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essentials of economics

Questions and Answers of Essentials of Economics

Which of the following is NOT true about the Federal Reserve?a. It was established by the U.S. Constitution.b. It regulates the banking system.c. It lends to banks.d. It can own government bonds.
If the Fed wants to increase the money supply, it cana. raise income tax rates.b. reduce income tax rates.c. buy bonds in open-market operations.d. sell bonds in open-market operations.
Isabella takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply ________, but if the bank lends out some of
If the reserve ratio is ¼ and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases bya. $90.b. $150.c. $160.d. $480.
A bank has capital of $200 and a leverage ratio of 5. If the value of the bank’s assets declines by 10 percent, then its capital will be reduced toa. $100.b. $150.c. $180.d. $185.
The classical principle of monetary neutrality states that changes in the money supply do not influence ________ variables, and it is thought to be most applicable in the ________ run.a. nominal;
If nominal GDP is $400, real GDP is $200, and the money supply is $100, thena. the price level is ½, and velocity is 2.b. the price level is ½, and velocity is 4.c. the price level is 2, and
According to the quantity theory of money, which variable in the quantity equation is most stable over long periods of time?a. moneyb. velocityc. price leveld. output
Hyperinflation occurs when the government runs a large budget ________, which the central bank finances with a substantial monetary ________.a. deficit; contractionb. deficit; expansionc. surplus;
According to the quantity theory of money and the Fisher effect, if the central bank increases the rate of money growth, thena. inflation and the nominal interest rate both increase.b. inflation and
Ongoing inflation does not automatically reduce most people’s incomes becausea. the tax code is fully indexed for inflation.b. people respond to inflation by holding less money.c. wage inflation
If an economy always has inflation of 10 percent per year, which of the following costs of inflation will it NOT suffer?a. shoeleather costs from reduced holdings of moneyb. menu costs from more
Because most loans are written in ________ terms, an unexpected increase in inflation hurts ________.a. real; creditorsb. real; debtorsc. nominal; creditorsd. nominal; debtors
When the economy goes into a recession, real GDP ________ and unemployment ________.a. rises; risesb. rises; fallsc. falls; risesd. falls; falls
Recessions occura. regularly, about every 3 years.b. regularly, about every 7 years.c. regularly, about every 12 years.d. irregularly.
According to classical macroeconomic theory and monetary neutrality, changes in the money supply affecta. the unemployment rate.b. real GDP.c. the GDP deflator.d. none of the above.
Most economists believe that classical macroeconomic theorya. is valid only in the long run.b. is valid only in the short run.c. is always valid.d. is never valid.
In the model of aggregate demand and aggregate supply, the quantity of ________ is on the horizontal axis, and the ________ is on the vertical axis.a. output; interest rateb. output; price levelc.
The aggregate-demand curve slopes downward because a fall in the price level causesa. real wealth to decrease.b. the interest rate to decline.c. the currency to appreciate.d. all of the above.
Which of the following would shift the aggregatedemand curve to the left?a. a decline in the stock marketb. an increase in taxesc. a decrease in government spendingd. all of the above
One reason the short-run aggregate-supply curve slopes upward is that a higher price levela. raises nominal wages if real wages are sticky.b. reduces nominal wages if real wages are sticky.c. raises
A change in which of the following would shift the short-run aggregate-supply curve but not the long-run aggregate-supply curve?a. the labor forceb. the capital stockc. the state of technologyd. the
A sudden increase in business pessimism shifts the aggregate-________ curve, leading to ________ output.a. supply; lowerb. supply; higherc. demand; lowerd. demand; higher
An increase in the aggregate demand for goods and services has a larger impact on output ________ and a larger impact on the price level ________.a. in the short run; in the long runb. in the long
Stagflation is caused by aa. leftward shift in the aggregate-demand curve.b. rightward shift in the aggregate-demand curve.c. leftward shift in the aggregate-supply curve.d. rightward shift in the
According to the theory of liquidity preference, an economy’s interest rate adjustsa. to balance the supply and demand for loanable funds.b. to balance the supply and demand for money.c.
If the central bank wants to contract aggregate demand, it can ________ the money supply and thereby ________ the interest rate.a. increase; increaseb. increase; decreasec. decrease; increased.
The Fed’s target for the federal funds ratea. is an extra policy tool for the central bank in addition to and independent of the money supply.b. commits the Fed to set a particular money supply so
If the government wants to expand aggregate demand, it can ________ government purchases or ________ taxes.a. increase; increaseb. increase; decreasec. decrease; increased. decrease, decrease
