I. Multiple Choice (2 points per each. In total 50 points) 1. Which of the following statements is true about a market economy? ( ) a. Market participants act as if guided by an "invisible hand" to produce out comes that promote general economic well-being. b. Taxes help prices communicate costs and benefits to producers and consumers. c. With a large enough computer, central planners could guide production more efficiently than markets. d. The strength of a market system is that it tends to distribute resources evenly across consumers. 2. High and persistent inflation is caused by ( ) a. unions increasing wages too much. b. OPEC raising the price of oil too much. c. governments increasing the quantity of money too much. d. regulations raising the cost of production too much. 3.Economic growth is depicted by ( ) a. a movement along a production possibilities frontier toward capital goods. b. a shift in the production possibilities frontier outward. c. a shift in the production possibilities frontier inward. d. a movement from inside the curve toward the curve. 4. Which of the following will not shift a country's production possibilities frontier outward? ( a. an increase in the capital stock b. an advance in technology c. a reduction in unemployment d. an increase in the labor force 5. If a nation has an absolute advantage in the production of a good, ( ) a. it can produce that good at a lower opportunity cost than its trading partner. b. it can produce that good using fewer resources than its trading partner. c. it can benefit by restricting imports of that good. d. it will specialize in the production of that good and export it. 6.Which of the following is not employed as an argument in support of trade restrictions? ( a. Free trade destroys domestic jobs. b. Free trade harms the national security if vital products are imported. c. Free trade is harmful to importing countries if foreign countries subsidize their exporting industries. d. Free trade harms both domestic producers and domestic consumers and therefore reduces total surplus. 7.GDP would include which of the following? ( ) a. Housework b. illegal drug sales c. intermediate sales d. consulting services 8. If a cobbler buys leather for $100 and thread for $50 and uses them to produce and sell $500 worth of shoes to consumers, the contribution to GDP is ( ) a. $50. b. $100. c. $500. 9. GDP would include which of the following? ( a. Housework b. illegal drug sales 10. The CPI will be most influenced by a 10 percent increase in the price of which of the following consumption categories? ( ) a. Housing 11. A reasonable measure of the standard of living in a country is ( ) d. $600. ) c. intermediate sales d. consulting services b. transportation c. medical care d. food and beverages a. real GDP per person. b. real GDP. 12. The opportunity cost of growth is ( ) a. a reduction in current investment. c. a reduction in current consumption. c. nominal GDP per person. d. nominal GDP. b. a reduction in current saving. d. a reduction in taxes. ) ) 13. A financial intermediary is a middle person between ( ) a. labor unions and firms. b. husbands and wives. c. buyers and sellers. d. borrowers and lenders. 14. Which of the following sets of government policies is the most growth oriented? ( ) a. lower taxes on the returns to saving, provide investment tax credits, and lower the deficit b. lower taxes on the returns to saving, provide investment tax credits, and in crease the deficit c. increase taxes on the returns to saving, provide investment tax credits, and lower the deficit d. increase taxes on the returns to saving, provide investment tax credits, and increase the deficit 15. Which of the following policy actions by the Fed is likely to increase the money supply? ( ) a. reducing reserve requirements b. selling government bonds c. increasing the discount rate d. increasing interest on reserves 16. In the long run, inflation is caused by ( ) a. banks that have market power and refuse to lend money. b. governments that raise taxes so high that it increases the cost of doing business and, hence, raises prices. c. governments that print too much money. d. increases in the price of inputs, such as labor and oil. 17. The initial effect of an increase in the money supply is to ( ) a. increase the price level. b. decrease the price level. c. increase the interest rate. d. decrease the interest rate. 18. The original Phillips curve illustrates ( ) a. the trade-off between inflation and unemployment. b. the positive relationship between inflation and unemployment. c. the trade-off between output and unemployment. d. the positive relationship between output and unemployment. 19. A minimum-wage law tends to ( ) a. create more unemployment in high-skill job markets than in low-skill job markets. b. create more unemployment in low-skill job markets than in high-skill job markets. c. have no impact on unemployment as long as it is set above the competitive equilibrium wage. d. help all teenagers because they receive a higher wage than they would otherwise. 20. According to the Bureau of Labor Statistics, a husband who chooses to stay home and take care of the household is ( ) a. unemployed. 21. The amount today that would be needed, at prevailing interest rates, to produce a particular sum in the future is known as ( ) a. compound value. b. future value. c. present value. d. fair value. 22. Which of the following should cause the price of a share of stock to rise? ( ) a. a reduction in market risk b. an increase in expected dividends c. a reduction in the interest rate d. All of the above should cause the price to rise. 23. National saving (or just saving) is equal to ( ) a. private saving + public saving. b. investment + consumption expenditures. c. GDP - government purchases. d. GDP + consumption expenditures + government purchases. 24. Our standard of living is most closely related to ( ) a. how hard we work. b. our supply of capital because everything of value is produced by machinery. c. our productivity because our income is equal to what we produce. d. our supply of natural resources because they limit production. 25. If inflation is 8 percent and the real interest rate is 3 percent, then the nominal interest rate should be ( ) a. 3/8 percent. b. 5 percent. c. 11 percent. d. 24 percent. b. employed. c. not in the labor force. d. a discouraged worker. II. True/False Questions (2 points per each. 16 points in total) 1. If Japan has an absolute advantage in the production of an item, it must also have a comparative advantage in the production of that item. ( ) 2. Macroeconomics is concerned with the study of how households and firms make decisions and how they interact in specific markets. ( ) 3. If an advanced country has an absolute advantage in the production of every thing, it will benefit if it eliminates trade with less-developed countries and be comes completely self-sufficient. ( ) 4. The "base year" in a price index is the benchmark year against which other years are compared. ( ) 5. In very poor countries, paying parents to send their children to school may in crease the education of poor children and decrease the use of child labor. ( ) 6. If the government wanted to increase the rate of growth, it should raise taxes on interest and dividends to shift the supply of loanable funds to the right. ( ) 7. If the prevailing interest rate is 10 percent, a rational person should be indifferent between receiving $1,000 today and $1,000 one year from today. ( ) 8. Public saving and the government's budget surplus are the same thing. ( ) III. Term definition (4 points per each. 24 points in total) 1. Gross domestic product 3. Catch-up effect 5. Efficient markets hypothesis IV. Discussion (10 points in total) 2. Producer price index 4. Financial intermediaries 6. Purchasing-power parity You are watching a presidential debate. When a candidate is questioned about his position on economic growth, the presidential candidate steps forward and says, "We need to get this country growing again. We need to use tax incentives to stimulate saving and investment, and we need to get that budget deficit down so that the government stops absorbing our nation's saving." 1. If government spending remains unchanged, what inconsistency is implied by the presidential candidate's statement? 2. If policymakers want to increase growth, and if policymakers have to choose between tax incentives to stimulate saving and tax incentives to stimulate in vestment, what might they want to know about supply and demand in the loan able-funds market before making their decision? Explain