Principles of Economics Test Bank N. Gregory Mankiw

Chapter 29: The Monetary System

1. Barter exchange tends to be inefficient because

a. gold is difficult to transport.

b. it limits the time and effort required for trade.

c. it can be a very time-consuming process to find a double coincidence of wants.

d. a standardized unit of value can be difficult to find in a primitive economy.

2. In order for something to function well as a medium of exchange, it must be

a. issued by a central government.

b. readily and widely accepted in trade.

c. backed by a valuable commodity.

d. All of the above are correct.

3. If a society chooses fiat money as its money form, it

a. must guarantee its convertibility into gold.

b. must worry about its liquidity.

c. cannot make use of a banking system.

d. must worry about controlling its quantity.

4. Which of the following is the most liquid category of assets?

a. large time deposits

b. money market mutual fund balances

c. small time deposits

d. demand deposits

5. Fred Jones won a lottery prize of $1 million. He put the money in the bank to save it for his daughter’s college education. For him, money was functioning primarily as a

a. unit of account.

b. store of value.

c. means of payment.

d. type of short-term loan.

6. Which of the following is not included in the M1 money stock?

a. small time deposits.

b. demand deposits.

c. travelers’ checks.

d. cash in the hands of the public.

7. Given the following information, what would be the values of M1 and M2?

Small time deposits $650 billion

Checking deposits $300 billion

Savings-type deposits $750 billion

Money market mutual funds $600 billion

Travelers’ checks $ 25 billion

Large time deposits $600 billion

Cash in hand $100 billion

a. M1 = $400 billion, M2 = $2,450 billion.

b. M1 = $100 billion, M2 = $1,075 billion.

c. M1 = $425 billion, M2 = $2, 425 billion.

d. M1 = $425 billion, M2 = $1,850 billion.

8. Credit cards are

a. included in M2 but not in M1.

b. not considered money.

c. included in M3 but not in M2 or M1.

d. considered money only when they are in the hands of the public.

9. The Federal Reserve is

a. part of the executive branch of the government.

b. not part of any branch of the government.

c. part of the judicial branch of the government.

d. included in all three branches of government.

10. Which of the following would not be used by the Fed to influence interest rates?

a. selling securities

b. buying stocks

c. setting reserve requirements

d. changing the discount rate

11. The interest rate that the Fed charges banks that borrow reserves from it is the

a. federal funds rate.

b. discount rate.

c. reserve requirement.

d. prime rate.

12. Which of the following can banks count as reserves?

a. coins in the bank vaults

b. paper currency in bank vaults

c. deposits at the Federal Reserve banks

d. All of the above are correct.

13. The most effective and frequently used tool the Fed has at its disposal to change the economy’s money supply is

a. open market operations.

b. the discount rate.

c. the reserve requirement.

d. the federal funds rate.

14. The Federal Open Market Committee is composed of

a. 12 Federal Reserve bank presidents and presidents of the seven largest commercial banks in the U.S.

b. the Board of Governors and the 12 Federal Reserve bank presidents.

c. the Board of Governors, the Secretary of the Treasury, and the President of the FDIC.

d. the Board of Governors and presidents of five Federal Reserve Banks.

15. An open market purchase occurs when

a. the Fed buys government securities from a bank.

b. a bank buys government securities from the Fed.

c. a securities dealer buys shards of stock from the Fed.

d. the Treasury buys government securities from the Fed.

16. The legal reserve requirement is

a. the minimum amount of reserves the Fed requires a bank to hold.

b. the interest rate that the Fed charges banks who borrow from it.

c. the interest rate on loans made by banks to other banks.

d. an appeal by the Fed to banks, asking for voluntary compliance with the Fed’s 100% reserves policy.

17. Given an initial deposit of $5,000 and a legal reserve requirement of 25%, the amount of money potentially created by the banking system is

a. $15,000.

b. $20,000.

c. $25,000.

d. $10,000.

18. When the potential money multiplier is 7, a $3,000 increase in demand deposits could support the creation of __________ additional new demand deposits.

a. $3,000

b. $9,000

c. $15,000

d. $18,000

19. If a bank receives a new demand deposit of $10,000, and the legal reserve requirement is 20 percent, then the bank can lend out

a. $2,000.

b. $10,000.

c. $40,000.

d. $8,000.

20. If the legal reserve requirement decreases, the

a. money multiplier increases.

b. money multiplier decreases.

c. amount of excess reserves the bank has decreases.

d. money multiplier is unaffected.

21. Given the information in the table, if the legal reserve requirement is 20 percent, this bank has excess reserves of

a. $80,000.

b. $60,000.

c. $40,000.

d. $20,000.

22. Given the information in the table, if the legal reserve requirement is 20 percent, this bank can expand its loans by as much as

a. $80,000.

b. $60,000.

c. $40,000.

d. $20,000.

23. If a bank keeps some of its excess reserves, the actual money multiplier

a. increases.

b. stays the same.

c. goes to zero.

d. decreases.

24. If the Fed reduces the money supply, banks will often initially have

a. more reserves than they are required to hold.

b. excess reserves.

c. increases demand deposits.

d. deficient reserves.

25. If the Fed decides to sell $10 million in securities and the Paris National Bank writes out a $10 million check to purchase these securities, then the

a. Paris National Bank now has $10 million more of excess reserves at the Fed.

b. Paris National Bank now has $10 million fewer reserves at the Fed.

c. Fed has increased its asset position by $20 million.

d. money supply has increased.

