Study Guide

Units 1 & 2
1. Guns and butter are used to represent the classical societal tradeoff between spending on 2. The primary determinant of a country's standard of living is 3. You have driven 1,000 miles on a vacation and then you notice that you are only 50 miles from an attraction you hadn't known about, but would really like to see. In computing the opportunity cost of visiting this attraction you had not planned to visit, you should include 4. Which of the following statements does not apply to a market economy? 5. Refer to the diagram above. Which arrow represents the flow of land, labor, and capital? 6. The following table contains some production possibilities for an economy for a given month. If the production possibilities frontier is bowed outward, then "?" could be 7. Production is efficient if the economy is producing at a point 8. A nation's standard of living is best measured by its 9. Benny rents 5 movies per month when the price is $3.00 per rental and 7 movies per month when the price is $2.50 per rental. Benny's demand demonstrates the law of 10. A supply curve slopes upward because
 * a. durable and nondurable goods.
 * b. imports and exports.
 * c. national defense and consumer goods.
 * d. law enforcement and agriculture.
 * a. the country's ability to prevail over foreign competition.
 * b. the country's ability to produce goods and services.
 * c. the total supply of money in the economy.
 * d. the average age of the country's labor force.
 * a. both the cost of driving the first 1,000 miles and the next 50 miles.
 * b. the cost of driving the first 1,000 miles, but not the cost of driving the next 50.
 * c. the cost of driving the next 50 miles, but not the cost of driving the first 1,000.
 * d. neither the cost of driving the first 1,000 miles nor the cost of driving the next 50 miles.
 * a. Firms decide whom to hire and what to produce.
 * b. The "invisible hand" usually maximizes the well-being of society as a whole.
 * c. Households decide which firms to work for and what to buy with their incomes.
 * d. Government policies are primary forces that guide the decisions of firms and households.
 * a. A
 * b. B
 * c. C
 * d. D
 * a. 100.
 * b. 150.
 * c. 200.
 * d. 250.
 * a. on the production possibilities frontier.
 * b. outside the production possibilities frontier.
 * c. on or inside the production possibilities frontier.
 * d. inside the production possibilities frontier.
 * a. real GDP.
 * b. real GDP per person.
 * c. nominal GDP.
 * d. nominal GDP per person.
 * a. price.
 * b. supply.
 * c. demand.
 * d. income.
 * a. as more is produced, total cost of production falls.
 * b. an increase in input prices increases supply.
 * c. the quantity supplied of most goods and services increases over time.
 * d. an increase in price gives producers an incentive to supply a larger quantity.

Answers

 * e

Free Response
1. Draw a production possibilities frontier showing increasing opportunity cost of hammers in terms of horseshoes. 2. The only two countries in the world, Alpha and Omega, face the following production possibilities frontiers.
 * a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes.
 * b. On the graph, label a point that is efficient and a point that is inefficient.
 * c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy.
 * d. On a second graph, illustrate the effect of a new computerized assembly line in the production of hammers on this economy.

(graph Alpha) (graph Omega) 3.
 * a. Assume that each country decides to use half of its resources in the production of each good. Show these points on the graphs for each country as point A.
 * b. If these countries choose not to trade, what would be the total world production of popcorn and peanuts?
 * c. Now suppose that each country decides to specialize in the good in which each has a comparative advantage. By specializing, what is the total world production of each product now?
 * d. If each country decides to trade 100 units of popcorn for 100 units of peanuts, show on the graphs the gain each country would receive from trade. Label these points B.


 * a. Given the table above, graph the demand and supply curves for flashlights. Make certain to label the equilibrium price and equilibrium quantity.


 * b. What is the equilibrium price and the equilibrium quantity?


 * c. Suppose the price is currently $5. What problem would exist in the market? What would you expect to happen to price? Show this on your graph.


 * d. Suppose the price is currently $2. What problem would exist in the market? What would you expect to happen to price? Show this on your graph.

