final exam

Which of the following statements about exchange is false?

if one trading partner gains, the other must lose.

the notion of scarcity is

a basic concept of economics that indicates consumer desire for something is more than the amt freely available from nature.

which of the following most accurately describes the invisible hand concept?

in a market setting, when individuals pursue their own interests, they simultaneously tend to promote public interest.

mike values his ipod at 100, and lauren values it at 250. if lauren buys it from mike for 150, which of the following is true?

mike gains 50 and lauren gaines 100 of value.

if price rises, what happens to quantity supplied of a product?

it increases

when property rights are clearly defined and enforced, private owners will

develop and direct their property toward uses that others value highly bc the market will generally reward them for doing so

there is no such thing as free lunch. this statement best reflects the fact that

an oppurtunity cost is always present when scarce resources are used to produce a good

when price is the rationing criterion, individuals havea strong incentive to

provide services to others in exchange for income

what are the 3 basic questions faced by every economy?

what, how, and for whom will goods be produced?

the economic way of thinking is

a set of basic concepts that helps one understand human choices

if we observe an increase in the price of a good and an increase in the amt of the good bought and sold, this could be explained by

an increase in the demand for a good

In which statement(s) is "demand" used correctly?
1. an increase in the price of hot dogs will reduce the demand for hot dogs.
2. An increase in the price of hot dogs will reduce the demand for hot dog buns.

statement 2 only

which of the following most clearly distinguishes between positive and normative economics?

pos economics is the study of facts; normative economics is concerned with what ought to be

the law of comparative advantage implies that a nation, individual, or region should produce those economic goods for which it

is a low opportunity cost producer

the law of demand refers to teh

inverse relationship between teh price of a good and the quantity demanded

when there is excess supply of a product in market

price must be above the equilibrium price.

in which statements is "supply" used correctly?
1. An increase in the price of eggs will increase the supply of eggs.
2. as the cost of producing eggs rises, the supply of eggs will tend to fall.

statement 2 only

How would a decrease in consumer income affect the market for new automobiles?

demand would decrease, leading to a reduction in price and quantity sold

according to the law of supply

producers are willing to supply larger amounts of a good as its price increases.

when economists say the demand for a product has increased, they mean

demand curve shifted right

Land used to grow corn is also often used to grow wheat. thus, when the market price of corn falls, it will

decrease the opportunity cost of producing wheat

suppose demand increases and supply decreases. which of the following will happen?

equilibrium quan. will rise, fall, or stay the same and equilibrium price will increase.

economics is primarily the study of

the allocation of scarce resources in an effort to satisfy wants that are virtually unlimited

which of the following would count as an investment expenditure in national income accounting?

boeing purchases a new metal stretching machine used to produce airplane wings.

other things the same, an increase in the price level induces people to hold

more money, so they lend less, and the interest rate rises.

why is it important to use real rather than nominal GDP figures when making comparisons of output across time periods?

the real figures will reflect changes in the quantity of output and not changes in the general level of prices

suppose a country had net exports of $8.3 bil and sold 52.4 bil of goods and services abroad. This country had

52.4 bil of exports, 44.1 bil of imports

Tom loses his job and immediately begins looking for another. other things the same, the unemployment rate

increases, and the labor force participation rate is unaffected.

What is most likely to shift the PPC curve inward?

an increase in unemployment

in the supply of a good decreased, what would be the effect on the equilibrium price and quantity?

price would increase, and quantity would decrease.

when economists speak of changes in GDP measured in constant dollars, they mean that

a price index has been used to adjust money GDP for the effects of inflation

which transaction would be included in this years GDP?
1. Johnson rents a five year old house from Smith.
2.Johnson purchases 100 shares of ATT stock from Smith.

1

Until recently, George lived in a home that was newly constructed in 2005. In 2005, he paid 200,000 for the brand new house. He sold the house in 2006 for 225,000. How does the 2006 sale affect 2005 and 2006 GDP?

The 2006 sale affected neither 2005 nor 2006 GDP

which of the following explains why higher prices in the goods and services market will lead to an upward sloping SRAS curve?

the higher prices will temporarily improve profit margins bc many of the cost components of firms will be fixed in the short run

Suppose the official unemployment rate is 10%. we can conclude without question that

one of every ten people in the labor force is currently unemployed.

matt loses his job and decides to sit on the beach rather than looking for work the next few months. other things the same, the unemployment rate

increases, and the labor force participation rate decreases.

other things constant, a decrease in resource prices will lead to

increased profits and an increase in short run aggregate supply.

resource prices will fall and SRAS will increase if

current output is less than the economys full employment level.

when an economy is temporarily operating at an output that is beyond its full employment rate,

excess demand in resource markets will lead to higher resource prices, which will increase costs and direct the economy toward full employment.

the expected price level is important because

firms and resource owners make long term agreements based on the expected price level.

during normal times, the multiplier effect of an increase in govt spending financed by taxes will be

weakened by an offsetting reduction in spending due to the higher taxes.

Federal budget deficits generally grow during recessions bc

tax revenues decrease while transfer payments increase.