26. When the Fed decreases the discount rates, it makes it easier for banks to

a. decrease their reserves by borrowing from the Fed, causing the money supply to shrink.

b. increase their reserves by borrowing from the Fed, causing the money supply to grow.

c. protect against the inevitable accompanying increase in the legal reserve requirement.

d. convert its loans into deposits.

27. The Fed loses some control over the interest rate once it targets the money supply,

a. but the interest rate does not move in an inappropriate direction with respect to the Fed’s monetary policy.

b. and the interest rate often moves in the opposite direction of the Fed’s target.

c. but it can still dictate what the interest rate will be.

d. and also loses some control over open market operations, which are linked to the interest rate.

28. If there is a recession, the Fed would most likely

a. encourage banks to provide loans by lowering the discount rate.

b. encourage banks to provide loans by raising the discount rate.

c. restrict bank lending by lowering the discount rate.

d. restrict bank lending by raising the discount rate.

Macroeconomics Test Bank , N. Gregory Mankiw

Chapter 29: The Monetary System - Principles of Economics Test Bank Mankiw

Pretty.Much Monday, November 21, 2016

Chapter 28: Unemployment and Its Natural Rate

1. The amount of __________increases when the economy goes into a recession and decreases when the economy goes into an expansion.

a. structural unemployment

b. seasonal unemployment

c. cyclical unemployment

d. frictional unemployment

2. It is difficult for cyclically unemployed persons to find jobs because

a. they typically do not meet the qualifications required for the available jobs.

b. the economy is in a recession.

c. they voluntarily quit their last jobs and employers may view them as unreliable.

d. they typically have not looked long enough to find a job.

3. The natural rate of unemployment is the economist’s notion of

a. full employment.

b. cyclical employment.

c. structural unemployment.

d. frictional unemployment.

4. Yuan recently completed his college degree and is entering the labor market for the first time. He has been submitting applications and has been interviewed twice in the last two weeks, but so far has not found a job. Yuan could be classified as

a. frictionally unemployed.

b. seasonally unemployed.

c. structurally unemployed.

d. cyclically unemployed.

5. Providing training for unemployed individuals will help to alleviate

a. frictional unemployment.

b. seasonal unemployment.

c. structural unemployment.

d. cyclical unemployment.

6. According to the data from the Bureau of Labor Statistics found here, the labor force totals

Number of workers employed 8,400

Frictional unemployment 250

Structural unemployment 350

Cyclical unemployment 600

Discouraged workers 400

Adult population 12,000

a. 7,550.

b. 8,000.

c. 8,400.

d. 9,600

7. According to the data from the Bureau of Labor Statistics found here, the unemployment rate is

a. 12.5 percent.

b. 15 percent.

c. 16 percent.

d. 24 percent.

8. According to the data from the Bureau of Labor Statistics found here, the labor force participation rate is

a. 12.5 percent.

b. 25 percent.

c. 60 percent.

d. 80 percent.

9. Brian Vargo, an auto repair mechanic who remains unemployed because he refuses to work for less than $1,000 per hour, is

a. counted as part of the labor force and is unemployed.

b. considered frictionally unemployed.

c. an underemployed worker.

d. not counted as part of the labor force.

10. The existence of many discouraged workers in an economy may cause us to

a. overstate the employment rate.

b. understate the employment rate.

c. overstate the unemployment rate.

d. understate the unemployment rate.

11. Changes in the composition of demand among industries or regions are called

a. frictional shifts.

b. sectoral shifts.

c. structural shifts.

d. temporary shifts.

12. Unemployment insurance

a. tends to increase unemployment by decreasing the cost of being unemployed.

b. tends to decrease unemployment by providing limited resources to the unemployed.

c. increases the hardships associated with unemployment.

d. increases the amount of job security demanded by employees.

13. Fred is a low-skilled worker who washes dishes in a local restaurant. He is worried about a proposed increase in the minimum wage because price

a. floors tend to create shortages.

b. ceilings tend to create shortages.

c. floors tend to reduce quantity demanded.

d. ceilings tend to reduce quantity demanded.

14. If the market for day care workers is in equilibrium at $5.00 per hour as shown in this diagram, a minimum wage of $8.00 per hour will increase unemployment by

a. 300 workers.

b. 500 workers.

c. 600 workers.

d. no workers.

15. Consider two labor markets in which jobs are equally attractive in all respects other than the wage rate. All workers are equally able to do either job. Initially, both labor markets are perfectly competitive. If a union organizes workers in one of the markets, then the wage rates will tend to

a. rise in both markets.

b. fall in both markets

c. rise for the union jobs, but remain unchanged for the nonunion jobs.

d. rise for the union jobs and fall for the nonunion jobs.

16. Unions attempt to raise wage rates for their members by

a. reducing the supply of the product their members produce.

b. lowering barriers to entry so their members have greater opportunities.

c. reducing the demand for labor so there are fewer nonunion competitors.

d. negotiating a higher-than-competitive wage rate.

17. The process of negotiation between union and management to arrive at a labor contract is called

a. arbitration.

b. mediation.

c. collective bargaining.

d. reconciliation.

18. The legislation that granted unions the legal right to organize workers and bargain collectively with employers was the

a. Norris-LaGuardia Act.

b. Wagner Act.

c. Taft-Hartley Act.

d. Sherman Act.

19. To negotiate a higher wage rate, a union cannot

a. start with a strike and then work to reach a contract to end the strike.

b. negotiate in good faith and expect to hold its bargaining power.

c. expect to maintain the same level of employment.

d. offer a supply curve of labor that is horizontal.

20. Efficiency wages are

a. lower than market wages paid by employers to increase profitability.

b. higher than market wages paid by employers to increase productivity.

c. government-determined minimum wages set to protect workers from unfair employers.

d. negotiated by unions when officials are interested in trimming work forces.

21. The idea of paying workers an efficiency wage is that

a. doing so is more efficient than paying them the market wage.

b. paying them less gives them the incentive to work harder.

c. workers and management gain at the expense of the stockholders of the company.

d. workers have the incentive to do high-quality work.

22. Henry Ford found that by paying an efficiency wage

a. he was able to bust the autoworkers union.

b. workers worked longer hours.

c. absentee and quit rates fell.

d. he could spend less on workers and more on capital equipment.

23. A potential problem with efficiency wages is that if all firms try to do it

a. no one will have a job.

b. unemployment will occur.

c. workers will have higher salaries than managers.

d. unions will go on strike against them.

24. When an agent lacks an incentive to promote the best interests of the principal, and the principal cannot observe the actions of the agent, there is said to be

a. an optimal contract.

b. monitoring.

c. a separating equilibrium.

d. moral hazard.

25. Carlos, who knew nothing about construction, paid Joe to remodel a room in his house. Two years later, the wall of the new room crumbled because Joe used poor-quality materials. This is an example of

a. moral hazard.

b. an optimal contract.

c. monitoring.

d. adverse selection.

26. The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

a. adverse selection.

b. monitoring.

c. moral hazard.

d. an optimal contract.

27. Guarantees may not completely eliminate adverse selection problems because

a. no one guarantees a product 100%.

b. getting the firm to honor guarantees is too much work.

c. a firm that makes low-quality products may issue guarantees and then go out of business.

d. a firm offering guarantees subjects itself to lawsuits concerning their obligations.

28. Adverse selection is less of a problem

a. the less often buyers and sellers deal with each other.

b. the more often buyers and sellers deal with each other.

c. if guarantees are not enforceable.

d. if there is also a lot of moral hazard.

Macroeconomics Test Bank , N. Gregory Mankiw

Chapter 28: Unemployment and Its Natural Rate - Principles of Economics Test Bank Mankiw

Pretty.Much Sunday, November 20, 2016

Chapter 26: Saving, Investment, and the Financial System

1. Bond markets allow firms to pursue

a. equity financing.

b. debt financing.

c. limited-growth policies.

d. government loans and subsidy programs.

2. Junk bonds are issues by firms with

a. high degrees of financial security.

b. business ties to the trash-hauling industry.

c. high degrees of financial insecurity.

d. the ability to offer lower interest rates to lenders.

3. The stock market is an institution that promotes

a. buying and selling of debt financing.

b. the purchase and sale of firm equities.

c. the purchase and sale of mutual funds.

d. bank borrowing and lending.

4. The major advantage of mutual funds is that

a. they allow people with limited funds to diversify.

b. they encourage households to spend their money on current consumption.

c. fund managers are replaced by household administrators.

d. they always use index funds to limit investor risk.

5. If an asset functions as a medium of exchange it

a. holds its value over a long period of time.

b. can be used by people to cover transactions.

c. can be used by firms for debt financing.

d. can be used by firms for equity financing.

6. The four categories of expenditures that make up GDP are consumption,

a. investment, net exports, and government expenditures.

b. investment, government purchases, and depreciation.

c. interest, government purchases, and net exports.

d. investment, exports, and rental expenditures.

7. Economists say that investment occurs when

a. someone buys stock on the New York Stock Exchange.

b. someone buys a U.S. government bond.

c. a firm increases its capital stock.

d. a government buys goods from another country.

8. Which of the following would be counted as a private investment expenditure in the national income accounts?

a. The Navy builds a new battleship.

b. Microsoft expands plant capacity to produce new software.

c. A public high school builds a new football stadium.

d. All of the above are correct.

9. If a series of major technological breakthroughs occur in the economy at the same time, then the most likely outcome would be that the economy’s

a. investment demand curve will shift downward.

b. investment demand curve will shift upward.

c. consumption curve will shift downward.

d. position along the existing investment curve will move upward.

10. Households make their savings available to borrowers through

a. resource markets.

b. the loanable funds market.

c. the labor market.

d. taxes.

11. What is the price of funds in the loanable funds market?

a. the real wage rate

b. the consumer price index

c. the nominal interest rate

d. the average firm profit rate

12. Assuming the economy is in equilibrium, use the following information to determine the amount of funds supplied to the loanable funds market.

Consumption Spending $3.5 trillion

Net Taxes $2.7 trillion

Household Saving $2.5 trillion

Investment Spending $2.2 trillion

Government Purchases $3.0 trillion.

a. $2.2 trillion

b. $2.5 trillion

c. $2.7 trillion

d. $3.0 trillion

13. The quantity of loanable funds supplied is

a. positively related to the level of income.

b. negatively related to the price level.

c. positively related to the price level.

d. positively related to the interest rate.

14. The supply of loanable funds curve is upward sloping because a rise in the interest rate

a. decreases the opportunity cost of firms’ investment spending.

b. increases the opportunity cost of firms’ investment spending.

c. decreases the opportunity cost to households of consuming.

d. increases the opportunity cost to households of consuming.

15. The investment demand curve

a. is upward sloping.

b. is downward sloping.

c. is horizontal.

d. begins sloping upward, then becomes horizontal.

16. When interest rates rise, the quantity of loanable funds demanded by

a. firms decreases.

b. government decreases.

c. firms increases.

d. government increases.

17. Market clearing in the loanable funds market

a. guarantees that total spending will be just sufficient to purchase whatever output is produced.

b. means that the interest rate never changes.

c. guarantees that total spending will equal the quantity of loanable funds demanded.

d. requires that the government run a budget deficit.

18. If taxes are reduced with no change in government spending, and people spend all the money from the tax cut on consumption

a. the demand for loanable funds will increase and the interest rate will increase.

b. the demand for loanable funds will increase and the interest rate will decrease.

c. the supply of loanable funds will decrease and the interest rate will increase.

d. neither the demand nor the supply of loanable funds will change.

19. If taxes are reduced with no change in government spending, and people save all the money from the tax cut,

a. the demand for loanable funds will increase and the interest rate will increase.

b. the demand for loanable funds will increase and the interest rate will remain constant.

c. the supply of loanable funds will increase and the interest rate will decrease.

d. neither the demand nor the supply of loanable funds will change.

20. A(n) __________ allows a firm to decrease its tax liability by a fraction of the investment it initiates during a particular period.

a. tax on corporate profits

b. tax on retained earnings

c. investment tax credit

d. personal income tax

21. If the U.S. government wants to increase the level of employment and real output, it could

a. increase corporate income taxes.

b. provide an investment tax credit.

c. decrease expenditures on roads and dams.

d. increase the personal income tax.

22. Assuming the economy was in equilibrium, use the following information to determine the government’s budget deficit or surplus.

Consumption Spending $3.5 trillion

Net Taxes $2.7 trillion

Household Saving $2.5 trillion

Investment Spending $2.2 trillion

The government’s deficit (surplus) was

a. $.3 trillion surplus.

b. $.2 trillion surplus.

c. $.3 trillion deficit.

d. $.5. trillion deficit.

23. The government budget deficit is

a. the difference between government purchases and government revenues from bonds and taxes.

b. caused by a lack of business sector investment.

c. created when the government expenditures exceed net taxes.

d. caused by leakages in the economy.

24. If the government budget deficit increases, the

a. supply of loans increases and the equilibrium interest rate increases.

b. supply of loans increases and the equilibrium interest rate decreases.

c. demand for loans increases and the equilibrium interest rate decreases.

d. demand for loans increases and the equilibrium interest rate increases.

25. If technical progress raises productivity permanently, then

a. the equilibrium interest rate will increase.

b. equilibrium saving will increase.

c. real GDP will increase.

d. All of the above are correct.

Macroeconomics Test Bank , N. Gregory Mankiw

Chapter 26: Saving, Investment, and the Financial System - Principles of Economics Test Bank Mankiw

Pretty.Much Friday, November 18, 2016

Chapter 27: The Basic Tools of Finance

1. The amount of money that someone would pay today for the right to receive a future payment is called the

a. present value of the future payment.

b. determinate value of the future payment.

c. market interest rate.

d. principal.

2. Which of the following changes would increase the present value of a future payment?

a. a decrease in the size of the payment

b. a decrease in the certainty of the payment actually being received

c. an increase in the amount of time that elapses before receiving the payment

d. a decrease in the interest rate

3. You have a bond that you can redeem for $10,000 one year from now. The interest rate is 10 percent per year. How much is the bond worth today?

a. $9,091.01

b. $10,000.00

c. $8,264.46

d. $9,523.81

4. A snowplow will generate a net income of $2,000 per year for its owner. After 8 years, the plow will break down and have zero value. The maximum amount of money anyone would pay for the plow is

a. less than $2,000.

b. $2000.

c. between $2,000 and $16,000.

d. $16,000.

5. You have a choice among three options. Option 1: receive $900 immediately. Option 2: receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The interest rate is 15% per year. Rank these three options from highest present value to lowest present value.

a. Option 1; Option 2; Option 3

b. Option 3; Option 2; Option 1

c. Option 2; Option 3; Option 1

d. Option 3; Option 1; Option 2

6. Someone who cares only about expected return and doesn’t worry about risk is someone who is

a. risk averse.

b. risk neutral.

c. risk seeking.

d. irrational.

7. Diversification has the advantage of

a. reducing expected return.

b. reducing actual return.

c. reducing risk.

d. reducing the profits of insurance companies.

8. To diversify, a homeowner with a variable-rate mortgage should choose investments that

a. pay higher returns when interest rates rise and lower returns when interest rates fall.

b. pay lower returns when interest rates rise and higher returns when interest rates fall.

c. provide a higher return than the market average.

d. provide a lower return than the market average.

9. Rex is a mortgage broker, who is paid by commission. When interest rates decline, he does a lot of business and earns a lot of money, as more people buy houses or refinance their mortgages. But when interest rates rise, business falls substantially. To diversify, Rex should choose investments that

a. provide a higher return than the market average.

b. provide a lower return than the market average.

c. pay higher returns when interest rates rise and lower returns when interest rates fall.

d. pay lower returns when interest rates rise and higher returns when interest rates fall.

10. A person is risk averse if he or she

a. prefers a riskier income, holding fixed its expected value.

b. doesn’t care about the riskiness of income.

c. prefers a less-risky income, holding fixed its expected value.

d. refuses to diversify risk.

11. When an agent lacks an incentive to promote the best interests of the principal, and the principal cannot observe the actions of the agent, there is said to be

a. an optimal contract.

b. diversification.

c. moral hazard.

d. idiosyncratic risk.

12. Steve bought fire insurance for his house for an amount that was greater than his house was worth, then became careless about leaving burning cigarettes around. This is an example of

a. an optimal contract.

b. diversification.

c. moral hazard.

d. aggregate risk.

13. Adverse selection occurs when

a. sellers have relevant information about some aspect of the product’s quality that buyers lack (or vice versa).

b. an agent lacks the incentive to act in the best interests of the principal and the principal cannot observe the actions of the agent.

c. a principal and an agent reach an agreement that maximizes the principal’s profit while providing an incentive for the agent to participate.

d. a principal obtains information about an agent’s actions.

14. The fact that someone with a high risk of medical problems is more likely to buy a lot of health insurance is an example of

a. adverse selection.

b. monitoring.

c. moral hazard.

d. an optimal contract.

15. Diversification can eliminate

a. all types of risk.

b. idiosyncratic risk but not aggregate risk.

c. aggregate risk but not idiosyncratic risk.

d. all types of risk but only if insurance is purchased.

16. Bonds are preferred to stocks by individual investors who

a. need to have immediate access to their money.

b. don't think the business is profitable.

c. prefer a guaranteed lower return to a risky higher return.

d. prefer a risky higher return to a guaranteed lower return.

17. Corporate profits that are not reinvested in the corporation are distributed to

a. consumers in the form of lower prices.

b. management and bondholders.

c. management and the board of directors.

d. shareholders in the form of dividends.

18. Which of the following factors would be considered by a fundamental analyst when predicting a firm's stock price?

a. recent changes in the stock's price

b. the knowledge and skills of the firm's current management

c. the marketing strategies of the firm's competitors

d. Both b and c are correct.

19. Which of the following factors would not be considered by a fundamental analyst when predicting stock prices?

a. the future demand for a firm's products

b. the patents held by a firm

c. the likelihood of new firms competing with an existing firm

d. recent jumps in a firm's stock prices

20. If the price of stock is greater than what you believe to be the true value of the business then the stock is

a. undervalued.

b. overvalued.

c. fairly valued.

d. no longer going to be traded.

21. According to the efficient markets hypothesis,

a. fundamental analysis is a way to profit from predicting stock prices.

b. fundamental and technical analysis are largely useless.

c. technical analysis is the best approach to profit from predicting stock prices.

d. fundamental and technical analysis must be synthesized in order to profit from predicting stock prices.

22. The efficient markets view of the stock market says that new information

a. is quickly and completely incorporated into stock prices.

b. is incorporated into stock prices only when discovered by fundamental analysis.

c. causes stock prices to increase.

d. has little impact on stock prices.

23. If the efficient markets theory is correct, stock prices

a. do not respond to unpredictable events.

b. are unpredictable.

c. rise at the beginning of a month and fall at the end of a month.

d. follow a predictable pattern over time.

24. If stock prices follow a random walk, it means

a. long periods of declining prices are followed by long periods of rising prices.

b. the greater the number of consecutive days of price declines, the greater the probability prices will increase the following day.

c. stock prices are unrelated to random events that shock the economy.

d. stock prices are just as likely to rise as to fall at any given time.

25. If stock prices follow a random walk then stock investors can make large profits by

a. using computer programs that perform technical analysis using past stock trends.

b. performing fundamental analysis of stocks using data contained in annual reports.

c. quickly responding to rumors of mergers between companies.

d. using inside information.

Macroeconomics Test Bank , N. Gregory Mankiw

Chapter 27: The Basic Tools of Finance - Principles of Economics Test Bank Mankiw

Pretty.Much

Chapter 25: Production and Growth

1. If one wants to know how the material well-being of the average person has changed over time the appropriate measure to look at is the growth

a. rate of real GDP.

b. rate of nominal GDP.

c. rate of per capita real GDP.

d. in the percentage of the labor force that is employed.

2. Per capita real GDP differs from per capita nominal GDP in that real GDP

a. measures the opportunity cost of growth.

b. has been adjusted for the time value of money.

c. has been adjusted for inflation.

d. has been discounted to the present.

3. Poor countries are poor for all of the following reasons except

a. their technology is less than modern.

b. their labor productivity is low.

c. foreign investment funds are difficult to attract.

d. their labor force is too small.

4. Of the following, which country experienced the fastest growth rate for the period 1900–1998?

a. United States

b. Japan

c. Canada

d. Brazil

5. Which of the following represents a productivity-enhancing investment in human capital?

a. a new labor-saving technology

b. a new health clinic

c. a new factory that will employ 1,000 workers

d. an increase in fringe benefits, such as paid vacations and overtime pay

6. If the capital stock increases faster than employment, then we would expect

a. both output and labor productivity to rise.

b. output to rise but labor productivity to fall.

c. both output and labor productivity to fall.

d. output to fall but labor productivity to rise.

7. As its capital stock increases, a nation will

a. move to the right along a fixed production function.

b. move to the left along a fixed production function.

c. find its production function shifting up.

d. find its production function shifting down.

