CH 21 Flashcards by Nina Ognjenović

The slope of the budget constraint represents which of the following?
A) The opportunity cost of good A in terms of good B.
B) The rate at which somebody can trade good A for good B.
C) The total quantity of both goods that can be consumed.
D) The ratio of the prices of good A and good B.

A) The opportunity cost of good A in terms of good B.
B) The rate at which somebody can trade good A for good B.
D) The ratio of the prices of good A and good B.

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The relative price of good A is best described as which of the following?
A) The amount of good B that must be given up to obtain one unit of good A.
B) The slope of the indifference curve associated with good A.
C) The ratio of the price of good A to the price of good B.
D) The total cost of acquiring both good A and good B at their current prices.

A) The amount of good B that must be given up to obtain one unit of good A.
C) The ratio of the price of good A to the price of good B.

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Suppose a consumer’s income increases from $1,000 to $2,000 while the prices of goods remain constant. Which of the following correctly describes the impact on the consumer’s budget constraint?
A) The budget constraint shifts outward, indicating the consumer can afford more of both goods.
B) The budget constraint pivots outward from the original intercept on one axis while the other intercept remains constant.
C) The slope of the budget constraint changes due to the increased purchasing power.
D) The slope of the budget constraint remains unchanged, resulting in a parallel outward shift of the budget constraint.

A) The budget constraint shifts outward, indicating the consumer can afford more of both goods.
D) The slope of the budget constraint remains unchanged, resulting in a parallel outward shift of the budget constraint.

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Homer buys pizza for $10 and Pepsi for $2. He has
income of $100. His budget constraint will shift
inward if
A) The price of pizza rises to $12.
B) The price of Pepsi falls to $1.
C) His income rises to $150.
D) The price of pizza, the price of Pepsi, and his income all rise by 50 percent.

A) the price of pizza rises to $12.

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Marge buys pizza for $10 and Pepsi for $2.
She has income of $200. Her budget constraint will
experience a parallel outward shift if
A) The price of pizza falls to $5, the price of Pepsi
falls to $1, and her income falls to $100.
B) The price of pizza rises to $20, the price of Pepsi
rises to $4, and her income remains the same.
C) The price of pizza falls to $8, the price of Pepsi
falls to $1, and her income rises to $240.
D) The price of pizza rises to $20, the price of Pepsi
rises to $4, and her income rises to $500.

C) The price of pizza falls to $8, the price of Pepsi
falls to $1, and her income rises to $240.

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The slope at any point on an indifference curve represents which of the following?
A) The marginal rate of substitution (MRS), or the rate at which a consumer is willing to trade one good for another.
B) The opportunity cost associated with consuming one more unit of a good.
C) The price ratio between the two goods being considered.
D) The change in total utility when moving along the curve.

A) The marginal rate of substitution (MRS), or the rate at which a consumer is willing to trade one good for another.
B) The opportunity cost associated with consuming one more unit of a good.

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What happens to the marginal rate of substitution (MRS) as you move down along an indifference curve?
A) It increases because the consumer values additional units of the good more.
B) It remains constant since the consumer’s preferences do not change.
C) It falls because the consumer is willing to give up less of one good to gain an additional unit of the other good.
D) It fluctuates based on changes in the prices of goods.

C) It falls because the consumer is willing to give up less of one good to gain an additional unit of the other good.

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At two points on an indifference curve,
A) The consumer has the same income.
B) The consumer has the same marginal rate of
substitution.
C) The bundles of goods cost the consumer the same
amount.
D) The bundles of goods yield the consumer the
same satisfaction.

D) The bundles of goods yield the consumer the
same satisfaction.

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At any point on an indifference curve, the slope of
the curve measures the consumer’s
A) Income.
B) Willingness to trade one good for the other.
C) Perception of the two goods as substitutes or
complements.
D) Elasticity of demand.

B) Willingness to trade one good for the other.

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What happens at the consumer’s optimum when the slope of the indifference curve equals the slope of the budget constraint?
A) The consumer’s utility is minimized at this point.
B) The consumer achieves a balance where their marginal rate of substitution (MRS) between the two goods is equal to the relative price of the goods.
C) The consumer chooses to consume more of the good with the higher marginal utility.
D) The budget constraint shifts outward due to increased income.

B) The consumer achieves a balance where their marginal rate of substitution (MRS) between the two goods is equal to the relative price of the goods.

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What do the slopes of the indifference curve and the budget constraint represent in the context of pizza and Pepsi?
A) The slope of the indifference curve represents the total utility of consuming both goods, while the slope of the budget constraint represents the consumer’s income level.
B) The slope of the indifference curve is the marginal rate of substitution (MRS) between pizza and Pepsi, while the slope of the budget constraint represents the relative price of pizza and Pepsi.
C) The slope of the budget constraint reflects the consumer’s willingness to substitute between pizza and Pepsi.
D) The slope of the indifference curve represents the consumer’s total budget, and the slope of the budget constraint is the maximum quantity of goods that can be consumed.

B) The slope of the indifference curve is the marginal rate of substitution (MRS) between pizza and Pepsi, while the slope of the budget constraint represents the relative price of pizza and Pepsi.

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At the consumer’s optimum, what is the marginal rate of substitution (MRS) equal to?
A) The total utility gained from all goods consumed.
B) The consumer’s total budget divided by the number of goods.
C) The relative price of the two goods being compared.
D) The difference between the prices of the two goods.

C) The relative price of the two goods being compared.

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When a consumer’s income rises and both goods are normal goods, what happens to their consumption choices?
A) The budget constraint shifts outward, but the consumer continues to purchase the same quantities of both goods.
B) The consumer reduces their consumption of both goods due to diminishing marginal returns.
C) The consumer responds to the increase in income by buying more of both goods, as the budget constraint shifts outward.
D) The consumer’s preferences change, causing them to focus on one good while ignoring the other.
E) The slope of the budget constraint becomes steeper, leading to decreased consumption of one good.

C) The consumer responds to the increase in income by buying more of both goods, as the budget constraint shifts outward.

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What characterizes an inferior good in terms of consumer behavior when income rises?
A) The consumer buys more of it as their income increases, reflecting higher demand for luxury goods.
B) The consumer reduces their consumption of the good when their income rises, opting for more preferred alternatives.
C) The consumer’s demand for the good remains unchanged regardless of changes in income.
D) The consumer’s total spending on the good increases due to a proportional increase in income.
E) The price of the good drops as consumer income rises, making it less desirable.

B) The consumer reduces their consumption of the good when their income rises, opting for more preferred alternatives.

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How do the income and substitution effects influence the consumption of Pepsi and Pizza when the price of Pepsi falls?
A) For Pepsi, the income effect leads to buying less, while the substitution effect also causes a decrease in demand, resulting in overall lower consumption.
B) For Pepsi, both the income and substitution effects encourage higher consumption, as the consumer becomes relatively wealthier and the price of Pepsi is unchanged or favorable.
C) For Pizza, both the income and substitution effects lead to unambiguous increases in consumption due to higher prices.
D) For Pizza, the income effect leads to increased consumption as the consumer becomes richer, but the substitution effect reduces consumption since pizza is relatively more expensive, leading to an ambiguous total effect.

B) For Pepsi, both the income and substitution effects encourage higher consumption, as the consumer becomes relatively wealthier and the price of Pepsi is unchanged or favorable.
D) For Pizza, the income effect leads to increased consumption as the consumer becomes richer, but the substitution effect reduces consumption since pizza is relatively more expensive, leading to an ambiguous total effect.

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When is the substitution effect larger: between substitute goods or between complementary goods, and why?
A) It is larger for complementary goods because they are consumed together, making consumers more responsive to price changes.
B) It is larger for substitute goods because consumers can easily switch to an alternative good when the price of one changes.
C) It is equal for both substitutes and complements since both involve consumer choice.
D) It is larger for complementary goods when their prices decrease simultaneously.

B) It is larger for substitute goods because consumers can easily switch to an alternative good when the price of one changes.

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Bart and Lisa are both optimizing consumers in the
markets for shirts and hats, where they pay $100
for a shirt and $50 for a hat. Bart buys 8 shirts and
4 hats, while Lisa buys 6 shirts and 12 hats. From
this information, we can infer that Bart’s marginal
rate of substitution is _________ hats per shirt, while
Lisa’s is _________.
A) 2; 1
B) 2; 2
C) 4; 1
D) 4; 2

B) 2; 2

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Maggie buys peanut butter and jelly, both of which
are normal goods. When the price of peanut butter
rises, the income effect induces Maggie to buy
_________ peanut butter and _________ jelly.
A) more; more
B) more; less
C) less; more
D) less; less

D) less; less

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Ned buys wine and bread. When the price of wine
rises, the substitution effect induces Ned to buy
_________ wine and _________ bread.
A) more; more
B) more; less
C) less; more
D) less; less

C) less; more

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When the price of potatoes increases, what happens to the consumer’s purchasing decisions, considering the income and substitution effects?
A) The income effect causes the consumer to buy more meat and fewer potatoes, as meat is a normal good and potatoes are inferior.
B) The substitution effect leads the consumer to buy more meat and fewer potatoes since potatoes are relatively more expensive.
C) The income effect makes the consumer poorer, leading them to buy less meat (a normal good) and more potatoes (an inferior good), while the substitution effect makes the consumer want more meat and fewer potatoes.
D) Both the income and substitution effects cause the consumer to buy fewer potatoes and more meat.

C) The income effect makes the consumer poorer, leading them to buy less meat (a normal good) and more potatoes (an inferior good), while the substitution effect makes the consumer want more meat and fewer potatoes.

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Why do Giffen goods have demand curves that slope upward?
A) Because they are luxury goods that become more desirable as their prices rise.
B) Because they are inferior goods where the substitution effect outweighs the income effect, leading to increased demand when prices rise.
C) Because they are inferior goods where the income effect dominates the substitution effect, causing consumers to buy more even as the price increases.
D) Because they are unrelated to normal market behaviors and do not follow the law of demand.
E) Because they are consumed together with complementary goods, making price changes irrelevant.

C) Because they are inferior goods where the income effect dominates the substitution effect, causing consumers to buy more even as the price increases.

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How do the income and substitution effects of a higher wage influence Jasmine’s labor-supply curve?
A) The substitution effect makes Jasmine work less because leisure becomes less expensive relative to consumption.
B) The income effect makes Jasmine work more, as she aims to increase both consumption and leisure.
C) The substitution effect encourages Jasmine to work more because leisure becomes more expensive relative to consumption, while the income effect encourages her to work less, as higher wages allow her to enjoy more leisure.
D) The labor-supply curve always slopes upward in response to higher wages due to the dominance of the substitution effect.

C) The substitution effect encourages Jasmine to work more because leisure becomes more expensive relative to consumption, while the income effect encourages her to work less, as higher wages allow her to enjoy more leisure.

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How does an increase in wages affect Jasmine’s labor-supply curve in different scenarios?
A) In all cases, a higher wage will always lead Jasmine to work more, causing an upward-sloping labor-supply curve.
B) Substitution effect and a higher wage induces Jasmine to enjoy less leisure and work more, resulting in an upward-sloping labor-supply curve, while income effect and higher wage leads her to enjoy more leisure and work less, resulting in a backward-sloping labor-supply curve.
C) A higher wage leads Jasmine to work less in all scenarios, creating a universally backward-sloping labor-supply curve.
D) In both panels, a higher wage causes Jasmine to allocate more time to leisure, making the labor-supply curve slope downward.
E) The labor-supply curve cannot slope backward regardless of wage increases.

B) Substitution effect and a higher wage induces Jasmine to enjoy less leisure and work more, resulting in an upward-sloping labor-supply curve, while income effect and higher wage leads her to enjoy more leisure and work less, resulting in a backward-sloping labor-supply curve.

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What causes a labor-supply curve to bend backward at higher wages?
A) The substitution effect becomes stronger than the income effect, causing individuals to work more as wages increase.
B) At higher wages, the income effect begins to dominate the substitution effect, leading individuals to choose more leisure over additional work.
C) The labor-supply curve bends backward only when individuals prefer constant hours regardless of wage changes.
D) The backward bend occurs because higher wages make work more desirable than leisure, increasing hours worked indefinitely.
E) It reflects a decrease in wages, causing individuals to work more to maintain their standard of living.

B) At higher wages, the income effect begins to dominate the substitution effect, leading individuals to choose more leisure over additional work.

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How does an increase in the interest rate affect Carlos’s decision to consume and save, according to the income and substitution effects? A) The substitution effect makes future consumption less costly relative to current consumption, causing Carlos to consume more when old and save more. B) The substitution effect makes future consumption less attractive, causing Carlos to consume more when young and save less. C) The income effect makes Carlos better off overall, leading him to want to consume more in both periods as long as consumption in both periods is a normal good. D) If the substitution effect dominates the income effect, Carlos will save more, as the higher interest rate makes saving more attractive. E) If the income effect dominates the substitution effect, Carlos will save less, as he uses his increased wealth to consume more when young.

A) The substitution effect makes future consumption less costly relative to current consumption, causing Carlos to consume more when old and save more. C) The income effect makes Carlos better off overall, leading him to want to consume more in both periods as long as consumption in both periods is a normal good. D) If the substitution effect dominates the income effect, Carlos will save more, as the higher interest rate makes saving more attractive. E) If the income effect dominates the substitution effect, Carlos will save less, as he uses his increased wealth to consume more when young.

Mr. Burns buys only lobster and chicken. Lobster is a normal good, while chicken is an inferior good. When the price of lobster rises, Mr. Burns buys A) Less of both goods. B) More lobster and less chicken. C) Less lobster and more chicken. D) Less lobster, but the impact on chicken is ambiguous.

C) Less lobster and more chicken.

If Edna buys more pasta when the price of pasta increases, we can infer that for Edna A) Pasta is a normal good for which the income effect exceeds the substitution effect. B) Pasta is a normal good for which the substitution effect exceeds the income effect. C) Pasta is an inferior good for which the income effect exceeds the substitution effect. D) Pasta is an inferior good for which the substitution effect exceeds the income effect.

C) Pasta is an inferior good for which the income effect exceeds the substitution effect.

Maude’s labor-supply curve slopes upward if, for Maude, A) Leisure is a normal good. B) Consumption is a normal good. C) The income effect on leisure exceeds the substitution effect. D) The substitution effect on leisure exceeds the income effect.

D) The substitution effect on leisure exceeds the income effect.

Consumption when young and consumption when old are both normal goods for Seymour, a worker saving for retirement. When the interest rate falls, what happens to Seymour’s consumption when old? A) It definitely increases. B) It definitely decreases. C) It increases only if the substitution effect exceeds the income effect. D) It decreases only if the substitution effect exceeds the income effect.

B) It definitely decreases.

What determines the price at which trade takes place, and how are the gains from trade shared between the trading parties? A) The price at which trade occurs must be above the opportunity cost of the buyer and below the opportunity cost of the seller for both parties to benefit. B) Trade prices are determined solely by the absolute cost of production for both parties. C) For both parties to gain from trade, the price at which they trade must lie between their respective opportunity costs. D) The gains from trade are shared equally between the trading parties as long as the price lies between their opportunity costs. E) The precise distribution of gains from trade depends on each party’s bargaining power and preferences.

C) For both parties to gain from trade, the price at which they trade must lie between their respective opportunity costs. E) The precise distribution of gains from trade depends on each party’s bargaining power and preferences.

Kayla can cook dinner in 30 minutes and wash the laundry in 20 minutes. Her roommate takes twice as long to do each task. How should the roommates allocate the work? A) Kayla should do more of the cooking based on her comparative advantage. B) Kayla should do more of the washing based on her comparative advantage. C) Kayla should do more of the washing based on her absolute advantage. D) There are no gains from trade in this situation.

D) There are no gains from trade in this situation.

The nation of Openia allows free trade and exports steel. If steel exports were prohibited, the price of steel in Openia would be _________, benefiting steel _________. A) Higher; consumers B) Lower; consumers C) Higher; producers D) Lower; producers

B) Lower; consumers

In the case of an exporting country, how is the demand curve from the rest of the world for the exported goods typically characterized, and why? A) It is perfectly inelastic because the rest of the world purchases a fixed quantity regardless of the price. B) It is perfectly elastic because, as a small economy, the exporting country can sell as much as it wants at the world price, and the rest of the world will purchase any quantity at that price. C) It is somewhat elastic because the quantity demanded by the rest of the world changes with the exporting country’s production costs. D) It is unit elastic because total revenue remains constant regardless of changes in the quantity supplied.

B) It is perfectly elastic because, as a small economy, the exporting country can sell as much as it wants at the world price, and the rest of the world will purchase any quantity at that price.

In the case of an importing country, how elastic is the supply curve from the rest of the world for the imported goods, and why? A) Perfectly inelastic, because the rest of the world offers a fixed quantity regardless of price changes. B) Somewhat elastic, because the supply changes depending on the importing country's demand fluctuations. C) Perfectly elastic, because the importing country can buy as much as it wants at a fixed world price without affecting that price. D) Unit elastic, as total revenue remains constant regardless of the quantity imported. E) Downward-sloping, reflecting changes in the quantity supplied with price variations.

C) Perfectly elastic, because the importing country can buy as much as it wants at a fixed world price without affecting that price.

What happens to consumer and producer surplus when the domestic price is less than the world price (PD

C) The country will export goods, leading to a fall in consumer surplus and a rise in producer surplus.

When the domestic price (PD) is greater than the world price (PW), what is the effect on total surplus and the direction of trade? A) The country exports goods, and total surplus falls. B) The country imports goods, causing both consumer and producer surplus to fall. C) The country imports goods, and total surplus rises. D) Total surplus falls because of a loss in producer surplus. E) The direction of trade remains unchanged.

C) The country imports goods, and total surplus rises.

Which of the following are true about the effects of import quotas and tariffs on international trade and the domestic economy? (Select all that apply) A) Both tariffs and import quotas reduce the quantity of imports and raise the domestic price of the good. B) Import quotas, unlike tariffs, have no impact on consumer welfare. C) Both policies decrease the welfare of domestic consumers while increasing the welfare of domestic producers. D) Tariffs and import quotas create deadweight losses in the economy. E) Import quotas encourage an increase in consumer surplus by making more goods available.

A) Both tariffs and import quotas reduce the quantity of imports and raise the domestic price of the good. C) Both policies decrease the welfare of domestic consumers while increasing the welfare of domestic producers. D) Tariffs and import quotas create deadweight losses in the economy.

What are the effects on the domestic textile market when the government allows Isolandians to import and export textiles? (Choose all that apply) A) If the domestic price before trade is below the world price, the domestic price will rise, reducing domestic consumption and increasing domestic production, making Isoland a textile exporter. B) If the domestic price before trade is above the world price, the domestic price will fall, increasing domestic consumption and decreasing domestic production, making Isoland a textile importer. C) Tariffs and import quotas both reduce imports, raise domestic prices, decrease consumer welfare, increase producer welfare, and create deadweight losses. D) Import quotas generate revenue for the domestic government similar to tariffs, even if permits are allocated to foreign producers. E) Tariffs raise revenue for the government, while import quotas generate surplus for those who hold import permits.

A) If the domestic price before trade is below the world price, the domestic price will rise, reducing domestic consumption and increasing domestic production, making Isoland a textile exporter. B) If the domestic price before trade is above the world price, the domestic price will fall, increasing domestic consumption and decreasing domestic production, making Isoland a textile importer. C) Tariffs and import quotas both reduce imports, raise domestic prices, decrease consumer welfare, increase producer welfare, and create deadweight losses. E) Tariffs raise revenue for the government, while import quotas generate surplus for those who hold import permits.

In the context of free trade in textiles, who gains and who loses, and how does it impact overall welfare? (Choose all that apply) A) If the price of textiles rises due to trade, producers of textiles gain, while consumers lose. B) If the price of textiles falls due to trade, consumers gain, while producers lose. C) Free trade in textiles always benefits consumers more than producers, regardless of price changes. D) In both cases of price rises or falls, the overall gains to society are larger than the losses, increasing total welfare. E) Free trade has no net impact on total welfare because gains and losses are equal.

A) If the price of textiles rises due to trade, producers of textiles gain, while consumers lose. B) If the price of textiles falls due to trade, consumers gain, while producers lose. D) In both cases of price rises or falls, the overall gains to society are larger than the losses, increasing total welfare.

Should a tariff be part of the new trade policy for Isoland, and what are its effects if applied to textile imports? (Choose all that apply) A) A tariff will have an impact only if Isoland becomes a textile importer. B) A tariff moves the economy further from the no-trade equilibrium, thereby increasing economic efficiency. C) A tariff causes deadweight losses similar to most taxes, reducing overall economic welfare. D) A tariff improves the welfare of domestic producers and raises government revenue, but the gains are offset by greater consumer losses. E) The most efficient policy for Isoland would be to allow free trade without tariffs.

A) A tariff will have an impact only if Isoland becomes a textile importer. C) A tariff causes deadweight losses similar to most taxes, reducing overall economic welfare. D) A tariff improves the welfare of domestic producers and raises government revenue, but the gains are offset by greater consumer losses. E) The most efficient policy for Isoland would be to allow free trade without tariffs.

Beyond the standard analysis of trade, what are some of the additional economic benefits of free trade? (Choose all that apply) A) Increased variety of goods, allowing consumers access to products from different countries with unique characteristics. B) Reduced competition, protecting domestic companies from foreign competitors and stabilizing market prices. C) Lower costs through economies of scale, as firms gain access to larger markets and can produce goods at lower per-unit costs. D) Increased competition, reducing market power of domestic firms and fostering more efficient markets. E) Enhanced productivity, with the most productive firms expanding while the least productive are forced out, leading to higher overall productivity. F) Enhanced flow of ideas, where technological advances are shared through the trade of goods embodying those technologies.

A) Increased variety of goods, allowing consumers access to products from different countries with unique characteristics. C) Lower costs through economies of scale, as firms gain access to larger markets and can produce goods at lower per-unit costs. D) Increased competition, reducing market power of domestic firms and fostering more efficient markets. E) Enhanced productivity, with the most productive firms expanding while the least productive are forced out, leading to higher overall productivity. F) Enhanced flow of ideas, where technological advances are shared through the trade of goods embodying those technologies.

When the nation of Ectenia opens itself to world trade in coffee beans, the domestic price of coffee beans falls. Which of the following describes the situation? A) Domestic production of coffee rises, and Ectenia becomes a coffee importer. B) Domestic production of coffee rises, and Ectenia becomes a coffee exporter. C) Domestic production of coffee falls, and Ectenia becomes a coffee importer. D) Domestic production of coffee falls, and Ectenia becomes a coffee exporter.

C) Domestic production of coffee falls, and Ectenia becomes a coffee importer.

When a nation opens itself to trade in a good and becomes an importer, A) Producer surplus decreases, but consumer surplus and total surplus both increase. B) Producer surplus decreases, consumer surplus increases, and so the impact on total surplus is ambiguous. C) Producer surplus and total surplus increase, but consumer surplus decreases. D) Producer surplus, consumer surplus, and total surplus all increase.

A) Producer surplus decreases, but consumer surplus and total surplus both increase.

If a nation that imports a good imposes a tariff, it will increase A) The domestic quantity demanded. B) The domestic quantity supplied. C) The quantity imported from abroad. D) The efficiency of the equilibrium.

B) The domestic quantity supplied.

Which of the following trade policies would benefit producers, hurt consumers, and increase the amount of trade? A) The increase of a tariff in an importing country B) The reduction of a tariff in an importing country C) Starting to allow trade when the world price is greater than the domestic price D) Starting to allow trade when the world price is less than the domestic price

C) Starting to allow trade when the world price is greater than the domestic price

What is the "jobs argument" for restricting trade, and how do economists typically respond to it? (Choose all that apply) A) Trade destroys jobs in industries that compete against imports, leading to increased unemployment overall. B) Total unemployment does not rise as imports increase because job losses in import-competing industries are offset by job gains in export industries. C) Economists argue that even if all goods could be produced more cheaply abroad, a country can still benefit from trade by focusing on goods for which it has a comparative advantage. D) The jobs argument holds that a country cannot have a viable export industry if foreign competition is allowed. E) Restricting trade always ensures more domestic job security without negative repercussions.

B) Total unemployment does not rise as imports increase because job losses in import-competing industries are offset by job gains in export industries. C) Economists argue that even if all goods could be produced more cheaply abroad, a country can still benefit from trade by focusing on goods for which it has a comparative advantage.

What is the national security argument for restricting trade, and what are economists' responses to it? (Choose all that apply) A) The argument states that industries vital to national security should be protected to prevent dependence on potentially disrupted imports during wartime. B) Economists generally dismiss the national security argument as irrelevant to trade policy. C) Economists agree that protection may be warranted but stress that it should be based on genuine security needs. D) Producers sometimes exaggerate their importance to national security to secure protection from foreign competition. E) Protecting industries for national security always guarantees economic benefits without any risk of abuse.

A) The argument states that industries vital to national security should be protected to prevent dependence on potentially disrupted imports during wartime. C) Economists agree that protection may be warranted but stress that it should be based on genuine security needs. D) Producers sometimes exaggerate their importance to national security to secure protection from foreign competition.

What is the infant-industry argument for restricting trade, and how do economists typically respond to it? (Choose all that apply) A) The argument states that new industries should be given temporary protection until they mature and can compete with established foreign firms. B) Economists generally support protecting infant industries because all new industries eventually become profitable. C) Economists argue that it is challenging for governments to accurately identify which industries will become competitive and whether the benefits of protecting them outweigh the costs to consumers. D) Economists point out that if a firm will be profitable in the long run, it should be willing to endure temporary losses without government protection. E) The infant-industry argument guarantees economic success if applied consistently.

A) The argument states that new industries should be given temporary protection until they mature and can compete with established foreign firms. C) Economists argue that it is challenging for governments to accurately identify which industries will become competitive and whether the benefits of protecting them outweigh the costs to consumers. D) Economists point out that if a firm will be profitable in the long run, it should be willing to endure temporary losses without government protection.

What is the unfair-competition argument for restricting trade, and how do economists typically respond to it? (Choose all that apply) A) The argument claims that foreign competitors have an unfair advantage, such as government subsidies, which can harm domestic producers. B) Economists argue that importing goods at lower prices due to foreign subsidies benefits consumers more than it harms domestic producers, as it provides extra-cheap products. C) The unfair-competition argument supports complete protectionism to ensure fair competition. D) Economists believe that the gains to consumers from lower prices typically outweigh the losses to domestic producers. E) The argument implies that domestic industries will never be able to compete with subsidized foreign goods.

A) The argument claims that foreign competitors have an unfair advantage, such as government subsidies, which can harm domestic producers. B) Economists argue that importing goods at lower prices due to foreign subsidies benefits consumers more than it harms domestic producers, as it provides extra-cheap products. D) Economists believe that the gains to consumers from lower prices typically outweigh the losses to domestic producers.

What is the protection-as-bargaining-chip argument for trade restrictions, and how do economists respond to it? (Choose all that apply) A) The argument suggests that a country can use threats to restrict imports as leverage to get other countries to lift their trade restrictions. B) Economists agree that using trade restrictions as a bargaining tool always leads to successful negotiations. C) Economists warn that if the other country refuses to comply, the imposing country faces two bad options: either follow through on the threat and reduce its own welfare, or back down and lose credibility. D) This approach guarantees improved trade relations and market access for both countries involved. E) Restricting imports as a bargaining tool can harm the domestic economy if the threat must be carried out.

A) The argument suggests that a country can use threats to restrict imports as leverage to get other countries to lift their trade restrictions. C) Economists warn that if the other country refuses to comply, the imposing country faces two bad options: either follow through on the threat and reduce its own welfare, or back down and lose credibility. E) Restricting imports as a bargaining tool can harm the domestic economy if the threat must be carried out.

Lilliput imports rope from Brobdingnag, where rope producers are subsidized by the government because of their great political clout. The most efficient policy from the standpoint of Lilliput is to A) Continue trading at the subsidized price. B) Place a tariff on rope imports to offset the subsidy. C) Give a similar subsidy to the rope producers of Lilliput. D) Stop trading with Brobdingnag.

A) Continue trading at the subsidized price.

The goal of multilateral trade agreements is usually to A) Equalize the level of tariffs across nations so no nation is disadvantaged relative to others. B) Use targeted tariffs to ensure that nations produce those goods in which they have a comparative advantage. C) Reduce tariffs in various nations simultaneously to blunt political pressure for protectionism. D) Ensure that tariffs are used only to promote infant industries that will eventually become viable.

C) Reduce tariffs in various nations simultaneously to blunt political pressure for protectionism.

In the context of GDP, what two components are always equal for an economy as a whole, and why? A) Total savings and total investments, because all income is saved. B) Total income and total expenditure, because every dollar spent by buyers becomes income for sellers. C) Total government revenue and total government spending, due to balanced budgets. D) Total imports and total exports, to maintain a constant trade balance. E) Total production costs and total expenditures, due to constant market prices.

B) Total income and total expenditure, because every dollar spent by buyers becomes income for sellers.

An economy’s gross domestic product is A) The excess of spending over income. B) The excess of income over spending. C) Total income and total spending. D) Total income times total spending.

C) Total income and total spending.

Sam bakes a cake and sells it to Carla for $10. Woody pays Diane $30 to tutor him. In this economy, GDP is A) $10. B) $20. C) $30. D) $40.

D) $40.

In the context of GDP, what does the term "market value" refer to? ("Market Value") A) The value of goods and services based on the prices set by the government. B) The total production cost of goods and services within an economy. C) The value of all final goods and services produced, measured at their selling prices in the open market. D) Goods and services valued based on arbitrary or non-monetary metrics. E) All goods measured in varying units, such as hours of work or raw materials used.

C) The value of all final goods and services produced, measured at their selling prices in the open market.

What does GDP include and exclude when measuring the market value of goods and services, and why? ("of All") A) GDP includes all goods and services produced within an economy, regardless of whether they are sold in a market. B) GDP tries to be comprehensive by including all items legally produced and sold in markets, including rental values for owner-occupied housing. C) GDP excludes items produced and consumed at home, such as homegrown vegetables, because they do not enter the marketplace. D) GDP measures illicit transactions like illegal drug sales to fully capture economic activity. E) GDP counts all services, even if provided without payment within a household, such as unpaid housework or gardening.

B) GDP tries to be comprehensive by including all items legally produced and sold in markets, including rental values for owner-occupied housing. C) GDP excludes items produced and consumed at home, such as homegrown vegetables, because they do not enter the marketplace.

Why does GDP include only the value of final goods and not intermediate goods? ("Final") A) Including both final and intermediate goods would more accurately reflect total production. B) The value of intermediate goods is already accounted for in the prices of final goods, so including them would lead to double counting. C) GDP measures both intermediate goods and their usage separately to avoid redundancy. D) Intermediate goods are counted only when they are sold internationally. E) An intermediate good is treated as a final good when it is added to a firm's inventory for future use or sale, contributing to GDP as inventory investment.

B) The value of intermediate goods is already accounted for in the prices of final goods, so including them would lead to double counting. E) An intermediate good is treated as a final good when it is added to a firm's inventory for future use or sale, contributing to GDP as inventory investment.

What types of goods and services does GDP include, and how are they measured? ("Goods and Services") A) GDP includes only tangible goods, such as food, clothing, and cars, because services are too difficult to measure accurately. B) GDP includes both tangible goods (like food, clothing, and cars) and intangible services (such as haircuts, housecleaning, and doctor visits). C) Tangible goods are counted in GDP, but services like concerts and housecleaning are excluded. D) GDP measures only goods produced within a specific sector of the economy.

B) GDP includes both tangible goods (like food, clothing, and cars) and intangible services (such as haircuts, housecleaning, and doctor visits).

Why does GDP include only goods and services that are currently produced? ("Produced") A) GDP includes all transactions, whether for newly produced or previously produced items, to fully capture economic activity. B) Including goods and services that are currently produced ensures that GDP measures the value of economic output within a given period, excluding transactions involving items produced in the past. C) When a used car is sold between individuals, the value is added to GDP to account for all economic exchanges. D) GDP focuses only on the resale market to reflect market dynamics accurately. E) Transactions involving past production are included in GDP to maintain consistency.

B) Including goods and services that are currently produced ensures that GDP measures the value of economic output within a given period, excluding transactions involving items produced in the past.

What does the phrase "within a country" signify when measuring GDP, and how does it affect what is included? "within a Country" A) GDP measures the value of production based solely on the nationality of the producer, regardless of where the production takes place. B) GDP includes all production within a country's geographic boundaries, regardless of the nationality of the producer. C) Production by a country's citizens abroad is always included in the country’s GDP. D) GDP measures only the value of goods and services produced by domestic citizens. E) Production by foreign workers within a country is excluded from GDP.

B) GDP includes all production within a country's geographic boundaries, regardless of the nationality of the producer.

What does it mean for GDP to be measured "in a given period of time," and how is this data typically reported? "In a Given Period of Time" A) GDP measures the value of production over any unspecified interval of time without consistency in reporting. B) GDP measures the value of production within a specific interval, such as a year or a quarter, and typically reports quarterly data at an annual rate for comparison purposes. C) The government reports GDP data only for entire years, excluding quarterly figures. D) Quarterly GDP data are presented without any adjustments, reflecting raw production values regardless of seasonal fluctuations. E) Seasonal adjustments are applied to GDP data to account for predictable fluctuations, such as increased production during the holiday season, allowing for clearer comparisons across different times of the year.

B) GDP measures the value of production within a specific interval, such as a year or a quarter, and typically reports quarterly data at an annual rate for comparison purposes. E) Seasonal adjustments are applied to GDP data to account for predictable fluctuations, such as increased production during the holiday season, allowing for clearer comparisons across different times of the year.

Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby’s store to be sold later. What is GDP here? A) $40 B) $60 C) $80 D) $100

C) $80

After graduation, an American college student moves to Japan to teach English. Her salary is included A) Only in U.S. GDP. B) Only in Japan’s GDP. C) In both U.S. GDP and Japan’s GDP. D) In neither U.S. GDP nor Japan’s GDP.

B) Only in Japan’s GDP.

What does the consumption component of GDP include, and what does it exclude? A) Consumption includes all household spending on goods and services, including new housing. B) Consumption includes spending by households on goods such as durable goods (e.g., automobiles) and nondurable goods (e.g., food), as well as services like haircuts, medical care, and education. C) Household spending on education is not counted as consumption but instead as an investment. D) Consumption excludes spending on new housing, which is treated separately within GDP. E) All goods purchased by households, regardless of their durability, are excluded from consumption calculations.

B) Consumption includes spending by households on goods such as durable goods (e.g., automobiles) and nondurable goods (e.g., food), as well as services like haircuts, medical care, and education. D) Consumption excludes spending on new housing, which is treated separately within GDP.

What does the investment component of GDP include, and how are different types of capital and inventories treated? A) Investment refers only to household spending on durable goods like appliances and cars. B) Investment includes the purchase of capital goods such as business structures, equipment, intellectual property, residential buildings, and inventory accumulation. C) The purchase of a new house by a household is categorized under Investment, not consumption. D) When a firm produces goods and adds them to its inventory, it is treated as part of investment spending since these goods are considered part of the economy’s production. E) Inventory accumulation is not included in GDP as it does not involve immediate consumption.

B) Investment includes the purchase of capital goods such as business structures, equipment, intellectual property, residential buildings, and inventory accumulation. C) The purchase of a new house by a household is categorized under Investment, not consumption. D) When a firm produces goods and adds them to its inventory, it is treated as part of investment spending since these goods are considered part of the economy’s production.

What do government purchases include in GDP, and what is excluded? A) Government purchases include all government spending, including transfer payments such as Social Security and unemployment benefits. B) Government purchases measure spending on goods and services by local, state, and federal governments, including salaries of government workers and expenditures on public works. C) Transfer payments, such as Social Security benefits, are included in government purchases since they alter household income. D) Government purchases exclude transfer payments because they are not made in exchange for currently produced goods or services and do not reflect economic production. E) Government purchases only include spending by federal government agencies.

B) Government purchases measure spending on goods and services by local, state, and federal governments, including salaries of government workers and expenditures on public works. D) Government purchases exclude transfer payments because they are not made in exchange for currently produced goods or services and do not reflect economic production.

What do net exports represent in GDP, and why are imports subtracted from exports? A) Net exports represent the total value of goods and services produced domestically, excluding all foreign trade. B) Net exports are the value of foreign purchases of domestically produced goods (exports) minus the value of domestic purchases of foreign goods (imports). C) Imports are subtracted from exports in the net exports calculation because they increase other components of GDP, such as consumption, investment, or government purchases. D) Imports are added to GDP as positive values to balance trade deficits. E) Net exports only measure goods produced and consumed domestically without any foreign transactions.

B) Net exports are the value of foreign purchases of domestically produced goods (exports) minus the value of domestic purchases of foreign goods (imports). C) Imports are subtracted from exports in the net exports calculation because they increase other components of GDP, such as consumption, investment, or government purchases.

Which of the following does NOT add to U.S. GDP? A) Boeing manufactures and sells a plane to Air France. B) General Motors builds a new auto factory in North Carolina. C) The city of New York pays a salary to a policeman. D) The federal government sends a Social Security check to your grandmother.

D) The federal government sends a Social Security check to your grandmother.

An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction? A) Net exports and GDP both rise. B) Net exports and GDP both fall. C) Net exports fall, while GDP does not change. D) Net exports do not change, while GDP rises.

C) Net exports fall, while GDP does not change.

Which is the largest component of GDP? A) Consumption B) Investment C) Government purchases D) Net exports

A) Consumption

What does the GDP deflator measure, and how is it calculated? A) The GDP deflator measures the ratio of real GDP to nominal GDP and reflects the level of production in an economy. B) The GDP deflator measures the current level of prices relative to the level of prices in the base year by taking the ratio of nominal GDP to real GDP. C) The GDP deflator uses nominal GDP to value output at base-year prices. D) It reflects changes in the economy's output rather than changes in prices. E) The GDP deflator excludes changes in price levels, focusing solely on production.

B) The GDP deflator measures the current level of prices relative to the level of prices in the base year by taking the ratio of nominal GDP to real GDP.

What is a key difference between the GDP deflator and the Consumer Price Index (CPI)? A) The GDP deflator measures the prices of goods and services bought by consumers, while the CPI reflects the prices of all goods and services produced domestically. B) The GDP deflator reflects the prices of all goods and services produced domestically, while the CPI measures the prices of goods and services bought by consumers. C) An increase in the price of a domestically produced good, like a Boeing airplane, is included in both the GDP deflator and the CPI. D) A price increase in an imported consumption good, such as a Volvo car, appears in the CPI but not in the GDP deflator. E) Both the GDP deflator and the CPI include only goods and services produced and consumed domestically.

B) The GDP deflator reflects the prices of all goods and services produced domestically, while the CPI measures the prices of goods and services bought by consumers. D) A price increase in an imported consumption good, such as a Volvo car, appears in the CPI but not in the GDP deflator.

How does a change in oil prices affect the Consumer Price Index (CPI) and the GDP deflator? A) An increase in oil prices affects the GDP deflator more than the CPI because oil is a larger share of GDP. B) An increase in oil prices affects the CPI more than the GDP deflator because oil and its products make up a larger share of consumer spending than of GDP. C) Oil prices have an equal effect on both the CPI and the GDP deflator because oil is used both domestically and internationally. D) The GDP deflator includes changes in oil prices only for imported oil, while the CPI includes all oil price changes. E) Neither the CPI nor the GDP deflator is significantly affected by changes in oil prices.

B) An increase in oil prices affects the CPI more than the GDP deflator because oil and its products make up a larger share of consumer spending than of GDP.

What is the second key difference between the GDP deflator and the Consumer Price Index (CPI)? A) The CPI uses a basket of goods and services that changes automatically over time, while the GDP deflator uses a fixed basket of goods and services. B) The CPI compares the price of a fixed basket of goods and services with its base-year price, while the GDP deflator compares the price of currently produced goods and services with their base-year prices. C) The GDP deflator’s basket of goods is updated only occasionally, while the CPI’s basket changes automatically over time. D) This difference is especially significant when prices of all goods and services change proportionately. E) The way prices are weighted in the GDP deflator changes automatically over time, while the CPI relies on a fixed basket, leading to different results if prices change at varying rates.

B) The CPI compares the price of a fixed basket of goods and services with its base-year price, while the GDP deflator compares the price of currently produced goods and services with their base-year prices. E) The way prices are weighted in the GDP deflator changes automatically over time, while the CPI relies on a fixed basket, leading to different results if prices change at varying rates.

The CPI measures approximately the same economic phenomenon as A) Nominal GDP. B) Real GDP. C) The GDP deflator. D) The unemployment rate.

C) The GDP deflator.

The largest component in the basket of goods and services used to compute the CPI is A) Food and beverages. B) Housing. C) Medical care. D) Apparel.

B) Housing.

If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase A) Both the CPI and the GDP deflator. B) Neither the CPI nor the GDP deflator. C) The CPI but not the GDP deflator. D) The GDP deflator but not the CPI.

D) The GDP deflator but not the CPI.

Because consumers can sometimes substitute cheaper goods for those that have risen in price, A) The CPI overstates inflation. B) The CPI understates inflation. C) The GDP deflator overstates inflation. D) The GDP deflator understates inflation.

A) The CPI overstates inflation.

How does the rate of inflation affect Sara’s purchasing power in relation to the rate of interest? A) Sara’s purchasing power increases regardless of the inflation rate, as long as she earns interest on her savings. B) The higher the rate of inflation, the smaller the increase in Sara’s purchasing power. C) If the rate of inflation exceeds the rate of interest, Sara’s purchasing power decreases. D) Inflation has no effect on purchasing power if interest rates remain constant. E) Purchasing power is unaffected by inflation as long as nominal interest rates rise.

B) The higher the rate of inflation, the smaller the increase in Sara’s purchasing power. C) If the rate of inflation exceeds the rate of interest, Sara’s purchasing power decreases.

How does deflation affect Sara’s purchasing power in relation to the rate of interest? A) Deflation causes Sara’s purchasing power to rise by less than the rate of interest. B) Deflation causes Sara’s purchasing power to rise by more than the rate of interest. C) Deflation reduces Sara’s purchasing power regardless of the interest rate. D) Deflation has no effect on purchasing power as long as nominal interest rates remain constant. E) Deflation eliminates the relationship between inflation and purchasing power.

B) Deflation causes Sara’s purchasing power to rise by more than the rate of interest.

What is the difference between technological knowledge and human capital, and how do they affect productivity? A) Technological knowledge refers to society’s understanding of how the world works, while human capital refers to the resources spent transmitting this knowledge to the labor force. B) Human capital measures the quality of society’s textbooks, while technological knowledge measures the time the population spends learning. C) Technological knowledge is unrelated to productivity, whereas human capital is the sole determinant of worker productivity. D) Workers’ productivity depends on both technological knowledge and human capital, which work together to enhance output. E) Human capital refers to physical infrastructure, while technological knowledge focuses on theoretical advancements.

A) Technological knowledge refers to society’s understanding of how the world works, while human capital refers to the resources spent transmitting this knowledge to the labor force. D) Workers’ productivity depends on both technological knowledge and human capital, which work together to enhance output.

What does it mean for a production function to have constant returns to scale? A) Increasing all inputs by the same percentage results in a smaller percentage increase in output. B) Increasing all inputs by the same percentage causes output to change by that exact percentage. C) Constant returns to scale imply that changes in one input do not affect the overall output. D) The production function becomes linear when all inputs are increased proportionally. E) Constant returns to scale only apply when one input is held constant, and others are increased proportionally.

B) Increasing all inputs by the same percentage causes output to change by that exact percentage.

What does a production function exhibit when increasing all inputs by the same percentage causes output to change by the same percentage? A) Diminishing returns to scale. B) Constant returns to scale. C) Increasing returns to scale. D) Non-linear input-output relationships. E) Proportionality between one input and output only.

B) Constant returns to scale.

Increases in the amount of human capital in the economy tend to _________ real incomes because they increase the _________ of labor. A) Increase; bargaining power B) Increase; productivity C) Decrease; bargaining power D) Decrease; productivity

B) Increase; productivity

Most economists are _________ that natural resources will eventually limit economic growth. As evidence, they note that the prices of most natural resources, adjusted for overall inflation, have tended to _________ over time. A) Concerned; rise B) Concerned; fall C) Not concerned; rise D) Not concerned; fall

D) Not concerned; fall

What is the effect of increasing the saving rate on growth, productivity, and income, according to the principle of diminishing returns? A) Increasing the saving rate leads to permanently higher growth rates in productivity and income. B) An increase in the saving rate initially leads to higher growth due to capital accumulation, but the growth slows down over time due to diminishing returns to capital. C) In the long run, a higher saving rate results in a higher level of productivity and income but does not lead to sustained higher growth in these variables. D) Diminishing returns prevent any increase in productivity or income, even with a higher saving rate. E) The long-term impact of a higher saving rate is immediate and does not take time to be realized.

B) An increase in the saving rate initially leads to higher growth due to capital accumulation, but the growth slows down over time due to diminishing returns to capital. C) In the long run, a higher saving rate results in a higher level of productivity and income but does not lead to sustained higher growth in these variables.

What is the implication of diminishing returns to capital for economic growth in countries with different levels of wealth? A) Countries that are wealthier grow faster because they have more capital to invest. B) Countries that start out relatively poor can grow faster, other things being equal, because they experience higher returns to capital compared to wealthier countries. C) Diminishing returns to capital imply that all countries grow at the same rate regardless of their initial wealth. D) Poorer countries cannot grow as fast due to limited access to technology and resources. E) Economic growth is unaffected by the initial level of wealth under the principle of diminishing returns.

B) Countries that start out relatively poor can grow faster, other things being equal, because they experience higher returns to capital compared to wealthier countries.

How does foreign investment affect a country’s GDP and GNP, and why? A) Foreign investment raises both GDP and GNP by the same amount because all income stays within the country. B) Foreign investment raises GDP more than GNP because some of the income generated by the investment accrues to nonresidents. C) Foreign investment raises GNP more than GDP because it includes income earned abroad by foreign investors. D) GDP measures the income earned by residents only, while GNP includes nonresident income, so foreign investment has no effect on either measure. E) Foreign investment decreases both GDP and GNP because income flows out of the country.

B) Foreign investment raises GDP more than GNP because some of the income generated by the investment accrues to nonresidents.

Which of the following is a good gauge of economic progress? A) The level of real GDP per person, but not the growth rate of real GDP per person. B) The level of real GDP per person and the growth rate of real GDP per person. C) The growth rate of real GDP per person, but not the level of real GDP per person. D) Neither the level nor the growth rate of real GDP per person.

C) The growth rate of real GDP per person, but not the level of real GDP per person.

A nation's standard of living is best measured by: A) Real GDP. B) Real GDP per person. C) Nominal GDP. D) Nominal GDP per person.

B) Real GDP per person.

Which of the following can be measured by the level of real GDP per person? A) Productivity and the standard of living. B) Productivity but not the standard of living. C) The standard of living but not productivity. D) Neither the standard of living nor productivity.

C) The standard of living but not productivity.

Which of the following measures how the level of well-being in a country has changed over time? A) Level of nominal GDP per person. B) Growth rate of nominal GDP. C) Growth rate of real GDP. D) Growth rate of real GDP per person.

D) Growth rate of real GDP per person.

The key determinant of the standard of living in a country is: A) The amount of goods and services produced from each hour of a worker's time. B) The total amount of goods and services produced within the country. C) The total amount of its physical capital. D) Its growth rate of real GDP.

A) The amount of goods and services produced from each hour of a worker's time.

For a given year, productivity in a particular country is most closely matched with that country's: A) Level of real GDP over that year. B) Level of real GDP divided by hours worked over that year. C) Growth rate of real GDP divided by hours worked over that year. D) Growth rate of real GDP per person over that year.

B) Level of real GDP divided by hours worked over that year.

Over the last ten years, productivity grew faster in Mapoli than in Romeria while the population and total hours worked remained the same in both countries. It follows that: A) Real GDP per person grew faster in Mapoli than in Romeria. B) Real GDP per person must be higher in Mapoli than in Romeria. C) The standard of living must be higher in Mapoli than in Romeria. D) All of the above are correct.

A) Real GDP per person grew faster in Mapoli than in Romeria.

Which of the following can explain faster growth of real GDP in Country A than in Country B? A) Both greater population growth and greater productivity growth in Country A. B) Greater population growth in Country A, but not greater productivity growth in Country A. C) Greater productivity growth in Country A, but not greater population growth in Country A. D) Neither greater population growth nor greater productivity growth in Country A.

A) Both greater population growth and greater productivity growth in Country A.

Suppose that real GDP grew more in Country A than in Country B last year. Which of the following statements is true? A) Country A must have a higher standard of living than Country B. B) Country A's productivity must have grown faster than Country B's. C) Both of the above are correct. D) None of the above are correct.

D) None of the above are correct.

How does foreign investment affect GDP and GNP, and what does this imply for economic prosperity? A) Foreign investment raises GDP more than GNP because some income from the investment goes to nonresidents. B) Foreign investment raises GNP more than GDP because it includes income earned by foreign investors abroad. C) Foreign investment affects GNP and GDP equally since both measures track all income within the country. D) GDP only measures domestic income from residents, while GNP includes income from foreign production. E) Foreign investment decreases GDP and GNP due to the outflow of income.

A) Foreign investment raises GDP more than GNP because some income from the investment goes to nonresidents.

What is the effect of brain drain on a country when human capital has positive externalities? A) Brain drain enriches the remaining population as fewer people compete for resources. B) Brain drain makes those left behind poorer because the positive externalities of human capital are diminished. C) Brain drain has no impact on the remaining population as externalities are irrelevant to economic outcomes. D) Brain drain increases the productivity of those who stay behind due to reduced competition in the job market. E) Brain drain reduces GDP but not the overall welfare of the remaining population.

B) Brain drain makes those left behind poorer because the positive externalities of human capital are diminished.

What do trends in natural resource prices suggest about their impact on economic growth? A) Natural resource prices have consistently risen over long periods, indicating a limit to economic growth. B) Natural resource prices, when adjusted for inflation, have remained stable or fallen over time, suggesting that conservation efforts are outpacing resource depletion. C) Fluctuations in natural resource prices show that they are the primary constraint on economic growth. D) The stability or decline in natural resource prices over time indicates that market prices provide evidence of limited conservation efforts. E) Natural resource prices show no connection to inflation-adjusted trends in economic growth.

B) Natural resource prices, when adjusted for inflation, have remained stable or fallen over time, suggesting that conservation efforts are outpacing resource depletion.

B) Increase; productivity

D) Not concerned; fall

How does a smaller quantity of capital per worker affect productivity and GDP per worker? A) A smaller quantity of capital per worker leads to higher productivity and higher GDP per worker due to efficient resource allocation. B) A smaller quantity of capital per worker reduces productivity, which in turn lowers GDP per worker. C) A smaller quantity of capital per worker has no impact on productivity or GDP per worker as long as population growth is balanced. D) A smaller quantity of capital per worker only affects productivity, not GDP per worker. E) A smaller quantity of capital per worker increases GDP per worker by fostering innovation.

B) A smaller quantity of capital per worker reduces productivity, which in turn lowers GDP per worker.

When the Japanese car maker Toyota expands one of its car factories in the United States, what is the likely impact of this event on the gross domestic product and gross national product of the United States? A) GDP rises and GNP falls. B) GNP rises and GDP falls. C) GDP and GNP both rise but GDP rises by more. D) GDP and GNP both rise but GNP rises by more.

C) GDP and GNP both rise but GDP rises by more.

What does it mean to say that a bond buyer is a lender and a bond is an IOU? A) The bond buyer becomes a part-owner of the borrower’s company. B) The bond buyer lends money to the issuer of the bond, and the bond serves as a promise to repay the debt. C) The bond buyer provides equity financing to the borrower in exchange for future profits. D) The bond buyer is guaranteed ownership of the borrower’s assets. E) The bond buyer is a shareholder in the borrower’s business, not a lender.

B) The bond buyer lends money to the issuer of the bond, and the bond serves as a promise to repay the debt.