With the economy in a recession because of inadequate aggregate demand, the government increases its purchases by $1,200. Suppose the central bank adjusts the money supply to hold the interest rate
If the central bank in the preceding question had instead held the money supply constant and allowed the interest rate to adjust, the change in aggregate demand resulting from the increase in
Suppose a wave of negative “animal spirits” overruns the economy, and people become pessimistic about the future. To stabilize aggregate demand, the Fed could ________ its target for the federal
Monetary policy affects the economy with a lag mainly because it takes a long timea. for central banks to make policy changes.b. to change the money supply after a policy decision has been made.c.
Which of the following is an example of an automatic stabilizer? When the economy goes into a recession,a. more people become eligible for unemployment insurance benefits.b. stock prices decline,
The citizens of Rohan spend a higher fraction of their income on food than do the citizens of Gondor. The reason could be thata. Rohan has lower food prices, and the price elasticity of demand is
A market is described by the following supply and demand curves:QS 5 2P QD 5 300 2 P.a. Solve for the equilibrium price and quantity.b. If the government imposes a price ceiling of $90, does a
Four consumers are willing to pay these amounts for haircuts:Each firm can give, at most, one haircut. To achieve efficiency, how many haircuts should be given? Which businesses should cut hair and
Name one economic interaction that isn’t covered by the simplified circular-flow diagram.
What is the relationship between a firm’s total revenue, profit, and total cost?
How and why does a firm’s average-total-cost curve differ in the short run compared with the long run?
What are the main characteristics of a competitive market?
Under what conditions will a firm exit a market? Explain.
Explain why an economy’s income must equal its expenditure.
Which contributes more to GDP—the production of an economy car or the production of a luxury car? Why?
A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP?
Many years ago, Peggy paid $500 to put together a record collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?
Fill in the blanks: Real GDP (in 2000 dollars) Nominal GDP GDP Deflator (base year 2000) (in current dollars) Year 1970 1,200 3,000 5,000 1980 60 1990 6,000 100 2000 8,000 2010 15,000 200 10,000 2020
The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded.
Goods and services that are not sold in markets, such as food produced and consumed at home, are generally not included in GDP. Can you think of how this might cause the numbers in the second column
Over a long period of time, the price of a candy bar rose from $0.20 to $1.20. Over the same period, the CPI rose from 150 to 300. Adjusted for overall inflation, how much did the price of the candy
Suppose that the year you were born someone bought $100 of goods and services for your baby shower. How much would you guess it would cost today to buy a similar amount of goods and services? Now
In what way is a college degree a form of capital?
How does the rate of population growth influence the level of GDP per person?
What is investment? How is it related to national saving in a closed economy?
What factors should a stock analyst think about in determining the value of a share of stock?
What distinguishes money from other assets in the economy?
Explain how an increase in the price level affects the real value of money.
According to the Fisher effect, how does an increase in the inflation rate affect the real interest rate and the nominal interest rate?
List and explain the three reasons the aggregate demand curve slopes downward.
List and explain the three theories for why the shortrun aggregate-supply curve slopes upward.
Explain whether each of the following events increases or decreases the money supply.a. The Fed buys bonds in open-market operations.b. The Fed reduces the reserve requirement.c. The Fed increases
In a supply-and-demand diagram, show producer and consumer surplus at the market equilibrium.
How does a tax on a good affect the price paid by buyers, the price received by sellers, and the quantity sold?
During the Revolutionary War, the American colonies could not raise enough tax revenue to fully fund the war effort. To make up the difference, the colonies decided to print more money. Printing
1. A life-saving medicine without any close substitutes will tend to havea. a small elasticity of demand.b. a large elasticity of demand.c. a small elasticity of supply.d. a large elasticity of
Does a change in producers’ technology lead to a movement along the supply curve or to a shift in the supply curve? Does a change in price lead to a movement along the supply curve or to a shift in
Harry’s income declines, and as a result, he buys more pumpkin juice. Is pumpkin juice an inferior or a normal good? What happens to Harry’s demand curve for pumpkin juice?
Draw and explain a production possibilities frontier for an economy that produces milk and cookies. What happens to this frontier if a disease kills half of the economy’s cows?
In what ways is economics a science?

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