8. An increase in the capital stock causes labor productivity to

a. decrease and the standard of living to increase.

b. increase and the standard of living to increase.

c. decrease and the standard of living to decrease.

d. increase while the standard of living remains constant.

9. If 100 lumberjacks generate $5,000 in real GDP, the output per laborer would be

a. .02

b. .05

c. 50

d. 100

10. Labor productivity, measuring the output per worker,

a. increases with increases in technology.

b. decreases with increases in technology.

c. increases with increases in capital stock.

d. is impossible to measure since so many workers are involved in the service sector.

11. Investments in human capital are often opposed because

a. investments in plant and machinery are more important.

b. the increase in productivity comes with opportunity costs to workers and firms.

c. investments in plant and machinery will have greater monetary payoffs.

d. they rarely lead to long-term economic growth.

12. One reason the prices of some exhaustible natural resources have fallen is

a. their supply has decreased rapidly.

b. the demand for them has increased quite rapidly.

c. technical progress has increased their supply.

d. they are not subject to diminishing returns.

13. Historical evidence indicates that scarcity of natural resources has

a. caused slower world economic growth.

b. nearly stopped economic growth in most countries throughout the world.

c. not limited economic growth.

d. limited economic growth, but only in high-growth countries.

14. The data on U.S. growth rates during the last half of the 20th century suggest that when the savings rate increases the rate of

a. growth can increase or decrease depending on the phase of the business cycle the economy is in.

b. economic growth increases.

c. economic growth decreases.

d. economic growth is unaffected.

15. The most direct opportunity cost of having large families in a poor country such as Egypt is the

a. loss of its customs and traditions.

b. benefit of having more hands to help in agricultural production.

c. larger tax revenues government will collect from families.

d. sacrifice of per capita material goods and services needed in the development process.

16. Poor countries often have a difficult time attracting foreign investment funds because

a. wages are low in poor countries.

b. investment risks are quite low in poor countries so rates of return are low.

c. property rights are not protected so investors fear their property may be confiscated.

d. All of the above are correct.

17. Which of the following would decrease the likelihood that foreign business firms will invest in a country?

a. a low corporate profit tax rate

b. political stability

c. a well-established legal system

d. political instability

18. Which of the following countries achieved economic growth, in part, by mandating a reduction in population growth?

a. the former Soviet Union

b. Great Britain

c. China

d. Hong Kong

19. Most countries that are developing with slow growth rates are characterized by

a. inadequate labor forces.

b. a high proportion of the population under the age of 15.

c. unfertile and uncultivable soil.

d. low total productivity but high per capita productivity.

20. A high proportion of the population under the age of 15 undermines economic growth because

a. the young require more infrastructure than older people.

b. the young require more capital goods than older people.

c. they present such a huge increase in human capital.

d. the young consume but they do not produce.

21. Countries like South Korea and Singapore have shown tremendous growth rates in recent years because

a. of diminishing returns.

b. of the catch-up effect.

c. of lower levels of domestic investment in recent years.

d. they have limited international trade.

22. Inward-oriented policies stall economic growth because

a. international trade leads to lower domestic employment.

b. they encourage the brain-drain.

c. infant industries are unable to compete with the rest of the world.

d. they do not allow a country to take advantage of the gains from trade.

23. Suppose everyone working the land in Exland knows the usefulness of investing in land irrigation systems but those who work the land may choose not to invest in these profitable irrigations systems as long as

a. the investment is too expensive.

b. the natural climate, such as abundant rain, makes the irrigation projects unnecessary.

c. their property rights, with respect to the land, are subject to change.

d. the government dictates the choice of investment.

24. A singular important link between politics and economics in countries that are attempting to increase their economic growth rates is that

a. democracies are more productive than non democracies.

b. democracies must constantly make difficult budgetary choices.

c. political instability is incompatible with long-term private investment.

d. conservative governments tend to focus development on military industries.

25. The main reason that some countries have serious reservations about increasing foreign direct investment in their countries is because they

a. think this will cause political instability.

b. believe that tax revenues will fall.

c. anticipate many of their most productive workers will leave the country.

d. fear a return to colonialism.

Macroeconomics Test Bank , N. Gregory Mankiw

Chapter 25: Production and Growth - Principles of Economics Test Bank Mankiw

Pretty.Much

Chapter 24: Measuring the Cost of Living

1. Which price index measures the average price of things purchased by the typical family in an urban area?

a. GDP deflator

b. producer price index

c. consumer price index

d. minimum wage

2. Which item would receive the most weight in the consumer price index?

a. salt

b. toothpicks

c. pencils

d. food

3. Which item would receive the least weight in the consumer price index?

a. brooms

b. automobiles

c. color televisions

d. automobile tires

4. The good that receives the most weight in the CPI is the good that

a. consumers buy most frequently.

b. has experienced the greatest price increase.

c. has the highest price.

d. consumers spend the largest fraction of their income on.

5. Which of the following is a reason why the Consumer Price Index (CPI) is not calculated as a simple average of all prices?

a. Some goods experience large price changes and the CPI would be too variable if computed by a simple average.

b. Goods differ in their importance in the average consumer’s budget.

c. Some goods never experience price changes and the CPI would not be variable enough if computed as a simple average.

d. It would be difficult to compute a price index using a simple average of all prices.

6. If the price of the market basket of goods in the base year of 1994 was $20,000 and the price of the same basket had risen to $22,000 by 1998, the CPI for 1998

a. cannot be calculated.

b. is $12,000.

c. is 200.

d. is 110.

7. Suppose you spend 30 percent of your budget on food, 20 percent on medical care, 40 percent on rent, 5 percent on entertainment, and 5 percent on miscellaneous items. If the price of all parts of your budget rises equally in percentage terms, which would have the most weight on your cost of living increase? (Assume you calculate your index the same way the CPI is calculated.)

a. food

b. medical care

c. rent

d. entertainment

8. Substitution bias

a. is one factor that causes the CPI to underestimate the inflation rate.

b. is caused by the poor quality of many imported products.

c. is one of the primary causes of inflation.

d. involves consumer behavior that helps explain why the CPI overestimates the inflation rate.

9. Improvements in the quality of consumer goods and services over time

a. cause the CPI to overstate actual inflation.

b. cause the CPI to understate actual inflation.

c. are accounted for in the CPI.

d. are insignificant and thus would not affect the CPI even if accounted for.

10. Factors that cause the CPI to exaggerate the inflation rate do not include

a. the tendency of consumers to substitute relatively cheaper goods for those that have become relatively more expensive.

b. political pressure from unions and retirees on the Bureau of Labor Statistics to overstate the inflation rate.

c. the introduction of new technologies that make it easier to obtain the same standard of living.

d. improvements over time on the quality of products.

11. Which of the following answers would accurately describe the bias in the CPI resulting from the fact that oil prices suddenly increase?

a. underestimate the cost of living

b. overestimate the cost of living

c. have no bias effect on the CPI

d. could overestimate or underestimate the cost of living, depending upon the quantity of oil purchased in that year

12. The CPI differs from the GDP deflator in that the CPI includes

a. raw material prices whereas the GDP deflator does not.

b. only goods whereas the GDP deflator includes both goods and services.

c. only services whereas the GDP deflator includes both goods and services.

d. only items the typical household buys, whereas the GDP deflator includes all goods and services produced in the economy.

13. The CPI differs from the GDP deflator in that the CPI

a. uses base-year quantities of goods to weight prices.

b. uses current-year quantities of goods to weight prices.

c. is not a weighted price index.

d. always indicates a higher rate of inflation than the GDP deflator.

14. The GDP deflator differs from the CPI because the GDP deflator includes goods we __________, while the CPI includes goods we __________.

a. import; export

b. export; import

c. buy; sell

d. consume; produce

15. If the consumer price index has a value of 150 today and the base year is 1987, then consumer prices have

a. increased by 50 percent since 1987.

b. doubled since 1987.

c. more than doubled since 1987.

d. declined 50 percent since 1987.

16. If the consumer price index has a value of 150 today and the base year is 1987, then it costs

a. $100 today to buy what cost $150 in the base year.

b. $1 today to buy what cost $150 in the base year.

c. $150 today to buy what cost $100 in the base year.

d. $2 today to buy what cost $1 in the base year.

17. Use this table to find the real wage in 2002.

a. $8.06

b. $8.13

c. $13.00

d. $20.80

18. If the CPI increases from 100 to 200 and the nominal wage increases from $100 to $400, what is the change in the real wage in terms of the beginning year’s dollars?

a. $200

b. $400

c. $100

d. –$200

19. The real interest rate on a loan

a. is the amount that the consumer agrees to pay.

b. is always the same as the nominal rate.

c. is the percentage increase in the lender’s purchasing power that results from making the loan.

d. decreases as the inflation rate increases.

20. If a lender wants a real return of 6 percent and she expects inflation to be 4 percent, which of the following is the nominal interest rate to charge?

a. 4 percent

b. 6 percent

c. 2 percent

d. 10 percent

21. Suppose that a labor union leader is trying to bargain for an increase in union workers’ real wages of 5 percent. If she expected the price level to rise at a rate of 3 percent this year, how much would nominal wages need to increase for her to accomplish her objective?

a. 2 percent

b. 3 percent

c. 5 percent

d. 8 percent

22. When borrowing money to purchase an automobile, Wei has the choice between a fixed nominal interest rate or adjustable nominal interest rate loan. Typically the adjustable rate loans start with a lower rate than the fixed rate loans. Given that, Wei would most likely want to borrow money at the higher fixed rate when she expects the

a. inflation rate to rise.

b. inflation rate to fall.

c. inflation rate to remain unchanged.

d. government to take action to lower the inflation rate in the near future.

23. If you borrow money at a nominal interest rate of 5 percent and the inflation rate is 10 percent, what real interest rate will you pay?

a. –5 percent

b. .5 percent

c. 2 percent

d. 10 percent

24. When the inflation rate ends up being lower than expected,

a. everyone benefits because money is cheaper.

b. everyone benefits because prices do not increase.

c. lenders of fixed-rate mortgages generally benefit because they will make higher profits than they had calculated.

d. borrowers with fixed-rate loans will benefit because their purchasing power will not decline as much.

25. In general, a higher-than-anticipated inflation rate

a. helps everyone.

b. hurts everyone.

c. helps creditors and harms debtors.

d. helps debtors and harms creditors.

Macroeconomics Test Bank , N. Gregory Mankiw

Chapter 24: Measuring the Cost of Living - Principles of Economics Test Bank Mankiw

Pretty.Much

Chapter 23: Measuring a Nation’s Income

1. In the circular flow model, the source of the factors of production used to create goods and services is

a. the product market.

b. the resource market.

c. firms.

d. households.

