Macroeconomics Resources Answer Key

1. Resources are a. Scarce for households but plentiful for economies. b. Plentiful for households but scarce for economies. c. Scarce for households and scarce for economies. d. Plentiful for households and plentiful for economies. ANSWER: c 2. Approximatelywhatpercentageoftheworld'seconomiesexperiencescarcity? a.10% b. 40% c. 85% d. 100% Answer: d 3. Whenasocietycannotproduceallthegoodsandservicespeoplewishtohave,itissaidthattheeconomyisexperi encing a. scarcity. b. surpluses. c. inefficiencies. d. inequalities. Answer: a 4. Which of the following products would be considered scarce? a. bread b. baseballs autographed by Babe Ruth c. motorcycles d. All of the above are correct Answer: d 5. The phrase “no such thing as a free lunch” means a. People must face tradeoffs. b. Rational people think at the margin. c. People respond to incentives. d. Trade can make everyone better off. Answer: a 6. John is an athlete. He has $120 to spend and wants to buy either a heart rate monitor or new running shoes. Both the heart rate monitor and running shoes cost $120, so he can only buy one. This illustrates the principle that a. Trade can make everyone better off. b. People face trade-offs. c. Rational people think at the margin. d. People respond to incentives answer b 7. When society requires that firms reduce pollution, there is e. A trade off because of reduced incomes to the firms' owners and workers. f. A trade off only if some firms are forced to close. g. No tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements. h. No tradeoff, since everyone benefits from reduced pollution. ANSWER: a 8. Economists use the word equality to describe a situation in which i. Each member of society has the same income. j. eachmemberofsocietyhasaccesstoabundantquantitiesofgoodsandservices,regardlessofhisorherincome k. Society is getting the maximum benefits from its scarce resources. l. society's resources are used efficiently. ANSWER: a 2. Efficiency means that a. society is conserving resources in order to save them for the future. b. society's goods and services are distributed equally among society's members. c. society's goods and services are distributed fairly, though not necessarily equally, among society's members. d. society is getting the maximum benefits from its scarce resources. ANSWER: d 3. Efficiency a. and equality both refer to how much a society can produce with its resources. b. and equality both refer to how fairly the benefits from using resources are distributed between members of a society. c. refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society. d. refers to how evenly the benefits from using resources are distributed between members of society. Equality refers to how much a society can produce with its resources ANSWER: c 4. The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that a. equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources. b. equality refers to maximizing benefits from scarce resources and efficiency refers to uniform distribution of those benefits. c. equality refers to everyone facing identical tradeoffs and efficiency refers to the opportunity cost of the benefits. d. equality refers to the opportunity cost of the benefits and efficiency refers to everyone facing identical tradeoffs. ANSWER: a 5. When the government redistributes income from the wealthy to the poor, a. Efficiency is improved, but equality is not. b. Equality is improved, but efficiency is not. c. Both efficiency and equality are improved. d. Neither efficiency nor equality are improved. ANSWER: b 6. When the government implements programs such as progressive income tax rates, which of the following is likely to occur? a. equality is increased and efficiency is increased. b. equality is increased and efficiency is decreased. c. equality is decreased and efficiency is increased. d. equality is decreased and efficiency is decreased. ANSWER: b 7. Suppose after graduating from college you get a job working at a bank earning $30,000 per year. After two years of working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate program that would require you to quit your job at the bank. Which of the following should not be included in a calculation of your opportunity cost? a. the cost of tuition and books to attend the graduate program b. the $30,000 salary that you could have earned if you retained your job at the bank c. the $45,000 salary that you will be able to earn after having completed your graduate program d. the value of insurance coverage and other employee benefits you would have received if you retained your job at the bank ANSWER: c 8. Consider Frank’s decision to go to college. If he goes to college, he will spend $21,000 on tuition, $11,000 on room and board, and $1,800 on books. If he does not go to college, he will earn $16,000 working in a store and spend $7,200 on room and board. Frank’s cost of going to college is a. $33,800. b. $42,600. c. $49,800. d. $57,000. ANSWER: b 9. Consider Noah’s decision to go to college. If he goes to college, he will spend $80,000 on tuition, $15,000 on room and board, and $4,000 on books. If he does not go to college, he will earn $22,000 working in a store and he will spend $13,000 on room and board. Noah’s cost of going to college is a. $99,000. b. $103,000. c. $108,000. d. $121,000. ANSWER: c 10. If Faith attends college, it will take her four years, during which time she will earn no income. She will pay $50,000 for tuition, $12,000 for room and board, and $5,000 for books. If she spends the four years working rather than attending college, she will pay $18,000 for room and board, pay no intuition, and buy no books. Based on this information, Faith’s economic cost of attending college would be $67,000 if, over the four years, she could earn a. $12,000 instead of attending college. b. $14,000 instead of attending college. c. $16,000 instead of attending college. d. $18,000 instead of attending college. ANSWER: d 11. When calculating the cost of college, which of the following should you probably include? a. The cost of your meal plan for the cafeteria. b. The cost of books required for college classes c. The income you earn at your part-time job. d. The cost of living in the dormitory. ANSWER: b 12. A rational decision maker takes an action if and only if a. the average benefit of the action exceeds the average cost. b. the average cost of the action exceeds the average benefit. c. the marginal benefit of the action exceeds the marginal cost. d. the marginal cost of the action exceeds the marginal benefit. ANSWER: c 13. It costs a meat-processing company $50,000 to produce 5,000 pounds of steak. The company’s cost will be $50,009 if it produces an additional pound of steak. If the company produces 5,001 pounds of steak then a. its average cost is greater than its marginal cost. b. its average cost and its marginal cost are equal. c. its average cost is less than its marginal cost. d. there is insufficient information to compute average and marginal costs. ANSWER: a 14. Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should a. sell the ticket because the marginal benefit exceeds the marginal cost. b. sell the ticket because the marginal benefit exceeds the average cost. c. not sell the ticket because the marginal benefit is less than the marginal cost. d. not sell the ticket because the marginal benefit is less than the average cost. ANSWER: a 15. to sell the car for $5,800. Stephen discovers that he needs to do an additional $2,400 of work to make the car worth $5,800 to potential buyers. He could also sell the car now, without completing the additional work, for $3,800. What should he do? a. He should sell the car now for $3,800. b. He should keep the car since it wouldn’t be rational to spend $6,400 restoring a car and then sell it for only $5,800. c. He should complete the additional work and sell the car for $5,800. d. It does not matter which action he takes since the outcome will be the same either way. ANSWER: a 16. Suppose the cost of operating a 75 room hotel for a night is $6,000 and there are 5 empty rooms for tonight. If the marginal cost of operating one room for one night is $40, the hotel managers should rent one of the empty rooms only if a customer is willing to pay a. more than $40, as the average benefit will exceed the marginal cost. b. more than $40, as the marginal benefit will exceed the marginal cost. c. more than $80, as the average benefit will exceed the marginal cost. d. more than $80, as the marginal benefit will exceed the marginal cost. ANSWER: b 17. Economists are particularly adept at understanding that people respond to a. laws. b. incentives. c. punishments more than rewards. d. rewards more than punishments. ANSWER: b 18. A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate? a. People face tradeoffs. b. The cost of something is what you give up to get it. c. Rational people think at the margin. d. People respond to incentives. ANSWER: d 19. People are likely to respond to a policy change a. only if they think the policy is a good one. b. only if the policy change changes the costs of their behavior. c. only if the policy change changes the benefits of their behavior. d. if the policy changes either the costs or benefits of their behavior. ANSWER: d 20. Suppose the state of Wyoming passes a law that increases the tax on cigarettes. As a result, smokers who live in Wyoming start purchasing their cigarettes in surrounding states. Which of the following principles does this best illustrate? a. People respond to incentives. b. Rational people think at the margin. c. Trade can make everyone better off. d. Markets are usually a good way to organize economic activity. ANSWER: a 21. Government policies can change the costs and benefits that people face. Those policies have the potential to a. alter people’s behavior. b. alter people’s decisions at the margin. c. produce results that policymakers did not intend. d. All of the above are correct. ANSWER: d 1. Dale is a guitar teacher and Terrence is a tile layer. If Dale teaches Terrence’s daughter to play the guitar in exchange for Terrence tiling Dale’s kitchen floor, a. only Dale is made better off by trade. b. only Terrence is made better off by trade. c. both Dale and Terrence are made better off by trade. d. neither Dale nor Terrence are made better off by trade. ANSWER: c 2. Annie is an excellent baker and Sam has a plentiful farm. If Sam trades eggs and butter to Annie for some of Annie’s bread and pastries, a. only Sam is made better off by trade. b. only Annie is made better off by trade. c. both Sam and Annie are made better off by trade. d. neither Sam nor Annie are made better off by trade. ANSWER: c 3. Dee is an accomplished actress and a homeowner who pays a landscaper to maintain her lawn rather than do it herself. Dee has determined that she can earn more in the hour it would take her to work on her lawn than she must pay her landscaper. This scenario is an example of which principle of economics? a. Trade can make everyone better off. b. Markets are usually a good way to organize economic activity. c. Governments can sometimes improve market outcomes. d. Prices rise when the government prints too much money. ANSWER: a 22. Which of the following is not an example of a group responding to an incentive? a. Students attend class because of an attendance policy that reduces their grade for absences. b. Consumers buy more of a product when it is on sale at a reduced price. c. Universities offer fewer online classes when they generate more revenue than traditional classes. d. Employees work harder to earn higher commissions. ANSWER: c 4. Trade a. allows specialization, which increases costs. b. allows specialization, which reduces costs. c. reduces specialization, which increases costs. d. reduces specialization, which reduces costs. ANSWER: b 5. Trade makes costs a. higher and reduces the variety of goods and services available. b. higher but raises the variety of goods and services available. c. lower but reduces the variety of goods and services available. d. lower and raises the variety of goods and services available. ANSWER: d 6. When the United States trades with China, a. both countries will likely benefit. b. only United States will benefit. c. only China will benefit. d. neither country will benefit. ANSWER: a 1. Your professor loves her work, teaching economics. She has been offered other positions in the corporate world that would increase her income by 25 percent, but she has decided to continue working as a professor. Her decision would not change unless the marginal a. Cost of teaching increased. b. Benefit of teaching increased. c. Cost of a corporate job increased. d. Benefit of a corporate job decreased. ANSWER: a 7. The term "invisible hand" was coined by a. Adam Smith. b. David Ricardo. c. Karl Marx. d. Benjamin Franklin. ANSWER: a 8. Market economies are distinguished from other types of economies largely on the basis of a. the political affiliations of government officials. b. the process by which government officials are elected or appointed. c. the ways in which scarce resources are allocated. d. the number of retail outlets available to consumers. ANSWER: c 9. Which of the following statements about markets is most accurate? a. Markets are usually a good way to organize economic activity. b. Markets are usually inferior to central planning as a way to organize economic activity. c. Markets fail and are therefore not an acceptable way to organize economic activity. d. