower price level B) real GDP and the price level both fall; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Answer: A Explanation:

56)

A) B) C) D) E) 20

58)

59) Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output will ________. A) decrease; decrease; decrease further; decrease further B) decrease; decrease; decrease further; be restored to potential output C) increase; decrease; increase further; increase further D) increase; decrease; increase further; be restored to potential output E) increase; increase; increase further; be restored to potential output Answer: E Explanation:

A) B) C) D) E)

60) Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run. A) a positive; no B) a positive; a positive C) no; a positive D) no; no E) not enough information to know Answer: A Explanation:

60)

A) B) C) D) E)

61) Consider the basic AD/AS macro model in long-run equilibrium. A permanent expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run. A) a positive; no B) a negative; no C) a positive; an even larger D) a positive; a smaller E) a negative; a positive Answer: C Explanation:

59)

A) B) C) D) E)

21

61)

62) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in the Canadian-dollar price of all imported raw materials. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is below its original level with a lower price level B) real GDP and the price level both rise; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level E) real GDP falls and the price level rises; real GDP and the price level return to their original levels Answer: E Explanation:

A) B) C) D) E)

63) Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, ________. In the long run, ________. A) real GDP and the price level both fall; real GDP is below its original level with a lower price level B) real GDP and the price level both rise; real GDP is above its original level with a higher price level C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level D) real GDP rises and the price level falls; real GDP and the price level return to their original levels E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level Answer: D Explanation:

62)

A) B) C) D) E)

22

63)

The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-3 64) Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from AD1 to AD2 . The

64)

initial effect is A) a recessionary output gap of 100. B) a recessionary output gap of 300. C) a recessionary output gap of 550. D) an inflationary output gap of 200. E) an inflationary output gap of 100. Answer: A Explanation:

A) B) C) D) E)

65) Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from AD1 to AD2 . At the new short-run equilibrium, the price level is ________ and real GDP is ________. A) 90; 900 B) 110; 800 C) 60; 1000 D) 60; 700 E) 90; 1250 Answer: A Explanation:

A) B) C) D) E)

23

65)

66) Refer to Figure 24-3. Which of the following events could have shifted the AD curve from AD1 to

66)

AD2 ? A) an increase in net exports B) an increase in government purchases C) an increase in desired investment D) an increase in autonomous household saving E) an increase in autonomous consumption Answer: D Explanation:

A) B) C) D) E)

67) Refer to Figure 24-3. After the negative aggregate demand shock shown in the diagram (from AD1

67)

to AD2 ), which of the following describes the adjustment process that would return the economy to its long-run equilibrium? A) Wages would eventually fall, causing the AD curve to shift to the right, returning to the original equilibrium at point A. B) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E. C) Wages would increase, causing the AS curve to shift to the right, reaching a new equilibrium at point E. D) Wages would increase, causing the AD curve to shift to the right, returning to the original equilibrium at point A. E) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D. Answer: B Explanation:

A) B) C) D) E)

68) Refer to Figure 24-3. Following the negative AD shock shown in the diagram (from AD1 to AD2 ), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 110; 1000 B) 60; 1000 C) 90; 900 D) 110; 800 E) 90; 1250 Answer: B Explanation:

A) B) C) D) E)

24

68)

69) Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y* Answer: C Explanation:

A) B) C) D) E)

70) Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y* Answer: A Explanation:

70)

A) B) C) D) E)

71) In the basic AD/AS macro model, which of the following events would cause stagflation? A) a large decrease in wages B) a large increase in business confidence C) a large increase in the net tax rate D) a large increase in the price of raw materials E) a large increase in labour productivity Answer: D Explanation:

69)

A) B) C) D) E)

25

71)

72) Consider the basic AD/AS macro model in long-run equilibrium. A negative AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; decrease; decrease further; will be restored to potential output C) increase; decrease; decrease; will be restored to potential output D) increase; decrease; increase further; will be restored to potential output E) increase; increase; increase further; will be restored to potential output Answer: C Explanation:

72)

A) B) C) D) E)

The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A.

FIGURE 24-4 73) Refer to Figure 24-4. The initial effect of a positive AS shock results in A) a recessionary output gap of 250. B) a recessionary output gap of 450. C) an inflationary output gap of 200. D) an inflationary output gap of 300. E) an inflationary output gap of 550. Answer: C Explanation:

A) B) C) D) E)

26

73)

74) Refer to Figure 24-4. The positive aggregate supply shock results in a new short-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1300 Answer: D Explanation:

A) B) C) D) E)

75) Refer to Figure 24-4. After the positive aggregate supply shock shown in the diagram, which of the following would shift the AS curve leftward during the economy's adjustment process? A) an increase in factor supplies B) an increase in the unemployment rate C) a decrease in wages and other factor prices D) an increase in labour productivity E) an increase in wages and other factor prices Answer: E Explanation:

76)

A) B) C) D) E)

77) Consider the basic AD/AS macro model, initially in a long-run equilibrium. A positive AS shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output ________. A) decrease; decrease; decrease further; will decrease further B) decrease; increase; decrease further; will be restored to potential output C) decrease; increase; return to its initial level; will be restored to potential output D) increase; increase; decrease; will be restored to potential output E) increase; increase; return to its initial level; will be restored to potential output Answer: C Explanation:

75)

A) B) C) D) E)

76) Refer to Figure 24-4. Following the positive AS shock shown in the diagram, the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________. A) 60; 1000 B) 60; 1300 C) 90; 750 D) 90; 1200 E) 110; 1000 Answer: E Explanation:

74)

A) B) C) D) E)

27

77)

78) The curve that is sometimes called the "long-run aggregate supply curve" (vertical Y*) relates the aggregate price level to real GDP A) in the short run. B) when wages are in adjustment but prices are unstable. C) when national income is at less than potential income. D) when technology is allowed to change. E) after factor prices have fully adjusted to eliminate output gaps. Answer: E Explanation:

A) B) C) D) E)

79) What economists sometimes call the "long-run aggregate supply curve" is A) vertical. B) horizontal. C) nonlinear. D) negatively sloped. E) positively sloped. Answer: A Explanation:

79)

A) B) C) D) E)

80) What is sometimes called the "long-run aggregate supply curve" shows the relationship between the price level and aggregate supply over a time period long enough to permit A) changes in the capital stock. B) wages and other factor prices to adjust. C) changes in technology to occur. D) changes in the size of the resource base to occur. E) population to increase. Answer: B Explanation:

78)

A) B) C) D) E)

28

80)

81) The "long-run aggregate supply curve," vertical at Y*, shows that A) potential output will rise as prices rise. B) potential output will fall as prices rise. C) potential output is compatible with any price level. D) potential output is compatible with one particular price level. E) prices will always rise in the long run. Answer: C Explanation:

A) B) C) D) E)

82) Consider the AD/AS model. In the long run, after factor prices have fully adjusted to any output gaps, real GDP A) and the price level are determined by aggregate demand. B) and the price level are determined by "long-run aggregate supply." C) is determined by aggregate demand and the price level by potential output. D) is determined by potential output and the price level by aggregate demand. E) is determined by AD and the price level is determined by the AS curve. Answer: D Explanation:

82)

A) B) C) D) E)

83) Consider the AD/AS model. Since output in the long run is determined by Y*, the only role of the AD curve is to determine the price level. This is true because the A) Y* is independent of the price level. B) aggregate demand curve is vertical. C) aggregate demand curve is horizontal. D) Y* depends on the price level. E) AS curve is upward sloping. Answer: A Explanation:

81)

A) B) C) D) E)

29

83)

84) Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will A) leave real output unaffected and increase the price level. B) decrease real output and decrease the price level. C) decrease real output and leave the price level unchanged. D) decrease real output and increase the price level. E) increase real output and decrease the price level. Answer: D Explanation:

A) B) C) D) E)

85) Consider the AD/AS model after factor prices have fully adjusted to output gaps. An increase in the level of potential output, with aggregate demand constant, will A) affect only the price level. B) decrease real GDP and the price level. C) affect only the level of real GDP. D) increase real GDP and lower the price level. E) decrease real GDP and raise the price level. Answer: D Explanation:

84)

A) B) C) D) E)

30

85)

FIGURE 24-5 86) Refer to Figure 24-5. The economy is not in long-run equilibrium at E1 because the

86)

A) AD1 curve will shift back to AD0 due to an increase in the price level. B) AD1 curve will shift back to the left due to a fall in current consumption. C) AS will shift to the left due to an increase in wages. D) AS will shift to the left due to an increase in the price level. E) AS will shift to the right due to a decrease in the price level. Answer: C Explanation:

A) B) C) D) E)

87) Refer to Figure 24-5. Following a positive demand shock that takes the economy from E0 to E1 , the movement of the economy from E1 to E2 indicates that A) a demand shock can keep real GDP above potential output permanently. B) an increase in the price level causes the AS curve to shift to the left. C) an increase in the price level causes the AD curve to shift to the left. D) the economy cannot return to potential output without government intervention. E) the output effect of a demand shock will be reversed in the long run when wages and prices are fully adjusted. Answer: E Explanation:

A) B) C) D) E)

31

87)

88) Refer to Figure 24-5. If the economy is currently in equilibrium at E3, the concept of asymmetrical

88)

adjustment of the AS curve suggests that A) the economy will attain potential output faster if there is no intervention by the government. B) a decrease in the price level will induce a rightward shift of AS. C) the return of the economy to potential output may be very slow without government intervention. D) the economy will never return to potential output. E) the price level is constant regardless of the level of equilibrium income. Answer: C Explanation:

A) B) C) D) E)

89) Consider the AD/AS macro model. The study of short-run cyclical fluctuations usually assumes, for simplicity, that there are no changes in A) the AS curve. B) potential GDP. C) either the AS curve or potential GDP. D) either the AD or AS curves. E) the intersection of the AD and AS curves. Answer: B Explanation:

A) B) C) D) E)

90) In the long run in the AD/AS macro model we can say that A) both real GDP and the price level are determined by aggregate demand. B) both real GDP and the price level are determined by Y*. C) long-run real GDP is determined by Y* and the long-run price level by the AD curve. D) real GDP is determined by aggregate demand and the price level by Y*. E) long-run real GDP is determined by aggregate demand and the price level is determined solely by the AS curve. Answer: C Explanation:

89)

A) B) C) D) E)

32

90)

91) Suppose the economy begins in a long-run equilibrium with Y = Y*. A permanent increase in aggregate demand will have its short-run effect on real GDP reversed in the long run with a ________ shift of ________. A) rightward; the aggregate supply curve B) rightward; the aggregate demand curve C) leftward; the aggregate supply curve D) leftward; the aggregate demand curve E) rightward; Y* Answer: C Explanation:

A) B) C) D) E)

92) Consider the AD/AS macro model. The main source of increases in material living standards over the long term is the A) maintenance of a continuous inflationary gap. B) continual avoidance of recessionary gaps. C) continuous outward shift of aggregate demand. D) continual increase in potential national income. E) positive slope of the aggregate supply curve. Answer: D Explanation:

92)

A) B) C) D) E)

93) In the basic AD/AS macro model, permanent increases in real GDP are possible only if A) potential output is increasing. B) the correct fiscal policy is implemented. C) the economy's automatic stabilizers are allowed to operate. D) the aggregate supply curve is vertical. E) aggregate demand responds positively to demand shocks. Answer: A Explanation:

91)

A) B) C) D) E)

33

93)

94) Fiscal policy refers to the A) government's attempts to maintain a vertical AS curve so as to stabilize output. B) government's use of spending and taxing policies to influence equilibrium real GDP. C) government's use of trade-related policy tools to influence the net export function, thereby influencing GDP. D) business sector's influence on investment and GDP. E) households' attempts to change saving to encourage growth. Answer: B Explanation:

94)

A) B) C) D) E)

FIGURE 24-1 95) Refer to Figure 24-1. If the economy is currently producing output of Y0 and the government initiates an expansionary fiscal policy adequate to close the output gap, the result will likely be A) the vertical line at Y * will shift to the left, intersecting the AS and AD curves at Y 0. B) no change in either price level or output, since expansionary fiscal policy is ineffective. C) that the AS curve will shift to the right until point A is reached. D) that the AS curve and the AD curve will shift left simultaneously. E) that the AD curve will shift to the right until point B is reached. Answer: E Explanation:

A) B) C) D) E)

34

95)

96) Refer to Figure 24-1. Suppose the economy is currently in a short-run equilibrium with output of Y0 . An appropriate fiscal policy response, to attain potential output (Y*), is

96)

A) an increase in personal income taxes. B) a reduction in government purchases of goods and services. C) an increase in corporate income taxes. D) an increase in government purchases. E) an increase in interest rates to encourage increased saving. Answer: D Explanation:

A) B) C) D) E)

FIGURE 24-2 97) Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1 . An appropriate fiscal policy for closing the output gap is A) a decrease in personal income taxes. B) a decrease in government purchases. C) an increase in current interest rates. D) an increase in government purchases. E) a decrease in corporate income-tax rates. Answer: B Explanation:

A) B) C) D) E)

35

97)

98) Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1 . An appropriate

98)

fiscal policy for attaining potential output (Y*) is a(n) A) increase in personal and corporate tax rates. B) increase in government spending. C) increase in current consumption. D) decrease in personal and corporate taxes. E) decrease in current imports. Answer: A Explanation:

A) B) C) D) E)

99) Refer to Figure 24-2. Suppose the economy is in a short-run equilibrium at Y1 . A contractionary

99)

fiscal policy would restore the economy to potential output (Y*) by shifting the A) AS curve to the left to intersect AD at C. B) AS curve to the right. C) potential GDP and the AS curve to the left. D) AD curve to the right. E) AD to the left to intersect AS at point A. Answer: E Explanation:

A) B) C) D) E)

100) One advantage of using expansionary fiscal policy rather than relying on automatic adjustment to recover from a recessionary gap is that A) the economy will overshoot potential GDP and a boom will be underway. B) inflation will not be as stimulated. C) price level will rise higher than otherwise. D) the recovery may be more rapid. E) the recovery will be slower, thereby causing less disruption. Answer: D Explanation:

A) B) C) D) E)

36

100)

101) Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts right unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP. A) too weak; stay below B) too weak; rise above C) too strong; stay below D) too strong; rise above E) appropriate; equal Answer: D Explanation:

A) B) C) D) E)

102) Consider the basic AD/AS model, and suppose there is a negative output gap. If an expansionary fiscal policy is pursued and the AS curve shifts leftward unexpectedly, the fiscal policy may be ________, and real GDP may ________ potential GDP. A) too weak; stay below B) too weak; rise above C) too strong; stay below D) too strong; rise above E) appropriate; equal Answer: A Explanation:

102)

A) B) C) D) E)

103) Suppose the economy has a high level of unemployment and a low level of aggregate output. Which of the following policies could the government implement to alleviate these conditions? A) an expansionary fiscal policy that increases tax rates B) a contractionary fiscal policy that increases government purchases C) automatic fiscal stabilizers D) a contractionary fiscal policy that increases tax rates E) an expansionary fiscal policy that increases government purchases Answer: E Explanation:

101)

A) B) C) D) E)

37

103)

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 24-6 104) Refer to Figure 24-6. In the initial short-run equilibrium, there is ________ output gap of ________ but this gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) a recessionary; 200; fiscal contraction D) an inflationary; 100; fiscal contraction E) an inflationary; 200; fiscal expansion Answer: B Explanation:

A) B) C) D) E)

105) Refer to Figure 24-6. If the government takes no action to change the short-run macro equilibrium, then A) the AD curve will shift downward until it intersects with the AS curve at point E. B) the AD curve will shift upward until it intersects with the AS curve at point C. C) the AS curve will shift to the left until it intersects with the AD curve at point D. D) the AS curve will shift to the right until it intersects with the AD curve at point B. E) the AS curve can either shift to the right or left depending on the fiscal policy. Answer: D Explanation:

104)

A) B) C) D) E)

38

105)

106) Refer to Figure 24-6. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) decreasing government purchases. D) decreasing government transfer payments. E) implementing a contractionary fiscal policy. Answer: B Explanation:

106)

A) B) C) D) E)

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A.

FIGURE 24-7 107) Consider Figure 24-7. At the initial short-run equilibrium, there is ________ output gap of ________. This gap could be closed by a ________. A) a recessionary; 100; fiscal contraction B) a recessionary; 200; fiscal expansion C) an inflationary; 100; fiscal contraction D) an inflationary; 200; fiscal contraction E) an inflationary; 350; fiscal expansion Answer: D Explanation:

A) B) C) D) E)

39

107)

108) Refer to Figure 24-7. If the government takes no action to close the existing output gap, then A) the AD curve will shift down until it intersects with the AS curve at point D. B) the AD curve will shift up until it intersects with the AS curve at point B. C) the AS curve will shift to the left until it intersects with the AD curve at point C. D) the AS curve will shift to the right until it intersects with the AD curve at point E. E) the AS curve can either shift to the right or left depending on the fiscal policy. Answer: C Explanation:

A) B) C) D) E)

109) Refer to Figure 24-7. The government could close the existing output gap by A) increasing the net tax rate. B) decreasing the net tax rate. C) increasing government purchases. D) decreasing government transfer payments. E) implementing an expansionary fiscal policy. Answer: A Explanation:

109)

A) B) C) D) E)

110) Suppose the economy is experiencing an inflationary gap in the short run. The advantage of using a contractionary fiscal policy rather than allowing the economy's natural adjustment process to operate is that A) it will reduce the upward pressure on the price level that would otherwise occur. B) if private-sector expenditures increase on their own, the policy will stabilize real GDP. C) it will shorten what might otherwise be a long recession. D) it will reduce the downward pressure on the price level that would otherwise occur. E) it will close the output gap. Answer: A Explanation:

108)

A) B) C) D) E)

40

110)

111) As a global recession began in late 2008, the governments of all major economies searched for policy responses to dampen the effects of the recession. In general, governments were aiming to A) shift the AD curve to the left by decreasing tax rates. B) increase potential GDP. C) shift the AS curve to the right through large increases in government spending. D) shift the AD curve to the right through large increases in government spending. E) shift the AS curve to the left by increasing wage rates. Answer: D Explanation:

A) B) C) D) E)

112) Consider the global recession that began in late 2008. In terms of the AD/AS model, which of the following statements best describes the macroeconomic effect on Canada's economy? A) The AD curve shifted to the right due to reduced demand for Canadian exports, which created a recessionary gap. B) The AD curve shifted to the left due to reduced demand for Canadian exports, which created a recessionary output gap. C) The AS curve shifted to the right due to increased factor prices, which created a recessionary gap. D) The AS curve shifted to the left due to increased factor prices, which created a recessionary gap. E) Potential GDP fell, which reduced actual national income. Answer: B Explanation:

112)

A) B) C) D) E)

113) Income taxes in Canada can be considered to be automatic stabilizers because tax A) revenues increase when income increases, thereby offsetting some of the increase in aggregate demand. B) revenues decrease when income increases, thereby intensifying the increase in aggregate demand. C) structures can be changed when the Minister of Finance brings down a budget. D) revenues are changed through discretionary fiscal policy to keep the budget balanced. E) revenues are changed through discretionary fiscal policy to create surpluses in recessions. Answer: A Explanation:

111)

A) B) C) D) E)

41

113)

114) An important automatic fiscal stabilizer in Canada is A) the exchange rate. B) the marginal propensity to consume. C) the marginal propensity to import. D) the income-tax system. E) government purchases of goods and services. Answer: D Explanation:

A) B) C) D) E)

115) Automatic fiscal stabilizers are most helpful in A) making discretionary fiscal policy effective. B) removing persistent output gaps. C) promoting economic growth. D) eliminating price fluctuations in the economy. E) reducing the intensity of business cycles. Answer: E Explanation:

115)

A) B) C) D) E)

116) "Automatic fiscal stabilization" in the economy refers to A) the properties of government spending and taxation that cause the simple multiplier to be increased. B) the discretionary fiscal policies that are automatically undertaken by the government when there is a recessionary gap. C) the properties of government spending and taxation that cause the simple multiplier to be reduced. D) the discretionary fiscal policies that are automatically undertaken by the government when there is an inflationary gap. E) all discretionary fiscal policies. Answer: C Explanation:

114)

A) B) C) D) E)

42

116)

117) Net tax revenues that rise with national income act as an automatic stabilizer by ________ the marginal propensity to spend and thereby causing the simple multiplier to ________. A) increasing; increase B) increasing; decrease C) decreasing; equal one D) decreasing; decrease E) decreasing; increase Answer: D Explanation:

A) B) C) D) E)

118) Consider the simplest macro model with demand-determined output. Other things being equal, the ________ the value of the simple multiplier, the ________ stable is real GDP in response to shocks to autonomous spending. A) larger; more B) larger; less C) smaller; more D) smaller; less E) both B and C are correct Answer: E Explanation:

118)

A) B) C) D) E)

119) Consider a simple macro model with demand-determined output. Which of the following parameters will produce the strongest automatic stabilizer? A) MPC = 0.8, t = 0.2, m = 0.3 B) MPC = 0.7, t = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2 Answer: C Explanation:

117)

A) B) C) D) E)

43

119)

120) Consider a simple macro model with demand-determined output. Which of the following parameters will produce the largest fluctuations in real GDP from autonomous expenditure shocks? A) MPC = 0.8, t = 0.2, m = 0.3 B) MPC = 0.7, t = 0.3, m = 0.2 C) MPC = 0.7, t = 0.1, m = 0.4 D) MPC = 0.9, t = 0.2, m = 0.4 E) MPC = 0.8, t = 0.1, m = 0.2 Answer: E Explanation:

A) B) C) D) E)

121) Automatic fiscal stabilizers ________ the impact of demand or supply shocks on the economy since government's net tax revenues ________ during booms and ________ during recessions. A) magnify; increase; decrease B) magnify; decrease; increase C) dampen; increase; decrease D) dampen; decrease; increase E) does not affect; are constant; are constant Answer: C Explanation:

121)

A) B) C) D) E)

122) Suppose the government implements a permanent reduction in the net tax rate in an effort to increase real GDP. One disadvantage of this policy is that A) the effect of economic shocks on government revenues becomes more volatile, while the economy becomes more stable. B) further reductions in the net tax rate will be required to maintain the effectiveness of the tax rate as an automatic stabilizer. C) private investment is crowded out, which may reduce the future growth rate of potential output. D) the effect of the automatic stabilizer is reduced and the economy will be more unstable. E) —both C and D are correct. Answer: E Explanation:

120)

A) B) C) D) E)

44

122)

123) The "paradox of thrift" refers to the understandable tendency of people who are worried about their economic situation to ________ their saving, but in aggregate this behaviour causes a ________ recession. A) decrease, more severe B) decrease; less severe C) increase; more severe D) increase; less severe E) increase; shorter Answer: C Explanation:

A) B) C) D) E)

124) In the long run, aggregate demand is ________ for determining real GDP, and the paradox of thrift ________. A) not important; applies B) not important; does not apply C) the only influence; applies D) the most important influence; does not apply E) stable and important; applies Answer: B Explanation:

124)

A) B) C) D) E)

125) The paradox of thrift does not exist in the long run because A) not everyone increases saving in the long run. B) aggregate supply has an impact on real GDP only in the short run. C) everyone increases consumption in the long run. D) changes in aggregate demand have no impact on real GDP in the long run. E) potential output is determined by changes in the price level. Answer: D Explanation:

123)

A) B) C) D) E)

45

125)

126) In the basic AD/AS macro model, the "paradox of thrift" is only a short-run phenomenon because A) consumers exhibit cyclical consumption behaviour. B) in the long run output is determined by potential output. C) savings are transformed into expenditures in the long run. D) the marginal propensity to consume is fixed in the long run. E) consumers base their consumption expenditures only on their lifetime income. Answer: B Explanation:

A) B) C) D) E)

127) Many economists think discretionary fiscal policy is of limited effectiveness in stabilizing the economy because 1) the multiplier effects associated with fiscal policy take a long time; 2) government deficits tend to reduce the value of the multiplier; 3) there are long and uncertain lags in implementing fiscal policy. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Explanation:

127)

A) B) C) D) E)

128) Given current limitations, fiscal policy as a macroeconomic stabilizer is more defensible the ________ the output gap being suffered, an argument supporting ________. A) larger; fine tuning B) larger; gross tuning C) smaller; fine tuning D) smaller; crowding out E) larger; crowding out Answer: B Explanation:

126)

A) B) C) D) E)

46

128)

129) Suppose the economy is experiencing a significant recessionary gap, but it has taken the government six months to determine that it will change fiscal policy. This is an example of A) an execution lag. B) fine tuning. C) gross tuning. D) a decision lag. E) automatic fiscal stabilizers. Answer: D Explanation:

A) B) C) D) E)

130) Which of the following statements about fiscal policy is the best description of "fine tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps. Answer: A Explanation:

130)

A) B) C) D) E)

131) Which of the following statements about fiscal policy is the best example of "gross tuning"? A) The government continuously alters its spending and taxing plans to hold real GDP at potential. B) The government cuts taxes to remove a large and persistent recessionary gap. C) The government increases its spending to reduce an inflationary gap. D) The government decreases tax rates to decrease an inflationary gap. E) The government uses automatic stabilizers to reduce any output gaps. Answer: B Explanation:

129)

A) B) C) D) E)

47

131)

132) Suppose the government had made a decision to change fiscal policy, but it then took nine months to implement a tax reduction. This is an example of A) a decision lag. B) fine tuning. C) gross tuning. D) automatic fiscal stabilizers. E) an execution lag. Answer: E Explanation:

A) B) C) D) E)

133) An expansionary fiscal policy that takes the form of an increase in government purchases carries the possibility that private investment ________ and, as a result, the future growth rate of ________. A) rises to an unsustainable level; real GDP is reduced B) is crowded out; corporate tax revenue is reduced C) increases; aggregate demand increases D) increases; net exports increases E) is crowded out; potential output is reduced Answer: E Explanation:

133)

A) B) C) D) E)

134) Suppose the economy is in macroeconomic equilibrium with real GDP equal to Y*. If the government then implements an expansionary fiscal policy by increasing government purchases, what are the long-run effects on potential output? A) The growth rate of potential output may be reduced due to the crowding out of investment. B) Potential output will adjust to the new higher level achieved with the expansionary fiscal policy. C) Potential output will drop below its starting point because of the crowding out of investment. D) The growth rate of potential output will rise due to the higher level of aggregate demand. E) The level of potential output is fixed and will not be affected by fiscal policy. Answer: A Explanation:

132)

A) B) C) D) E)

48

134)

135) In any decision about stimulating the economy with a fiscal expansion (increasing government purchases), the government must weigh the short-run benefits of ________ against the long-run costs of ________. A) a higher price level; unemployment B) increased potential output; a higher price level C) a higher price level; lower real GDP D) increased real GDP; higher economic growth E) increased economic activity; lower economic growth Answer: E Explanation:

A) B) C) D) E)

136) Suppose that the government announces temporary tax cuts to stimulate consumers' consumption expenditures but the impact of this tax change on consumption is observed to be very small. This outcome might be explained by the fact that A) this economy is already at its long-run equilibrium. B) this economy is suffering from the paradox of thrift. C) the impact of the policy is dampened by the automatic fiscal stabilizers. D) the government has little credibility. E) the consumers anticipate that the tax change is only temporary and thus is unlikely to affect their "lifetime" income. Answer: E Explanation:

136)

A) B) C) D) E)

137) The ________ associated with fiscal policy make(s)________ tuning difficult to implement successfully. A) execution lag; gross B) execution lag; fine C) decision lag; gross D) decision lag; fine E) execution and decision lags; fine Answer: E Explanation:

135)

A) B) C) D) E)

49

137)

138) The growth rate of potential output might be decreased by an expansionary fiscal policy if A) the budget deficits are persistent. B) the simple multiplier is small. C) the policy crowds out private investment. D) public investment has high productivity. E) the composition of output is not altered. Answer: C Explanation:

A) B) C) D) E)

139) A reduction in the net tax rate might lead to an increase in the growth rate of potential output if A) the simple multiplier is large. B) the tax cuts stimulate private investment. C) firms are operating at their normal capacity. D) households are not forward looking. E) the marginal propensity to consume is large. Answer: B Explanation:

139)

A) B) C) D) E)

140) The use of government purchases (G) as a fiscal policy tool can have an effect on long-run growth in the economy. Under what circumstances might an increase in G cause the level of potential output (Y *) to increase? A) If the increase in G crowds out private investment. B) If the increase in G causes a permanent increase in the marginal propensity to consume, which causes a permanent rightward shift of the AD curve. C) If the increase in G is spent on public infrastructure that increases the productivity of private-sector production. D) If the increase in G leads to a permanent increase in the level of autonomous saving in the economy. E) If the increase in G is offset by an equal decrease in C, I, and NX. Answer: C Explanation:

138)

A) B) C) D) E)

50

140)

Answer Key Testname: UNTITLED24

1) C 2) D 3) D 4) D 5) D 6) E 7) A 8) A 9) A 10) C 11) A 12) B 13) D 14) E 15) D 16) E 17) B 18) C 19) C 20) A 21) B 22) C 23) D 24) A 25) A 26) B 27) D 28) A 29) C 30) D 31) C 32) C 33) E 34) B 35) A 36) B 37) C 38) D 39) C 40) C 41) D 42) B 43) A 44) D 45) D 46) C 47) C 48) C 49) E 50) E 51

Answer Key Testname: UNTITLED24

51) B 52) C 53) C 54) C 55) C 56) E 57) C 58) A 59) E 60) A 61) C 62) E 63) D 64) A 65) A 66) D 67) B 68) B 69) C 70) A 71) D 72) C 73) C 74) D 75) E 76) E 77) C 78) E 79) A 80) B 81) C 82) D 83) A 84) D 85) D 86) C 87) E 88) C 89) B 90) C 91) C 92) D 93) A 94) B 95) E 96) D 97) B 98) A 99) E 100) D 52

Answer Key Testname: UNTITLED24

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140)

D A E B D B D C A A D B A D E C D E C E C E C B D B E B D A B E E A E E E C B C

53

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Many economists argue that Japan's remarkable long-run growth rate between 1950 and 1990 was largely due to Japan's A) excessive amounts of money invested into research and development. B) high consumption rate for high quality electronic products. C) high national saving rate. D) restrictive trade barriers which eliminated foreign competition. E) skilled labour force that developed over those forty years. Answer: C Explanation:

A) B) C) D) E)

2) Other things being equal, a country with a high national saving rate may have a ________ long-run growth rate because more saving increases the ________. A) high; interest rate and encourages more investment B) high; wealth of people and increases future consumption C) high; availability of funds, thus lowering the interest rate D) low; consumption in the long run E) low; unemployment and decreases wages in the long run Answer: C Explanation:

2)

A) B) C) D) E)

3) A former Governor of the Bank of Canada argued that high interest rates tend to accompany high inflation because inflation A) causes the Canadian dollar to appreciate which again fuels inflation even more. B) erodes the value of the dollar and therefore lenders need to be compensated through higher interest rates. C) reduces banks' profits who then respond by lowering their lending rates. D) increases housing prices so younger Canadians are made worse off. E) lowers short term interest rates and acts as an incentive to borrow money. Answer: B Explanation:

1)

A) B) C) D) E)

1

3)

4) A former governor of the Bank of Canada argued that interest rates must be increased in order to reduce inflation, and this would ultimately result in lower interest rates. This apparent contradiction can be explained by noting that A) higher interest rates in the short run put downward pressure on inflation which, in turn, lowers demand for borrowed funds, thus decreasing interest rates in the long run. B) higher interest rates promote saving which increases the supply of funds for lending and, other things constant, drives the "price" of borrowing down. C) interest rates move in cycles and therefore tend to rise before they fall. D) the Governor of the Bank of Canada is typically a patronage appointment with little formal training or knowledge of economic theory. E) increasing interest rates increases inflation in the short run, but decreases inflation in the long run. Answer: A Explanation:

A) B) C) D) E)

5) Long-run increases in real national income can generally be traced to A) excess of demand in the labour market that increases employment. B) growing demand that lead to increases in output and prices. C) growing demand which causes continuous growth in consumer spending. D) growing supply because higher wages will increase the participation rate. E) growing availability of factors and/or growing factor productivity. Answer: E Explanation:

5)

A) B) C) D) E)

6) In the short run, changes in real GDP are primarily determined by changes in factor-utilization rates which, in turn, are due to changes in A) aggregate demand only. B) aggregate demand because increases in demand will lead to increases in output. C) aggregate supply only. D) aggregate supply because when firms increase prices they are then willing to produce more. E) both aggregate demand and aggregate supply. Answer: E Explanation:

4)

A) B) C) D) E)

2

6)

7) Potential GDP is defined as the level of aggregate output at which A) all factors of production are fully employed. B) all factors of production are employed 24 hours per day, 7 days per week. C) the unemployment rate is zero. D) there is only cyclical and structural unemployment. E) there is only cyclical and frictional unemployment, and capital equipment is being used at 100% capacity. Answer: A Explanation:

A) B) C) D) E)

8) Which of the following statements describes a possible self-fulfilling prophesy in the short run involving households' behaviour? A belief of an impending recession leads households A) to decrease their desired saving. B) to increase their registration in post-secondary institutions to reduce their risk of being unemployed. C) to increase their desired consumption. D) to increase their desired saving. E) to increase the autonomous portion of their desired consumption. Answer: D Explanation:

8)

A) B) C) D) E)

9) Consider the basic AD/AS model. In the short run, a shift of the aggregate supply curve would lead to a change in real GDP by mostly changing A) the amount of labour employed. B) the amount of land (natural resources) available to the economy. C) the prices of factors of production. D) the productivity of capital. E) the level of investment. Answer: A Explanation:

7)

A) B) C) D) E)

3

9)

10) A decrease in long-run real GDP (potential GDP) would be most likely caused by a (an) A) decrease in factor productivity. B) decrease in interest rates. C) decrease in unemployment rates. D) increase in factor-utilization rates. E) increase in unemployment rates. Answer: A Explanation:

A) B) C) D) E)

11) A decrease in short-run real GDP that leaves potential GDP unaffected would be most likely caused by a (an) A) decrease in factor-utilization rates. B) decrease in interest rates. C) decrease in unemployment rates. D) increase in factor productivity. E) None of the above are likely to cause a reduction in real GDP. Answer: A Explanation:

12)

A) B) C) D) E)

13) Long-run increases in potential GDP would most likely be caused by a (an) A) decrease in factor-utilization rates. B) decrease in factor productivity. C) decrease in saving in the short run. D) increased availability of key factors of production. E) increases in the prices of factors of production such as wages or interest rates. Answer: D Explanation:

11)

A) B) C) D) E)

12) An increase in potential GDP would most likely be caused by a (an) A) decrease in factor-utilization rates. B) increase in factor productivity. C) increase in interest rates. D) decrease in saving in the short run. E) increase in the unemployment rate. Answer: B Explanation:

10)

A) B) C) D) E) 4

13)

14) Which of the following may increase real GDP in the short run but may actually decrease the long-run growth rate of GDP? A) decrease in households' desired saving B) decrease in factor productivity C) increase in factor-utilization rates in the short run D) increase in factor supplies E) increase in the unemployment rate Answer: A Explanation:

A) B) C) D) E)

15) A characteristic of the short run in macroeconomics is that A) the output gap opens or closes as the economy moves through the phases of the business cycle. B) the output gap is constant because the capital stock cannot change. C) actual GDP is always less than potential GDP. D) actual GDP is always greater than potential GDP. E) actual GDP is always growing at the same rate as potential GDP. Answer: A Explanation:

15)

A) B) C) D) E)

16) The study of the short run in macroeconomics focuses A) equally on potential GDP and actual GDP. B) primarily on changes to potential GDP. C) primarily on changes to potential GDP with less emphasis on changes in actual GDP. D) primarily on changes to actual GDP with no interest in the output gap. E) primarily on changes to the output gap with less emphasis on changes to potential GDP. Answer: E Explanation:

14)

A) B) C) D) E)

5

16)

17) In the long run, increases in potential GDP are possible only if there is A) no government interference with the market system. B) growth in the supply of available factors or growth in factor productivity. C) continuous growth in the saving rate. D) an increase in the general price level. E) an increase in the unemployment rate. Answer: B Explanation:

A) B) C) D) E)

18) At any given time, the level of potential GDP depends on 1) the available supply of factors of production; 2) normal rates of utilization for labour and capital; 3) the productivity of factors of production. A) 1 only B) 2 only C) 3 only Answer: E Explanation:

17)

18)

D) 2 and 3

E) 1, 2, and 3

A) B) C) D) E)

19) Relatively small annual changes in factor productivity are A) easy to calculate across many industries. B) thought to be an important cause of long-run economic growth. C) not important to long-run growth but are the dominant source of short-run changes in GDP. D) the only important source of changes in potential GDP. E) always cancelled out by changes in the growth in factor supplies. Answer: B Explanation:

A) B) C) D) E)

20) The study of the long run in macroeconomics focuses A) on changes to actual GDP but not on changes in potential GDP. B) equally on potential GDP and actual GDP. C) primarily on changes to potential GDP. D) primarily on changes to the output gap, with a constant level of potential output. E) primarily on the supply of factors of production. Answer: C Explanation:

19)

A) B) C) D) E)

6

20)

21) When an economy experiences sustained growth in real GDP, A) actual GDP is greater than potential GDP. B) actual GDP is less than potential GDP. C) potential GDP is likely to be increasing. D) factor prices are likely to be decreasing. E) wage rates will decrease slowly as factor-utilization rates decrease. Answer: C Explanation:

A) B) C) D) E)

22) In the long run, changes to real GDP are most likely to be caused by an increase in A) interest rates. B) factor productivity. C) factor-utilization rates. D) desired consumption. E) factor prices. Answer: B Explanation:

22)

A) B) C) D) E)

23) The level of aggregate output is determined in the short run by ________ but in the long run by the level of ________. A) the output gap; factor productivity B) the AD curve; interest rates C) the AS curve; potential output D) the AD and AS curves; Y* E) the AD and AS curves; factor utilization Answer: D Explanation:

21)

A) B) C) D) E)

7

23)

24) Which of the following provides the best explanation for why GDP may increase over long periods of time? A) increase in capital stock B) increase in emigration C) increase in mortality rates D) increase in interest rates E) increase in unemployment Answer: A Explanation:

A) B) C) D) E)

25) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe), where F represents the total factor supply and Fe represents the number of employed factors. The term (GDP/Fe) represents A) factor supply per level of output. B) output per capita. C) factor utilization. D) average factor productivity. E) income per person. Answer: D Explanation:

25)

A) B) C) D) E)

26) Consider the equation GDP = F ∙

FE GDP . What is the significance of this equation? ∙ F FE

A) It allows for a more accurate accounting of actual GDP in any given year. B) The three components on the right-hand side provide a better understanding of all of the short-run changes in GDP. C) The three components on the right-hand side provide a better understanding of the long-run changes in GDP. D) It shows us how any change in real GDP can be decomposed into changes in factor supply, the utilization of factors, and productivity. E) It allows us a better understanding of how changes in factor supply, the utilization of factors, and productivity affect changes in the output gap. Answer: D Explanation:

24)

A) B) C) D) E)

8

26)

27) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe). In this equation, the term (Fe/F) represents A) factor supply per level of output. B) output per capita. C) the factor-utilization rate. D) factor productivity. E) income per person. Answer: C Explanation:

A) B) C) D) E)

28) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe). The term Fe represents A) the number of employed factors. B) output per capita. C) the factor-utilization rate. D) factor productivity. E) income per person. Answer: A Explanation:

28)

A) B) C) D) E)

29) GDP can be represented by the equation: GDP = L × [E/L] × [GDP/E] where L is the total supply of labour and E is the level of employment. In this equation, the term [GDP/E] represents A) the productivity of labour. B) the ratio of the population unemployed. C) one minus the unemployment rate. D) output per unit of capital. E) the unemployment rate. Answer: A Explanation:

27)

A) B) C) D) E)

9

29)

30) GDP can be represented by the equation: GDP = L × [E/L] × [GDP/E]. In this equation, the term [E/L] represents A) the productivity of labour. B) the ratio of the population unemployed. C) one minus the unemployment rate. D) the level of employment at a given period of time. E) the labour force. Answer: C Explanation:

A) B) C) D) E)

31) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe). This equation tells us that real aggregate output can be expressed as factor A) price times the utilization rate times GDP per capita. B) supply times the equilibrium factor price times GDP per capita. C) supply times equilibrium factor price times factor productivity. D) supply times the factor-utilization rate times factor productivity. E) utilization times equilibrium factor price times factor productivity. Answer: D Explanation:

31)

A) B) C) D) E)

32) GDP can be represented by the equation: GDP = F × (Fe/F) × (GDP/Fe). This equation tells us that any change in real GDP can be decomposed into changes in A) factor price, productivity and the investment rate by businesses. B) factor price, productivity and factor-utilization rates. C) factor supply, productivity and per capita consumption by households. D) factor supply, productivity and the investment rate by businesses. E) factor supply, productivity and factor-utilization rates. Answer: E Explanation:

30)

A) B) C) D) E)

10

32)

33) Consider the equation: GDP = L × [E/L] × [GDP/E] where L is the supply of labour and E is the level of employment. In this equation, the term [E/L] represents the A) productivity of labour. B) the ratio of the population unemployed. C) labour employment rate. D) number of people employed. E) capital-utilization rate. Answer: C Explanation:

A) B) C) D) E)

34) Changes in factor-utilization rates are considered important for explaining short-run changes in real GDP because A) wages increase and decrease rapidly in the short run, dampening the effect of factor utilization. B) the employment ratio of labour and the amount of excess capacity respond quickly to changes in aggregate demand or supply. C) additions to the labour force occur more frequently than changes in the utilization rate. D) changes to the capital stock are almost impossible to make in the short run. E) land and capital can change only in the short run. Answer: B Explanation:

34)

A) B) C) D) E)

35) When accounting for changes in real GDP, changes in the factor-utilization rate are most important in the A) long run because firms need time to hire more workers or acquire additional capital. B) long run because firms adapt to wage changes and hire more workers. C) short run because firms react to changes in demand by increasing production from existing facilities. D) short run because firms immediately build new plants to satisfy changes in demand. E) short run because firms need time to adjust their price lists. Answer: C Explanation:

33)

A) B) C) D) E)

11

35)

36) A low factor-utilization rate describes ________ in factor markets, which causes factor prices to ________ and shifts the aggregate supply curve to the ________. A) excess supply; fall; left B) excess demand; rise; right C) excess supply; rise; right D) excess demand; fall; right E) excess supply; fall; right Answer: E Explanation:

A) B) C) D) E)

37) An estimate for the value of potential GDP can be generated by observing and recording A) the economy's total supply of factors, their normal rates of utilization, and factor productivity. B) the economy's total supply of factors, the costs of those factors, and their productivity. C) the economy's total output, its total cost and demand for that output. D) the total available capacity for production in the Canadian economy. E) the level of actual GDP when the unemployment rate is zero. Answer: A Explanation:

38)

A) B) C) D) E)

39) Consider the equation GDP = F × (FE/F) × (GDP/FE). Which component describes the amount of output produced per unit of input employed? A) F B) FE C) (F E/F) D) (GDP/F E) E) GDP Answer: D Explanation:

37)

A) B) C) D) E)

38) Since 1985, Canada's potential GDP has been A) rising steadily. B) falling steadily. C) relatively stable. D) volatile, but with an upward trend. E) volatile, but with a downward trend. Answer: A Explanation:

36)

A) B) C) D) E)

12

39)

40) Consider the equation GDP = F × (FE/F) × (GDP/FE). Which component describes the fraction of the available factors actually employed at any time? A) F B) FE C) (F E/F) D) (GDP/F E) E) GDP Answer: C Explanation:

A) B) C) D) E)

41) Consider a small economy where factor supply is 1000 units, the factor utilization rate is 0.9 and a simple measure of productivity (GDP per factor employed) is $80. This economy's GDP is A) $7200. B) $72 000. C) $80 000. D) $88 888. E) $90 000. Answer: B Explanation:

42)

A) B) C) D) E)

43) Consider an economy where factor supply is 2.5 million units, the factor utilization rate is 0.85 and a simple measure of productivity (GDP per factor employed) is $200. This economy's GDP is A) $2.125 million. B) $200 million. C) $425 million. D) $500 million. E) $525 million. Answer: C Explanation:

41)

A) B) C) D) E)

42) Consider a small economy where factor supply is 4000 units, the factor utilization rate is 0.8 and a simple measure of productivity (GDP per factor employed) is $50. This economy's GDP is A) $40 000. B) $160 000. C) $200 000. D) $320 000. E) $500 000. Answer: B Explanation:

40)

A) B) C) D) E)

13

43)

44) Consider a small economy where GDP is $100 000. Factor supply is 1000 units and the factor utilization rate is 0.8. What is a simple measure of productivity (GDP per factor employed) in this economy? A) $125 B) $800 C) $100 D) $125 000 E) $1000 Answer: A Explanation:

A) B) C) D) E)

45) Consider an economy in long-run equilibrium where factor supply is 2.5 million units, the factor utilization rate is 0.85 and a simple measure of productivity (GDP per factor employed) is $200. Now suppose that, other things being equal, the productivity measure rises to $210. The effect of this change will be A) an inflationary gap caused by simultaneous rightward shifts of the aggregate demand and aggregate supply curves. B) a rightward shift of the aggregate supply curve, and an adjustment back to Y*. C) a rightward shift of the aggregate demand curve due to the increased wealth of the private sector. D) an increase in this economy's potential output, and an adjustment back to its original level after factor prices have adjusted. E) an increase in this economy's potential output in the long run. Answer: E Explanation:

46)

A) B) C) D) E)

47) In Canada, the labour-force participation rate is about A) 66%. B) 76%. C) 86%. Answer: A Explanation:

45)

A) B) C) D) E)

46) The average rate of labour productivity growth in Canada over the past few decades has been about A) 15% per year. B) 25% per year. C) 0.2% per year. D) 1.3% per year. E) 5% per year. Answer: D Explanation:

44)

A) B) C) D) E) 14

47) D) 90%.

E) 92%.

48) The utilization rate for physical capital is called the A) physical utilization rate. B) investment utilization rate. C) capacity utilization rate. D) stock of capital utilization rate. E) normal utilization rate. Answer: C Explanation:

A) B) C) D) E)

49) In the short run, aggregate demand and aggregate supply shocks cause output gaps, which in turn, cause fluctuations in A) the factor utilization rate. B) the normal factor utilization rate. C) the natural rate of unemployment. D) factor supply. E) productivity. Answer: A Explanation:

49)

A) B) C) D) E)

50) Consider the equation GDP = F × (FE/F) × (GDP/FE). If the economy enters a recessionary gap because of a negative aggregate demand shock, the equation changes in which of the following ways? A) The value of F falls as the rate of unemployment rises. B) The value of FE/F rises as the rate of unemployment rises. C) The value of GDP/FE rises as workers are laid off and equipment is used less intensively. D) The value of FE/F falls as workers are laid off and equipment is used less intensively. E) There are no short-run changes in this case. Answer: D Explanation:

48)

A) B) C) D) E)

15

50)

51) An economy's stock of capital increases directly because of A) an increase in interest rates. B) high levels of immigration. C) a positive flow of investment. D) a decrease in business cycles. E) low levels of saving. Answer: C Explanation:

A) B) C) D) E)

52) Changes in any of the following variables contribute to changes in GDP. Which one typically changes most over short periods of time? A) the number of workers who are available to work B) the number of employed workers as a portion of the number of workers available to work C) the output produced per worker D) the number of workers who are available to work and the output produced per worker E) the labour-force participation rate Answer: B Explanation:

53)

A) B) C) D) E)

54) An economy's current GDP is $100 billion, the labour force is composed of 2.2 million people, and 2 million people are employed. What is this economy's labour utilization rate? A) 0.2 B) 0.22 C) 0.45 D) 0.91 E) 4.4 Answer: D Explanation:

52)

A) B) C) D) E)

53) An economy's current GDP is $100 billion, the labour force is composed of 2.2 million people, and 2 million people are employed. What is the economy's (approximate) labour productivity? A) 0.91 B) 0.45 C) $50 D) $5000 E) $50 000 Answer: E Explanation:

51)

A) B) C) D) E)

16

54)

55) For the economy as a whole, high rates of factor utilization are associated with A) downward pressure on wage rates. B) excess demand in factor markets. C) increasing unemployment rates. D) excess supply in factor markets. E) downward shifts in the AS curve. Answer: B Explanation:

A) B) C) D) E)

56) For the economy as a whole, changes in the factor-utilization rate are associated with short-run fluctuations in output because A) firms cannot change their prices in the short run. B) potential output is affected by the factor-utilization rate in the short run. C) factor prices can only fully adjust in the long run. D) the short-run fluctuations in factor supplies and productivity cancel each other out. E) it is cheaper for firms to let their inventories accumulate than to employ more workers. Answer: C Explanation:

57)

A) B) C) D) E)

58) Suppose GDP in an economy is $144 000, the unemployment rate is 10% and there are 8000 people in the labour force. Calculate the GDP per worker for this economy. A) $10 B) $14.40 C) $18 D) $20 E) $80 Answer: D Explanation:

56)

A) B) C) D) E)

57) Suppose there are 7000 people in the labour force of an economy and the unemployment rate is 6%. If GDP per worker in this economy is $15, then GDP is equal to A) $6300. B) $12 800. C) $35 000. D) $98 700. E) $105 000. Answer: D Explanation:

55)

A) B) C) D) E)

17

58)

59) Suppose that real GDP in an economy is $750 000 and real GDP per worker is $250. If the employment rate in this economy is 80%, then there are A) 3000 people in the labour force in this economy. B) 3750 people in the labour force in this economy. C) 33 000 people in the labour force in this economy. D) 150 000 people in the labour force in this economy. E) 600 000 people in the labour force in this economy. Answer: B Explanation:

A) B) C) D) E)

60) Inflationary gaps are typically associated with A) excess demand for factors and higher-than normal factor-utilization rates. B) excess demand for factors and lower-than-normal factor-utilization rates. C) excess supply of factors and higher-than-normal factor-utilization rates. D) excess supply of factors and lower-than-normal factor-utilization rates. E) excess supply of factors and normal factor-utilization rates. Answer: A Explanation:

60)

A) B) C) D) E)

61) On the basis of both theory and empirical evidence, most economists believe that changes in monetary policy have A) no long-run effect on real GDP but a substantial long-run effect on inflation. B) no effect on real GDP or inflation in the long run. C) no effect on real GDP or factor utilization in the short run. D) important long-run effects by changing real interest rates. E) powerful effects on real GDP and factor prices both in the short run and in the long run. Answer: A Explanation:

59)

A) B) C) D) E)

18

61)

62) On the basis of both theory and empirical evidence, most economists believe that changes in fiscal policy have A) long-run effects on potential GDP but have little impact on short-run real GDP. B) major effects on the incentive to save in the short run. C) important short-run effects on real GDP and factor utilization but are less effective in changing potential GDP in the long run. D) no effect on factor utilization in the short run or on factor prices in the long run. E) powerful effects on real GDP and factor prices both in the short run and in the long run. Answer: C Explanation:

A) B) C) D) E)

63) In the long run, many economists argue that fiscal policy is ineffective because it has little effect on A) nominal GDP. B) potential GDP. C) nominal interest rates. D) the price level. E) the inflation rate. Answer: B Explanation:

63)

A) B) C) D) E)

64) Which of the following policies is most likely to have an effect on GDP in the long run? A) increase government purchases B) increase labour productivity C) change factor utilization rates D) increase consumption E) reduce unemployment rates Answer: B Explanation:

62)

A) B) C) D) E)

19

64)

65) Fiscal and monetary policies typically affect the short-run level of GDP because they cause shifts in the ________ but they will not generally have any long-run effects on real GDP unless they affect ________. A) AS curve; factor-utilization rates B) AS curve; factor supplies or factor productivity C) AD curve; factor-utilization rates D) AD curve; the unemployment rate E) AD curve; the level of potential output Answer: E Explanation:

A) B) C) D) E)

20

65)

Answer Key Testname: UNTITLED25

1) C 2) C 3) B 4) A 5) E 6) E 7) A 8) D 9) A 10) A 11) A 12) B 13) D 14) A 15) A 16) E 17) B 18) E 19) B 20) C 21) C 22) B 23) D 24) A 25) D 26) D 27) C 28) A 29) A 30) C 31) D 32) E 33) C 34) B 35) C 36) E 37) A 38) A 39) D 40) C 41) B 42) B 43) C 44) A 45) E 46) D 47) A 48) C 49) A 50) D 21

Answer Key Testname: UNTITLED25

51) C 52) B 53) E 54) D 55) B 56) C 57) D 58) D 59) B 60) A 61) A 62) C 63) B 64) B 65) E

22

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Over a long period of time, perhaps many years, changes in real GDP come primarily from A) upward shifts of the AS curve. B) upward shifts of the AE curve. C) rightward shifts of the AD curve. D) continuous increases in potential GDP. E) leftward shifts of the AD curve. Answer: D Explanation:

A) B) C) D) E)

2) Between the years 1960 and 2011, the Canadian economy experienced growth in real GDP at an average annual rate of ________%. A) 0.7 B) 1.2 C) 1.9 D) 3.3 E) 6.3 Answer: D Explanation:

2)

A) B) C) D) E)

3) In the long run, changes in average material living standards are best shown by A) growth in real GDP. B) population growth. C) growth in real per capita GDP. D) improvements in fiscal policy. E) improvements in monetary policy. Answer: C Explanation:

1)

A) B) C) D) E)

1

3)

4) The compounding of economic growth rates means that A) a large increase in investment today has little effect on national income over the long run. B) small changes in sustained growth rates can have a significant impact on national income over several decades. C) consumers should not save, given the low real returns that compounding produces. D) a 10% annual rate of return will double an investment in less than 6 years. E) a 2% annual growth rate of GDP will double national income in 27 years. Answer: B Explanation:

A) B) C) D) E)

5) If per capita GDP in a richer country grows at a faster annual rate than in a poorer country, A) the gap between their standards of living will widen over time. B) the gap between their standards of living will close over time. C) the gap between their standards of living will close over time as long as the rate of population growth is higher in the poorer country. D) whether the gap in living standards widens or closes over time depends on the absolute size of the relative growth rates. E) the difference in their living standards will not change over time. Answer: A Explanation:

5)

A) B) C) D) E)

6) If GDP in a richer country grows at the same annual rate as in a poorer country, the A) gap between their standards of living will widen over time. B) gap between their standards of living will close over time. C) gap between their standards of living will close over time as long as the rate of population growth is lower in the poorer country. D) gap between their standards of living will close over time as long as the rate of population growth is lower in the richer country. E) difference in their living standards will not change over time. Answer: C Explanation:

4)

A) B) C) D) E)

2

6)

7) A common measure of a country's level of productivity is A) the average efficiency of capital. B) the capital-output ratio. C) output per capita. D) output per unit of labour input. E) per capita GDP. Answer: D Explanation:

A) B) C) D) E)

8) A common measure of a country's rate of economic growth is A) the marginal efficiency of capital. B) the capital-output ratio. C) the level of output per capita. D) the change in output per capita. E) the level of real gross domestic product. Answer: D Explanation:

9)

A) B) C) D) E)

10) If real income grows at approximately 2% per year, the number of years it will take for real income to double is approximately A) 5. B) 12. C) 24. D) 36. E) 72. Answer: D Explanation:

8)

A) B) C) D) E)

9) Over the long term, by far the most potent force for raising average material living standards is A) economic growth. B) reducing inefficiencies. C) redistributing income. D) increasing the money supply. E) appropriate fiscal policies. Answer: A Explanation:

7)

A) B) C) D) E)

3

10)

11) If real income grows at approximately 4% per year, the number of years it will take for real income to double is approximately A) 5. B) 12. C) 18. D) 36. E) 72. Answer: C Explanation:

A) B) C) D) E)

12) Of the variables listed below, the best measure of a nation's average material standard of living is A) nominal GDP. B) percent change in nominal GDP. C) per capita real GDP. D) per capita nominal GDP. E) real GDP. Answer: C Explanation:

13)

A) B) C) D) E)

14) Which of the following is the best example of the acquisition of human capital? A) A worker takes a training course that increases his/her productivity. B) A worker receives new machinery enabling him/her to do the amount of work that was formerly done by two workers. C) A worker communicates more quickly and accurately with suppliers because of upgrades to communications software. D) A government-sponsored program increases the amount of investment available per worker. E) A computer chip manufacturer introduces a faster processor for micro-computing. Answer: A Explanation:

12)

A) B) C) D) E)

13) The theory of economic growth concentrates on the ________ over the long run, not on ________. A) growth of investment in capital goods; short-run fluctuations of investment B) growth of real GDP; growth of potential GDP C) factor utilization rates; growth of the supplies of factors D) factor utilization rates; growth of real GDP E) growth of potential output; fluctuations of output around potential Answer: E Explanation:

11)

A) B) C) D) E)

4

14)

15) The four major determinants of economic growth include all of the following EXCEPT A) technological improvement. B) growth in physical capital. C) growth in human capital. D) growth in financial capital. E) growth in the labour force. Answer: D Explanation:

15)

A) B) C) D) E)

The diagram below shows alternate paths for two hypothetical economies, each starting with GDP of $1 billion. Assume that Area 1 is equal to Area 2.

FIGURE 26-1 16) Refer to Figure 26-1. Which of the following statements best describes what we know about the difference between the two economies at Year 0? A) Economy A has a higher level of real GDP at Year 0 than Economy B. B) Economy B's households are consuming a larger percentage of GDP than Economy A's households. C) There is no opportunity cost for economic growth for Economy B at Year 0. D) There is no opportunity cost of economic growth for Economy A at Year 0. E) Economy A's households are consuming a larger percentage of GDP than Economy B's households. Answer: E Explanation:

A) B) C) D) E)

5

16)

17) Refer to Figure 26-1. Which of the following statements about Economies A and B is correct? A) Economy A will sustain higher material living standards than Economy B in the long run. B) Economies A and B will have equal material living standards beginning at Year 0. C) Economy B will sustain higher material living standards than Economy A in the long run. D) Economies A and B will have equal material living standards beginning at Year X. E) Economies A and B will have equal material living standards beginning at Year Y. Answer: C Explanation:

A) B) C) D) E)

18) Refer to Figure 26-1. The area marked Area 1 represents A) the value of consumption from Year 0 to Year X in Economy A. B) the value of the investment in capital goods undertaken by Economy B. C) the value of the investment in capital goods undertaken by Economy A. D) the sacrifice of current consumption by Economy B, as compared to Economy A. E) the sacrifice of current consumption by Economy A, as compared to Economy B. Answer: D Explanation:

18)

A) B) C) D) E)

19) Refer to Figure 26-1. Suppose Economy A jumps to the path of Economy B at Year 0 by increasing the share of GDP that is saved. In that case, which of the following statements about Economy A is true? A) Economy A will not be able to regain the losses in consumption it incurs by jumping to the path of Economy B. B) By Year Y, the increase in consumption made possible by the economy's higher growth rate equals the consumption sacrificed in earlier years. C) By Year X, Economy A is better off in terms of material living standards for having jumped to the path of Economy B. D) By jumping to a new growth path at Year 0, Economy A has increased the share of national income that is consumed. E) By Year X, Economy A is saving and investing the same share of its national income as it would have been had it stayed on its original path. Answer: B Explanation:

17)

A) B) C) D) E)

6

19)

20) Refer to Figure 26-1. Which of the following costs of economic growth are reflected in this diagram? A) the sacrifice of current consumption B) lower real interest rate C) environmental degradation D) resource exhaustion E) national saving Answer: A Explanation:

A) B) C) D) E)

21) If a country transfers resources from the production of consumption goods to the production of capital goods, the result will be to A) raise future consumption. B) raise current living standards. C) decrease the long-run growth rate. D) lower future living standards. E) raise current consumption. Answer: A Explanation:

22)

A) B) C) D) E)

23) The costs of long-run economic growth include: 1) declining future average living standards; 2) that current consumption must be sacrificed to increase investment in capital goods; 3) current increases in investment may only generate greater consumption in the distant future. A) 1 and 2 B) 2 and 3 C) 1 only D) 2 only E) 3 only Answer: B Explanation:

21)

A) B) C) D) E)

22) One of the benefits of long-run economic growth is A) growth in nominal GDP greater than real GDP. B) decreased productive capacity. C) a greater ability to reduce inequality. D) increased future interest rates. E) decreased current saving and increased current consumption. Answer: C Explanation:

20)

A) B) C) D) E) 7

23)

24) For a given level of technology, a more rapid rate of economic growth can probably be achieved only if a country's citizens are prepared to A) redistribute income. B) sacrifice some present consumption. C) increase their demand for goods and services. D) increase exports. E) decrease interest rates. Answer: B Explanation:

A) B) C) D) E)

25) The costs of economic growth include A) declining future living standards. B) current saving must be sacrificed to increase investment in capital goods. C) improvements in technology. D) the effects on workers whose skills are made obsolete by technical change. E) reduced interest rates. Answer: D Explanation:

25)

A) B) C) D) E)

26) Long-run economic growth can help alleviate the problems of poverty by A) creating new low-paying jobs for the unemployed. B) generating more resources that can be used to reduce income inequality. C) reallocating income away from low-value production to increase the incentives for high-value production. D) requiring increased saving on the part of most of the population. E) increasing future consumption for the middle class. Answer: B Explanation:

24)

A) B) C) D) E)

8

26)

27) Long-term economic growth A) is achieved only by changes in factor-utilization rates. B) alleviates all poverty. C) can improve average material living standards. D) is the result of expansionary fiscal policy. E) leads to equal income distribution. Answer: C Explanation:

A) B) C) D) E)

28) Consuming fewer goods today in order to invest resources in capital goods can be considered the ________ of economic growth. A) opportunity cost B) social cost C) investment cost D) external cost E) total cost Answer: A Explanation:

28)

A) B) C) D) E)

29) Alleviation of poverty is more achievable in a growing economy mainly because A) individuals are more likely to object to the redistribution of income when they earn more. B) everyone, including the poor, benefits equally from growth. C) poor individuals are relatively easier to be identified in a growing economy. D) nobody has to be made worse off when the increment to income caused by growth is redistributed. E) wage rates for low-income people are naturally rising. Answer: D Explanation:

27)

A) B) C) D) E)

9

29)

30) An important social cost of economic growth is A) the increasing inequality of income that usually accompanies sustained growth. B) the sacrifice of current consumption required for a higher level of future consumption. C) the associated inflation. D) the associated frictional unemployment. E) the destruction of jobs due to labour skills of certain workers becoming obsolete. Answer: E Explanation:

A) B) C) D) E)

31) Economic growth is often associated with structural change in the economy, and this change can present difficult policy challenges to governments. Which of the following government policies would be most useful at addressing the social costs of economic growth? A) expansionary monetary policy B) the imposition of trade restrictions to protect Canadian jobs C) subsidies directed at Canadian manufacturing firms D) worker re-training and education programs E) reducing income taxes Answer: D Explanation:

30)

A) B) C) D) E)

10

31)

The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 26-3 32) Refer to Figure 26-3. Suppose the interest rate in this market for financial capital is 2%. In this case there is an excess ________ financial capital of ________ billion dollars. A) supply of; 30 B) demand for; -30 C) supply of; 50 D) demand for; 30 E) demand for; 80 Answer: D Explanation:

A) B) C) D) E)

11

32)

33) Which of the equations is a correct expression for national saving in the long run when real GDP equals potential output? A) NS = Y* - C - G B) NS = Y* - C + T - G C) NS = Y* - T - C D) NS = T - G E) NS = T - G - C Answer: A Explanation:

A) B) C) D) E)

34) Consider the long-run theory of investment, saving and growth. In the long-run version of our macro model (with real GDP equal to Y*), the equilibrium interest rate is determined where A) aggregate demand equals aggregate expenditure. B) desired national saving equals desired investment. C) the nominal price level equals the real price level. D) desired consumption equals desired investment. E) desired saving equals desired consumption. Answer: B Explanation:

35)

A) B) C) D) E)

36) Consider a closed economy with real GDP in the long run of $400, consumption expenditures of $250, government purchases of $75, and net tax revenue of $20. What is the level of national saving? A) $55 B) $75 C) $95 D) $225 E) $230 Answer: B Explanation:

34)

A) B) C) D) E)

35) If government policies are to be successful in enhancing a country's long-run growth rate, they likely work through generating A) higher levels of current consumption. B) greater private investment in physical and human capital. C) an increase in current consumption and a reduction in saving. D) a leftward shift in the AS curve. E) fiscal policies that shift the AD curve to the right. Answer: B Explanation:

33)

A) B) C) D) E) 12

36)

The table below shows aggregate values for a hypothetical economy. Suppose that this economy has real GDP equal to potential output. Potential GDP Net tax revenues Government purchases Investment Consumption Net exports

$2500 $50 $200 $100 $2350 -$135

TABLE 26-1 37) Refer to Table 26-1. What is the level of private saving for this economy? A) $50 B) $100 C) $150 D) $200 Answer: B Explanation:

A) B) C) D) E)

38) Refer to Table 26-1. What is the level of public saving for this economy? A) -$200 B) -$150 C) -$50 D) $150 Answer: B Explanation:

38) E) $200

A) B) C) D) E)

39) Refer to Table 26-1. What is the level of national saving for this economy? A) -$200 B) -$150 C) -$50 D) $150 Answer: C Explanation:

37) E) $300

39) E) $200

A) B) C) D) E)

40) Suppose the government has a budget deficit of $400. If the country's level of national saving is $200, then private saving must be A) -$400. B) $200. C) $400. D) $600. E) $800. Answer: D Explanation:

A) B) C) D) E)

13

40)

41) Suppose the government has a budget surplus of $2 billion. If the country's level of private saving is $1.2 billion, then national saving must be A) - $1.2 billion. B) - $800 million. C) $0. D) $800 million E) $3.2 billion Answer: E Explanation:

A) B) C) D) E)

42) Consider the long-run theory of investment, saving, and growth. For a given level of private saving, an increase in government purchases will likely ________ the economy's long-run growth rate. A) slow down B) accelerate C) not affect D) increase E) Not enough information to know Answer: A Explanation:

42)

A) B) C) D) E)

43) For a given level of national income, an increase in private consumption or government purchases will cause national saving to A) increase. B) grow at a constant rate. C) remain unchanged from its initial level. D) exceed investment. E) decrease. Answer: E Explanation:

41)

A) B) C) D) E)

14

43)

44) An increase in the government budget surplus, everything else constant, will cause a(n) A) decrease in national saving. B) increase in national saving. C) decrease in the growth rate. D) equal increase in private consumption. E) equal decrease in private investment. Answer: B Explanation:

A) B) C) D) E)

45) Consider a closed economy in the long run. A country with a low national saving rate (as a fraction of real GDP) is likely to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) either a high or low growth rate depending on the investment schedule. C) an AS curve moving continually to the right. D) trouble achieving potential real national income in the short run. E) a low growth rate because sustained high investment is not possible with low saving. Answer: E Explanation:

45)

A) B) C) D) E)

46) Consider the market for financial capital for a closed economy in the long run. Other things being equal, a country with a high national saving rate will tend to have A) a high growth rate because aggregate expenditure will be high out of any given income. B) a high growth rate because sustained high investment is possible with high saving. C) an AS curve moving continually to the left. D) trouble achieving potential real national income in the short run. E) either a high or low growth rate depending on the investment demand schedule. Answer: B Explanation:

44)

A) B) C) D) E)

15

46)

47) Which of the following statements concerning national saving is true? A) A country's saving rate is unrelated to its growth rate. B) An increase in the rate of saving will lead to a reduction in consumption and therefore to both a short-run and a long-run decrease in national income. C) An increase in the rate of saving will cause an immediate increase in national income, but may cause a drop in national income in the long-run. D) An increase in the rate of saving will always be offset by a reduction in private investment. E) An increase in the rate of saving will lead to a short-run reduction in national income, but to higher economic growth in the long run. Answer: E Explanation:

A) B) C) D) E)

48) For a given level of national income, a decrease in government tax revenues will cause A) a decrease in national saving. B) an increase in national saving. C) an increase in the growth rate. D) no effect on national saving. E) a decrease in consumption. Answer: A Explanation:

48)

A) B) C) D) E)

49) For a given level of private saving, a decrease in the government's budget deficit ________ the long-run rate of economic growth. A) will reduce B) will leave unchanged C) will increase D) will diminish E) none of the above Answer: C Explanation:

47)

A) B) C) D) E)

16

49)

50) Consider the long-run theory of investment, saving, and growth. For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) increase and the flow of national saving to decrease. B) increase and the flow of investment to increase. C) increase and the flow of investment to decrease. D) decrease and the flow of national saving to increase. E) decrease and the flow of national saving to decrease. Answer: D Explanation:

A) B) C) D) E)

51) For a given level of national income, a decrease in private consumption or government purchases will cause the equilibrium interest rate to A) increase and the flow of national saving to fall. B) increase and the flow of investment to increase. C) increase and the flow of investment to decrease. D) decrease and the flow of investment to decrease. E) decrease and the flow of investment to increase. Answer: E Explanation:

51)

A) B) C) D) E)

52) Consider the market for financial capital in the long run. The national saving curve is upward sloping because an increase in the real interest rate A) leads households to increase their current consumption. B) leads to an increase in investment demand. C) decreases the supply of public saving. D) leads households to reduce their current consumption. E) decreases the supply of private saving. Answer: D Explanation:

50)

A) B) C) D) E)

17

52)

53) Consider the market for financial capital in the long run. The investment demand curve is downward sloping because A) an increase in the real interest rate leads to an increase in investment demand. B) all components of desired investment are negatively related to the real interest rate. C) all components of desired investment are positively related to the real interest rate. D) a decrease in the real interest rate reflects a higher opportunity cost to firms of using financial capital. E) an increase in the real interest rate reflects a lower opportunity cost to firms of using financial capital. Answer: B Explanation:

53)

A) B) C) D) E)

The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.

FIGURE 26-2 54) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. If the real interest rate is i1 , there is ________ which will drive the interest rate down until it reaches i*. A) an excess demand for financial capital C) an excess supply of financial capital Answer: C Explanation:

B) an excess demand for investment D) an excess supply of public saving

A) B) C) D)

18

54)

55) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. If the real interest rate is i4 , there is ________, which will drive the real interest rate up to i*. A) an excess demand for financial capital C) an excess supply of saving Answer: A Explanation:

55)

B) an excess supply of financial capital D) an excess demand for public saving

A) B) C) D)

56) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose there is a reduction in government purchases (G). What is the effect

56)

on the equilibrium real interest rate? A) There is no effect on NS or ID, and the interest rate remains at i*. B) National saving shifts to NS1 and the interest rate falls to i3 . C) Investment demand shifts to I1D, and the interest rate rises to i2 . D) The real interest rate rises because of the decrease in the budget surplus. E) The real interest rate falls because of the decrease in the budget surplus. Answer: B Explanation:

A) B) C) D) E)

57) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose there is a reduction in government purchases. What is the effect on investment demand? A) National saving shifts to NS1 , causing an increase in the quantity of investment demanded from I* to I 2. B) There is no effect on NS or ID, and the quantity of investment demanded remains at I*. C) Investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I1. D) Investment demand shifts to I1D, causing an increase in the quantity of investment demanded from I* to I 3. E) National saving shifts to NS1 , and investment demand shifts to I1 D, causing an increase in the quantity of investment demanded from I* to I3 . Answer: A Explanation:

A) B) C) D) E)

19

57)

58) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose the government implements a revenue-neutral tax policy that

58)

encourages investment. What is the effect on the real interest rate? A) There is no effect on NS or ID, and the interest rate remains at i*. B) National saving shifts to NS1 , and the real interest rate falls to i3 . C) The real interest rate rises because of the decrease in the budget surplus. D) The real interest rate falls because of the decrease in the budget surplus. E) Investment demand shifts to I1D, and the real interest rate rises to i2 . Answer: E Explanation:

A) B) C) D) E)

59) Refer to Figure 26-2. Suppose national saving is reflected by NS0 and investment demand is reflected by I0D. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the quantity of national saving? A) There is no effect on NS or ID and the quantity of national saving supplied remains at I*. B) National saving shifts to NS1 , and the quantity of national saving supplied rises to I2 . C) Investment demand shifts to I1D and the quantity of national saving supplied rises to I1 . D) Investment demand shifts to I1D, national saving shifts to NS1 , and the quantity of national saving rises to I3 . E) National saving shifts to NS1 , investment demand shifts to I1 D, and the quantity of national saving rises to I1 . Answer: C Explanation:

A) B) C) D) E)

20

59)

The diagram below shows the market for financial capital in the long run when real GDP is equal to potential output, Y*.

FIGURE 26-3 60) Refer to Figure 26-3. The equilibrium interest rate in this market is ________% and the equilibrium flow of investment and saving is ________ billion dollars. A) 1; 50 B) 2; 60 C) 3; 70 D) 4; 80 E) 5; 90 Answer: C Explanation:

A) B) C) D) E)

61) Refer to Figure 26-3. Suppose the interest rate in this market for financial capital is 4%. In this case there is an excess ________ financial capital of ________ billion dollars. A) supply of; 30 B) demand for; -60 C) supply of; 90 D) demand for; 30 E) demand for; 60 Answer: A Explanation:

60)

A) B) C) D) E)

21

61)

62) Refer to Figure 26-3. Suppose the interest rate in this market for financial capital is 2%. Which of the following statements correctly describes the adjustment that will occur in this market? A) The excess supply of saving will push up the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. B) The excess demand for investment will push up the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. C) The excess supply of saving will push down the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. D) The excess demand for investment will push down the real interest rate, which will decrease the quantity demanded of investment and increase the quantity supplied of saving. E) The excess demand for investment will push up the real interest rate, which will increase the quantity demanded of investment and decrease the quantity supplied of saving. Answer: B Explanation:

A) B) C) D) E)

63) In the long run, an increase in the demand for investment pushes ________ the real interest rate, encourages ________ saving by households, and leads to a ________ future growth rate of potential output. A) down; less; lower B) up; less; lower C) down; less; higher D) up; more; higher E) up; more; lower Answer: D Explanation:

63)

A) B) C) D) E)

64) Data from most industrialized countries show that countries with high investment rates (as a percentage of GDP) tend to be countries A) with the highest levels of per capita GDP. B) with the highest levels of GDP. C) with high rates of economic growth. D) with the lowest rate of national saving. E) with a negative relationship between investment and the rate of economic growth. Answer: C Explanation:

62)

A) B) C) D) E)

22

64)

65) Consider the Neoclassical growth model. The effect of an increase in population (or the labour force) in an economy, with everything else held constant, is A) an increase in per capita national income. B) an increasingly aging population. C) a decrease in per capita output. D) a decrease in the capital-output ratio. E) an inward shift of the production possibilities boundary. Answer: C Explanation:

A) B) C) D) E)

66) One important assumption of the Neoclassical growth model is that, with a given state of technology, A) increases in the use of a single factor bring increasing returns. B) increases in the use of a single factor result in constant returns. C) increases in the use of single factor bring diminishing returns. D) the return from successive units of a single factor increases over time. E) increases in GDP are possible only if all factors are increased at an equal rate. Answer: C Explanation:

66)

A) B) C) D) E)

67) The main properties of a Neoclassical aggregate production function are ________ when all factors are increased proportionally and ________ when any one factor is increased on its own. A) increasing returns to scale; diminishing marginal returns B) constant returns to scale; diminishing marginal returns C) constant returns to scale; constant marginal returns D) decreasing returns to scale; diminishing marginal returns E) increasing returns to scale; increasing marginal returns Answer: B Explanation:

65)

A) B) C) D) E)

23

67)

68) The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor will eventually A) increase the average product of the factor. B) decrease the average product of the factor. C) lead to an increase in the marginal output of the factor. D) lead to a decrease in total output by the factor. E) lead to an increase in the material standard of living. Answer: B Explanation:

A) B) C) D) E)

69) The Neoclassical growth model assumes that, with a given state of technology, increases in the use of a single factor eventually cause the A) average product of the factor to increase. B) marginal product of the factor to fall. C) marginal product of the factor to increase at an increasing rate. D) marginal product of the factor to increase but at a decreasing rate. E) material standard of living to increase. Answer: B Explanation:

69)

A) B) C) D) E)

70) A central assumption of the Neoclassical growth model is that A) long-run growth arises from correcting market failures. B) long-run growth arises only from technological innovation. C) there are diminishing marginal returns to a single factor. D) there are constant marginal returns to investment. E) there are increasing marginal returns to capital investment. Answer: C Explanation:

68)

A) B) C) D) E)

24

70)

71) In the Neoclassical growth model, whenever diminishing returns applies, increases in the population, other things being equal, are accompanied by A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and constant living standards. E) increasing GDP and increasing living standards. Answer: C Explanation:

A) B) C) D) E)

72) In the Neoclassical growth model, decreases in the population, other things being equal, would eventually result in A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and increasing living standards. E) increasing savings and increasing living standards. Answer: B Explanation:

72)

A) B) C) D) E)

73) In the Neoclassical growth model, increases in the stock of physical capital, other things being equal, will lead to A) decreasing GDP and falling living standards. B) decreasing GDP and increasing living standards. C) increasing GDP and falling living standards. D) increasing GDP and increasing living standards. E) increasing GDP and decreased national wealth. Answer: D Explanation:

71)

A) B) C) D) E)

25

73)

74) In the Neoclassical growth model, if capital and labour grow at the same rate, we will observe A) rising GDP but falling living standards. B) rising GDP but no change in living standards. C) rising GDP and increasing living standards. D) increasing living standards but only for workers using labour-intensive production. E) increasing living standards but only for workers using capital-intensive production. Answer: B Explanation:

A) B) C) D) E)

75) According to the Neoclassical growth model, it is most likely that GDP would increase, but that average material living standards would fall, as a result of A) a fast-growing capital stock. B) a better educated labour force. C) an increase in the working population. D) a growing capacity to develop and incorporate new innovations. E) an increase in the availability of natural resources. Answer: C Explanation:

75)

A) B) C) D) E)

76) In Neoclassical growth theory, an increase in the labour force ________ total output and ________ total output per person. A) increases; increases B) increases; leaves constant C) increases; reduces D) leaves constant; leaves constant E) leaves constant; reduces Answer: C Explanation:

74)

A) B) C) D) E)

26

76)

77) In Neoclassical growth theory, average material living standards in an economy could fall when A) additional units of capital are added to the other factors. B) additional units of labour are added to the other factors. C) there is equal percentage growth in capital and labour inputs. D) technology improves. E) there is a decline in the population. Answer: B Explanation:

A) B) C) D) E)

78) In Neoclassical growth theory, increasing the amount of capital employed in production ________ the average standard of living as long as the marginal product of capital exceeds zero. A) unambiguously raises B) unambiguously reduces C) has no effect on D) at first raises but eventually reduces E) at first reduces but eventually raises Answer: A Explanation:

78)

A) B) C) D) E)

79) The Neoclassical theory of economic growth led economics to be referred to as the "dismal science." The explanation for this reference lies in the theory's emphasis on A) growing inequality of income. B) increasing government intervention in the economy. C) increasing damage to the environment. D) the immoral behaviour of firms. E) diminishing returns in production. Answer: E Explanation:

77)

A) B) C) D) E)

27

79)

80) The Neoclassical growth model assumes that with a given state of technology, A) increases in the use of a single factor bring increasing returns. B) increases in the use of a single factor result in constant returns. C) increases in GDP are possible only if all factors are increased at an equal rate. D) growth in GDP happens only if the labour force grows more quickly than the amount of physical capital. E) the standard of living will decrease if the labour force grows more quickly than the amount of physical capital. Answer: E Explanation:

A) B) C) D) E)

81) In the Neoclassical growth model, the law of diminishing marginal returns implies that capital accumulation leads to ever A) larger decreases in GDP and large decreases in living standards. B) larger increases in GDP but smaller decreases in living standards. C) smaller increases in GDP and living standards. D) larger levels of unemployment but small increases in the standard of living. E) larger levels of unemployment but larger increases in the standard of living. Answer: C Explanation:

81)

A) B) C) D) E)

82) A person who returns to school to improve her computer skills is an example of an increase in A) the labour force. B) human capital. C) physical capital. D) technological capital. E) financial capital. Answer: B Explanation:

80)

A) B) C) D) E)

28

82)

83) According to the Neoclassical growth model, which of the following scenarios explains improvements in long-run material living standards? A) an increase in population B) a decrease in unemployment rates C) an increase in the stock of physical capital D) an equal increase in both population and the stock of capital E) an equal increase in both population and output Answer: C Explanation:

A) B) C) D) E)

84) According to the Neoclassical growth model, which of the following scenarios (other things being equal) explains progressively smaller increases in per capita GDP? A) an increase in population B) a decrease in unemployment rates C) an increase in the capital stock D) an equal increase in both population and the stock of capital E) an equal increase in population and output Answer: C Explanation:

84)

A) B) C) D) E)

85) Real GDP is not a good measure of average material living standards because A) it is biased by the changes in the inflation rate. B) it excludes the role of imported goods. C) it does not take into account the size of the population. D) it is sensitive to the base year chosen in its calculation. E) the price level may be changing, which affects what people can afford to buy. Answer: C Explanation:

83)

A) B) C) D) E)

29

85)

86) Balanced growth of labour and capital in the Neoclassical growth model A) leads to rising material living standards. B) will not increase the level of per capita GDP. C) will result in a constant level of GDP. D) is a natural outcome of long-run equilibrium. E) explains current rising per capita incomes in many countries. Answer: B Explanation:

A) B) C) D) E)

87) According to the Neoclassical growth theory, sustained rising material living standards can only be explained by A) growth in human capital. B) growth in physical capital. C) growth in the labour force. D) balanced growth of labour and capital. E) exogenous technological change. Answer: E Explanation:

87)

A) B) C) D) E)

88) "Embodied technical change" is said to occur when A) older capital equipment is replaced with different, more productive, capital. B) the capital-labour ratio is increasing. C) innovations in the organization of production take place which do not involve changes in the form of capital used. D) techniques of managerial control are improved. E) the labour force acquires new skills that can be used across a wide range of industries. Answer: A Explanation:

86)

A) B) C) D) E)

30

88)

89) Consider the Neoclassical growth model. Sustained economic growth in the long run could best be fostered by A) expansionary fiscal policy. B) decreasing excise taxes on consumer goods. C) technological improvements embodied in physical or human capital. D) elimination of an output gap. E) expansionary monetary policy. Answer: C Explanation:

A) B) C) D) E)

90) When a new personal computer is purchased to replace an old one, and the new PC is much better and faster than the old one, there has been A) a disembodied technical change. B) a rise in the capital-output ratio. C) a fall in the output per unit of capital. D) an embodied technical change. E) capital "deepening." Answer: D Explanation:

90)

A) B) C) D) E)

91) If a country experiences growth in "total factor productivity" (i.e., the "Solow residual"), then A) all growth in real GDP can be explained by growth in the labour force. B) all growth in real GDP can be explained by growth in the capital stock. C) there is some growth in real GDP that cannot be accounted for by growth in capital or the labour force. D) none of the growth in real GDP can be accounted for by growth in capital and the labour force. E) material standards of living are falling. Answer: C Explanation:

89)

A) B) C) D) E)

31

91)

92) The growth of "total factor productivity," or the "Solow residual," is equal to the growth in real GDP A) accounted for by changes in all factors of production but excluding technological changes. B) accounted for by changes in all factors of production and including technological changes. C) that cannot be accounted for by changes in the quantities of labour and capital. D) that cannot be accounted for by changes in technology. E) that cannot be accounted for by changes in the labour force. Answer: C Explanation:

A) B) C) D) E)

93) An example of "embodied technical change" is A) education that teaches a wider portion of the labour force basic numeracy. B) the strengthening of social infrastructure, such as delivery of basic health-care services. C) better methods of inventory control. D) the development of better intellectual property law. E) the replacement of old computer chips with new ones designed for faster processing. Answer: E Explanation:

93)

A) B) C) D) E)

94) The Solow residual is an estimate of changes in A) economic growth. B) human capital. C) physical capital. D) labour. E) technology. Answer: E Explanation:

92)

94)

A) B) C) D) E)

32

95) The so-called "Solow residual" A) refers to the amount of GDP growth that cannot be explained by the growth in technological change. B) takes embodied technological change into consideration. C) is an underestimate of the amount of technological change when embodied technological progress occurs. D) is an alternative to a measure of "total factor productivity." E) is an overestimate of the amount of technological change when embodied technological progress occurs. Answer: C Explanation:

A) B) C) D) E)

96) The aggregate production function shows the ________ for given levels of labour and capital inputs. A) marginal product of labour B) marginal product of capital C) returns to scale D) total output for society (real GDP) E) the production possibilities boundary Answer: D Explanation:

96)

A) B) C) D) E)

97) Neoclassical growth theory is based on the assumption of ________ marginal returns to a single factor and ________ returns to scale exhibited by the aggregate production function. A) decreasing; constant B) decreasing; decreasing C) constant; decreasing D) increasing; increasing E) increasing; constant Answer: A Explanation:

95)

A) B) C) D) E)

33

97)

98) An aggregate production function exhibits constant returns to scale when a 1% increase in labour input A) produces a 1% increase in output. B) along with a 1% increase in capital produces the same amount of output. C) along with a 1% increase in capital produces 1% more output. D) along with a 1% decrease in capital produces the same amount of output. E) induces a 1% increase in capital input. Answer: C Explanation:

A) B) C) D) E)

99) An aggregate production function exhibits increasing returns to capital when A) no change in capital produces a 1% increase in output. B) a 1% decrease in capital produces an increase in the marginal product of capital. C) a 1% increase in capital produces no change in output. D) each additional unit of capital increases the number of jobs by more than 1%. E) each additional unit of capital has a higher marginal product than the previous unit. Answer: E Explanation:

99)

A) B) C) D) E)

100) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5% each and total output (Y) increases by 5% as a result, then this production function is displaying A) increasing returns to scale. B) constant returns to scale. C) decreasing returns to scale. D) diminishing marginal returns. E) a change in technology. Answer: B Explanation:

98)

A) B) C) D) E)

34

100)

101) Consider the aggregate production function Y = F(K, L). If the inputs K and L are increased by 5% each, and the production function displays constant returns to scale, then total output will increase by ________%. A) 0 B) less than 5 C) 5 D) more than 5 E) Not enough information to determine Answer: C Explanation:

A) B) C) D) E)

102) Consider an aggregate production function Y = F(K, L) that displays diminishing marginal returns to labour. If the amount of capital is held constant and the amount of labour used in production is increasing, then A) each additional unit of labour will add less to total output than the previous unit of labour. B) each additional unit of labour will add more to total output than the previous unit of labour. C) total output increases in proportion to the increases in labour. D) there are increasing returns to scale. E) there are constant returns to scale. Answer: A Explanation:

101)

A) B) C) D) E)

35

102)

Consider the following table for a hypothetical economy in which the initial level of GDP (Y0 ) in all cases is 1000. Assume that real GDP grows according to the equation Y 0(1 + growth rate)N, where N is the number of years in the future. Solutions are rounded to the nearest whole number.

Year 0 1 5 20 50

Real GDP with Alternative Growth Rates 1% 2% 3% 1000 1000 1000 1010

4% 1000

TABLE 26-2 103) Note: This question requires a calculator with an exponent feature. Refer to Table 26-2. What is real GDP in this economy in Year 20 if the annual growth rate is 1%? A) 200 B) 1020 C) 1220 D) 6727 E) 20 200 Answer: C Explanation:

A) B) C) D) E)

104) Note: This question requires a calculator with an exponent function. Refer to Table 26-2. What is real GDP in this economy in Year 20 if the annual growth rate is 4%? A) 2191 B) 8000 C) 20 800 D) 80 000 E) 836 683 Answer: A Explanation:

104)

A) B) C) D) E)

105) Note: This question requires a calculator with an exponent function. Refer to Table 26-2. If this economy is growing at an annual rate of 2%, then real GDP in Year 50 will be ________; if it is growing at an annual rate of 4%, then real GDP in Year 50 will be ________. A) 1645; 2000 B) 1126; 1268 C) 2692; 7107 D) 500; 2000 E) 51 000; 52 000 Answer: C Explanation:

103)

A) B) C) D) E)

36

105)

106) Modern or "new" theories of long-run economic growth are based on the assumptions that technological change is mainly ________ to an economy and that investment yields ________ marginal returns. A) exogenous; diminishing B) exogenous; constant C) exogenous; increasing D) endogenous; decreasing E) endogenous, increasing Answer: E Explanation:

A) B) C) D) E)

107) The "new" theories of economic growth emphasize that the pace of technological change is ________ to economic signals, and that it is ________ to the economic system. A) responsive; exogenous B) responsive; endogenous C) unresponsive; exogenous D) unresponsive; endogenous E) unresponsive; unrelated Answer: B Explanation:

107)

A) B) C) D) E)

108) The "new" theories of economic growth emphasize that technological change ________ to price and profit signals. A) and product development are both directly related B) is directly related and product development is inversely related C) is unaffected by but product development is directly related D) is directly related and population growth is inversely related E) and product development are both unrelated Answer: A Explanation:

106)

A) B) C) D) E)

37

108)

109) According to the "new" theories of economic growth, increasing marginal returns to capital investment is A) possible, but only in the early stages of innovation before imitators rush in to drive prices down. B) possible after initial fixed costs of innovation have been borne. C) possible only if the capital is government-owned infrastructure. D) impossible, and is thus a weak source of growth. E) impossible because diminishing returns are unavoidable. Answer: B Explanation:

A) B) C) D) E)

110) New theories of economic growth based on the idea that growth is endogenous A) assume that the rate of growth of the economy is equal to the rate of population growth. B) assume that the growth rate of technology is exogenous. C) incorporate factors such as central-bank behaviour. D) ignore the role of technology. E) stress the role of knowledge and learning in the economy's rate of growth. Answer: E Explanation:

110)

A) B) C) D) E)

111) With respect to long-run economic growth, one rationale for the idea that there may be increasing marginal returns to investment is that A) as further investment takes place the economy moves down to the right along the marginal product schedule. B) as further investment takes place the economy moves upward to the left along the marginal product schedule. C) the investment costs to "followers" are lower than those for "pioneers." D) initial investment shifts the the investment demand schedule to the left, making further investment less costly. E) initial investment shifts the the aggregate demand schedule to the left, making further investment less costly. Answer: C Explanation:

109)

A) B) C) D) E)

38

111)

112) According to some modern theories of long-run economic growth, successive increments of investment have ________ returns since some fixed costs are ________ for subsequent firms. A) constant; identical B) increasing; lower C) increasing; higher D) decreasing; higher E) decreasing; lower Answer: B Explanation:

A) B) C) D) E)

113) In new theories of "endogenous growth," increasing marginal returns to investment can occur because A) investment costs for followers can be higher than for pioneers. B) knowledge provides the input that allows investment to be profitable. C) many investments require large fixed costs, the benefits of which are not available to subsequent firms. D) little risk is associated with the process of innovation for technological followers. E) early investors create an infrastructure favorable to followers. Answer: E Explanation:

113)

A) B) C) D) E)

114) Compared to Neoclassical growth theory, newer "endogenous growth" theories are more ________ regarding the prospect of continuous increases in the standard of living, due in part to its emphasis on the ________. A) pessimistic; endogeneity of technological change B) pessimistic; accelerating depletion of natural resources C) pessimistic; increasing birth rates as a result of higher real income per capita D) optimistic; accelerating depletion of natural resources E) optimistic; endogeneity of technological change Answer: E Explanation:

112)

A) B) C) D) E)

39

114)

115) Given the rapid growth of world population in recent decades, the present needs and aspirations of the world's population can likely only be met through A) enormous increases in financial capital. B) increasing knowledge and technological improvements. C) reductions in the world's capital stock, as a means of controlling the exhaustion of natural resources. D) coordination of fiscal and monetary policies. E) relatively small increases in the saving rates of the developing economies. Answer: B Explanation:

A) B) C) D) E)

116) Modern growth theories are more optimistic than Neoclassical growth theories because the former emphasize the unlimited potential of A) modern capital. B) knowledge-driven technological change. C) more educated government policy making. D) modern labour. E) economic theory. Answer: B Explanation:

116)

A) B) C) D) E)

117) Which of the following statements is true of new growth theory, and not true of Neoclassical growth theory? A) It cannot explain improved living standards over the long term. B) It can explain improved living standards over the long term. C) Economic growth does not have an impact on resource exhaustion. D) Economic growth depends only on population growth. E) Economic growth is the result of innovation. Answer: B Explanation:

115)

A) B) C) D) E)

40

117)

118) Investment in innovation is often considered to have increasing marginal returns because A) new products increase firms' profits. B) R&D costs are negligible relative to firms' total costs. C) innovation is mostly through "leaning by doing." D) of market development costs and the "public good" nature of knowledge. E) after the initial investment is made, subsequent investors face more difficult and expensive production problems. Answer: D Explanation:

A) B) C) D) E)

119) Consider the competing products made by Apple (iPhone) and Samsung, for example. The innovation generated by these firms as a result of their intense rivalry is an example of A) covert collusion. B) constant returns to scale. C) exogenous technological change. D) endogenous technological change. E) decreasing marginal returns. Answer: D Explanation:

119)

A) B) C) D) E)

120) In new theories of economic growth, "learning by doing" contributes to endogenous technological change because A) knowledge can be considered a private good. B) knowledge can be considered a public good. C) information at all stages of the design and production processes is fed upstream and contributes to further innovation. D) "learning by doing" increases the marginal product of physical capital. E) new technical knowledge can be transferred at zero cost. Answer: C Explanation:

118)

A) B) C) D) E)

41

120)

121) Resource exhaustion is not considered to be among the main factors that limit economic growth because A) the population growth rate is decreasing over time and projected to be negative in the future. B) different types of inputs are used in production over time. C) resources can be obtained from other planets as technology advances. D) technological advances change the nature of production over time and also make more resources available for extraction. E) there are limitless supplies of resources, at high enough prices. Answer: D Explanation:

A) B) C) D) E)

122) In 1950, when the world's population was 2.5 billion, it was unimaginable that the world could ever produce enough food to feed the present world population of 7 billion. Such a belief was likely based on the following erroneous assumptions: A) food production increases geometrically and population increases arithmetically. B) the potential GDP of all countries is constant, and food production would comprise a declining share of GDP. C) the state of technology is constant and the stock of resources is fixed. D) global political and economic cooperation would be a necessary condition to feed such a growing population. Answer: C Explanation:

122)

A) B) C) D)

123) Suppose that most of the world's population would like to achieve a standard of living equal to that of the average Canadian family. Such a rise in global living standards is A) not possible given the world's current resources and the current state of technology. B) possible with better political and economic cooperation around the world. C) possible given the world's current resources and current state of technology. D) not possible under any circumstances. E) possible with no adverse effects on pollution and environmental degradation. Answer: A Explanation:

121)

A) B) C) D) E)

42

123)

124) In the early 1970s, a group called the "Club of Rome" published a book entitled The Limits to Growth which concluded that industrialized countries faced an imminent absolute limit to growth. Did this prediction come true in the subsequent years? A) No, because as income levels rose, we could afford to purchase more resources and increase growth. B) No, because technology has changed, allowing for new discoveries, development, and more efficient use of resources. C) Yes, all growth in recent decades has been in the non-industrialized and developing economies. D) Yes, there has been no change in absolute levels of output of industrialized countries. Answer: B Explanation:

A) B) C) D)

125) Economic growth allows increasing numbers of people around the world to enjoy higher incomes and to escape (material) poverty. Which of the following statements best describes the current limits to this growth? A) Rising consumption due to higher incomes puts increasing pressure on the world's natural ecosystems and its ability to cope with further pollution and environmental degradation. B) The supply of financial capital is insufficient to maintain this level of economic growth. C) The inability of developing countries to increase their human capital will prevent further economic growth. D) Increasing prices of natural resources will limit further economic growth. E) Innovation and technological change with respect to resource development have been exhausted. Answer: A Explanation:

124)

A) B) C) D) E)

43

125)

Answer Key Testname: UNTITLED26

1) D 2) D 3) C 4) B 5) A 6) C 7) D 8) D 9) A 10) D 11) C 12) C 13) E 14) A 15) D 16) E 17) C 18) D 19) B 20) A 21) A 22) C 23) B 24) B 25) D 26) B 27) C 28) A 29) D 30) E 31) D 32) D 33) A 34) B 35) B 36) B 37) B 38) B 39) C 40) D 41) E 42) A 43) E 44) B 45) E 46) B 47) E 48) A 49) C 50) D 44

Answer Key Testname: UNTITLED26

51) E 52) D 53) B 54) C 55) A 56) B 57) A 58) E 59) C 60) C 61) A 62) B 63) D 64) C 65) C 66) C 67) B 68) B 69) B 70) C 71) C 72) B 73) D 74) B 75) C 76) C 77) B 78) A 79) E 80) E 81) C 82) B 83) C 84) C 85) C 86) B 87) E 88) A 89) C 90) D 91) C 92) C 93) E 94) E 95) C 96) D 97) A 98) C 99) E 100) B 45

Answer Key Testname: UNTITLED26

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125)

C A C A C E B A B E C B E E B B B D D C D C A B A

46

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The function of money in an economy is to serve as 1) a unit of account; 2) a store of value; 3) a medium of exchange. A) 1 and 2 B) 2 and 3 C) 1 and 3 Answer: D Explanation:

E) 3 only

2)

A) B) C) D) E)

3) In order to be considered "money," paper currency must be A) convertible into a precious metal. B) impossible to counterfeit. C) issued by a chartered bank. D) issued by a government agency. E) generally acceptable as a medium of exchange. Answer: E Explanation:

D) 1, 2, and 3

A) B) C) D) E)

2) Money is commonly defined as A) a generally accepted medium of exchange. B) gold. C) foreign-exchange reserves. D) paper currency. E) the Canadian dollar. Answer: A Explanation:

1)

A) B) C) D) E)

1

3)

4) Doug is saving money in order to purchase a new snowboard next winter. This represents using money as A) a medium of exchange. B) a store of value. C) a unit of account. D) a medium of deferred payment. E) method of barter. Answer: B Explanation:

A) B) C) D) E)

5) Other things being equal, a rise in the price level will A) increase the value of money. B) decrease the purchasing power of money. C) stabilize the value of money. D) increase the purchasing power of money. E) have no effect on the value of money. Answer: B Explanation:

6)

A) B) C) D) E)

7) When you are estimating your monthly income and expenses, money is being used as A) a medium of exchange. B) a store of value. C) a unit of account. D) a standard unit of deferred payment. E) a money substitute. Answer: C Explanation:

5)

A) B) C) D) E)

6) Other things being equal, the purchasing power of money is A) inversely related to the level of aggregate demand. B) inversely related to the price level. C) directly related to the price level. D) directly related with the cost of living. E) directly related to the level of aggregate demand. Answer: B Explanation:

4)

A) B) C) D) E) 2

7)

8) Doug compares the unit price of chocolate bars in order to get the "best buy." This represents using money as A) a medium of exchange. B) a store of value. C) a unit of account. D) a unit of deferred payment. E) a money substitute. Answer: C Explanation:

A) B) C) D) E)

9) The major advantage of using money rather than barter is that A) in the barter system there is no way to express values of commodities. B) money is the only convenient way to store one's wealth. C) money has more value than real goods. D) money stays where you put it, whereas a cow often has to be fenced in. E) the use of money significantly reduces transactions costs. Answer: E Explanation:

9)

A) B) C) D) E)

10) The biggest disadvantage of a barter system compared to one that uses money is that A) it is difficult to find goods to trade in a barter system that satisfy the needs of society. B) a standardized unit of account cannot exist in a barter system. C) commodities are difficult to transport and therefore inefficient for exchange. D) each trade requires a double coincidence of wants. E) commodities are difficult to use as a store of value. Answer: D Explanation:

8)

A) B) C) D) E)

3

10)

11) An example of the use of money as a medium of exchange is: A) Dave keeps $250 in his drawer for a "rainy day." B) Mike gets a friend to give him a beer today in return for promising to give the friend two beer when Mike gets paid at the end of the month. C) Judy lends her car to a friend who signs a promissory note that she will pay Judy $10 a day for the use of the car after she returns the car to Judy. D) Barry pays $275 with his bank debit card for tickets for an NHL play-off game. E) ABC Investments Inc. enters in its account books that it owes Nallai $20 for his last month's investment income. Answer: D Explanation:

A) B) C) D) E)

12) If a majority of Canadian households and businesses refused to accept Canadian dollars in exchange for goods and services, the value of the Canadian dollar would A) fall. B) rise since less would be in circulation. C) stay constant since the value does not depend on its acceptability by people. D) stay constant since its value is determined only by the Bank of Canada. E) stay constant since its value is determined only by the Government of Canada. Answer: A Explanation:

12)

A) B) C) D) E)

13) In order for money to be successfully used as a medium of exchange, it must 1) be readily acceptable; 2) be easily divisible; 3) have a high value-weight ratio. A) 1 only B) 2 only C) 3 only D) 1 and 2 Answer: E Explanation:

11)

A) B) C) D) E)

4

13)

E) 1, 2, and 3

14) The use of money in an economy does which of the following? A) creates the necessity for a double coincidence of wants B) solves the problem of inflation C) creates a problem of trading a portion of indivisible commodities such as a ship D) promote specialization and the division of labour E) promotes the use of barter Answer: D Explanation:

A) B) C) D) E)

15) When metal coins, such as gold and silver, were used as money, a technique which helped to prevent the reduction of their value through clipping was A) basing. B) re-minting. C) milling. D) debasement. E) sweating. Answer: C Explanation:

16)

A) B) C) D) E)

17) Gresham's law predicts that A) good money drives out bad money. B) debased money will circulate with undebased money. C) undebased money will be driven from circulation. D) debased money will be driven from circulation. E) money is neutral in the long run. Answer: C Explanation:

15)

A) B) C) D) E)

16) Historically, when gold and silver coins were used as money, their debasement resulted in A) deflation B) an increase in the supply of money. C) an increase in the amount of gold bullion. D) an increase in the desire to store wealth by holding coins. E) a decrease in the money supply. Answer: B Explanation:

14)

A) B) C) D) E) 5

17)

18) Which of the following is consistent with the predictions of Gresham's law? A) An increase in the money supply will be followed by inflation. B) The increased circulation of U.S. coins in Canada during periods when the Canadian dollar is worth significantly less than the U.S. dollar. C) Debasement of a metallic money will be followed by inflation. D) Increases in the money supply led to the hyperinflation of the 1920s in Germany. E) The disappearance of U.S. coins circulating in Canada during periods when the Canadian dollar is worth less than the U.S. dollar. Answer: E Explanation:

A) B) C) D) E)

19) Suppose you come into possession of two "silver" dollars, one minted in the 1950s which contains a lot of silver, the other minted in the 1990s which contains no silver at all. The legal exchange rate between the coins is fixed at one for one. According to Gresham's law, the 1950s silver dollar A) is considered "bad" money. B) will drive out of circulation the 1990s silver dollar. C) is more likely to be used as a medium of exchange. D) is less likely to be used as a medium of exchange. E) is less likely to be used as a store of value because it will appear old fashioned. Answer: D Explanation:

19)

A) B) C) D) E)

20) Which of the following was the most important initial step in the evolution of paper currency? A) the acceptance of bank notes B) the acceptance of goldsmiths' receipts C) the acceptance of metallic coins D) the issuance of currency by governments E) the use of the Gold Standard Answer: B Explanation:

18)

A) B) C) D) E)

6

20)

21) Suppose an economy has two types of money — gold and silver coins — that are both legal tender but have different non-monetary values. Gresham's law has come into effect when A) people refuse to use the coins of lesser value. B) the value of the coins is in the same ratio as their non-monetary values. C) the lower-valued coin is taken out of circulation. D) the higher-valued coin is taken out of circulation. E) people use the higher-valued coins for exchange and the lower-valued for savings. Answer: D Explanation:

A) B) C) D) E)

22) The major problem of a currency that is fractionally backed and convertible into a precious metal is that of A) clipping, which debases the metal coins. B) counterfeiting. C) maintaining its convertability into the metal. D) paper money being less durable than gold. E) perennial shortages of paper currency. Answer: C Explanation:

22)

A) B) C) D) E)

23) Most Canadians accept Canadian dollars in payment for goods and services in Canada because they have confidence that the dollar A) will be accepted in the future. B) is fully convertible into gold. C) is accepted by foreigners as more stable than their own currency. D) is fully convertible into American dollars at a set exchange rate. E) is fully backed by the British pound sterling. Answer: A Explanation:

21)

A) B) C) D) E)

7

23)

24) Fiat money has value because it A) can be manufactured at will by the issuing government. B) has intrinsic value equal to its face value. C) is fully backed by gold at a fixed ratio. D) is only fractionally backed by gold. E) is generally accepted. Answer: E Explanation:

A) B) C) D) E)

25) For a country to be on a "gold standard," it must A) use gold coins as money. B) use gold coins as money and promise never to debase its coins. C) use gold as money, but not necessarily in the form of gold coins. D) make its currency convertible into gold at a fixed rate of exchange. E) use gold as fiat money. Answer: D Explanation:

26)

A) B) C) D) E)

27) The currency that is in circulation in Canada today is A) fully backed by gold held at the central bank. B) backed by the U.S. dollar. C) backed by the euro. D) fractionally backed by gold. E) not officially backed by anything. Answer: E Explanation:

25)

A) B) C) D) E)

26) If most individuals accept paper currency in transactions, and paper currency is convertible into gold, then banks can safely issue A) no more paper currency than the value of the gold they hold. B) more paper currency than the value of the gold they hold. C) as much paper currency as they please. D) paper currency equal to a fraction of the gold they hold. E) paper currency equal to the bank's commercial debt divided by their gold reserves. Answer: B Explanation:

24)

A) B) C) D) E) 8

27)

28) Which of the following illustrates the use of fiat money? A) exchanging Canadian dollars for a T-shirt B) exchanging money-market funds for gold C) exchanging money-market funds for insurance D) keeping gold as a hedge against inflation E) bartering goods for services Answer: A Explanation:

A) B) C) D) E)

29) Debit cards that are issued by commercial banks can be characterized as A) an example of near money. B) an electronic version of a cheque. C) deposit money. D) fiat money. E) a store of value. Answer: B Explanation:

29)

A) B) C) D) E)

30) In recent years, the use of debit cards issued by commercial banks has skyrocketed. When you pay for a purchase at a store using a debit card, you are A) authorizing the transfer of cash from your bank account to the merchant's bank account. B) creating an electronic debt to the merchant. C) authorizing an electronic transfer of a money substitute from you to the merchant. D) authorizing an electronic transfer of deposit money from you to the merchant. E) authorizing the transfer of bank notes from you to the merchant. Answer: D Explanation:

28)

A) B) C) D) E)

9

30)

31) Which of the following statements about deposit money is true? A) The quantity of fiat money in the Canadian economy far exceeds the quantity of deposit money. B) Deposit money can legally be created solely by the Bank of Canada. C) Deposit money is the paper money or coinage that is decreed by the government to be accepted as legal tender. D) Deposit money is recorded as an asset on the balance sheet of a commercial bank. E) The quantity of deposit money in the Canadian economy far exceeds the quantity of fiat money in circulation. Answer: E Explanation:

A) B) C) D) E)

32) The largest element of the Canadian money supply today is A) coins. B) paper money. C) bank deposits. D) gold. E) the debt of the federal government. Answer: C Explanation:

32)

A) B) C) D) E)

33) The functions of the Bank of Canada include A) acting as the lender of last resort for the largest private corporations. B) acting as banker for the commercial banks. C) regulating both the money market and stock market. D) setting the exchange rate for the Canadian dollar on world markets. E) providing deposit insurance at Canadian commercial banks. Answer: B Explanation:

31)

A) B) C) D) E)

10

33)

34) Basic functions of the Bank of Canada include 1) acting as lender of last resort to private non-financial corporations; 2) acting as banker for the chartered banks. 3) regulating the money supply. A) 1 only B) 2 only C) 3 only D) 2 and 3 Answer: D Explanation:

34)

E) 1, 2, and 3

A) B) C) D) E)

35) The largest component of the assets of the Bank of Canada is A) Government of Canada securities. B) Government of Canada deposits. C) notes and coins in circulation. D) loans to commercial banks. E) loans to private individuals. Answer: A Explanation:

A) B) C) D) E)

36) The largest component of the liabilities of the Bank of Canada is A) Government of Canada securities. B) Government of Canada deposits. C) Canadian dollars in circulation. D) deposits of commercial banks and other financial institutions. E) loans to private individuals. Answer: C Explanation:

36)

A) B) C) D) E)

37) In the event of a sudden loss in confidence in the ability of the commercial banks to redeem deposits, the Bank of Canada would probably A) take over the operation of any banks in severe difficulties. B) lend reserves to the commercial banks. C) offer to sell government bonds to the chartered banks. D) suspend operation of the banking system until the panic subsided. E) impose severe financial penalties on the commercial banks by charging them interest at higher than the Bank rate. Answer: B Explanation:

35)

A) B) C) D) E) 11

37)

38) Suppose the rare event occurs that a major Canadian commercial bank is on the verge of insolvency and collapse due to volatile world credit markets. The likely initial response is A) a bankruptcy filing overseen by the Superintendent of Financial Institutions. B) the adoption of all of the bank's liabilities by the Bank of Canada as the "lender of last resort." C) the sale of the bank's assets to the remaining commercial banks. D) the provision of funds by the World Bank as the "lender of last resort." E) the provision of funds by the Bank of Canada as the "lender of last resort." Answer: E Explanation:

A) B) C) D) E)

39) Which of the following statements best describes the relationship between the Bank of Canada and the Government of Canada? A) The Bank of Canada has the same status as the Department of Finance and is directly responsible to Parliament for its day-to-day operations of monetary policy. B) The Bank of Canada is a wholly owned entity of the government but is given independence in the day-to-day operations of monetary policy. C) The Bank of Canada is a central-banking institution that is completely independent of the government and is fully autonomous in its conduct of monetary policy. D) The Bank of Canada is a privately owned banking institution that is overseen by a Board of Directors with a mandate to act in the best interests of the citizens of Canada. E) The governor of the Bank of Canada and the minister of finance have joint responsibility for both fiscal and monetary policy. Answer: B Explanation:

39)

A) B) C) D) E)

40) Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet? A) deposit money held in accounts at Canada's commercial banks B) Government of Canada securities C) foreign currency reserves D) paper notes in circulation E) Canadian corporate securities Answer: D Explanation:

38)

A) B) C) D) E)

12

40)

41) Commercial banks in Canada are prohibited by law from A) accepting demand deposits. B) issuing paper currency. C) lending money to households and firms. D) accepting term deposits. E) settling inter-bank debts through a clearinghouse. Answer: B Explanation:

A) B) C) D) E)

42) The financial crisis that occurred in 2007 and 2008 highlighted one of the crucial functions of commercial banks and other financial institutions in developed economies. A crucial function that ceased to work smoothly during this time, and contributed to the global recession that began in 2008, was A) the acceptance of deposits from firms and households. B) the joint regulation of financial markets. C) the provision of credit to firms and households. D) cheque clearing and collection. E) the clearing of electronic transfers. Answer: C Explanation:

42)

A) B) C) D) E)

43) An example of "interbank activities" in the Canadian banking system is A) banks pooling their money together to fund the operations of the Bank of Canada. B) banks lending money to each other in order to meet daily cash requirements. C) the joint regulation of financial markets. D) the joint regulation of the money supply. E) lender of last resort to the banking system. Answer: B Explanation:

41)

A) B) C) D) E)

13

43)

44) The Canada Deposit Insurance Corporation (CDIC) was set up to protect A) member financial institutions in case of non-payment of loans from borrowers. B) member financial institutions in case of non payment of loans from the government. C) depositors with Canadian dollar accounts in member institutions for up to a maximum of $100 000 per eligible deposit. D) depositors with Canadian dollar accounts in any Canadian financial institution for up to a maximum of $100 000 per institution. E) depositors of any currency in any Canadian financial institution for up to a maximum of $100 000 per institution. Answer: C Explanation:

A) B) C) D) E)

45) Which of the following entries would appear on the liabilities side of the Bank of Canada's balance sheet? A) Government of Canada securities B) deposits of commercial banks C) advances to commercial banks D) savings deposits E) shareholders' equity Answer: B Explanation:

45)

A) B) C) D) E)

46) Which of the following entries would appear on the assets side of a commercial bank's balance sheet? A) Government of Canada securities B) chequable deposits C) Government of Canada deposits D) savings deposits E) shareholders' equity Answer: A Explanation:

44)

A) B) C) D) E)

14

46)

47) Which of the following entries would appear on the liabilities side of a commercial bank's balance sheet? A) mortgage loans B) Government of Canada securities C) cash reserves D) foreign currency reserves E) demand deposits Answer: E Explanation:

47)

A) B) C) D) E)

Consider the following list of entries that might appear on the balance sheet of a commercial bank. All figures are millions of dollars. Shareholders' equity Demand deposits Foreign-currency reserves Deposits at the Bank of Canada Mortgage loans Notice (term) deposits Government deposits Cash reserves

200 1500 2000 50 700 1200 60 210

TABLE 27-1 48) Refer to Table 27-1. What are the total assets on the balance sheet of this commercial bank? A) 2410 B) 2520 C) 2810 D) 2960 E) 3160 Answer: D Explanation:

A) B) C) D) E)

49) Refer to Table 27-1. What are the total liabilities on the balance sheet of this commercial bank? A) 2410 B) 2520 C) 2810 D) 2960 E) 3160 Answer: D Explanation:

48)

A) B) C) D) E)

15

49)

50) A bank run is unlikely to occur in Canada today because A) if necessary, the central bank can provide all the reserves that are necessary to avoid this situation. B) the commercial banks are required by law to maintain 100% of their deposits in cash. C) there is relatively little demand for cash at present. D) banking is done mostly electronically. E) the commercial banks hold enough government securities that are convertible into cash. Answer: A Explanation:

A) B) C) D) E)

51) What is a bank run? A) A situation where a commercial bank is holding zero reserves. B) A panic situation where many depositors rush simultaneously to withdraw their deposit money in the form of cash. C) A situation where all commercial banks in the system are simultaneously short of reserves. D) The collapse of a non-commercial bank as a result of non-payment of loans. E) The collapse of a commercial banks as a result of the devaluation of their assets. Answer: B Explanation:

51)

A) B) C) D) E)

52) Why is the possibility of a bank run extremely small in Canada today? A) The Bank of Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. B) The Department of Finance guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. C) The Canadian Deposit Insurance Corporation provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic. D) The Office of the Superintendent of Financial Institutions provides deposit insurance on eligible deposits, so most depositors would not feel the need to withdraw all of their money in a panic. E) Industry Canada guarantees the deposits at all commercial banks in Canada, eliminating the danger of a rush of withdrawals. Answer: C Explanation:

50)

A) B) C) D) E)

16

52)

53) Canadian commercial banks maintain their reserves in the form of A) cash in their bank vaults and deposits at the Bank of Canada. B) cash in their bank vaults. C) gold in their bank vaults. D) deposits at other commercial banks that are immediately accessible. E) cash and foreign currency at the Bank of Canada. Answer: A Explanation:

A) B) C) D) E)

54) A commercial bank's actual reserve ratio is the A) fraction of its deposit liabilities that it actually holds as reserves, either as cash or as deposits with the Bank of Canada. B) fraction of its deposit liabilities that it actually holds as gold, other precious metal or cash in its own vaults. C) fraction of its deposit liabilities that are backed by gold. D) ratio of Canadian dollars to foreign currencies that it holds on its books. E) ratio of chequable deposits to term deposits that it holds on its books. Answer: A Explanation:

54)

A) B) C) D) E)

55) "Excess reserves" for a commercial bank refer to A) any surplus in the bank's supply of gold. B) any surplus of chequable deposits. C) any reserves (cash or deposits with the Bank of Canada) that the bank holds over and above its desired reserves. D) reserves (cash or deposits with the Bank of Canada) that the Bank of Canada requires the bank to hold. E) excess demand for money from that bank. Answer: C Explanation:

53)

A) B) C) D) E)

17

55)

56) Consider a new deposit of $10 000 to the Canadian banking system. The bank that initially receives this deposit will find itself with A) no excess reserves if there is no reserve requirement. B) $1000 of excess cash reserves if its target reserve ratio is 10%. C) $2000 of excess cash reserves if its target reserve ratio is 10%. D) $8000 of excess cash reserves if its target reserve ratio is 20%. E) $10 000 of excess cash reserves if its target reserve ratio is 100%. Answer: D Explanation:

A) B) C) D) E)

57) A commercial bank's target reserve ratio is the A) fraction of its deposit liabilities that it wishes to holds as reserves, either as cash or as deposits with the Bank of Canada. B) fraction of its deposit liabilities that it actually holds as cash in its own vaults. C) fraction of its deposit liabilities that are backed by gold. D) ratio of Canadian dollars to foreign currencies that the bank holds on its books. E) ratio of chequable deposits to term deposits that the bank holds on its books. Answer: A Explanation:

57)

A) B) C) D) E)

58) If all the commercial banks in the banking system collectively have $300 million in cash reserves and are satisfying their target reserve ratio of 20%, what is the amount of deposits they have? A) $0 B) $60 million C) $600 million D) $1500 million E) $2000 million Answer: D Explanation:

56)

A) B) C) D) E)

18

58)

59) Which of the following statements about reserve ratios at Canadian commercial banks is true? Commercial banks in Canada A) are required by the Bank Act to hold required reserves. B) have a reserve ratio of zero. C) have a reserve ratio of 100%. D) have a positive reserve ratio. E) never have excess reserves. Answer: D Explanation:

A) B) C) D) E)

60) Without a central bank, commercial banks in Canada would probably hold ________ reserves than they do now, resulting in a ________ money supply than at present. A) the same; the same B) more; larger C) more; smaller D) less; smaller E) less; larger Answer: C Explanation:

60)

A) B) C) D) E)

61) Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as A) the required reserve. B) the excess reserve ratio. C) the fractional reserve. D) the reserve ratio. E) the target reserve. Answer: D Explanation:

59)

A) B) C) D) E)

19

61)

62) The Canadian banking system is a A) gold-reserve system. B) fractional-reserve system. C) target-reserve system. D) asset-backed reserve system. E) treasury-bill reserve system. Answer: B Explanation:

62)

A) B) C) D) E)

63) Suppose a commercial bank has a level of target reserves of $500 million and actual reserves of $575 million. This bank's ________ is/are $75 million. A) profits B) fractional reserves C) excess reserves D) reserve ratio E) cash drain Answer: C Explanation:

A) B) C) D) E)

64) Suppose a commercial bank has a target reserve ratio of 1%, but has an actual reserve ratio of 0.8%. This bank will likely A) expand its portfolio of loans. B) contract its portfolio of loans. C) maintain its new, higher reserve ratio because it is more profitable. D) buy government securities from the Bank of Canada. E) allow fewer cash withdrawals by the bank's customers. Answer: B Explanation:

63)

A) B) C) D) E)

20

64)

65) Suppose Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000 it will immediately find itself with A) no excess cash reserves. B) excess cash reserves of $10 000. C) excess cash reserves of $90 000. D) excess cash reserves of $100 000. E) excess cash reserves equal to 10% of its deposits. Answer: C Explanation:

A) B) C) D) E)

66) Suppose Bank ABC has a target reserve ratio of 2%. If Bank ABC receives a new deposit of $50 million it will immediately find itself with A) no excess cash reserves. B) excess cash reserves of $1 million. C) excess cash reserves of $10 million. D) excess cash reserves of $49 million. E) excess cash reserves of $49.5 million. Answer: D Explanation:

66)

A) B) C) D) E)

67) Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the Bank of Canada), all banks have a target reserve ratio of 20%, and there are no excess reserves. What is the amount of deposits in the banking system? A) $4 million B) $40 million C) $80 million D) $100 million E) $120 million Answer: D Explanation:

65)

A) B) C) D) E)

21

67)

68) A central bank can "create" money by A) selling some of its foreign-currency reserves for domestic currency. B) selling government Treasury bills to the commercial banks. C) increasing the rate of inflation. D) issuing its own Central Bank bonds. E) purchasing government securities on the open market. Answer: E Explanation:

A) B) C) D) E)

69) Which of the following examples constitutes a new deposit to the Canadian commercial banking system? A) an individual transfers money from ShipShape Credit Union to Scotiabank B) an individual immigrates to Canada and deposits money from abroad C) an individual puts cash in a safety-deposit box D) the Bank of Canada sells government securities to an individual or a firm E) the Bank of Canada buys foreign currency from abroad Answer: B Explanation:

69)

A) B) C) D) E)

70) A new deposit to the banking system can result when A) an individual stashes cash in a mattress. B) a new immigrant to Canada sends cash to his or her home country. C) the Bank of Canada sells a government security to a firm which then maintains the asset in a bank. D) the Bank of Canada buys a government security from a firm, which keeps the proceeds from the sale in a company vault. E) the Bank of Canada buys a government security from a firm, which then deposits the proceeds from the sale in its account at a commercial bank. Answer: E Explanation:

68)

A) B) C) D) E)

22

70)

71) Which of the following examples constitutes a new deposit to the Canadian commercial banking system? A) an individual transfers money from Ship Shape Credit Union to Scotiabank B) an individual immigrates to Canada and maintains his existing deposits in a foreign bank C) an individual puts cash in a safety-deposit box D) the Bank of Canada buys government securities from a Canadian commercial bank E) the Bank of Canada buys foreign currency from abroad Answer: D Explanation:

71)

A) B) C) D) E)

Bank North's Balance Sheet Assets Reserves $300 Loans $2200 $2500

Liabilities Deposits $2000 Capital $500 $2500

TABLE 27-2

72) Refer to Table 27-2. Assume that Bank North is operating with no excess reserves. What is their actual reserve ratio? A) 12% B) 13.67% C) 15% D) 20% E) 25% Answer: C Explanation:

A) B) C) D) E)

73) Refer to Table 27-2. What are the income-earning assets for Bank North? A) Reserves B) Loans C) Deposits D) Capital Answer: B Explanation:

72)

A) B) C) D) E)

23

73) E) Liabilities

74) Refer to Table 27-2. If Bank North receives a new deposit of $400, its actual reserve ratio immediately becomes A) 7% B) 15% C) 25% D) 29% E) 35% Answer: D Explanation:

A) B) C) D) E)

75) Refer to Table 27-2. Assume that Bank North is operating at its target reserve ratio and has no excess reserves. If Bank North receives a new deposit of $400, it can immediately expand its loans by ________ while maintaining its target reserve ratio. A) $260 B) $272 C) $340 D) $400 E) $700 Answer: C Explanation:

75)

A) B) C) D) E)

76) Refer to Table 27-2. Assume that Bank North is operating at its target reserve ratio and has no excess reserves, and that all commercial banks have the same target reserve ratio. If a new deposit to the Canadian banking system of $400 is deposited at Bank North, the total new deposits created in the banking system can be calculated as follows: A) 300/.136 = $2205.88 B) 400/.15 = $2666.67 C) 400/.12 = $3333.33 D) 700/.12 = $5833.33 E) Not enough information to determine Answer: B Explanation:

74)

A) B) C) D) E)

24

76)

Consider the following situation in the Canadian banking system: ∙ ∙ ∙ ∙ ∙

The Bank of Canada purchases $5 million worth of government securities from an investment dealer with a cheque drawn on the Bank of Canada. The dealer deposits this cheque at Bank XYZ, a commercial bank. The target reserve ratio for all commercial banks is 25%. All commercial banks operate with no excess reserves. There is no cash drain.

TABLE 27-3 77) Refer to Table 27-3. Bank XYZ is immediately in a position to expand its loans by A) $1.25 million. B) $3.75 million. C) $5 million. D) $15 million. E) $20 million. Answer: B Explanation:

A) B) C) D) E)

78) Refer to Table 27-3. If Bank XYZ increases its loans to the maximum extent possible with its new excess reserves, the second-generation banks will be able to expand their loans by A) $0.94 million. B) $1.00 million. C) $1.50 million. D) $2.81 million. E) $3.75 million. Answer: D Explanation:

78)

A) B) C) D) E)

79) Refer to Table 27-3. The maximum creation of new deposits by the banking system, including the dealer's original deposit at Bank XYZ, is A) $25 million. B) $22.5 million. C) $20 million. D) $15 million. E) $5 million. Answer: C Explanation:

77)

A) B) C) D) E)

25

79)

80) Refer to Table 27-3. Suppose the public decides to hold 5% of their deposits in cash - that is, there is now a cash drain of 5%. As a result of the new deposit, the money supply would eventually A) increase by $16.67 million. B) increase by $20 million. C) decrease by $20 million. D) decrease by $16.67 million. E) decrease by $ 8.33 million. Answer: A Explanation:

A) B) C) D) E)

81) Refer to Table 27-3. Suppose the public decides to hold 15% of their deposits in cash - that is, there is now a cash drain of 15%. As a result of the new deposit, the money supply would eventually A) increase by $ 3.75 million. B) increase by $12.50 million. C) decrease by $12.50 million. D) decrease by $20.00 million. E) not change. Answer: B Explanation:

80)

81)

A) B) C) D) E)

Consider the following situation in the Canadian banking system: ∙ ∙ ∙ ∙ ∙

An investment dealer withdraws $10 million from its account at Bank XYZ to purchase government securities from the Bank of Canada. As a result, $10 million has been withdrawn from the Canadian banking system. The target reserve ratio for all banks is 10%. All commercial banks operate with no excess reserves. There is no cash drain.

TABLE 27-4 82) Refer to Table 27-4. Bank XYZ is immediately in a position to A) decrease its loans by $100 million. B) decrease its loans by $10 million. C) decrease its loans by $9 million. D) increase loans by $9 million. E) increase loans by $10 million Answer: C Explanation:

A) B) C) D) E)

26

82)

83) Refer to Table 27-4. Assume that Bank XYZ has decreased its loans and re-established its target reserve ratio. The second-generation banks in this scenario will A) decrease their loans by $9.0 million. B) decrease their loans by $8.1 million. C) not have to change their loan positions. D) increase their loans by $8.1 million. E) increase their loans by $9.0 million. Answer: B Explanation:

A) B) C) D) E)

84) Refer to Table 27-4. As a result of this withdrawal from the banking system, the Canadian banking system would eventually A) decrease its loans by $100 million. B) decrease its loans by $90 million. C) decrease its loans by $10 million. D) increase loans by $90 million. E) increase loans by $100 million. Answer: A Explanation:

84)

A) B) C) D) E)

85) Consider the creation of deposit money in the banking system. One implication of an increase in the cash drain to the public is that the A) banking system cannot create any additional money following a new deposit. B) amount of new money that can be created from a new source of reserves is increased. C) desired ratio is reduced. D) desired reserve ratio is increased. E) banking system's ability to create new money following a new deposit is reduced. Answer: E Explanation:

83)

A) B) C) D) E)

27

85)

86) Suppose you found a $100 bill that was lost for many years under your grandmother's mattress and you decided to deposit this money in a commercial bank. If the target reserve ratio were 20% and all excess reserves were lent out, your new deposit of $100 would lead to an eventual expansion of the money supply of A) $120. B) $200. C) $500. D) $1200. E) $2000. Answer: C Explanation:

A) B) C) D) E)

87) Suppose you found a $100 bill that was lost for many years under your grandmother's mattress. If the banking system has a cash drain of 5%, its target reserve ratio is 20%, and all excess reserves were lent out, your new deposit of the $100 bill would lead to an eventual expansion of the money supply of A) $20. B) $25. C) $200. D) $400. E) $500. Answer: D Explanation:

88)

A) B) C) D) E)

89) If all the banks in the banking system collectively have $500 million in cash reserves, and have a target reserve ratio of 5%, the maximum amount of deposits the banking system can support is A) $10 million. B) $100 million. C) $25 billion. D) $100 billion. E) $10 billion. Answer: E Explanation:

87)

A) B) C) D) E)

88) If all the banks in the banking system collectively have $20 million in cash reserves and have a target reserve ratio of 5%, the maximum amount of deposits the banking system can support is A) $4 million. B) $40 million. C) $80 million. D) $100 million. E) $400 million. Answer: E Explanation:

86)

A) B) C) D) E)

28

89)

90) Assume that Bank ABC has a target reserve ratio of 10%. If Bank ABC receives a new deposit of $100 000, the largest new loan this bank could initially make, and maintain its target reserve ratio, is A) $ 1000. B) $ 10 000. C) $ 90 000. D) $100 000. E) $900 000. Answer: C Explanation:

A) B) C) D) E)

91) Suppose that the excess reserves in Toronto Dominion Bank increase by $700. Given a desired reserve ratio of 2.5% and no cash drain, the maximum change in deposits for the entire banking system would be A) $682.50. B) $700.00. C) $17 500.00. D) $28 000.00. E) $70 000.00. Answer: D Explanation:

91)

A) B) C) D) E)

92) Suppose that the excess reserves in Toronto Dominion Bank increase by $700. Given a target reserve ratio of 1.0% and no cash drain, the maximum change in deposits for the entire banking system would be A) $682.50. B) $700.00. C) $17 500.00. D) $28 000.00. E) $70 000.00. Answer: E Explanation:

90)

A) B) C) D) E)

29

92)

93) A desire by ________ has no effect on the ability of the banking system to create bank deposits, for a given amount of reserves in the banking system. A) banks to delay making loans in expectation of higher future interest rates B) households to increase the fraction of their money held in the form of currency C) households to hold more money in safety-deposit boxes D) the government to increase its level of spending E) firms to reduce their desired level of borrowing from banks Answer: D Explanation:

93)

A) B) C) D) E)

Northern Bank: Balance Sheet Assets Reserves $800 Loans $11 200 $12 000

Liabilities Deposits $10 000 Capital $2000 $12 000

TABLE 27-5 94) Refer to Table 27-5. Assume that Northern Bank's target reserve ratio is 10%. What is it's actual reserve ratio? A) 6.67% B) 7.1% C) 8.0% D) 9.1% E) 10.0% Answer: C Explanation:

A) B) C) D) E)

95) Refer to Table 27-5. Northern Bank extends credit to its customers in the form of household mortgages and lines of credit. Under which category of the balance sheet do these fall? A) Reserves B) Loans C) Liabilities D) Deposits E) Capital Answer: B Explanation:

95)

A) B) C) D) E)

96) Refer to Table 27-5. Owners of Northern Bank contributed money to start the bank. Under which category of it's balance sheet do these funds fall? A) Reserves B) Loans C) Assets D) Deposits E) Capital Answer: E Explanation:

94)

A) B) C) D) E) 30

96)

97) Refer to Table 27-5. Assume that Northern Bank's target reserve ratio is 10%. What is its current level of excess reserves? A) -$320 B) -$200 C) $0 D) $320 E) $400 Answer: B Explanation:

A) B) C) D) E)

98) Refer to Table 27-5. Assume that Northern Bank's target reserve ratio is 10%. In order to achieve its target reserve ratio, Northern Bank must ________ and ________. A) increase its reserves by $200; decrease its deposits by $200 B) increase its reserves by $400; decrease its deposits by $400 C) not change its reserves; not change its deposits D) increase its reserves by $200; decrease its loans by $200 E) increase its reserves by $400; increase its loans by $800 Answer: D Explanation:

99)

A) B) C) D) E)

100) Consider a new deposit of $10 000 to the Canadian banking system. The commercial bank that initially receives this deposit will find itself with A) no excess reserves if there is no reserve requirement. B) $1000 of excess cash reserves if its target reserve ratio is 10%. C) $2000 of excess cash reserves if its target reserve ratio is 2%. D) $9000 of excess cash reserves if its target reserve ratio is 10%. E) $98 000 of excess cash reserves if its target reserve ratio is 2%. Answer: D Explanation:

98)

A) B) C) D) E)

99) Refer to Table 27-5. Northern Bank holds cash in its vault and has some deposits in its account at the central bank. Under which category on its balance sheet are these funds included? A) reserves B) loans C) liabilities D) deposits E) capital Answer: A Explanation:

97)

A) B) C) D) E)

31

100)

101) Consider a new deposit of $10 000 to the Canadian banking system. Assuming that all Canadian banks have a target reserve ratio of 2%, and that there is no cash drain, the banking system as a whole could create ________ as a result of this single new deposit. A) $10 000 of new deposits B) $50 000 of new deposits C) $500 000 of new deposits D) $980 000 of additional loans E) $1 000 000 of additional loans Answer: C Explanation:

A) B) C) D) E)

102) Consider a new deposit of $100 000 to the Canadian banking system. The commercial bank that initially receives this deposit will find itself with A) no excess reserves if there is no reserve requirement. B) $1000 of excess cash reserves if its target reserve ratio is 10%. C) $2000 of excess cash reserves if its target reserve ratio is 2%. D) $10 000 of excess cash reserves if its target reserve ratio is 10%. E) $98 000 of excess cash reserves if its target reserve ratio is 2%. Answer: E Explanation:

102)

A) B) C) D) E)

103) If the Bank of Canada enters the open market and purchases $1000 of government securities, what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system? A) decrease of $1000 B) decrease of $5000 C) decrease of $10 000 D) increase of $5000 E) increase of $10 000 Answer: E Explanation:

101)

A) B) C) D) E)

32

103)

104) If the Bank of Canada enters the open market and sells $1000 of government securities, what will be the eventual change in the money supply if commercial banks lend out all excess reserves and they have a 2.5% target reserve ratio? A) decrease of $40 000 B) decrease of $4000 C) increase of $40 000 D) increase of $4000 E) decrease of $25 000 Answer: A Explanation:

A) B) C) D) E)

105) If the Bank of Canada enters the open market and sells $1000 of government securities, what will be the eventual change in the money supply given a 10% target reserve ratio in the commercial banking system and a 10% cash drain? A) decrease of $1000 B) decrease of $5000 C) decrease of $10 000 D) increase of $5000 E) increase of $10 000 Answer: B Explanation:

106)

A) B) C) D) E)

107) If the target reserve ratio in the banking system is 10%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of A) $0.01. B) $0.10. C) $1.00. D) $10.00. E) $100.00. Answer: D Explanation:

105)

A) B) C) D) E)

106) If the target reserve ratio in the banking system is 20%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of A) $0.20. B) $1.20. C) $2.00. D) $5.00. E) $20.00. Answer: D Explanation:

104)

A) B) C) D) E)

33

107)

108) If the target reserve ratio in the banking system is 1%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an expansion of the money supply of A) $0.01. B) $1.10. C) $1.00. D) $10.00. E) $100.00. Answer: E Explanation:

A) B) C) D) E)

109) Suppose Bank ABC has a target reserve ratio of 10%, no excess reserves, and it receives a new deposit of $500 000. This bank will initially expand its loans by A) $50 000. B) $450 000. C) $500 000. D) $4.5 million. E) $5 million. Answer: B Explanation:

109)

A) B) C) D) E)

110) The expansion of deposits resulting from an injection of new cash to the banking system can be calculated as follows. The change in deposits is equal to A) the change in loans divided by the sum of the target reserve ratio. B) the change in reserves divided by the cash-deposit ratio. C) the change in reserves divided by the target reserve ratio. D) the change in reserves divided by the sum of the target reserve ratio and the cash-deposit ratio. E) the change in reserves divided by the sum of excess reserves and cash drain. Answer: D Explanation:

108)

A) B) C) D) E)

34

110)

111) Suppose that the cash drain in the banking system increases during holiday periods. As a result, A) the capacity of the banking system to create deposit money is dampened during holiday periods. B) the capacity of the banking system to create deposit money is increased during holiday periods. C) commercial banks decrease their target reserve ratios. D) changes in reserves will result in no change in deposits during holiday periods. E) the money supply will automatically increase. Answer: A Explanation:

A) B) C) D) E)

112) When discussing the banking system, a cash drain of 5% means that A) 5% of an initial new deposit to the banking system is paid in banking fees and is therefore not available for the creation of new deposit money. B) depositors wish to hold 5% of the value of their deposits in cash. C) 5% of an initial new deposit to the banking system is payable as a financial services tax. D) 95% of an initial new deposit is maintained as cash reserves by the commercial bank. E) depositors wish to hold 95% of the value of their deposits in cash. Answer: B Explanation:

112)

A) B) C) D) E)

113) In reality, the reserve ratio for Canadian commercial banks is close to ________%, which means that the deposit creation process is ________. A) 0.1; extremely powerful B) 5; powerful C) 20; similar to that discussed in the text D) 50; weak E) 100; very weak Answer: B Explanation:

111)

A) B) C) D) E)

35

113)

114) Suppose a student deposits into a downtown bank a $200 cheque that she received from her parents in the suburbs. This transaction alone would A) decrease the money supply. B) not change the money supply. C) increase the money supply by an indeterminate amount. D) increase the money supply by $1000 if the target reserve ratio was 20%. E) decrease the money supply by $1000 if the target reserve ratio was 20%. Answer: B Explanation:

A) B) C) D) E)

115) The money supply in Canada is measured using M1, M2, M2+, and M3. The reason there are so many measures of the money supply is that A) the Bank of Canada wants to confuse the general public. B) different kinds of bank accounts represent different functions of money, and so the various measures are used to reflect these different functions. C) the money supply is too large to have only one measurement. D) only the newer and broader measurements are correct but the older measurements are still used so that historical comparisons are possible. E) it is a convenient way for provincial and federal governments to hide their budgetary surpluses. Answer: B Explanation:

115)

A) B) C) D) E)

116) Until recently, and for many years, the common definition of the money supply used by the Bank of Canada was M1, which included currency in circulation plus A) chequable deposits at the chartered banks. B) chequable deposits and savings accounts at the chartered banks. C) savings accounts and demand loans. D) term deposits and money market funds. E) chequable deposits at all financial institutions. Answer: A Explanation:

114)

A) B) C) D) E)

36

116)

117) As a measure of the Canadian money supply, M2+ is defined as currency in circulation plus A) all chequable deposits. B) notice deposits at all financial institutions. C) savings deposits at the chartered banks and non-bank financial institutions. D) term deposits and money market funds at all financial institutions. E) term deposits, money market funds and personal savings accounts. Answer: B Explanation:

A) B) C) D) E)

118) The main distinction between M2 and M2+ is that M2+ also includes A) deposits at trust companies, caisse populaires and foreign-currency accounts. B) coins in circulation. C) money market mutual funds held by the Bank of Canada. D) paper currency. E) deposits at financial institutions other than the chartered banks. Answer: E Explanation:

119)

A) B) C) D) E)

120) Credit cards are considered to be "money substitutes" instead of money because A) they are not acceptable to pay for purchases. B) they cannot serve as a temporary medium of exchange. C) the only function of money they can perform is to serve as a store of value. D) money must eventually be used to pay for the transaction. E) credit card accounts are not chequable. Answer: D Explanation:

118)

A) B) C) D) E)

119) The concept of "near money" refers to A) money substitutes such as credit cards. B) cheques on demand deposits. C) financial assets whose capital values are too unstable for them to be classified as money. D) assets that fulfill the temporary store-of-value function but not the medium-of-exchange function. E) assets that fulfill the medium-of-exchange function but not the store of value function. Answer: D Explanation:

117)

A) B) C) D) E) 37

120)

121) Which of the following is an example of "near money"? A) Scotiabank credit card B) American Express card C) 30-day Treasury bill D) mortgage on a house E) car loan Answer: C Explanation:

A) B) C) D) E)

122) When you pay for your $74 purchase at the grocery store with a debit card, you are A) transferring $74 of currency from your bank account to the grocery store's bank account. B) withdrawing $74 from your bank account with which you pay for your groceries. C) transferring your claim on $74 worth of gold to the grocery store. D) electronically transferring $74 of deposit money from your bank account to the grocery store's bank account. E) essentially promising the grocery store that your bank will pay them $74 at the end of the month when debts are settled. Answer: D Explanation:

122)

A) B) C) D) E)

123) The M2 and M2+ definitions of the money supply concentrate on the ________ function of money. A) store of value B) unit of account C) medium-of-exchange D) accounting E) deposit-creation Answer: C Explanation:

121)

A) B) C) D) E)

38

123)

124) The M2++ and M3 definitions of the money supply include financial assets A) that serve the store-of-value function and are convertible into a medium of exchange. B) such as deposits at credit unions and caisses populaires. C) such as deposits at non-bank financial institutions. D) such as a credit card. E) such as a government Treasury bill. Answer: A Explanation:

A) B) C) D) E)

125) Developments in the financial industry in recent years have resulted in a multitude of types of deposits. For the purposes of studying the money supply, the most important distinction is between chequing and savings deposits which are ________ and term deposits and other financial assets which are ________. A) a store of value; not a store a value B) a unit of account; not a unit of account C) a component of the money supply; not a component of the money supply D) media of exchange; not media of exchange E) money substitutes; near money Answer: D Explanation:

124)

A) B) C) D) E)

39

125)

Answer Key Testname: UNTITLED27

1) D 2) A 3) E 4) B 5) B 6) B 7) C 8) C 9) E 10) D 11) D 12) A 13) E 14) D 15) C 16) B 17) C 18) E 19) D 20) B 21) D 22) C 23) A 24) E 25) D 26) B 27) E 28) A 29) B 30) D 31) E 32) C 33) B 34) D 35) A 36) C 37) B 38) E 39) B 40) D 41) B 42) C 43) B 44) C 45) B 46) A 47) E 48) D 49) D 50) A 40

Answer Key Testname: UNTITLED27

51) B 52) C 53) A 54) A 55) C 56) D 57) A 58) D 59) D 60) C 61) D 62) B 63) C 64) B 65) C 66) D 67) D 68) E 69) B 70) E 71) D 72) C 73) B 74) D 75) C 76) B 77) B 78) D 79) C 80) A 81) B 82) C 83) B 84) A 85) E 86) C 87) D 88) E 89) E 90) C 91) D 92) E 93) D 94) C 95) B 96) E 97) B 98) D 99) A 100) D 41

Answer Key Testname: UNTITLED27

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125)

C E E A B D D E B D A B B B B A B E D D C D C A D

42

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Other things being equal, bond prices A) are unaffected by changes in the demand for money. B) are unaffected by interest-rate changes. C) vary directly with interest rates. D) vary inversely with interest rates. E) vary proportionally with interest rates. Answer: D Explanation:

A) B) C) D) E)

2) The present value of an asset is A) the most someone would be willing to pay upon maturity of the asset. B) the most someone would be willing to pay today for the asset. C) equivalent to the face value of the asset. D) the amount someone would pay in the future to have the asset today. E) the amount someone would pay in the future for the current stream of payments from the asset. Answer: B Explanation:

2)

A) B) C) D) E)

3) The present value of a bond is determined by the A) face value and the date of maturity. B) rate of inflation. C) market rate of interest only. D) market rate of interest, the date of maturity, and the face value. E) marginal rate of income tax. Answer: D Explanation:

1)

A) B) C) D) E)

1

3)

4) If Robert expects interest rates to fall in the near future, he will probably be willing to A) buy bonds now, and hold less money. B) buy bonds now, but only if their price falls. C) sell bonds now, and hold less money. D) put his money under his mattress rather than buy bonds. E) maintain only the current holding of bonds. Answer: A Explanation:

A) B) C) D) E)

5) When Janet expects interest rates to rise in the near future, she will probably be willing to A) buy bonds now, and hold less money. B) buy bonds now, but only if their price falls. C) sell bonds now, and hold more money. D) put her money under her mattress rather than in a bank account. E) maintain only the current holding of bonds. Answer: C Explanation:

6)

A) B) C) D) E)

7) When i is the annual interest rate, the formula for calculating the present value of a bond with a face value of R dollars, receivable in one year is A) PV = (1+i)/R. B) PV = i(R+i). C) PV = R (1+i). D) PV = R/i. E) PV = R/(1+i). Answer: E Explanation:

5)

A) B) C) D) E)

6) What is the present value of a bond that pays $121.00 one year from today if the interest rate is 10% per year? A) $100.00 B) $110.00 C) $121.00 D) $133.10 E) $221.00 Answer: B Explanation:

4)

A) B) C) D) E)

2

7)

8) If the annual market rate of interest is 5%, an asset that promises to pay $100 after each of the next two years has a present value of A) $ 90.70. B) $ 95.24. C) $ 181.40. D) $ 185.94. E) $ 200.00. Answer: D Explanation:

A) B) C) D) E)

9) If the annual interest rate is 8%, an asset that promises to pay $160 after each of the next two years has a present value of A) $ 178.32. B) $ 285.32. C) $ 296.30. D) $ 300.00. E) $ 320.00. Answer: B Explanation:

10)

A) B) C) D) E)

11) If the annual interest rate is 3%, $10 000 received today has the same present value as ________ received one year from now. A) $10 000 B) $13 000 C) $300 D) $9707.74 E) $10 300 Answer: E Explanation:

9)

A) B) C) D) E)

10) If the annual interest rate is 10%, $5.00 received today has the same present value as A) $4.00 received one year from now. B) $4.50 received one year from now. C) $5.00 received one year from now. D) $5.50 received one year from now. E) $6.00 received one year form now. Answer: D Explanation:

8)

A) B) C) D) E)

3

11)

12) Consider a bond with a face value of $10 000, a three-year term and a coupon payment of 6% made at the end of each year. The face value of the bond is repaid at the end of the term. Which of the following equations will correctly calculate the present value of the bond? $600 $600 $10 600 A) PV = + + 1.06 1.1236 1.1910 B) PV =

$600 $600 $600 + + 1.06 1.1236 1.1910

C) PV =

$600 $600 $10 000 + + 1.06 1.106 1.06

D) PV =

$600 $600 $10 600 + + 1.6 2.56 4.096

E) PV =

$600 $600 $9400 + + 1.06 1.06 1.1910

Answer: A Explanation:

A) B) C) D) E)

13) In a competitive financial market, the equilibrium price of an asset will equal the A) present value of the asset. B) future value of the asset. C) sum of present value of the asset multiplied by the interest rate. D) future value of the asset multiplied by the interest rate. E) issue price of the asset. Answer: A Explanation:

13)

A) B) C) D) E)

14) Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If the market interest rate is 6%, what is the present value of this bond? A) $267.30 B) $283.02 C) $1763.22 D) $1854.67 E) $1946.53 Answer: E Explanation:

12)

A) B) C) D) E)

4

14)

15) Consider a bond that promises to make coupon payments of $100 each year for three years (beginning in one year's time) and also repays the face value of $2000 at the end of the third year. If the market interest rate is 4%, what is the present value of this bond? A) $288.45 B) $1866.67 C) $1941.57 D) $1966.39 E) $2055.50 Answer: E Explanation:

A) B) C) D) E)

16) When considering the present value of any financial asset that makes a stream of payments in the future, we know that if the market interest rate falls, A) the present value of the asset will rise. B) the future value of the asset will rise. C) the current value of the asset will fall. D) the present value of the asset will fall. E) the present value of the asset is unaffected. Answer: A Explanation:

16)

A) B) C) D) E)

17) Consider a Government of Canada bond with a face value of $1000, and a present value of $925. If this bond is offered for sale at $960, then A) the excess demand for the bond at $960 will drive the price up to the face value of the bond. B) individuals will purchase the bond at the offer price which will drive the market rate of interest up. C) individuals will purchase the bond at the offer price which will drive the market rate of interest down. D) the equilibrium market price of this bond has been achieved. E) the lack of demand for this bond will drive the price down until it reaches its equilibrium market price of $925. Answer: E Explanation:

15)

A) B) C) D) E)

5

17)

18) Consider a Hydro Quebec bond with a face value of $1000, and a present value of $1175. If this bond is offered for sale at $1025, then A) excess supply of this bond will drive the price down until it reaches its face value. B) individuals will purchase the bond at the offer price which will drive down the price further. C) excess demand for this bond will drive the price up until it reaches its equilibrium market price of $1175. D) the equilibrium market price of this bond has been achieved. E) Hydro Quebec will be forced to change the face value of the bond. Answer: C Explanation:

A) B) C) D) E)

19) If the current market price of a bond is less than the present value of the income stream the bond will produce, the price will ________ due to excess ________ of/for the bond. A) rise; supply B) fall; supply C) rise; demand D) fall; demand Answer: C Explanation:

19)

A) B) C) D)

20) An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4% and the bond is being offered for sale at a price of $9800. The analyst should recommend A) purchasing the bond because the buyer will earn a profit of $185. B) purchasing the bond because the bond price is equal to its present value. C) not purchasing the bond because the price is lower than its present value. D) not purchasing the bond because the buyer could earn an additional $192 by investing the $9800 elsewhere. E) not purchasing the bond because the buyer could earn an additional $392 by investing the $9800 elsewhere. Answer: D Explanation:

18)

A) B) C) D) E)

6

20)

21) An analyst is considering the purchase of a Government of Canada bond that will pay its face value of $10 000 in one year's time, but pay no direct interest. The market interest rate is 4% and the bond is being offered for sale at a price of $9400. The analyst should recommend A) purchasing the bond because the purchase price is more than its present value and is therefore profitable. B) purchasing the bond because the purchase price is less than its present value and is therefore profitable. C) not purchasing the bond because the buyer could earn an additional $224 by investing the $9400 elsewhere. D) not purchasing the bond because the buyer could earn an additional $376 by investing the $9400 elsewhere. E) not purchasing the bond because the purchase price is less than its present value. Answer: B Explanation:

A) B) C) D) E)

22) In order to calculate the present value of the sum of future payments due from a bond, we use the interest rate to ________ those future payments. A) adjust B) correct C) discount D) inflate E) maximize Answer: C Explanation:

22)

A) B) C) D) E)

23) When the market price of a bond falls, ceteris paribus, then A) the term to maturity of the bond increases. B) the term to maturity of the bond decreases. C) the yield on that bond rises. D) the yield on that bond also falls. E) the market interest rate rises. Answer: C Explanation:

21)

A) B) C) D) E)

7

23)

24) Suppose the market interest rate rises from 3% to 4%. This will lead to ________ in bond prices and ________ in bond yields. A) a fall; a fall B) a fall; a rise C) a rise; a fall D) a rise; a rise E) no change; no change Answer: B Explanation:

A) B) C) D) E)

25) Suppose the market interest rate falls from 3% to 2%. This will lead to ________ in bond prices and ________ in bond yields. A) a fall; a fall B) a fall; a rise C) a rise; a fall D) a rise; a rise E) no change; no change Answer: C Explanation:

25)

A) B) C) D) E)

26) Suppose the market interest rate is stable at 4% and we see a decline in bond prices (and thus a rise in bond yields). One explanation for this is that A) bond issuers are facing an excess demand for their bonds. B) bond purchasers perceive a reduction in riskiness and thus a higher expected present value from those bonds. C) there is no causal relationship between market interest rates and bond prices. D) bond purchasers perceive an increase in riskiness and thus a lower expected present value from those bonds. E) there is a positive relationship between interest rates and bond prices. Answer: D Explanation:

24)

A) B) C) D) E)

8

26)

27) Suppose a Government of Canada bond is being offered in financial markets at a price that is higher than its present value. We can expect that A) the price of the bond will rise further. B) the face value of the bond will be adjusted to a lower value. C) the relatively high demand for the bond will cause its present value to rise. D) the lack of demand for this bond will cause its price to fall. E) the face value of the bond will be adjusted to a lower value. Answer: D Explanation:

A) B) C) D) E)

28) Suppose a Government of Canada bond is being offered in financial markets at a price that is lower than its present value. We can expect that A) the lack of demand for this bond will cause its present value to fall. B) the price of the bond will fall further. C) the relatively high demand for this bond will cause its price to rise. D) the face value of the bond will be adjusted to a lower value. E) the face value of the bond will be adjusted to a higher value. Answer: C Explanation:

28)

A) B) C) D) E)

29) The term "demand for money" usually refers to the A) aggregate demand for money balances in the economy. B) average person's desire to hold cash. C) cash and deposits actually held by firms. D) sum of all desired holdings of cash. E) sum of all desired assets, including cash, bonds, and real property. Answer: A Explanation:

27)

A) B) C) D) E)

9

29)

30) The opportunity cost of holding money rather than bonds is A) the rate of interest earned on bonds. B) the price level. C) forgone consumption. D) forgone liquidity. E) zero — there is no opportunity cost of holding money. Answer: A Explanation:

A) B) C) D) E)

31) If a person is holding money for the purchase of goods and services, this demand for money is known as A) speculative demand. B) precautionary demand. C) transactions demand. D) real balance demand. E) nominal balance demand. Answer: C Explanation:

32)

A) B) C) D) E)

33) The "precautionary demand" for money arises from the A) fear that interest rates will fall. B) fear that interest rates will rise. C) need to make predictable purchases of goods and services. D) uncertainty about when some expenditures will be necessary. E) desire to avoid paying interest on credit purchases. Answer: D Explanation:

31)

A) B) C) D) E)

32) The "transactions demand" for money arises from the fact that A) there is uncertainty in the receipts of income. B) there is uncertainty about the movement of interest rates. C) households wish to have all their wealth in the form of money. D) households decide to hold money in order to make purchases of goods and services. E) households want to keep cash on had to buy bonds if bond prices drop. Answer: D Explanation:

30)

A) B) C) D) E) 10

33)

34) Other things being equal, the transactions demand for money tends to increase when A) interest rates rise. B) interest rates stop rising. C) national income rises. D) national income falls. E) the price level falls. Answer: C Explanation:

A) B) C) D) E)

35) Consider the demand for money. If real GDP falls, other things being equal, we can expect A) an increase in the speculative demand for money. B) an increase in the total demand for money. C) a decrease in transactions demand for money. D) an increase in transactions demand for money. E) an increase in precautionary demand for money. Answer: C Explanation:

35)

A) B) C) D) E)

36) Suppose an economic analyst suggests that investors should now hold cash instead of stocks or bonds. The analyst is probably encouraging an increase in money balances for which reason? A) transaction demand B) precautionary demand C) speculative demand D) present value demand E) portfolio demand Answer: C Explanation:

34)

A) B) C) D) E)

11

36)

37) A firm that holds cash to avoid penalties associated with the late payment of bills is demonstrating which type of demand for money? A) transactions demand B) precautionary demand C) speculative demand D) present value demand E) risk-return demand Answer: B Explanation:

A) B) C) D) E)

38) Among other things, people hold cash balances for which of the following reasons? 1) to meet unforeseen emergencies 2) to maximize their returns on interest-earning assets 3) to guard against the uncertainty of the timing of receipts and payments A) 1 only B) 2 only C) 3 only D) 1 and 2 Answer: E Explanation:

38)

E) 1 and 3

A) B) C) D) E)

39) Speculative demand for money arises from the desire by individuals and firms to hold cash balances A) for speculative equity purchases. B) in anticipation of changes in interest rates and bond prices. C) to meet unforeseen business expenses. D) in anticipation of investing in capital purchases for the firm. E) to maintain adequate cash flow in case of inflation. Answer: B Explanation:

39)

A) B) C) D) E)

40) In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for money depends on the A) aggregate demand for goods and services. B) level of government spending. C) rate of growth of real GDP. D) level of taxes. E) level of real GDP and the price level. Answer: E Explanation:

37)

A) B) C) D) E) 12

40)

41) The demand for money (MD) function defines the relationship between

41)

A) interest rates and bond prices. B) inflation and bond prices. C) interest rates and financial assets. D) the quantity of money demanded and the price level. E) the quantity of money demanded and the rate of interest. Answer: E Explanation:

A) B) C) D) E)

FIGURE 28-1 42) Refer to Figure 28-1. A rightward shift of the money demand curve can be caused by A) an increase in the price level. B) a decrease in the price level. C) a decrease in real GDP. D) an increase in the rate of interest. E) a decrease in the rate of interest. Answer: A Explanation:

A) B) C) D) E)

13

42)

43) Refer to Figure 28-1. A leftward shift in the money demand curve can be caused by by A) an increase in the rate of interest. B) a decrease in the rate of interest. C) an increase in the price level. D) a decrease in real GDP. E) an increase in real GDP. Answer: D Explanation:

43)

A) B) C) D) E)

44) Refer to Figure 28-1. Given the money demand curve, MD, an increase in the quantity of money

44)

demanded from M1 to M0 can be caused by A) an increase in the price level. B) a decrease in the price level. C) an increase in real GDP. D) an increase in the rate of interest. E) a decrease in the rate of interest. Answer: E Explanation:

A) B) C) D) E)

45) Refer to Figure 28-1. Given the money demand curve, MD, a decrease in the quantity of money demanded from M0 to M can be caused by 1 A) an increase in the price level. B) a decrease in the price level. C) an increase in real GDP. D) an increase in the rate of interest. E) a decrease in the rate of interest. Answer: D Explanation:

A) B) C) D) E)

14

45)

46) If there are just two assets, bonds and money, then an excess demand for money implies A) an excess supply of bonds. B) an excess demand for bonds. C) equilibrium in the bond market. D) an indeterminate equilibrium in the bond market. E) nothing about conditions of demand for the other financial asset. Answer: A Explanation:

A) B) C) D) E)

47) Assume there are just two assets, money and bonds. We can expect that an individual with a given level of wealth will A) hold less money when bond prices rise. B) hold more money when the current interest rate is very low. C) not hold money as long as bonds pay a positive rate of interest. D) hold lots of money even at very high interest rates. E) hold less money when the current interest rate is very low. Answer: B Explanation:

47)

A) B) C) D) E)

48) According to the "liquidity preference" theory of the rate of interest, if the supply of money increases, then, ceteris paribus, bond prices will A) fall as the rate of interest rises. B) rise as the rate of interest rises. C) fall as the rate of interest falls. D) rise as the rate of interest falls. E) stay the same. Answer: D Explanation:

46)

A) B) C) D) E)

15

48)

49) If the general price level were to increase, other things being equal, the money demand function would A) not be affected. B) shift to the left. C) shift to the right. D) shift, but the direction of the shift cannot be predicted. E) become steeper but not shift. Answer: C Explanation:

A) B) C) D) E)

50) If the annual market interest rate is 20%, the annual opportunity cost of having $50 cash in your pocket is A) $0. B) $2. C) $10. D) $50. E) $1000. Answer: C Explanation:

50)

A) B) C) D) E)

51) Suppose that at a given interest rate and money supply, all firms and households simultaneously try to add to their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate. A) sell bonds; supply of bonds; increase in the price of bonds; decrease B) buy bonds; supply of bonds; decrease in the price of bonds; increase C) sell bonds; demand for bonds; increase in the price of bonds; decrease D) buy bonds; demand for bonds; increase in the price of bonds; decrease E) sell bonds; supply of bonds; decrease in the price of bonds; increase Answer: E Explanation:

49)

A) B) C) D) E)

16

51)

52) Suppose that at a given interest rate and money supply, all firms and households simultaneously try to reduce their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate. A) sell bonds; supply of bonds; increase in the price of bonds; decrease B) buy bonds; supply of bonds; decrease in the price of bonds; increase C) sell bonds; demand for bonds; increase in the price of bonds; decrease D) buy bonds; demand for bonds; increase in the price of bonds; decrease E) sell bonds; supply of bonds; decrease in the price of bonds; increase Answer: D Explanation:

A) B) C) D) E)

53) When there is an excess demand for money balances, monetary equilibrium is established by a process that involves 1) movement down the money demand function; 2) interest rates falling; 3) the price of bonds falling. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: C Explanation:

53)

A) B) C) D) E)

54) Consider a money market in which there is an excess supply of money at the prevailing interest rate. The likely response is: A) the corresponding excess supply for bonds will cause the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply. B) the corresponding excess demand for bonds will cause the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply. C) the money supply curve will shift to the left until the demand for money equals the supply. D) the money supply curve will shift to the right until the demand for money equals the supply. E) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply. Answer: B Explanation:

52)

A) B) C) D) E)

17

54)

55) Consider a money market in which there is an excess demand for money at the prevailing interest rate. The likely response is: A) the corresponding excess demand of bonds will cause the price of bonds to decrease and the interest rate to rise, until the demand for money equals the supply. B) the money supply curve will shift to the left until the demand for money equals the supply. C) the money supply curve will shift to the right until the demand for money equals the supply. D) the money demand curve will shift to the right, causing the price of bonds to increase, and the interest rate to fall, until the demand for money equals the supply. E) the corresponding excess supply of bonds will cause the price of bonds to decrease and the interest rate to rise, until the demand for money equals the supply. Answer: E Explanation:

A) B) C) D) E)

56) When there is an excess supply of money, monetary equilibrium is restored through A) interest rates rising. B) individuals attempting to sell bonds. C) the price of bonds falling. D) the price of bonds increasing. E) the price level falling. Answer: D Explanation:

56)

A) B) C) D) E)

57) Monetary equilibrium occurs when the A) growth in the money supply is zero. B) existing supply of money is willingly held by households and firms in the economy at the current rate of interest. C) nominal rate of interest equals the real rate of interest. D) the money supply is growing at a constant rate. E) supply and demand for all goods in the economy are equal at the current rate of interest. Answer: B Explanation:

55)

A) B) C) D) E)

18

57)

58) If the economy is currently in monetary equilibrium, an increase in the money supply will A) not change the equilibrium conditions. B) cause a reduction in the demand for money, leading to a higher rate of interest. C) cause an excess demand for money and a decrease in the rate of interest. D) cause an increase in the demand for money, leading to a lower rate of interest. E) lead to a movement down the money demand curve to a lower rate of interest. Answer: E Explanation:

58)

A) B) C) D) E)

FIGURE 28-2 59) Refer to Figure 28-2. Starting at equilibrium E0 , an increase in real GDP will lead to a A) shift of the MS curve to the left and an increase in the interest rate. B) shift of the MS curve to the right and a fall in the interest rate. C) downward movement along the MD curve and a lower interest rate. D) shift of the MD curve to the left and a fall in the interest rate. E) shift of the MD curve to the right and an increase in the interest rate. Answer: E Explanation:

A) B) C) D) E)

19

59)

60) Refer to Figure 28-2. Starting at equilibrium E0 , an increase in the supply of money will result in

60)

the A) shift of the MS curve to the left and an increase in the interest rate. B) shift of the MS curve to the right and a fall in the interest rate. C) downward movement along the MD curve and a higher interest rate. D) shift of the MD curve to the left and a fall in the interest rate. E) upward movement along the MD curve and a lower interest rate. Answer: B Explanation:

A) B) C) D) E)

61) Refer to Figure 28-2. If the interest rate is i2, the subsequent adjustment in the money market is as

61)

follows: A) excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise. B) MS curve will shift to the left as to maintain the interest rate at i2 . C) the interest rate will remain at i2 , because the money market is in equilibrium at this interest rate. D) excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall to i0 . E) excess supply of money leads to the sale of bonds, which in turn causes the interest rate to fall. Answer: D Explanation:

A) B) C) D) E)

62) Refer to Figure 28-2. If the interest rate is i1, the subsequent adjustment in the money market is as follows: A) excess demand for money leads to a sale of bonds, which in turn causes the interest rate to rise. B) the MS curve will shift to the left so as to maintain the interest rate at i2 . C) the interest rate will remain at i1 because the money market is in equilibrium at this interest rate. D) excess supply of money leads to the purchase of bonds, which in turn causes the interest rate to fall. E) excess demand for money leads to a purchase of bonds, which in turn causes the interest rate to rise. Answer: A Explanation:

A) B) C) D) E)

20

62)

63) Refer to Figure 28-2. Suppose the market interest rate is i1. The situation in this market is as

63)

follows: A) firms and households are attempting to increase their money holdings by selling bonds. B) firms and households are attempting to decrease their money holdings by selling bonds. C) firms and households are attempting to increase their money holdings by buying bonds. D) firms and households are attempting to decrease their money holdings by buying bonds. E) the market is in equilibrium and no change will occur. Answer: A Explanation:

A) B) C) D) E)

64) Refer to Figure 28-2. Suppose the market interest rate is i2. The situation in this market is as

64)

follows: A) firms and households are attempting to increase their money holdings by selling bonds. B) firms and households are attempting to decrease their money holdings by selling bonds. C) firms and households are attempting to increase their money holdings by buying bonds. D) firms and households are attempting to decrease their money holdings by buying bonds. E) the market is in equilibrium and no change will occur. Answer: D Explanation:

A) B) C) D) E)

65) When the price level increases, ceteris paribus, it causes households and firms to try to A) reduce money balances, which drives interest rates down. B) reduce money balances, which drives interest rates up. C) reduce money balances, which drives national income up. D) increase money balances, which drives interest rates down. E) increase money balances, which drives interest rates up. Answer: E Explanation:

A) B) C) D) E)

21

65)

66) If there are just two assets, bonds and money, then an equilibrium between the supply and demand for money implies A) an excess supply of bonds. B) an excess demand for bonds. C) equilibrium in the bond market. D) an indeterminant equilibrium in the bond market. E) nothing about conditions of demand for the other financial asset. Answer: C Explanation:

A) B) C) D) E)

67) How does monetary equilibrium re-establish itself when there is an excess supply of money balances? A) the interest rate rises B) individuals attempt to sell bonds C) the price of bonds falls D) the price of bonds increases E) the price level falls Answer: D Explanation:

67)

A) B) C) D) E)

68) The linkage between changes in monetary equilibrium and changes in aggregate demand is called the A) monetary transmission mechanism. B) simple multiplier. C) equilibrium mechanism. D) transactions mechanism. E) liquidity preference function. Answer: A Explanation:

66)

A) B) C) D) E)

22

68)

69) Other things being equal, a reduction in the money supply will lead to a A) fall in the rate of interest and an increase in investment expenditure. B) rise in the rate of interest and in increase in investment expenditure. C) fall in the rate of interest and a decrease in investment expenditure. D) rise in the rate of interest and a decrease in investment expenditure. E) rise in the rate of interest and no change in investment expenditure. Answer: D Explanation:

A) B) C) D) E)

70) The economy's investment demand function describes the A) positive relationship between desired investment, the rate of interest, and aggregate expenditure. B) positive relationship between desired investment and the rate of interest. C) negative relationship between the demand for money and the interest rate. D) negative relationship between desired investment and aggregate expenditure. E) negative relationship between the interest rate and desired investment. Answer: E Explanation:

69)

A) B) C) D) E)

23

70)

FIGURE 28-3 71) Refer to Figure 28-3. The increase in the money supply from MS0 to MS1 shifts the monetary

71)

equilibrium from E0 to E1. The result is A) a decrease in the interest rate and an increase in desired investment. B) an increase in the interest rate and a decrease in desired investment. C) sustained monetary disequilibrium. D) a shift of the investment demand curve to the right. E) a shift of the investment demand curve to the left. Answer: A Explanation:

A) B) C) D) E)

72) Refer to Figure 28-3. This figure illustrates A) only the first step of the monetary transmission mechanism. B) the entire monetary transmission mechanism. C) the first two steps of the monetary transmission mechanism. D) the effect of a change in the money supply on money demand. E) the ultimate effect of a change in the money supply on real GDP. Answer: C Explanation:

A) B) C) D) E)

24

72)

73) Refer to Figure 28-3. The increase in desired investment expenditure, as shown by the movement from point A to point B, occurs because of A) a fiscal policy designed to encourage investment. B) an increase in the money supply. C) a change in sales, which increases inventory investment. D) an improvement in business confidence. E) a tax-rate induced change in desired investment. Answer: B Explanation:

73)

A) B) C) D) E)

74) Refer to Figure 28-3. Part (i) of the figure shows the money market and the effect of an increase in the supply of money. The corresponding sequence of events in the bond market is as follows: The ________ of money at i0 leads firms and households to ________ bonds, which leads to a(n)

74)

________ in the price of bonds and a decrease in the interest rate. A) excess demand; buy; increase B) excess demand; sell; decrease C) excess supply; buy; decrease D) excess supply; sell; decrease E) excess supply; buy; increase Answer: E Explanation:

A) B) C) D) E)

75) The monetary transmission mechanism can be set in motion when a rise in the price level causes A) an increased demand for money balances, leading people to sell bonds, which in turn raises the interest rate. B) an increased demand for money balances, leading people to sell bonds, which in turn decreases the interest rate. C) an increased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate. D) a decreased demand for money balances, leading people to buy bonds, which in turn decreases the interest rate. E) a decreased demand for money balances, leading people to sell bonds, which in turn raises the interest rate. Answer: A Explanation:

A) B) C) D) E)

25

75)

76) The monetary transmission mechanism describes the process by which changes in A) personal consumption affect real GDP. B) business investment influence real GDP. C) monetary equilibrium influence real GDP through changes in desired investment. D) monetary equilibrium influence the interest rate. E) interest rate affect the demand for money. Answer: C Explanation:

A) B) C) D) E)

77) Which one of the following statements best describes the monetary transmission mechanism? A) An increase in personal consumption leads to an upward shift in the AE curve and thereby increases real GDP. B) An increase in government spending causes the AE curve to shift upwards, leading to a higher GDP. C) A decrease in imports causes the AE curve to shift upwards, leading to a higher interest rate. D) An increase in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve and a higher GDP. E) A decrease in the money supply leads to a lower interest rate, higher investment, an upward shift in the AE curve and a higher GDP. Answer: D Explanation:

77)

A) B) C) D) E)

78) Consider monetary equilibrium and the monetary transmission mechanism. An exogenous fall in the price level will lead to A) an excess demand for money resulting in a rise in the rate of interest, which shifts the AE function downward and decreases the equilibrium level of income. B) an excess supply of money resulting in a fall in the rate of interest, which shifts the AE function upward and increases the equilibrium level of income. C) people being able to buy more with their increased wealth, which will shift the AE function downward and decrease the equilibrium level of income. D) a movement to the right along the AE function. E) a movement to the left along the AE function. Answer: B Explanation:

76)

A) B) C) D) E)

26

78)

79) An increase in the money supply sets the monetary transmission mechanism in motion which results in A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. Answer: C Explanation:

A) B) C) D) E)

80) A decrease in the money supply sets the monetary transmission mechanism in motion which results in A) a rise in the rate of interest, a rise in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. B) a fall in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. C) a fall in the rate of interest, a rise in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. D) a rise in the rate of interest, a fall in the level of desired investment, an upward shift in the AE curve, and a rightward shift in the AD curve. E) a rise in the rate of interest, a fall in the level of desired investment, a downward shift in the AE curve, and a leftward shift in the AD curve. Answer: E Explanation:

80)

A) B) C) D) E)

81) Consider monetary equilibrium and the monetary transmission mechanism. An exogenous rise in the price level, with no change in the supply of money, will A) increase the demand for money and increase desired aggregate expenditure. B) increase the demand for money and decrease desired aggregate expenditure. C) decrease the demand for money and increase aggregate demand. D) decrease the demand for money and decrease aggregate demand. E) decrease aggregate demand but not affect the demand for money. Answer: B Explanation:

79)

A) B) C) D) E)

27

81)

82) Consider monetary equilibrium and the monetary transmission mechanism. An exogenous decrease in the price level, with no change in the supply of money, will A) increase the demand for money and increase aggregate expenditure. B) increase the demand for money and decrease aggregate expenditure. C) decrease the demand for money and increase real GDP along the aggregate demand curve. D) decrease the demand for money and decrease real GDP along the aggregate demand curve. E) decrease the demand for money and leave aggregate demand unchanged. Answer: C Explanation:

A) B) C) D) E)

83) Consider the monetary transmission mechanism. A disturbance to monetary equilibrium which changes the interest rate will affect aggregate demand through A) a shift of the investment demand function and a movement along the aggregate expenditure curve. B) a movement along the investment demand function and a shift of the aggregate expenditure curve. C) a shift of both the investment demand function and the aggregate expenditure curve. D) movements along the investment demand function and the aggregate expenditure curve. E) a movement along the aggregate expenditure curve. Answer: B Explanation:

83)

A) B) C) D) E)

84) A decrease in the money supply is most likely to A) raise interest rates, investment, and aggregate expenditures. B) raise interest rates, lower investment, and lower aggregate expenditures. C) lower interest rates, raise investment, and raise aggregate expenditures. D) lower interest rates, investment, and aggregate expenditures. E) raise interest rates and investment, and lower aggregate expenditures. Answer: B Explanation:

82)

A) B) C) D) E)

28

84)

85) If the Bank of Canada were to increase the money supply, other things being equal, we would expect the aggregate expenditure curve to shift A) upward and the aggregate demand curve to shift to the right. B) upward and the aggregate demand curve to shift to the left. C) downward and the aggregate demand curve to shift to the right. D) downward and the aggregate demand curve to shift to the left. E) downward but the aggregate demand curve will remain unchanged. Answer: A Explanation:

A) B) C) D) E)

86) If the Bank of Canada were to reduce the money supply, other things being equal, we would expect the aggregate expenditure curve to shift A) upward and the aggregate demand curve to shift to the right. B) upward and the aggregate demand curve to shift to the left. C) downward and the aggregate demand curve to shift to the right. D) downward and the aggregate demand curve to shift to the left. E) downward but the aggregate demand curve will remain unchanged. Answer: D Explanation:

86)

A) B) C) D) E)

87) If real GDP is greater than potential GDP, the output gap could be eliminated by 1) an increase in government purchases; 2) an upward shift in the AE curve; 3) a reduction in the money supply. A) 1 only B) 2 only C) 3 only D) 1 or 2 Answer: C Explanation:

85)

A) B) C) D) E)

29

87)

E) 1 or 2 or 3

88) Which of the following explanations for the negative slope of the AD curve is correct? A fall in the price level, with an unchanged money supply, causes the transactions demand for money to A) decrease, shifting the MD curve downward, lowering the interest rate and increasing desired

88)

investment, causing the AE curve to shift upward. B) decrease, shifting the MD curve upward, raising the interest rate and increasing desired investment, causing the AE curve to shift upward. C) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift upward. D) increase, shifting the MD curve downward, lowering the interest rate and decreasing desired investment, causing the AE curve to shift downward. E) increase, shifting the MD curve upward, raising the interest rate and decreasing desired investment, causing the AE curve to shift downward. Answer: A Explanation:

A) B) C) D) E)

89) The monetary transmission mechanism in an OPEN economy is more complicated than it is in a closed economy because the effects of domestic monetary contraction or expansion are A) strengthened because domestic interest rates must be equal to those in the rest of the world. B) weakened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world. C) strengthened because changes in autonomous expenditure cause monetary effects that influence interest rates in the rest of the world. D) strengthened because changes in the domestic money supply cause changes in the exchange rate, which then reinforce the changes in desired investment. E) weakened because changes in the domestic money supply cause changes in the exchange rate which then offset the changes in desired investment. Answer: D Explanation:

A) B) C) D) E)

30

89)

90) Consider the monetary transmission mechanism in an open economy. Other things being equal, an increase in the domestic money supply leads to A) an appreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. B) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand. Answer: C Explanation:

A) B) C) D) E)

91) Consider the monetary transmission mechanism in an open economy. Other things being equal, a decrease in the domestic money supply leads to A) an appreciation of the domestic currency, thereby inhibiting net exports and reducing aggregate demand. B) a depreciation of the domestic currency, thereby inhibiting net exports and raising aggregate demand. C) a depreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. D) an appreciation of the domestic currency, thereby stimulating net exports and raising aggregate demand. E) an appreciation of the domestic currency, thereby stimulating net exports and reducing aggregate demand. Answer: A Explanation:

91)

A) B) C) D) E)

92) Which of the following correctly describes the way in which a change in the money supply affects aggregate demand? A) a shift of the ID curve and a movement along the aggregate demand curve B) a movement along the ID curve and a shift of the aggregate demand curve C) a shift of both the ID curve and the aggregate demand curve D) movements along the ID curve and the aggregate demand curve E) a movement along the aggregate demand curve Answer: B Explanation:

90)

A) B) C) D) E)

31

92)

93) Changes in the money supply in an open economy, as compared to a closed economy, A) are likely to have a greater effect on AD because of the secondary effect that exchange rates have on exports. B) are likely to have a smaller effect on AD because the secondary effect of exchange rates will offset the changes created by monetary disturbances. C) are the same in either situation. D) affect investment to a greater degree because foreign investors can create new investment in an open economy. E) cannot be determined with the available information. Answer: A Explanation:

A) B) C) D) E)

94) Which of the following phenomena add a second channel to the monetary transmission mechanism? A) inflation B) diminishing marginal returns C) rising productivity D) open-market operations E) international capital mobility Answer: E Explanation:

94)

A) B) C) D) E)

95) Consider the monetary transmission mechanism. In an open economy, such as Canada's, an increase in the money supply leads to a fall in the interest rate. This is followed by A) an outflow of financial capital and an appreciation of the Canadian dollar. B) an inflow of financial capital and a depreciation of the Canadian dollar. C) an outflow of financial capital and a depreciation of the Canadian dollar. D) an inflow of financial capital and an appreciation of the Canadian dollar. Answer: C Explanation:

93)

A) B) C) D)

32

95)

96) Consider the monetary transmission mechanism. In an open economy, such as Canada's, a decrease in the money supply leads to a rise in the interest rate. This is followed by A) an outflow of financial capital and an appreciation of the Canadian dollar. B) an inflow of financial capital and a depreciation of the Canadian dollar. C) an outflow of financial capital and a depreciation of the Canadian dollar. D) an inflow of financial capital and an appreciation of the Canadian dollar. Answer: D Explanation:

A) B) C) D)

97) Other things being equal, a decrease in the money supply will lead to ________ in real interest rates and, in the short run, ________ in real GDP because ________. A) an increase; an increase; more money is available for investing in bonds from abroad B) an increase; a decrease; of the decline in domestic investment C) a decrease; an increase; of the increase in domestic investment D) a decrease; a decrease; of the decrease in domestic investment E) a decrease; a decrease, of the decrease in net exports Answer: B Explanation:

97)

A) B) C) D) E)

98) If the economy is experiencing an undesired inflationary gap, the Bank of Canada could A) increase the supply of money, lowering interest rates, which would shift the AD curve inward. B) decrease the demand for money, lowering interest rates, which would shift the AD curve outward. C) decrease the supply of money, raising interest rates, which would shift the AD curve inward. D) increase the supply of money, lowering interest rates, which would shift the AD curve outward. E) shift the investment demand curve to the right by lowering interest rates, which would shift the AD curve outward. Answer: C Explanation:

96)

A) B) C) D) E)

33

98)

99) The monetary transmission mechanism provides a partial explanation for the downward slope of the AD curve. For a given vertical MS curve, the explanation for the negative relationship between the price level and aggregate demand is as follows: A rise in the price level shifts the MD curve

99)

A) to the right, the interest rate rises and desired investment expenditure rises. B) to the left, the interest rate falls, and desired investment expenditure rises. C) to the right, the interest rate rises and desired investment expenditure falls. D) to the left, the interest rate rises and desired investment expenditure falls. E) to the right, the interest rate falls and desired investment expenditure falls. Answer: C Explanation:

A) B) C) D) E)

100) Which of the following is partly responsible for the negative slope of the aggregate demand (AD) curve? A) open-market operations of the Bank of Canada B) the monetary transmission mechanism C) the multiplier effect D) the speculative demand for money E) the precautionary demand for money Answer: B Explanation:

A) B) C) D) E)

34

100)

FIGURE 28-4 101) Refer to Figure 28-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. The initial effect is A) a shift of the AD curve to AD1 and an increase in real GDP to Y1. B) a shift of the AS curve to AS1 and a decrease in real GDP to Y2 . C) a shift of the AD curve to AD1, and then a shift back to AD0 to restore equilibrium at E0 . D) a simultaneous shift of AD to AD1 and AS to AS1 , resulting in a new equilibrium at E2. E) no change in the short-run equilibrium or level of real GDP. Answer: A Explanation:

A) B) C) D) E)

35

101)

102) Refer to Figure 28-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the adjustment toward the new long-run equilibrium? A) The AD curve shifts to AD1 . The inflationary gap causes prices to rise, AS shifts to AS1 and equilibrium is restored at E3 . B) The AD curve shifts to AD1 . The inflationary gap causes wages to rise, AS shifts to AS1 and equilibrium is restored at E2 . C) The AS curve shifts to AS1 which causes the AD curve to shift to AD1 , resulting in a new equilibrium at E2 . D) The AD curve shifts to AD1 . The increased money supply causes an increase in potential output and a new long-run equilibrium at E1 . E) The AD and AS curves shift to AD1 and AS1 simultaneously. The increased price level pushes them back to AD0 and AS0 and equilibrium is restored at E0 . Answer: B Explanation:

A) B) C) D) E)

103) Refer to Figure 28-4. The economy begins in equilibrium at E0. Now consider an expansion of the money supply. What is the long-run effect of this change? A) a higher price level B) a higher price level and higher real GDP C) higher real GDP D) lower real GDP E) no change in price level or real GDP Answer: A Explanation:

102)

A) B) C) D) E)

36

103)

FIGURE 28-5

37

0 0 104) Refer to Figure 28-5. This economy begins in equilibrium with M S , M D and real GDP equal to

104)

potential GDP (with AD0 and AD1 ). At this initial equilibrium, the money supply is ________, the interest rate is ________, the price level is ________, and real GDP is ________. A) $500 billion; 2%; 104; $800 billion B) $500 billion; 2%; 102; $805 billion C) $500 billion; 4%; 100; $800 billion D) $540 billion; 3%; 100; $800 billion E) $540 billion; 4%; 104; $805 billion Answer: C Explanation:

A) B) C) D) E)

0 0 105) Refer to Figure 28-5. This economy begins in equilibrium with M S , M D and real GDP equal to potential GDP (with AD0 and AD1 ). Now suppose there is an increase in the money supply to $540 billion. The initial response in this economy is 1 A) an increase in the demand for money, causing a shift of the money demand curve to M D , and a fall in interest rate to 3%. 1 B) an increase in the demand for money, causing a shift of the money demand curve to M D , and a fall in the interest rate to 2%. C) the AD and AS curves shift up simultaneously. D) a movement down along the money demand curve to a lower interest rate at 2%. 2 E) an increase in the demand for money, causing a shift of the money demand curve to M D and the interest rate remains at 4%. Answer: D Explanation:

A) B) C) D) E)

38

105)

0 0 106) Refer to Figure 28-5. This economy begins in equilibrium with M S , M D and real GDP equal to

106)

potential GDP (with AD0 and AD1 ). Now suppose there is an increase in the money supply to $540 billion. After the initial effect on the interest rate, the next response in this economy is as follows: A) the lower interest rate stimulates investment demand, which causes the AD curve to shift to AD1 . Real GDP rises to $805 billion and the price level rises to 102. B) the lower interest rate stimulates an increase in the demand for money, which causes the MD curve to shift to MD1. The interest rate rises to 3%. C) the lower interest rate causes wages and other factor prices to rise, which causes the AS curve to shift to AS1 . Real GDP falls to $795 billion and the price level rises to 102. D) the higher interest rate causes wages and other factor prices to rise, which causes the AS curve to shift to AS1 . Real GDP falls to $795 billion and the price level rises to 102. Answer: A Explanation:

A) B) C) D)

0 0 107) Refer to Figure 28-5. This economy begins in equilibrium with M S , M D and real GDP equal to potential GDP (with AD0 and AD1 ). Now suppose there is an increase in the money supply to $540 billion. The short-run effects of this increase lead to the opening of a(n) ________ gap of ________. A) recessionary; $5 billion B) recessionary; $10 billion C) inflationary; $5 billion D) inflationary; $10 billion E) There is no output gap. Answer: C Explanation:

A) B) C) D) E)

39

107)

FIGURE 28-6 108) Refer to Figure 28-6. The famous debate from the the 1950s and 1960s between Keynesians and Monetarists centred around the slopes of the money demand and investment demand curves. The Keynesians believed A) the diagrams in part (ii) were more realistic than those in part (i), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy. B) the diagrams in part (ii) were more realistic than those in part (i), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy. C) the diagrams in part (i) were more realistic than those in part (ii), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy. D) the diagrams in part (i) were more realistic than those in part (ii), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy. Answer: C Explanation:

A) B) C) D)

40

108)

109) Refer to Figure 28-6. The famous debate from the 1950s and 1960s between Keynesians and Monetarists centred around the slopes of the money demand and investment demand curves. The Monetarists believed A) the diagrams in part (ii) were more realistic than those in part (i), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy. B) the diagrams in part (ii) were more realistic than those in part (i), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy. C) the diagrams in part (i) were more realistic than those in part (ii), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy. D) the diagrams in part (i) were more realistic than those in part (ii), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy. Answer: B Explanation:

A) B) C) D)

110) The view of the Classical economists regarding the "neutrality of money" was that A) the allocation of resources is independent of the distribution of income. B) the distribution of income is independent of the allocation of resources. C) the real part of the economy cannot affect the level of money prices. D) the quantity of money has no effect on any real variables in the economy. E) money is neutral in its effect on absolute prices in the economy. Answer: D Explanation:

110)

A) B) C) D) E)

111) Which of the following best represents the view of the Classical economists regarding money? A) Relative prices are determined by the money supply. B) The monetary sector influences consumers' preferences and relative prices. C) The economy is composed of the real sector and the monetary sector, and the latter does not affect the former. D) The distribution of income is affected by the money supply. E) The allocation of resources is affected by the money supply. Answer: C Explanation:

109)

A) B) C) D) E)

41

111)

112) According to the views of the Classical economists, if the money supply doubles, A) money prices will double. B) money prices will be halved. C) relative prices will double. D) real income will double. E) there will be no effect on money prices. Answer: A Explanation:

A) B) C) D) E)

113) Classical economists' belief in the "neutrality of money" led them to argue that A) absolute prices were determined in the real part of the economy. B) the allocation of resources was determined by the quantity of money and not by the forces of supply and demand. C) relative prices have no role in the real allocation of resources. D) a change in the quantity of money would not affect money prices or relative prices. E) a change in the quantity of money would change the price level but would not change relative prices. Answer: E Explanation:

113)

A) B) C) D) E)

114) Which of the following statements best describes the difference between the Classical and modern views regarding the role of money in the economy? A) Both schools of thought accept the neutrality of money within the economy. B) Unlike modern economists, Classical economists believed that the neutrality of money existed only in the long run. C) Classical economists argued that relative prices are determined by the supply of money, while modern economists believe that the money supply will never affect relative prices. D) Both Classical and modern economists accept the neutrality of money in the long run, but modern economists question neutrality in the short run. E) Both Classical and modern economists accept the neutrality of money in the short run, but modern economists question neutrality in the long run. Answer: D Explanation:

112)

A) B) C) D) E)

42

114)

115) The long-run neutrality of money implies that A) changes to the money supply have no effect on either the price level or real GDP. B) changes to the money supply never have any effect on real GDP. C) in response to any change in the money supply, the economy's adjustment process will bring Y back to Y*, which is unaffected by the change in the money supply. D) the economy's level of potential output will adjust to accommodate any change in the money supply. E) in response to any change in the money supply, the demand for money will adjust to cancel out its effects on all macroeconomic variables. Answer: C Explanation:

A) B) C) D) E)

116) The hypothesis in economics known as hysteresis is that A) the economy's adjustment process operates in response to an expansion of the money supply, but not a contraction. B) changes in the money supply have a stronger influence on investment demand than do changes in fiscal policy. C) the monetary transmission mechanism does not apply in an open-economy setting. D) the role of money in the long run is neutral. E) the path of real GDP in an economy can influence that economy's level of potential output. Answer: E Explanation:

116)

A) B) C) D) E)

117) Suppose changes in the money supply only affected the price level and never affected real GDP. If this were the case, it could be viewed as evidence A) that the modern view of the neutrality of money is correct. B) supporting both the Classical and modern views of the neutrality of money. C) that both the Classical and modern views of the neutrality of money are incorrect. D) that the Classical view of the neutrality of money is correct. E) that has no bearing on the theories of either Classical or modern economists. Answer: D Explanation:

115)

A) B) C) D) E)

43

117)

FIGURE 28-5

44

0 0 118) Refer to Figure 28-5. This economy begins in equilibrium with M S , M D and real GDP equal to

118)

potential GDP (with AD0 and AD1 ). Now suppose there is an increase in the money supply to $540 billion. In the long run, after all adjustments have taken place, the money supply is ________, the interest rate is ________, the price level is ________, and real GDP is ________. A) $500 billion; 2%; 100; $800 billion B) $540 billion; 2%; 102; $805 billion C) $500 billion; 4%; 104; $800 billion D) $540 billion; 4%; 102; $795 billion E) $540 billion; 4%; 104; $800 billion Answer: E Explanation:

A) B) C) D) E)

0 0 119) Refer to Figure 28-5. This economy begins in equilibrium with M S , M D and real GDP equal to potential GDP (with AD0 and AD1 ). Now suppose there is an increase in the money supply to $540 billion. In the long run, after all adjustments have taken place, what is the effect of the increase in the money supply? A) an increase in the price level to 102, and no change to any real economic variables B) an increase in the price level to 104, and no change to any real economic variables C) a decrease in the interest rate to 2% and an increase in the price level to 104 D) a decrease in the interest rate to 2%, an increase in potential GDP to $805 billion, and an increase in the price level to 102 E) a decrease in the interest rate to 2%, an increase in real GDP to $805 billion and an increase in the price level to 102 Answer: B Explanation:

A) B) C) D) E)

45

119)

0 0 120) Refer to Figure 28-5. This economy begins in equilibrium with M S , M D and real GDP equal to

120)

potential GDP (with AD0 and AD1 ). Now suppose there is an increase in the money supply to $540 billion. According to the Classical economists of the eighteenth and nineteenth centuries, A) the neutrality of money holds in the long run, but in the short run changes in the money supply cause significant fluctuations of real GDP. B) the neutrality of money holds in the long run, but in the short run changes in the money supply cause significant fluctuations in employment but not real GDP. C) there is no connection between the "money" and "real" sides of the economy, and the only effect is a decrease in the interest rate. D) there is no connection between the "money" and "real" sides of the economy, and the only effect is a rise in the price level. E) such increases in the money supply cause long-run disequilibriums in the economy. Answer: D Explanation:

A) B) C) D) E)

121) The proposition of long-run neutrality of money is supported by evidence over more than fifty years and many countries that there is a positive relationship between A) money supply growth and real GDP. B) money supply growth and interest rates. C) potential GDP and money supply growth. D) inflation rates and interest rates. E) inflation rates and money supply growth. Answer: E Explanation:

A) B) C) D) E)

122) Other things being equal, the steeper the AS curve for the economy, the A) larger the impact on real output from any given increase in the money supply. B) more sensitive the aggregate expenditure function to changes in the interest rate. C) larger the impact on the price level from any given increase in the money supply. D) less sensitive the aggregate expenditure function to changes in the interest rate. E) smaller the impact on the price level from any given increase in the money supply. Answer: C Explanation:

121)

A) B) C) D) E)

46

122)

123) Other things being equal, the flatter the AS curve for the economy, the A) smaller the impact on real output from any given increase in the money supply. B) more sensitive the aggregate expenditure function to changes in the interest rate. C) larger the impact on the price level from any given increase in the money supply. D) less sensitive the aggregate expenditure function to changes in the interest rate. E) smaller the impact on the price level from any given increase in the money supply. Answer: E Explanation:

A) B) C) D) E)

124) Consider the monetary transmission mechanism. Other things being equal, the steeper is the investment demand function, the A) more responsive is desired investment to a change in the interest rate. B) less responsive is desired investment to a change in the interest rate. C) less responsive is the interest rate to a change in the money supply. D) more responsive is the demand for money to a change in the interest rate. E) less responsive is the demand for money to a change in the interest rate. Answer: B Explanation:

124)

A) B) C) D) E)

125) Consider the monetary transmission mechanism. Other things being equal, the flatter is the investment demand function, the A) more responsive is desired investment to a change in interest rates. B) less responsive is desired investment to a change in interest rates. C) less responsive is the interest rate to a change in the money supply. D) more responsive is the demand for money to a change in interest rates. E) less responsive is the demand for money to a change in interest rates. Answer: A Explanation:

123)

A) B) C) D) E)

47

125)

126) Consider the monetary transmission mechanism. If the Bank of Canada were to increase the money supply, we would expect a large increase in aggregate demand if the money demand function A) and the investment demand function are relatively flat. B) and the investment demand function are relatively steep. C) is relatively flat and the investment demand function is relatively steep. D) is relatively steep and the investment demand function is relatively flat. E) remains the same and the investment demand function is steep. Answer: D Explanation:

A) B) C) D) E)

127) The effectiveness of monetary policy in bringing about changes in real GDP is enhanced when the A) investment demand curve and money demand function are both relatively flat. B) investment demand curve and money demand function are both relatively steep. C) investment demand curve is relatively steep and the money demand function is relatively flat. D) investment demand curve is relatively flat and the money demand function is relatively steep. E) None of the above - monetary policy is always equally effective. Answer: D Explanation:

127)

A) B) C) D) E)

128) Monetary policy can have the largest impact on desired aggregate expenditures when the A) investment demand curve and money demand function are both relatively flat. B) investment demand curve and money demand function are both relatively steep. C) investment demand curve is relatively steep and the money demand function is relatively flat. D) investment demand curve is relatively flat and the money demand function is relatively steep. E) None of the above - monetary policy is always equally effective. Answer: D Explanation:

126)

A) B) C) D) E)

48

128)

129) Monetary policy will be least effective in changing aggregate demand when the A) investment demand curve and money demand function are both relatively flat. B) investment demand curve and money demand function are both relatively steep. C) investment demand curve is relatively steep and the money demand function is relatively flat. D) investment demand curve is relatively flat and the money demand function is relatively steep. E) None of the above - monetary policy is always equally effective. Answer: C Explanation:

A) B) C) D) E)

130) Consider the monetary transmission mechanism. A relatively steep investment demand curve and a relatively flat money demand curve A) make it impossible for the Bank of Canada to change the money supply. B) increase the effectiveness of expansionary monetary policy. C) imply that large increases in the money supply have little effect on aggregate expenditure. D) make the money supply a particularly powerful policy instrument. E) are believed by many monetarists to be realistic descriptions of the economy. Answer: C Explanation:

129)

A) B) C) D) E)

49

130)

Answer Key Testname: UNTITLED28

1) D 2) B 3) D 4) A 5) C 6) B 7) E 8) D 9) B 10) D 11) E 12) A 13) A 14) E 15) E 16) A 17) E 18) C 19) C 20) D 21) B 22) C 23) C 24) B 25) C 26) D 27) D 28) C 29) A 30) A 31) C 32) D 33) D 34) C 35) C 36) C 37) B 38) E 39) B 40) E 41) E 42) A 43) D 44) E 45) D 46) A 47) B 48) D 49) C 50) C 50

Answer Key Testname: UNTITLED28

51) E 52) D 53) C 54) B 55) E 56) D 57) B 58) E 59) E 60) B 61) D 62) A 63) A 64) D 65) E 66) C 67) D 68) A 69) D 70) E 71) A 72) C 73) B 74) E 75) A 76) C 77) D 78) B 79) C 80) E 81) B 82) C 83) B 84) B 85) A 86) D 87) C 88) A 89) D 90) C 91) A 92) B 93) A 94) E 95) C 96) D 97) B 98) C 99) C 100) B 51

Answer Key Testname: UNTITLED28

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130)

A B A C D A C C B D C A E D C E D E B D E C E B A D D D C C

52

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Any central bank, including the Bank of Canada, can implement its monetary policy by directly influencing either ________ or ________, but not both. A) money supply; money demand B) aggregate supply; aggregate demand C) the money supply; the interest rate D) aggregate demand; the interest rate E) the price level; the interest rate Answer: C Explanation:

A) B) C) D) E)

2) Consider the implementation of monetary policy. One difficulty in attempting to stabilize the economy by controlling the money supply is that A) firms may be sensitive to changes in the rate of interest. B) the Bank of Canada can print more money. C) the commercial banks may choose not to hold excess reserves. D) the money demand function may be unstable. E) the Canadian government requires long-term loans. Answer: D Explanation:

2)

A) B) C) D) E)

3) If the Bank of Canada chooses to expand M2 by exactly $1 million, it could do so by A) buying $1 million worth of government securities on the open market. B) selling $1 million worth of government securities on the open market. C) increasing reserves at the commercial banks by $1 million. D) decreasing reserves at the commercial banks by $1 million. E) None of the above - the Bank of Canada cannot precisely control the money supply. Answer: E Explanation:

1)

A) B) C) D) E)

1

3)

4) In practice, it is not possible for the Bank of Canada to control the money supply because A) the resulting effects on the value of the Canadian dollar are difficult to predict. B) it cannot control the process of deposit creation carried out by the commercial banks. C) it cannot control the amount of cash reserves that are injected into or withdrawn from the banking system. D) it does not have the legal power to do so. E) None of the abovethe Bank of Canada could control the money supply if it chose to do so. Answer: B Explanation:

A) B) C) D) E)

5) Suppose the Bank of Canada were to implement an expansionary monetary policy by buying government securities on the open market, thereby increasing cash reserves in the banking system. If the commercial banks do not expand their lending in response, then 1) there would be no change in the money supply at all; 2) the Bank of Canada could force the commercial banks to expand their lending, based on regulations in the Bank Act; 3) the increase in the overall money supply would be smaller than the Bank of Canada may have intended. A) 1 only B) 2 only C) 3 only D) 1 or 2 E) 2 or 3 Answer: C Explanation:

5)

A) B) C) D) E)

6) One reason that the Bank of Canada does not try to influence the money supply directly is that A) the Bank of Canada has many other policy tools with which it can influence aggregate demand. B) the Bank of Canada does not have the mandate to change the money supply. C) because the money demand curve is almost horizontal, changes in the money supply would have little or no effect on the interest rate. D) because the investment demand curve is almost vertical, any change in the interest rate resulting from a change in money supply would have little or no effect on desired investment expenditure. E) the slope of the money demand curve is not precisely known, and so the effect on the interest rate of a change in money supply is uncertain. Answer: E Explanation:

4)

A) B) C) D) E)

2

6)

7) Most central banks, including the Bank of Canada, implement monetary policy by A) controlling the money supply directly. B) influencing a short-term interest rate directly. C) influencing investment demand directly. D) influencing the demand for money directly. E) controlling the process of deposit creation in the commercial banking system. Answer: B Explanation:

A) B) C) D) E)

8) The Bank of Canada chooses to influence interest rates directly rather than influencing the money supply directly because A) the former method does not require knowledge of the position of the money demand curve. B) the deposit creation mechanism in the banking system is outside the full control of the Bank of Canada. C) it is easier to communicate policy actions to the public by setting the interest rate. D) the former method does not require knowledge of the slope of the money demand curve. E) all of the above. Answer: E Explanation:

7)

A) B) C) D) E)

3

8)

The diagrams below illustrate two alternative approaches to implementing monetary policy. The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to M0 .

FIGURE 29-1 9) Refer to Figure 29-1. If the Bank of Canada raises the target interest rate to 3%, as shown in part (i), then it must accommodate the resulting ________ in quantity of money demanded by ________ in financial markets. A) increase; selling government securities B) decrease; selling government securities C) increase; buying government securities D) decrease; buying government securities Answer: B Explanation:

A) B) C) D)

10) Refer to Figure 29-1. If the Bank of Canada pursues a(n) ________ monetary policy and raises the target interest rate to 3%, then the quantity of money demanded will ________. A) contractionary; rise B) contractionary; fall C) expansionary; not change D) expansionary; rise E) expansionary; fall Answer: B Explanation:

9)

A) B) C) D) E)

4

10)

11) Refer to Figure 29-1. If the Bank of Canada's goal is to increase the target interest rate to 3%, then the most effective approach is to A) reduce the money supply to M1 , as shown in part (ii), and then let the interest rate adjust to

11)

3%. B) increase the money supply to M1, as shown in part (ii), and then let the interest rate adjust to 3%. C) allow the money supply to shift to M1 by market forces, which will cause the interest rate to rise to 3%. D) raise the interest rate to 3%, as shown in part (i), and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded. E) raise the interest rate to 3%, as shown in part (i), and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded. Answer: E Explanation:

A) B) C) D) E)

12) Refer to Figure 29-1. The Bank of Canada must be able to easily communicate its monetary policy actions to the public. Which approach is more amenable to this requirement, and why? A) part (ii) - targeting the money supply: because an announcement of a 1% decrease in the money supply is more easily understood than an increase in the interest rate. B) part (i) - targeting the interest rate: because the Bank of Canada can more easily instruct the commercial banks to raise their interest rates. C) part (ii) - targeting the money supply: because the public can more easily understand that a decrease in reserves in the banking system makes it more difficult to get a loan or mortgage. D) part (i) - targeting the interest rate: because changes in the interest rate are much more meaningful and understandable to the public than changes in the money supply. Answer: D Explanation:

A) B) C) D)

13) Refer to Figure 29-1. One advantage of implementing monetary policy by targeting the interest rate as shown in part (i), rather than targeting the money supply as shown in part (ii), is that A) it is easier to get political support for changes in interest rates than for changes in the money supply. B) it is almost impossible to change the money supply without passing new legislation. C) the overall change in interest rates, and thus on aggregate demand, is more certain. D) changes in interest rates have a stronger impact on aggregate demand than do changes in the money supply. E) the position and slope of the money demand curve are known with certainty. Answer: C Explanation:

12)

A) B) C) D) E)

5

13)

14) In practise, the Bank of Canada uses monetary policy to reduce undesirable fluctuations in real GDP by A) controlling business investment expenditures directly. B) controlling government spending. C) influencing market interest rates through changes in its target for the overnight interest rate. D) directly influencing the money supply which affects the interest rate and hence, consumption and investment. E) targeting the money supply directly. Answer: C Explanation:

A) B) C) D) E)

15) What is the "bank rate"? A) The interest rate at which the Bank of Canada will lend funds to the Canadian government. B) The interest rate at which the Bank of Canada will lend funds to commercial banks. C) The interest rate that commercial banks charge their best customers. D) The interest rate that the Bank of Canada pays on deposits from the commercial banks. E) It is the same as a margin requirement. Answer: B Explanation:

15)

A) B) C) D) E)

16) Loans from the Bank of Canada are A) made only to the Canadian federal government and to provincial governments. B) made to commercial banks at the bank rate. C) made to commercial banks at the prime rate and are short-term in nature. D) made to large non-bank corporations. E) the Bank's major policy instrument. Answer: B Explanation:

14)

A) B) C) D) E)

6

16)

17) To reduce short-term market interest rates, the Bank of Canada could A) reduce its target for the overnight rate. B) decrease the commercial banks' reserves. C) decrease the money supply directly. D) adjust the rate paid on Treasury bills. E) reduce the commercial banks' reserve requirements. Answer: A Explanation:

A) B) C) D) E)

18) The Bank of Canada determines the "bank rate" by setting it equal to the upper end of a 50 basis-point-range that the A) Government of Canada pays for short term loans to meet interest payments on the public debt. B) Bank of Canada announces as a target range for the overnight interest rate. C) Bank of Canada announces as a target range for the exchange rate between the Canadian Dollar and the US Dollar. D) Bank of Canada announces as the target range for the five-year mortgage rate. E) Bank of Canada announces as its target for the core rate of inflation. Answer: B Explanation:

18)

A) B) C) D) E)

19) To raise short-term market interest rates, the Bank of Canada could A) purchase government securities in the open market. B) increase its target for the overnight rate. C) increase the commercial banks' required reserves. D) adjust the rate paid on Treasury bills. E) lower the reserve requirement. Answer: B Explanation:

17)

A) B) C) D) E)

7

19)

20) In practice, the Bank of Canada implements its monetary policy by A) directly influencing the overnight interest rate. B) directly influencing the excess reserves in the commercial banking system. C) setting the money supply. D) directly influencing the price level. E) influencing the slope of the money demand curve. Answer: A Explanation:

A) B) C) D) E)

21) The term structure of interest rates refers to A) the general observation that the yield on 30-year government bonds is less than the yield on 90-day Treasury bills. B) the variance of the different interest rates available in the economy. C) the composition of the market interest rate. D) the variation of the market interest rate over the span of one year. E) the pattern of interest rates that corresponds to the varying terms to maturity of government securities. Answer: E Explanation:

21)

A) B) C) D) E)

22) The interest rate that commercial banks charge each other for the shortest period of borrowing or lending is called the A) term interest rate. B) prime rate. C) overnight interest rate. D) bank rate. E) preferred lending rate. Answer: C Explanation:

20)

A) B) C) D) E)

8

22)

23) The interest rate that the Bank of Canada charges commercial banks for loans is called the A) term interest rate. B) prime rate. C) overnight interest rate. D) bank rate. E) preferred lending rate. Answer: D Explanation:

A) B) C) D) E)

24) Suppose the Bank of Canada announces its target for the overnight interest rate at 2.5%. In that case, the Bank of Canada is willing to lend to commercial banks at ________% and is willing to pay ________% on deposits it receives from commercial banks. A) 2.25; 2.5 B) 2.5; 2.0 C) 2.5; 2.5 D) 2.75; 2.25 E) 3.5; 1.5 Answer: D Explanation:

24)

A) B) C) D) E)

25) The Bank of Canada establishes a rate at which they will lend to commercial banks and a rate at which they will borrow from commercial banks. By doing so, A) the Bank of Canada can ensure that the actual overnight interest rate will never fall below 2%. B) the Bank of Canada can ensure that the commercial banks will not be earning excess profits. C) the Bank of Canada can ensure that money demand remains at the level necessary for monetary equilibrium. D) the Bank of Canada establishes a spread, into which all interest rates in the economy fall. E) the Bank of Canada can ensure that the actual overnight interest rate will fall between these two interest rates. Answer: E Explanation:

23)

A) B) C) D) E)

9

25)

26) Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term rates in the market fall as a result. Households' and firms' demand for new loans from the commercial banks would ________. In order to make the new loans, the commercial banks require more ________. A) rise; government securities B) fall; currency C) rise; cash reserves D) remain stable; excess reserves E) fall; excess reserves Answer: C Explanation:

A) B) C) D) E)

27) Suppose the Bank of Canada raises its target for the overnight interest rate and longer-term rates in the market rise as a result. Households' and firms' demand for loans from the commercial banks would ________. In order to accommodate this change, the commercial banks require ________. A) rise; more government securities B) fall; more cash reserves C) rise; more currency D) remain stable; no change to their reserves E) fall; fewer cash reserves Answer: E Explanation:

27)

A) B) C) D) E)

28) Suppose the Bank of Canada lowers its target for the overnight interest rate and longer-term interest rates in the market fall as a result. When this occurs, the commercial banks respond to A) an increase in the demand for loans by buying government securities from the Bank of Canada, against which they can extend new loans. B) an increase in the demand for loans by selling government securities to the Bank of Canada in exchange for cash, with which they can extend new loans. C) a decrease in the demand for loans by selling government securities to the Bank of Canada and calling in existing loans. D) a decrease in the demand for loans by buying government securities from the Bank of Canada in exchange for cash, and calling in existing loans. E) an increase in the demand for loans by borrowing cash from the Bank of Canada with which they can extend new loans. Answer: B Explanation:

26)

A) B) C) D) E)

10

28)

29) Suppose the actual overnight interest rate is 3.5%. If the Bank of Canada raises its target for the overnight interest rate to 4%, and longer-term interest rates in the market rise as a result, A) the demand for loans from commercial banks falls, the commercial banks sell government securities to the Bank of Canada, and the money supply falls. B) the demand for loans from commercial banks rises, the commercial banks buy government securities from the Bank of Canada, and the money supply falls. C) the demand for loans from commercial banks rises, the commercial banks sell government securities to the Bank of Canada, and the money supply rises. D) the demand for loans from commercial banks falls, the commercial banks buy government securities from the Bank of Canada, and the money supply falls. E) the demand for loans from commercial banks rises the commercial banks buy government securities from the Bank of Canada, and the money supply rises. Answer: D Explanation:

A) B) C) D) E)

30) Suppose the actual overnight interest rate is 4%. If the Bank of Canada lowers its target for the overnight rate to 3.75%, the money supply will eventually A) increase as a result of open-market operations. B) increase as a result of an increase in excess reserves in the banking system. C) decrease as a result of an increase in excess reserves in the banking system. D) decrease as a result of open-market operations. E) decrease as a result of a decrease in the demand for new loans. Answer: A Explanation:

30)

A) B) C) D) E)

31) If the Bank of Canada wants to influence real economic variables in the short run, it uses A) policy instruments such as the exchange rate and investment to influence the economy. B) its only policy instrumentthe overnight interest rate targetto influence aggregate demand. C) policy variables such as the exchange rate and investment to influence aggregate demand. D) policy variables such as open-market operations to influence aggregate demand. E) policy variables such as the money supply to influence investment and aggregate supply. Answer: B Explanation:

29)

A) B) C) D) E)

11

31)

32) The overnight interest rate is crucial to the Bank of Canada when it implements its monetary policy because A) the Bank of Canada's first priority is to ensure the solvency of commercial banks. B) its changes in the overnight interest rate generally lead to changes in longer-term interest rates. C) overnight loans constitute a major source for open-market operations. D) the Bank of Canada has no ability to influence other interest rates. E) it is the result of the Bank of Canada's regular changes in the money supply. Answer: B Explanation:

A) B) C) D) E)

33) Suppose the Bank of Canada announces its target for the overnight interest rate at 2.75%. What is the Bank's target range for the overnight interest rate? A) 1.75 - 3.75% B) 2.25 - 3.25% C) 2.5 - 3.00% D) 2.7 - 2.8% E) 2.74 - 2.76% Answer: C Explanation:

33)

A) B) C) D) E)

34) Suppose the Bank of Canada's announced target for the overnight interest rate is 2.75%. Why should we expect commercial banks to borrow and lend overnight funds at a rate very close to this target? A) Because the Bank of Canada Act requires that commercial banks borrow from each other at a rate no higher than 0.25% above the target rate. B) Because commercial banks know that they can borrow from the Bank of Canada at 3.00%, and lend to the Bank at 2.50% so the rate they charge each other will stay within that range. C) Because the Bank of Canada chooses its target rate based on the anticipated borrowing needs of the commercial banks. D) Because it is not legal for commercial banks to transact between each other at any rate outside of the Bank of Canada's target range. E) Because commercial banks face regulatory obstacles if they borrow from each other at any rate outside of the Bank of Canada's target range. Answer: B Explanation:

32)

A) B) C) D) E)

12

34)

35) How does the Bank of Canada communicate its target for the overnight interest rate to the public? A) monthly announcements at fixed announcement dates (FADs) B) in its quarterly publication "Monetary Policy Report" C) announcements made 8 times per year at pre-specified fixed announcement dates (FADs) D) the target is communicated to the minister of finance for approval and then released to the public on a quarterly basis E) the target is communicated to the Prime Minister for approval and then released to the public at 8 pre-specified fixed announcement dates (FADs) Answer: C Explanation:

A) B) C) D) E)

36) In Canada, open-market operations are A) government actions aimed at creating competition within the banking industry. B) loans made by the Bank of Canada to the commercial banks. C) conducted to enforce the reserve requirements of commercial banks. D) no longer carried out. E) the buying and selling of government securities by the Bank of Canada. Answer: E Explanation:

36)

A) B) C) D) E)

37) The Bank of Canada's purchases and sales of government securities, when they occur, are referred to as A) increases and decreases in government expenditure. B) margin requirements. C) open-market operations. D) reserve requirements. E) the setting of the bank rate. Answer: C Explanation:

35)

A) B) C) D) E)

13

37)

38) If the Bank of Canada chooses to expand the money supply directly, it could A) sell government securities on the open market. B) sell some of its foreign currency assets. C) reduce its deposits at commercial banks. D) buy government securities on the open market. E) change the price level. Answer: D Explanation:

A) B) C) D) E)

39) When the Bank of Canada enters the open market and buys or sells government securities, we refer to this as A) monetary policy. B) commercial lending. C) changing the target reserve ratio. D) setting the target ratio. E) open-market operations. Answer: E Explanation:

39)

A) B) C) D) E)

40) The Bank of Canada conducts its open-market operations directly in response to A) changes in aggregate demand. B) orders from Parliament. C) its announced changes in the money supply. D) changes in the price level. E) the changing demand for cash reserves from the commercial banks. Answer: E Explanation:

38)

A) B) C) D) E)

14

40)

41) The amount of currency in circulation in the Canadian economy is described as being endogenous to the system. This is because A) the process of deposit creation by the commercial banks is determined by the Bank of Canada. B) the commercial banks determine the currency in circulation in response to the Bank of Canada's changes to the money supply. C) the Bank of Canada conducts its open-market operations in response to the changing demand for cash from the commercial banks. D) the Bank of Canada targets the money supply directly. E) the Bank of Canada targets the currency in circulation directly. Answer: C Explanation:

A) B) C) D) E)

42) Suppose the Bank of Canada reduces its target for the overnight interest rate by 0.50 percentage points. In this situation, the Bank will likely need to accommodate the eventual resulting change in the demand for money by A) increasing the supply of money by buying government securities on the open market. B) increasing the supply of money by selling government securities on the open market. C) decreasing the supply of money by buying government securities on the open market. D) decreasing the supply of money by selling government securities on the open market. E) maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate. Answer: A Explanation:

42)

A) B) C) D) E)

43) Suppose the Bank of Canada increases its target for the overnight interest rate by 0.25 percentage points. In this situation, the Bank will likely need to accommodate the resulting change in the demand for money by A) increasing the supply of money by buying government securities on the open market. B) increasing the supply of money by selling government securities on the open market. C) decreasing the supply of money by buying government securities on the open market. D) decreasing the supply of money by selling government securities on the open market. E) maintaining the current supply of money which will increase the effectiveness of the change in the overnight interest rate. Answer: D Explanation:

41)

A) B) C) D) E)

15

43)

44) An expansionary monetary policy by the Bank of Canada could include A) moral suasion to increase the commercial banks' desired reserves. B) moral suasion to reduce lending by commercial banks. C) an open-market sale of government securities. D) a reduction of the Bank's target for the overnight interest rate. E) None of the above would be expansionary. Answer: D Explanation:

A) B) C) D) E)

45) An expansionary monetary policy would ________ and would eventually increase the money supply. A) reduce short-term interest rates B) involve selling foreign-currency reserves in the foreign-exchange market C) involve selling government bonds on the open market D) increase short-term interest rates E) involve increasing the target for the overnight interest rate. Answer: A Explanation:

45)

A) B) C) D) E)

46) Suppose the Canadian economy had an inflationary gap. To decrease the level of aggregate desired investment, the Bank of Canada could A) buy securities in the open market. B) lower short-term interest rates. C) reduce its spending. D) raise its target for the overnight interest rate. E) raise the price level. Answer: D Explanation:

44)

A) B) C) D) E)

16

46)

47) Suppose the Canadian economy had a recessionary gap. To increase the level of desired aggregate expenditure, the Bank of Canada could A) raise the bank rate. B) increase its spending. C) reduce the reserve requirements of the commercial banks. D) sell securities in the open market. E) reduce its target for the overnight interest rate. Answer: E Explanation:

A) B) C) D) E)

48) The best description of the cause-and-effect chain of a contractionary monetary policy in the short run is that it will A) lower the interest rate, increase investment spending, and increase real GDP. B) raise the interest rate, decrease investment spending, and decrease real GDP. C) lower the interest rate, lower investment spending, and decrease real GDP. D) raise the interest rate, decrease investment spending, and increase real GDP. E) raise the interest rate, increase investment spending, and decrease real GDP. Answer: B Explanation:

48)

A) B) C) D) E)

49) The best description of the cause-and-effect chain of an expansionary monetary policy is that it will A) lower the interest rate, raise investment spending, and increase real GDP. B) raise the interest rate, decrease investment spending, and increase real GDP. C) raise the interest rate, increase investment spending, and increase real GDP. D) lower the interest rate, increase investment spending, and reduce real GDP. E) raise the interest rate, decrease investment spending, and decrease real GDP. Answer: A Explanation:

47)

A) B) C) D) E)

17

49)

50) To remove an inflationary gap, the Bank of Canada would probably seek to A) increase its target for the money supply. B) decrease its target for the overnight interest rate. C) increase its target for the overnight interest rate. D) decrease the bank rate. E) buy government securities through open-market operations. Answer: C Explanation:

A) B) C) D) E)

51) To remove a recessionary gap, the Bank of Canada would probably seek to A) increase its target for the overnight interest rate. B) increase the bank rate. C) decrease its target for the overnight interest rate. D) sell government securities through open-market operations. E) decrease its target for the money supply. Answer: C Explanation:

52)

A) B) C) D) E)

53) Changes in monetary aggregates such as M2 and M2+ can be a poor guide to the stance of monetary policy if A) commercial bank reserves are rising. B) interest rates are changing rapidly. C) interest rates are constant. D) money demand is changing in unpredictable ways. E) money demand is constant. Answer: D Explanation:

51)

A) B) C) D) E)

52) If there were a large and persistent recessionary gap, an appropriate monetary policy could include A) increasing the bank rate. B) increasing the overnight lending rate. C) decreasing reserves available to the commercial banks. D) the Bank of Canada reducing its target for the overnight interest rate. E) the Bank of Canada selling government securities to the public. Answer: D Explanation:

50)

A) B) C) D) E) 18

53)

54) If desired investment spending is relatively sensitive to changes in interest rates, then monetary policy could be very useful because it would A) be very effective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods. B) be very effective in reducing expenditure during inflationary periods and ineffective in expanding expenditure during recessionary periods. C) be very ineffective in reducing expenditure during inflationary periods and very effective in expanding expenditure during recessionary periods. D) be very ineffective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods. E) be somewhat effective in reducing expenditure during inflationary periods and very ineffective in expanding expenditure during recessionary periods. Answer: A Explanation:

A) B) C) D) E)

55) If we observe that the bank rate has increased, we can conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) Bank of Canada has adjusted the rate it pays on Treasury bills. Answer: B Explanation:

55)

A) B) C) D) E)

56) If we observe that the bank rate has fallen, we can conclude that the A) Bank of Canada has implemented a contractionary monetary policy. B) Bank of Canada has abandoned its inflation target. C) Government of Canada has reduced the money supply. D) Bank of Canada has implemented an expansionary monetary policy. E) Bank of Canada has adjusted the rate it pays on Treasury bills. Answer: D Explanation:

54)

A) B) C) D) E)

19

56)

57) If we observe a small increase in the actual overnight interest rate over a several-day period, we can definitely conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Explanation:

A) B) C) D) E)

58) If we observe a small decrease in the actual overnight interest rate over a several-day period, we can definitely conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Explanation:

58)

A) B) C) D) E)

59) If we observe that the actual rate of CPI inflation has fallen, we can certainly conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Explanation:

57)

A) B) C) D) E)

20

59)

60) If we observe that the actual rate of CPI inflation has increased, we can certainly conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Explanation:

A) B) C) D) E)

61) If we observe that short-term market interest rates have fallen, we can certainly conclude that the A) Bank of Canada has implemented an expansionary monetary policy. B) Bank of Canada has implemented a contractionary monetary policy. C) Bank of Canada has abandoned its inflation target. D) Government of Canada has reduced the money supply. E) It is not possible to conclude any of the above. Answer: E Explanation:

62)

A) B) C) D) E)

63) The Bank of Canada initially implements an expansionary monetary policy by A) directly increasing the money supply. B) selling government securities on the open market. C) buying government securities on the open market. D) reducing its target for the overnight interest rate. E) raising its target for the overnight interest rate. Answer: D Explanation:

61)

A) B) C) D) E)

62) The monetary transmission mechanism describes how changes in the the money market (possibly caused by monetary policy) cause changes in the interest rate, which then cause changes in 1) aggregate demand and real GDP; 2) desired investment and net exports; 3) the price level. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1, 2, and 3 Answer: E Explanation:

60)

A) B) C) D) E)

21

63)

64) The Bank of Canada initially implements a contractionary monetary policy by A) directly decreasing the money supply. B) raising its target for the overnight interest rate. C) selling government securities on the open market. D) buying government securities on the open market. E) reducing its target for the overnight interest rate. Answer: B Explanation:

A) B) C) D) E)

65) Suppose the economy is experiencing an inflationary gap. Which of the following describes a likely policy response by the Bank of Canada? A) A contractionary monetary policy which leads to a lower interest rate, reduced investment demand, and a shift to the left of the AD curve. B) An expansionary monetary policy which leads to an increase in investment demand, and a shift to the right of the AD curve. C) An expansionary monetary policy which leads to a decrease in investment demand, and a shift to the left of the AD curve. D) A contractionary monetary policy which leads to an increase in investment demand, and a shift to the right of the AD curve. E) A contractionary monetary policy which leads to a reduction in investment demand, and a shift to the left of the AD curve. Answer: E Explanation:

65)

A) B) C) D) E)

66) How does the Bank of Canada set in motion the monetary transmission mechanism? A) by altering its target for the overnight interest rate B) by altering the price level C) by influencing the demand for money directly D) by influencing the exchange rate directly E) by influencing aggregate supply directly Answer: A Explanation:

64)

A) B) C) D) E)

22

66)

67) Most central banks accept that, in the long run, monetary policy has an effect on A) the level of aggregate demand. B) the price level and the inflation rate only. C) the level of investment demand. D) all real economic variables. E) real GDP and the price level. Answer: B Explanation:

A) B) C) D) E)

68) Many central banks have established formal targets for the rate of inflation because of the following fundamental observations about economic relationships: 1. there are high costs associated with inflation 2. high inflation causes high unemployment 3. monetary policy is the cause of sustained inflation A) 1 only B) 2 only C) 3 only D) 1 and 3 only E) 1, 2, and 3 Answer: D Explanation:

68)

A) B) C) D) E)

69) High inflation is costly to firms and individuals. Of the following, who is most adversely affected by high inflation? A) a homeowner with a 25-year fixed-rate mortgage B) a student with student loans repayable in nominal terms at a fixed rate of interest C) a student with student loans repayable on an indexed basis at a variable rate of interest D) a senior whose retirement income is an indexed pension plan E) a senior whose retirement income is fixed in dollar terms Answer: E Explanation:

67)

A) B) C) D) E)

23

69)

70) Which of the following describes the cause of a sustained inflation? A) the monetary transmission mechanism B) an aggregate demand shock significant enough to cause a substantial rise in the price level C) continual monetary expansion D) an aggregate supply shock significant enough to cause a substantial rise in the price level E) simultaneous AD and AS shocks. Answer: C Explanation:

A) B) C) D) E)

71) Given its existing policy regime of "inflation targeting," the Bank of Canada would likely react to a large positive aggregate demand shock by A) lowering the bank rate. B) buying bonds from the open market. C) increasing its target for the overnight interest rate. D) decreasing its target for the overnight interest rate E) ignoring the shock and allowing the economy to adjust. Answer: C Explanation:

71)

A) B) C) D) E)

72) Given its existing policy regime of "inflation targeting," the Bank of Canada would likely react to a large negative AD shock by A) raising the bank rate. B) selling bonds on the open market. C) increasing its target for the overnight interest rate. D) decreasing its target for the overnight interest rate E) ignoring the shock and allowing the economy to adjust. Answer: D Explanation:

70)

A) B) C) D) E)

24

72)

73) The long-run target currently used by the Bank of Canada is to set A) M2 = real GDP/M1 B) a long-run target range for the overnight lending rate. C) a long-run target range for the Canadian-U.S. exchange rate. D) a long-run target range for the 5-year mortgage rate. E) a long-run target range for the inflation rate. Answer: E Explanation:

A) B) C) D) E)

74) Consider the following statement about inflation targeting: A policy of inflation targeting acts as an automatic stabilizer in the economy, just like the automatic fiscal stabilizers. Choose the most appropriate response to this statement. The statement is: A) true, because an inflationary gap is met with a contractionary monetary policy. B) true, because a recessionary gap is met with an expansionary monetary policy. C) not true, because inflation targeting requires active policy decisions by the Bank of Canada, whereas fiscal stabilizers need no policy implementation. D) not true, because inflation targeting automatically maintains inflation within the target range, whereas fiscal stabilizers require government policy decisions. E) true, because inflation targeting and fiscal stabilizers are essentially the same policy tool. Answer: C Explanation:

74)

A) B) C) D) E)

75) Because of the volatility of food and energy prices, the Bank of Canada pays more attention in the short run to changes in ________ than to changes in ________. A) core inflation; total CPI inflation B) total CPI inflation; core inflation C) total CPI inflation; inflation of the GDP deflator D) inflation of the GDP deflator; total CPI inflation E) the nominal exchange rate; the real exchange rate Answer: A Explanation:

73)

A) B) C) D) E)

25

75)

76) One problem with focusing on the CPI when conducting monetary policy is that A) many elements in the CPI change for reasons unrelated to the state of the Canadian economy. B) it is closely related to the value of M2. C) changes in monetary policy have little effect on the CPI, especially in the long run. D) the CPI is too stable to accurately reflect the changes occurring in the Canadian economy. E) the CPI distorts the value of commercial bank reserves. Answer: A Explanation:

A) B) C) D) E)

77) Most central banks in the developed countries focus their attention on A) the elimination of output gaps. B) reducing unemployment. C) the reduction and control of inflation. D) alleviating the harmful effects of inflation. E) the growth of potential output. Answer: C Explanation:

77)

A) B) C) D) E)

78) High and uncertain inflation is damaging to the economy because A) the price system is no longer capable of effectively signalling changes in relative scarcity through changes in relative prices. B) individuals who receive their incomes in fixed nominal terms are made worse off. C) there can be unexpected reallocations of real income between workers and firms. D) there can be unexpected reallocations of real income between borrowers and lenders. E) All of the above. Answer: E Explanation:

76)

A) B) C) D) E)

26

78)

79) It is widely accepted by economists that monetary policy is the most important determinant of a country's A) level of real GDP. B) level of potential output. C) aggregate supply curve. D) long-run rate of inflation. E) long-run rate of economic growth. Answer: D Explanation:

A) B) C) D) E)

80) As of 2012, the Bank of Canada's policy objective is to maintain inflation at or near the target of A) 0%. B) 1%. C) 2%. D) 3%. E) 4%. Answer: C Explanation:

81)

A) B) C) D) E)

82) In an effort to maintain inflation at its targeted level the Bank of Canada designs its policies, in the short run, to A) eliminate all unemployment. B) keep real GDP close to potential output. C) minimize the growth of the money supply. D) allow the aggregate supply curve to close any output gaps. E) eliminate all negative shocks to the economy. Answer: B Explanation:

80)

A) B) C) D) E)

81) The Bank of Canada's formal policy target is ________. It's current target is to keep the annual inflation rate close to ________%. A) core inflation; 1 B) core inflation; 0 C) the money supply; 2 D) CPI inflation; 2 E) the money supply; 1 Answer: D Explanation:

79)

A) B) C) D) E)

27

82)

83) An example of how inflation targeting by the Bank of Canada helps to stabilize the economy is: A) firms and households are aware of the announced inflation target and adjust their behaviour so as to maintain this level of actual inflation. B) when a recessionary gap reduces the rate of inflation (below the target level) the Bank of Canada will implement an expansionary monetary policy, which helps to close the gap. C) when the actual inflation rate falls below the targeted level of inflation, then commercial banks automatically increase deposit creation. D) when an output gap opens in the economy, the inflationary target adjusts to close the gap. E) when an output gap opens in the economy, the Bank of Canada chooses the inflation target appropriate for closing the gap. Answer: B Explanation:

A) B) C) D) E)

84) In the short run the Bank of Canada aims to ________, in an effort to ________. A) enhance any positive shocks; keep inflation within its target band B) reduce any positive or negative output gaps; keep inflation close to the official target C) ignore any shocks as they are automatically adjusting; keep GDP growth constant D) keep actual output within 1%-3% of potential output; keep the money supply growing at a constant rate E) ignore any shocks as they are automatically adjusting; keep inflation within its target band Answer: B Explanation:

84)

A) B) C) D) E)

85) The economic variables that the Bank of Canada tries to influence are ________ in the short run and ________ in the long run. A) the distribution of income; the unemployment rate B) real GDP; the path of the price level C) the distribution of income; economic efficiency D) real GDP; the exchange rate E) the exchange rate; the rate of inflation Answer: B Explanation:

83)

A) B) C) D) E)

28

85)

86) Inflation targeting A) is irrelevant to the stability of the economy because of the long-run neutrality of money. B) is a destabilizing policy because it requires the Bank of Canada to engage in inappropriate policy responses. C) is a stabilizing policy because the Bank of Canada's policy adjustments act to stabilize real GDP growth. D) should be replaced with fiscal policy targeting because of the long-run neutrality of money. E) creates output gaps that must be then offset with fiscal policy stabilizers. Answer: C Explanation:

A) B) C) D) E)

87) Suppose output is at its potential level and then there is a sudden increase in food and energy prices. This increase A) makes inflation targeting easier because it makes these problems less relevant. B) makes inflation targeting harder because these are closely related to excess demand in the economy. C) would be unlikely to lead to an immediate policy response because it would not appear in "core" inflation. D) would be offset by a decline in the Canadian dollar, making these price increases irrelevant. E) is closely related to changes in core inflation so the Bank of Canada uses these for targeting inflation. Answer: C Explanation:

87)

A) B) C) D) E)

88) Inflation that is fully anticipated by workers, firms, and consumers A) leads to reductions in real incomes for all workers. B) is hard to predict. C) improves the efficiency of the price system. D) does not impact the purchasing power of individuals whose incomes are fully indexed to inflation. E) has no real or nominal effects in the economy. Answer: D Explanation:

86)

A) B) C) D) E)

29

88)

89) Which of the following goods are included in Canada's measure of "core inflation"? A) natural gas B) a new car C) fresh vegetables D) excise tax on gasoline E) coffee Answer: B Explanation:

A) B) C) D) E)

90) Consider a central bank that chooses to implement its monetary policy by expanding the money supply by a fixed percentage amount in every year. One important disadvantage with this approach to monetary policy is that it may A) lead to sustained inflation. B) be destabilizing if the demand for money is unstable. C) lead to stable growth of national income. D) be inconsistent with the Bank of Canada Act. E) create a recessionary output gap. Answer: B Explanation:

90)

A) B) C) D) E)

91) Most economists now accept the proposition that A) an ideal monetary policy would allow the money supply to grow at a constant rate. B) to reduce the long-run rate of inflation there must be a sustained monetary contraction. C) monetary policy leaves real GDP and the overnight lending rate unaffected in the short run. D) lowering the Bank Rate will have no effect on desired investment in the short run but will have a direct effect on core inflation. E) monetary policy is the only policy tool available for influencing aggregate demand. Answer: B Explanation:

89)

A) B) C) D) E)

30

91)

92) Suppose Canadian real GDP is currently equal to potential GDP. Then, because of events elsewhere in the world, European investors decide to hold fewer Canadian financial assets, which leads to a sustained depreciation of the Canadian dollar. If the Bank of Canada is committed to its inflation target then it should A) implement an expansionary monetary policy by increasing its target for the overnight interest rate. B) implement an expansionary monetary policy by decreasing its target for the overnight interest rate. C) not intervene in the economy at all since this shock will not have any real effects in the short run. D) implement a contractionary monetary policy by increasing its target for the overnight interest rate. E) implement a contractionary monetary policy by decreasing its target for the overnight interest rate. Answer: D Explanation:

A) B) C) D) E)

93) Suppose Canadian real GDP is currently equal to potential GDP. Then the Canadian dollar depreciates due to the reduced demand by European producers to purchase Canadian-made raw materials. If the Bank of Canada is committed to its inflation target then it should A) implement an expansionary monetary policy by increasing its target for the overnight interest rate. B) implement an expansionary monetary policy by decreasing its target for the overnight interest rate. C) not intervene in the economy at all since this shock will not have any real effects in the short run. D) implement a contractionary monetary policy by increasing its target for the overnight interest rate. E) implement a contractionary monetary policy by decreasing its target for the overnight interest rate. Answer: B Explanation:

92)

A) B) C) D) E)

31

93)

94) Which of the following events would justify the Bank of Canada implementing an expansionary monetary policy, while maintaining its commitment to its inflation target? A) The appreciation of the Canadian dollar due to increases in the world prices of Canadian exports. B) The depreciation of the Canadian dollar due to persistent current account deficits of Canada. C) The OPEC oil-price shocks that result in inflation. D) The U.S. economy increasing its demand for Canadian goods and services. E) The stock market crash following the terrorist attacks on September 11, 2001. Answer: E Explanation:

A) B) C) D) E)

95) Suppose Canadian real GDP is equal to potential GDP. An appreciation of the Canadian dollar then implies that the Bank of Canada should engage in A) a loosening of monetary policy because of the excess demand for Canadian products that is creating the appreciation. B) a tightening of monetary policy because of the excess demand for Canadian products that is creating the appreciation. C) no change in monetary policy because the exchange rate is always allowed to float freely. D) an increase in inflation because of the higher cost of imports. E) either a contractionary or an expansionary policy, depending on the cause of the appreciation. Answer: E Explanation:

95)

A) B) C) D) E)

96) Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar on the foreign-exchange market then requires the Bank of Canada to A) engage in expansionary monetary policy to counter the rise in the dollar. B) engage in contractionary monetary policy to counter the rise in the dollar. C) identify the cause of the change in the exchange rate before taking any action to adjust policy. D) increase the target band for the inflation rate. E) increase the target band for the overnight lending rate. Answer: C Explanation:

94)

A) B) C) D) E)

32

96)

97) Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar would likely lead the Bank to engage in a contractionary monetary policy if the Bank's policy experts traced the cause of the appreciation to A) a decrease in the overnight lending rate. B) an increase in the desire of non-residents to purchase Canadian financial assets. C) an increase in the desire of non-residents to purchase more Canadian goods and services. D) a reduction in Canada's core inflation rate. E) a recession in Canada. Answer: C Explanation:

A) B) C) D) E)

98) Suppose Canadian real GDP is equal to potential GDP. A significant and sustained appreciation of the Canadian dollar would likely lead the Bank to engage in an expansionary monetary policy if the Bank's policy experts traced the cause of the appreciation to A) a decrease in the overnight lending rate. B) an increase in the desire of non-residents to purchase Canadian financial assets. C) an increase in the desire of non-residents to purchase more Canadian goods and services. D) a reduction in Canada's core inflation rate. E) a recession in Canada. Answer: B Explanation:

98)

A) B) C) D) E)

99) Time lags in monetary policy can cause A) monetary policy to work in the opposite direction to what was initially predicted by economists. B) an expansionary policy to have a smaller effect than what was expected by policymakers. C) monetary expansions to work very quickly but cause monetary contractions to work very slowly. D) difficulty in the timing of appropriate policy and can even lead to destabilization. E) short-term monetary policy to work more effectively than long-term targeting. Answer: D Explanation:

97)

A) B) C) D) E)

33

99)

100) Economists at the Bank of Canada estimate that time lags in monetary policy imply that A) monetary policy is totally ineffective in changing overnight lending rates in the short run. B) monetary policy is totally ineffective in changing core inflation rates in the long run. C) monetary policy can cause changes in real GDP to occur in 9-12 months and changes in core inflation to occur in 18-24 months. D) monetary policy can cause changes in core inflation to occur in 9-12 months and changes in the exchange rate to occur in 18-24 months. E) monetary policy can cause changes in core inflation to occur in 9 to 12 months and changes in real GDP to occur in 18-24 months. Answer: C Explanation:

A) B) C) D) E)

101) If an economist supports targeting inflation as opposed to monetary fine-tuning, this economist probably believes that time lags in the implementation of monetary policy are A) short but predictable. B) short but unpredictable. C) long and unpredictable. D) long but predictable. E) predictable in their short-run effects but unpredictable in the long run. Answer: C Explanation:

101)

A) B) C) D) E)

102) Long time lags in the effectiveness of monetary policy A) decrease the effectiveness of the Bank of Canada's fine tuning. B) decrease the destabilizing side-effects of Bank of Canada's monetary policy. C) increase the effectiveness of the Bank of Canada's fine tuning. D) increase the growth of the money supply. E) decrease the growth of the money supply. Answer: A Explanation:

100)

A) B) C) D) E)

34

102)

103) If the Bank of Canada were required to gain approval for all changes in monetary policy from Parliament before implementing them, this would result in A) higher inflation in the long run. B) longer time lags in monetary policy. C) permanently higher unemployment. D) permanently higher exchange rates for the Canadian dollar. E) temporary reductions in the interest rate. Answer: B Explanation:

A) B) C) D) E)

104) It might take a while before the effects of changes in monetary policy are realized in the economy because it takes a while for A) the overnight interest rate and longer-term interest rates to adjust. B) investment expenditures and net exports to adjust. C) government purchases to adjust. D) monetary policy to be implemented via open-market operations. E) the exchange rate to adjust. Answer: B Explanation:

104)

A) B) C) D) E)

105) Which of the following is correct regarding the implications of time lags associated with monetary policy? A) Lags in monetary policy would be relatively longer in a closed economy than in an open one. B) The destabilizing effects of monetary policy will not be observed if it is used only for fine-tuning purposes. C) The Bank of Canada should design its policy based upon what has been already observed in the economy. D) The Bank of Canada generally responds to shocks that are persistent and of a significant magnitude. Answer: D Explanation:

103)

A) B) C) D)

35

105)

106) Suppose the Bank of Canada is criticized for implementing a contractionary monetary policy at a time when the inflation rate is at or near its target level. One explanation for this policy decision is likely that A) the Bank regularly maintains a contractionary policy stance in order to keep inflation at or near its target. B) it is extremely difficult to predict future events and a contractionary policy is the safest policy choice. C) the Bank anticipates a decrease in Canadian net exports and is acting now because of the unavoidable time lags. D) the Bank anticipates a decrease in investment spending and is acting now because of the unavoidable time lags. E) the Bank anticipates a rise in inflation and is acting now because of the unavoidable time lags. Answer: E Explanation:

A) B) C) D) E)

107) Most economists now accept the proposition that 1) to reduce the long-run rate of inflation there must be a sustained monetary contraction; 2) monetary policy should be aimed at controlling the inflation rate in the long run, with a short-run focus on reducing output gaps; 3) high inflation, even if it is largely expected, can generate significant costs for the economy. A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1, 2 and 3 Answer: E Explanation:

107)

A) B) C) D) E)

108) In 1980, the annual inflation rate in Canada was A) over 12%. B) roughly 8%. C) roughly 6%. D) roughly 2%. E) roughly zero. Answer: A Explanation:

106)

108)

A) B) C) D) E)

36

109) In the early 1980s, the Bank of Canada contracted the rate of growth of the money supply in an attempt to reduce inflation. One problem with this policy was that A) an unexpected increase in the demand for money caused the policy to be more contractionary than necessary, leading to a recession. B) an unexpected increase in the demand for money caused the policy to be more expansionary than necessary, leading to further inflation. C) the demand for money dropped at the same time, causing the policy to be more contractionary than necessary, leading to an undesirable boom. D) the demand for money dropped at the same time, causing the policy to be more expansionary than necessary, leading to further inflation. E) it proved completely ineffective in influencing either real GDP or the price level. Answer: A Explanation:

A) B) C) D) E)

110) During a period of renewed inflation fears in 1988, the governor of the Bank of Canada, Mr. John Crow, announced that monetary policy would henceforth be guided more by A) exchange rate targets since depreciation of the Canadian dollar tends to be inflationary. B) real GDP growth. C) the goal of long-term "price stability." D) the level of real income growth and "price stability." E) unemployment levels and the level of prices. Answer: C Explanation:

110)

A) B) C) D) E)

111) During the period of economic recovery between 1983 and 1987, the main challenge for the Bank of Canada was to A) accommodate the recovery, and the associated growth in money demand, without increasing the money supply so much as to refuel inflation. B) decrease the money supply to dampen inflationary expectations. C) increase the money supply so that only a mild form of inflation would reappear. D) stabilize the exchange rate between the U.S. and Canadian dollars. E) stabilize the unemployment rate. Answer: A Explanation:

109)

A) B) C) D) E)

37

111)

112) The decision by the Bank of Canada and many other central banks to target the rate of inflation partly reflects the evidence of the A) long-run neutrality of money. B) link between the money supply and the exchange rate. C) power of the overnight lending rate to affect long-run investment. D) power of the overnight interest rate to affect consumer borrowing. E) link between the output gap and the money supply. Answer: A Explanation:

A) B) C) D) E)

113) In the early 1980s, when the Bank of Canada was focusing its attention on reducing the growth rate of the money supply, an unplanned surge in ________ led to an unintended tight monetary policy which caused ________. A) money demand; decreased inflation and a serious recession B) money supply; a drop in the overnight lending rate and increased investment C) desired investment; inflation to increase D) desired investment; the Bank of Canada to adopt a core inflation targeting policy E) money supply; the Bank of Canada to apologize to the public for its policy error Answer: A Explanation:

113)

A) B) C) D) E)

114) In 1994, the federal minister of finance (Paul Martin) appointed Gordon Thiessen as the new governor of the Bank of Canada, who proceeded to A) continue the tough and unpopular contractionary monetary policy of his predecessor. B) continue the popular low overnight lending policy of his predecessor. C) abandon the tough and unpopular contractionary monetary policy of his predecessor in favour of a policy designed to depreciate the Canadian dollar. D) abandon the tough and unpopular contractionary monetary policy of his predecessor in favour of a low-interest-rate policy. E) increase the overnight lending rate in order to stabilize the Canadian-U.S. exchange rate. Answer: A Explanation:

112)

A) B) C) D) E)

38

114)

115) What is the policy response by the Bank of Canada to an inflationary gap in one region of Canada (e.g. the West) when at the same time a recessionary gap exists in another region of Canada (e.g. Ontario)? A) Each regional office of the Bank of Canada implements the appropriate monetary policy for that region. B) The Bank of Canada implements monetary policy in each region of Canada as required. C) There are automatic stabilizers inherent in monetary policy that allow the policy to adjust to close the output gap. D) The Bank of Canada consults with the commercial banks on the appropriate level of deposit creation for each region of the country. E) The Bank of Canada responds to the average level of inflation in the country and implements a single monetary policy. Answer: E Explanation:

A) B) C) D) E)

116) In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. What actions did the Bank of Canada take between the fall of 2007 and the end of 2008 in an attempt to maintain the level of economic activity in Canada? The Bank of Canada A) maintained its target for the overnight rate and made short-term loans to financial institutions more accessible. B) implemented a large fiscal stimulus program to counteract the sharp rise in interest rates that had occurred. C) reduced its target for the overnight rate by over 3.5 percentage points and made short-term loans to financial institutions more accessible. D) reduced its target for the overnight rate by over 5 percentage points and purchased "toxic" assets from Canadian commercial banks. E) purchased "toxic" assets from Canadian commercial banks and implemented a large fiscal stimulus program. Answer: C Explanation:

116)

A) B) C) D) E)

117) In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By the spring of 2009, the Bank of Canada had reached a practical minimum for its nominal policy interest rate of ________%. A) 0 B) 0.25 C) 0.50 D) 0.75 E) 1.00 Answer: B Explanation:

115)

A) B) C) D) E)

39

117)

118) In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By early 2009, the Canadian economy was in a recession with Y < Y*. What economic policies were implemented to close the output gap? A) expansionary monetary policy B) expansionary fiscal policy C) contractionary monetary policy and contractionary fiscal policy D) contractionary monetary policy and expansionary fiscal policy E) expansionary monetary policy and expansionary fiscal policy Answer: E Explanation:

A) B) C) D) E)

119) In 2007 and 2008, Canada was affected by the global financial crisis that had begun with the U.S. housing collapse. By 2009, the Canadian economy had entered a recession, largely due to a reduction in investment and a ________. The policy objective for the Bank of Canada and the government at this time was to ________. A) fall in net exports; shift the AD curve to the right to close the recessionary output gap B) fall in consumption; shift the AD curve to the right to close the inflationary output gap C) fall in consumption; shift the AD curve to the left to close the recessionary output gap D) fall in net exports; shift the AS curve to close the inflationary output gap E) fall in housing starts; shift the AD curve to the left to close the recessionary output gap Answer: A Explanation:

119)

A) B) C) D) E)

120) During the financial crisis that began in 2008 the Bank of Canada took actions to increase the amount of reserves in the banking system (they were "injecting liquidity"). However, the money supply (M2+) did not increase as predictably as it would have at other times. Why not? A) The banks formally increased their target reserve ratios to over 40% due to the increased risks in the Canadian economy. B) The panic in the world's financial sector led to a massive reduction in all types of lending from financial institutions. C) The banks formally increased their target reserve ratios to 20% due to the increased risks in the Canadian economy. D) The large and sudden increase in excess reserves at the commercial banks led to a significant increase in lending and a subsequent reduction in M2+. E) The panic in the world's financial sector led to a massive increase in all types of lending from financial institutions. Answer: B Explanation:

118)

A) B) C) D) E)

40

120)

Answer Key Testname: UNTITLED29

1) C 2) D 3) E 4) B 5) C 6) E 7) B 8) E 9) B 10) B 11) E 12) D 13) C 14) C 15) B 16) B 17) A 18) B 19) B 20) A 21) E 22) C 23) D 24) D 25) E 26) C 27) E 28) B 29) D 30) A 31) B 32) B 33) C 34) B 35) C 36) E 37) C 38) D 39) E 40) E 41) C 42) A 43) D 44) D 45) A 46) D 47) E 48) B 49) A 50) C 41

Answer Key Testname: UNTITLED29

51) C 52) D 53) D 54) A 55) B 56) D 57) E 58) E 59) E 60) E 61) E 62) E 63) D 64) B 65) E 66) A 67) B 68) D 69) E 70) C 71) C 72) D 73) E 74) C 75) A 76) A 77) C 78) E 79) D 80) C 81) D 82) B 83) B 84) B 85) B 86) C 87) C 88) D 89) B 90) B 91) B 92) D 93) B 94) E 95) E 96) C 97) C 98) B 99) D 100) C 42

Answer Key Testname: UNTITLED29

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

C A B B D E E A A C A A A A E C B E A B

43

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose the Canadian economy is facing an inflationary output gap (Y > Y*). In our macro model, such an output gap can explain changes in which of the following variables? A) the average level of wages B) the level of wages in the forestry sector relative to the mining sector C) the level of wages in a high-growth region of the country relative to a slow-growth region D) the level of wages for skilled workers relative to unskilled workers E) the level of wages for female workers relative to male workers Answer: A Explanation:

A) B) C) D) E)

2) The term NAIRU stands for the A) non-accelerating inflation rate of unemployment. B) natural and indexed rate of unemployment. C) non-accelerating, indexed and regulated unemployment. D) North American indexed rate of unemployment. E) North American inflation rate of unemployment. Answer: A Explanation:

2)

A) B) C) D) E)

3) Suppose economists were able to measure frictional unemployment as 3%, cyclical unemployment as 2%, and structural unemployment as 4%. Then we would know that the NAIRU is ________ and the actual unemployment rate is ________. A) 6%; 5% B) 5%; 9% C) 7%; 9% D) 7%; 7% E) 6%; 6% Answer: C Explanation:

1)

A) B) C) D) E)

1

3)

4) If the unemployment rate is greater than the NAIRU, A) there will be upward pressure on wages. B) the AS curve will shift upward. C) there is a negative output gap. D) real national income is above potential GDP. E) there is an inflationary gap. Answer: C Explanation:

A) B) C) D) E)

5) Suppose economists were able to measure frictional unemployment as 3%, cyclical unemployment as 2%, and structural unemployment as 4%. Then we would know that A) Y is below Y* and there is downward pressure on wages. B) Y is below Y* and there is upward pressure on wages. C) Y is equal to Y* and there is no pressure on wages. D) Y is above Y* and there is downward pressure on wages. E) Y is above Y* and there is upward pressure on wages. Answer: A Explanation:

5)

A) B) C) D) E)

6) If the unemployment rate is less than the NAIRU, A) there is no pressure on the AS curve to shift. B) there is a recessionary output gap. C) demand forces will exert upward pressure on wages. D) the AS curve will shift downward. E) there will be downward pressure on wages. Answer: C Explanation:

4)

A) B) C) D) E)

2

6)

7) Inflationary pressures that result from a rightward shift in the AD curve A) cause Y to fall below Y *.

7)

B) will worsen any existing unemployment problem. C) will initiate a wage-price spiral. D) will eventually subside unless accompanied by continual increases in the money supply. E) will permanently increase output. Answer: D Explanation:

A) B) C) D) E)

8) Other things being equal, unit costs will rise and the AS curve will shift upward if A) there is a fall in the price of oil. B) the government reduces payroll taxes. C) wage increases exceed productivity increases. D) wages rise. E) wage and price controls are in effect. Answer: C Explanation:

A) B) C) D) E)

9) If the NAIRU is 8% and the actual unemployment rate is 5%, A) there is no pressure on the AS curve to shift. B) there is a recessionary gap. C) demand forces put upward pressure on wages. D) the AS curve will shift downward. E) it will get stuck there permanently. Answer: C Explanation:

8)

A) B) C) D) E)

3

9)

10) Suppose the NAIRU for Canada is 6%, the actual unemployment rate is 7%, and productivity is constant. We can conclude that A) there is an inflationary gap. B) the NAIRU will readjust to 7%. C) the AD curve will automatically shift up. D) the excess demand for labour will put upward pressure on wages. E) the excess supply of labour will put downward pressure on wages. Answer: E Explanation:

A) B) C) D) E)

11) Suppose the NAIRU for Canada is 6.5%, the actual unemployment rate is 5% and productivity is constant. We can conclude that A) there is a recessionary gap. B) the NAIRU will re-adjust to 5%. C) the AD curve will automatically shift up. D) the excess demand for labour will put upward pressure on wages. E) the excess supply of labour will put downward pressure on wages. Answer: D Explanation:

11)

A) B) C) D) E)

12) Suppose the NAIRU for Canada is 6.5%, and the actual unemployment rate is 5%. If the Bank of Canada reduces its target for the overnight interest rate, A) it will move real GDP back toward potential GDP. B) it will worsen the existing inflationary gap. C) it will increase the unemployment rate. D) the AD curve will shift to the left. E) the AS curve will shift upward. Answer: B Explanation:

10)

A) B) C) D) E)

4

12)

13) Which of the following will lead to sustained inflation? A) the imposition of a new sales tax B) the sudden doubling of a key raw materials price C) a new payroll tax that raises firms' unit labour costs D) persistent expectations of continued inflation E) an early frost that damages the agricultural harvest Answer: D Explanation:

A) B) C) D) E)

14) Which of the following would be expected to cause a sustained increase in the inflation rate rather than a once-and-for-all increase in the price level? A) the imposition of a new sales tax B) the sudden doubling of a key raw materials price C) a new payroll tax that raises unit wage costs D) expectations of higher future inflation E) an early frost that damages the agricultural harvest Answer: D Explanation:

15)

A) B) C) D) E)

16) Increases in nominal wages in the economy are generally the effect of which force(s)? A) output-gap effect B) expectational effect C) supply-shock inflation D) output gap effect plus expectational effect E) output gap effect plus expectational effect minus supply-shock inflation Answer: D Explanation:

14)

A) B) C) D) E)

15) The reason why inflation can persist even after its original causes have been removed is that A) workers expect wage increases to match increases in labour productivity. B) workers are willing to accept wage increases lower than the increase in productivity. C) the Bank of Canada ensures that money-supply growth matches growth in real GDP. D) inflationary expectations cause the AS curve to continue shifting upwards. E) governments embark on a deficit-cutting program. Answer: D Explanation:

13)

A) B) C) D) E) 5

16)

17) Actual inflation would be 2% when expected future inflation is ________, output-gap inflation is ________, and supply-shock inflation is ________. A) 2%; 2%; 2% B) 2%; 0%; -2% C) 2%; 0%; 0% D) 1%; 1%; 1% E) 0%; 0%; -2% Answer: C Explanation:

A) B) C) D) E)

18) Which of the following is consistent with constant inflation: expected future inflation of ________, output-gap inflation of ________, and supply-shock inflation ________. A) 2%; 2%; 2% B) 2%; 0%; -2% C) 2%; 0%; 0% D) 1%; 1%; 1% E) 0%; 0%; -2% Answer: C Explanation:

18)

A) B) C) D) E)

19) Which of the following statements are correct? The expectational effect of inflation 1) is nullified as soon as the government promises zero inflation; 2) often plays a role in accelerating inflation; 3) is not directly a monetary cause of inflation. A) 1 only B) 2 only C) 3 only D) 1 and 2 Answer: E Explanation:

17)

A) B) C) D) E)

6

19)

E) 2 and 3

20) Suppose the actual rate of inflation in the economy is 5%. If we know that expected inflation is 2%, and that output-gap inflation is 1%, then we also know that A) the NAIRU is 5%. B) money wages must be rising by 5%. C) non-wage supply-shock inflation must equal 2%. D) expected inflation is rising by 2%. E) the actual rate of inflation is falling. Answer: C Explanation:

A) B) C) D) E)

21) Average wages in Canada have increased each year since the Second World War, even though the economy has experienced some severe recessions during this time. The explanation for this continued increase in nominal wages is A) the existence of powerful labour unions in Canada. B) that the actual unemployment rate is consistently below the NAIRU. C) that wage effects of the inflationary gaps outweigh the wage effects of the recessionary gaps. D) the persistent expectation that the price level will increase. E) a continued shortage of labour. Answer: D Explanation:

22)

A) B) C) D) E)

23) In the basic AD/AS macro model, actual inflation is the sum of three separate components. They are A) accelerated inflation, expected inflation and output gap inflation. B) validated inflation, expected inflation, and output gap inflation. C) output gap inflation, wage-push inflation and demand inflation. D) output gap inflation, expected inflation and supply-shock inflation. E) accelerated inflation, demand inflation and supply inflation. Answer: D Explanation:

21)

A) B) C) D) E)

22) Assume your salary is $2000 per month and the expectation is that over the next twelve months inflation will be 6%. In order to prevent a drop in your real salary over the year, your employer would have to agree to change your nominal salary by A) - 12%. B) - 6%. C) 0. D) + 6%. E) + 12%. Answer: D Explanation:

20)

A) B) C) D) E) 7

23)

24) Assume your salary is $2000 per month and your employer gives you a raise of 6%. Over the next twelve months the inflation rate is 12%. Your real salary will change by A) +12%. B) + 6%. C) 0%. D) - 6%. E) - 12%. Answer: D Explanation:

A) B) C) D) E)

25) Consider the AD/AS model with a sustained and constant inflation. In this case, A) there is no effective set of monetary policy tools to reduce inflation. B) there is a tendency for the price of bonds to be increasing rapidly. C) the AS curve is shifting upward because of inflation expectations. D) expected inflation tends to be significantly less than actual inflation. E) the AD curve is not shifting at all. Answer: C Explanation:

26)

A) B) C) D) E)

27) A major reason why it is so difficult to eliminate a sustained inflation is that inflationary expectations A) make it impossible to stop the rightward shift of the AD curve. B) make it impossible to reduce aggregate expenditure. C) keep shifting the AS curve upward. D) keep shifting the AS curve downward. E) cannot be influenced by monetary policy. Answer: C Explanation:

25)

A) B) C) D) E)

26) When a central bank attempts to stop a sustained inflation, it tries to remove the inflationary gap by A) shifting the AS curve upward. B) shifting the AS curve downward. C) increasing the outward shift of the AD curve. D) stopping the outward shift of the AD curve. E) taking no action and allowing the market to correct itself. Answer: D Explanation:

24)

A) B) C) D) E)

8

27)

28) A constant inflation in the AD/AS macro model is only possible when A) AS shifts upward at a uniform rate and AD shifts downwards at a uniform rate. B) AS shifts downward at a uniform rate and AD shifts upwards at a uniform rate. C) AD shifts upwards at a uniform rate and AS shifts upwards at the same uniform rate. D) AD shifts upwards at a uniform rate and AS shifts upwards at a higher uniform rate. E) None of the above - constant inflation is not possible. Answer: C Explanation:

A) B) C) D) E)

29) A constant inflation rate can be illustrated by the AD curve shifting upward A) with no shifts in aggregate supply. B) at the same rate as aggregate supply shifts upward. C) at the same rate as aggregate supply shifts downward. D) faster than aggregate supply shifts upward. E) faster than aggregate supply shifts downward. Answer: B Explanation:

29)

A) B) C) D) E)

30) Consider an economy without any supply shocks. If the expected inflation rate is 3% and the actual inflation rate is also 3%, then it is probably true that A) real GDP equals potential GDP. B) real GDP is less than potential GDP. C) real GDP is more than potential GDP. D) we can deduce nothing about the level of GDP. E) the economy cannot be in a short-run equilibrium. Answer: A Explanation:

28)

A) B) C) D) E)

9

30)

31) Canada's actual rate of inflation is fairly constant around the 2% level. We can conclude that A) real GDP must be below potential GDP because we also have positive unemployment. B) real GDP must be above potential GDP. C) the Bank of Canada is accommodating this level of inflation with increases in the money supply. D) the expectations about inflation are consistently wrong. E) the economy is consistently experiencing an inflationary gap. Answer: C Explanation:

A) B) C) D) E)

32) Consider the AD/AS model with a sustained and constant rate of inflation. In this situation, the money supply is rising, which tends to reduce interest rates. However, interest rates are actually likely to remain stable. Why? A) Because the money transmission mechanism does not apply in a situation of sustained inflation. B) Because the rising price level is decreasing the demand for money which is pushing interest rates up. C) Because the declining interest rates cause the investment demand curve to shift to the right, which causes interest rates to rise. D) Because the rising price level is increasing the demand for money which tends to push interest rates up. E) Because the declining interest rates cause the investment demand curve to shift to the left, which causes interest rates to rise. Answer: D Explanation:

31)

A) B) C) D) E)

10

32)

Consider the AD/AS model below with a constant rate of inflation. No exogenous AD or AS shocks are occurring.

FIGURE 30-1 33) Refer to Figure 30-1. Assume there are no demand or supply shocks present in this analysis. What explains the movement of the AS curve from AS0 to AS1 to AS2 and so on? A) unit costs are rising due to excess demand for labour B) expectations of inflation are causing wage costs to rise continually C) unit costs are rising because real wages are rising faster than nominal wages D) expectations of inflation are causing a perpetual inflationary output gap E) the AS curve shifts up as potential GDP (Y*) is continuously rising Answer: B Explanation:

A) B) C) D) E)

11

33)

34) Refer to Figure 30-1. What explains the movement of the AD curve from AD0 to AD1 to AD2 and

34)

so on? A) increasing nominal wages cause desired consumption to increase, shifting the AD curve to the right B) desired investment is increasing, shifting the AD curve to the right C) the central bank is attempting to reduce inflation by removing monetary validation D) the process of disinflation E) the central bank is increasing the money supply and validating the inflationary expectations Answer: E Explanation:

A) B) C) D) E)

35) Refer to Figure 30-1. Which of the following statements about this AD/AS diagram is true? A) expected inflation exceeds actual inflation B) actual inflation exceeds expected inflation C) actual inflation equals expected inflation D) actual inflation equals output gap inflation E) expected inflation equals output gap inflation Answer: C Explanation:

A) B) C) D) E)

36) Refer to Figure 30-1. A constant rate of inflation of 3% is portrayed in an AD/AS diagram like this one as A) an annual shift upward of the AD curve by 3%. B) an annual shift upward of the AS curve by 3%. C) an annual increase in the inflation rate of 3%. D) an annual increase in the equilibrium price level of 3%. E) Not applicable. The diagram shows the price level, not the inflation rate. Answer: D Explanation:

35)

A) B) C) D) E)

12

36)

37) Refer to Figure 30-1. Suppose the constant rate of inflation is 3%. In this case, A) equilibrium GDP and the price level are each increasing at a constant rate of 3% per year. B) the AS curve is shifting upward by 3% per year and the AD curve remains stationary. C) the AD curve is shifting upward by 3% per year and the AS curve remains stationary. D) an annual shift upward of each of the AS and AD curves by 1.5% leads to a constant rate of inflation of 3%. E) an annual shift upward of the AS curve by 3% is matched by an annual shift upward of the AD curve by 3%. Answer: E Explanation:

A) B) C) D) E)

38) Assuming that the economy is currently in a long-run equilibrium at Y*, a negative aggregate demand shock with no change in the money supply will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and GDP below potential output. D) a higher price level and GDP at potential GDP. E) a lower price level and GDP at its potential level. Answer: E Explanation:

38)

A) B) C) D) E)

39) A rightward shift in the AD curve accompanied by a leftward shift of the AS curve will result in A) an increase the price level and an uncertain effect on unemployment. B) a reduction in the price level and an uncertain effect on unemployment. C) an increase in unemployment and an uncertain effect on the price level. D) a reduction in unemployment and an uncertain effect on the price level. E) a reduction in both unemployment and the price level. Answer: A Explanation:

37)

A) B) C) D) E)

13

39)

40) A leftward shift in the AD curve accompanied by a leftward shift of the AS curve will A) increase the price level but have an uncertain effect on GDP. B) reduce the price level but have an uncertain effect on GDP. C) increase GDP but have an uncertain effect on the price level. D) reduce GDP but have an uncertain effect on the price level. E) increase both GDP and the price level. Answer: D Explanation:

A) B) C) D) E)

41) A leftward shift of the AD curve accompanied by a rightward shift of the AS curve will A) increase unemployment but have an uncertain effect on the price level. B) reduce unemployment but have an uncertain effect on the price level. C) increase the price level but have an uncertain effect on unemployment. D) reduce the price level but have an uncertain effect on unemployment. E) increase both the price level and unemployment. Answer: D Explanation:

42)

A) B) C) D) E)

43) If the central bank responds to repeated negative supply shocks with monetary validations, the economy will be faced with A) a one-time increase in prices. B) a one-time decrease in prices. C) alternating periods of inflation and deflation. D) steady reductions in real output. E) continuous inflation. Answer: E Explanation:

41)

A) B) C) D) E)

42) A rightward shift of the AD curve accompanied by a rightward shift of the AS curve will A) increase GDP but have an uncertain effect on the price level. B) reduce GDP but have an uncertain effect on the price level. C) increase the price level but have an uncertain effect on GDP. D) reduce the price level but have an uncertain effect on GDP. E) reduce both the price level and GDP. Answer: A Explanation:

40)

A) B) C) D) E) 14

43)

44) Suppose the economy is currently in long-run equilibrium with real GDP equal to potential GDP. A positive demand shock, that is not validated by the Bank of Canada, will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and real GDP below potential output. D) a higher price level and GDP at potential output. E) an ongoing deflation in the economy. Answer: D Explanation:

A) B) C) D) E)

45) Suppose there is an inflationary gap and the Bank of Canada does not respond in any way to change its monetary policy. This scenario will lead to A) an increase in wages and an upward shift of the AS curve. B) a wage-price spiral. C) a permanent decrease in output. D) the emergence of a recessionary gap. E) reduced transactions demand for money, an increase in the price of bonds, and a lower rate of interest. Answer: A Explanation:

45)

A) B) C) D) E)

46) Suppose there is a recessionary gap and the Bank of Canada holds the money supply constant. This scenario will eventually lead to A) an increase in wages and an upward shift of the AS curve. B) a reduction in wages and a downward shift of the AS curve. C) a permanent decrease in output. D) the emergence of an inflationary gap. E) increased transactions demand for money, and a higher rate of interest. Answer: B Explanation:

44)

A) B) C) D) E)

15

46)

47) Beginning from a position of long-run equilibrium, an expansionary monetary policy by the Bank of Canada causes A) aggregate demand for goods and services to exceed potential output. B) aggregate demand for goods and services to fall short of potential output. C) an increase in most market interest rates. D) a fall in the general price level. E) an increase in the level of potential output. Answer: A Explanation:

A) B) C) D) E)

48) Beginning from a position of long-run equilibrium, a contractionary monetary policy by the Bank of Canada causes A) aggregate demand for goods and services to exceed potential output. B) potential output to exceed aggregate demand for goods and services. C) a fall in most market interest rates. D) an increase in the general price level. E) an increase in potential output. Answer: B Explanation:

48)

A) B) C) D) E)

49) Assume that an economy is currently in long-run equilibrium at its potential output and that it is subjected to a positive demand shock. When the economy moves back to producing its potential level of national income, the price level will be A) equal to what it was originally before the demand shock. B) lower than it was in short-run equilibrium and the lower than it was originally. C) lower than it was in the short-run equilibrium but higher than it was originally. D) higher than it was in the short-run equilibrium but lower than it was originally. E) higher than it was in the short-run equilibrium and even higher than it was originally. Answer: E Explanation:

47)

A) B) C) D) E)

16

49)

50) Assuming that the economy is currently in a long-run equilibrium with real GDP equal to Y*, a positive AD shock (with no change in the money supply) will eventually result in A) no change in the price level. B) an ongoing inflation in the economy. C) a lower price level and GDP below its potential level. D) a higher price level and GDP at its potential level. E) a lower price level and GDP at its potential level. Answer: D Explanation:

A) B) C) D) E)

51) For the economy of Ontario, which is a major oil user and importer, an increase in the world price of oil would be considered A) monetary validation. B) a negative demand shock. C) demand inflation. D) a negative supply shock. E) an adjustment process. Answer: D Explanation:

51)

A) B) C) D) E)

52) For the economy of Alberta, a major oil exporter, an increase in the world price of oil would be mostly A) supply inflation. B) a negative demand shock. C) a negative supply shock. D) a positive demand shock. E) a positive supply shock. Answer: D Explanation:

50)

A) B) C) D) E)

17

52)

53) For the economy of Canada, a major oil user and exporter, a decrease in the world price of oil would be considered A) a negative demand and a negative supply shock. B) both a negative demand shock and a positive supply shock. C) both a positive demand shock and a negative supply shock. D) a negative demand shock only. E) a negative supply shock only. Answer: B Explanation:

A) B) C) D) E)

54) At the end of the 1970s, the inflation rate in Canada had exceeded 10%. This high inflation was due mainly to A) external pressures on the Canadian dollar. B) steadily decreasing factor prices. C) steadily decreasing factor prices and a contractionary monetary policy. D) a substantial negative supply shock that was partly validated by monetary policy. E) the extremely high wage increases being won by strong labour unions. Answer: D Explanation:

54)

A) B) C) D) E)

55) Suppose the economy is operating at full employment. A permanent rightward shift in the AD curve will cause inflationary pressures that will A) cause Y to fall below Y*. B) worsen any existing unemployment problem. C) initiate a wage-price spiral. D) eventually subside unless accompanied by expansionary monetary policy. E) permanently increase output. Answer: D Explanation:

53)

A) B) C) D) E)

18

55)

56) The first OPEC oil-price shock in 1973 caused the AS curves in all industrialized countries to shift upward. The Bank of Canada validated this negative supply shock with an increase in the money supply, whereas in the United States such monetary validation did not take place. The predictable result was that A) both countries experienced large increases in price levels and almost no recession. B) Canada experienced a large increase in its price level but almost no recession, and the U.S. experienced a smaller increase in its price level but a significant recession. C) Canada experienced a one-time price increase and the U.S. experienced persistent inflation. D) the U.S. experienced a large increase in its price level but almost no recession, and Canada experienced a smaller increase in its price level but a severe recession. E) both countries experienced small increases in price levels and severe recessions. Answer: B Explanation:

56)

A) B) C) D) E)

FIGURE 30-2 57) Refer to Figure 30-2. The movement of the economy from E0 to E1 was likely caused by a A) positive demand shock associated with increased investment. B) negative demand shock due to government cut-backs. C) negative supply shock due to a rise in input prices. D) positive supply shock induced by developments of new technology. E) positive supply shock caused by lower nominal wages. Answer: A Explanation:

A) B) C) D) E)

19

57)

58) Refer to Figure 30-2. The movement of the economy from E1 to E2 was likely caused by

58)

A) an increase in the price level. B) a positive supply shock induced by new technology. C) a negative demand shock due to government cut-backs. D) a negative supply shock due to a rise in input prices. E) the monetary validation of an initial demand shock by the central bank, combined with ongoing inflation expectations. Answer: E Explanation:

A) B) C) D) E)

59) Refer to Figure 30-2. Suppose the economy has moved from E0 to E1 . If there is then no monetary validation, the adjustment process will lead to a new equilibrium at A) E0 . B) E1. C) E2 . D) E3 . Answer: D Explanation:

E) E4 .

A) B) C) D) E)

60) Refer to Figure 30-2. Suppose an inflationary gap has opened and the economy is at E1 . Which of the following statements best describes the movement of the economy from E1 to E2 ? A) The inflationary gap puts upward pressure on factor prices and AS shifts upward. Simultaneously, the Bank of Canada validates the demand shock, thus shifting the AD curve further to the right. B) The inflationary gap puts upward pressure on factor prices and AS shifts upward. Simultaneously, the Bank of Canada implements a contractionary monetary policy, shifting the AD curve to the left. C) The inflationary gap causes an increase in the expectations of the future inflation. As a result, the AS curve shifts upward and the AD curve shifts to the right. D) The inflationary gap generates excess demand for labour, which causes the AD curve to shift to the right. The adjustment process then shifts the AS curve upward. E) The economy's adjustment process causes the economy to move from E1 to E2 . Answer: A Explanation:

59)

A) B) C) D) E)

20

60)

FIGURE 30-3 61) Refer to Figure 30-3. The movement of the economy from E0 to E1 was likely caused by

61)

A) a positive demand shock due to an increase in investment. B) a positive supply shock caused by improved productivity. C) a negative demand shock caused by fall in consumption. D) a negative supply shock caused by higher input prices. E) an increase in the price level. Answer: D Explanation:

A) B) C) D) E)

62) Refer to Figure 30-3. The movement of the economy from E1 to E2 was likely caused by A) a negative demand shock associated with a reduction in net exports. B) a positive supply shock caused by improved productivity. C) a monetary expansion by the Bank of Canada. D) an increase in the price level. E) a negative demand shock combined with a positive supply shock. Answer: C Explanation:

A) B) C) D) E)

21

62)

63) Refer to Figure 30-3. Suppose that the economy is at E1 and that there is no policy response by the

63)

Bank of Canada to this recessionary gap. Compared to the price level and real GDP at E1 , the economy will tend towards a new long-run equilibrium characterized by a(n) A) lower price level and GDP below the potential level. B) higher price level and GDP below the potential level. C) unchanged price level and GDP at the potential level. D) lower price level and GDP at the potential level. E) higher price level and GDP above the potential level. Answer: D Explanation:

A) B) C) D) E)

64) Suppose the economy is at full employment and the AS curve shifts upward due to a once-and-for-all increase in the price of oil. If the central bank does not respond to this shock, A) prices will rise and stay at the higher level with no further inflation. B) a recessionary gap will be created, which will eventually cause the AS curve to shift back downward. C) aggregate demand will shift up and cause further inflation. D) an inflationary gap will be created, which will cause the AS curve to shift upward again. E) a recessionary gap will be created and will cause a permanent reduction in employment. Answer: B Explanation:

A) B) C) D) E)

65) If the central bank responds to a single negative supply shock with monetary validation, we can expect an increase in A) the money supply but a decrease in costs and prices. B) costs but a decrease in real national income. C) the size of the output gap. D) costs, the price level, and the money supply. E) the price level and unemployment. Answer: D Explanation:

64)

A) B) C) D) E)

22

65)

66) If there is repeated monetary validation to wage-push supply shocks, A) unemployment will continue to rise. B) the supply shocks will reverse themselves. C) workers will have higher real wages. D) there will be ongoing inflation. E) there will be a once-and-for-all rise in the price level. Answer: D Explanation:

A) B) C) D) E)

67) Economists use the term "monetary validation" to refer to A) the money supply being increased in response to a demand shock. B) the Bank of Canada having a credible policy of zero inflation. C) the money supply being increased in response to a supply or a demand shock that raises the price level. D) people who hold smaller money balances at higher rates of interest. E) money supply increases which have been approved by Parliament. Answer: C Explanation:

67)

A) B) C) D) E)

68) The act of "monetary validation" by a central bank can A) cause a supply shock. B) perpetuate inflation. C) act to reduce inflation. D) increase unemployment. E) no longer be carried out by the Bank of Canada. Answer: B Explanation:

66)

A) B) C) D) E)

23

68)

69) A central bank might decide to "validate" a negative supply shock because A) there is no other way to return the economy to full employment. B) the economy might suffer a long slump before wages and prices fall enough to restore full employment. C) central banks tend to pay little heed to inflation. D) it is an effective means of preventing inflation. E) there are no negative effects from this policy action. Answer: B Explanation:

A) B) C) D) E)

70) Isolated negative aggregate supply shocks, in the absence of monetary validation, will A) eventually be self-correcting as wages slowly fall. B) never be self-correcting without government policy to expand the money supply. C) be self-correcting only if the aggregate demand curve shifts. D) result in a permanent output gap. E) have no short-run or long-run effects. Answer: A Explanation:

70)

A) B) C) D) E)

71) There can be strong pressure on the Bank of Canada to validate a large negative supply shock. The motive behind this pressure is A) to reduce unemployment below the NAIRU. B) that the Bank of Canada must be seen to be pursuing a restrictive monetary policy, in order to stop any expectational inflation. C) that wages often fall only very slowly, so the adjustment back to full employment can take a very long time. D) that there is the danger of initiating a wage-price spiral. E) to keep a "healthy" amount of inflation in the economy. Answer: C Explanation:

69)

A) B) C) D) E)

24

71)

72) If the economy is faced with continued negative supply shocks, such as annual wage increases for unionized workers, and there is no monetary validation, we can expect A) an inflationary gap. B) a one-time rise in the price level. C) rising unemployment until the wage increases cease, or are offset by other wage decreases. D) a shrinking output gap. E) peace in labour-management relations. Answer: C Explanation:

A) B) C) D) E)

73) If the Bank of Canada validates a positive AD shock, A) it will have eliminated the possibility of a continued inflation. B) there is the risk of continued inflation. C) wages will fall to reduce the resulting unemployment. D) output will fall more rapidly than if the shock had not been validated. E) the AD curve will shift to the left and inflation will stop. Answer: B Explanation:

73)

A) B) C) D) E)

74) Suppose that an increase in world oil prices leads to an increase in Canadian aggregate demand but no change in Canadian aggregate supply. The short-term effect on the Canadian price level would be called A) monetary validation. B) a monetary transmission. C) demand inflation. D) a supply shock. E) an adjustment process. Answer: C Explanation:

72)

A) B) C) D) E)

25

74)

75) Suppose that an increase in world oil prices leads to greater aggregate demand for Canadian exports of oil. If the Bank of Canada reduces the overnight interest rate in response to this increase in AD, this is called A) monetary validation. B) a demand shock. C) demand inflation. D) a supply shock. E) an adjustment process. Answer: A Explanation:

A) B) C) D) E)

76) "Supply inflation" refers to A) inflation arising from a leftward shift of the AS curve that is not the result of excess demand for factors of production. B) inflation arising from a shortage of labour. C) the increase in the price level that occurs when the excess demand for inputs pushes up input costs. D) the increase in the price level that occurs when there is excess supply of factors of production. E) any increase in the price level that results from an upward shift of the AD curve. Answer: A Explanation:

76)

A) B) C) D) E)

77) "Demand inflation" refers to A) the inflation that results from a decrease in net exports. B) any inflation that is originally caused by a rightward shift of the AD curve but is maintained at a constant level by monetary validation. C) any inflation that is originally caused by a rightward shift of the AD curve but is accelerating due to monetary validation. D) only the inflation that results from an expansionary monetary policy. E) the inflation that results from any inflationary gap caused by a rightward shift of the AD curve. Answer: E Explanation:

75)

A) B) C) D) E)

26

77)

78) Suppose the Canadian economy is booming due to rising net exports and there is political pressure to maintain the "good times." If the Bank of Canada does so by implementing an expansionary monetary policy, it would A) cause a temporary drop in inflation. B) decrease the actual inflation rate. C) cause a permanent recessionary gap. D) be acting to de-stabilize the economy. E) decrease employment. Answer: D Explanation:

A) B) C) D) E)

79) An inflation that begins as a result of any demand or supply shock will eventually come to a halt A) if there is no monetary validation. B) in the long run. C) in the short run. D) independent of the economy's adjustment process. E) if expected inflation is positive but constant. Answer: A Explanation:

79)

A) B) C) D) E)

80) Suppose the economy is in a long-run equilibrium. The AS curve now shifts upward due to a one-time increase in the price of raw materials. If the central bank validates this supply shock, A) an inflationary gap will be created with further inflation B) an inflationary gap will be created, which will cause the AS curve to shift upward again. C) the aggregate demand curve will shift up and result in a higher price level. D) a recessionary gap will be created, which eventually causes the AS curve to shift downward. E) a recessionary gap will be created and will cause a permanent reduction of employment. Answer: C Explanation:

78)

A) B) C) D) E)

27

80)

81) The reason that some economists advise central banks to never validate a negative supply shock is A) because the economy's adjustment process is ineffective. B) the monetary validation causes downward pressure on wages. C) the monetary validation results in a higher level of unemployment. D) that there are no short-run effects on any real variables, and so it is not worthwhile. E) to avoid the possibility of entrenching expectations and creating a wage-price spiral. Answer: E Explanation:

A) B) C) D) E)

82) The acceleration hypothesis states that A) when the central bank holds an inflationary gap constant, inflation will tend to accelerate. B) if an economy is growing, inflation will grow at an ever-increasing rate. C) capital investment is the primary cause of inflation. D) monetary validation causes inflation. E) if a recessionary gap is not closed, unemployment will tend to accelerate. Answer: A Explanation:

82)

A) B) C) D) E)

83) If the central bank uses monetary policy to attempt to hold real GDP (Y) permanently above potential GDP (Y *), A) inflation can be kept at a low, constant rate. B) inflation is not a problem, but unemployment is. C) inflation will accelerate over time. D) it will fail. E) the AD curve will shift leftward to cure the inflation problem. Answer: C Explanation:

81)

A) B) C) D) E)

28

83)

84) Suppose we know the following information about a hypothetical economy: - real GDP = $550 billion - potential GDP = $500 billion - inflation rate = 4% If the central bank tries to keep real GDP constant at $550 billion, the inflation rate is likely to A) remain constant at 4% B) fall below 4% C) rise above 4% D) cause stagflation E) cause a recession Answer: C Explanation:

A) B) C) D) E)

85) According to the "acceleration hypothesis," the inflation rate will accelerate when actual output is held A) at the NAIRU. B) at the level where unemployment is at the natural rate. C) below potential output. D) at potential output. E) above potential output. Answer: E Explanation:

85)

A) B) C) D) E)

86) The Bank of Canada has formally adopted an inflation target of 2%. One important reason for this is A) the supply-shock inflation will never exceed this amount. B) to avoid the temptation of validating positive economic shocks that could lead to accelerating inflation. C) that output-gap inflation will never exceed this amount. D) to allow for a permanent inflationary gap which is beneficial to the economy. E) that economists have determined that only an inflation rate of 2% is consistent with NAIRU. Answer: B Explanation:

84)

A) B) C) D) E)

29

86)

87) It is often said that inflation is a "monetary phenomenon." The most accurate interpretation of this phrase is that A) the price level cannot rise without an increase in the money supply. B) a continuous rise in prices is possible only with continuing increases in the money supply. C) only an increase in the money supply can start a period of inflation. D) repeated supply shocks cannot drive up prices if there is no monetary validation. E) increases in the price level are always associated with increases in the money supply. Answer: B Explanation:

A) B) C) D) E)

88) The view that sustained inflation is possible only with continuous monetary validation is now widely accepted but was made famous by and is still closely associated with A) John Maynard Keynes. B) Adam Smith. C) David Ricardo. D) Milton Friedman. E) James Tobin. Answer: D Explanation:

88)

A) B) C) D) E)

89) The statement that "inflation is everywhere and always a monetary phenomenon" is closely associated with A) John Maynard Keynes. B) Milton Friedman. C) John Crow. D) David Dodge. E) Adam Smith. Answer: B Explanation:

87)

A) B) C) D) E)

30

89)

90) Consider the statement "Inflation is everywhere and always a monetary phenomenon." This statement does not hold true A) as long as demand and supply shocks are validated by expansionary monetary policy. B) if the economy's adjustment process is working effectively. C) for temporary bursts of inflation that are not accompanied by a monetary expansion. D) as long as the AD curve is shifting to the right at the same rate as the AS curve is shifting to the left. E) in industrialized economies. Answer: C Explanation:

A) B) C) D) E)

91) The Phillips curve originally appeared to demonstrate a trade-off between inflation and unemployment. This was later thought to be deficient because A) it was later recognized that inflation and unemployment were unrelated. B) the influence on aggregate demand had not been incorporated. C) changes in unemployment had not been incorporated. D) the effects of fiscal policy on aggregate demand had not been incorporated. E) inflationary expectations had not been incorporated. Answer: E Explanation:

91)

A) B) C) D) E)

92) The idea that, in the long run, the Phillips curve is vertical, implying no trade-off between inflation and unemployment, is based on the premise that A) inflation and unemployment are unrelated. B) expectations do not adjust to reflect actual inflation. C) changes in unemployment do not influence real GDP. D) inflationary expectations fully adjust to actual inflation. E) inflationary expectations do not influence inflation. Answer: D Explanation:

90)

A) B) C) D) E)

31

92)

The three figures below show the phases of a disinflation. In part (i), the economy is experiencing a sustained inflation at E1 .

FIGURE 30-4 93) Refer to Figure 30-4, part (i). The elimination of the inflationary gap would normally be initiated by A) workers accepting a reduction in their wage growth. B) an increase in the productivity of workers. C) the Bank of Canada engaging in an expansionary monetary policy. D) the Bank of Canada stopping the ongoing monetary expansion. E) the government engaging in tax cuts and increasing transfer payments. Answer: D Explanation:

A) B) C) D) E)

32

93)

94) Refer to Figure 30-4, part (ii). The upward shift of the AS curve in Phase 2 is normally caused by A) workers accepting a reduction in their wages. B) an increase in the productivity of workers. C) the Bank of Canada engaging in an expansionary monetary policy. D) an increase in the unemployment rate. E) inflationary expectations that cause wages to continue rising. Answer: E Explanation:

94)

A) B) C) D) E)

95) Refer to Figure 30-4, part (iii). The movement of the economy from E3 to E4 in Phase 3 is often

95)

caused by A) workers accepting a reduction in their wages. B) an increase in the productivity of workers. C) the Bank of Canada implementing an expansionary monetary policy. D) an increase in the unemployment rate. E) inflationary expectations that cause wages to continue rising. Answer: C Explanation:

A) B) C) D) E)

96) Refer to Figure 30-4, part (ii). If the AS curve continues to drift upward during Phase 2 of the disinflation process, the economy will experience A) falling unemployment and rising output. B) falling real wages and factor prices and falling unemployment. C) rising real wages and factor prices and rising employment. D) rising unemployment and falling output. E) a falling price level and falling output. Answer: D Explanation:

A) B) C) D) E)

33

96)

97) Refer to Figure 30-4, part (ii), Phase 2 of the disinflation process. The upward drift of the AS curve will generally continue longer, with rising unemployment and falling output, when A) real wages and other factor prices are falling. B) the price level is falling as a result of the disinflation. C) firms and consumers regard the central bank's disinflation policy as highly credible. D) the central bank pursues a contractionary monetary policy even more severe than they had announced. E) firms and consumers do not regard the central bank's disinflation policy as credible. Answer: E Explanation:

97)

A) B) C) D) E)

98) Refer to Figure 30-4, part (iii). Consider the recovery phase of the disinflation process when output is returning from Y3 to Y*. Real GDP can return to potential either by ________, or by ________.

98)

A) the AS curve falling slowly back to AS2 ; further monetary contraction which shifts the AD curve to AD2 B) the AS curve falling slowly back to AS2 ; a monetary expansion which shifts the AD curve to AD2 C) fiscal policy which causes the AS curve to shift back to AS2 ; a monetary expansion which shifts the AD curve to AD2 D) legislating a wage-and-price freeze which shifts the AS curve back to AS2 ; a further contraction of monetary policy which shifts the AD curve to AD2 E) the AS curve drifting upward to AS3 ; the AD curve drifting back to AD1 Answer: B Explanation:

A) B) C) D) E)

99) Refer to Figure 30-4, part (iii). Consider the recovery phase of the disinflation process. The disadvantage of implementing an expansionary monetary policy to shift equilibrium from E3 to E4 is A) the likelihood of entering a deflationary phase. B) that since expected inflation has been eliminated, real wages will not adjust to any further AD or AS shocks. C) a falling price level. D) firms and consumers will no longer respond to decreases in interest rates. E) the danger of reviving expected inflation, and having to repeat the phases of the disinflation. Answer: E Explanation:

A) B) C) D) E)

34

99)

100) Refer to Figure 30-4, part (ii) or (iii). The movement of the economy from E3 to E2 could be due to

100)

A) a slow fall in wages due to a recessionary gap. B) an expansionary monetary policy. C) a contractionary monetary policy. D) a rise in unit costs caused by falling wages. E) a positive aggregate demand shock. Answer: A Explanation:

A) B) C) D) E)

101) A contractionary monetary policy that has been imposed to reduce inflation will most likely A) have no effect on the short-run level of GDP and unemployment. B) not control inflation, since money supply changes have little or no effect on the price level. C) produce long-lasting unemployment if wages adjust rapidly. D) lead to a recession that is long and severe, under any circumstances. E) lead to a recession which will be short if inflation expectations adjust rapidly and accurately. Answer: E Explanation:

A) B) C) D) E)

102) It is difficult for the Bank of Canada to remove a sustained inflation without producing stagflation because inflationary expectations cause the A) AD curve to shift too far to the right. B) AD curve to shift too far to the left. C) AS curve to continue shifting upward. D) AS curve to continue shifting downward. E) AD curve to continue shifting to the right. Answer: C Explanation:

101)

A) B) C) D) E)

35

102)

103) The reason why stagflation can occur when the Bank of Canada attempts to remove a sustained inflation is that inflationary expectations cause the A) AD curve to shift too far to the right. B) AD curve to shift too far to the left. C) AS curve to continue shifting downward. D) AS curve to continue shifting upward. E) AD curve to continue shifting to the right. Answer: D Explanation:

A) B) C) D) E)

104) One of the results of the restrictive monetary policy adopted by the Bank of Canada in the early 1980s was that A) inflation fell dramatically and real GDP remained at full employment levels. B) inflation fell dramatically, but was accompanied by a major recession. C) inflation remained over 10%, but the Bank of Canada avoided a major recession. D) inflation remained over 10% and there was a major recession. E) unemployment fell, but inflation accelerated due to higher interest rates. Answer: B Explanation:

104)

A) B) C) D) E)

105) Of the three phases of a disinflation, the first phase consists of the central bank A) pursuing an expansionary monetary policy. B) directing its monetary policy to achieve a stable exchange rate. C) slowing the rate of monetary expansion. D) directing its monetary policy to reduce the unemployment rate. E) directing its monetary policy to reduce the overnight interest rate. Answer: C Explanation:

103)

A) B) C) D) E)

36

105)

106) Of the three phases involved in the elimination of a sustained inflation in Canada, the second phase is characterized by A) the Bank of Canada pursuing an expansionary monetary policy. B) stagflation with falling output and continuing inflation. C) the Bank of Canada increasing the rate of monetary expansion. D) aggregate output being returned to potential output. E) increased inflation with rising output and falling unemployment. Answer: B Explanation:

A) B) C) D) E)

107) If a central bank is to successfully end a sustained inflation, it is essential that it A) avoid any loss in national income. B) do so using a "cold-turkey" approach. C) change people's expectations of future inflation. D) maintain the sacrifice ratio at a constant level. E) avoid any increase in unemployment. Answer: C Explanation:

107)

A) B) C) D) E)

108) The process of disinflation can involve some period of increased inflation and reduced output. Economists refer to this as A) the sacrifice period. B) monetary validation. C) the recovery phase. D) an inflationary recession. E) stagflation. Answer: E Explanation:

106)

A) B) C) D) E)

37

108)

109) Suppose we know the following information about a hypothetical economy: -real GDP = $485 billion -potential GDP = $500 billion -inflation rate = 4% -target overnight interest rate = 6% If the central bank implements a contractionary monetary policy in an effort to reduce the inflation rate, the short-run effect of this policy is likely to be that A) unemployment will rise further beyond the NAIRU. B) unemployment will fall below NAIRU. C) the interest rate and the inflation rate will both rise and unemployment will fall. D) the interest rate and the inflation rate will both fall and unemployment will rise. E) all real variables will remain unchanged. Answer: A Explanation:

A) B) C) D) E)

110) A measure that has been developed to analyze the amount of output that must be given up in order to reduce the inflation rate by one percentage point is called the A) misery index. B) Phillips measure. C) credibility index. D) output gap. E) sacrifice ratio. Answer: E Explanation:

110)

A) B) C) D) E)

111) The sacrifice ratio is a measure of the A) number of people unemployed due to disinflation. B) loss of real GDP associated with inflation. C) the crowding out of investment due to increases in government purchases. D) unemployment associated with a recessionary gap. E) cumulative loss in real GDP due to a disinflation. Answer: E Explanation:

109)

A) B) C) D) E)

38

111)

112) The sacrifice ratio is calculated by A) dividing the number unemployed by the labour force. B) dividing the number employed by the labour force. C) dividing the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation by the number of percentage points by which inflation fell. D) dividing the cumulative loss of potential GDP (as a percentage of actual GDP) due to disinflation by the number of percentage points by which inflation fell. E) adding the cumulative loss of real GDP (as a percentage of potential GDP) due to disinflation to the number of percentage points by which unemployment exceeds the NAIRU. Answer: C Explanation:

A) B) C) D) E)

113) In general, the sacrifice ratio will be greater, the A) shorter it takes to revise inflationary expectations downwards. B) shorter it takes to revise inflationary expectations upwards. C) longer it takes to revise inflationary expectations upwards. D) longer it takes to revise inflationary expectations downwards. E) lower is the rate of unemployment. Answer: D Explanation:

113)

A) B) C) D) E)

114) In general, the sacrifice ratio will be smaller, the A) shorter it takes to revise inflationary expectations downwards. B) shorter it takes to revise inflationary expectations upwards. C) longer it takes to revise inflationary expectations upwards. D) longer it takes to revise inflationary expectations downwards. E) sacrifice ratio will be the same always. Answer: A Explanation:

112)

A) B) C) D) E)

39

114)

115) Suppose the current inflation rate is 4% and the Bank of Canada wants to reduce it to 2%, knowing that the sacrifice ratio is 2. Apparently, the Bank of Canada is prepared to accept a decline of real GDP of ________ as the cost of disinflation. A) 1% of potential output B) 0.5% of potential output C) 2% of potential output D) 4% of potential output E) 8% of potential output Answer: D Explanation:

A) B) C) D) E)

116) The sacrifice ratio reflects the cost of ________ as measured by the ________. A) disinflation; loss in economic activity B) inflationary expectations; change in the rate of inflation C) supply shocks; change in the price level D) validation; change in inflationary expectations E) the Phillips curve; change in the NAIRU Answer: A Explanation:

117)

A) B) C) D) E)

118) Consider an economy that is in the process of a disinflation. Suppose that over a 2-year period, the rate of inflation is reduced from 6% to 1%. Over this same time, the cumulative loss in real GDP is $30 billion. Potential GDP is $600 billion. What is the sacrifice ratio? A) 1 B) 2 C) 3 D) 4 E) 5 Answer: A Explanation:

116)

A) B) C) D) E)

117) Suppose policymakers are faced with ending a sustained inflation. They must weigh the future benefits of ________ against the immediate costs of ________. A) lower inflation; administering the policy B) a higher rate of economic growth; reduced output C) lower rate of economic growth; lower inflation D) lower inflation; reduced output and higher unemployment E) a higher real GDP; lower inflation Answer: D Explanation:

115)

A) B) C) D) E) 40

118)

119) Consider an economy that is in the process of a disinflation. If the sacrifice ratio is 3, then A) unemployment increases by 3% for every 1% reduction in inflation. B) it costs 3% of GDP to reduce inflation by 1 percentage point. C) the cumulative loss of output in the economy will reach a total of 3%. D) the costs of disinflation are 3 times the benefits of disinflation. E) unemployment increases by 3% during the period of disinflation Answer: B Explanation:

A) B) C) D) E)

120) Consider the process of disinflation. Typical estimates for the sacrifice ratio for many developed economies suggest that reducing inflation by 1 percentage point "costs" the economy between ________% of real GDP. A) 0 and 1 B) 2 and 4 C) 4 and 6 D) 5 and 10 E) 10 and 12 Answer: B Explanation:

119)

A) B) C) D) E)

41

120)

Answer Key Testname: UNTITLED30

1) A 2) A 3) C 4) C 5) A 6) C 7) D 8) C 9) C 10) E 11) D 12) B 13) D 14) D 15) D 16) D 17) C 18) C 19) E 20) C 21) D 22) D 23) D 24) D 25) C 26) D 27) C 28) C 29) B 30) A 31) C 32) D 33) B 34) E 35) C 36) D 37) E 38) E 39) A 40) D 41) D 42) A 43) E 44) D 45) A 46) B 47) A 48) B 49) E 50) D 42

Answer Key Testname: UNTITLED30

51) D 52) D 53) B 54) D 55) D 56) B 57) A 58) E 59) D 60) A 61) D 62) C 63) D 64) B 65) D 66) D 67) C 68) B 69) B 70) A 71) C 72) C 73) B 74) C 75) A 76) A 77) E 78) D 79) A 80) C 81) E 82) A 83) C 84) C 85) E 86) B 87) B 88) D 89) B 90) C 91) E 92) D 93) D 94) E 95) C 96) D 97) E 98) B 99) E 100) A 43

Answer Key Testname: UNTITLED30

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

E C D B C B C E A E E C D A D A D A B B

44

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) If the actual unemployment rate is equal to the NAIRU, then A) actual GDP will be higher than potential GDP. B) actual GDP will be below potential GDP. C) potential GDP will expand permanently. D) the unemployment rate is 0%. E) actual and potential GDP are equal. Answer: E Explanation:

A) B) C) D) E)

2) When aggregate output is less than potential output, the unemployment rate ________ the NAIRU. A) falls toward B) falls below C) rises toward but never exceeds D) is equal to E) rises above Answer: E Explanation:

2)

A) B) C) D) E)

3) When aggregate output is greater than potential output, the unemployment rate ________ the NAIRU. A) falls toward B) falls below C) rises toward but never exceeds D) is equal to E) rises above Answer: B Explanation:

1)

A) B) C) D) E)

1

3)

4) When the growth rate of the labour force is greater than the growth rate of total employment, the unemployment rate A) decreases. B) increases. C) is below NAIRU. D) is above NAIRU. E) is equal to NAIRU. Answer: B Explanation:

A) B) C) D) E)

5) When the growth rate of the labour force is less than the growth rate of total employment, the unemployment rate A) decreases. B) increases. C) is below NAIRU. D) is above NAIRU. E) is equal to NAIRU. Answer: A Explanation:

5)

A) B) C) D) E)

6) Suppose that next year 300 000 existing jobs in the economy are eliminated through layoffs and plant closures, and 400 000 new jobs are created through expansions and the creation of new firms. The amount of unemployment will rise over that year if A) more than 300 000 people drop out of the labour force. B) more than 100 000 people drop out of the labour force. C) less than 100 000 people drop out of the labour force. D) less than 100 000 people join the labour force. E) more than 100 000 people join the labour force. Answer: E Explanation:

4)

A) B) C) D) E)

2

6)

7) Suppose that next year 300 000 existing jobs in the economy are eliminated and 200 000 new jobs are created. The amount of unemployment will decline over that year if A) more than 100 000 people drop out of the labour force. B) less than 100 000 people drop out of the labour force. C) less than 100 000 people join the labour force. D) more than 100 000 people join the labour force. E) more than 300 000 people join the labour force. Answer: A Explanation:

A) B) C) D) E)

8) If there are more job vacancies in the economy than there are unemployed workers, it is likely that A) fiscal policy aimed at increasing aggregate demand would cause the actual unemployment rate to move toward the NAIRU. B) the actual unemployment rate is less than the NAIRU. C) the economy has a high NAIRU. D) there is excessive involuntary unemployment in this economy. E) there is no structural unemployment in this economy. Answer: B Explanation:

8)

A) B) C) D) E)

9) If the actual unemployment rate is one percentage point less than the NAIRU, then A) actual and potential GDP are equal. B) actual GDP is greater than potential GDP. C) actual GDP is less than potential GDP. D) potential GDP will expand permanently. E) potential GDP will contract until it equals actual GDP. Answer: B Explanation:

7)

A) B) C) D) E)

3

9)

10) The total amount of unemployment in the economy rises when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment. Answer: B Explanation:

A) B) C) D) E)

11) The total amount of unemployment in the economy decreases when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment. Answer: C Explanation:

11)

A) B) C) D) E)

12) The total amount of unemployment in the economy is constant when the flows of individuals A) into unemployment are positive. B) into unemployment exceed the flows out of unemployment. C) out of unemployment exceed the flows into unemployment. D) out of unemployment are negative. E) out of unemployment are equal to the flows into unemployment. Answer: E Explanation:

10)

A) B) C) D) E)

4

12)

13) One reason that economists are interested in gross flows in the labour market as well as in the stock of unemployment is that examining the gross flows A) gives a better estimate of NAIRU. B) gives a good estimate of the incidence of unemployment. C) excludes only the new entrants and retirements of people moving into and out of the labour force. D) in relation to the stock of unemployment can indicate the amount of time the average person spends unemployed. E) provides a better indication of the total number of people unemployed at any one time. Answer: D Explanation:

A) B) C) D) E)

14) One reason that economists are interested in the gross flows in the labour market as well as the stocks of unemployed is that examining the flows A) gives us a better estimate of NAIRU. B) gives more insight into the amount of labour-market turnover. C) provides a better indication of the total number of people unemployed at any one time rather than just looking at the stocks. D) provides a good estimate of the overall level of employment. E) provides the only reliable way to measure cyclical unemployment. Answer: B Explanation:

14)

A) B) C) D) E)

15) Suppose John finishes school and immediately gets a part-time job. The measured unemployment rate would A) rise because he was not in the labour force when in school. B) not change since he is now employed. C) fall because he was considered unemployed when in school. D) fall because he was not in the labour force when in school. E) not change because part-time jobs aren't counted in the labour force. Answer: D Explanation:

13)

A) B) C) D) E)

5

15)

16) When the actual unemployment rate is equal to the NAIRU, we can say that A) all remaining unemployment is structural. B) the economy is experiencing no lost output due to frictional unemployment. C) the economy is at full employment. D) frictional unemployment is zero. E) frictional and structural unemployment are both zero. Answer: C Explanation:

A) B) C) D) E)

17) When one worker is unemployed for one year, A) we no longer include that worker in labour-force statistics. B) there may be significant personal costs, but there is no cost to the economy. C) it is not a problem because as soon as the worker is employed again, any loss of output goes away. D) there is no effect on national income. E) the output that the worker would have produced is lost forever. Answer: E Explanation:

17)

A) B) C) D) E)

18) Suppose in a given month the flow out of unemployment equals 300 000 per month, and the flow into unemployment equals 330 000 per month. The rate of unemployment has A) increased by 30 000. B) decreased by 30 000. C) increased by 10%. D) decreased by 10%. E) Not enough information to determine. Answer: E Explanation:

16)

A) B) C) D) E)

6

18)

19) Suppose the official rate of unemployment reported by Statistics Canada is 7.2%. One reason that this is likely to be an understatement of the amount of "true" unemployment is that A) the official rate is a measure of gross flows into and out of unemployment rather than net flows. B) discouraged workers who have given up searching for a job, but would take one if offered, are not included. C) the official rate is a measure of net flows into and out of unemployment rather than gross flows. D) Statistics Canada does not have a good measure of the numbers of people entering the labour force. E) seasonal workers are not included at all in the official data. Answer: B Explanation:

A) B) C) D) E)

20) Suppose the official rate of unemployment reported by Statistics Canada declines from one month to the next from 7.5% to 7.2%, but we also know that the stock of unemployed workers has not changed. How is this possible? A) The labour force has declined due to out-migration of working-age people. B) The labour force has grown as previously discouraged workers re-start their job-search process as unemployed individuals. C) Some individuals who were previously outside the labour force have joined the labour force and immediately found jobs. D) We have gone from a month with high seasonal unemployment to a month with low seasonal unemployment. E) We have gone from a month with low seasonal unemployment to a month with high seasonal unemployment. Answer: C Explanation:

19)

A) B) C) D) E)

7

20)

21) Suppose we know the following information about the labour market. Over a one-month period: -total number of previously unemployed workers that found jobs = 150 000 -total number of previously employed workers that became unemployed = 150 000 During this month the gross flow into unemployment was ________ and the net flow into unemployment was ________. A) 150 000; zero B) 150 000; 150 000 C) zero; 150 000 D) zero; zero E) 300 000; 150 000 Answer: A Explanation:

A) B) C) D) E)

22) Suppose we know the following information about the labour market. Over a one-month period: -total number of previously unemployed workers that found jobs = 500 000 -total number of individuals what became unemployed = 500 000 During the same month the unemployment rate increased from 7.1% to 7.3%. It must be the case that A) the population increased during that month. B) the population decreased during that month. C) a certain number of people entered the labour force during that month. D) the gross flow and the net flow into unemployment are equal. E) a certain number of people left the labour force during that month. Answer: E Explanation:

21)

A) B) C) D) E)

8

22)

The table below provides hypothetical unemployment, employment, and labour force data for a small economy over a 3-month period. The unemployment rate on January 1 is 6%.

January 1 February 1 March 1

Stock of unemployment 600 750 750

Stock of employment 9400 9200 9800

Stock outside the labour force Total population 8000 18 000 8050 18 000 7450 18 000

TABLE 31-1 23) Refer to Table 31-1. What is the unemployment rate on February 1? A) 4.17% B) 6.0% C) 7.54% D) 8.15% Answer: C Explanation:

A) B) C) D) E)

24) Refer to Table 31-1. What is the unemployment rate on March 1? A) 6.0% B) 7.11% C) 10.07% D) 7.65% Answer: B Explanation:

23) E) 9.32%

24) E) 4.17%

A) B) C) D) E)

25) Refer to Table 31-1. Between February 1 and March 1 the stock of unemployment remained stable at 750, and the unemployment rate ________ because ________. A) decreased; the labour force grew by 600 B) decreased; the labour force shrank by 600 C) remained stable; the stock of unemployment did not change D) increased; the labour force grew by 600 E) increased; the labour force shrank by 600 Answer: A Explanation:

A) B) C) D) E)

9

25)

26) Market-clearing theories of the labour market assume that labour markets A) always clear. B) are inefficient. C) have asymmetrically rigid wages. D) should be regulated to produce an efficient wage rate. E) will always provide a subsistence wage. Answer: A Explanation:

A) B) C) D) E)

27) If labour markets had perfectly flexible wages, as the market-clearing theories suggest, involuntary unemployment would A) not exist. B) rise when the labour demand curve shifts to the left. C) rise when the labour demand curve shifts to the right. D) rise when the labour supply curve shifts to the left. E) rise when the labour supply curve shifts to the right. Answer: A Explanation:

27)

A) B) C) D) E)

28) What economists sometimes call "voluntary unemployment" occurs when A) a job is available but the worker has not yet found it. B) the level of real GDP is at or above the economy's potential output. C) a person is willing to accept a job at the going wage rate but cannot find one. D) a worker enters the job market for the first time. E) a worker is not willing to accept an available job at the going wage rate. Answer: E Explanation:

26)

A) B) C) D) E)

10

28)

29) If, as the market-clearing theories suggest, all labour markets had perfectly flexible wages, real wages would rise when labour demand A) rises and fall when labour supply rises. B) rises and fall when labour supply falls. C) falls and rise when labour supply falls. D) rises and rise when labour supply rises. E) falls and falls when labour supply rises. Answer: A Explanation:

A) B) C) D) E)

30) Market-clearing theories suggest that fluctuations in employment and wages can be caused by the supply side of the labour market through changes in the A) price level. B) level of net exports in the economy. C) marginal efficiency of investment. D) willingness of firms to hire workers. E) willingness of workers to supply their labour. Answer: E Explanation:

31)

A) B) C) D) E)

32) Market-clearing theories of the labour market feature ________ wages, and thus involuntary unemployment ________. A) perfectly flexible; exists B) sticky; does not exist C) sticky; exists D) perfectly flexible; does not exist Answer: D Explanation:

30)

A) B) C) D) E)

31) Market-clearing theories of the labour market argue that A) competitive labour markets can be relied upon to eliminate all unemployment. B) labour markets will clear and involuntary unemployment will thereby be eliminated. C) all unemployment is most easily corrected by government intervention in the economy. D) all unemployment arises from firms being unwilling to demand labour services. E) labour unions are necessary elements in reducing unemployment. Answer: B Explanation:

29)

A) B) C) D)

11

32)

33) Which statement by an employer is consistent with the market-clearing theory of unemployment? A) "I pay more than the going rate so I can hire good workers." B) "I pay only enough to attract workers who are at the bottom of the pay scale." C) "I love it when inflation goes up because that drives down my wage costs." D) "Workers can always find jobs, if only they lower their expectations." E) "Unions have only their current members' interests at heart." Answer: D Explanation:

A) B) C) D) E)

34) Empirical observation of employment and real-wage fluctuations over the business cycle in Canada and other developed countries A) is not able to refute the market-clearing theory of unemployment. B) shows that employment is volatile and real wages are not. C) shows that real wages are volatile and employment levels are not. D) supports the market-clearing theory that there is no involuntary unemployment. E) supports the market-clearing theory that labour markets always clear. Answer: B Explanation:

33)

A) B) C) D) E)

12

34)

The labour market in the diagram below begins in equilibrium with a real wage of $10 and quantity employed of 1000.

FIGURE 31-1 35) Refer to Figure 31-1. Given the labour supply and labour demand curves, D0 and S0 , which of the following statements is true in the market-clearing theory of unemployment? A) At any wage above $10, there is an excess demand for labour, and the wage will be driven down. B) At any wage above $10, there is an excess supply of labour, and the wage will be driven down. C) At any wage above $10, there is persistent, involuntary unemployment. D) At any wage below $10, there is an excess supply of labour, and the wage will be driven up. E) At any wage below $10, there is an excess demand for labour, and the wage will be driven down. Answer: B Explanation:

A) B) C) D) E)

13

35)

36) Refer to Figure 31-1. The economy begins with D0 and S0 . Suppose there is a negative shock to the economy, which shifts the demand for labour curve to D1 . In the market-clearing theory of unemployment, A) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 200 workers. B) the wage rate would fall to $8, employment would fall to 800, causing involuntary unemployment of 200 workers. C) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 300 workers. D) the wage rate would fall to $8, employment would fall to 800 and there would be no unemployment. E) all markets would clear, causing the demand for labour curve to shift back to D0 and the wage rate and employment levels would return to their original levels. Answer: D Explanation:

A) B) C) D) E)

37) Refer to Figure 31-1. The economy begins with D0 and S0 . Suppose there is a negative shock to the economy, which shifts the demand for labour curve to D1 . An outcome consistent with non-market-clearing theories of unemployment is A) the wage rate would fall to $8, employment would fall to 800, causing involuntary unemployment of 200 workers. B) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 300 workers at that wage. C) the wage rate would fall to $8, employment would fall to 800 and there would be no unemployment. D) wages would be sticky and would adjust downward to, perhaps $9, causing involuntary unemployment of 200 workers at that wage. E) all markets would clear, causing the demand for labour curve to shift back to D0 and the wage rate and employment levels would return to their original levels. Answer: D Explanation:

36)

A) B) C) D) E)

14

37)

38) Refer to Figure 31-1. The economy begins with D0 and S0 . Suppose there is a positive shock to the economy, which shifts the demand for labour curve to D2 , and the wage rate rises to $11. The result is A) cyclical unemployment of 200 workers. B) excess supply of labour of 300 workers. C) excess demand for labour of 300 workers. D) excess supply of labour of 200 workers. E) excess demand for labour of 200 workers. Answer: E Explanation:

A) B) C) D) E)

39) Refer to Figure 31-1. The economy begins with D0 and S0 . Suppose there is a positive shock to the economy which shifts the demand for labour curve to D2 . Which of the following explains why the wage might rise only to $11 but not enough to clear the market? 1) Firms may find it costly to make large changes in wages. 2) Wages are set only infrequently in contracts and are thus slow to respond to changes in demand. 3) The wage rate is slow to adjust when there are long-term employment relationships. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 2 only E) 3 only Answer: C Explanation:

39)

A) B) C) D) E)

40) A central argument of non-market-clearing theories of unemployment is that A) labour markets will clear and unemployment will thereby be eliminated. B) all unemployment is caused by government intervention in the economy. C) all unemployment arises from firms being unwilling to hire extra workers. D) even competitive labour markets cannot be relied upon to eliminate involuntary unemployment. E) monetary policy is rarely effective at reducing unemployment. Answer: D Explanation:

38)

A) B) C) D) E)

15

40)

41) What economists call "involuntary unemployment" occurs when A) a job is available but the worker has not yet found it. B) the level of real GDP is at or above the economy's potential output. C) a person is willing to accept a job at the going wage rate but cannot find one. D) a person enters the job market for the first time. E) a person is not willing to accept an available job at the going wage rate. Answer: C Explanation:

A) B) C) D) E)

42) In non-market-clearing theories of the labour market an important explanation for the existence of involuntary unemployment is that labour markets exhibit A) an elastic labour demand curve. B) perfectly flexible wages. C) rigid or sticky wages. D) unshifting labour demand. E) unshifting labour supply. Answer: C Explanation:

42)

A) B) C) D) E)

43) Involuntary unemployment in a labour market is said to exist when the wage is ________ the market-clearing wage, this creating an excess ________ labour. A) greater than; demand for B) greater than; supply of C) equal to; employment of D) less than; supply of E) less than; demand for Answer: B Explanation:

41)

A) B) C) D) E)

16

43)

44) Non-market-clearing theories of the labour market feature ________ wages, and thus involuntary unemployment ________. A) perfectly flexible; cannot exist B) perfectly flexible; can exist C) sticky; cannot exist D) sticky; can exist E) efficiency wages; cannot exist Answer: D Explanation:

A) B) C) D) E)

45) Retaining a core group of experienced employees that feels entitled to some degree of job security requires that in a recession firms hold wages ________ the market-clearing level, thus ________ involuntary unemployment. A) above; avoiding B) above; creating C) equal to; avoiding D) below; avoiding E) below; creating Answer: B Explanation:

45)

A) B) C) D) E)

46) Long-term labour contracts are an important feature of ________ theories of the labour market. In contrast to a world with continuous bargaining of wages and employment, the existence of such contracts leads to a labour market in which involuntary unemployment is ________. A) non-market-clearing; possible B) non-market-clearing; impossible C) market-clearing; possible D) market-clearing; impossible E) market-clearing; always present Answer: A Explanation:

44)

A) B) C) D) E)

17

46)

47) Wage contracts are often set for periods of up to three years. As a result, fluctuations in aggregate demand and aggregate supply tend to A) cause changes in the amount of involuntary unemployment. B) cause greater inflexibility of wages. C) have no effect in labour markets until wages are renegotiated. D) clear the labour market. E) either increase or decrease the NAIRU. Answer: A Explanation:

A) B) C) D) E)

48) The main difference between market-clearing and non-market-clearing models of the economy is A) the long-run path of wages. B) the long-run path of employment. C) the degree of wage and price flexibility in the short run. D) the long-run path of output. E) the tendency for output to return to potential in the long run. Answer: C Explanation:

49)

A) B) C) D) E)

50) "Efficiency wages" are said to exist when wages are A) such that cyclical unemployment is zero. B) such that the NAIRU is zero. C) high enough above market levels that workers increase their productivity. D) equal to the market wage. E) just high enough to induce a worker to take a job. Answer: C Explanation:

48)

A) B) C) D) E)

49) The market-clearing and non-market-clearing theories of unemployment both agree that A) actual unemployment rates will equal the NAIRU in the long run. B) wages and prices are perfectly flexible. C) unemployment is always voluntary. D) actual output adjusts only gradually to potential output. E) wages are rigid and adjust only over the long run. Answer: A Explanation:

47)

A) B) C) D) E) 18

50)

51) The theory of "efficiency wages" provides A) a way in which firms can pay workers less than the market-clearing wage. B) an explanation for the high wages that unions are able to extract from firms. C) many firms with a good reason to dismiss workers. D) most workers with a good reason to quit. E) one explanation for why wages do not readily fall in response to excess supply in labour markets. Answer: E Explanation:

A) B) C) D) E)

52) The theory of "efficiency wages" suggests that a pool of involuntarily unemployed workers A) quickly disappears because perfectly-flexible wages eliminates this inefficient waste of resources. B) exists only between sessions of wage re-negotiation. C) is comprised solely of workers who have failed to meet the productivity standards of potential employers. D) is irrelevant to the behaviour of employed workers. E) provides an incentive for employees to work hard so they are not laid off. Answer: E Explanation:

52)

A) B) C) D) E)

53) A likely consequence of firms paying "efficiency wages" is A) decreased unemployment. B) increased unemployment. C) lower real wages for employed workers. D) more competitive labour markets. E) rapid wage adjustment in the face of labour-market changes. Answer: B Explanation:

51)

A) B) C) D) E)

19

53)

54) Which statement by an employer is consistent with the efficiency wage theory? A) "I pay more than the going rate so that my employees work hard." B) "I pay only enough to attract workers who are at the bottom of the pay scale." C) "I love it when unemployment goes up because that drives down my wage costs." D) "Workers can always find jobs, if only they lower their expectations." E) "Unions have only their current members' interests at heart." Answer: A Explanation:

A) B) C) D) E)

55) In macroeconomic theories of national-income determination, short-run changes in real GDP are typically associated with changes in ________ unemployment. A) frictional B) structural C) cyclical D) voluntary E) efficiency-wage Answer: C Explanation:

55)

A) B) C) D) E)

56) When the total number of unfilled job openings in the economy is equal to the total number of persons unemployed, ________ is zero. A) cyclical unemployment B) frictional unemployment C) involuntary unemployment D) the NAIRU E) structural unemployment Answer: A Explanation:

54)

A) B) C) D) E)

20

56)

57) The concept of "full employment" refers to a situation in which there exists A) an unemployment rate of less than 5%. B) no job vacancies at the time. C) only structural and/or frictional unemployment. D) only involuntary unemployment. E) a measured unemployment rate of zero. Answer: C Explanation:

A) B) C) D) E)

58) The kind of unemployment that results when actual real GDP is less than potential GDP is known as ________ unemployment. A) cyclical B) frictional C) natural D) structural E) voluntary Answer: A Explanation:

59)

A) B) C) D) E)

60) Which of the following statements about frictional unemployment is most accurate? A) The only way to reduce it is to shift the AD curve to the left. B) The only way to reduce it is to shift the AD curve to the right. C) Its source is that unemployed workers and the employers with job vacancies have not yet found each other. D) It exists when only there are no jobs for the unemployed people in the economy. E) Its source is a mismatch between the needs of employers with job vacancies and the unemployed workers. Answer: C Explanation:

58)

A) B) C) D) E)

59) The best description of the cause of "cyclical" unemployment is that A) firms engage in race, gender and sex discrimination in their hiring practices. B) some individuals do not have marketable skills for the jobs that do exist. C) the AD curve shifts to the right. D) the level of overall economic activity falls below its potential level. E) workers often voluntarily quit a job to look for a better job. Answer: D Explanation:

57)

A) B) C) D) E)

21

60)

61) Another name for "frictional" unemployment is A) economic unemployment. B) real-wage unemployment. C) recessional unemployment. D) search unemployment. E) structural unemployment. Answer: D Explanation:

61)

A) B) C) D) E)

62) An unemployed worker can be identified as being "structurally" unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) the worker wants to work only during certain months of the year. E) there is a recession and the worker is laid off. Answer: B Explanation:

A) B) C) D) E)

63) An unemployed worker can be identified as being "cyclically" unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) the worker wants to work only during certain months of the year. E) there is an economic downturn and the worker is laid off. Answer: E Explanation:

63)

A) B) C) D) E)

64) An unemployed worker can be identified as being "frictionally" unemployed if A) minimum wage laws prevent the worker from finding a job. B) the worker has a different set of skills than what is desired by firms. C) the worker quits a job in order to search for a better one. D) the worker wants to work only during certain months of the year. E) there is a recession and the worker is laid off. Answer: C Explanation:

62)

A) B) C) D) E)

22

64)

65) The normal turnover of workers and the usual time it takes to find a satisfactory job causes ________ unemployment to persist even at potential GDP. A) excess B) cyclical C) frictional D) involuntary E) structural Answer: C Explanation:

A) B) C) D) E)

66) Technological changes over time caused workers who in the past produced such things as slide rules, eight-track music tapes, and manual typewriters to become ________ unemployed, at least until they could be re-employed in other industries. A) frictionally B) cyclically C) seasonally D) structurally E) voluntarily Answer: D Explanation:

66)

A) B) C) D) E)

67) Other things being equal, a macroeconomic shock that leads to an inflationary output gap results in A) a decrease in cyclical unemployment. B) a decrease in NAIRU. C) an increase in NAIRU. D) a decrease in frictional unemployment. E) a decrease in structural unemployment. Answer: A Explanation:

65)

A) B) C) D) E)

23

67)

68) Suppose that in PetroLand the oil fields in the western region suddenly stop producing, causing oil companies to shift activities to their fields in the eastern region. This is bound to cause some ________ unemployment in the western region of the country's economy. A) cyclical B) efficiency-wage C) frictional D) structural E) voluntary Answer: D Explanation:

A) B) C) D) E)

69) Other things being equal, when changes in technology cause some industries to decline and other industries to expand the result is A) a decrease in cyclical unemployment. B) a decrease in NAIRU. C) an increase in NAIRU. D) an increase in frictional unemployment. E) an increase in structural unemployment. Answer: E Explanation:

69)

A) B) C) D) E)

70) Other things being equal, improvements in the efficiency of labour markets that make it easier for firms to advertise prospective jobs and which reduce the effort of workers to search for jobs will A) decrease cyclical unemployment. B) decrease frictional unemployment. C) increase frictional unemployment. D) increase structural unemployment. E) increase NAIRU. Answer: B Explanation:

68)

A) B) C) D) E)

24

70)

71) Suppose a free-trade agreement with Central America eliminates all tariffs on imported textiles from those countries. Which type of unemployment will be affected in Canada? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) seasonal unemployment E) hidden unemployment Answer: B Explanation:

A) B) C) D) E)

72) Suppose there are 2000 unemployed textile workers in Quebec and 2000 vacant positions in Alberta oil production. We say that this unemployment is A) cyclical. B) hysteresis. C) efficient. D) structural. E) frictional. Answer: D Explanation:

73)

A) B) C) D) E)

74) Consider Canada's employment insurance (EI) program, which provides benefits to eligible unemployed workers. If the program is designed such that benefits are more generous in regions with higher rates of unemployment, then we can expect that A) cyclical unemployment will increase. B) frictional unemployment will decrease because workers have more time to find a well-suited job. C) the NAIRU will decrease. D) labour markets will adapt to changes more quickly as a result. E) structural unemployment will increase and the NAIRU will be higher than otherwise. Answer: E Explanation:

72)

A) B) C) D) E)

73) Suppose the NAIRU in April, 2010 is 7.2%. If the actual unemployment rate is 8.1%, then A) there is an inflationary gap. B) 0.9 percentage points are due to cyclical factors. C) the sum of frictional and structural unemployment is greater than the NAIRU. D) the NAIRU has increased by 0.9 percentage points. E) cyclical unemployment is 8.1%. Answer: B Explanation:

71)

A) B) C) D) E) 25

74)

The economy in the diagram below begins in long-run equilibrium at E0 .

FIGURE 31-2 75) Refer to Figure 31-2. At E0, the unemployment rate is 5.6%. Therefore, 1) the NAIRU is 5.6%; 2) cyclical unemployment is 5.6%; 3) the economy is at full unemployment. A) 1 only B) 2 only C) 3 only D) 1 and 2 Answer: E Explanation:

75)

E) 1 and 3

A) B) C) D) E)

76) Refer to Figure 31-2. At E0, the unemployment rate is 5.6%. An increase in the price of raw materials shifts the AS curve to AS 1 and a new short-run equilibrium is established at E1 . At E1 , the unemployment rate is 7%. Therefore, A) the NAIRU is 7%. B) the sum of frictional and structural unemployment is 7%. C) cyclical unemployment is 1.4%. D) the economy is at full employment. E) cyclical unemployment is negative. Answer: C Explanation:

A) B) C) D) E)

26

76)

77) Refer to Figure 31-2. Suppose the economy is in a recession at E1 that is very long lasting. As a result, many young workers are unable to enter the labour market for the first time and are unable to gain experience. These workers continue to have higher than average unemployment rates when the recession is over, causing the NAIRU to rise. This is an example of A) discrimination. B) hysteresis. C) inflexible labour markets. D) demographic unemployment. E) voluntary unemployment. Answer: B Explanation:

A) B) C) D) E)

78) Some economists argue that increases in labour-force participation rates by young people and females in the 1970s and 1980s caused A) a decrease in frictional unemployment. B) a decrease in cyclical unemployment. C) a decrease in NAIRU. D) an increase in NAIRU. E) an increase in cyclical unemployment. Answer: D Explanation:

78)

A) B) C) D) E)

79) According to 2011 data, unemployment rates for females are ________ unemployment rates for males for any given age group; and unemployment rates for youths (age 15-24) are ________ unemployment rates for all other age groups. A) equal to; higher than B) higher than; higher than C) lower than; higher than D) higher than; lower than E) lower than; lower than Answer: C Explanation:

77)

A) B) C) D) E)

27

79)

80) Suppose that unemployed workers searching to replace their lost jobs become discouraged and so decide to temporarily give up the search. Such a decision A) increases the NAIRU. B) decreases the NAIRU. C) increases the official unemployment rate. D) decreases the official unemployment rate. E) has no effect on the official unemployment rate. Answer: D Explanation:

A) B) C) D) E)

81) An increase in the rate of aggregate economic growth usually speeds up the rate of change in the structure of labour demand. As a result, we can expect that structural unemployment will ________, and will therefore cause the NAIRU to ________. A) decrease; increase B) decrease; decrease C) remain constant; remain constant D) increase; increase E) increase; decrease Answer: D Explanation:

81)

A) B) C) D) E)

82) Economic models in which the NAIRU can be influenced by changes in the actual rate of unemployment are said to include A) demographic shifts. B) efficiency-wage behaviour. C) hysteresis. D) labour-market clearing. E) rational expectations. Answer: C Explanation:

80)

A) B) C) D) E)

28

82)

83) In macroeconomic models, the idea that NAIRU can be influenced by the actual rate of unemployment is referred to as A) efficiency-wage unemployment. B) hysteresis. C) the market-clearing theory. D) rational expectations. E) the Phillips curve. Answer: B Explanation:

A) B) C) D) E)

84) A good example of an outcome that could lead to "hysteresis" in the labour market is A) new entrants to the labour market have a high rate of unemployment due to technological change. B) new entrants to the labour market have difficulty finding jobs, and as a result have a higher rate of unemployment throughout their working lives. C) unemployment is generated by an increase in the minimum wage. D) a negative supply shock persists. E) a negative demand shock persists. Answer: B Explanation:

84)

A) B) C) D) E)

85) A decrease in the share of the labour force that is unionized may ________ the degree of wage flexibility, which would put ________ pressure on NAIRU. A) increase; upward B) increase; downward C) decrease; upward D) decrease; downward E) have no effect on; no Answer: B Explanation:

83)

A) B) C) D) E)

29

85)

86) If there were an increase in the share of the labour force that is unionized, it would likely lead to ________ wage flexibility, which would ________ the NAIRU. A) more; increase B) more; decrease C) less; increase D) less; decrease E) less; not change Answer: C Explanation:

A) B) C) D) E)

87) The NAIRU is likely to be affected by all of the following EXCEPT A) a demographic shift. B) employment insurance. C) globalization. D) labour-market flexibility. E) recession. Answer: E Explanation:

87)

A) B) C) D) E)

88) In some European countries, labour-market policies make it very costly for firms to lay off or fire workers. Theory and evidence tells us that A) European unemployment is lower because workers are less likely to lose their jobs during an economic downturn. B) these policies have no effect on wages or employment in the long run. C) the European experience is more consistent with market-clearing theories of unemployment than that of Canada or the United States. D) these policies reduce labour-market flexibility and tend to increase unemployment. E) cyclical unemployment will always be higher in these European countries than in Canada or the United States. Answer: D Explanation:

86)

A) B) C) D) E)

30

88)

89) Unemployment rates among workers in the 15-24 age group tend to be ________ the overall unemployment rate. An influx of workers of this age group into the labour force would tend to ________ the NAIRU. A) higher than; increase B) higher than; decrease C) lower than; increase D) lower than; decrease E) the same as; not change Answer: A Explanation:

A) B) C) D) E)

90) The ongoing process of globalization of the world economy has an effect on the NAIRU in Canada. Choose the statement that best describes the likely effect. A) Since globalization has brought net economic benefits to Canada, it follows that the NAIRU must be decreasing. B) Canadian labour markets increasingly need to adjust to changing supply and demand conditions around the world. These ongoing adjustments tend to increase the NAIRU. C) Because Canada is experiencing greater trade with the rest of the world, the increasing demand for exports puts upward pressure on the demand for labour in Canada and thus tends to decrease the NAIRU. D) Canada's labour market is increasingly connected to labour markets in other parts of the world and the NAIRU in Canada tends to adjust to the same levels as those of our trading partners. E) Globalization has meant that Canadian labour markets are less exposed to economic fluctuations elsewhere in the world, which has decreased the NAIRU. Answer: B Explanation:

90)

A) B) C) D) E)

91) As Canada continues to become more integrated with the global economy, and our labour market is increasingly affected by demand and supply conditions elsewhere in the world, we can expect that A) all types of unemployment will certainly fall. B) all types of unemployment will certainly rise. C) government policies to ease the adjustment will have no effect. D) the NAIRU will tend to increase. E) the NAIRU in affected industries will tend to increase. Answer: D Explanation:

89)

A) B) C) D) E)

31

91)

92) Which of the following statements best explains why unemployment rates in European countries have tended to be higher than unemployment rates in Canada or the United States? (Note: this statement refers not to the current recession in Europe but to a longer-term average.) A) European countries have higher-paying jobs than Canada or the U.S., which causes an influx of workers into the labour force, which then increases the unemployment rate. B) Workers in European countries have less skills and training than North American workers and therefore have higher rates of unemployment. C) European countries have experienced more recessionary gaps than Canada or the U.S. and therefore have significantly higher cyclical unemployment. D) Canada and the U.S. have greater labour-market flexibility than European countries. E) The Canadian and the U.S. economies are more heavily unionized than European countries. Answer: D Explanation:

A) B) C) D) E)

93) Unemployment rates in Canada and the United States have been lower than those in Europe for many years. A generally accepted explanation for this trend is that A) unions are more powerful in North America than in Europe. B) social programs are more generous in North America than in Europe. C) employment insurance programs are more generous in North America than in Europe. D) firms are more risk averse in North America than in Europe. E) labour-market flexibility is greater in North America than in Europe. Answer: E Explanation:

92)

A) B) C) D) E)

32

93)

The table below shows real GDP, potential GDP and the unemployment rate for a hypothetical economy. Real GDP (billions of $) 424 429 435 435 438 442 440 449 457

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011

Potential GDP (billions of $) 425 429 433 436 440 442 446 450 453

Unemployment Rate 6.2 6.1 5.8 6.2 6.4 6.1 7.0 6.2 5.9

TABLE 31-2 94) Refer to Table 31-2. What is the NAIRU in this economy? A) 5.9% B) 6.1% C) 6.2% Answer: B Explanation:

94) D) 6.4%

E) 7.0%

A) B) C) D) E)

95) Refer to Table 31-2. In which years is this economy operating at full employment? A) 2004 only B) 2005 only C) 2006 only D) 2004 and 2008 E) 2005 and 2011 Answer: D Explanation:

A) B) C) D) E)

96) Refer to Table 31-2. In which year is the cyclical unemployment equal to 0.3%? A) 2007 B) 2008 C) 2009 D) 2010 Answer: A Explanation:

95)

A) B) C) D) E)

33

96) E) 2011

97) Refer to Table 31-2. The variations in the unemployment rate between 2003 and 2011 are due to variations in A) the NAIRU. B) frictional unemployment. C) structural unemployment. D) potential output. E) the output gap. Answer: E Explanation:

97)

A) B) C) D) E)

The table below shows the%age of the labour force accounted for by males and females over a two-decade period. Assume that real GDP is equal to potential in each of the given years.

Year 1960 1965 1970 1975 1980

% of Labour Force Males 75 70 65 60 55

Females 25 30 35 40 45

TABLE 31-3 98) Refer to Table 31-3. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. What is the economy's NAIRU in 1960? A) 5.0% B) 5.5% C) 5.6% D) 5.7% E) 5.8% Answer: B Explanation:

A) B) C) D) E)

99) Refer to Table 31-3. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. What is the economy's NAIRU in 1975? A) 5.0% B) 5.5% C) 5.6% D) 5.7% E) 5.8% Answer: E Explanation:

98)

A) B) C) D) E)

34

99)

100) Refer to Table 31-3. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. By how much does this economy's NAIRU change between 1960 and 1975? A) it decreases by 1 percentage point B) it remains the same C) it increases by 0.5 percentage point D) it increases by 0.3 percentage point E) it increases by 0.2 percentage point Answer: D Explanation:

A) B) C) D) E)

101) Refer to Table 31-3. Suppose that for each year listed the unemployment rate among males is 5% while it is 7% among females. Which of the following statements correctly describes the change in the NAIRU in this economy between 1960 and 1980? A) Since females account for a smaller percentage of the labour force in all years, the NAIRU is decreasing over time. B) The NAIRU remains constant between 1960 and 1980 because the unemployment rates for males and females remain constant. C) Since females have a higher unemployment rate, the NAIRU increases over time as the female share in the labour force increases. D) Since real GDP is equal to potential GDP in all years, cyclical unemployment is equal to zero, and therefore the NAIRU does not change. E) Since males have a lower unemployment rate, and they make up a larger percentage of the labour force, the NAIRU is decreasing over time. Answer: C Explanation:

101)

A) B) C) D) E)

102) Other things being equal, many economists believe that more generous employment-insurance benefits would A) lower frictional unemployment. B) lower structural unemployment. C) raise structural unemployment. D) raise frictional unemployment. E) have no effect on unemployment. Answer: D Explanation:

100)

A) B) C) D) E)

35

102)

103) Many economists believe that the more strict rules for qualifying for employment-insurance benefits that were introduced by the federal government in the early 1990s led to A) lower cyclical unemployment. B) lower frictional unemployment. C) lower structural unemployment. D) higher structural unemployment. E) higher frictional unemployment. Answer: B Explanation:

A) B) C) D) E)

104) Many economists believe that long-run economic growth is best promoted by ________ structural change, such as with a policy of ________. A) resisting; subsidizing failing industries B) resisting; retraining and relocation grants C) resisting; contractionary monetary policy D) adapting to; assisting retraining and relocation E) adapting to; subsidizing failing industries Answer: D Explanation:

104)

A) B) C) D) E)

105) One motivation for having publicly subsidized retraining programs is to A) reduce structural unemployment. B) reduce cyclical unemployment. C) resist adjustment to technological change. D) encourage employment in low-paying jobs. E) encourage the use of efficiency wages. Answer: A Explanation:

103)

A) B) C) D) E)

36

105)

106) Which of the following would be the most appropriate policy for reducing structural unemployment? A) a combination of tax cuts and increased government spending B) a decrease in the money supply C) an increase in the money supply D) increased benefits for workers covered by employment insurance E) introduction of programs for the retraining and relocation of labour Answer: E Explanation:

A) B) C) D) E)

107) Which of the following would be the most appropriate policy for reducing cyclical unemployment? A) a combination of tax cuts and increased government spending B) a decrease in the money supply C) increased benefits for workers covered by employment insurance D) reduced benefits for workers covered by employment insurance E) introduction of programs for the retraining and relocation of labour Answer: A Explanation:

107)

A) B) C) D) E)

108) Which of the following policies could the government implement to reduce cyclical unemployment? A) retraining programs for chronically unemployed people B) a national "job bank" listing available jobs throughout the country C) relocation allowances to move unemployed people around the country D) expansionary monetary policy E) contractionary monetary policy Answer: D Explanation:

106)

A) B) C) D) E)

37

108)

109) Which of the following policies could the government implement to reduce frictional unemployment? A) retraining programs for chronically unemployed people B) a national "job bank" listing available jobs throughout the country C) relocation allowances to move unemployed people around the country D) expansionary monetary policy E) contractionary monetary policy Answer: B Explanation:

A) B) C) D) E)

110) Which of the following best explains why a certain amount of unemployment may be socially desirable? A) When some workers become unemployed it provides a chance for others in the labour force to become employed. B) Unemployed workers are able to benefit from employment insurance. C) The time spent unemployed by the worker is valuable for finding the most appropriate match with firms. D) A pool of unemployed workers drives down the average wage in the economy, and keeps workers from becoming greedy. E) A pool of unemployed workers provides an incentive to those employed to remain productive. Answer: C Explanation:

110)

A) B) C) D) E)

111) Suppose the Canadian government implements a new program to provide training to unemployed workers. The government is likely trying to reduce A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. E) the gross flow of people out of unemployment. Answer: B Explanation:

109)

A) B) C) D) E)

38

111)

112) Theory suggests that frictional unemployment in Canada will decrease if A) workers have higher levels of education and training. B) labour-market flexibility in Canada decreases. C) the benefits received under the employment-insurance system have become less generous. D) the labour-force participation rate for men falls. E) the labour-force participation rate for women falls. Answer: C Explanation:

A) B) C) D) E)

39

112)

The economy in the diagram below begins in long-run equilibrium at E0 .

FIGURE 31-2 113) Refer to Figure 31-2. Suppose the economy is in a short-run equilibrium at E1 after a negative supply shock. How will cyclical unemployment be reduced in the absence of any government policy intervention? A) Cyclical unemployment will be reduced when the labour market becomes more flexible and can adjust to the changes in the supply of and demand for labour. B) The excess supply of labour at E1 will eventually put downward pressure on wages, and AS will shift back to AS0 and full employment at E0. C) Cyclical unemployment will only be reduced when AD grows such that AD shifts up to AD1 and full employment at E2 . D) A new NAIRU will be established at E1 and cyclical unemployment will drop to zero. E) The excess supply of labour at E1 will eventually cause an increase in government purchases and AD will shift up to AD1 and full employment at E2 . Answer: B Explanation:

A) B) C) D) E)

40

113)

114) Refer to Figure 31-2. Suppose the economy is in a short-run equilibrium at E1 after a negative

114)

aggregate supply shock. If the government's policy objective is to reduce unemployment, which of the following policies would be appropriate? A) Increase personal income-tax rates. B) Provincial governments increase the minimum wage in each province. C) The Bank of Canada sells large amounts of securities to Canadian financial institutions. D) The Bank of Canada raises the target for the overnight interest rate. E) The federal government initiates a highway infrastructure renewal program. Answer: E Explanation:

A) B) C) D) E)

115) Refer to Figure 31-2. Suppose the economy is in a short-run equilibrium at E1 after a negative supply shock. Cyclical unemployment at E1 can be reduced by A) an expansionary monetary policy that shifts the AD curve to AD1 and a new equilibrium at E2 . B) reducing government purchases to cause the AD curve to shift to AD 1 and a new equilibrium at E2 . C) increasing taxes to cause the AD curve to shift to AD1 and a new equilibrium at E2. D) a contractionary monetary policy that shifts the AS curve back to AS0, returning the economy to equilibrium at E0 . E) expanding education and training programs for unemployed workers. Answer: A Explanation:

A) B) C) D) E)

41

115)

Answer Key Testname: UNTITLED31

1) E 2) E 3) B 4) B 5) A 6) E 7) A 8) B 9) B 10) B 11) C 12) E 13) D 14) B 15) D 16) C 17) E 18) E 19) B 20) C 21) A 22) E 23) C 24) B 25) A 26) A 27) A 28) E 29) A 30) E 31) B 32) D 33) D 34) B 35) B 36) D 37) D 38) E 39) C 40) D 41) C 42) C 43) B 44) D 45) B 46) A 47) A 48) C 49) A 50) C 42

Answer Key Testname: UNTITLED31

51) E 52) E 53) B 54) A 55) C 56) A 57) C 58) A 59) D 60) C 61) D 62) B 63) E 64) C 65) C 66) D 67) A 68) D 69) E 70) B 71) B 72) D 73) B 74) E 75) E 76) C 77) B 78) D 79) C 80) D 81) D 82) C 83) B 84) B 85) B 86) C 87) E 88) D 89) A 90) B 91) D 92) D 93) E 94) B 95) D 96) A 97) E 98) B 99) E 100) D 43

Answer Key Testname: UNTITLED31

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115)

C D B D A E A D B C B C B E A

44

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) What is the difference between the government's debt and the government's deficit? A) The debt is the accumulation of past deficits whereas the deficit is the annual shortfall between revenues and disbursements. B) The debt is the annual shortfall of revenues minus disbursements whereas the deficit is the accumulation of past debts. C) The debt is the amount the government pays in interest payments whereas the deficit has not yet incurred interest charges. D) The debt is the amount payable to the Bank of Canada whereas the deficit is the annual shortfall of revenue minus disbursements. E) The debt is the difference between tax revenues and government expenditures whereas the deficit is the difference between tax revenues and borrowing. Answer: A Explanation:

A) B) C) D) E)

2) A simple equation describing the government's budget constraint is A) government expenditure = tax revenue - borrowing. B) government expenditure = tax revenue + borrowing. C) government expenditure = tax revenue + debt-service payments. D) tax revenue = government expenditure + borrowing. E) tax revenue = borrowing - government expenditure. Answer: B Explanation:

1)

A) B) C) D) E)

1

2)

3) Consider the following variables: G = government purchases i = interest rate on government debt D = stock of government debt T = net tax revenue The government's budget constraint can be expressed as A) (G + iD) = borrowing - T B) (G + iD) - T = borrowing C) (G + iD) + T = borrowing D) G - T - (iD) = borrowing E) (G - iD) = borrowing + T Answer: B Explanation:

A) B) C) D) E)

4) Consider the following variables: G = government purchases i = interest rate on government debt D = stock of government debt T = net tax revenue The government's budget deficit can be expressed as A) ΔD = (G + iD) - T B) ΔD = (G - iD) + T C) deficit = D - (G + iD) + T D) deficit = D - T + (G + iD) E) T = ΔD - (G + iD) Answer: A Explanation:

4)

A) B) C) D) E)

5) In any given year, the government's debt-service payments are A) equal to the annual budget deficit. B) equal to the annual primary budget deficit. C) the interest payments on the outstanding stock of government debt. D) not related to the government deficit. E) not required unless the debt is held by foreigners. Answer: C Explanation:

3)

A) B) C) D) E)

2

5)

6) In any given year, the government's debt-service payments are equal to A) (fiscal borrowing) × (the interest rate) B) (government spending) × (the interest rate) C) (government spending - tax revenue) × (the interest rate) D) (total outstanding government debt) × (the interest rate) E) (government spending + tax revenue) × (the interest rate) Answer: D Explanation:

A) B) C) D) E)

7) Consider the government's budget constraint. The accumulated stock of government debt will begin to fall A) if the government's debt-service payments are zero. B) if the government does not borrow money. C) if the growth rate of real GDP is higher than the real interest rate. D) when the government's annual budget is in deficit. E) when the government's annual budget is in surplus. Answer: E Explanation:

8)

A) B) C) D) E)

9) Do we get a useful and meaningful statistic by dividing the national debt by the GDP? A) No — we are essentially "dividing apples by oranges," which is unhelpful. B) No — the GDP is not a meaningful measure of the well-being of the economy. C) Yes — we can then see how much of the national debt is owed by each individual citizen. D) Yes — we can see the burden of the debt in relation to the size of the economy. E) No — dividing a stock by a flow can never be sensible. Answer: D Explanation:

7)

A) B) C) D) E)

8) The government's annual primary budget deficit is equal to the A) accumulation of government borrowing. B) decrease in the stock of government debt during the course of a year. C) excess of government's program expenditures over tax revenues in a given fiscal year. D) total amount of government spending on program expenses, personnel, and capital outlays. E) excess of current revenue over current expenditure. Answer: C Explanation:

6)

A) B) C) D) E) 3

9)

10) The government's primary budget deficit (or surplus) is the A) non-interest expenditures and interest payments. B) sum of total government expenditures and revenues. C) sum of interest payments and revenues. D) total budget deficit between two fiscal years. E) total budget deficit (or surplus) excluding debt-service payments. Answer: E Explanation:

A) B) C) D) E)

11) The government's primary budget deficit (or surplus) is the difference between the A) non-interest expenditures and interest payments. B) interest payments and revenues. C) total budget deficit (or surplus) and debt-service payments. D) total budget deficit (or surplus) between one year and the next. E) total government expenditures and revenues. Answer: C Explanation:

12)

A) B) C) D) E)

13) Consider the federal government's budget constraint. If the government's total budget deficit is $27 billion and its debt-service payments are $29 billion, then its A) primary budget deficit is $2 billion. B) primary budget deficit is $56 billion. C) primary budget surplus is $2 billion. D) primary budget surplus is $56 billion. E) Not enough information to determine. Answer: C Explanation:

11)

A) B) C) D) E)

12) The federal government's "primary budget deficit" A) includes domestic borrowing but excludes foreign borrowing. B) excludes debt-service payments. C) is the amount of government borrowing in a fiscal year. D) is the amount of tax revenue minus the amount of interest paid on the public debt. E) is the most important indicator of the level of government spending. Answer: B Explanation:

10)

A) B) C) D) E) 4

13)

14) Suppose that in Year 2 there was a higher federal budget deficit than in Year 1. This could be explained by ________ in Year 2. A) lower real interest rates. B) higher real GDP (with fiscal policy constant) C) lower real GDP (with fiscal policy constant) D) lower government expenditure (with real GDP constant) E) a lower primary budget surplus Answer: C Explanation:

A) B) C) D) E)

15) The extent to which tax revenues are able to finance the discretionary part of total government expenditure is best measured by the A) cyclically adjusted deficit/surplus. B) government's current fiscal policy. C) debt-to-GDP ratio. D) government's primary budget deficit or surplus. E) tax-to-GDP ratio. Answer: D Explanation:

15)

A) B) C) D) E)

16) When a government changes its fiscal policy, it is A) changing the exchange rates to change national income. B) increasing the money supply to increase national income. C) changing government spending and/or tax rates to achieve some objective D) using government spending and taxes together with changing the money supply in order to achieve full employment. E) buying and selling private bonds to increase or decrease the overnight lending rate. Answer: C Explanation:

14)

A) B) C) D) E)

5

16)

17) If we want to know whether tax revenues are sufficient to finance the discretionary part of government expenditure, which of the following measures should we analyze? A) the cyclically adjusted deficit/surplus B) the government's budget constraint C) the debt-to-GDP ratio D) the government's primary deficit/surplus E) the interest rate on government bonds compared to the growth rate of real GDP Answer: D Explanation:

A) B) C) D) E)

18) If voters want to know how their tax dollars are being spent and how the federal government is managing its current spending, they should look at A) federal/provincial tax transfers. B) changes in the money supply. C) the primary budget balance. D) the overall budget balance. E) the inflation adjusted deficit. Answer: C Explanation:

18)

A) B) C) D) E)

19) Suppose the stock of government debt in Canada at the end of one fiscal year is $475 billion. If the stock of debt falls to $461 billion by the end of the next fiscal year, then we know that in that year A) the government had a primary budget surplus of $14 billion. B) the government had a primary budget deficit of $14 billion. C) tax revenues increased by $14 billion. D) the government had an annual budget surplus of $14 billion. E) debt-service payments fell by $14 billion. Answer: D Explanation:

17)

A) B) C) D) E)

6

19)

20) Suppose the stock of government debt in Canada at the end of one fiscal year is $475 billion. If the stock of debt falls to $461 billion by the end of the next fiscal year, and debt-service payments during that year were $38 billion, then we know that the government had A) a primary budget surplus of $52 billion. B) a primary budget surplus of $14 billion. C) a primary budget surplus of $24 billion. D) an annual budget surplus of $38 billion. E) an annual budget deficit of $14 billion. Answer: A Explanation:

A) B) C) D) E)

21) Suppose the stock of government debt in Canada at the end of one fiscal year is $475 billion. If the stock of debt rises to $482 billion by the end of the next fiscal year, then we know that in that year A) debt-service payments rose by $7 billion. B) the government had a primary budget surplus of $7 billion. C) the government had an annual budget deficit of $7 billion. D) the government had a primary budget deficit of $7 billion. E) tax revenues decreased by $7 billion. Answer: C Explanation:

21)

A) B) C) D) E)

22) Suppose the stock of government debt in Canada at the end of one fiscal year (Year 1) is $475 billion. During the following year (Year 2), government purchases were $180 billion, debt-service payments were $25 billion, and net tax revenues were $208 billion. What is the stock of debt at the end of Year 2? A) $422 billion B) $457 billion C) $472 billion D) $475 billion E) $478 billion Answer: C Explanation:

20)

A) B) C) D) E)

7

22)

23) Suppose during one fiscal year, government purchases are $195 billion, debt-service payments are $22 billion and net tax revenues are $208 billion. What is the annual budget deficit/surplus? A) budget surplus of $22 billion B) budget deficit of $13 billion C) budget surplus of $13 billion D) budget deficit of $9 billion E) budget surplus of $9 billion Answer: D Explanation:

A) B) C) D) E)

24) Suppose during one fiscal year, government purchases are $195 billion, debt-service payments are $22 billion and net tax revenues are $208 billion. What is the government's primary budget deficit/surplus? A) primary budget surplus of $22 billion B) primary budget deficit of $13 billion C) primary budget surplus of $13 billion D) primary budget deficit of $9 billion E) primary budget surplus of $9 billion Answer: C Explanation:

24)

A) B) C) D) E)

25) If the government's tax revenues are less than its total spending (including debt-service payments), then we know 1) the government has an annual budget deficit; 2) the government has a primary budget deficit; 3) the stock of government debt is increasing. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 1 and 3 Answer: E Explanation:

23)

A) B) C) D) E)

8

25)

26) If the government's total budget deficit is $24 billion and its debt-service payments are $20 billion, then its ________ is $4 billion. A) cyclically adjusted deficit B) primary budget deficit C) primary budget surplus D) government expenditure E) total tax revenue Answer: B Explanation:

A) B) C) D) E)

27) If the government's total budget surplus is $10 billion and its debt-service payments are $8 billion, then its primary budget surplus is A) $2 billion. B) $8 billion. C) $10 billion. D) $18 billion. E) -$2 billion. Answer: D Explanation:

27)

A) B) C) D) E)

28) Consider the federal government's budget constraint. Suppose total government expenditure (government purchases, G, plus debt-service payments, i × D) is $500 billion and net tax revenues, T, is $481 billion. In this case, A) the annual budget surplus is $19 billion and the debt can be reduced by this amount. B) the primary budget surplus is $19 billion and the debt can be reduced by this amount. C) it is not possible to determine the deficit or surplus situation of the government because we do not know the value of the debt-service payments. D) the primary budget deficit is $19 billion and the government must borrow this amount. E) the annual budget deficit is $19 billion and the government must borrow this amount. Answer: E Explanation:

26)

A) B) C) D) E)

9

28)

29) The stock of government debt will continue to rise unless the government A) increases its taxes. B) decreases its expenditures. C) decreases the size of its transfers. D) runs a budget surplus. E) runs a budget deficit. Answer: D Explanation:

A) B) C) D) E)

30) The government's current spending and taxation policies cannot affect the A) primary budget deficit. B) annual budget deficit. C) the size of its transfers. D) change in the stock of government debt. E) the existing stock of government debt. Answer: E Explanation:

30)

A) B) C) D) E)

31) Consider two economies, A and B. Economy A has a stock of government debt equal to $800 billion, while Economy B has a stock of government debt equal to $22 billion. In order to determine the economic importance of these government debt loads in the respective economies, it is necessary to know ________ for each economy. A) the level of government expenditures B) the net tax rate C) the primary budget deficit D) the GDP E) the stance of monetary policy Answer: D Explanation:

29)

A) B) C) D) E)

10

31)

32) The Canadian federal debt-to-GDP ratio reached a post Second World War high of about ________% in 1996. By 2008-2009, before the onset of the recent recession, the debt-to GDP ratio had ________%. A) 80; risen to 110 B) 50; fallen to 0 C) 40; fallen to less than 10 D) 110; fallen to 50 E) 70; fallen to about 30 Answer: E Explanation:

A) B) C) D) E)

33) The Canadian federal government's net debt as a percentage of GDP is forecast to be about 30% by 2015. The historic high for this ratio in Canada was A) 70% in 1996 due to large and persistent deficits throughout the 1970s. B) 70% in 1982 due to the OPEC oil shock in the mid 1970s and the severe inflation that followed. C) 110% in 1946 as a result of Canada's participation in the Second World War. D) 52% in 2012 due to the fiscal expansion following the global financial crisis. E) 90% in the late 1960s due to massive infrastructure projects in progress across Canada. Answer: C Explanation:

33)

A) B) C) D) E)

34) Consider two economies, A and B. Economy A has a stock of government debt equal to $800 billion and a debt-to-GDP ratio of 10%. Economy B has a stock of government debt equal to $22 billion and a debt-to-GDP ratio of 80%. What is the GDP for each economy? A) Economy A: GDP = $8 trillion Economy B: GDP = $27.5 billion B) Economy A: GDP = $80 billion Economy B: GDP = $18.7 billion C) Economy A: GDP = $80 trillion Economy B: GDP = $275 billion D) Economy A: GDP = $800 billion Economy B: GDP = $22 billion E) Economy A: GDP = $8 trillion Economy B: GDP = $2.75 billion Answer: A Explanation:

32)

A) B) C) D) E)

11

34)

35) The Canadian federal government's debt-to-GDP ratio climbed steadily from A) 1939 to the late 1980s. B) 1960 to the late 1990s. C) 1975 to the mid 1990s. D) 1995 to 2009. E) 2000 to 2009. Answer: C Explanation:

A) B) C) D) E)

36) In every year between 1998 and 2008, the Canadian federal government had a A) budget deficit, indicating that even deep cuts in government spending were not sufficient to alleviate the problem. B) primary deficit, indicating that tax revenues were insufficient to cover discretionary government expenditures. C) budget deficit, which contributed to a growing stock of government debt. D) primary surplus but overall deficit, indicating that tax revenues were more than sufficient to cover discretionary government expenditures. E) budget surplus, indicating that tax revenues were more than sufficient to cover total government expenditures. Answer: E Explanation:

37)

A) B) C) D) E)

38) The budget deficit function is graphed with the budget deficit on the vertical axis and ________ on the horizontal axis, and is ________. A) real GDP; downward sloping B) real GDP; upward sloping C) the interest rate; downward sloping D) the interest rate; upward sloping E) the interest rate; horizontal Answer: A Explanation:

36)

A) B) C) D) E)

37) The Canadian federal government had a budget surplus each year from ________ until 2008. A) 1945 B) 1967 C) 1987 D) 1998 E) 2000 Answer: D Explanation:

35)

A) B) C) D) E) 12

38)

39) Consider the government's budget deficit function. With an unchanged fiscal policy by government, an increase in GDP tends to ________ net tax revenues and thus ________ the budget deficit. A) raise; raise B) raise; lower C) lower; raise D) lower; lower E) lower; leave unchanged Answer: B Explanation:

A) B) C) D) E)

40) Consider the budget deficit function. With an unchanged fiscal policy by government, an increase in national income causes ________ the budget deficit function. A) an upward movement along B) a downward movement along C) an upward shift of D) a downward shift of E) a downward rotation in Answer: B Explanation:

40)

A) B) C) D) E)

41) Consider the government's budget deficit function over Years 1 and 2. Suppose that in Year 2 there was a lower federal budget deficit than in Year 1. This could be explained by ________ in Year 2. A) higher government expenditures (with constant real GDP) B) higher real GDP (with constant fiscal policy) C) lower real GDP (with constant fiscal policy) D) a higher stock of government debt E) an upward shift of the budget deficit function Answer: B Explanation:

39)

A) B) C) D) E)

13

41)

42) Consider the government's budget deficit function. Other things being equal, an autonomous increase in government purchases causes ________ the budget deficit function. A) an upward movement along B) a downward movement along C) an upward shift of D) a downward shift of E) no change in Answer: C Explanation:

A) B) C) D) E)

43) Consider the government's budget deficit function, graphed with the budget deficit on the vertical axis and real GDP on the horizontal axis. The vertical position (or height) of the budget deficit function is determined by A) the government's fiscal policies. B) nominal GDP. C) the interest rate times taxes. D) the purchase and sale of government securities on the open market. E) the stock of government debt minus government spending. Answer: A Explanation:

43)

A) B) C) D) E)

44) Consider the government's budget deficit function, graphed with dollars on the vertical axis and real GDP on the horizontal axis. This function is downward sloping because as real GDP A) falls, the budget deficit function shifts down. B) falls, tax revenues rise, decreasing the deficit or increasing the surplus. C) rises, tax revenues rise, decreasing the deficit or increasing the surplus. D) rises, tax revenues fall, decreasing the deficit or increasing the surplus. E) rises, it leads to increasing debt-service payments. Answer: C Explanation:

42)

A) B) C) D) E)

14

44)

45) If the economy goes into a recession, a government budget deficit is most likely to A) increase, because government expenditures and tax revenues will both rise. B) increase, because government expenditures will rise and tax revenues will decline. C) remain unchanged, although there will be a primary budget surplus. D) remain unchanged, because changes in government expenditures and tax revenues will balance each other out. E) decrease, because government expenditures will decrease and tax revenues will rise. Answer: B Explanation:

A) B) C) D) E)

46) Suppose the government's budget deficit falls from one year to the next, but there has been no change in the government's fiscal policy. The change in the budget deficit can be explained by A) a rising real interest rate. B) a change in the stance of fiscal policy. C) a rising real GDP. D) a rise in the cyclically adjusted deficit. E) a rise in the primary budget deficit. Answer: C Explanation:

45)

A) B) C) D) E)

15

46)

The diagram below shows the budget deficit function for a government in a hypothetical economy.

FIGURE 32-1 47) Refer to Figure 32-1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A on the graph. Which of the following is consistent with a move from point A to point B? A) implementation of an expansionary fiscal policy B) implementation of a contractionary fiscal policy C) implementation of a contractionary monetary policy D) the economy entering into a recession E) the economy entering into a boom Answer: E Explanation:

A) B) C) D) E)

16

47)

48) Refer to Figure 32-1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements an expansionary fiscal policy by decreasing lump-sum taxes, then A) the budget deficit function would shift up. B) the budget deficit function would shift down. C) the budget deficit function would become steeper. D) the budget deficit function would become flatter. E) the size of the budget deficit would decrease as we move from point A to point B. Answer: A Explanation:

A) B) C) D) E)

49) Refer to Figure 32-1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements an expansionary fiscal policy by increasing its purchases of goods and services, then A) the budget deficit function would shift down. B) the budget deficit function would become steeper. C) the budget deficit function would become flatter. D) the budget deficit function would shift up. E) the size of the budget deficit would decrease as we move from point A to point B. Answer: D Explanation:

49)

A) B) C) D) E)

50) Refer to Figure 32-1. Initially, suppose that real GDP is $100 million and the budget deficit is $4 million, as shown by point A. If the government implements a contractionary fiscal policy by decreasing its purchases of goods and services, then A) the budget deficit function would shift up. B) the budget deficit function would shift down. C) the budget deficit function would become steeper. D) the budget deficit function would become flatter. E) the size of the budget deficit would decrease as we move from point A to point B. Answer: B Explanation:

48)

A) B) C) D) E)

17

50)

51) Refer to Figure 32-1. For the given budget deficit function in the diagram, the government will have a budget surplus if 1) real GDP increases beyond $X million 2) the interest rate on government debt decreases 3) government expenditure decreases A) 1 only B) 2 only C) 3 only D) 1 or 2 or 3 E) 2 or 3 only Answer: A Explanation:

51)

A) B) C) D) E)

The diagram below shows two budget deficit functions for a hypothetical economy.

FIGURE 32-2 52) Refer to Figure 32-2. Initially, suppose that real GDP is $100 million and the budget deficit is $14 million, as shown by point A. Which of the following events could result in a move from point A to point B? A) the implementation of an expansionary fiscal policy B) the implementation of a contractionary fiscal policy C) the implementation of an expansionary monetary policy D) the implementation of a contractionary monetary policy E) the economy entering into a boom Answer: B Explanation:

A) B) C) D) E)

18

52)

53) Refer to Figure 32-2. Initially, suppose that real GDP is $100 million and the budget deficit is $14 million, as shown by point A. Which of the following events could result in a move from point A to point C? A) a fiscal expansion and an increase in GDP B) a fiscal contraction and an increase in GDP C) a fiscal expansion and a decrease in GDP D) a fiscal contraction and a decrease in GDP E) an increase in GDP with no change in fiscal policy Answer: E Explanation:

A) B) C) D) E)

54) Refer to Figure 32-2. Initially, suppose the economy is at point A. If the government were to then implement a fiscal expansion, the cyclically adjusted budget deficit would be A) $4 million. B) $6 million. C) $7 million. D) $10 million. E) Insufficient information to know. Answer: E Explanation:

54)

A) B) C) D) E)

55) Refer to Figure 32-2. Initially, suppose the economy is at point A on budget deficit function B0 . If the level of potential output were 300, the cyclically adjusted budget deficit would be A) $2 million. B) $14 million. C) measured by the vertical distance between the horizontal axis and B0 (at real GDP = 300). D) measured by the vertical distance between point A and the budget deficit that would exist at real GDP = 300 million. E) Insufficient information to know. Answer: C Explanation:

53)

A) B) C) D) E)

19

55)

56) Refer to Figure 32-2. Initially, suppose the economy is at point A on budget deficit function B0 . If

56)

the level of potential output were 400, the cyclically adjusted budget deficit would be A) $14 million. B) $4 million. C) negative. D) -$10 million. E) $0. Answer: B Explanation:

A) B) C) D) E)

57) The government's cyclically adjusted budget deficit (CAD) is the budget deficit that would exist A) if real GDP were equal to potential GDP. B) with taxes and expenditures measured at the equilibrium level of GDP. C) if policy were changed to eliminate the business cycle. D) if tax rates were set to maximize tax revenues. E) if there were no discretionary fiscal interventions in the economy. Answer: A Explanation:

A) B) C) D) E)

58) The best measure of the change in the stance of a government's fiscal policy is A) the actual budget deficit. B) the cyclically adjusted deficit. C) the change in the cyclically adjusted deficit. D) the change in the actual budget deficit. E) the change in the primary budget deficit. Answer: C Explanation:

57)

A) B) C) D) E)

20

58)

59) The government's cyclically adjusted budget deficit (CAD) adjusts for A) any primary budget surplus or deficit incurred by the federal government. B) changes in investment to smooth fluctuations in national income. C) changes in spending or tax revenues caused by deviations in national income from potential output. D) increases in the money supply in excess of the real growth in the economy. E) interest rate changes that affect the absolute amount of debt-service payments. Answer: C Explanation:

A) B) C) D) E)

60) Suppose the government's actual budget deficit is equal to the cyclically adjusted budget deficit. Then it must be the case that A) the primary budget deficit is zero. B) the overall government budget is balanced. C) the debt-to-GDP ratio is stable. D) real GDP is equal to potential GDP. E) the government is not reporting all of its expenses. Answer: D Explanation:

60)

A) B) C) D) E)

61) If the economy goes into a recession, the cyclically adjusted deficit is most likely to A) increase, because government expenditures and tax revenues will both rise. B) increase, because government expenditures will rise and tax revenues will decline. C) remain unchanged, although there will be a primary budget surplus. D) remain unchanged, unless government actively changes its fiscal policy. E) decrease, because government expenditures will decrease and tax revenues will rise. Answer: D Explanation:

59)

A) B) C) D) E)

21

61)

The data below provides the Actual and Cyclically Adjusted Deficits (CAD), as a percentage of real GDP, for Canada between 1999 and 2010. Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Actual -1.6 -3.0 -0.7 0.1 0.1 -1.0 -1.5 -1.6 -1.4 0.4 4.6 5.3

CAD -2.0 -1.9 -0.9 -0.8 -0.7 -1.0 -1.0 -1.0 -0.9 0.1 -1.0 0.2

TABLE 32-1 62) Refer to Table 32-1. Consider the year 2008-2010. The fact that the actual budget deficit in each year was greater than the CAD reflects the fact that A) output was equal to potential. B) fiscal policy was contractionary over that time. C) fiscal policy was expansionary over that time. D) actual GDP was less than potential in each of those years. E) actual GDP was greater than potential in each of those years. Answer: D Explanation:

A) B) C) D) E)

63) Refer to Table 32-1. Consider the year 2004. Based on the data in the table we can conclude that A) fiscal policy was expansionary in that year. B) real output was less than potential in that year. C) real output was equal to potential in that year. D) real output was greater than potential in that year. E) monetary policy was expansionary in that year. Answer: C Explanation:

62)

A) B) C) D) E)

22

63)

64) Refer to Table 32-1. Based on the data in the table, in which of the following years was output greater than potential? A) 1999 B) 2004 C) 2000 D) 2008 E) 2010 Answer: C Explanation:

A) B) C) D) E)

65) Refer to Table 32-1. Based on the data in the table, over which of the following intervals was fiscal policy expansionary? A) 1999-2003 because the CAD is falling B) 1999-2003 because the CAD is rising C) 2008-2010 because the actual deficit is greater than zero D) 2004-2007 because the CAD is fairly stable Answer: B Explanation:

65)

A) B) C) D)

66) Consider the following variables, defined as follows: d = debt-to-GDP ratio x = primary budget deficit as a percentage of GDP r = real interest rate on government bonds g = growth rate of real GDP Which of the following expressions correctly describes the change in the debt-to-GDP ratio? A) Δd = x + (r - g) + d B) Δd = x + (r - g) × d C) Δd = x(r - g) + d D) Δd = x(g - r) - d E) Δd = x + (g - r) × d Answer: B Explanation:

64)

A) B) C) D) E)

23

66)

67) Consider a government with a positive stock of debt. If the growth rate of real GDP exceeds the real rate of interest on government bonds, then to keep the debt-to-GDP ratio constant the A) government must have a primary budget deficit. B) government must have a primary budget surplus. C) government must implement an expansionary fiscal policy. D) money supply should be increased at a constant rate. E) nominal interest rate must be constant. Answer: A Explanation:

A) B) C) D) E)

68) Consider a government with a positive stock of debt, and suppose the real interest rate on government bonds equals the rate of growth of real GDP. In this case, the government's debt-to-GDP ratio will rise only if A) the debt-to-GDP ratio is already high. B) the primary budget surplus exceeds the overall budget surplus. C) the real interest rate is high. D) there is an overall budget deficit. E) there is a primary budget deficit. Answer: E Explanation:

68)

A) B) C) D) E)

69) Consider changes in the government's debt-to-GDP ratio. Suppose that over a one year period the government has a primary budget surplus, and the real interest rate on government bonds is higher than the growth rate of real GDP. What is the effect on the debt-to-GDP ratio? A) it will rise B) it will fall C) uncertain - it is necessary to know the relative size of the different effects D) it will remain stable - the two effects cancel each other out Answer: C Explanation:

67)

A) B) C) D)

24

69)

70) Suppose the real interest rate on government bonds is 5% while the growth rate of real GDP is 4%, and that the government's current debt-to-GDP ratio is 30%. If the government has a primary budget balance of zero in the current year, the debt-to-GDP ratio will A) rise by 3.0 percentage points. B) rise by 0.3 percentage points. C) remain unchanged. D) fall by 3.0 percentage points. E) fall by 0.3 percentage points. Answer: B Explanation:

A) B) C) D) E)

71) Suppose the change in the government's debt-to-GDP ratio in a given year is 0.026. This figure tells us that the government's debt-to-GDP ratio has A) fallen by 0.026%. B) risen by 0.026%. C) risen by 2.6 percentage points. D) fallen by 2.6 percentage points. E) risen by 0.026 percentage points. Answer: C Explanation:

71)

A) B) C) D) E)

72) Suppose the government's debt-to-GDP ratio on January 1 of Year 1 is 32%. The change in the debt-to-GDP ratio during Year 1 is -0.037. On January 1 of Year 2 the government's debt-to-GDP ratio is A) 31.963%. B) 32. 037%. C) 28.3%. D) 35.7%. E) Not enough information to determine. Answer: C Explanation:

70)

A) B) C) D) E)

25

72)

73) Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 2% - growth rate of real GDP = 3% - current debt-to-GDP ratio = 50% - primary budget deficit = 0 Over this one-year period the debt-to-GDP ratio will have A) remained unchanged. B) risen by 50%. C) fallen by 50%. D) risen by 0.5 percentage points. E) fallen by 0.5 percentage points. Answer: E Explanation:

A) B) C) D) E)

74) Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3% - growth rate of real GDP = 1% - current debt-to-GDP ratio = 40% - primary budget deficit as a percentage of GDP = 2% Over this one-year period the debt-to-GDP ratio will have risen by A) 82 percentage points. B) 8.2 percentage points. C) 0.82 percentage points. D) 2.8 percentage points. E) 0.28 percentage points. Answer: D Explanation:

73)

A) B) C) D) E)

26

74)

75) Consider the following data about government debt and deficit in a given year: - real interest rate on government bonds = 3% - growth rate of real GDP = 3% - current debt-to-GDP ratio = 25% - primary budget surplus as a percentage of GDP = 2% Over this one-year period the debt-to-GDP ratio will have A) remained unchanged. B) risen by 0.2 percentage points. C) fallen by 0.2 percentage points. D) risen by 2 percentage points. E) fallen by 2 percentage points. Answer: E Explanation:

A) B) C) D) E)

76) Suppose that the real rate of interest on government bonds is 4% and the growth rate of real GDP is 2%. If the government has a positive stock of outstanding debt and its policy objective is to hold the debt-to-GDP ratio constant at its current level, it must A) eliminate the overall deficit. B) run an annually balanced budget. C) run a cyclically balanced budget. D) run a primary budget deficit. E) run a primary budget surplus. Answer: E Explanation:

76)

A) B) C) D) E)

77) Suppose the government's objective is to hold its debt-to-GDP ratio constant at its current level of 30%. If the real interest rate on government bonds is 4% and the growth rate of real GDP is 2%, the government must A) run a primary budget deficit of 0.6% of GDP. B) run an overall budget deficit of 6.0% of GDP. C) run an overall budget surplus of 6.0% of GDP. D) run a primary budget surplus of 0.6% of GDP. E) balance the overall budget. Answer: D Explanation:

75)

A) B) C) D) E)

27

77)

78) Suppose that the real rate of interest is 3% and the growth rate of real GDP is 1%. If the government has a positive stock of outstanding debt and its goal is to hold the debt-to-GDP ratio constant at its current level, then it A) must run a cyclically balanced budget. B) must run an annually balanced budget. C) must run a primary budget deficit. D) must run a primary budget surplus. E) must eliminate the overall deficit. Answer: D Explanation:

A) B) C) D) E)

79) Consider a government with an outstanding stock of public debt. If, in any given year, the government has a primary budget surplus and the real interest rate on government bonds is less than the growth rate of real GDP, then A) debt-service payments will be eliminated. B) the debt-to-GDP ratio is certainly negative. C) the debt-to-GDP ratio will certainly rise. D) the debt-to-GDP ratio will certainly fall. E) real GDP will certainly rise. Answer: D Explanation:

79)

A) B) C) D) E)

80) Consider a government with an outstanding stock of public debt. If, in any given year, the government has a primary budget surplus and the real interest rate on government bonds is more than the growth rate of real GDP, then A) the debt-to-GDP ratio will certainly fall. B) debt-service payments will be eliminated. C) the debt-to-GDP ratio is certainly negative. D) the debt-to-GDP ratio will certainly rise. E) the effect on the debt-to-GDP ratio is uncertain. Answer: E Explanation:

78)

A) B) C) D) E)

28

80)

81) The concept of "national saving" refers to the A) difference between private saving and government saving. B) sum of private saving and government saving. C) money supply measure, M3. D) difference between the two measurements of the money supply, M3 - M2. E) total saving of the private sector. Answer: B Explanation:

A) B) C) D) E)

82) What economists call "government saving" is the same as the A) government's actual budget surplus. B) difference between household saving and business saving. C) difference between household saving and private saving. D) dollar amount of bonds that the government holds at any given time. E) sum of the budget surplus and national saving. Answer: A Explanation:

82)

A) B) C) D) E)

83) An illustration of "crowding out" in macroeconomics is best provided by A) a decrease in government subsidies for low-cost housing causes an increase in private spending on housing. B) a decrease in the money supply decreases nominal GDP. C) an increase in tariffs causes a decrease in imports. D) an increase in the money supply crowds out the issuance of privately held debt. E) a fiscal expansion raises interest rates and thereby lowers private investment. Answer: E Explanation:

81)

A) B) C) D) E)

29

83)

84) Consider a closed-economy AD/AS macro model. A policy-induced increase in the government's budget deficit is most likely to crowd-out private investment if A) interest rates decrease sharply as a result of the deficit. B) interest rates rise sharply as a result of the deficit. C) rising income increases the volume of saving and interest rates rise very little. D) there is a very large output gap. E) consumers reduce consumption as a result of the deficit. Answer: B Explanation:

A) B) C) D) E)

85) Consider an open-economy AD/AS macro model. An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ net exports. A) deficit; appreciate the currency; decrease B) surplus; depreciate the currency; increase C) deficit; appreciate the currency; increase D) surplus; appreciate the currency; decrease E) deficit; depreciate the currency; decrease Answer: A Explanation:

85)

A) B) C) D) E)

86) Consider a closed-economy AD/AS macro model. An expansionary fiscal policy will generally increase the government's budget ________ and also tends to ________ and thus ________ investment. A) deficit; raise interest rates; decrease B) surplus; reduce interest rates; increase C) deficit; raise interest rates; increase D) surplus; reduce interest rates; decrease E) deficit; reduce interest rates; increase Answer: A Explanation:

84)

A) B) C) D) E)

30

86)

87) Consider a closed-economy AD/AS model. If an increase in the government's budget deficit drives up market interest rates, A) credit will become less expensive. B) nothing — government borrowing cannot push up interest rates. C) private expenditure will likely increase. D) some private investment expenditure will probably be crowded out. E) the money supply will increase. Answer: D Explanation:

A) B) C) D) E)

88) In an open economy like Canada's, a policy-induced increase in the government's budget deficit tends to A) attract foreign capital and reduce interest rates. B) crowd out public consumption. C) crowd out net exports and reduce interest rates. D) attract foreign capital and crowd out net exports. E) depreciate the domestic currency. Answer: D Explanation:

88)

A) B) C) D) E)

89) In an open economy like Canada's, a fiscal expansion by the government tends to A) appreciate the currency. B) attract foreign capital and encourage increased investment. C) crowd out net exports and encourage private investment. D) attract foreign capital, appreciate the currency, and crowd out net exports. E) attract foreign capital, depreciate the currency, and crowd out net exports. Answer: D Explanation:

87)

A) B) C) D) E)

31

89)

90) In an open economy with internationally mobile financial capital, we would expect a policy-induced increase in the government's budget deficit to crowd out A) consumption more than investment. B) consumption more than net exports. C) investment more than net exports. D) government purchases more than net exports. E) net exports more than investment. Answer: E Explanation:

A) B) C) D) E)

91) The proposition that increases in government budget deficits in an open economy tend to crowd out net exports relies on the idea that A) government demand for labour tends to create manpower shortages in export industries. B) much government expenditure is typically directed towards imported goods and services. C) the resulting increase in interest rates attracts an inflow of financial capital that causes the currency to appreciate. D) the rise in private-sector wealth associated with the rising stock of bonds leads to a fall in the saving rate and therefore a current account deficit. E) there is downward pressure on interest rates that causes the currency to depreciate. Answer: C Explanation:

90)

A) B) C) D) E)

32

91)

The diagram below is for a closed economy which begins in long-run equilibrium at Y* and P0 .

FIGURE 32-3 92) Refer to Figure 32-3. Suppose the government implements an expansionary fiscal policy which increases the budget deficit. The initial effect of this policy is the opening of a(n) ________ gap, and a new short-run equilibrium with a price level of ________ and real GDP of ________. A) recessionary; P1 ; Y2 B) inflationary; P1 ; Y* C) inflationary; P2 ; Y* D) inflationary; P1 ; Y1 E) recessionary; P0 ; Y* Answer: D Explanation:

A) B) C) D) E)

93) Refer to Figure 32-3. Suppose the government in this closed economy implements an expansionary fiscal policy, which increases the budget deficit. When the economy reaches its new long-run equilibrium, how has the composition of national income changed? A) net exports have fallen B) investment has fallen C) consumption has increased D) net exports have risen E) the composition of national income at Y* is unchanged Answer: B Explanation:

92)

A) B) C) D) E)

33

93)

94) Refer to Figure 32-3. Suppose the government implements an expansionary fiscal policy, which increases the budget deficit. The economy's adjustment process returns real GDP to Y* in the long run. Since real GDP is not affected in the long run, how are future generations likely to be harmed by this government policy? A) Investment in public infrastructure has been crowded out, which will harm future generations. B) Private investment has been crowded out, which may lead to a lower future growth rate of potential GDP. C) The inflationary gap is harmful to the economy and reduces real GDP in the future. D) The budget deficit causes an appreciation in the domestic currency which reduces the income of future generations. E) Future generations are definitely not harmed by this policy. Answer: B Explanation:

A) B) C) D) E)

95) Until the onset of the most recent recession in 2009, Canadian governments (federal and provincial) had been running budget surpluses for about 10 years. Economic theory suggests that, other things being equal, these budget surpluses will lead to A) a rise in national saving, a fall in interest rates and a "crowding in" of investment and net exports. B) a fall in national saving, a rise in interest rates and a "crowding out" of investment and net exports. C) an appreciation of the domestic currency and a fall in Canada's net exports. D) a depreciation of the domestic currency and a fall in Canada's net exports. E) a rise in national saving, a rise in interest rates and a "crowding out" of investment and net exports. Answer: A Explanation:

95)

A) B) C) D) E)

96) Many economists argue that the long-term burden of government debt will include: 1) a redistribution of resources away from future generations toward the current generation; 2) reduced investment and as a result a lower long-run rate of economic growth; 3) a burden on future generations who will have to pay interest to the owners of government bonds. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 2 only E) 3 only Answer: C Explanation:

94)

A) B) C) D) E)

34

96)

97) There is a long-term burden of government debt in a closed economy when A) foreign owners of Canadian debt demand repayment. B) it is no longer possible to find individuals in the private sector willing to finance the debt. C) the burden of the debt is being borne by the current generation rather than future generations. D) present consumption and government expenditure are not reduced because of future crowding-out. E) the stock of physical productive capital is reduced because of crowding out. Answer: E Explanation:

A) B) C) D) E)

98) It can be argued that a government budget deficit, rather than being a burden for future generations, may provide net benefits to future generations. This view is correct if the current budget deficit is used to A) pay transfers such as welfare and old age pensions in the present period. B) finance projects that deliver long-term benefits to society. C) invest in the purchasing of goods not available in the local economy. D) ensure that all interest paid goes to residents rather than foreigners. E) pay subsidies to Canadian firms to offset rising energy costs. Answer: B Explanation:

98)

A) B) C) D) E)

99) The concept of capital budgeting refers to the idea that A) government budgets should be designed to be balanced, while fully recognizing that changing economic circumstances may prevent such balance. B) if the debt-to-GDP ratio rises to unacceptable levels, the central bank can monetize portions of the government debt. C) counter-cyclical fiscal policy is included in the government budget. D) the government would classify all expenditures as either consumption (benefiting current generations) or investment (benefiting future generations). E) the government would direct a fixed percentage of its budget toward investment expenditure that would benefit future generations. Answer: D Explanation:

97)

A) B) C) D) E)

35

99)

100) Decreasing government expenditures in order to reduce the government's budget deficit can involve certain costs. An example of such a cost could be A) larger school facilities to accommodate a growing population. B) longer queues for essential government services such as health-care services. C) encouraging future generations to be more self-sufficient and less reliant on government to provide for them. D) a lower portion of taxes being used to pay interest. E) improving the flexibility to practice counter-cyclical fiscal policy. Answer: B Explanation:

A) B) C) D) E)

101) Financing a budget deficit by increasing the money supply will A) allow more flexibility in the design of monetary policy. B) increase investment over time. C) create greater inflationary pressure. D) have no short-run monetary effects on the economy. E) reduce the burden of government debt. Answer: C Explanation:

101)

A) B) C) D) E)

102) In the long run, the government budget will add to sustained inflation if A) they require decreases in the money supply. B) continual deficits are financed by the continual creation of new money. C) deficits are always accompanied by decreases in the money supply. D) government borrowing lowers interest rates. E) the government finances the deficit by borrowing from the private sector. Answer: B Explanation:

100)

A) B) C) D) E)

36

102)

103) In general, the government will have ________ flexibility in implementing counter-cyclical fiscal policy when the outstanding stock of government debt is ________ relative to the size of GDP. A) more; large B) more; small C) total; large D) less; small E) less; insignificant Answer: B Explanation:

A) B) C) D) E)

104) Consider the government's debt-to-GDP ratio. A significant reason for a government to maintain a low debt-to-GDP ratio is so that A) the real interest rate remains high, which leads to increased investment. B) the Canadian dollar will appreciate and net exports will increase. C) the government has the flexibility to use expansionary fiscal policy if the economy enters a recession. D) the Bank of Canada has the flexibility to use contractionary policy. E) there is no "crowding in" of investment or net exports. Answer: C Explanation:

104)

A) B) C) D) E)

105) In Canada, specific legislation requiring the federal government to run balanced budgets or budget surpluses on an annual basis A) is contained in the Sustainability Fund Act. B) is contained in the preamble to The Charter of Rights and Freedoms. C) is a non-binding guideline in Bill C-101. D) is a binding restriction on fiscal policy set out in the Fiscal Responsibility Act. E) does not exist. Answer: E Explanation:

103)

A) B) C) D) E)

37

105)

106) An annually balanced government budget is a A) destabilizer because fiscal policy is then pro-cyclical. B) destabilizer because the fiscal year is longer than the business cycle. C) stabilizer because it smooths out the peaks and troughs of the business cycle. D) stabilizer because it allows greater flexibility in the design of fiscal policy. E) stabilizer in most circumstances. Answer: A Explanation:

A) B) C) D) E)

107) The policy objective of an annually balanced government budget A) is feasible and would be stabilizing. B) is feasible but would be destabilizing. C) would be stabilizing, but is difficult to achieve. D) is difficult to achieve and would be destabilizing. E) would eliminate the swings in real GDP. Answer: D Explanation:

107)

A) B) C) D) E)

108) An annually balanced government budget is a difficult policy goal to achieve because A) a significant portion of the government's budget is beyond the short-term discretion of the federal government. B) government has little control over interest-rate charges on its debt during a fiscal year. C) tax revenues automatically rise during economic booms and fall during recessions. D) transfer payments rise during recessions and fall during economic booms. E) —all of the above are reasons why a balanced budget is difficult to achieve. Answer: E Explanation:

106)

A) B) C) D) E)

38

108)

109) If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was rising it would have to A) increase tax rates and/or increase spending which would destabilize the economy. B) decrease spending and transfer payments while holding tax rates constant. C) decrease tax rates and/or increase spending which would destabilize the economy. D) decrease interest payments on the debt. E) decrease tax rates and/or decrease spending which would destabilize the economy. Answer: C Explanation:

A) B) C) D) E)

110) If the Canadian federal government adopted a formal balanced budget rule, during times that GDP was falling it would have to A) increase tax rates and/or increase spending which would destabilize the economy. B) decrease spending and transfer payments while holding tax rates constant. C) decrease tax rates and/or increase spending which would destabilize the economy. D) decrease interest payments on the debt. E) increase tax rates and/or decrease spending which would destabilize the economy. Answer: E Explanation:

110)

A) B) C) D) E)

111) An annually balanced government budget would tend to A) accentuate the swings in national income that accompany changes in autonomous expenditure flows. B) increase national income in response to changes in autonomous expenditure flows. C) reduce national income in all circumstances. D) reduce national income in response to changes in autonomous expenditure flows. E) reduce the swings in national income that accompany changes in autonomous expenditure flows. Answer: A Explanation:

109)

A) B) C) D) E)

39

111)

112) Most economists believe that balancing the government budget over the business cycle, rather than for each fiscal year, A) is absolutely necessary for prudent management of the economy. B) is the same as an annually balanced budget. C) is a worthy idea but requires accurate forecasting and definition of the business cycle. D) would be pro-cyclical. E) would stabilize the economy and produce an annual budget balance of zero. Answer: C Explanation:

A) B) C) D) E)

113) If the government were able to operate a "cyclically balanced budget," then the actual budget would A) be balanced every year. B) be balanced every four years. C) have surpluses during inflationary gaps. D) have surpluses during recessionary gaps. E) have deficits during inflationary gaps. Answer: C Explanation:

113)

A) B) C) D) E)

114) The Canadian tax and transfer system acts as an automatic stabilizer because A) net tax revenues decrease during economic booms and decrease during economic recessions. B) net tax revenues increase during economic booms and decrease during economic recessions. C) tax rates will automatically decrease to stimulate the economy during economic booms. D) tax rates will automatically increase if the government is running deficits. E) tax rates will automatically increase to stimulate the economy during economic recessions. Answer: B Explanation:

112)

A) B) C) D) E)

40

114)

115) Suppose the government decided to ensure that its cyclically adjusted budget deficit was always zero. This policy would be problematic because A) it would act as a built-in destabilizer. B) it would entail a rising debt-to-GDP ratio. C) it would tend to mean that net exports would be crowded out. D) it would require continual fiscal expansion. E) it would require continual fiscal contraction. Answer: A Explanation:

A) B) C) D) E)

116) Transfer payments (such as welfare payments and employment-insurance benefits) act as automatic stabilizers because they A) decrease the swings of the business cycle but make an annually balanced budget much harder to achieve. B) increase the swings of the business cycle but make an annually balanced budget much easier to achieve. C) increase the swings of the business cycle and make an annually balanced budget much harder to achieve. D) increase the government surplus during the expansionary phase of the business cycle. E) increase the debt-to-GDP ratio during the expansionary phase of the business cycle. Answer: A Explanation:

116)

A) B) C) D) E)

117) Suppose legislation in Canada required annually balanced government budgets. This legislation would A) require the Bank of Canada to expand and contract the money supply according to an annual timetable. B) force a balanced budget that could turn a minor downturn in the economy into a serious and prolonged recession. C) force increased levels of government spending automatically increasing the size of the government debt. D) allow deficits but prevent the government from running surpluses. E) require the Bank of Canada to lower interest rates during periods of inflation. Answer: B Explanation:

115)

A) B) C) D) E)

41

117)

118) Annually balanced government budgets A) are easy to implement due to the total control of government over its budget components in the short run. B) would allow the level of government expenditures to be independent of the changes in real GDP. C) would reduce the size of output gaps. D) would undermine the success of stabilization policies implemented by the government. E) would require the federal government to control both fiscal and monetary policy. Answer: D Explanation:

A) B) C) D) E)

119) Implementation of cyclically balanced government budgets A) result in larger output gaps than with annually balanced budgets. B) requires precise prediction of potential GDP to pinpoint the stages of the business cycle. C) eliminates the need for built-in fiscal stabilizers. D) is easier with frequent changes in political power. E) is successfully practiced in Canada. Answer: B Explanation:

119)

A) B) C) D) E)

120) The 2008-2009 global recession had an effect on Canadian federal and provincial budgets. In general, government debt-to-GDP ratios rose in Canada because of A) contractionary monetary policy and expansionary fiscal policy. B) an increased burden of debt-service payments due to the necessary reduction in the target overnight interest rate by the central bank. C) the decline in net tax revenues due to the recession, as well an expansionary fiscal policy. D) the necessity to balance the primary budget at the same time that the interest rate on government debt was rising. E) the necessity to balance the cyclically adjusted budget at the same time that the interest rate on government debt was rising. Answer: C Explanation:

118)

A) B) C) D) E)

42

120)

Answer Key Testname: UNTITLED32

1) A 2) B 3) B 4) A 5) C 6) D 7) E 8) C 9) D 10) E 11) C 12) B 13) C 14) C 15) D 16) C 17) D 18) C 19) D 20) A 21) C 22) C 23) D 24) C 25) E 26) B 27) D 28) E 29) D 30) E 31) D 32) E 33) C 34) A 35) C 36) E 37) D 38) A 39) B 40) B 41) B 42) C 43) A 44) C 45) B 46) C 47) E 48) A 49) D 50) B 43

Answer Key Testname: UNTITLED32

51) A 52) B 53) E 54) E 55) C 56) B 57) A 58) C 59) C 60) D 61) D 62) D 63) C 64) C 65) B 66) B 67) A 68) E 69) C 70) B 71) C 72) C 73) E 74) D 75) E 76) E 77) D 78) D 79) D 80) E 81) B 82) A 83) E 84) B 85) A 86) A 87) D 88) D 89) D 90) E 91) C 92) D 93) B 94) B 95) A 96) C 97) E 98) B 99) D 100) B 44

Answer Key Testname: UNTITLED32

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120)

C B B C E A D E C E A C C B A A B D B C

45

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Since 1950, the world's real GDP has increased by seven times and the volume of world trade has increased by roughly A) the same amount. B) two times. C) ten times. D) fifteen times. E) thirty times. Answer: E Explanation:

A) B) C) D) E)

2) In 2011 the value of goods exported from Canada was approximately $________ while the value of goods imported was approximately $________. Each of these flows represents ________% of Canada's GDP. A) 50 billion; 30 billion; 6 B) 450 billion; 450 billion; 32 C) 12 billion; 12 billion; 1 D) 100 billion; 100 billion; 15 E) 25 billion; 25 billion; 10 Answer: B Explanation:

2)

A) B) C) D) E)

3) A country that engages in no foreign trade is said to be in a situation of A) comparative advantage. B) absolute advantage. C) reciprocal absolute advantage. D) autarky. E) isolation. Answer: D Explanation:

1)

A) B) C) D) E)

1

3)

4) The increases in a nation's output and consumption that result from specialization and trade are called A) the terms of trade. B) the gains from trade. C) autarky. D) absolute advantage. E) comparative advantage. Answer: B Explanation:

A) B) C) D) E)

5) Trade, whether between individuals or nations, generally promotes A) self-sufficiency. B) specialization. C) lower living standards. D) higher product prices. E) autarky. Answer: B Explanation:

5)

A) B) C) D) E)

6) The existence of any "gains from trade" relies on A) closed economies. B) absolute advantage. C) comparative advantage. D) both absolute and comparative advantage. E) tariffs. Answer: C Explanation:

4)

6)

A) B) C) D) E)

2

7) The existence of "absolute advantage" A) implies that there will be no benefits from trade between two nations. B) refers to a situation where one country can produce one unit of a given product with fewer resources than the other country. C) fosters the self-sufficiency of nations. D) refers to a situation in which one country can produce one unit of all goods with fewer resources than can another country. E) is not physically possible. Answer: B Explanation:

A) B) C) D) E)

8) One region is said to have an absolute advantage over another region in the production of good X when A) the first region has a more productive labour force than the second. B) the first region has a larger supply of the raw materials required to produce good X. C) an equal quantity of resources can produce more of good X in the first region than in the second region. D) there is no demand for good X in the second region. E) the opportunity cost of one unit of X is lower in the first region than in the second region. Answer: C Explanation:

8)

A) B) C) D) E)

9) The concept of "comparative advantage" refers to the A) ability of one region to produce a commodity at a lower opportunity cost than another region. B) ability of one region to produce a commodity with less labour input than another region. C) ability of one region to produce a commodity with fewer total inputs than another region. D) gains from international trade. E) terms of trade index. Answer: A Explanation:

7)

A) B) C) D) E)

3

9)

10) The principle of comparative advantage was first formulated in the 18th century by A) David Hume. B) Thomas Malthus. C) Karl Marx. D) David Ricardo. E) Adam Smith. Answer: D Explanation:

A) B) C) D) E)

11) There will be no gains from specialization and trade between two countries if 1) neither country has an absolute advantage in the production of any good; 2) neither country has a comparative advantage in the production of any good; 3) opportunity costs are the same in the two countries. A) 1 only B) 2 only C) 3 only D) 1 and 2 Answer: E Explanation:

11)

E) 2 and 3

A) B) C) D) E)

12) There will be no gains from specialization and trade between two countries if 1) neither country has an absolute advantage in the production of any good; 2) neither country has a comparative advantage in the production of any good; 3) opportunity costs differ too much between the two countries. A) 1 only B) 2 only C) 3 only D) 1 and 2 Answer: B Explanation:

10)

12)

E) 2 and 3

A) B) C) D) E)

13) Consider two countries that can produce rice and other products. If neither country has an absolute advantage in the production of rice, A) there is no possibility that either country will import rice from the other. B) neither country can possibly have a comparative advantage in the production of rice. C) rice will still be traded as long as one of the countries has a comparative advantage in its production. D) the opportunity cost of producing rice must be identical in the two countries. E) then rice should not be produced. Answer: C Explanation:

A) B) C) D) E)

4

13)

14) If a country has a comparative advantage in the production of soybeans, and it trades freely with other countries, it will most probably A) derive no advantage from any trade in soybeans. B) increase its consumption of soybeans. C) export soybeans. D) import soybeans. E) not consume soybeans. Answer: C Explanation:

A) B) C) D) E)

15) Consider a country that is initially autarkic and then engages freely in international trade. If a country has a comparative advantage in the production of soybeans, it will most probably A) derive no advantage from any trade in soybeans. B) decrease the production of soybeans for domestic consumption. C) increase the production of soybeans for domestic consumption. D) increase the production of soybeans to allow for the export of soybeans. E) import soybeans Answer: D Explanation:

14)

15)

A) B) C) D) E)

Consider the following information about the production of two goods, X and Y, in two countries, A and B: ∙

In Country A it takes Xa units of resources to produce one unit of X and Ya units

∙

of resources to produce one unit of Y. In Country B it takes Xb units of resources to produce one unit of X and Yb units

∙

of resources to produce one unit of Y. Assume that the amount of resources used to produce the goods in the two countries can be compared unambiguously.

TABLE 33-1 16) Refer to Table 33-1. Country A has an absolute advantage in producing good X if A) (Xa /Ya) is less than (Xb/Yb). B) Xa is less than Xb. C) Xa is less than Ya . D) (Xa /Xb) is less than (Ya/Yb). E) Xa = Xb. Answer: B Explanation:

A) B) C) D) E) 5

16)

17) Refer to Table 33-1. Country A has a comparative advantage in producing good X if A) (Xa /Ya ) is less than (Xb/Yb).

17)

B) (Xa /Xb) is greater than (Ya /Yb). C) (Xa /Ya ) is greater than (Xb/Yb). D) Xa is less than Yb. E) Xa = Xb. Answer: A Explanation:

A) B) C) D) E)

18) Refer to Table 33-1. There is no scope for gains from trade due to specialization between the two countries if A) (Xa /Ya ) is greater than (Xb/Yb).

18)

B) Xa is equal to Yb. C) (Xa /Ya ) is equal to (Xb/Yb). D) Xa is less than Yb and Ya is less than Yb. E) Xa is less than Xb. Answer: C Explanation:

A) B) C) D) E)

19) Suppose that Spain is currently producing 90 units of wine and 10 units of cheese, but to produce 10 more units of cheese it must sacrifice 30 units of wine. Further, suppose that Portugal produces 45 units of wine and 45 units of cheese, but to produce 10 more units of cheese it must sacrifice only 10 units of wine. It can be concluded that A) Portugal has an absolute advantage in both wine and cheese production. B) Portugal has an absolute advantage in wine production and Spain has an absolute advantage in cheese production. C) Spain has an absolute advantage in both wine and cheese production. D) neither country has an absolute advantage in the production of either wine or cheese. E) more information is needed to conclude anything about absolute advantage in either country. Answer: E Explanation:

A) B) C) D) E)

6

19)

20) Suppose that Spain is currently producing 90 units of wine and 10 units of cheese, but to produce 10 more units of cheese it must sacrifice 30 units of wine. Further, suppose that Portugal produces 45 units of wine and 45 units of cheese, but to produce 10 more units of cheese it must sacrifice only 10 units of wine. It can be concluded that A) Portugal has an absolute advantage in both wine and cheese production. B) Portugal has an absolute advantage in wine production and Spain has an absolute advantage in cheese production. C) Spain has an absolute advantage in both wine and cheese production. D) Spain has a comparative advantage in the production of wine and Portugal has a comparative advantage in the production of cheese. E) more information is needed to conclude anything about comparative advantage in either country. Answer: D Explanation:

A) B) C) D) E)

21) Which of the following statements about comparative advantage is true? A) A country with a rising price level will lose any existing comparative advantage. B) To have a comparative advantage a country must also have an absolute advantage. C) Comparative advantage is based solely on differences in factor endowments. D) Comparative advantage for certain products may be acquired by deliberate domestic government policy. E) Comparative advantage is based solely on differences in climate. Answer: D Explanation:

21)

A) B) C) D) E)

22) If two nations want to trade with one another, they can determine their respective comparative advantages by A) hiring economists to gather and interpret the relevant data. B) first determining which has absolute advantage in the production of goods and services. C) allowing firms in each country to freely engage in international trade. D) making certain that the prices of tradable goods and services are equal in both nations. E) computing the opportunity costs of all goods and services. Answer: C Explanation:

20)

A) B) C) D) E)

7

22)

23) Two nations want to engage in trade but discover that one of them is more efficient in producing all goods. In this case, A) each nation should export the good in which it has a comparative advantage. B) no trade is possible. C) the more efficient country should produce all goods and export them. D) the less efficient country should engage in importation of goods only. E) the more efficient country should import all goods. Answer: A Explanation:

A) B) C) D) E)

24) In moving from a no-trade to a free-trade situation, a country will A) experience increases in employment in all industries. B) be consuming inside its production possibilities boundary. C) import those goods which are acquired more cheaply through trade than through domestic production. D) expect a decrease in the average standard of living, but will see increased profits for firms in the export business. E) experience an increase in its average standard of living only if it begins with an absolute advantage in the production of all goods. Answer: C Explanation:

24)

A) B) C) D) E)

25) If Canada has an absolute advantage in the production of oil relative to the United States, then A) Canada also has a comparative advantage in producing oil. B) Canada also has a comparative advantage in producing some good other than oil. C) the opportunity cost of producing oil is higher in Canada than in the United States. D) the opportunity cost of producing oil is lower in Canada than in the United States. E) Canada may or may not have a comparative advantage in producing oil relative to the United States. Answer: E Explanation:

23)

A) B) C) D) E)

8

25)

26) Suppose Canada could produce all goods and services more cheaply than all other countries. In that case, A) no trade would occur because Canada would have an absolute advantage in producing everything. B) no trade would occur because Canada would not have a comparative advantage in producing anything. C) trade would probably take place because Canada would still have a comparative disadvantage in producing some goods. D) trade would occur but only if other countries also have an absolute advantage. E) trade would occur but only if other countries subsidize the import of Canadian goods and services. Answer: C Explanation:

A) B) C) D) E)

9

26)

Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources between industries. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted lines. The outputs of wool and steel are given in physical units.

FIGURE 33-1 27) Refer to Figure 33-1. Japan has an absolute advantage in A) wool. B) steel. C) both goods. D) neither good. E) Insufficient information to determine the answer. Answer: B Explanation:

A) B) C) D) E)

28) Refer to Figure 33-1. Before any trade takes place, the opportunity cost of a unit of steel is A) 3/4 unit of wool in Ireland; 3/8 unit of wool in Japan. B) 4/3 unit of wool in Ireland; 8/3 unit of wool in Japan. C) 3 units of wool in Ireland; 3 units of wool in Japan. D) 4 units of wool in Ireland; 8 units of wool in Japan. E) 4 units of wool in Ireland; 4 units of wool in Japan. Answer: A Explanation:

27)

A) B) C) D) E)

10

28)

29) Refer to Figure 33-1. The comparative advantage is held by A) neither country in either good. B) Japan in both goods. C) Ireland in both goods. D) Ireland in wool, Japan in steel. E) Ireland in steel, Japan in wool. Answer: D Explanation:

A) B) C) D) E)

30) Refer to Figure 33-1. When trade between Ireland and Japan begins, the probable trade pattern is to A) export wool from Ireland to Japan and steel from Japan to Ireland. B) export wool from Japan to Ireland and steel from Ireland to Japan. C) export both wool and steel from Ireland to Japan. D) export both wool and steel from Japan to Ireland. E) impose tariffs on both goods in both countries. Answer: A Explanation:

30)

A) B) C) D) E)

31) Refer to Figure 33-1. If Ireland and Japan were each to specialize in the good for which they have a comparative advantage, Ireland would produce ________ and Japan would produce ________. A) 0 units of wool and 6 units of steel; 4 units of wool and 0 units of steel B) 3 units of wool and 6 units of steel; 4 units of wool and 8 units of steel C) 3 units of wool and 4 units of steel; 3 units of wool and 8 units of steel D) 3 units of wool and 0 units of steel; 0 units of wool and 8 units of steel E) 4 units of wool and 0 units of steel; 0 units of wool and 8 units of steel Answer: D Explanation:

29)

A) B) C) D) E)

11

31)

FIGURE 33-2 32) Refer to Figure 33-2. Each of the two diagrams is illustrating A) a budget line. B) a terms of trade index. C) a production possibilities boundary. D) a downward sloping demand curve. E) absolute advantage. Answer: C Explanation:

A) B) C) D) E)

33) Refer to Figure 33-2. The diagrams illustrate that the ________ is lower in Austria than in Switzerland. A) opportunity cost of producing shoes B) opportunity cost of producing bicycles C) total cost of producing shoes D) average cost of producing bicycles E) comparative advantage in producing bicycles Answer: A Explanation:

32)

A) B) C) D) E)

12

33)

34) Refer to Figure 33-2. The diagrams illustrate that Switzerland A) has an absolute advantage in the production of bicycles. B) has a comparative advantage in the production of shoes. C) has an absolute advantage in the production of shoes. D) has a higher consumption of bicycles than Austria. E) has a comparative advantage in the production of bicycles. Answer: E Explanation:

A) B) C) D) E)

35) Refer to Figure 33-2. Assume that Austria and Switzerland do not engage in international trade. In that case, A) Austria will produce all shoes and no bicycles. B) Switzerland will produce all bicycles and no shoes. C) each country will consume according to comparative advantage anyway. D) the downward-sloping lines illustrate each country's consumption possibilities. E) each country will produce according to comparative advantage anyway. Answer: D Explanation:

36)

A) B) C) D)

37) When opportunity costs differ between countries, A) comparative advantages may not exist. B) specialization and trade can lead to increases in the production of all commodities. C) each country should produce only those goods for which it has an absolute advantage. D) only the smaller countries will benefit from trade. E) only the larger countries will benefit from trade. Answer: B Explanation:

35)

A) B) C) D) E)

36) Refer to Figure 33-2. If Austria and Switzerland engage in free trade with each other, it is likely that Switzerland will specialize in the production of ________ and Austria will specialize in the production of ________. A) bicycles; bicycles B) shoes; bicycles C) shoes; shoes D) bicycles; shoes Answer: D Explanation:

34)

A) B) C) D) E)

13

37)

38) When opportunity costs are identical between two countries for all goods, A) there can be no gains from trade unless there are economies of scale in some of the products. B) international trade will be advantageous only to the country that has an absolute advantage in the production of some commodity. C) there will be gains from trade for both countries if one country has an absolute advantage in the production of some commodity. D) absolute advantages will determine the gains from trade. E) there will be absolute advantages from trade but no comparative advantages from trade. Answer: A Explanation:

A) B) C) D) E)

39) Consider two countries that can produce wheat and coffee. The gains from trade when the two countries have different opportunity costs are realized when A) production possibility boundaries shift inward. B) the two countries continue to produce the same quantities of wheat and coffee. C) each country has an absolute advantage in one of the two commodities. D) resources are reallocated within the two countries such that each specializes in the production of the good in which it has an absolute advantage. E) resources are reallocated within the two countries such that each specializes in the production of the good in which it has a comparative advantage. Answer: E Explanation:

39)

A) B) C) D) E)

40) If two countries each produce wool and cotton, the country with the lower opportunity cost for cotton (in terms of wool) will also have A) a comparative advantage in the production of wool. B) a comparative advantage in the production of cotton. C) an absolute advantage in the production of wool. D) an absolute advantage in the production of cotton. E) an absolute advantage in the production of both wool and cotton. Answer: B Explanation:

38)

A) B) C) D) E)

14

40)

41) If two countries each produce wool and cotton, the country with the higher opportunity cost for cotton (in terms of wool) will also have A) a comparative advantage in the production of wool. B) a comparative advantage in the production of cotton. C) an absolute advantage in the production of wool. D) an absolute advantage in the production of cotton. E) an absolute advantage in the production of both wool and cotton. Answer: A Explanation:

A) B) C) D) E)

42) If two countries each produce wool and cotton, we know that the country with the comparative advantage in cotton will also have a lower A) opportunity cost to produce wool. B) opportunity cost to produce cotton. C) resource input per unit produced of wool. D) resource input per unit produced of cotton. E) resource input per unit produced of both cotton or wool. Answer: B Explanation:

42)

A) B) C) D) E)

43) The concept of comparative advantage in international trade is based on ________ as opposed to absolute costs. A) relative prices B) absolute prices C) opportunity costs D) average cost E) total cost Answer: C Explanation:

41)

A) B) C) D) E)

15

43)

44) If Country A has a comparative advantage in the production of good X relative to Country B, A) then Country A also has an absolute advantage in the production of this good. B) then Country A also has an absolute advantage in the production of some good other than X. C) then the opportunity cost of producing X in Country A is higher than in Country B. D) then the opportunity cost of producing X in Country A is lower than in Country B. E) we do not have enough information to say anything about relative opportunity costs. Answer: D Explanation:

A) B) C) D) E)

45) If Country A has a comparative advantage in the production of oil relative to Country B, then A) Country A also has an absolute advantage in producing oil. B) Country A also has an absolute advantage in producing some good other than oil. C) the opportunity cost of producing oil is higher in Country A than in Country B. D) the opportunity cost of producing oil is lower in Country A than in Country B. E) Country A when compared to Country B must have an absolute advantage in producing some good other than oil. Answer: D Explanation:

44)

45)

A) B) C) D) E)

The following production possibilities schedule shows the quantities of wheat and rice that can be produced in Canada and India with one unit of equivalent resources. Wheat (bushels) 13 6

Canada India

Rice (bushels) 5 13

TABLE 33-2 46) Refer to Table 33-2. If Canada were to transfer one unit of resources from rice to wheat production and if one unit of Indian resources were switched from wheat to rice production, A) total wheat production would go up by 7 bushels. B) total rice production would increase by 18 bushels. C) total wheat production would be decreased by 13 bushels. D) total rice output would decrease by 8 bushels. E) both total wheat and total rice production would go up by 7 bushels. Answer: A Explanation:

A) B) C) D) E)

16

46)

47) Refer to Table 33-2. To achieve the potential gains from international trade, A) India should export wheat to Canada and import Canadian rice. B) Canada should produce both wheat and rice and not trade with India. C) India should export rice to Canada and import Canadian wheat. D) India should exclude wheat from its consumption. E) India should produce both wheat and rice and not trade with Canada. Answer: C Explanation:

A) B) C) D) E)

48) Refer to Table 33-2. India has an absolute advantage in the production of A) rice. B) wheat. C) both rice and wheat. D) neither rice nor wheat. Answer: A Explanation:

47)

48)

A) B) C) D)

The following production possibilities schedule shows the quantities of soybeans and oil that can each be produced in Canada and Mexico with one unit of equivalent resources. Soybeans (bushels) 60 24

Canada Mexico

Oil (barrels) 10 8

TABLE 33-3 49) Refer to Table 33-3. The opportunity cost of a barrel of oil in Canada is A) 16.67 bushels of soybeans. B) 6 bushels of soybeans. C) 2.5 bushels of soybeans. D) 1.25 barrels of oil. E) 0.8 barrels of oil. Answer: B Explanation:

A) B) C) D) E)

17

49)

50) Refer to Table 33-3. The opportunity cost of a barrel of oil in Mexico is A) 0.33 bushels of soybeans. B) 1.25 barrels of oil. C) 0.8 barrels of oil. D) 3 bushels of soybeans. E) 16 bushels of soybeans. Answer: D Explanation:

A) B) C) D) E)

51) Refer to Table 33-3. The opportunity cost of one bushel of soybeans in Mexico is A) 3 barrels of oil. B) 0.33 barrels of oil. C) 0.4 bushels of soybeans. D) indicative of Mexico's comparative advantage in soybean production. E) lower than the opportunity cost of soybeans in Canada. Answer: B Explanation:

52)

A) B) C) D)

53) Refer to Table 33-3. If Canada were to transfer half a unit of resources from oil to soybeans and Mexico were to transfer one unit of resources from soybeans to oil, the effect on the total output of the two countries would be as follows: A) soybean production would increase by 30 bushels. B) soybean production would increase by 6 bushels and oil production would increase by 3 barrels. C) soybean production would increase by 36 bushels and oil production would decrease by 2 barrels. D) oil production would increase by 8 barrels. E) soybean production would increase by 6 bushels and oil production would increase by 2.02 barrels. Answer: B Explanation:

51)

A) B) C) D) E)

52) Refer to Table 33-3. Canada has an absolute advantage in the production of A) soybeans. B) oil. C) neither soybeans nor oil. D) both soybeans and oil. Answer: D Explanation:

50)

A) B) C) D) E) 18

53)

54) Refer to Table 33-3. Mexico would not gain by producing and exporting oil and importing soybeans unless it received A) any quantity of soybeans. B) 2 bushels of soybeans per barrel of oil. C) more than 3 bushels of soybeans per barrel of oil. D) more than 6 bushels of soybeans per barrel of oil. E) more than 10 barrel of oil. Answer: C Explanation:

54)

A) B) C) D) E)

This table shows how much cotton and cocoa can be produced in Peru and Brazil with one unit of equivalent resources. Cotton (bales) 2 1

Peru Brazil

Cocoa Beans (bushels) 4 6

TABLE 33-4 55) Refer to Table 33-4. The opportunity cost of a bale of cotton in Peru is A) 1/6 bushel of cocoa beans. B) 1/2 bushel of cocoa beans. C) 2/3 bushel of cocoa beans. D) 2 bushels of cocoa beans. E) 4 bushels of cocoa beans. Answer: D Explanation:

A) B) C) D) E)

56) Refer to Table 33-4. The opportunity cost of a bale of cotton in Brazil is A) 4 bushels of cocoa beans. B) 6 bushels of cocoa beans. C) 1/6 bushels of cocoa beans. D) 1 bushel of cocoa beans. E) 2 bushels of cocoa beans. Answer: B Explanation:

55)

A) B) C) D) E)

19

56)

57) Refer to Table 33-4. The opportunity cost of a bushel of cocoa beans in Peru is A) 1/2 bale cotton. B) 1 bale cotton. C) 1/6 bale cotton. D) 1/3 bale cotton. E) 2/3 bale cotton. Answer: A Explanation:

A) B) C) D) E)

58) Refer to Table 33-4. The opportunity cost of a bushel of cocoa beans in Brazil is A) 1/2 bale cotton. B) 1 bale cotton. C) 1/6 bale cotton. D) 1/3 bale cotton. E) 2/3 bale cotton. Answer: C Explanation:

59)

A) B) C) D) E)

60) Refer to Table 33-4. If one unit of resources is shifted from cotton to cocoa beans in Brazil, and one unit of resources is shifted from cocoa beans to cotton in Peru, world output would increase by A) 2 bales of cotton. B) 1 bale of cotton and 2 bushels of cocoa beans. C) 6 bushels of cocoa beans. D) 3 bales of cotton and 10 bushels of cocoa beans. E) 2 bales of cotton and 1 bushel of cocoa beans. Answer: B Explanation:

58)

A) B) C) D) E)

59) Refer to Table 33-4. Compared with Peru, Brazil has A) a comparative but not absolute advantage in the production of cocoa beans. B) an absolute and a comparative advantage in the production of cocoa beans. C) an absolute, but not a comparative, advantage in the production of cocoa beans. D) an absolute advantage in the production of cotton. E) an absolute and a comparative advantage in the production of cotton. Answer: B Explanation:

57)

A) B) C) D) E) 20

60)

61) Refer to Table 33-4. For trade to be advantageous to both Peru and Brazil, the number of bushels of cocoa beans that must be traded for a bale of cotton is A) less than 2. B) 2. C) more than 2, but less than 6. D) 6. E) more than 6. Answer: C Explanation:

61)

A) B) C) D) E)

This table shows how much wine and cheese can be produced in Spain and Portugal with one unit of equivalent resources. Initially there is no trade. Once trade opens up, transportation costs are assumed to be zero. Wine (units) 2 2

Spain Portugal

Cheese (units) 8 3

TABLE 33-5 62) Refer to Table 33-5. The comparative advantage in wine is held by A) Spain. B) Portugal. C) both countries. D) neither country. E) Insufficient information to determine the answer. Answer: B Explanation:

A) B) C) D) E)

63) Refer to Table 33-5. The comparative advantage in cheese is held by A) Spain. B) Portugal. C) both countries. D) neither country. E) Insufficient information to know. Answer: A Explanation:

62)

A) B) C) D) E)

21

63)

64) Refer to Table 33-5. The opportunity cost of cheese in terms of wine is A) 1/4 in Spain. B) 4 in Spain. C) 2 in each country. D) 3/2 in Portugal. E) 3 in Portugal. Answer: A Explanation:

A) B) C) D) E)

65) Refer to Table 33-5. Once trade begins, A) some resources will be permanently unemployed in Portugal. B) it will be beneficial for Portugal to ban the import of cheese. C) it will be beneficial for Spain to ban the import of wine. D) the opportunity cost of the goods they now import will be less than when there was no trade, but for Portugal only. E) the opportunity cost of the goods they now import will be less than when there was no trade, for both countries. Answer: E Explanation:

64)

A) B) C) D) E)

22

65)

The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts.