Unit 3
1. As an alternative to selling shares of stock as a means of raising funds, a large company could, instead, 2. Which of the following is a financial-market transaction? 3. The old adage, "Don't put all your eggs in one basket", is very similar to a modern bit of advice concerning financial matters: 4. In a closed economy, what does (T - G) represent? 5. In a small closed economy investment is $20 billion and private saving is $22 billion. What are public saving and national saving? 6. Imagine that someone offers you $100 today or $200 in 10 years. You would prefer to take the $100 today if the interest rate is 7. Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 6 percent, then you would prefer to take the $X today if and only if 8. Which of the following is the correct way to compute the future value of $1 put into an account that earns 5 percent interest for 20 years? 9. Consider four survivors on an island.
 * a. invest in physical capital.
 * b. use equity finance.
 * c. sell bonds.
 * d. purchase bonds.
 * a. A saver buys shares in a mutual fund.
 * b. A saver deposits money into a credit union.
 * c. A saver buys a bond a corporation has just issued so it can purchase capital.
 * d. None of the above are correct.
 * a. "Buy low-risk bonds."
 * b. "Use a medium of exchange."
 * c. "Diversify."
 * d. "Intermediate."
 * a. national saving
 * b. investment
 * c. private saving
 * d. public saving
 * a. $24 billion and $2 billion
 * b. $20 billion and -$2 billion
 * c. $2 billion and $24 billion
 * d. -$2 billion and $20 billion
 * a. 4 percent.
 * b. 5 percent.
 * c. 6 percent.
 * d. None of the above are correct.
 * a. X > 1,055.56.
 * b. X > 1,120.89.
 * c. X > 1,213.33.
 * d. X > 1,338.26.
 * a. $1(1 + .05)^20
 * b. $1(1 + .05 x 20) x 20
 * c. $1(1 + .05 x 20)
 * d. $1(1 + 20/.05)^20

Which of the following pairs of survivors has a double-coincidence of wants? 10. The "yardstick" people use to post prices and record debts is called 11. Demand deposits are included in 12. Which of the following might explain why the United States has so much currency per person? 13. Suppose that banks desire to hold no excess reserves, the reserve requirement is 5 percent, and a bank receives a new deposit of $1,000. This bank 14. '''Refer to the table above. '''If the bank faces a reserve requirement of 10 percent, then the bank 15. When the Fed buys government bonds,
 * a. Rupert with Amber, and Rob with Tom
 * b. Amber with Tom
 * c. Rupert with Rob
 * d. None of the above are correct.
 * a. a medium of exchange.
 * b. a unit of account.
 * c. a store of value.
 * d. liquidity.
 * a. M1 but not M2.
 * b. M2 but not M1.
 * c. M1 and M2.
 * d. neither M1 nor M2.
 * a. U.S. citizens are holding a lot of foreign currency.
 * b. Currency may be a preferable store of wealth for criminals.
 * c. People use credit and debit cards more frequently.
 * d. All of the above help explain the abundance of currency.
 * a. will increase its requires reserves by $50.
 * b. will initially see its total reserves increase by $1,000.
 * c. will be able to make a new loan of $950.
 * d. All of the above are correct.
 * a. is in a position to make a new loan of $15,000.
 * b. has fewer reserves than are required.
 * c. has excess reserves of $10,000.
 * d. None of the above are correct.
 * a. The money supply increases and the federal funds rate increases.
 * b. The money supply increases and the federal funds rate decreases.
 * c. The money supply decreases and the federal funds rate increases.
 * d. The money supply decreases and the federal funds rate decreases.

Answers

 * D
 * D
 * ?\1
 * D
 * D
 * ?\1
 * ?\1
 * ?\1
 * ?\1
 * ?\1
 * ?\1
 * ?\1

Free Response
1. Assume that as a result of increased political instability, investors move their funds out of the country of Tara. 2. Assume that the reserve requirement is 20 percent and the banks hold no excess reserves. 3. Explain how each of the following changes the money supply. 4. Identify each of the following acts as representing either saving or investment.
 * a. Using a correctly labeled graph of the loanable funds market in Tara, show the impact of this decision by investors on the real interest rate in Tara.
 * b. Given your answer in part (a), what will happen to Tara's rate of economic growth? Explain.
 * a. Assume that Kim deposits $100 of cash from her pocket into her checking account. Calculate each of the following.
 * 1. The maximum dollar amount the commercial bank can initially lend.
 * 2. The maximum total change in demand deposits in the banking system.
 * 3. The maximum change in the money supply.
 * b. Assume that the Federal Reserve buys $5 million in government bonds on the open market. As a result of the open market purchase, calculate the maximum increase in the money supply in the banking system.
 * a. The Fed buys bonds.
 * b. The Fed raises the discount rate.
 * c. The Fed raises the reserve requirement.
 * a. Fred uses some of his income to buy government bonds.
 * b. Julie takes some of her income and buys mutual funds.
 * c. Alex purchases a new truck for his delivery business using borrowed funds.
 * d. Elaine uses some of her income to buy stock in a major corporation.
 * e. Henrietta hires a builder to construct a new building for her bicycle shop.

Unit 4
1. For an economy as a whole, 2. GDP is defined as 3. What would be the effect on GDP if a car produced in 2008 is sold in 2009? 4. Net exports equal 5. Suppose the government eliminates all environmental regulations and, as a result, the production of goods and services increases, but there is considerably more pollution. Based on this scenario, which of the following statements is correct? 6. For any given year, the CPI is the price of the basket of goods and services in the 7. For an imaginary economy, the value of the consumer price index was 140 in 2006 and 149.1 in 2007. The economy's inflation rate for 2007 was 8. When the quality of a good improves while its price remains the same, the purchasing power of the dollar 9. Suppose that over the past year, the real interest rate was 5 percent and the inflation rate was 3 percent. It follows that 10. Who of the following are included in the Bureau of Labor Statistics' "employed" category? 11. Zeeman is a college student who is not working or looking for a job. the Bureau of Labor Statistics counts Zeeman as 12. Unemployment that results because the job skills possessed by those in some labor markets may be insufficient to give a job to everyone who wants one is called 13.
 * a. wages must equal profit.
 * b. consumption must equal saving.
 * c. income must equal expenditure.
 * d. the number of buyers must equal the number of sellers.
 * e. investment must equal consumption.
 * a. The market value of all goods and services produced within a country in a given period of time.
 * b. The market value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.
 * c. The market value of all final goods and services produced within a country in a given period of time.
 * d. The market value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.
 * e. The quantity of all final goods and services produced within a country in a given period of time.
 * a. GDP in 2009 would increase by the price of the car.
 * b. Consumption would increase in 2009, investment would decrease in 2009 by the same amount, and GDP would be unaffected.
 * c. GDP would increase in 2008 and would decrease in 2009 by the same amount.
 * d. GDP would decrease in 2008 and would increase in 2009 by the same amount.
 * e. GDP in 2008 would be unaffected as the car was not sold.
 * a. exports plus imports.
 * b. exports minus imports.
 * c. imports minus exports.
 * d. GDP minus imports.
 * e. GDP minus GNP.
 * a. GDP would definitely increase, despite the fact that GDP includes environmental quality.
 * b. GDP would definitely decrease because GDP includes environmental quality.
 * c. GDP would definitely increase because GDP excludes environmental quality.
 * d. GDP could either increase or decrease because GDP excludes environmental quality.
 * e. Nominal GDP would increase but real GDP would remain unchanged.
 * a. given year divided by the price of the basket in the base year, then multiplied by 100.
 * b. given year divided by the price of the basket in the previous year, then multiplied by 100.
 * c. base year divided by the price of the basket in the given year, then multiplied by 100.
 * d. previous year divided by the price of the basket in the given year, then multiplied by 100.
 * e. given year minus the price in the previous year.
 * a. 6.1 percent.
 * b. 6.5 percent.
 * c. 9.1 percent.
 * d. 49.1 percent.
 * e. 140 percent.
 * a. increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
 * b. increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
 * c. decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
 * d. decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
 * e. remains the same as these two forces offset each other.
 * a. The dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 2 percent.
 * b. The dollar value of savings increased at 5 percent, and the purchasing power of savings increased at 8 percent.
 * c. The dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 2 percent.
 * d. The dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 5 percent.
 * e. The dollar value of savings increased at 8 percent, and the purchasing power of savings decreased by 5 percent.
 * 1) retired workers
 * 2) part-time workers
 * 3) workers on vacation
 * a. 1 only
 * b. 2 only
 * c. 3 only
 * d. 1 and 2 only
 * e. 2 and 3 only
 * a. unemployed and in the labor force.
 * b. unemployed, but not in the labor force.
 * c. in the labor force, but not unemployed.
 * d. neither in the labor force nor unemployed.
 * e. in the labor force and employed as a full-time student.
 * a. the natural rate of unemployment.
 * b. cyclical unemployment.
 * c. structural unemployment.
 * d. frictional unemployment.
 * e. seasonal unemployment.

(Graph)

Refer to the graph above. If the government imposes a minimum wage of $4, then employment will decrease by 14. In which of the following cases was the inflation rate 10 percent over the last year? 15. If M = 10,000, P = 2, and Y = 20,000, then velocity = 16. On its website, your bank posts the interest rates it is paying on savings accounts. Those posted rates are 17. You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced 18. If the dollar appreciates because of speculation or government policy 19.
 * a. 0 workers.
 * b. 2,000 workers.
 * c. 3,000 workers.
 * d. 4,000 workers.
 * e. 5,000 workers.
 * a. One year ago, the price index had a value of 110, and now it has a value of 120.
 * b. One year ago, the price index had a value of 120, and now it has a value of 132.
 * c. One year ago, the price index had a value of 126, and now it has a value of 140.
 * d. One year ago, the price index had a value of 145, and now it has a value of 163.
 * e. One year ago, the price index had a value of 90, and now it has a value of 100.
 * a. 4. Velocity will rise if money changes hands more frequently.
 * b. 4. Velocity will rise if money changes hands less frequently.
 * c. 8. Velocity will rise if money changes hands more frequently.
 * d. 8. Velocity will rise if money changes hands less frequently.
 * e. 8. Velocity will fall if money changes hands more frequently.
 * a. real values.
 * b. nominal values.
 * c. gross values.
 * d. net values.
 * e. adjusted for inflation.
 * a. both a nominal gain and a real gain, and you paid taxes on the nominal gain.
 * b. both a nominal gain and a real gain, and you paid taxes only on the real gain.
 * c. a nominal gain, but no real gain, and you paid taxes on the nominal gain.
 * d. a nominal gain, but no real gain, and you paid no taxes on the transaction.
 * e. a real gain, but no nominal gain, and you paid taxes on the real gain.
 * a. aggregate demand shifts left. If other countries experience recessions, aggregate demand in the United States also shifts left.
 * b. aggregate demand shifts left. If other countries experience recessions, aggregate demand in the United States shifts right.
 * c. aggregate demand shifts right. If other countries experience recessions, aggregate demand in the United States shifts left.
 * d. aggregate demand shifts right. If other countries experience recessions, aggregate demand in the United States also shifts right.
 * e. aggregate demand shifts right. If other countries experience inflation, aggregate demand in the United States also shifts right.

(graph)

'''Refer to the graph above. '''The shift of the short-run aggregate-supply curve from AS1 to AS2 (graph 1)
 * a. could be caused by a decrease in the availability of oil.
 * b. could be caused by a decrease in the expected price level.
 * c. causes the economy to experience an increase in the unemployment rate.
 * d. causes the economy to experience stagflation.
 * e. causes the economy to experience an increase in the inflation rate.

20.''' Refer to graph 1. ''' An increase in the money supply would move the economy from C to 21. Refer to graph 1. If the economy is at A and there is a fall in aggregate demand 22. Refer to graph 1. The economy would be moving to long-run equilibrium if it started at
 * a. B in the short run and the long run.
 * b. D in the short run and the long run.
 * c. B in the short run and A in the long run.
 * d. D in the short run and C in the long run.
 * e. A in the short run and D in the long run.
 * a. in the short run stays at A.
 * b. in the short run moves to B.
 * c. in the short run moves to C.
 * d. in the short run moves to D.
 * e. in the long run moves to B.
 * a. A and moved to B.
 * b. C and moved to B.
 * c. D and moved to C.
 * d. C and moved to D.
 * e. A and moved to D.

Free Response
1. Make a list of things that would shift the aggregate-demand curve to the right. Make another list of things that would shift the long-run aggregate-supply curve to the right.

2. Suppose that a decrease in the demand for goods and services pushes the economy into recession. What happens to the price level? If the government does nothing, what ensures that the economy will eventually get back to the natural rate of output?

3. Identify each of the following as nominal or real variables. 4. In a simple economy, people consume only two goods, food and clothing. The market basket of goods used to compute the CPI consists of fifty units of food and ten units of clothing. 5. Identify the immediate effect of each of the following events on U.S. GDP and its components. 6. The table below uses data for the year 2003 provided by the Bureau of Labor Statistics and is adjusted to be comparable to U.S. data. All values are in thousands. Fill in the blank entries in the table.
 * 1) The physical output of goods and services.
 * 2) The dollar price of apples.
 * 3) The price of apples relative to the price of oranges.
 * 4) The amount that shows up on your paycheck after taxes.
 * 5) The amount of goods you can purchase with the wage you get each hour.
 * 6) The taxes that you pay the government.
 * a. What are the percentage increases in the price of food and in the price of clothing?
 * b. What is the percentage increase in the CPI?
 * c. Do these price changes affect all consumers to the same extent? Explain.
 * a. James receives a Social Security check.
 * b. John buys an Italian sports car.
 * c. Henry buys domestically produced tools for his construction company.