GDP is the sum of the purchase price multiplied by the quantity of

final goods and services produced domestically during the period.

the crowding out effect stresses that

additional govt borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise.

if decreased govt borrowing drives down real interest rates in the US,

the dollar will depreciate leading to an increase in net exports.

when a customer deposits $100 into a checking account, the effect is to

increase both the banks liabilities and its assets.

you withdraw $100 from your checking account. how does this affect the money supply and the reserves of your bank?

No affect on money supply, and the reserves of your bank decline.

given the strict quantity theory of money, if the quantity of money were decreased by 50%, prices would

fall by 50%.

In the short run, an unanticipated increase in the money supply will exert its primary impact on

output and employment rather than on prices.

When the Fed decreases the money supply, interest rates

rise.

A decrease in the money supply

raises the interest rate, causing a decrease in investment and a decrease in GDP.

if the Fed unexpectedly shifts to a more restrictive monetary policy, which of the following will most likely occur in the short run?

an increase in unemployment

which of the following will most likely occur during the contractionary phase of a business cycle?

the sales of most businesses decline, and the unemployment rate rises.

sharon was being treated bad by her boss. she stormed off the job and 2 days later found another position. For those two days, Sharon experienced

frictional unemployment.

Bc GDP doesnt fully account for improvements in the quality of goods,

the inflation rate is overstated and the real GDP is understated.

a vertical LRAS curve indicates that

an increase in the Price level will not expand an economys output capacity in the long run.

if the dollar price of the english pound goes from $1.80 to 1.40, the dollar has

appreciated, and the English will find US goods more expensive.

If equilibrium is present in the foreign exchange market and a nation is experiencing a trade surplus,

the nation must be experiencing a net capital outflow.

Other things the same, a decrease in the price level makes the dollars people hold worth

more, so they are willing to spend more.

An unanticipated shift to a more expansionary monetary policy by the Fed will

reduce real interest rates and thereby stimulate investment, current concsumption, and AD.

The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be

lower interest rates, increase in AD, and an expansion in output.

resource prices will fall and SRAS will increase if

current output is less than the economys full-employment level.

if the Fed wants to shift toward a more expansionary policy, it often announces that it is going to change teh federal funds rate. The Fed controls the federal funds rate through

its policy of open market operations

when the interest rate decreases, the opportunity cost of holding money

decreases, so the quantity of money demanded increases.

In the AD/AS model, when the output of an economy is less than its long run potential, the economy will experience

declining real wages and interest rates that will stimulate employment and real output.

within the AD/AS model, an unanticipated increase in SRAS will cause real output to

increase, and the general level of prices to fall.

The crowding out effect suggests that

a reduction in private spending that results from higher interest rates caused by budget deficit will largely offset the expansionary effects of the deficit.

if an economy is growing, but experiences no inflation, this means

AD and AS increased by the same amount.

if the Fed unexpectedly decreases the money supply, real GDP

decreases bc the resulting increase in the interest rate leads to a decrease in investment.

Keynesian analysis stresses that a tax cut that increases the govts budget deficit (or reduces its budget surplus) will

stimulate AD and thereby, promote employment.

In the AD/AS model, the short run effects of an unanticipated increase in the money supply will be

an increase in both the price level and real GDP

When individuals correctly anticipate the effects of expansionary monetary policy, the expansionary policy will

increase the general level of prices.

Which of the following will most likely accompany an unanticipated increase in AD?

an increase in real output

Expansionary fiscal policy during a recession is most effective when it

directs the economy to full employment and resources into productive projects.

The forces of supply and demand assure that

the price of a good will eventually rise in response to an excess demand for that good

if net exports are positive, then

net capital outflow is positive, so foreign assets bought by americans are greater than american assets bought by foreigners.

If Brooke can produce more donuts in one day than Brynn can produce in one day, then

Brooke has an absolute advantage in the production of donuts.

A restaurant offers all you can eat buffet for $12. Meg eats 4 servings but leaves half of a 5th helping uneaten. Why?

her marginal value of food has fallen to zero

Real GDP per person

provides more meaningful comparisons across time and countries than real GDP

A large # of men who used to work or seek work now no longer do either. Other things constant, this makes the

number of people unemployed and labor force both fall

in computing GDP, market prices are used to value final goods and services bc

market prices reflect the values of goods/ services to the buyer

the immediate effect of a member banks sale of US govt securities to the Fed is

Increase in that banks excess reserves

when the fed wants to increase the money supply, what does it usually do?

purchases US govt securities

If the Fed wants to increase the money supply, it would ___ the reserve requirement.

decrease

The Fed would __ bonds in order to pursue a restrictive monetary policy.

sell

The Fed ___ the discount rate to increase money supply and __ the rate to decrease the money supply.

lowers, raises

If the Fed wants to increase the money supply it will ____ interest rates paid on excess reserves.

decrease

When the Fed increases the money supply unexpectedly, there is an increase in AD since ___ real interest rates will stimulate business investment and consumer purchases.

lower