FIGURE 33-3 66) Refer to Figure 33-3. Starting from point A and moving to point B, Robinson Crusoe's opportunity cost of producing each additional kilogram of coconuts is A) increasing. B) increasing followed by decreasing. C) constant. D) decreasing. E) decreasing followed by increasing. Answer: C Explanation:

A) B) C) D) E)

23

66)

67) Refer to Figure 33-3. Starting from point B and moving to point A, his opportunity cost of producing each additional kilogram of bananas is A) increasing. B) increasing followed by decreasing. C) constant. D) decreasing. E) decreasing followed by increasing. Answer: C Explanation:

A) B) C) D) E)

24

67)

The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice.

FIGURE 33-4 68) Refer to Figure 33-4. Starting from point A and moving to point B, the opportunity cost of producing each additional tonne of ice is A) increasing. B) increasing followed by decreasing. C) constant. D) decreasing. E) decreasing followed by increasing. Answer: C Explanation:

A) B) C) D) E)

25

68)

69) Refer to Figure 33-4. Beginning at point A on Arcticland's production possibilities boundary, the opportunity cost of producing 10 more tonnes of fish is ________ and the opportunity cost of producing 10 more tonnes of ice is ________. A) 5 tonnes of fish; 20 tonnes of ice B) 5 tonnes of ice; 20 tonnes of fish C) 20 tonnes of ice; 5 tonnes of fish D) 10 tonnes of ice; 10 tonnes of fish E) 0; 0 Answer: C Explanation:

A) B) C) D) E)

70) When two countries are specializing and trading with each other, the gains from trade will tend to be greater when A) opportunity costs in the two countries are similar. B) there are economies of scale in production. C) prices rise in both countries. D) the production possibilities boundaries shift inward. E) comparative advantages are eliminated. Answer: B Explanation:

70)

A) B) C) D) E)

71) According to David Ricardo's principle of comparative advantage, there will be gains from international trade A) only by a country with an absolute advantage in the production of some commodity. B) only by developed countries. C) by any trading country with opportunity costs similar to other countries. D) by only one country if opportunity costs are identical across countries. E) by any country with opportunity costs different from other countries. Answer: E Explanation:

69)

A) B) C) D) E)

26

71)

72) When specialization according to comparative advantage also makes economies of scale possible, A) trade is not beneficial to the country that has the absolute advantage in both goods. B) the production possibilities boundaries of all trading countries will shift inward. C) there will be additional gains from trade. D) costs will rise in all trading countries. E) it will be beneficial for all trading countries to impose tariffs. Answer: C Explanation:

A) B) C) D) E)

73) The idea that unit production costs fall as producers become more familiar with a new production process is known as A) an Edgeworth box. B) an opportunity cost curve. C) an isoquant map. D) learning by doing. E) intra-industry trade. Answer: D Explanation:

73)

A) B) C) D) E)

74) In addition to realizing the benefits of specialization according to comparative advantage, a nation that engages in international trade and specialization may realize benefits from A) economies of scale and learning by doing. B) diseconomies of scale and learning by doing. C) learning by doing and increased opportunity costs. D) a devaluation of its currency. E) a less diversified economy. Answer: A Explanation:

72)

A) B) C) D) E)

27

74)

75) A country with a ________ domestic market is most likely to gain from international trade, in part because of its prospects of benefitting from ________. A) small; diseconomies of scale and learning by doing B) small; economies of scale and learning by doing C) large; a less diversified economy D) mature; a devaluation of its currency E) mature; a less diversified economy Answer: B Explanation:

A) B) C) D) E)

76) North America exports clothing to the European Union, and the European Union exports clothing to North America. This is a(n) A) violation of the law of comparative advantage. B) obvious failure to take advantage of specialization. C) likely result of economies of scale and product differentiation. D) general conclusion of the Heckscher-Ohlin theory. E) example of the inefficiency of trade patterns. Answer: C Explanation:

76)

A) B) C) D) E)

77) Economies of scale and product differentiation can provide an explanation for A) countries remaining at their autarkic positions. B) countries trading in completely different products. C) countries trading in similar products. D) firms seeking government intervention to protect their industries. E) firms seeking government approval of mergers. Answer: C Explanation:

75)

A) B) C) D) E)

28

77)

78) Economies of scale and product differentiation can provide an explanation for A) countries remaining at their autarkic positions. B) countries trading in completely different products. C) the imposition of trade barriers. D) intra-industry trade. E) absolute advantage. Answer: D Explanation:

A) B) C) D) E)

79) International trade permits a country to A) produce and consume beyond its production possibilities boundary. B) shift its production possibilities boundary outward. C) increase its absolute advantage for its imported goods. D) expand its production possibilities while holding constant its consumption possibilities. E) consume beyond its production possibilities boundary. Answer: E Explanation:

79)

A) B) C) D) E)

80) Canadian politicians who promoted the NAFTA in the early 1990s claimed that Canadian producers would have access to a larger market and thus costs would decline. Which of the following sources of the gains from trade are implied by this statement? A) climate B) economies of scale C) comparative advantage D) factor endowments E) absolute advantage Answer: B Explanation:

78)

A) B) C) D) E)

29

80)

81) Since joining NAFTA in the early 1990s, Canada has experienced increases in productivity and output in many export-oriented industries because of economies of scale and learning by doing. In these industries, these gains from trade will lead to A) downward shifts in the long-run average cost (LRAC) curve. B) downward movement (to the right) along the LRAC curve only. C) downward shifts in the LRAC and short-run AC curves. D) downward shifts in the LRAC curves and downward movement (to the right) along the LRAC curve. E) downward shifts in the LRAC and movement to the left along the LRAC curve. Answer: D Explanation:

A) B) C) D) E)

82) Australia exports wine to Canada, and Canada also exports wine to Australia. This is a(n) A) violation of the law of comparative advantage. B) obvious failure to take advantage of specialization. C) likely result of economies of scale and product differentiation. D) general conclusion of the Heckscher-Ohlin theory. E) example of the inefficiency of trade patterns. Answer: C Explanation:

82)

A) B) C) D) E)

83) Consider the sources of the gains from international trade. Governments often implement programs designed to encourage research and development. Such programs may change the comparative advantage of that country because A) they are expected to change the endowments of each country. B) they are expected to lead to improvements in technology. C) they will raise the costs of production of the trading partners. D) the opportunity costs of exported products cannot change. E) increases in research and development always lead to an increase in imports. Answer: B Explanation:

81)

A) B) C) D) E)

30

83)

84) The theory that patterns of international trade are determined by natural endowments of factors successfully explains the prominence of A) Britain in the pop music industry. B) Japan in car manufacturing. C) the United States in pharmaceutical research. D) Canada in communications technology. E) tourism in the Turks and Caicos. Answer: E Explanation:

A) B) C) D) E)

85) According to the Heckscher-Ohlin theory, national comparative advantages exist because of A) differences in national factor endowments. B) differences in saving and investment. C) differences in climate alone. D) economies of scale. E) international factor mobility. Answer: A Explanation:

85)

A) B) C) D) E)

86) Which of the following statements about comparative advantage are true? 1) A country's pattern of comparative advantage depends partly upon the relative abundance of different types of resources in its endowment of factors. 2) Trade allows small countries to reap economies of scale through specialization. 3) Climate affects a country's pattern of comparative advantage. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 1 only E) 2 only Answer: C Explanation:

84)

A) B) C) D) E)

31

86)

87) According to what economists call the "law of one price," A) the world price of a commodity is established by the country with the highest relative demand for that product without respect to the cost of production. B) the world price of a commodity is established by the country with the highest opportunity cost in producing the product without respect to the domestic or world demand for the product. C) the price of a specific product will be the same in any two markets in which the cost of labour is the same. D) the lower the costs to move a product from one market to the other, the more equal the prices for the same product when it is sold in different markets. E) the price of a given product will never be equal in two different markets because of differences in the patterns of demand. Answer: D Explanation:

A) B) C) D) E)

88) The "law of one price" states that the price of A) labour, measured in terms of its opportunity cost, is the same in all markets. B) a product is always equal to the absolute cost of the resources that went into its production in any country. C) a product worldwide is always equal to the cost of production from the country with the lowest opportunity cost to make the product. D) a product that is costless to transport will be the same in all markets. E) natural resources is the same in all markets. Answer: D Explanation:

88)

A) B) C) D) E)

89) Consider the trade of a product between two regions. If it is very inexpensive to move the product from one regional market to another, then the A) "law of one price" argues that it will sell for the same price in all markets. B) price it sells for in every country will depend on the cost of labour in the single low-cost country in which the product was produced. C) difference in the price from one market to another will depend on the relative elasticities of supply in the separate markets. D) absolute cost of producing the product must be the same in all markets. E) production of the world supply will be from the single country with the lowest absolute cost of producing it. Answer: A Explanation:

87)

A) B) C) D) E)

32

89)

90) The hypothesis that the price of some given internationally traded product in one country will be equal to the price of the same product in some other country is known as A) absolute advantage. B) comparative advantage. C) gains from trade. D) the law of one price. E) the Big Mac index. Answer: D Explanation:

90)

A) B) C) D) E)

The diagram below shows the domestic demand and supply curves in the market for newsprint in Paperland.

FIGURE 33-5 91) Refer to Figure 33-5. If Paperland does not engage in international trade, the equilibrium quantity of newsprint produced domestically will be A) Q1 . B) Q2 . C) Q3 . D) Q4. E) Q5 . Answer: C Explanation:

A) B) C) D) E)

33

91)

92) Refer to Figure 33-5. If Paperland engages in international trade and the world price is PA, the amount of newsprint produced by Paperland will be A) Q1 . B) Q2 . C) Q3 . Answer: E Explanation:

D) Q4.

92)

E) Q5 .

A) B) C) D) E)

93) Refer to Figure 33-5. If Paperland engages in international trade and the world price is PA, the

93)

amount of newsprint ________ will be ________. A) imported; Q5 - Q1 B) exported; Q5 C) imported; Q1 D) exported; Q5 - Q1 E) imported; Q5 - Q3 Answer: D Explanation:

A) B) C) D) E)

94) Refer to Figure 33-5. If Paperland engages in international trade and the world price is PC, the amount of newsprint produced by Paperland will be A) Q1 . B) Q2 . C) Q3 . Answer: B Explanation:

D) Q4.

E) Q5 .

A) B) C) D) E)

95) Refer to Figure 33-5. If Paperland engages in international trade and the world price is PC, the amount of newsprint ________ will be ________. A) imported; Q4 B) exported; Q2 C) imported; Q4 - Q2 D) exported; Q4 - Q2 E) imported; Q3 Answer: C Explanation:

94)

A) B) C) D) E)

34

95)

96) Refer to Figure 33-5. If Paperland engages in trade and the world price is PA, the residents of Paperland will consume ________ units of newsprint. A) Q1 B) Q2 C) Q3 Answer: A Explanation:

D) Q4

E) Q5

A) B) C) D) E)

97) Refer to Figure 33-5. If Paperland engages in trade and the world price is PB, the residents of Paperland will consume ________ units of newsprint, and the net exports of newsprint from Paperland will be ________ units. A) Q1 ; Q5 - Q1 B) Q2 ; zero C) Q3; zero D) Q4; Q5 - Q1 E) Q5; zero Answer: C Explanation:

96)

A) B) C) D) E)

35

97)

The diagram below shows the (hypothetical) demand and supply curves for regional jets in Canada. Assume that the market is competitive, all jets are identical, and that Canada engages in international trade.

FIGURE 33-6 98) Refer to Figure 33-6. If the world price of a regional jet is $20 million, Canada will A) export 50 jets per year. B) export 70 jets per year. C) import 70 jets per year. D) import 40 jets per year. E) import 90 jets per year. Answer: D Explanation:

A) B) C) D) E)

99) Refer to Figure 33-6. If the world price of a regional jet is $30 million, Canada will A) neither import nor export any jets. B) import 70 jets per year. C) import 90 jets per year. D) export 50 jets per year. E) export 70 jets per year. Answer: A Explanation:

98)

A) B) C) D) E)

36

99)

100) Refer to Figure 33-6. If the world price of a regional jet is $35 million, Canada will A) neither import nor export any jets. B) import 60 jets per year. C) import 20 jets per year. D) export 80 jets per year. E) export 20 jets per year. Answer: E Explanation:

A) B) C) D) E)

101) Refer to Figure 33-6. At what price is the total domestic demand for regional jets met completely by domestic supply? A) exactly $30 million B) $30 million and below C) $30 million and above D) $35 million E) no price - there will always be some imported jets in this market. Answer: C Explanation:

102)

A) B) C) D) E)

103) Refer to Figure 33-6. Assume the world price of a regional jet is $20 million. Further, suppose that Canada disallowed international trade in regional jets. With no trade in regional jets, Canadian consumers will spend ________ at the domestic equilibrium price and quantity versus ________ for the same quantity at the world price. A) $1000 million; $1800 million B) $1800 million; $1000 million C) $1400 million; $2100 million D) $2100 million; $2100 million E) $2100 million; $1400 million Answer: E Explanation:

101)

A) B) C) D) E)

102) Refer to Figure 33-6. Assume the world price of a regional jet is $20 million. How many jets are not produced in Canada that would have been if Canada did not engage in international trade? A) 20 B) 40 C) 50 D) 70 E) 90 Answer: A Explanation:

100)

A) B) C) D) E) 37

103)

The table below shows hypothetical Canadian domestic demand and supply schedules for granite. Assume there are no restrictions on trade. World Price of Granite ($/tonne) 1000 900 800 700 600 500 400 300

Quantity Demanded of Granite (tonnes) 20 40 60 80 100 120 140 160

Quantity Supplied of Granite (tonnes) 170 140 110 80 50 20 0 0

TABLE 33-6 104) Refer to Table 33-6. At what price and quantity combination will Canada not engage in international trade in granite? A) $1000 and 20 tonnes B) $1000 and 170 tonnes C) $700 and 80 tonnes D) $400 and 140 tonnes E) $400 and 0 tonnes Answer: C Explanation:

A) B) C) D) E)

105) Refer to Table 33-6. Suppose the world price of granite is $900. What quantity will Canada import or export? A) Canada will export 100 tonnes B) Canada will export 140 tonnes C) Canada will neither import nor export D) Canada will import 40 tonnes E) Canada will import 100 tonnes Answer: A Explanation:

104)

A) B) C) D) E)

38

105)

106) Refer to Table 33-6. Suppose the world price of granite is $350 per tonne. What quantity will Canada import or export? A) Canada will import 0 tonnes B) Canada will import 150 tonnes C) Canada will export 160 tonnes D) Canada will neither import nor export E) Canada will export 140 tonnes Answer: B Explanation:

A) B) C) D) E)

107) The "terms of trade" reflect the A) amount of absolute advantage held by one country over another. B) conditions under which trade takes place, as established by the World Trade Organization. C) difference in opportunity costs between two countries. D) quantity of domestic goods that must be exported to get a unit of imported goods. E) quantity of imports that must be purchased to sell a unit of exported goods. Answer: D Explanation:

108)

A) B) C) D) E)

109) There will be a favourable change in a nation's terms of trade if the A) export and import prices rise by the same amount. B) export price index rises by more than the import price index. C) import price index rises by more than the export price index. D) export and import prices fall by the same amount. E) export and import prices stay the same. Answer: B Explanation:

107)

A) B) C) D) E)

108) The division of the gains of trade between two trading countries depends on the A) difference between the terms of trade and the countries' autarkic relative prices. B) long-run costs. C) quantity of resources held by each country. D) level of unemployment in both countries. E) size of the absolute advantages possessed by each country. Answer: A Explanation:

106)

A) B) C) D) E) 39

109)

110) There is an unfavourable change in a nation's terms of trade whenever its A) import prices rise more than its export prices. B) export prices rise more than its import prices. C) import prices fall while its export prices remain constant. D) export prices rise while its import prices remain constant. E) export and import prices stay the same. Answer: A Explanation:

A) B) C) D) E)

111) The index for a country's terms of trade is computed as A) index of export prices/index of import prices. B) (index of import prices/index of export prices) × 100. C) index of import prices/index of export prices. D) (index of import prices + index of export prices) × 100. E) (index of export prices/index of import prices) × 100. Answer: E Explanation:

112)

A) B) C) D) E)

113) If Canada's index of export prices is 250 and the index of import prices is 200, then the index of the terms of trade is A) 125. B) 80. C) 50 D) 1.25. E) 0.8. Answer: A Explanation:

111)

A) B) C) D) E)

112) If Canada's terms of trade rise from 212 to 236, then the change is said to be A) favourable. B) unfavourable. C) neutral. D) prudent, since the rule of 72 is not violated. E) a deterioration. Answer: A Explanation:

110)

A) B) C) D) E)

40

113)

114) If Canada's index of import prices is 250 and the index of export prices is 200, then the index of the terms of trade is A) 0.80. B) 1.25. C) 12.50. D) 80.00. E) 125.00. Answer: D Explanation:

A) B) C) D) E)

115) If the index of export prices increases from 120 to 150 and the index of import prices increases from 100 to 125, it may be said that A) the terms of trade have improved. B) the terms of trade have deteriorated. C) there has been no change in the terms of trade. D) the terms of trade have improved by 10%. E) there is insufficient information to calculate the terms of trade. Answer: C Explanation:

115)

A) B) C) D) E)

116) If, over a period of a year, a country's import price index rises from 100 to 120 and its export price index rises from 100 to 110, its index for the terms of trade has A) risen from 100 to 120. B) risen from 100 to 110. C) risen to 109.09. D) fallen to 91.67. E) fallen from 110 to 100. Answer: D Explanation:

114)

A) B) C) D) E)

41

116)

Ireland and Japan are assumed to produce only wool and steel, to have full employment and complete mobility of resources between industries. Their production possibilities boundaries before trade are drawn in solid lines. It is assumed that the two countries have the same amount of resources. Their consumption possibilities after trade are shown by the dotted lines. The outputs of wool and steel are given in physical units.

FIGURE 33-1 117) Refer to Figure 33-1. At the "terms of trade" shown by the dotted lines, A) only Japan can benefit from trade. B) both countries can experience gains from trade. C) consumers will press for tariffs. D) resources will be permanently unemployed in Japan. E) resources will be permanently unemployed in Ireland. Answer: B Explanation:

A) B) C) D) E)

42

117)

The diagram below shows Robinson Crusoe's annual production possibilities boundary for the production of bananas and coconuts.

FIGURE 33-3 118) Refer to Figure 33-3. Suppose that a trading partner offers to give coconuts to Robinson Crusoe in exchange for his bananas. If Robinson Crusoe is to improve his consumption possibilities, the terms of trade must be 1 kg coconuts for A) 5 kg bananas. B) 4 kg bananas. C) 3 kg bananas. D) 2 kg bananas. E) 1 kg bananas. Answer: E Explanation:

A) B) C) D) E)

43

118)

119) Refer to Figure 33-3. Suppose that a trading partner offers to give bananas to Robinson Crusoe in exchange for his coconuts. If Robinson Crusoe is to improve his consumption possibilities, the terms of trade must be 1 kg bananas for A) 3.0 kg coconuts. B) 2.0 kg coconuts. C) 1.0 kg coconuts. D) 0.5 kg coconuts. E) 0.33 kg coconuts. Answer: E Explanation:

A) B) C) D) E)

44

119)

The figure below shows Arcticland's annual production possibilities boundary for the production of fish and ice.

FIGURE 33-4 120) Refer to Figure 33-4. Suppose that a trading partner offers to give Arcticland some fish in exchange for its ice. If Arcticland is to improve its consumption possibilities, the terms of trade must be 1 tonne of fish for A) 5 tonnes of ice. B) 4 tonnes of ice. C) 3 tonnes of ice. D) 2 tonne of ice. E) 1 tonne of ice. Answer: E Explanation:

A) B) C) D) E)

45

120)

121) Refer to Figure 33-4. Suppose that a trading partner offers to give Arcticland ice in exchange for its fish. If Arcticland is to improve its consumption possibilities, the terms of trade must be 1 tonne of ice for: A) 3 tonnes of fish. B) 2 tonnes of fish. C) 1 tonne of fish. D) 0.5 tonne of fish. E) 0.33 tonne of fish. Answer: E Explanation:

A) B) C) D) E)

122) Consider Canada's terms of trade. Canada is a net exporter of oil. An increase in the world price of oil, ceteris paribus, means that Canada's terms of trade will A) deteriorate. B) improve. C) not change. D) improve as long as all of Canada's production of oil is being exported. E) deteriorate as long as Canada exports more oil than it imports. Answer: B Explanation:

122)

A) B) C) D) E)

123) Consider Canada's terms of trade. Canadians consume millions of cups of Tim Horton's coffee each year. If Tim Horton's reduced the price per cup of coffee (because of a decrease in administration and transportation costs), ceteris paribus, Canada's terms of trade will A) deteriorate. B) improve. C) not change. D) improve as long as consumption of coffee decreases. E) deteriorate as long as consumption of coffee increases. Answer: C Explanation:

121)

A) B) C) D) E)

46

123)

124) Consider Canada's terms of trade. Canada is a net importer of citrus fruit. If severe weather in Florida wipes out the fruit crop for one season, Canada's terms of trade will likely A) deteriorate. B) improve. C) not change. D) improve as long as Canada stops importing citrus fruit from Florida. E) indeterminable with the information provided. Answer: A Explanation:

A) B) C) D) E)

125) Canada is both an importer and an exporter of automobiles. If Canada exports more automobiles than it imports, and the price of automobiles rises, then ceteris paribus, Canada's terms of trade will likely A) improve because the index of export prices would rise and the index of import prices would fall. B) remain the same because the index of export prices would rise by the same amount as the index of import prices. C) deteriorate because of the loss of exports that would result. D) deteriorate because the loss of exports would be more than offset by the gain in imports. E) improve because the index of export prices will rise more than the index of import prices. Answer: E Explanation:

124)

A) B) C) D) E)

47

125)

Answer Key Testname: UNTITLED33

1) E 2) B 3) D 4) B 5) B 6) C 7) B 8) C 9) A 10) D 11) E 12) B 13) C 14) C 15) D 16) B 17) A 18) C 19) E 20) D 21) D 22) C 23) A 24) C 25) E 26) C 27) B 28) A 29) D 30) A 31) D 32) C 33) A 34) E 35) D 36) D 37) B 38) A 39) E 40) B 41) A 42) B 43) C 44) D 45) D 46) A 47) C 48) A 49) B 50) D 48

Answer Key Testname: UNTITLED33

51) B 52) D 53) B 54) C 55) D 56) B 57) A 58) C 59) B 60) B 61) C 62) B 63) A 64) A 65) E 66) C 67) C 68) C 69) C 70) B 71) E 72) C 73) D 74) A 75) B 76) C 77) C 78) D 79) E 80) B 81) D 82) C 83) B 84) E 85) A 86) C 87) D 88) D 89) A 90) D 91) C 92) E 93) D 94) B 95) C 96) A 97) C 98) D 99) A 100) E 49

Answer Key Testname: UNTITLED33

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125)

C A E C A B D A B A E A A D C D B E E E E B C A E

50

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Any policy designed to benefit domestic industries at the expense of foreign export industries is called A) predatory practice. B) monopolization. C) commercialization. D) cartelization. E) protection. Answer: E Explanation:

A) B) C) D) E)

2) Suppose you are an economist advising the Canadian government as to whether to erect trade barriers for the protection of Canada's textile industry. You are likely to study the gains to be realized in this industry and weigh those against A) the effect on factor incomes of Canada's trading partners. B) the lower factor prices that occur in competing domestic industries. C) the cost in terms of higher prices to Canadian consumers. D) the cost in terms of lower national income of Canada's trading partners. Answer: C Explanation:

2)

A) B) C) D)

3) Does free trade improve the living standards of all residents of a country? A) Yes, definitely, because the gains from trade outweigh the losses in the import-competing industries. B) Yes, because inefficient import-competing industries are replaced with efficient export industries. C) Probably not - in principle, the net gains from trade could be divided such that every individual is better off, but in practice, some individuals are likely to be worse off. D) No, because the benefits from free trade are only theoretical. E) No, because the losses in the import-competing industries outweigh the gains from trade in the new export industries. Answer: C Explanation:

1)

A) B) C) D) E)

1

3)

4) Which of the following policy objectives can sometimes lead a government of a small economy to rationally oppose free trade? A) to maximize national income B) to protect against low-wage labour from abroad C) to raise average living standards D) to diversify production in the domestic economy E) to prevent domestic currency from going abroad Answer: D Explanation:

A) B) C) D) E)

5) Suppose a national government chooses to impose barriers to trade in an effort to promote a more diversified economy. This objective would be particularly important to, for example, an economy largely dependent on one or two agricultural products because A) that country's terms of trade will continue to deteriorate over time if it continues to specialize. B) it will allow firms in the economy to exploit economies of scale in newly developed industries. C) it will certainly maximize national income and raise average living standards. D) it will increase net exports for the economy. E) any volatility in the world prices of those commodities leads to great volatility in national income. Answer: E Explanation:

5)

A) B) C) D) E)

6) The main objective of protectionist trade policies is to A) create a level playing field. B) raise average real wages in the economy. C) raise government revenues through tariffs. D) maximize world production. E) shield local producers from foreign competition. Answer: E Explanation:

4)

A) B) C) D) E)

2

6)

7) According to the infant-industry argument for protection, a new small industry A) must be protected even if it will never have a comparative advantage. B) must be protected permanently to provide for a diversified economy. C) will need protection once it has exploited available economies of scale. D) may need protection temporarily until it can exploit its economies of scale. E) must be protected in order to provide a domestic supply of the product. Answer: D Explanation:

A) B) C) D) E)

8) In the past few decades, an example of the infant-industry argument at work has been the A) Canadian forest-products industry. B) Canadian agriculture industry. C) Japanese agriculture industry. D) European commercial aircraft industry. E) U.S. automobile industry. Answer: D Explanation:

8)

A) B) C) D) E)

9) Economists would tend to accept which of the following arguments in favour of tariffs? A) Tariffs are needed to avoid exporting jobs. B) Tariffs are needed to limit imports and reduce the capital flow from the country. C) Tariffs help to reduce inflation by reducing the price of domestic products. D) Temporary tariff protection in some situations may help to generate an eventual comparative advantage in that product. E) Tariffs will stimulate the domestic economy. Answer: D Explanation:

7)

A) B) C) D) E)

3

9)

10) An example of the "infant industry" argument for trade protection is that A) tariffs should be implemented in order to improve the terms of trade and thereby maximize the gains from trade. B) tariffs should not be imposed on countries that have democratic governments. C) in the presence of unexploited scale economies, tariff protection may permit a country to develop future comparative advantage in certain products. D) imports of certain products should be limited in the interests of national defence. E) "strategic" trade policy is helpful when other countries are also being strategic. Answer: C Explanation:

A) B) C) D) E)

11) A business which contends that it needs temporary protection so that it can expand significantly and thereby reduce its costs so as to enable it to compete with foreign producers is using an argument known as the A) infant-industry case for tariffs. B) monopolistic competition case for tariffs. C) strategic case for tariffs. D) price fluctuations case for tariffs. E) social advantages case for tariffs. Answer: A Explanation:

11)

A) B) C) D) E)

12) A common argument for the use of tariffs when the objective is to maximize a country's national income would be to A) improve the country's terms of trade. B) subject infant industries to the discipline of the market. C) enjoy the advantages of diversification. D) prevent learning-by-doing by potential trade partners. E) increase the prices of domestic exports. Answer: A Explanation:

10)

A) B) C) D) E)

4

12)

13) Many of the world's industrialized countries initially developed their industries with heavy tariff protection. In Canada's case, this was the basis for A) the National Policy of 1876. B) the National Energy Program of the 1980s. C) reciprocity. D) the NAFTA. E) the Charlottetown Accord. Answer: A Explanation:

A) B) C) D) E)

14) A country can impose a tariff to improve its own terms of trade if it A) constitutes a large fraction of the world demand for some commodity that it imports. B) has a high level of industrial diversification. C) has a significant trade surplus. D) imports mostly primary products. E) produces and exports a large fraction of the world's supply of some commodity. Answer: A Explanation:

14)

A) B) C) D) E)

15) A common, but invalid argument for using tariffs to maximize national income and raise domestic living standards is to A) alter the terms of trade. B) keep Canadian currency in Canada. C) encourage learning by doing. D) create a strategic trade advantage. E) exploit economies of scale. Answer: B Explanation:

13)

A) B) C) D) E)

5

15)

16) Continued tariff protection for industries that have already attained all potential economies of scale and possibilities for learning by doing is likely to A) increase employment in the protected industries. B) reduce average real income for the country's residents. C) redistribute income away from the factors used in the protected industries. D) decrease prices to consumers of the products produced in the protected industries. E) both A and B are correct. Answer: E Explanation:

A) B) C) D) E)

17) Continued tariff protection for industries that have already attained all potential economies of scale and opportunities for learning by doing is likely to A) reduce employment in the protected industries. B) reduce the stream of tariff revenue to the government. C) redistribute income in favour of the factors used in the protected industries. D) decrease prices to consumers of the products produced in the protected industries. E) result in increased demand for imports. Answer: C Explanation:

17)

A) B) C) D) E)

18) Continued tariff protection for industries that have already attained all the possible economies of scale will likely A) reduce employment in the protected industries. B) reduce the stream of tariff revenue to the government. C) redistribute income away from the factors used in the protected industries. D) maintain high prices to consumers of the products produced in the protected industries. E) result in lower domestic prices for the products they produce. Answer: D Explanation:

16)

A) B) C) D) E)

6

18)

19) If wages in Mexico are lower than those in Canada, A) Canadian living standards can be raised by imposing tariffs on imports from Mexico. B) Canadian consumers can benefit by purchasing some low-cost goods from Mexico. C) Canada may have a comparative advantage in all products. D) Mexico may have a comparative advantage in all products. E) Mexico probably has an absolute advantage in all products due to its low labour costs. Answer: B Explanation:

A) B) C) D) E)

20) Consider trade between country A and country B. If country A has wages that are substantially less than those in country B, A) country A will have an absolute advantage over country B. B) country A will not have to subsidize its export industries. C) country B will import from A but will not be able to export to country A. D) country B will benefit by placing tariffs on imports from country A. E) the pattern of comparative advantage will depend also on the relative productivities of labour in the two countries. Answer: E Explanation:

20)

A) B) C) D) E)

21) If a country is exporting more goods and services than it is importing, we should consider this to be "beneficial" only in the sense that it A) allows a country to add to its foreign-exchange reserves above the level needed to cope with fluctuations in private payments. B) represents an accumulation of assets for the domestic economy that can be used in the future to finance consumption. C) increases the standard of living through a larger national income. D) is a necessary condition to enable a country to take full advantage of scale economies. E) means that an economy is earning more than it is spending. Answer: B Explanation:

19)

A) B) C) D) E)

7

21)

22) If all countries try to expand their exports and restrict their imports through the use of export subsidies and import tariffs, the net effect will probably be A) a fall in the volume of trade and an increase in the standard of living in each country. B) a fall in the volume of trade and a decline in the average living standards in each country. C) an increase in the volume of trade but little change in unemployment levels. D) no change in the volume of trade but an increase in the overall unemployment rates. E) no change in the volume of trade but less unemployment. Answer: B Explanation:

A) B) C) D) E)

23) It is not possible for one country to sell all products more cheaply than other countries for any length of time because the A) importing countries will react by constructing severe trade barriers. B) exporting country will find its cost of production decreasing relative to the importing country. C) depreciation of the importing countries' currencies ensures that trade will flow in both directions. D) depreciation of the exporting country's currency will lead to trade in both directions. E) the principle of absolute advantage would then be violated. Answer: C Explanation:

23)

A) B) C) D) E)

24) Consider the following statement: "Canada is unambiguously better off if it is exporting more, in dollar value, to the rest of the world than it is importing." This statement is ________ because ________. A) correct; exports are good and imports are bad B) correct; it is based on the mercantilist doctrine C) incorrect; it fails to recognize that the gains from trade come from the volume rather than the balance of trade D) incorrect; it does not recognize the operation of the foreign-exchange market E) incorrect; imports improve Canada's terms of trade Answer: C Explanation:

22)

A) B) C) D) E)

8

24)

25) Consider the following statement: "Canadians on average are worse off when some manufacturing jobs migrate from Canada to low-wage countries in Central America." This statement is ________ because ________. A) correct; the loss of manufacturing jobs leads to permanent income losses in Canada B) correct; Canadian firms cannot compete with production in low-wage countries C) incorrect; the permanent gains to consumers from lower prices outweigh the temporary losses to the displaced manufacturing workers D) incorrect; low-wage countries do not produce manufactured goods E) incorrect; there are no Canadians made worse off by such an event Answer: C Explanation:

A) B) C) D) E)

26) Consider the following statement: "With unemployment at its highest level in years, Canada needs to protect domestic jobs by promoting a "Buy Canadian" policy." This statement is ________ because ________. A) incorrect; it confuses the real and nominal gains from trade B) incorrect; it fails to recognize that imports of foreign goods also help to encourage the export of domestic goods C) correct; it recognizes that such a policy can sustain high levels of domestic employment D) correct; a "Buy Canadian" policy will take advantage of Canada's comparative advantage E) incorrect; it will work against Canada's pattern of absolute advantage Answer: B Explanation:

26)

A) B) C) D) E)

27) Consider the following statement: "Without a doubt, free trade improves the lives of every Canadian citizen." This statement is ________ because ________. A) correct; it is consistent with the idea of comparative advantage B) correct; because Canada has long been a successful trading nation C) incorrect; it fails to recognize that the movement to free trade involves both winners and losers D) incorrect; we do not know much about the benefits of free trade E) correct; there are no net costs associated with the movement to free trade Answer: C Explanation:

25)

A) B) C) D) E)

9

27)

28) What is a tariff? A) an encouragement to worldwide specialization and division of labour B) a quota imposed on imported goods C) a tax imposed on domestically produced manufactured goods D) a tax imposed on exported goods E) a tax imposed on imported goods Answer: E Explanation:

A) B) C) D) E)

29) The effect of the imposition of a new tariff is to ________ domestic production of the commodity and ________ the domestic consumption of the commodity. A) decrease; increase B) leave unaffected; decrease C) decrease; decrease D) increase; increase E) increase; decrease Answer: E Explanation:

29)

A) B) C) D) E)

30) For most products, Canada is a small economy with no market power in the global market. If Canada imposed a tariff on imported goods from a low-wage foreign country, this would A) reduce the price of the imported good in Canada. B) reduce the advantages of specialization and trade. C) increase the income of the foreign producer. D) equalize the costs of production between the two countries. E) increase national income in the low-wage country. Answer: B Explanation:

28)

A) B) C) D) E)

10

30)

31) For most products, Canada is a small economy with no market power in the global market. If Canada imposed a tariff on imported goods from a low-wage foreign country, this would A) reduce the price of the imported good in Canada. B) improve Canada's terms of trade. C) increase the Canadian price of the imported good. D) equalize the costs of production between the two countries. E) increase wages in the low-wage foreign country. Answer: C Explanation:

A) B) C) D) E)

32) Many people argue that the imposition of tariffs in industry X will increase factor incomes in that industry and therefore be good for the country as a whole. The counter-argument is that A) the increase in industry X factor incomes would be more than offset by reductions in real incomes to all other domestic residents. B) the increase in factor incomes would increase unemployment. C) the increase in factor incomes in industry X would reduce profits to business owners by an equal amount. D) factor incomes would first rise and then decrease in industry X. E) factor incomes overall would increase, but wages in industry X would fall, which would hurt workers in that industry. Answer: A Explanation:

32)

A) B) C) D) E)

33) Assume Canada is trading with a country that has lower costs of production for some good and can therefore sell that good at a lower price. If Canada imposes a tariff large enough to equalize the foreign country's price with ours, then A) this tariff will eliminate exploitation of Canadian markets. B) Canada would gain absolute advantage. C) a "level playing field" will be created. D) all Canadians would realize an increase in their standard of living. E) the gains from international specialization would be reduced. Answer: E Explanation:

31)

A) B) C) D) E)

11

33)

34) The imposition of a tariff on an imported good causes consumer surplus to ________ and producer surplus to ________. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease E) remain the same; decrease Answer: C Explanation:

A) B) C) D) E)

35) The effect of imposing a tariff on a specific imported good is to ________ the domestic price of the good and ________ the domestic production of the good. A) decrease; decrease B) decrease; to leave unaffected C) decrease; increase D) increase; increase E) increase; decrease Answer: D Explanation:

35)

A) B) C) D) E)

36) If a tariff is imposed by a country that is large enough to have market power in global markets, the domestic consumer will face an autarkic price ________ than the world price for the product, and this world price will be ________ by the tariff. A) higher; reduced B) higher; increased C) lower; increased D) lower; unaffected E) lower; reduced Answer: A Explanation:

34)

A) B) C) D) E)

12

36)

37) Over the long run, protecting a domestic industry using a high tariff is likely to ________ new products and production methods, thus making it ________ to compete in the global marketplace. A) encourage it to develop; less able B) encourage it to develop; more able C) discourage it from developing; less able D) discourage it from developing; more able E) discourage it from developing; more focused on investing in its ability Answer: C Explanation:

A) B) C) D) E)

38) If a tariff is imposed in a country that is too small to have global market power, the domestic consumer will face a ________ price, and the price paid to foreign producers will ________. A) higher; fall B) higher; not change C) higher; rise D) lower; not change E) lower; rise Answer: B Explanation:

38)

A) B) C) D) E)

39) Canada is a net importer of durable consumer goods (washing machines, refrigerators, etc.). If Canada, a small country in global markets, imposes a 15% tariff on these goods, it will cause A) a reduction in the consumption of these goods in Canada. B) an increase in the quantity imported of these goods. C) an upward shift in the demand curve for these goods. D) a decrease in the price consumers pay for these goods in Canada. E) a reduction in tariff revenue collected by the Canadian government. Answer: A Explanation:

37)

A) B) C) D) E)

13

39)

40) Canada is a net importer of durable consumer goods (washing machines, refrigerators, etc.). If Canada, a small country in global markets, imposes a 10% tariff on these goods, we would expect to observe A) a reduction in the production of these goods in Canada. B) an increase in the quantity imported of these goods. C) an upward shift in the demand curve for these goods. D) an increase in the price paid by Canadian consumers. E) a decrease in the price paid by Canadian consumers. Answer: D Explanation:

A) B) C) D) E)

41) Canada is a net importer of durable consumer goods (washing machines, refrigerators, etc.). If Canada initially has no tariffs and it then imposes a 10% tariff on these goods, we would expect to observe A) a reduction in the production of the commodity in Canada. B) an upward shift in the commodity's supply curve. C) an upward shift in the commodity's demand curve. D) a downward shift in the commodity's demand curve. E) an increase in the tariff revenue collected by the Canadian government. Answer: E Explanation:

41)

A) B) C) D) E)

42) Suppose Canada reduces a tariff on imported solar panels from 20% to 5%. We would expect to observe A) a reduction in the quantity consumed of solar panels in Canada. B) a reduction in the quantity imported of solar panels. C) an upward shift in the demand curve for solar panels. D) a downward shift in the demand curve for solar panels. E) an increase in quantity consumed of solar panels in Canada. Answer: E Explanation:

40)

A) B) C) D) E)

14

42)

43) Suppose Canada reduces a tariff on imported solar panels from 20% to 5%. We would expect to observe A) an increase in Canada's terms of trade. B) an increase in tariff revenue by the Government of Canada. C) an upward shift in the demand curve for solar panels. D) an increase in the number of solar panels imported into Canada. E) a downward shift in the demand curve for solar panels. Answer: D Explanation:

A) B) C) D) E)

44) If Canada reduces the tariff imposed on a commodity from 10% to 5%, we would expect to observe A) a reduction in the quantity consumed of the commodity in Canada. B) a reduction in the quantity produced of the commodity in Canada. C) an upward shift in the commodity's demand curve. D) a downward shift in the commodity's demand curve. E) an increase in quantity produced of the commodity in Canada. Answer: B Explanation:

45)

A) B) C) D) E)

46) A 10% tariff on all wines imported into Canada will A) equally protect the production of all Canadian wines. B) protect the expensive wines more than the cheaper wines. C) protect the cheaper wines at the expense of the expensive wines. D) provide no protection at all to the Canadian wine industry. E) create the incentive to produce better quality wines. Answer: A Explanation:

44)

A) B) C) D) E)

45) A $1 per-litre tariff on all wine imported into Canada will A) equally protect the production of all Canadian wines. B) protect the production of expensive wines more than cheaper wines. C) protect the production of cheaper wines more than expensive wines. D) provide no protection at all to the Canadian wine industry. E) create an incentive to produce better quality wines. Answer: C Explanation:

43)

A) B) C) D) E) 15

46)

47) Suppose that lumber, a homogeneous product, is exported from Canada at the current world price. If Canada imposes a 25% tariff on imported lumber, we would expect to observe A) an increase in revenues for foreign lumber producers. B) a decrease in domestic consumption and an increase in domestic production. C) no change in the domestic consumption or production of lumber. D) an increase in tariff revenues for the Canadian government. E) a decrease in tariff revenues for the Canadian government. Answer: C Explanation:

A) B) C) D) E)

48) Suppose that at the current world price bananas are imported into Canada. Suppose also that domestic supply is perfectly inelastic and domestic demand has unit elasticity. If Canada were to place a tariff on imported bananas, the A) revenues of the foreign exporters of bananas would rise. B) quantity imported would be unaffected. C) quantity imported would rise. D) price of bananas in Canada would rise, but total domestic expenditures would fall. E) price of bananas in Canada would rise, but total domestic expenditures would be unaffected. Answer: E Explanation:

48)

A) B) C) D) E)

49) If a country is small in world markets and imports some product at the world price, the country effectively faces a horizontal foreign supply curve for that product. If the country then restricts the volume of imports by imposing an import quota, the effect on the domestic market for that product is to A) shift the entire supply curve to the left. B) make the domestic demand curve a horizontal line at the permitted quantity of imports. C) make the domestic demand curve a vertical line at the permitted quantity of imports. D) make the foreign supply curve a vertical line determined by the permitted quantity of imports. E) make the foreign supply curve a horizontal line at the current price. Answer: D Explanation:

47)

A) B) C) D) E)

16

49)

The diagram below shows the demand and supply curves for refrigerators in Canada.

FIGURE 34-1 50) Refer to Figure 34-1. The free-market equilibrium price of refrigerators in Canada is P0, implying

50)

that P0 is the A) tariff-protected price. B) quota-induced price. C) cartel-induced price. D) world price. E) Canadian autarkic price. Answer: D Explanation:

A) B) C) D) E)

51) Refer to Figure 34-1. At the price P0 , the quantity of refrigerators supplied to the Canadian market by domestic Canadian producers is A) Q1 . B) Q2 . Answer: A Explanation:

C) Q3 .

D) Q4.

A) B) C) D) E)

17

E) Q5 .

51)

52) Refer to Figure 34-1. At the price P0 , the quantity of refrigerators imported into the Canadian market is A) Q3 Q5. Answer: E Explanation:

B) Q2 Q4 .

C) Q2 Q5 .

D) Q2Q3 .

52)

E) Q1 Q5.

A) B) C) D) E)

53) Refer to Figure 34-1. Suppose that P0 is the world price. If Canada imposes a tariff causing the

53)

price of refrigerators in Canada to rise from P0 to P1 , the consequence would be that A) both domestic production and domestic consumption would decrease by equal amounts. B) domestic production will increase from Q1 to Q2 and domestic consumption will fall from Q5 to Q4 . C) domestic production will increase from Q1 to Q3 and domestic consumption will fall from Q5 to Q3 . D) domestic production will exceed domestic consumption. E) both domestic production and domestic consumption would increase by equal amounts. Answer: B Explanation:

A) B) C) D) E)

54) Refer to Figure 34-1. Suppose that P0 is the world price. If Canada imposes a tariff causing the price of refrigerators in Canada to rise from P0 to P1 , the Canadian government will collect tariff revenues equal to A) the original price P0 , multiplied by the original quantity of refrigerators imported into Canada, Q1 Q5 . B) (P1 - P0 ) multiplied by the tariff-induced quantity of refrigerators imported into Canada, Q1 Q5. C) (P1 - P0 ) multiplied by the tariff-induced quantity of refrigerators imported into Canada, Q2 Q4. D) the new price, P1 , multiplied by the total quantity of refrigerators purchased in Canada, Q4 . E) the new price, P1 , multiplied by the total quantity of refrigerators purchased in Canada, Q2 . Answer: C Explanation:

A) B) C) D) E)

18

54)

55) Refer to Figure 34-1. Suppose that P0 is the world price and Canada imports refrigerators. Suppose

55)

the Canadian government then responds to political pressure from domestic refrigerator manufacturers and imposes a tariff high enough that all imports are eliminated. As a result of this tariff, the price and quantity of refrigerators in Canada will be, respectively, A) P0 and Q1 . B) P0 and Q5 . C) P1 and Q2 . D) P1 and Q3 . E) P2 and Q3. Answer: E Explanation:

A) B) C) D) E)

56) Refer to Figure 34-1, and assume the world price is P0 . The Canadian government now imposes an

56)

import quota of the amount Q2 Q4 . The result would be that the price in Canada would: A) stay at P0 and consumption would stay at Q5 . B) stay at P0 and consumption would rise to Q3. C) rise to P2 and consumption would decrease to Q5 . D) rise to P2 and consumption would decrease to Q4 . E) rise to P1 and consumption would decrease to Q4 . Answer: E Explanation:

A) B) C) D) E)

57) Refer to Figure 34-1. If we compare the effect of an import tariff with the effect of an import quota, both of which cause the Canadian price to increase by the same amount, the major difference between the two policies is: A) the quota does not directly reduce the quantity whereas the tariff does. B) the tariff raises revenue for the government whereas the quota benefits foreign producers. C) the tariff raises revenue for the protected producers whereas the quota benefits the government. D) the tariff does not directly affect the price consumers pay whereas the quota does. E) the tariff directly affects the price consumers pay whereas the quota has neither direct nor indirect price effects. Answer: B Explanation:

A) B) C) D) E)

19

57)

The diagram below shows the domestic demand and supply curves for denim jeans in Canada. The prevailing world price is PW. Assume that all jeans are identical.

FIGURE 34-2 58) Refer to Figure 34-2. If Canada were to engage in no international trade in denim jeans, then the quantity consumed and produced in Canada would be A) Q1 B) Q2 C) Q3 D) Q4 E) Q5 Answer: C Explanation:

A) B) C) D) E)

59) Refer to Figure 34-2. In the presence of free international trade, Canada's consumption of denim jeans will be the quantity A) Q1 B) Q2 C) Q3 D) Q4 E) Q5 Answer: E Explanation:

58)

A) B) C) D) E)

20

59)

60) Refer to Figure 34-2. In the presence of free international trade, Canada's production will be at the quantity: A) Q1 B) Q2 C) Q3 D) Q4 E) Q5 Answer: A Explanation:

A) B) C) D) E)

61) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canada's production will then be at the quantity A) Q1 B) Q2 C) Q3 D) Q4 E) Q5 Answer: B Explanation:

62)

A) B) C) D) E)

63) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canada's jean-producing firms will gain producer surplus equal to the area A) A. B) A + B + C. C) A + D. D) D. E) D + E + F + G + H. Answer: D Explanation:

61)

A) B) C) D) E)

62) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canada's consumption will then be at the quantity: A) Q1 B) Q2 C) Q3 D) Q4 E) Q5 Answer: D Explanation:

60)

A) B) C) D) E)

21

63)

64) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canadian consumers will lose consumer surplus equal to the area A) A. B) A + B + C. C) B + C + E + F + G + H. D) D. E) D + E + F + G + H. Answer: E Explanation:

A) B) C) D) E)

65) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. The Canadian government's tariff revenues will be equal to A) B + C. B) E + F. C) E + F + G + H. D) F + G. E) F + G + H. Answer: D Explanation:

65)

A) B) C) D) E)

66) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. Canadian jean producers' revenues will increase by the area equal to A) A + B + F + J. B) D + E + I. C) E + F + G + H. D) F + G. E) F + G + H. Answer: B Explanation:

64)

A) B) C) D) E)

22

66)

67) Refer to Figure 34-2. Suppose Canada has free trade in jeans and then imposes a tariff of $t per pair. The deadweight loss to the Canadian economy is represented by the area A) E + H. B) E + F + G + H. C) D + E + F + G + H. D) B + C. E) A + B + C. Answer: A Explanation:

A) B) C) D) E)

68) Refer to Figure 34-2. Suppose Canada has free trade in jeans. If Canada initially has no tariff on jeans but then imposes a tariff of $t per pair, Canada's imports will A) increase from (Q4 - Q2 ) to (Q5 - Q1). B) increase from (Q4 - Q2 ) to (Q5 - Q3). C) decrease from (Q5 - Q1 ) to (Q4 - Q2 ). D) decrease from (Q5 - Q3 ) to (Q4 - Q2 ). E) decrease from(Q5 - Q3 ) to (Q3 - Q1 ). Answer: C Explanation:

67)

A) B) C) D) E)

23

68)

The diagram below shows the domestic demand and supply curves for cotton towels in Canada. The prevailing world price of cotton towels is PW. Assume that all cotton towels are identical.

FIGURE 34-3 69) Refer to Figure 34-3. If Canada has free trade in cotton towels, foreign producers' revenues from their Canadian sales will be equal to the amount A) A + B + E + F + G. B) E + F. C) E + F + G + H + I. D) E + F + G + H + I + J. E) G + H + I. Answer: E Explanation:

A) B) C) D) E)

24

69)

70) Refer to Figure 34-3. If Canada imposes a tariff of $t per cotton towel, foreign producers' revenues from their Canadian sales will be equal to the area A) B + C + D. B) B + C + D + G + H + I. C) C + H. D) H. E) G +H + I. Answer: D Explanation:

A) B) C) D) E)

71) Refer to Figure 34-3. If Canada imposes a tariff of $t per cotton towel, Canadian towel producers' revenues will be equal to the amount A) A + B + C + D. B) A + B + C + E + F + G + H. C) A + B + E + F + G. D) E + F + G. E) E + F + G + H. Answer: C Explanation:

71)

A) B) C) D) E)

72) Refer to Figure 34-3. If Canada imposes a tariff of $t per cotton towel, the Canadian government's tariff revenues will be equal to the area A) A + B + C. B) A + B + C + D. C) B + C + D. D) C. E) C + H. Answer: D Explanation:

70)

A) B) C) D) E)

25

72)

73) Refer to Figure 34-3. If Canada imposes a tariff of $t per cotton towel, the deadweight loss to the Canadian economy is shown by area A) A + B + C. B) A + B + C + D. C) B + D. D) C. E) C + H. Answer: C Explanation:

73)

A) B) C) D) E)

74) Refer to Figure 34-3. If the Canadian government imposes a quota on imported cotton towels of the amount (Q3 - Q2 ), then foreign producers' revenues from their sales in Canada will be equal to the

74)

area A) B + C + D. B) B + C + D + G + H + I. C) C + H. D) H. E) G + H + I. Answer: C Explanation:

A) B) C) D) E)

75) Refer to Figure 34-3. If the Canadian government imposes a quota on imported cotton towels of the amount (Q3 - Q2 ), then the deadweight loss to the Canadian economy is shown by the area A) B + C + D. Answer: A Explanation:

B) B +D.

C) C + H.

A) B) C) D) E)

26

D) H.

E) G + H + I.

75)

76) Refer to Figure 34-3. If the Canadian government imposes a quota on imported cotton towels of the amount (Q3 - Q2 ), then domestic towel producers' revenues will be equal to the area A) A + B + C + D. B) A + B + C + E + F + G + H. C) A + B + E + F + G. D) E + F + G. E) E + F + G + H. Answer: C Explanation:

A) B) C) D) E)

27

76)

The diagram below shows supply and demand curves for bicycles in the domestic Canadian market. Assume that all bicycles are identical.

FIGURE 34-4 77) Refer to Figure 34-4. Assume there is free trade in bicycles. If the world price of bicycles is $500, domestic consumption is ________ at a price of ________. A) 40 000; $500 B) 40 000; $400 C) 30 000; $500 D) 50 000; $300 E) 30 000; $300 Answer: C Explanation:

A) B) C) D) E)

28

77)

78) Refer to Figure 34-4. Assume there is free trade in bicycles. If the world price of bicycles is $500, Canada's ________ will be ________ bicycles per year. A) imports; 30 000 B) imports; 20 000 C) exports; 30 000 D) exports; 20 000 E) exports; 50 000 Answer: D Explanation:

A) B) C) D) E)

79) Refer to Figure 34-4. Assume there is free trade in bicycles. If the world price of bicycles is $200, domestic consumption is ________ and domestic production is ________. A) 20 000; 60 000 B) 30 000; 50 000 C) 40 000; 40 000 D) 50 000; 30 000 E) 60 000; 20 000 Answer: E Explanation:

79)

A) B) C) D) E)

80) Refer to Figure 34-4. Assume there is free trade in bicycles. At a world price of $300, Canada's ________ will be ________ bicycles per year. A) imports; 30 000 B) imports; 20 000 C) exports; 30 000 D) exports; 20 000 E) exports; 50 000 Answer: B Explanation:

78)

A) B) C) D) E)

29

80)

81) Refer to Figure 34-4. Suppose there is free trade in bicycles and the world price is $200. If Canada then imposes a 50% import tariff on bicycles, domestic consumption will A) increase by 30 000. B) decrease by 10 000. C) increase by 20 000. D) decrease by 20 000. E) increase by 10 000. Answer: B Explanation:

A) B) C) D) E)

82) Refer to Figure 34-4. Suppose the world price of bicycles is $200 and Canada has in place a 50% import tariff on this good. The Canadian government will collect tariff revenue in the amount of ________ per year. A) $0.5 million B) $1.0 million C) $1.5 million D) $2.0 million E) $2.5 million Answer: D Explanation:

82)

A) B) C) D) E)

83) Refer to Figure 34-4. Suppose the world price of bicycles is $200 and Canada has in place a 50% tariff on this good. The deadweight loss to the Canadian economy resulting from this tariff is ________ per year. A) $0 B) $0.5 million C) $1.0 million D) $1.5 million E) $2.0 million Answer: C Explanation:

81)

A) B) C) D) E)

30

83)

84) Refer to Figure 34-4. Suppose the world price of bicycles is $500 and Canada has in place a 50% tariff on this good. The deadweight loss to the Canadian economy resulting from this tariff is ________ per year. A) $0 B) $0.5 million C) $1.0 million D) $1.5 million E) $2.0 million Answer: A Explanation:

A) B) C) D) E)

85) The effect of a tariff on a specific imported good on (domestic) consumer and producer surplus can be summarized as follows: A) consumer surplus is increased and producer surplus is decreased. B) consumer surplus and producer surplus are both increased. C) consumer surplus and producer surplus are both decreased. D) consumer surplus is decreased and producer surplus is increased. E) there is no effect on either consumer or producer surplus. Answer: D Explanation:

85)

A) B) C) D) E)

86) Suppose Canada imposes a 20% tariff on imported textiles. Which of the following will occur? 1) an increase in producer surplus for Canadian textile producers 2) a reduction in the quantity of textiles imported 3) a reduction in the consumption of textiles in Canada A) 1 only B) 2 only C) 3 only D) 1, 2, and 3 E) 2 and 3 Answer: D Explanation:

84)

A) B) C) D) E)

31

86)

87) When a country chooses to protect domestic industries from foreign competition, it will incur a cost in the form of A) the loss of revenue from tariffs. B) higher unemployment. C) the loss of jobs in the protected industries. D) lower material living standards. E) the loss of those protected industries. Answer: D Explanation:

A) B) C) D) E)

88) Which of the following methods of import protection leads to the largest deadweight loss for the importing country? A) dumping B) tariff C) countervailing duty D) quota E) import duty Answer: D Explanation:

88)

A) B) C) D) E)

89) Suppose Canada has a 12% tariff on foreign-made cotton clothing. If the tariff is raised to 20%, there will be a ________ in the Canadian price of cotton clothing, ________ profits for domestic producers, and ________ in deadweight loss. A) rise; increased; a decrease B) fall; reduced; a decrease C) fall; increased; a decrease D) rise; increased; an increase E) rise; reduced; an increase Answer: D Explanation:

87)

A) B) C) D) E)

32

89)

90) Suppose Canada eliminates a 15% tariff on foreign-made leather goods. There will be a ________ in the Canadian price of leather goods, ________ profits for domestic leather-goods producers, and ________ in the deadweight loss associated with the tariff. A) rise; increased; an increase B) fall; decreased; a decrease C) rise; increased; a decrease D) fall; increased; a decrease E) fall; decreased; an increase Answer: B Explanation:

A) B) C) D) E)

91) Suppose the Canadian government imposes trade restrictions (tariffs or quotas) on the import of steel. Which of the following groups are likely to be in favour of this policy? A) Canadian automotive union B) Canadian consumers C) foreign steel producers D) foreign steel consumers E) Canadian steelworkers' union Answer: E Explanation:

90)

A) B) C) D) E)

33

91)

The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all cheddar cheese is identical. Producing Country Canada United Kingdom United States

Canadian Price in $ Free Trade 10.00 9.00 8.00

Canadian Price in $ 40% Import Tariff ________ ________ ________

TABLE 34-1 92) Refer to Table 34-1. If Canada has a 40% tariff in place on the import of cheddar cheese, the price per kilogram of cheese from Canada, United Kingdom and United States respectively, is A) $10, $12.60 and $11.20. B) $10, $9.00 and $8.00. C) $14, $12.60 and $11.20. D) $14, $9.00 and $8.00. E) $10, $10 and $10. Answer: A Explanation:

A) B) C) D) E)

93) Refer to Table 34-1. Assuming that a 40% tariff is in place and that Canadians buy only the lowest-priced cheddar cheese, from which country will Canada buy its cheese? A) all from United Kingdom B) all from the United States C) all from Canada D) from Canada and United States E) from United Kingdom and United States Answer: C Explanation:

92)

A) B) C) D) E)

34

93)

94) Refer to Table 34-1. Suppose Canada and the United Kingdom negotiate a free-trade agreement in cheese. But Canada has a 40% tariff on cheese imported from other countries. From which country will Canada now buy its cheese? A) all from United Kingdom B) all from the United States C) all from Canada D) from Canada and United States E) from United Kingdom and United States Answer: A Explanation:

A) B) C) D) E)

95) When a firm sells its product abroad for less than the price at which it sells it in its domestic market, it is often accused of A) countervailing. B) cross-subsidization. C) dumping. D) predatory pricing. E) strategic selling. Answer: C Explanation:

95)

A) B) C) D) E)

96) A country that implements a voluntary export restriction (VER) A) employs the "escape clause." B) sets a countervailing duty. C) sets a maximum on the quantity of some commodity that it may import each year. D) agrees to limit the amount of a commodity it sells to another country. E) sets a tariff to raise the price of an imported commodity. Answer: D Explanation:

94)

A) B) C) D) E)

35

96)

97) In international trade, "dumping" is defined as charging A) a lower price in foreign markets than in the domestic market. B) a domestic retail price above the marginal cost faced by a firm importing the product at the wholesale level. C) export prices below average cost for a short period of time. D) export prices below average cost for any period of time. E) export prices below marginal cost for any period of time. Answer: A Explanation:

A) B) C) D) E)

98) Suppose that a Canadian brewery sells beer in both Canadian and American markets and that all prices are in Canadian dollars. The Canadian domestic price is $17.00 per case while in the American market it sells the same case for $13.00. The average total cost of production is $11.50. This brewery could be accused of A) bad management. B) dumping. C) exploiting the Canadian beer drinkers. D) exchange-rate manipulation. E) trying to reduce the American domestic price of beer. Answer: B Explanation:

98)

A) B) C) D) E)

99) Trade-remedy policies commonly used to achieve a "level playing field" are A) countervailing duties. B) export taxes. C) quotas. D) system-wide subsidies to domestic consumers. E) voluntary export restraints (VER). Answer: A Explanation:

97)

A) B) C) D) E)

36

99)

100) Countervailing duties are a method of trade restriction designed to offset A) foreign tariffs. B) dumping. C) quotas. D) a trading partner's countervailing duties. E) subsidies by foreign governments. Answer: E Explanation:

A) B) C) D) E)

101) Suppose Canada implements new border procedures that require goods arriving from Country X to be held for 60 days in a bonded warehouse. This new policy is ________ and is likely to ________. A) a voluntary export restriction; reduce imports from Country X B) an example of trade diversion; increase imports from Country X C) a non-tariff barrier; reduce imports from Country X D) a non-tariff barrier; drive down the price of imports from Country X E) an example of an anti-dumping measure; reduce exports from Country X Answer: C Explanation:

101)

A) B) C) D) E)

102) The main difference between a tariff and an "equivalent" voluntary export restriction (VER) is that A) a tariff allows the government of the importing country to appropriate the extra market value of the imported good, but with a VER the extra market value accrues to the good's foreign producers. B) a tariff allows the extra market value of the good to accrue to the supplier, but a VER allows the extra market value to be appropriated by the government of the importing country. C) a tariff restricts free trade between two countries and a VER does not. D) a tariff keeps the price in the importing country higher than it would otherwise be; a VER does not. E) a tariff allows the importing country to protect wages and other factor incomes in the affected industry, while a VER does not. Answer: A Explanation:

100)

A) B) C) D) E)

37

102)

103) Which of the following actions (all of which affect international trade) would be taken by a private firm as opposed to a national government? A) dumping B) tariff C) countervailing duty D) quota E) import duty Answer: A Explanation:

A) B) C) D) E)

104) Mercosur is A) a new trade agreement between the countries of Mexico, Canada, and Cuba. B) a customs union between Argentina, Brazil, Paraguay, and Uruguay. C) the first president of the World Trade Organization (WTO). D) the location of the last GATT round of negotiations. E) the location of the WTO headquarters. Answer: B Explanation:

104)

A) B) C) D) E)

105) An agreement among a group of countries to eliminate trade barriers among themselves, to present a common trading front to the rest of the world in terms of common barriers to trade, and to permit free movement of factors of production among member countries is called a A) confederation. B) common market. C) customs union. D) free-trade area. E) reciprocity association. Answer: B Explanation:

103)

A) B) C) D) E)

38

105)

106) An agreement among a group of countries that allows for tariff-free trade among the members but leaves each member free to levy its own tariffs on imports from other countries is called a A) confederation. B) common market. C) customs union. D) free-trade area. E) reciprocity association. Answer: D Explanation:

A) B) C) D) E)

107) The concept of "trade creation" refers to A) the opening up of new trading routes. B) inefficient trade that follows the establishment of a free-trade area. C) trade based on comparative advantage that typically follows the reduction of trade barriers. D) increased exports and reduced imports as a result of a high-tariff policy. E) regional trade agreements. Answer: C Explanation:

107)

A) B) C) D) E)

108) The concept of "trade diversion" refers to A) the main benefit of creating a free-trade area. B) the replacement of a low-cost foreign supplier with a high-cost one based on membership in a trade agreement. C) trade that is shifted between members of a customs union. D) something that is predicted by theory, but has never been observed in practice. E) an increase in economic efficiency that comes with a newly established trading relationship. Answer: B Explanation:

106)

A) B) C) D) E)

39

108)

109) Suppose Canada has a 20% tariff on the import of carpets, and Canada currently imports this product from India at a with-tariff price of $22. The with-tariff price of identical carpets from the United States is $24. Now suppose a free-trade agreement with the U.S. eliminates the tariff and so the no-tariff price from the U.S. is $20. Canada now purchases carpets from the U.S. This is an example of A) dumping. B) trade diversion. C) a countervailing duty. D) trade creation. E) specialization. Answer: B Explanation:

A) B) C) D) E)

110) Suppose Canada has a 20% tariff on the import of carpets, and Canada currently imports this product from India at a with-tariff price of $22. The with-tariff price of identical carpets from the United States is $24. Now suppose a free-trade agreement with the U.S. eliminates the tariff and so the no-tariff price from the U.S. is $20. Canada now purchases carpets from the U.S. Is Canada made better off from this trade diversion? A) No, because it would still be cheaper for individual consumers to buy carpets from India. B) Canada is not better or worse off. The gain in consumer surplus in Canada is identical to the loss in tariff revenue to the Canadian government. C) Yes, because Canadian consumers are paying less for carpets and consumer surplus has increased. D) No, because before the agreement Canada was buying from India at a lower (pre-tariff) price and collecting tariff revenue. E) Yes, because Canada has diverted trade toward the United States. Answer: D Explanation:

110)

A) B) C) D) E)

111) What is potentially an important argument against regional trade agreements? A) The benefits of trade creation may be outweighed by the costs of trade diversion. B) They are more difficult to negotiate than multilateral agreements at the WTO. C) The gains from trade can only be realized with global trade agreements. D) Regional trade agreements lead to more volatile swings in national income. E) Regional trade agreements are not legally enforceable. Answer: A Explanation:

109)

A) B) C) D) E)

40

111)

The table below shows the prices in Canada of one kilogram of cheddar cheese produced in three different countries. Assume that all cheddar cheese is identical. Producing Country Canada United Kingdom United States

Canadian Price in $ Free Trade 10.00 9.00 8.00

Canadian Price in $ 40% Import Tariff ________ ________ ________

TABLE 34-1 112) Refer to Table 34-1. Assume there is free trade in cheddar cheese and Canada imports the lowest price cheese from the United States. If a 40% tariff is then imposed on U.S. imports, Canada would be likely to purchase its cheese from ________. This situation would be one of ________. A) United States; trade creation B) United Kingdom; trade diversion C) United Kingdom; trade creation D) United States; trade diversion E) United States; free trade Answer: B Explanation:

A) B) C) D) E)

113) An agreement among a group of countries to eliminate trade barriers among themselves, to present a common trading front to the rest of the world in terms of common tariffs, but which does not permit free movement of factors of production among member countries, is called a A) confederation. B) common market. C) customs union. D) free-trade area. E) reciprocity association. Answer: C Explanation:

112)

A) B) C) D) E)

41

113)

114) Suppose Canada entered into a free-trade arrangement with China and, as a result, Canadian imports from India were replaced with imports from China. This would be an example of A) trade diversion. B) trade creation. C) dumping. D) trade expansion. E) countervailing trade. Answer: A Explanation:

A) B) C) D) E)

115) Suppose five countries in Central America agree that products are to be freely traded across their borders, they will share a common set of import duties, and that the flow of people will continue to be restricted. This is an example of a A) common market. B) political union. C) customs union. D) free-trade area. E) trade association. Answer: C Explanation:

115)

A) B) C) D) E)

116) The final round of GATT talks, called the Uruguay Round, established GATT's successor, known as the A) European Union (EU). B) North American Free Trade Agreement (NAFTA). C) Second General Agreement on Trade and Tariffs (GATT 2). D) World Trade Organization (WTO). E) United Nations Council for Free and Fair Trade (UNCFFT). Answer: D Explanation:

114)

A) B) C) D) E)

42

116)

117) Canadian governments (provincial and federal) currently provide enormous protection (through tariffs) to which of the following domestic industries? A) textile B) steel C) lumber D) dairy E) electronic gaming Answer: D Explanation:

A) B) C) D) E)

118) Canada and the United States had a prolonged dispute about alleged government subsidies to the softwood lumber industry in Canada. Who loses and who gains from the situation in which Canadian governments impose taxes on Canadian exports of softwood lumber to the United States? A) U.S. users of lumber lose and U.S. producers of lumber gain. B) U.S. producers of lumber lose and U.S. users of lumber gain. C) Canadian users of lumber lose and Canadian producers of lumber gain. D) Canadian users of lumber lose and U.S. producers of lumber lose. E) U.S. users of lumber gain and U.S. producers of lumber gain. Answer: A Explanation:

118)

A) B) C) D) E)

119) The North American Free Trade Agreement (NAFTA) is guided by the principle of A) countervailing duties. B) most-favoured-nation status. C) national treatment. D) protectionism. E) strategic trade policy. Answer: C Explanation:

117)

A) B) C) D) E)

43

119)

120) According to the principle of "national treatment" in the North American Free Trade Agreement (NAFTA), member countries A) have complete autonomy over their own laws and the way in which they are applied to any firm, domestic or foreign, operating on their soil. B) can establish new laws as they wish, as long as these laws apply equally to domestic and foreign-owned firms. C) must submit any new laws being considered to a cross-border judicial panel before the laws are enacted. D) cannot establish new laws which harm the domestic environment. E) can establish specific subsidies to favour their own national firms over international firms, as long as it applies only to domestic operations. Answer: B Explanation:

A) B) C) D) E)

121) Consider the North American Free Trade Agreement (NAFTA) between Canada, the United States and Mexico. Some industries in Canada, however, continue to have some trade protection. An example is A) mining. B) beef. C) computer software. D) auto parts. E) dairy products. Answer: E Explanation:

121)

A) B) C) D) E)

122) Suppose Canada imposed more stringent quality standards on pharmaceutical products being imported from Mexico than were imposed on firms producing the same products in Canada. This action would be A) an example of a countervailing duty. B) a breach of WTO trade guidelines. C) a violation of Canadian Competition Bureau rules. D) a violation of NAFTA's principle of national treatment. E) an example of an unfair subsidy to domestic firms. Answer: D Explanation:

120)

A) B) C) D) E)

44

122)

123) Canada and the United States have been in a prolonged dispute about Canada's supply-managed agricultural industries, such as dairy and poultry. If the United States is successful in having Canada's "tariff equivalents" removed, who will lose and who will gain? A) American consumers lose and American poultry and dairy producers gain. B) American poultry and dairy producers lose and American consumers gain. C) Canadian consumers lose and Canadian poultry and dairy producers gain. D) Canadian poultry and dairy producers lose and Canadian consumers gain. E) Canadian consumers gain and Canadian poultry and dairy producers gain. Answer: D Explanation:

A) B) C) D) E)

124) Suppose the Canadian government imposed more stringent environmental regulations on U.S.-owned pulp and paper mills than on Canadian-owned mills. This practice would be a violation of A) Canada's Charter of Rights and Freedoms. B) the NAFTA principle of national treatment. C) GATT rules. D) WTO rules. E) U.S. Environmental Protection Agency rules. Answer: B Explanation:

124)

A) B) C) D) E)

125) Suppose the Canadian government began subsidizing wheat farmers by paying them $25 per bushel of wheat produced. According to existing international trade agreements, other countries would be allowed to react to this subsidy by imposing a A) VER. B) quota. C) trade diversion. D) non-tariff barrier. E) countervailing duty. Answer: E Explanation:

123)

A) B) C) D) E)

45

125)

Answer Key Testname: UNTITLED34

1) E 2) C 3) C 4) D 5) E 6) E 7) D 8) D 9) D 10) C 11) A 12) A 13) A 14) A 15) B 16) E 17) C 18) D 19) B 20) E 21) B 22) B 23) C 24) C 25) C 26) B 27) C 28) E 29) E 30) B 31) C 32) A 33) E 34) C 35) D 36) A 37) C 38) B 39) A 40) D 41) E 42) E 43) D 44) B 45) C 46) A 47) C 48) E 49) D 50) D 46

Answer Key Testname: UNTITLED34

51) A 52) E 53) B 54) C 55) E 56) E 57) B 58) C 59) E 60) A 61) B 62) D 63) D 64) E 65) D 66) B 67) A 68) C 69) E 70) D 71) C 72) D 73) C 74) C 75) A 76) C 77) C 78) D 79) E 80) B 81) B 82) D 83) C 84) A 85) D 86) D 87) D 88) D 89) D 90) B 91) E 92) A 93) C 94) A 95) C 96) D 97) A 98) B 99) A 100) E 47

Answer Key Testname: UNTITLED34

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125)

C A A B B D C B B D A B C A C D D A C B E D D B E

48

Exam Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A credit entry in Canada's balance-of-payments accounts A) is any transaction that involves a payment to other nations. B) is any transaction that involves a receipt from other nations. C) typically results in less foreign exchange being held by Canadians. D) typically gives rise to the acquisition of foreign exchange on current-account transactions and the loss of foreign exchange on capital-account transactions. E) can be recorded only by the central bank in the official financing accounts. Answer: B Explanation:

A) B) C) D) E)

2) When a Japanese firm buys Canadian lumber, this transaction appears as a A) debit on the Canadian capital account. B) credit on the Japanese capital account. C) credit on the Canadian current account. D) credit on the Japanese current account. E) debit on Canada's trade account. Answer: C Explanation:

2)

A) B) C) D) E)

3) A debit entry in the Canadian balance-of-payments accounts 1) is a credit in the balance-of-payments accounts for foreign countries; 2) arises when Canadian assets are sold to foreigners; 3) typically results in more foreign exchange being held by foreigners. A) 1 only B) 2 only C) 3 only D) 1 and 2 Answer: E Explanation:

1)

A) B) C) D) E)

1

3)

E) 1 and 3

4) A credit entry in the Canadian balance-of-payments accounts 1) is a credit in the balance-of-payments accounts for foreign countries; 2) occurs when Canadians receive investment income from foreign countries; 3) is any transaction that results in a payment to other nations. A) 1 only B) 2 only C) 3 only D) 1 and 2 Answer: B Explanation:

4)

E) 2 and 3

A) B) C) D) E)

5) Which of the following is true? A credit entry in the Canadian balance-of-payments accounts A) is any transaction that results in a payment to other nations. B) typically results in more foreign exchange being held by foreigners. C) is a credit in the balance-of-payments accounts for foreign countries. D) arises when Canadian assets are sold to foreigners. E) arises when Canadians purchase assets from foreigners. Answer: D Explanation:

A) B) C) D) E)

6) Payments made to foreign firms arising from Canadians' purchases of foreign goods and services are shown in Canada's A) capital account. B) current account. C) official financing account. D) capital-service account. E) foreign-currency reserves. Answer: B Explanation:

6)

A) B) C) D) E)

7) Canadian firms' receipts from foreign consumers arising from the exports of goods and services are shown in Canada's A) investment account. B) capital account. C) official financing account. D) trade account. E) capital-service account. Answer: D Explanation:

5)

A) B) C) D) E) 2

7)

8) With respect to Canada's balance of payments, A) if the current account is in deficit, the capital account must also be in deficit. B) the current account balance must be zero. C) the trade account balance must be zero. D) total payments must equal total receipts. E) if the current account is in surplus, the capital account must also be in surplus. Answer: D Explanation:

A) B) C) D) E)

9) With respect to Canada's balance of payments, A) if the current account is in deficit, the capital account must also be in deficit. B) the current account balance must be zero. C) the current account balance plus the capital account balance must be zero. D) the trade account plus the capital account must equal the official financing account. E) the capital account balance must be zero. Answer: C Explanation:

9)

A) B) C) D) E)

10) The capital-service account in Canada's balance-of-payments is the section of the A) capital account which records the net change in Canadian investments abroad and the net change in foreign investments in Canada. B) capital account which represents the financial reserves held by the Bank of Canada which they can use in the foreign-exchange market. C) current account which records the interest charges and earnings of Canadian importers and exporters. D) current account which records income paid to foreign owners of assets in Canada and income received by Canadians for assets located abroad. E) current account which records the financial reserves held by the Bank of Canada which they can use in the foreign-exchange market. Answer: D Explanation:

8)

A) B) C) D) E)

3

10)

11) The purchase of foreign assets by Canadians is, for Canada, considered a capital A) outflow and is recorded as a debit on the current account. B) outflow and is recorded as a debit on the capital account. C) inflow and is recorded as a credit on the current account. D) inflow and is recorded as a credit on the capital account. E) inflow and is recorded as a debit on the capital account. Answer: B Explanation:

A) B) C) D) E)

12) The purchase of Canadian assets by foreigners is, for Canada, considered a capital A) outflow and is recorded as a credit on the current account. B) outflow and is recorded as a debit on the capital account. C) outflow and is recorded as a debit on the current account. D) inflow and is recorded as a credit on the capital account. E) inflow and is recorded as a credit on the current account. Answer: D Explanation:

12)

A) B) C) D) E)

13) Which of the following would appear as a credit item in the trade account of the Canadian balance of payments? A) dividends payable to Canadians on Canadian-owned assets located in Cuba B) sales of Canadian steel to European importers C) Canadian purchases of American-made vehicles D) purchases by Japanese firms of shares of Canadian firms in the entertainment industry E) the opening of an Ottawa branch of a Swiss bank Answer: B Explanation:

11)

A) B) C) D) E)

4

13)

14) Which of the following would appear as a debit item in the trade account of the Canadian balance of payments? A) dividends payable to Canadians on Canadian-owned assets located in Australia. B) sales of Canadian steel to European importers. C) Canadian purchases of Colombian coffee D) purchases by a Japanese pension fund of CN Rail shares E) purchases by General Motors of Canadian-made auto parts Answer: C Explanation:

A) B) C) D) E)

15) Payments by Canadians of interest and dividends on foreign-owned capital located in Canada A) are a debit in the current account. B) are a debit in the capital account. C) contribute to a surplus on the trade account. D) contribute to increased foreign-exchange holding by the Bank of Canada. E) are a credit in the capital account. Answer: A Explanation:

15)

A) B) C) D) E)

16) Which one of the following transactions would appear as a debit in the current account of the Canadian balance of payments? A) The Arabian Capital Investment Corporation makes a loan to a Canadian firm. B) A Canadian subsidiary exports raw materials to its Dutch parent company. C) Canadians receive dividends on U.S. investment in Latin America. D) Canadian tourists in France purchase cases of wine. E) The Bank of Canada purchases euros to hold in its official reserves. Answer: D Explanation:

14)

A) B) C) D) E)

5

16)

17) Which one of the following transactions would appear as a credit in the capital account of the Canadian balance of payments? A) Canadians purchase foreign securities. B) A Dutch firm purchases a uranium mine in Canada. C) Canadian firms pay dividends to foreigners. D) Coffee is imported from Venezuela. E) French tourists buy ski tickets in Canada. Answer: B Explanation:

A) B) C) D) E)

18) If Canadian exports of goods and services were $40 billion, imports of goods and services were $35 billion, transfers by Canadians to foreigners were $2 billion and transfers from foreigners to Canadian citizens were $1 billion, then the current account balance would be A) + $6 billion. B) + $4 billion. C) - $4 billion. D) - $6 billion. E) - $7 billion Answer: B Explanation:

18)

A) B) C) D) E)

19) If Canadian purchases of foreign real estate was $100 million, Canadian purchases of foreign-country bonds was $50 million, foreign purchases of Canadian real estate was $75 million, and foreign purchases of Canadian bonds was $35 million, then the capital account balance is equal to A) + $90 million. B) + $40 million. C) - $10 million. D) - $40 million. E) - $90 million. Answer: D Explanation:

17)

A) B) C) D) E)

6

19)

20) Consider Canada's balance of payments. If the Canadian government were to purchase more foreign-exchange reserves, this transaction A) represents the sale of an asset, and thus enters as a credit item in the official financing account. B) represents the purchase of an asset from abroad, and thus enters as a debit item in the official financing account. C) enters as a credit in the current account. D) enters as a credit in the capital account. E) represents the purchase of an asset from abroad, and thus enters as a debit item in the capital-service account. Answer: B Explanation:

A) B) C) D) E)

21) Consider Canada's balance of payments. If the Canadian government were to purchase more foreign-exchange reserves, this transaction A) represents the sale of an asset, and thus enters as a credit item in the official financing account. B) represents the purchase of an asset from abroad, and thus enters as a debit item in the capital-service account. C) enters as a credit in the current account. D) enters as a debit in the capital account. E) enters as a credit in the capital account. Answer: D Explanation:

21)

A) B) C) D) E)

22) If the Government of Canada were to sell some of its foreign-exchange reserves to a foreign government, the transaction would A) represent the sale of an asset, and thus enter as a credit item in the official financing account. B) represent the purchase of an asset from abroad, and thus enter as a debit item in the official financing account. C) enter as a credit in the current account. D) enter as a debit in the capital account. E) enters as a credit in the capital-service account. Answer: A Explanation:

20)

A) B) C) D) E)

7

22)

23) When a grocery importer in Sweden buys Quebec maple syrup, this transaction A) appears as a debit item on the Canadian current account. B) appears as a credit item on the Swedish current account. C) appears as a credit item on the Canadian capital account. D) appears as a debit item on the Swedish current account. E) appears as a debit item on the Canadian capital account. Answer: D Explanation:

A) B) C) D) E)

24) The ________ represents the difference between the payments and receipts from international transactions in goods and services (plus net foreign-investment income). The ________ represents the difference between payments and receipts from international transactions in assets. A) capital outflow; capital inflow B) trade balance; capital-service account C) trade balance; official-financing account D) current account balance; capital account balance E) merchandise account; investment account Answer: D Explanation:

23)

24)

A) B) C) D) E)

Consider the balance-of-payments accounting information for Lalaland in 2010 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. Exports Imports Net foreign-investment income Capital outflows Capital inflows

500 350 -60 180 90

TABLE 35-1 25) Refer to Table 35-1. What is the current account balance for Lalaland in 2010? A) -$250 billion B) -$90 billion C) $0 D) $90 billion E) $210 billion Answer: D Explanation:

A) B) C) D) E)

8

25)

26) Refer to Table 35-1. What is the capital account balance for Lalaland in 2010? A) -$270 billion B) -$90 billion C) $0 D) $90 billion E) $270 billion Answer: B Explanation:

A) B) C) D) E)

27) Refer to Table 35-1. What is the net change in the stock of Lalaland's investments abroad in 2010? A) a decrease of $180 billion B) a decrease of $90 billion C) an increase of $90 billion D) an increase of $180 billion E) insufficient information to determine Answer: C Explanation:

27)

A) B) C) D) E)

28) Refer to Table 35-1. What is the net capital flow between Lalaland and the rest of the world in 2010? A) a net capital outflow from Lalaland of $90 billion B) a net capital outflow from Lalaland of 180 billion C) a net capital inflow into Lalaland of $90 billion D) a net capital inflow into Lalaland of $180 billion E) a net capital outflow from Lalaland of $60 billion Answer: A Explanation:

26)

A) B) C) D) E)

9

28)

29) Consider a country's balance of payments. An excess of payments over receipts on the current account A) must equal the net debit balance of the capital account. B) must equal the net credit balance of the current account. C) is not possible. D) must be matched by an excess of payments over receipts on the capital account. E) must be matched by an excess of receipts over payments on the capital account. Answer: E Explanation:

A) B) C) D) E)

30) Consider Canada's balance of payments. If Canada's current account is in deficit, then we can be sure that there is a ________ on the capital account, which means a capital ________ to (from) Canada. A) surplus; inflow B) deficit; inflow C) surplus; outflow D) deficit; outflow Answer: A Explanation:

31)

A) B) C) D) E)

32) A country's balance of payments is sometimes incorrectly said to be "in surplus." This usually refers to a situation where A) total credits exceed total debits. B) the government is increasing its holding of foreign-currency reserves. C) the official financing account is also in surplus. D) the official financing accounts show a decrease in the stocks of official reserves. E) credits exceed debits on the capital account only. Answer: B Explanation:

30)

A) B) C) D)

31) A country's balance of payments is sometimes incorrectly said to be "in deficit." This statement often refers to a situation where A) total debits exceed total credits. B) the official financing account is in surplus. C) the official financing account is also "in deficit." D) the government is increasing its stock of foreign-exchange reserves. E) debits exceed credits on the capital account only. Answer: B Explanation:

29)

A) B) C) D) E) 10

32)

33) Canada's balance of payments is sometimes incorrectly said to be "in surplus". The reason this must be incorrect is that A) Canada's balance of payments has been in deficit for almost all of its history. B) unlike most countries, Canada's balance of payments is almost always balanced. C) like any other country in the world, Canada's balance of payments is always perfectly balanced. D) the Canadian government has long been committed to avoiding balance of payments surpluses. E) it is not possible for capital flows to be in a surplus situation. Answer: C Explanation:

A) B) C) D) E)

34) Canada's balance of payments is sometimes incorrectly said to be "in deficit." The reason this must be incorrect is that A) Canada's balance of payments has been in surplus for almost all of its history. B) unlike most countries, Canada's balance of payments is almost always balanced. C) like any other country in the world, Canada's balance of payments is always perfectly balanced. D) the Canadian government has long been committed to avoiding balance of payments deficits. E) it is not possible for capital flows to be in a deficit situation. Answer: C Explanation:

34)

A) B) C) D) E)

35) Consider Canada's balance of payments. Suppose Canada's current account has a surplus of $18 billion in 2013. It follows that Canada must have a capital account ________ of ________, meaning that there is a capital flow of this amount ________ Canada. A) surplus; $18 billion; into B) deficit; $18 billion; out of C) deficit; less than $18 billion; out of D) surplus; less than $18 billion; into E) deficit; $18 billion; into Answer: B Explanation:

33)

A) B) C) D) E)

11

35)

36) Consider Canada's balance of payments. Suppose Canada's current account has a deficit of $12 billion in 2013. It follows that Canada must have a capital account ________ of ________, meaning that there is a capital flow of this amount ________ Canada. A) surplus; $12 billion; into B) deficit; $12 billion; out of C) deficit; less than $12 billion; out of D) surplus; less than $12 billion; into E) deficit; $12 billion; into Answer: A Explanation:

A) B) C) D) E)

37) Consider Canada's balance of payments. Suppose Canada's capital account has a deficit of $10 billion in 2013. It follows that Canada must have a current account ________ of ________, meaning that net payments of this amount from the sale of goods and services are flowing ________ Canada. A) surplus; $10 billion; into B) deficit; $10 billion; out of C) deficit; less than $10 billion; out of D) surplus; $10 billion; out of E) deficit; $10 billion; into Answer: A Explanation:

37)

A) B) C) D) E)

38) In 2011, Canada had a current account deficit of approximately $49 billion. This deficit implies that during that year, Canada A) had negative net assets with the rest of the world. B) also had a capital account deficit. C) had a net debt to the rest of the world of more than $49 billion. D) experienced a capital inflow of $49 billion. E) experienced a decrease in GDP of $49 billion. Answer: D Explanation:

36)

A) B) C) D) E)

12

38)

39) In 2011, Canada had a capital account surplus of nearly $56 billion. This surplus implies that during that year, 1) foreigners purchased net $56 billion of Canadian assets 2) Canada had a current account deficit 3) Canadians purchased $56 billion of foreign assets A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: D Explanation:

A) B) C) D) E)

40) An appreciation of the Canadian dollar implies A) a fall in the external value of the dollar, such that fewer dollars are required to purchase foreign currency. B) a fall in the external value of the dollar, such that more dollars are required to buy foreign currency. C) a rise in the external value of the dollar, such that fewer dollars are required to purchase foreign currency. D) a rise in the external value of the dollar, such that more dollars are required to purchase foreign currency. E) is shown only by changes in the official reserves of the Bank of Canada and does not influence the exchange rate. Answer: C Explanation:

40)

A) B) C) D) E)

41) For Canada, the term "exchange rate," as used by most economists, refers to A) the price at which purchases and sales of foreign goods take place in Canada. B) Canadian exports minus imports. C) the price of foreign currency in terms of Canadian dollars. D) the ratio of Canadian exports to imports. E) dividends from foreign sources minus interest paid by residents to non-residents. Answer: C Explanation:

39)

A) B) C) D) E)

13

41)

42) A depreciation of the Canadian dollar implies A) a fall in the external value of the dollar, such that fewer dollars are required to purchase foreign currency. B) a fall in the external value of the dollar, such that more dollars are required to buy foreign currency. C) a rise in the external value of the dollar, such that fewer dollars are required to purchase foreign currency. D) a rise in the external value of the dollar, such that more dollars are required to purchase foreign currency. E) a rise in the official reserves of foreign currency held by the Bank of Canada. Answer: B Explanation:

A) B) C) D) E)

43) A rise in the Canadian-dollar price of foreign currency is referred to as A) an appreciation of the Canadian dollar. B) a depreciation of the Canadian dollar. C) a decrease in the exchange rate. D) a gain in the relative value of the Canadian dollar. E) a rise in the external value of the Canadian dollar. Answer: B Explanation:

43)

A) B) C) D) E)

44) Suppose there are only two countries in the world, countries A and B. If the currency of country A appreciates, the currency of country B A) can appreciate relative to other countries. B) must appreciate. C) may appreciate or depreciate, depending on the elasticity of demand for the exports of country A. D) must depreciate. E) may appreciate or depreciate, depending on the volume of trade between the two countries. Answer: D Explanation:

42)

A) B) C) D) E)

14

44)

45) Consider Canada's trade with the United States. Canadian exports to the U.S., Americans travelling in Canada, and U.S. capital flows into Canada all give rise to A) a supply of U.S. dollars on the foreign-exchange market. B) a demand for U.S. dollars on the foreign-exchange market. C) a lower value of the Canadian dollar. D) a decrease in U.S. dollar reserves in Canada. E) a depreciation of the Canadian dollar. Answer: A Explanation:

A) B) C) D) E)

46) Imports into Canada, Canadians travelling outside of Canada, and capital flows out of Canada to purchase foreign assets all give rise to A) a supply of Canadian currency on the foreign-exchange market. B) a supply of foreign currency on the foreign-exchange market. C) a higher value of the Canadian dollar. D) an increase in foreign-exchange reserves in Canada. E) an appreciation of the Canadian dollar. Answer: A Explanation:

46)

A) B) C) D) E)

47) An American traveling to Canada converts U.S.$100 into $118 Canadian dollars. One month later he does the same thing and receives $125 Canadian dollars. There are no transactions costs. The Canadian-U.S. exchange rate has A) risen. B) fallen. C) neither risen nor fallen. D) either risen or fallen; more information is required to determine the direction of movement with certainty. Answer: A Explanation:

45)

A) B) C) D)

15

47)

48) If the exchange rate between British pounds sterling and the Canadian dollar is 1 pound = $2.80, then A) one pound exchanges for 0.28 dollars. B) one pound exchanges for 2.40 dollars. C) one dollar exchanges for 0.280 pounds. D) one dollar exchanges for 0.357 pounds. E) one dollar exchanges for 1.40 pounds. Answer: D Explanation:

A) B) C) D) E)

49) A Canadian traveling to the United States converts $100 Canadian into 85 U.S. dollars. One month later he does the same thing and receives only 80 U.S. dollars. There are no transactions costs. The Canadian-U.S. exchange rate has ________ and the Canadian dollar has ________ relative to the U.S. dollar. A) increased; depreciated B) fallen; depreciated C) increased; appreciated D) fallen; appreciated E) not changed; remained stationary Answer: A Explanation:

49)

A) B) C) D) E)

50) A Canadian traveling to the United States converts $100 Canadian into 95 U.S. dollars. One month later he does the same thing and receives 105 U.S. dollars. There are no transactions costs. The Canadian-U.S. exchange rate has ________ and the Canadian dollar has ________ relative to the U.S. dollar. A) increased; depreciated B) fallen; depreciated C) increased; appreciated D) fallen; appreciated E) not changed; remained stationary Answer: D Explanation:

48)

A) B) C) D) E)

16

50)

51) A fall in the Canadian-dollar price of foreign currency is referred to as A) a depreciation of the Canadian dollar. B) an increase in the exchange rate. C) a loss in the relative value of the Canadian dollar. D) a fall in the external value of the Canadian dollar. E) an appreciation of the Canadian dollar. Answer: E Explanation:

A) B) C) D) E)

52) To macroeconomists, "foreign exchange" refers to A) the price at which purchases and sales of foreign goods take place. B) the movement of goods and services from one country to another. C) foreign currency or various claims on it. D) the difference between exports and imports. E) the actual transaction that occurs as currencies are traded. Answer: C Explanation:

53)

A) B) C) D) E)

54) Other things being equal, a depreciation of the domestic currency tends to A) encourage merchandise imports. B) discourage foreigners from travelling to Canada. C) encourage Canadians to travel abroad. D) have a negative effect on the domestic trade account. E) encourage merchandise exports. Answer: E Explanation:

52)

A) B) C) D) E)

53) Other things being equal, an appreciation of the domestic currency A) lowers the domestic price of imported goods. B) raises the domestic price of imported goods. C) raises the world price of imported goods. D) lowers the world price of imported goods. E) lowers the value of our currency in a foreign country. Answer: A Explanation:

51)

A) B) C) D) E)

17

54)

55) Other things being equal, an appreciation of the domestic currency tends to A) discourage Canadians from travelling abroad. B) encourage foreigners to travel to Canada. C) have a positive effect on the domestic trade account. D) encourage merchandise imports. E) encourage merchandise exports. Answer: D Explanation:

A) B) C) D) E)

56) The demand for Canadian dollars in the foreign-exchange market is derived from A) exports from Canada + capital outflows from Canada. B) exports from Canada + capital inflows to Canada. C) imports to Canada + capital outflows from Canada. D) imports to Canada + capital inflows to Canada. E) the Canadian government's holding of official reserves. Answer: B Explanation:

56)

A) B) C) D) E)

57) The supply curve for Japanese yen on the foreign-exchange market is upward-sloping when plotted against the exchange rate (measured as the Canadian dollar price of one Japanese yen) because A) when the dollar appreciates, Canadian goods are cheaper in Japan. B) a depreciation of the dollar will cause the yen prices of Canadian goods to rise. C) when the dollar depreciates, the price of Japanese exports to Canada decreases. D) an appreciation of the dollar will cause the yen prices of Canadian exports to fall. E) when the dollar depreciates, Canadian goods are cheaper in Japan, and more Canadian exports are therefore demanded. Answer: E Explanation:

55)

A) B) C) D) E)

18

57)

58) The supply of Canadian dollars to the foreign-exchange market, which is also the demand for foreign currency, is derived from A) imports to Canada + capital inflows to Canada. B) exports from Canada + capital outflows from Canada. C) exports from Canada + capital inflows to Canada. D) the Canadian government's holdings of official reserves. E) imports to Canada + capital outflows from Canada. Answer: E Explanation:

A) B) C) D) E)

59) Suppose a Canadian grocery chain imports one million kilograms of cheese from a Swiss exporter. Ceteris paribus, the effect is to A) decrease the number of Canadian dollars needed to buy one Swiss franc. B) increase the number of Swiss francs needed to buy one Canadian dollar. C) increase the demand for Swiss francs in the foreign-exchange market. D) increase the supply of Swiss francs in the foreign-exchange market. E) increase the demand for Canadian dollars in the foreign-exchange market. Answer: C Explanation:

59)

A) B) C) D) E)

60) If Canadian demand for French wine increases, the supply of Canadian dollars to the foreign-exchange market will ________ and the demand for euros will therefore ________. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase E) increase; remain the same Answer: D Explanation:

58)

A) B) C) D) E)

19

60)

61) The supply of Canadian dollars to the foreign-exchange market, which is also the demand for foreign currency, will increase if A) tourism to Canada increases. B) foreign demand for Canadian goods increases. C) imports into Canada increase. D) Canadian interest rates are high. E) Canadian inflation rates are low. Answer: C Explanation:

A) B) C) D) E)

62) Other things being equal, if the Canadian dollar appreciates, there will be a ________ in the demand for foreign imports, and the number of dollars offered in the foreign-exchange market will ________. A) rise; rise B) rise; fall C) fall; rise D) fall; fall E) fall; remain constant Answer: A Explanation:

62)

A) B) C) D) E)

63) Suppose that in Canada we experience a rise in the Canadian dollar price of foreign exchange. In this circumstance, the dollar will have ________ and the exchange rate will have ________. A) depreciated; fallen B) depreciated; risen C) appreciated; fallen D) appreciated; risen E) appreciated; depreciated Answer: B Explanation:

61)

A) B) C) D) E)

20

63)

64) Suppose that in Canada we experience a fall in the Canadian dollar price of foreign exchange. In this circumstance, the dollar will have ________ and the exchange rate will have ________. A) depreciated; fallen B) depreciated; risen C) appreciated; fallen D) appreciated; risen E) appreciated; remained the same Answer: C Explanation:

A) B) C) D) E)

65) In a competitive foreign-exchange market between the dollar and the British pound, a price of pounds (in terms of dollars) above the free-market equilibrium would A) result in the quantity of pounds demanded being greater than the quantity supplied. B) indicate that some people who wish to purchase pounds will not be able to do so at the current exchange rate. C) lead to an appreciation of the dollar. D) result in the quantity of dollars supplied being greater than the quantity demanded. E) lead to a depreciation of the dollar. Answer: C Explanation:

65)

A) B) C) D) E)

66) In a competitive foreign-exchange market between the Canadian dollar and the British pound, a price of pounds (in terms of dollars) below the free-market equilibrium would A) result in the quantity of pounds supplied being greater than the quantity demanded. B) indicate that all people who wish to purchase pounds will be able to do so at the current exchange rate. C) lead to an appreciation of the dollar. D) result in a sustained shortage of pounds. E) lead to a depreciation of the dollar. Answer: E Explanation:

64)

A) B) C) D) E)

21

66)

67) Consider the market in which Canadian dollars are exchanged for British pounds. An increased preference of Canadian consumers for British goods would A) shift the supply-of-pounds curve to the left and lead to a rise in the exchange rate. B) shift the demand-for-pounds curve to the right and lead to a rise in the exchange rate. C) shift the supply-of-pounds curve to the right and lead to a fall in the exchange rate. D) shift the demand-for-pounds curve to the left and lead to a fall in the exchange rate. E) lead to a temporary excess supply of British pounds on the international currency market. Answer: B Explanation:

A) B) C) D) E)

68) Consider the market in which Canadian dollars are exchanged for British pounds. An increased preference of British consumers for Canadian goods would A) shift the supply-of-pounds curve to the left and lead to a rise in the exchange rate. B) shift the demand-for-pounds curve to the right and lead to a rise in the exchange rate. C) shift the supply-of-pounds curve to the right and lead to a fall in the exchange rate. D) shift the demand-for-pounds curve to the left and lead to a fall in the exchange rate. E) lead to a temporary excess demand for British pounds on the international currency market. Answer: C Explanation:

68)

A) B) C) D) E)

69) Consider the market in which Canadian dollars are exchanged for Chinese yuan (the Chinese currency). An increase in Chinese demand for Canadian resources would A) shift the supply-of-yuan curve to the right and lead to an appreciation of the Canadian dollar. B) shift the supply-of-yuan curve to the left and lead to an appreciation of the Canadian dollar. C) shift the demand-for-yuan curve to the right and lead to a depreciation of the Canadian dollar. D) shift the demand-for-yuan curve to the left and lead to an appreciation of the Canadian dollar. E) have no effect on the foreign-exchange market. Answer: A Explanation:

67)

A) B) C) D) E)

22

69)

FIGURE 35-1 70) Refer to Figure 35-1. A rise in the exchange rate (moving up the vertical axis) indicates A) that fewer dollars are needed to purchase one euro. B) that more euros are required to purchase one Canadian dollar. C) an appreciation of the Canadian dollar. D) a depreciation of the Canadian dollar. E) no effect on the value of the currency. Answer: D Explanation:

A) B) C) D) E)

71) Refer to Figure 35-1. A fall in the exchange rate (moving down the vertical axis) indicates A) that more dollars are needed to purchase one euro. B) that fewer euros are required to purchase one Canadian dollar. C) an appreciation of the Canadian dollar. D) a depreciation of the Canadian dollar. E) no effect on the value of the currency. Answer: C Explanation:

70)

A) B) C) D) E)

23

71)

72) Refer to Figure 35-1. A fall in the exchange rate (moving down the vertical axis) indicates A) a depreciation of the Canadian dollar. B) that more dollars are needed to purchase one euro. C) that fewer dollars are needed to purchase one euro D) that fewer euros are required to purchase one Canadian dollar. E) no effect on the value of the currency. Answer: C Explanation:

72)

A) B) C) D) E)

FIGURE 35-2 73) Refer to Figure 35-2. If the exchange rate is e1, there is A) an excess demand for foreign exchange. B) pressure for the Canadian dollar to depreciate. C) pressure for the exchange rate to rise. D) an excess supply of foreign exchange. E) a surplus of Canadian dollars. Answer: D Explanation:

A) B) C) D) E)

24

73)

74) Refer to Figure 35-2. If the exchange rate is e2, there is

74)

A) an excess supply of foreign exchange. B) pressure for the Canadian dollar to appreciate. C) pressure for the exchange rate to fall. D) a shortage of Canadian dollars. E) an excess demand for foreign exchange. Answer: E Explanation:

A) B) C) D) E)

75) Refer to Figure 35-2. If the exchange rate is e1, there is

75)

A) a shortage of foreign exchange. B) a surplus of Canadian dollars. C) pressure on the Canadian dollar to depreciate. D) pressure on the exchange rate to rise. E) a shortage of Canadian dollars. Answer: E Explanation:

A) B) C) D) E)

76) Refer to Figure 35-2. If the exchange rate is e2, there is A) a surplus of foreign exchange. B) a surplus of Canadian dollars. C) pressure on the Canadian dollar to appreciate. D) pressure on the exchange rate to fall. E) a shortage of Canadian dollars. Answer: B Explanation:

A) B) C) D) E)

25

76)

FIGURE 35-3 77) Refer to Figure 35-3. An increase in demand or decrease in the supply of foreign exchange will A) encourage Canadians to buy more European goods. B) encourage Europeans to buy fewer Canadian goods. C) cause the Canadian dollar to appreciate. D) cause the Canadian dollar to depreciate. E) have no effect on the exchange rate. Answer: D Explanation:

A) B) C) D) E)

78) Refer to Figure 35-3. An increase in demand for foreign exchange OR a decrease in the supply of foreign exchange may be due to A) foreign inflation in excess of domestic inflation. B) domestic inflation in excess of foreign inflation. C) equal rates of inflation. D) increased preference for Canadian goods. E) more Europeans travelling to Canada. Answer: B Explanation:

77)

A) B) C) D) E)

26

78)

79) Countries can engage in trade with each other only if A) there are international trading agreements in place. B) currencies of the trading nations can be exchanged. C) the countries engaging in trade officially establish an agreed upon exchange rate. D) the trade is bilateral. E) trading nations share the same currency. Answer: B Explanation:

A) B) C) D) E)

80) A rise in the Canadian-dollar price of foreign currency is A) a decrease in the exchange rate. B) an appreciation of the Canadian dollar. C) a depreciation of the Canadian dollar. D) a gain in the relative value of the Canadian dollar. E) a rise in the external value of the Canadian dollar. Answer: C Explanation:

81)

A) B) C) D) E)

82) Other things being equal, a depreciation of the Canadian dollar leads to A) an increase in the number of foreign tourists travelling to Canada. B) an increase in the number of Canadian citizens travelling abroad. C) a negative effect on the trade account of Canada's balance of payments. D) an increase in desired merchandise imports. E) a decrease in desired merchandise exports. Answer: A Explanation:

80)

A) B) C) D) E)

81) If the exchange rate between Mexican pesos and Canadian dollars is 1 peso = $0.1428, A) one peso exchanges for $0.2857. B) one dollar exchanges for 7 pesos. C) one dollar exchanges for 14.28 pesos. D) one peso exchanges for $1.42. E) one dollar exchanges for .028 pesos. Answer: B Explanation:

79)

A) B) C) D) E)

27

82)

83) When you hear on the news that the "Canadian dollar is at 87 cents U.S.," what is the Canada/U.S. exchange rate expressed as the Canadian-dollar price of one U.S. dollar? A) $0.87 B) $1.00 C) $1.13 D) $1.15 E) $1.87 Answer: D Explanation:

A) B) C) D) E)

84) Suppose we hear on the news that the Canadian dollar is valued at 94.6 U.S. cents. In this case, the Canada-U.S. exchange rate is A) 94.6. B) 0.946. C) 0.0946. D) 1.057. E) 10.57. Answer: D Explanation:

85)

A) B) C) D) E)

86) Other things being equal, if the Canadian dollar depreciates, the quantity of foreign exchange demanded will decline because A) the Canadian-dollar price of foreign goods will rise. B) the foreign-exchange price of foreign goods will fall. C) the Canadian-dollar price of foreign goods will fall. D) the foreign-exchange price of foreign goods will rise. E) the Canadian-dollar price of Canadian goods will rise. Answer: A Explanation:

84)

A) B) C) D) E)

85) Suppose we hear on the news that the Canadian dollar is valued at U.S.$1.08. In this case, the Canada-U.S. exchange rate is A) 92.59. B) 9.259. C) 0.9259. D) 1.08. E) 0.0108. Answer: C Explanation:

83)

A) B) C) D) E)

28

86)

87) Suppose that Canada imposed a tax of 10% on all foreign-exchange transactions. We can predict that A) the Canadian dollar would depreciate by 10% in response and no change in trade would occur. B) the tax would reduce the profit of exporters and importers but would not affect the volume of trade. C) the gains from trade would be reduced and less trade would occur. D) the tax would have no effect on the volume of trade because it affects only Canadians, and not foreigners. E) the Canadian dollar would appreciate due to increased demand. Answer: C Explanation:

A) B) C) D) E)

88) Suppose that a laptop computer sells in China for 3000 yuan, and that the exchange rate between the Canadian dollar and the yuan is 12 yuan per Canadian dollar. If you buy the laptop in China it will cost you the equivalent of ________ Canadian. A) $3600 B) $360 C) $250 D) $36 E) $25 Answer: C Explanation:

88)

A) B) C) D) E)

89) Suppose that a shipment of electronic equipment is arriving in Canada from Taiwan. The price in Taiwanese dollars (TWD) is 20 million TWD. Assume the exchange rate between the Canadian dollar and the TWD is 28 TWDs per dollar. The Canadian-dollar value of the shipment is A) $7142. B) $56 000. C) $5 600 000. D) $560 000. E) $714 286. Answer: E Explanation:

87)

A) B) C) D) E)

29

89)

90) Suppose there is a rise in the world price of Canada's imports. If the Canadian demand for imports has a price elasticity greater than 1 (elastic), the demand for foreign exchange will ________ and the Canadian dollar will ________. A) rise; appreciate B) rise; depreciate C) fall; appreciate D) fall; depreciate E) fall; and remain constant Answer: C Explanation:

A) B) C) D) E)

91) Suppose there is a rise in the world price of Canada's imports. If the Canadian demand for imports has a price elasticity less than 1 (inelastic), the demand for foreign exchange will ________ and the Canadian dollar will ________. A) rise; appreciate B) rise; depreciate C) fall; appreciate D) fall; depreciate E) fall; and remain constant Answer: B Explanation:

91)

A) B) C) D) E)

92) If there are no transactions in the official financing account, it is likely that A) the central bank has pegged the exchange rate so that the current and capital accounts sum to zero. B) the exchange rate is being determined freely in the foreign-exchange market. C) this country must not be engaging in international trade. D) there must be a disequilibrium in the foreign-exchange market. E) this country has a pegged exchange rate and persistent surpluses on its balance of payments. Answer: B Explanation:

90)

A) B) C) D) E)

30

92)

93) Assume exchange rates are flexible. The existence of inflation in a country that is higher than inflation in the rest of the world will tend to A) increase the demand for that country's currency in the foreign-exchange market, and lead to an appreciation of that currency. B) increase the supply of that country's currency in the foreign-exchange market, and lead to a depreciation of that currency. C) increase its exports. D) decrease its imports. E) have no effect on the foreign-exchange market. Answer: B Explanation:

A) B) C) D) E)

94) Assume exchange rates are flexible. General domestic inflation that is above inflation in the rest of the world will affect the supply and demand for foreign exchange in the following way: A) decrease the demand and increase the supply B) increase both the supply and demand C) decrease both the supply and demand D) decrease the supply and increase the demand E) there will be no effect. Answer: D Explanation:

94)

A) B) C) D) E)

95) Assume exchange rates are flexible. When the quality of one country's products is improving more rapidly than the quality of the products produced in the rest of the world, there will be a tendency, ceteris paribus, for A) short term capital to flow out of the country. B) the country's interest rates to rise relative to the rest of the world. C) that country's currency to appreciate. D) that country's currency to depreciate. E) the country's inflation rate to rise relative to the rest of the world. Answer: C Explanation:

93)

A) B) C) D) E)

31

95)

96) Assume exchange rates are flexible. Capital inflows tend to A) appreciate the currency of the capital-importing nation. B) appreciate the currency of the capital-exporting nation. C) increase the supply of the capital-importing country's currency in the foreign-exchange market. D) increase the demand for the capital-exporting country's currency in the foreign-exchange market. E) decrease the official reserves of the capital-importing country. Answer: A Explanation:

A) B) C) D) E)

97) Assume exchange rates are flexible. Other things being equal, a contractionary monetary policy in Canada will tend to cause a(n) A) depreciation of the Canadian dollar. B) appreciation of the European currency. C) financial capital outflows. D) a decreased external value of the Canadian dollar. E) appreciation of the Canadian dollar. Answer: E Explanation:

97)

A) B) C) D) E)

98) Long-term capital movements are largely influenced by A) long-term expectations about another country's profit opportunities and the path of the exchange rate. B) differences in the overnight interest rates between the domestic country and foreign countries. C) speculation about movements in the exchange rate in coming months. D) whether they are treated as debits or credits in the capital account. E) speculation about the movements in monthly inflation rate estimates. Answer: A Explanation:

96)

A) B) C) D) E)

32

98)

99) If a Canadian company builds and operates a mine in Indonesia, in the foreign-exchange market there will be a(n) A) fall in the demand for dollars in the foreign-exchange market. B) increase in the demand for dollars in the foreign-exchange market. C) fall in the supply of dollars to the foreign-exchange market. D) increase in the supply of dollars to the foreign-exchange market. E) decrease in the debits on Canada's capital account. Answer: D Explanation:

A) B) C) D) E)

100) If the Bank of Canada pursues a contractionary monetary policy, interest rates in Canada will A) rise, there will be a capital outflow, and the Canadian dollar will depreciate. B) rise, there will be a capital inflow, and the Canadian dollar will appreciate. C) fall, there will be a capital inflow, and the Canadian dollar will depreciate. D) fall, there will be a capital outflow, and the Canadian dollar will appreciate. E) fall, there will be a loss in official reserves at the Bank of Canada, and the Canadian dollar will depreciate. Answer: B Explanation:

100)

A) B) C) D) E)

101) Under a system of flexible exchange rates, a nation which tightens its monetary policy would be likely to experience A) a loss in international reserves. B) a fall in the value of its currency. C) short-term capital outflows. D) an appreciation of its currency. E) a surplus in its current account. Answer: D Explanation:

99)

A) B) C) D) E)

33

101)

102) An increase in Canadian interest rates (caused by a monetary contraction) should A) decrease the external value of the Canadian dollar. B) stimulate Canadian exports. C) increase the external value of the Canadian dollar. D) always induce an offsetting action by the Bank of Canada. E) lead to a surplus in Canada's current account. Answer: C Explanation:

A) B) C) D) E)

103) Suppose Canada has a flexible exchange rate. If there is a decline in the world price of copper (a major Canadian export), other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar. A) contract; depreciation B) contract; appreciation C) expand; depreciation D) expand; appreciation E) expand; the reduced speculative appeal of Answer: C Explanation:

103)

A) B) C) D) E)

104) Suppose Canada has a flexible exchange rate. If there is a rise in the world price of copper (a major Canadian export), other exporting sectors of the Canadian economy will likely ________ due to the resulting ________ of the Canadian dollar. A) contract; depreciation B) contract; appreciation C) expand; depreciation D) expand; appreciation E) expand; reduced speculative appeal Answer: B Explanation:

102)

A) B) C) D) E)

34

104)

105) Suppose two countries, A and B, are trading with each other. Suppose also that the rate of inflation in B is higher than in A. There will be A) an increase in the demand for Country B's currency in the foreign-exchange market. B) an increase in Country B's exports. C) a decrease in Country B's imports. D) an increase in the supply of Country B's currency in the foreign-exchange market. E) no effect on the foreign-exchange market. Answer: D Explanation:

A) B) C) D) E)

106) If the Bank of Canada pursues an expansionary monetary policy, A) interest rates will rise, there will be a capital outflow, and the Canadian dollar will depreciate. B) interest rates will rise, there will be a capital inflow, and the Canadian dollar will appreciate. C) interest rates will fall, there will be a capital inflow, and the Canadian dollar will depreciate. D) interest rates will fall, there will be a capital outflow, and the Canadian dollar will appreciate. E) interest rates will fall, there will be a capital outflow, and the Canadian dollar will depreciate. Answer: E Explanation:

106)

A) B) C) D) E)

107) Consider a country that is operating under a system of flexible exchange rates. If the central bank in this country imposes an expansionary monetary policy, it would be likely to experience 1) a depreciation of its currency; 2) short-term capital outflows; 3) an appreciation of its currency. A) 1 only B) 2 only C) 3 only D) 1 and 2 E) 2 and 3 Answer: D Explanation:

105)

A) B) C) D) E)

35

107)

108) Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%, while interest rates in other countries do not change. The result will be A) an inflow of financial capital, a decrease in demand for Canadian dollars, and a depreciation of the Canadian dollar. B) an inflow of financial capital, an increase in demand for Canadian dollars, and a depreciation of the Canadian dollar. C) an inflow of financial capital, an increase in demand for Canadian dollars, and an appreciation of the Canadian dollar. D) an outflow of financial capital, an increase in demand for Canadian dollars, and an appreciation of the Canadian dollar. E) an outflow of financial capital, a decrease in demand for Canadian dollars, and a depreciation of the Canadian dollar. Answer: C Explanation:

A) B) C) D) E)

109) Suppose the Bank of Canada raises its target for the overnight interest rate from 3% to 3.25%, while interest rates in other countries do not change. How will this policy action affect Canada's imports and exports? A) The Canadian dollar will appreciate and encourage imports into Canada. B) The Canadian dollar will appreciate and encourage Canada's exports. C) The Canadian dollar will depreciate and discourage Canada's exports. D) The Canadian dollar will depreciate and encourage imports into Canada. E) The Canadian dollar will appreciate and discourage imports into Canada. Answer: A Explanation:

109)

A) B) C) D) E)

110) World commodity prices increased significantly over the years 2002-2008. Since Canada is a large exporter of commodities, it is not surprising that over this time period Canada experienced A) a significant depreciation of its currency against the U.S. dollar. B) a significant increase in the rate of inflation. C) a significant appreciation of its currency against the U.S. dollar. D) a significant decrease in the rate of inflation. E) outflows in the capital-service account. Answer: C Explanation:

108)

A) B) C) D) E)

36

110)

111) If the central bank pegs the exchange rate above its free-market equilibrium level, there will be a(n) ________ of foreign exchange and the central bank will ________ foreign currency. A) excess supply; purchase B) excess supply; sell C) excess demand; purchase D) excess demand; sell Answer: A Explanation:

A) B) C) D)

112) Consider a country that is operating under a fixed exchange-rate system. The country's balance of payments will always show total debits equal to total credits because A) fluctuations in exchange rates will bring debits and credits into equality. B) any official financing required to maintain the fixed exchange rate will offset any deficit or surplus in the rest of the balance of payments accounts. C) short-term capital flows will always offset any deficit or surplus in current accounts and long-term capital accounts. D) the official financing account will always offset a deficit or surplus in the current account. E) fluctuations in interest rates will bring debits and credits into equality. Answer: B Explanation:

113)

A) B) C) D)

114) Suppose the Bank of Canada fixes the Canada-U.S. exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar. If the free-market equilibrium exchange rate would otherwise be Cdn$1.25, then the A) Bank of Canada needs to engage in expansionary monetary policy to support the dollar. B) Government of Canada must reduce spending and increase taxes. C) Bank of Canada must sell U.S. dollars. D) Bank of Canada must buy U.S. dollars. E) Federal Reserve System in the Untied States is required to increase the number U.S. dollars circulating in Canada. Answer: C Explanation:

112)

A) B) C) D) E)

113) If the central bank pegs the exchange rate below its free-market equilibrium level, there will be a(n) ________ of foreign exchange and the central bank will ________ foreign currency. A) excess supply; purchase B) excess supply; sell C) excess demand; purchase D) excess demand; sell Answer: D Explanation:

111)

A) B) C) D) E)

37

114)

115) Suppose that Canada's central bank fixes the Canada-U.S. exchange rate between the limits of Cdn$1.10 and Cdn$1.20 to the U.S dollar. If the free market equilibrium exchange rate would otherwise be Cdn$1.05, then A) Canada's central bank must buy U.S. dollars. B) Canada's central bank must sell U.S. dollars. C) Canada's central bank need not intervene as the exchange rate will return to its equilibrium level on its own. D) The Federal Reserve System in the United States must decrease the supply of U.S. dollars on international currency markets. E) Government of Canada must increase spending and increase taxes. Answer: A Explanation:

A) B) C) D) E)

116) China fixes its exchange rate (yuan per units of foreign currency) at a rate well above its free-market equilibrium level, which means that China is keeping the external value of the yuan A) artificially high. B) at its free-market price. C) at the rate established by its trading partners. D) artificially low. E) in line with the world market for foreign currency. Answer: D Explanation:

116)

A) B) C) D) E)

117) China fixes its exchange rate (yuan per units of foreign currency) at a rate well above its free-market equilibrium level. In order to maintain this exchange rate, and to prevent its currency from ________, the Chinese central bank must be accumulating ________. A) appreciating; foreign-exchange reserves B) appreciating; reserves of its domestic currency C) depreciating; foreign-exchange reserves D) depreciating; reserves of its domestic currency E) depreciating; U.S. dollars Answer: A Explanation:

115)

A) B) C) D) E)

38

117)

118) The Chinese government fixes its exchange rate well above its free-market equilibrium level. Its purpose in keeping the Chinese currency depreciated is probably to A) make it more affordable for Chinese firms to import new materials. B) make it more affordable for Chinese households to purchase consumer goods from the United States. C) maintain respect for the Chinese yuan. D) help maintain a current account deficit and thus a capital inflow to China. E) make Chinese exports more attractive to the rest of the world. Answer: E Explanation:

A) B) C) D) E)

39

118)

The diagram below shows the market for foreign exchange from the perspective of Canada. The demand for foreign exchange is D0 and the supply of foreign exchange varies between S2 and S1 , with an average of S0 .

FIGURE 35-4 119) Refer to Figure 35-4. Suppose the Bank of Canada pegs the exchange rate at e0 and the supply curve is S1. The Bank would have to ________ foreign exchange in the amount of ________ per month. A) sell; Q0 Q1 B) sell; Q2 Q0 C) purchase; Q2 Q1 D) purchase; Q0 Q1 E) No transaction would be necessary Answer: D Explanation:

A) B) C) D) E)

40

119)

120) Refer to Figure 35-4. Suppose the Bank of Canada pegs the exchange rate at e0 and the supply

120)

curve is S2. The Bank would have to ________ foreign exchange in the amount of ________ per month. A) sell; Q0 Q1 B) sell; Q2 Q0 C) purchase; Q2 Q0 D) purchase; Q0 Q1 E) No transaction would be necessary Answer: B Explanation:

A) B) C) D) E)

121) Refer to Figure 35-4. Suppose the Bank of Canada pegs the exchange rate at e0 and the supply

121)

curve is S0. The Bank would have to ________ foreign exchange in the amount of ________ per month. A) purchase; Q0 Q1 B) purchase; Q2 Q0 C) sell; Q0 Q1 D) sell; Q2 Q0 E) No transaction would be necessary Answer: E Explanation:

A) B) C) D) E)

122) Consider a country's balance of payments. An excess of receipts over payments on the current account A) must equal the net credit balance of the capital account. B) must equal the net debit balance of the current account. C) is not possible. D) must be matched by an excess of payments over receipts on the capital account. E) must be matched by an excess of receipts over payments on the capital account. Answer: D Explanation:

A) B) C) D) E)

41

122)

123) People who might be called "neomercantalists" are most likely to argue that 1) the benefits from international trade increase with the size of the trade surplus; 2) the power of the government is related to the size of the trade balance; 3) the country's living standard is related to the size of the trade surplus. A) 1 and 2 B) 2 and 3 C) 1, 2, and 3 D) 2 only Answer: C Explanation:

123)

E) 3 only

A) B) C) D) E)

124) If Canada has a current account deficit, it is A) matched by a trade surplus of the same size. B) matched by a deficit on the capital-service portion of the current account. C) matched by a capital account deficit of the same size. D) matched by a capital account surplus of the same size. E) not matched by a change in the capital account. Answer: D Explanation:

A) B) C) D) E)

125) Mercantilists, both ancient and modern, believe that a country's gains from trade arise primarily from having A) exports equal imports. B) a trade deficit. C) comparative advantage in the production of products in which their opportunity costs are low. D) imports exceed exports. E) exports exceed imports. Answer: E Explanation:

125)

A) B) C) D) E)

126) Any country's current account can be expressed as CA = A) (S + T) - (T + G). B) (S + I) + (T + G). C) (S - I) - (T - G). D) (S - I) + (T - G). E) (S + I) - (T - G). Answer: D Explanation:

124)

A) B) C) D) E) 42

126)

127) Consider the balance of payments for a small country. Suppose that in this country private saving is $4 million, its investment is $10 million, government purchases are $6 million, and net tax revenues are $15 million in a given year. The current account balance for this country is a A) deficit of $6 million. B) deficit of $9 million. C) surplus of $3 million. D) surplus of $9 million. E) surplus of $15 million. Answer: C Explanation:

A) B) C) D) E)

128) Other things being equal, an increase in the current account deficit could be due to A) an increase in private saving. B) a decrease in private saving. C) a fall in domestic investment. D) a fall in the government's budget deficit. E) a rise in the budget surplus. Answer: B Explanation:

128)

A) B) C) D) E)

129) Other things being equal, an increase in the current account deficit could result from A) an increase in private saving. B) a fall in domestic investment. C) a rise in domestic investment. D) a fall in the government's budget deficit. E) a rise in the government's budget surplus. Answer: C Explanation:

127)

A) B) C) D) E)

43

129)

130) Other things being equal, an increase in the current account deficit could result from A) an increase in private saving. B) a fall in domestic investment. C) a fall in the government's budget deficit. D) a rise in the government's budget deficit. E) a rise in the budget surplus. Answer: D Explanation:

A) B) C) D) E)

131) Other things being equal, an increase in the current account deficit may be due to A) an increase in private saving. B) a fall in domestic investment. C) a rise in the government's budget surplus. D) a fall in the government's budget surplus. E) a fall in the government's budget deficit. Answer: D Explanation:

132)

A) B) C) D) E)

133) Which of the following policies could be implemented by the government in order to decrease its country's current account deficit? A) more stringent anti-trust policy B) better fiscal stabilization policies C) a contractionary fiscal policy D) a reduction of public saving E) wage and price controls Answer: C Explanation:

131)

A) B) C) D) E)

132) The problem of the "twin deficits" refers to A) a decrease in domestic investment and an increase in the deficit on the capital account. B) a decrease in the government's budget deficit. C) an increase in the government's budget deficit and an increase in private sector borrowing. D) having both a government budget deficit and a deficit on the current account. E) an increase in private saving and a decrease in the capital account. Answer: D Explanation:

130)

A) B) C) D) E) 44

133)

134) An increase in a country's current account deficit A) is desirable regardless of the cause of the change. B) is undesirable regardless of the cause of the change. C) is not desirable if it is caused by an increase in domestic investment. D) might be desirable depending on the cause of the change. E) is desirable if it is caused by a reduction in the level of private saving. Answer: D Explanation:

A) B) C) D) E)

135) The theory of "purchasing power parity" (PPP) predicts that the A) actual exchange rate will eventually exceed the PPP exchange rate. B) actual exchange rate will eventually be lower than the PPP exchange rate. C) actual exchange rate will eventually equal the PPP exchange rate. D) there is no relationship between the actual exchange rate and the PPP exchange rate. E) prices of of non-traded goods will be equalized across all countries. Answer: C Explanation:

135)

A) B) C) D) E)

136) Purchasing power parity A) is an index of the average value of exchange rates. B) is a theory that says price levels in two countries should be equal when measured in a common currency. C) allows for both countries' currencies to appreciate at their own rates of inflation. D) will tend to cause those currencies with lower inflation rates to depreciate. E) holds exactly in the short run but not in the long run. Answer: B Explanation:

134)

A) B) C) D) E)

45

136)

137) If Canadian inflation is 4% while Japanese inflation is 7%, PPP theory predicts that the Japanese yen will ________ relative to the Canadian dollar. A) depreciate by 11% B) depreciate by 3% C) appreciate by 3% D) appreciate by 11% E) appreciate by 28% Answer: B Explanation:

A) B) C) D) E)

138) If a basket of goods costs 1000 euros in Europe and the Canadian dollar exchange rate is $1.40 = 1 euro, then according to the theory of PPP the same basket of goods should cost ________ in Canada. A) $ 140.00 B) $ 714.29 C) $1000.00 D) $1400.00 E) $7142.90 Answer: D Explanation:

139)

A) B) C) D) E)

140) If a basket of goods costs 1000 euros in Europe and the Canadian dollar exchange rate is $1.50 = 1 euro, then the same basket of goods should cost ________ in Canada. A) $ 150.00 B) $ 666.67 C) $1000.00 D) $1500.00 E) $6666.67 Answer: D Explanation:

138)

A) B) C) D) E)

139) If a basket of goods costs $1000 in Canada and the Canadian dollar exchange rate is $1.40 = 1 euro, then according to the theory of PPP the same basket of goods in Europe should cost ________ euros. A) 140.00 B) 714.29 C) 1000.00 D) 1400.00 E) 7142.90 Answer: B Explanation:

137)

A) B) C) D) E)

46

140)

141) If a basket of goods costs $1000 in Canada and the Canadian dollar exchange rate is $1.50 = 1 euro, then the same basket of goods in Europe should cost ________ euros. A) 150.00 B) 666.67 C) 1000.00 D) 1500.00 E) 6666.67 Answer: B Explanation:

A) B) C) D) E)

142) According to the theory of purchasing power parity (PPP), the exchange rate between two country's currencies is determined by A) relative price levels in the two countries. B) absolute price levels in the two countries. C) relative quantities of gold and official reserves held by the central banks of two countries. D) quantities of goods and services produced in the two countries. E) quantities of goods and services traded in the two countries. Answer: A Explanation:

142)

A) B) C) D) E)

143) Which of the following provides an explanation for the failure of the theory of purchasing power parity? 1) differences in the structure of the different price indices in different countries 2) the presence of nontraded goods 3) changes in the relative prices of traded goods A) 1 only B) 2 only C) 3 only D) 2 and 3 E) 1, 2, and 3 Answer: E Explanation:

141)

A) B) C) D) E)

47

143)

The table below shows indexes for the price levels for Canada and the United States and the nominal exchange rate between their currencies (the Canadian-dollar price of 1 U.S. dollar).

Year 2008 2009 2010 2011 2012

Price level (Canada) 122 125 128 131 135

Price level (U.S.) 115 118 122 125 129

Nominal exchange rate 1.15 1.10 1.05 1.00 0.95

TABLE 35-2 144) Refer to Table 35-2. According to the theory of Purchasing Power Parity (PPP), the actual Canada-US exchange rate in 2008 should have been A) 115/122 = 0.94. B) 1.15, the actual exchange rate that year. C) (122 × 115)/100 = 140.3. D) 122, the price level in Canada that year. E) 122/115 = 1.06. Answer: E Explanation:

A) B) C) D) E)

145) Refer to Table 35-2. According to the theory of Purchasing Power Parity (PPP), the Canadian-U.S. exchange rate in 2008 was ________, meaning that the Canadian dollar was ________ relative to its PPP equilibrium value. A) too high; overvalued B) too low; undervalued C) too high; undervalued D) too low; overvalued Answer: C Explanation:

145)

A) B) C) D)

146) Refer to Table 35-2. According to the theory of Purchasing Power Parity (PPP), the Canadian-U.S. exchange rate in 2012 was ________, meaning that the Canadian dollar was ________ relative to its PPP equilibrium value. A) too low; undervalued B) too low; overvalued C) too high; overvalued D) too high; undervalued Answer: B Explanation:

144)

A) B) C) D)

48

146)

147) Refer to Table 35-2. Based on the "law of one price," the value of the "PPP exchange rate" in 2011 was A) 131/125 = 1.048. B) 125/131 = 0.954. C) 1.00, the actual exchange rate that year. D) (131 × 125)/100 = 163.75. E) 131, the price level in Canada that year. Answer: A Explanation:

A) B) C) D) E)

148) Proponents of fixed exchange rates argue that flexible exchange rates can lead to 1) greater transactions costs of trade; 2) greater uncertainty surrounding the profitability of trade; 3) imbalances in the balance of payments. A) 1 only B) 2 only C) 3 only D) 1 and 2 Answer: B Explanation:

148)

E) 1, 2, and 3

A) B) C) D) E)

149) In Canada, proponents of a flexible exchange rate argue that the flexible exchange rate acts as a "shock absorber." By this, they mean that A) negative shocks to the Canadian economy will be fully absorbed by a depreciation of the dollar, causing net exports to rise. B) a flexible exchange rate protects Canadian exporters from increases in the prices of their products in the rest of the world. C) flexible exchange rates allow for more certainty with regard to the profitability of international transactions, which dampens negative effects on output and employment. D) external shocks to the Canadian economy can be partially absorbed by fluctuations in the exchange rate, which dampen the effect of the shock on output and employment. E) positive shocks to the Canadian economy will be fully absorbed by an appreciation of the dollar, causing net exports to fall. Answer: D Explanation:

147)

A) B) C) D) E)

49

149)

150) Prior to the onset of the global financial crisis and recession in 2008, Canada was experiencing strong growth in demand for its commodities (notably from China and India) which caused a(n) ________ of its currency. Other things being equal, this change in the exchange rate, in turn, caused a(n) ________ in economic activity in Ontario and Quebec manufacturing industries. A) appreciation; increase B) depreciation; increase C) depreciation; decrease D) appreciation; decrease Answer: D Explanation:

150)

A) B) C) D)

FIGURE 35-5 151) Refer to Figure 35-5. For a shift in the supply curve of foreign exchange from S0 to S1, the Bank of Canada could maintain a fixed exchange rate at e0 by A) selling Canadian currency. B) holding foreign reserves constant. C) buying foreign currency reserves. D) selling foreign currency reserves. E) lowering the overnight interest rate. Answer: D Explanation:

A) B) C) D) E)

50

151)

152) Refer to Figure 35-5. The leftward shift in the supply curve to S1 (assuming flexible exchange rates)

152)

may be due to a A) fall in the Canadian demand for foreign imports. B) fall in the world's demand for Canadian exports. C) rise in the world's demand for Canadian exports. D) rise in the Canadian demand for foreign imports. E) rise in the Canadian demand for foreign assets. Answer: B Explanation:

A) B) C) D) E)

153) Refer to Figure 35-5. A decrease in the world's demand for Canadian exports (assuming fixed exchange rates) will shift A) the supply curve from S0 to S1 and aggregate demand curve from AD0 to AD1 .

153)

B) the supply curve from S0 to S1 and the aggregate demand curve from AD0 to AD2. C) the supply curve from S1 to S0 and the aggregate demand curve from AD2 to AD1. D) only the aggregate demand curve, to AD1 . E) only the aggregate demand curve, to AD2 . Answer: B Explanation:

A) B) C) D) E)

154) Refer to Figure 35-5. A decrease in the world's demand for Canadian exports (assuming fixed exchange rates) will A) require the Bank of Canada to accommodate the excess demand for Canadian dollars. B) require the Bank of Canada to purchase foreign-currency reserves. C) shift the AD curve to the left more than would have occurred under a flexible exchange rate. D) shift the AD curve to the left less than would have occurred under a flexible exchange rate. E) have less effect on national income than if the exchange rate had been flexible. Answer: C Explanation:

A) B) C) D) E)

51

154)

155) A flexible exchange rate ________ the impact of terms of trade shocks on output and employment because of the effect of a change in the exchange rate on ________. A) dampens; the terms of trade B) dampens; net exports C) has no effect on; the inflation rate D) magnifies; the interest rate E) magnifies; the terms of trade Answer: B Explanation:

A) B) C) D) E)

52

155)

Answer Key Testname: UNTITLED35

1) B 2) C 3) E 4) B 5) D 6) B 7) D 8) D 9) C 10) D 11) B 12) D 13) B 14) C 15) A 16) D 17) B 18) B 19) D 20) B 21) D 22) A 23) D 24) D 25) D 26) B 27) C 28) A 29) E 30) A 31) B 32) B 33) C 34) C 35) B 36) A 37) A 38) D 39) D 40) C 41) C 42) B 43) B 44) D 45) A 46) A 47) A 48) D 49) A 50) D 53

Answer Key Testname: UNTITLED35

51) E 52) C 53) A 54) E 55) D 56) B 57) E 58) E 59) C 60) D 61) C 62) A 63) B 64) C 65) C 66) E 67) B 68) C 69) A 70) D 71) C 72) C 73) D 74) E 75) E 76) B 77) D 78) B 79) B 80) C 81) B 82) A 83) D 84) D 85) C 86) A 87) C 88) C 89) E 90) C 91) B 92) B 93) B 94) D 95) C 96) A 97) E 98) A 99) D 100) B 54

Answer Key Testname: UNTITLED35

101) 102) 103) 104) 105) 106) 107) 108) 109) 110) 111) 112) 113) 114) 115) 116) 117) 118) 119) 120) 121) 122) 123) 124) 125) 126) 127) 128) 129) 130) 131) 132) 133) 134) 135) 136) 137) 138) 139) 140) 141) 142) 143) 144) 145) 146) 147) 148) 149) 150)

D C C B D E D C A C A B D C A D A E D B E D C D E D C B C D D D C D C B B D B D B A E E C B A B D D 55

Answer Key Testname: UNTITLED35

151) 152) 153) 154) 155)

D B B C B

56