Why are long-term bonds riskier than short-term bonds, and how does this affect their interest rates? A) Long-term bonds are riskier because holders have to wait longer for repayment of the principal, and they may have to sell the bond at a reduced price if they need money before maturity. B) Long-term bonds are less risky than short-term bonds because they guarantee repayment over a longer period. C) Long-term bonds pay lower interest rates than short-term bonds because they are considered safer investments. D) Short-term bonds are riskier because they mature quickly, leaving less time for investors to earn interest. E) The risk level of long-term bonds is unrelated to their interest rates.

A) Long-term bonds are riskier because holders have to wait longer for repayment of the principal, and they may have to sell the bond at a reduced price if they need money before maturity.

Which of the following characteristics can make a bond risky? (Choose all that apply) A) The term of the bond, as long-term bonds are riskier due to the longer wait for repayment and the possibility of having to sell at a reduced price. B) The credit risk, as bonds with a higher probability of default require higher interest rates to compensate for this risk. C) Municipal bonds. D) The lack of inflation protection, as nominal bonds can lose purchasing power if inflation rises. E) The issuer of the bond, as state and local municipal bonds are inherently riskier than corporate bonds.

A) The term of the bond, as long-term bonds are riskier due to the longer wait for repayment and the possibility of having to sell at a reduced price. B) The credit risk, as bonds with a higher probability of default require higher interest rates to compensate for this risk. D) The lack of inflation protection, as nominal bonds can lose purchasing power if inflation rises

How is the supply curve for stocks typically characterized in the primary and secondary markets? A) In both the primary and secondary markets, the supply curve is always upward-sloping as prices rise. B) In the primary market, the supply curve is upward-sloping, while in the secondary market, it is usually vertical or inelastic because the quantity of stock doesn’t directly depend on price. C) In the secondary market, the supply curve is upward-sloping, while in the primary market, it is perfectly elastic. D) In both markets, the supply curve is vertical, reflecting a fixed supply of stock. E) The supply curve in the secondary market is horizontal, indicating perfect elasticity.

B) In the primary market, the supply curve is upward-sloping, while in the secondary market, it is usually vertical or inelastic because the quantity of stock doesn’t directly depend on price.

What is the effect of a tax reform that encourages greater saving on the loanable funds market? A) It raises interest rates and reduces investment. B) It reduces interest rates and increases investment. C) It leaves interest rates unchanged but increases the quantity of loanable funds supplied. D) It decreases both the quantity of loanable funds demanded and the quantity of loanable funds supplied. E) It raises interest rates, reducing borrowing and investment.

B) It reduces interest rates and increases investment.

What is the effect of a tax reform that encourages greater investment on the loanable funds market? A) It lowers interest rates and decreases saving. B) It raises interest rates and increases saving. C) It leaves interest rates unchanged but increases the demand for loanable funds. D) It decreases the quantity of loanable funds supplied while increasing borrowing. E) It reduces both the interest rate and the quantity of loanable funds demanded.

B) It raises interest rates and increases saving.

What are the effects of a government budget deficit on the loanable funds market and the economy? A) A budget deficit reduces the supply of loanable funds, raising the interest rate and reducing private investment. B) A budget deficit increases the supply of loanable funds, lowering the interest rate and increasing investment. C) A budget deficit increases the quantity of loanable funds demanded, raising both investment and long-term economic growth. D) A budget deficit leaves the interest rate unchanged but reduces public saving and national saving. E) A budget deficit has no impact on investment or the economy’s growth rate.

A) A budget deficit reduces the supply of loanable funds, raising the interest rate and reducing private investment.

How do government budget deficits affect the economy's growth rate? A) Budget deficits reduce national saving, raising interest rates and reducing investment, which slows the economy’s growth rate. B) Budget deficits have no impact on long-term economic growth because they do not affect private investment. C) Budget deficits increase investment by encouraging higher borrowing, which boosts the economy’s growth rate. D) Budget deficits increase national saving and long-term economic growth. E) Budget deficits reduce government debt and accelerate economic growth.

A) Budget deficits reduce national saving, raising interest rates and reducing investment, which slows the economy’s growth rate.

How does a budget deficit resulting from a tax cut affect public and private saving? A) A tax cut increases public saving as reduced taxes lead to higher consumption and economic activity. B) A tax cut has no effect on public saving, but private saving increases significantly, leading to a rise in overall national saving. C) A tax cut reduces public saving by decreasing tax revenue, and although private saving may increase slightly, it rises by less than the decline in public saving due to increased consumption. D) A tax cut reduces both public and private saving because lower taxes encourage higher consumption, reducing overall national saving. E) A tax cut increases both public and private saving by stimulating investment and reducing consumption.

C) A tax cut reduces public saving by decreasing tax revenue, and although private saving may increase slightly, it rises by less than the decline in public saving due to increased consumption.

What are the effects of a government budget surplus on the loanable funds market? A) A budget surplus decreases the supply of loanable funds, raises the interest rate, and reduces investment. B) A budget surplus has no effect on national saving or the interest rate. C) A budget surplus decreases public saving but raises private saving, leaving the supply of loanable funds unchanged. D) A budget surplus increases the supply of loanable funds, reduces the interest rate, and stimulates investment. E) A budget surplus increases government borrowing, reducing the supply of loanable funds.

D) A budget surplus increases the supply of loanable funds, reduces the interest rate, and stimulates investment.

Suppose the government cuts taxes by $200 billion. How do public saving, private saving, national saving, and investment change in the following scenarios? Consumers save the full tax cut: A) Public saving decreases by $200 billion, private saving increases by $200 billion, national saving and investment remain unchanged. B) Public saving decreases by $200 billion, private saving decreases by $200 billion, and national saving decreases by $200 billion. C) Public saving and private saving remain unchanged, while national saving decreases. D) Public saving decreases by $200 billion, private saving increases by $50 billion, and national saving decreases by $150 billion. Consumers save 1/4 of the tax cut and spend 3/4: A) Public saving decreases by $200 billion, private saving increases by $50 billion, national saving decreases by $150 billion, and investment falls by $150 billion. B) Public saving decreases by $200 billion, private saving increases by $200 billion, national saving and investment remain unchanged. C) Public saving decreases by $150 billion, private saving decreases by $50 billion, and investment decreases by $200 billion. D) Public saving and private saving remain unchanged, while national saving decreases

A) Public saving decreases by $200 billion, private saving increases by $200 billion, national saving and investment remain unchanged. A) Public saving decreases by $200 billion, private saving increases by $50 billion, national saving decreases by $150 billion, and investment falls by $150 billion.

Which of the following policy actions would unambiguously reduce the supply of loanable funds and crowd out investment? A) An increase in taxes and a decrease in government spending B) A decrease in taxes together with an increase in government spending C) An increase in both taxes and government spending D) A decrease in both taxes and government spending

B) A decrease in taxes together with an increase in government spending

How do banks holding all deposits in reserve affect the money supply in an economy? A) The money supply increases as deposits in the bank create additional money. B) Banks holding reserves lead to an indefinite increase in the money supply. C) The money supply decreases as currency is taken out of circulation and held in bank reserves. D) The money supply always increases when deposits are made, regardless of whether banks hold reserves. E) The money supply remains unchanged because each deposit reduces currency and raises demand deposits by the same amount.

E) The money supply remains unchanged because each deposit reduces currency and raises demand deposits by the same amount.

What happens when banks hold only a fraction of deposits in reserve? A) The banking system creates money by lending out a portion of the deposits. B) The banking system destroys money by reducing the total amount of currency in circulation. C) The money supply remains unchanged because the amount of reserves is fixed. D) Fractional reserve banking leads to a decrease in the money supply as reserves are held back. E) The money supply always shrinks when reserves are not fully held.

A) The banking system creates money by lending out a portion of the deposits.

What is the result of money creation through fractional-reserve banking? A) Money creation by banks generates wealth for the economy by providing borrowers with additional assets. B) Banks create money and wealth simultaneously, enriching both borrowers and lenders. C) Money creation by banks increases the medium of exchange but does not increase overall wealth because loans create liabilities equal to the money created. D) Money creation by banks reduces economic liquidity while increasing wealth. E) Money creation by banks eliminates liabilities, making borrowers richer.

C) Money creation by banks increases the medium of exchange but does not increase overall wealth because loans create liabilities equal to the money created.

What happens to the value of money when the overall price level rises? A) The value of money increases because more goods and services are produced. B) The value of money decreases because higher prices reduce its purchasing power. C) The value of money remains unchanged regardless of changes in the price level. D) The value of money increases as the economy produces more goods to offset inflation. E) The value of money decreases only when the price level of a single good rises, not the overall price level.

B) The value of money decreases because higher prices reduce its purchasing power.

How does a higher price level affect the quantity of money people choose to hold? A) A higher price level increases the quantity of money demanded because transactions require more money. B) A higher price level decreases the quantity of money demanded because transactions require less money. C) A higher price level has no impact on the quantity of money demanded. D) A higher price level decreases the quantity of money demanded by lowering the purchasing power of money. E) A higher price level increases the demand for credit, but not the quantity of money held.

A) A higher price level increases the quantity of money demanded because transactions require more money.

How are money supply and money demand brought into equilibrium in the long run? A) Interest rates alone determine the equilibrium between money supply and money demand in the long run. B) The overall price level adjusts so that the quantity of money demanded equals the quantity of money supplied by the central bank. C) If the price level is above equilibrium, the Fed must increase the money supply to balance supply and demand. D) Money supply and demand are unaffected by changes in the price level in the long run. E) The central bank fixes the money demand to match any changes in the price level.

B) The overall price level adjusts so that the quantity of money demanded equals the quantity of money supplied by the central bank.

What happens to the price level as the value of money rises? A) The price level rises because the purchasing power of money increases. B) The price level falls because higher money value reduces the cost of goods and services. C) The price level remains unchanged regardless of changes in the value of money. D) The price level rises as the value of money decreases. E) The price level and the value of money move in the same direction.

B) The price level falls because higher money value reduces the cost of goods and services.

What determines the equilibrium in the money market, and what are its implications? A) The equilibrium is determined by the Fed adjusting the money supply to match money demand, and this sets the value of money and the price level. B) The equilibrium is irrelevant to the value of money or the price level in the long run. C) The equilibrium is achieved when the price level adjusts to match changes in money demand, with no role for the Fed's money supply policy. D) The equilibrium occurs only when money supply is perfectly elastic, allowing for price level changes without shifts in demand. E) The equilibrium occurs where the vertical money supply curve meets the downward-sloping money demand curve, determining the value of money and the price level.

E) The equilibrium occurs where the vertical money supply curve meets the downward-sloping money demand curve, determining the value of money and the price level.

How are the money supply and money demand curves represented in the money market? A) The money supply curve is vertical because the Fed fixes the quantity of money, and the money demand curve is downward-sloping, showing higher money demand at lower values of money (higher price levels). B) Both the money supply and demand curves are horizontal, reflecting changes in money supply and demand with no effect on the price level. C) The money supply curve is downward-sloping, while the money demand curve is vertical, indicating that money demand is fixed by the Fed. D) The money supply curve is upward-sloping, reflecting an increase in money supply with higher values of money, while the demand curve is downward-sloping. E) Both curves are vertical because money supply and demand do not depend on the price level.

A) The money supply curve is vertical because the Fed fixes the quantity of money, and the money demand curve is downward-sloping, showing higher money demand at lower values of money (higher price levels).

What is the effect of a monetary injection (increase in the money supply) on the economy? A) A monetary injection decreases the price level, making each dollar more valuable. B) A monetary injection reduces the supply of money, causing deflation. C) A monetary injection leaves the price level and the value of money unchanged. D) A monetary injection increases the price level, making each dollar less valuable. E) A monetary injection has no effect on the price level or the value of money.

D) A monetary injection increases the price level, making each dollar less valuable.

What happens immediately after a monetary injection, and how does the economy reach a new equilibrium? A) A monetary injection creates an excess supply of money, leading to an increase in demand for goods and services, which causes prices to rise until a new equilibrium is reached. B) A monetary injection decreases the supply of money, reducing demand for goods and services and lowering prices. C) A monetary injection increases the economy’s output of goods and services, leading to a lower price level at the new equilibrium. D) A monetary injection has no immediate impact on the economy and leaves the price level and equilibrium unchanged. E) A monetary injection permanently reduces the quantity of money demanded, leaving prices unaffected.

A) A monetary injection creates an excess supply of money, leading to an increase in demand for goods and services, which causes prices to rise until a new equilibrium is reached.

What distinguishes relative prices from nominal prices? A) Relative prices are measured in monetary terms, while nominal prices are measured in physical units. B) Relative prices compare the value of two goods in physical units, while nominal prices are measured in terms of money. C) Nominal prices remain constant across goods, while relative prices fluctuate with market conditions. D) Relative prices are always measured in terms of dollars, while nominal prices are expressed as quantities of goods. E) Both relative prices and nominal prices are unaffected by changes in money supply or inflation.

B) Relative prices compare the value of two goods in physical units, while nominal prices are measured in terms of money.

What does the concept of monetary neutrality imply about changes in the money supply? A) Changes in the money supply affect both nominal and real variables equally. B) Changes in the money supply only affect nominal variables, such as prices, without impacting real variables, such as output or employment. C) Changes in the money supply affect real variables, such as productivity, but not nominal variables. D) Changes in the money supply have no effect on nominal variables, such as the price level. E) Changes in the money supply reduce both nominal and real economic variables proportionally.

B) Changes in the money supply only affect nominal variables, such as prices, without impacting real variables, such as output or employment.

How do monetary changes affect nominal and real variables in the long run? A) Monetary changes have significant effects on both nominal and real variables in the long run. B) Monetary changes increase both nominal and real GDP proportionally in the long run. C) Monetary changes do not affect nominal variables but significantly impact real variables in the long run. D) Monetary changes affect neither nominal nor real variables in the long run. E) Monetary changes have significant effects on nominal variables, such as the price level, but only negligible effects on real variables, such as real GDP, in the long run.

E) Monetary changes have significant effects on nominal variables, such as the price level, but only negligible effects on real variables, such as real GDP, in the long run.

According to the quantity equation, what can result from an increase in the quantity of money in an economy? (Choose all that apply) A) The price level must rise. B) The quantity of output must rise. C) The velocity of money must fall. D) The interest rate must fall. E) The government deficit must decrease.

A) The price level must rise. B) The quantity of output must rise. C) The velocity of money must fall.

Which of the following statements explain the equilibrium price level and inflation rate? (Choose all that apply) A) The velocity of money is relatively stable over time. B) Changes in the money supply cause proportionate changes in the nominal value of output (P × Y). C) Money affects the economy’s output of goods and services by influencing factor supplies and technology. D) When output (Y) is fixed, changes in the money supply (M) lead to proportional changes in the price level (P). E) Rapid increases in the money supply result in high rates of inflation.

A) The velocity of money is relatively stable over time. B) Changes in the money supply cause proportionate changes in the nominal value of output (P × Y). D) When output (Y) is fixed, changes in the money supply (M) lead to proportional changes in the price level (P). E) Rapid increases in the money supply result in high rates of inflation.

Which of the following statements accurately describe the relationship between money growth, inflation, and real GDP? (Choose all that apply) A) If real GDP is constant, the inflation rate equals the money growth rate. B) If real GDP is growing, the inflation rate is less than the money growth rate. C) Economic growth increases the number of transactions, requiring some money growth to accommodate them. D) Excessive money growth does not affect the inflation rate. E) Excessive money growth causes inflation.

A) If real GDP is constant, the inflation rate equals the money growth rate. B) If real GDP is growing, the inflation rate is less than the money growth rate. C) Economic growth increases the number of transactions, requiring some money growth to accommodate them. E) Excessive money growth causes inflation.

How does growth in the money supply affect interest rates in the long run? (Choose all that apply) A) Growth in the money supply does not affect the real interest rate because it is a real variable. B) An increase in the inflation rate causes a one-for-one increase in the nominal interest rate to keep the real interest rate unchanged. C) Growth in the money supply leads to a lower nominal interest rate in the long run. D) In the long run, higher money growth results in both a higher inflation rate and a higher nominal interest rate. E) Changes in the money supply have no impact on inflation or interest rates in the long run.

A) Growth in the money supply does not affect the real interest rate because it is a real variable. B) An increase in the inflation rate causes a one-for-one increase in the nominal interest rate to keep the real interest rate unchanged. D) In the long run, higher money growth results in both a higher inflation rate and a higher nominal interest rate.

Which of the following statements correctly describe the relationship between the real interest rate, money supply growth, and inflation? (Choose all that apply) A) The real interest rate is determined by saving and investment in the loanable funds market. B) Money supply growth determines the real interest rate in the long run. C) Money supply growth determines the inflation rate. D) The real interest rate is unaffected by changes in saving and investment. E) Money supply growth has no effect on the inflation rate in the long run.

A) The real interest rate is determined by saving and investment in the loanable funds market. C) Money supply growth determines the inflation rate.

A budget constraint shows: A) The maximum utility that a consumer can achieve for a given level of income. B) A series of bundles that cost the consumer the same amount of money. C) A series of bundles that give the consumer the same level of utility. D) All of the above are correct.

B) A series of bundles that cost the consumer the same amount of money.

The relative price of the two goods equals: A) The marginal rate of substitution. B) The rate at which the consumer will give up X to gain Y while maintaining the same level of utility. C) The slope of the budget constraint. D) All of the above are correct.

C) The slope of the budget constraint.

The slope of the budget constraint is all of the following EXCEPT: A) The relative price of two goods. B) The rate at which a consumer can afford to trade one good for another. C) The marginal rate of substitution. D) Constant.

C) The marginal rate of substitution.

CH 21 Flashcards

(139 cards)