2. In the circular flow model, firms use the money they earn from selling their goods and services to pay for the

a. goods and services they buy on the product market.

b. resources they buy on the product market.

c. goods and services they buy from government.

d. resources they buy in the factor market.

3. In the circular flow model, for every flow of goods, services, and resources there is a counter-flow of

a. more goods, services, and resources.

b. people from firms to households.

c. people from households to firms.

d. money.

4. In producing a sweater, a man who shears sheep pays a farmer $4 for a sheep. The shearing shop sells the wool to a knitting mill for $7. The knitting mill buys he wool and makes it into a fine fabric and sells it to a sweater-making firm for $13. The sweater-making firm sells the sweater to a clothing store for $20, and the clothing store sells the sweater, gift wrapped, for $50. What is the contribution to GDP of the previous sales transactions?

a. $4.

b. $44.

c. $50.

d. $94.

5. Susie grows corn in her backyard garden to feed her family. The corn she grows is not counted in GDP because

a. it was not produced for the marketplace.

b. it is an intermediate good which Susie will process further.

c. the corn has no value.

d. it reduces the amount of corn she will buy at the store.

6. Which of the following would be counted in U.S. GDP?

a. the purchase of an historical house

b. the purchase of a haircut

c. the purchase of a $1000 government savings bond

d. the value generated when you wash your car in your driveway

7. Personal consumption spending now comprises approximately what fraction of GDP?

a. one-third

b. one-sixth

c. three-quarters

d. one half

8. If private investment increased by $50 billion while GDP remained the same, which of the following could have occurred, all else being the same?

a. Consumption spending decreased by $50 billion.

b. Exports increased by $50 billion.

c. Imports decreased by $50 billion.

d. Net exports increased by $50 billion.

9. Assume net exports are –$220, consumption is $5,000, tax revenues are $1,000, government purchases are $1,500, and 1997 GDP, calculated by the expenditures approach, is $8,000. We can conclude that

a. private investment was $1,940.

b. public investment was $310.

c. private investment was $320.

d. private investment was $1,720.

10. The four categories of expenditures that make up GDP are consumption, investment,

a. exports, and government purchases.

b. imports, and government purchases.

c. net exports, and government [query: purchases].

d. net exports, and government transfer payments.

11. Which of the following would be counted as an investment expenditure in the national income accounts?

a. The Navy builds a new battleship.

b. Microsoft expands plant capacity to produce new software.

c. A public high school builds a new football stadium.

d. All of the above would be counted as an investment expenditure.

12. Real GDP is nominal GDP

a. plus depreciation.

b. adjusted for changes in the price level.

c. minus depreciation.

d. minus taxes.

An economy produces only two goods, oranges and VCRs. The quantities and prices for the years 1998 and 1999 are shown in the table. The base year is 1998.

13. Nominal GDP in 1998 is

a. $402.

b. $12,000.

c. $200,200

d. $410,000

14. Nominal GDP in 1999 is

a. $18,000.

b. $180,000.

c. $612,000.

d. $1,250,000.

15. Real GDP in 1998 is

a. $6,000.

b. $240,000.

c. $410,000.

d. $612,000.

16. Real GDP in 1999 is

a. $6,000.

b. $410,000.

c. $612,000.

d. $808,000.

17. The GDP deflator in 1999 is about

a. .76.

b. .67.

c. .51.

d. 1.32.

18. The growth rate of nominal GDP in 1999 was about

a. 10 percent.

b. 49 percent.

c. 78 percent.

d. 100 percent.

19. The growth rate of real GDP in 1999 was about

a. 24 percent.

b. 50 percent.

c. 97 percent.

d. 125 percent.

20. The rate of inflation in 1999 was about

a. –48 percent.

b. –24 percent.

c. 33 percent.

d. 67 percent.

21. Suppose a person marries his or her gardener and therefore no longer pays him or her for gardening services. GDP

a. stays the same as long as the services are still provided.

b. increases since the services are now provided for free.

c. decreases since there is no longer a market exchange.

d. stays the same, since services are not included in GDP.

22. Which of the following would most likely cause GDP to overstate the actual output produced in a year?

a. increased production in the underground economy

b. a decline in the quality of goods and services produced

c. increased production for home use (non-market production)

d. a decline in population

23. Suppose that population grows by 2 percent. For the standard of living to rise, which of the following must occur?

a. Nominal GDP must grow by more than 2 percent.

b. Real GDP must grow by more than 2 percent.

c. Real GDP per capita must grow by more than 2 percent.

d. consumption spending must grow by more than 2 percent.

24. During recessions, GDP falls and unemployment increases. Why might the actual output produced not fall as much as officially measured GDP during a recession?

a. There is an increase in involuntary part-time employment, the output from which is not accounted for in GDP.

b. Workers who became unemployed during the recession may produce goods in the underground economy.

c. Unemployment benefits to laid-off workers will allow them to purchase nearly as much output as before.

d. Laid off workers may start their own businesses, but profit income from self-employment is not accounted for in GDP.

25. Which of the following is a problem with the measurement of GDP?

a. Transfer payments are not included.

b. Production in the underground economy is not counted.

c. Non-market production is not counted.

d. Both b and c are correct.

Macroeconomics Test Bank , N. Gregory Mankiw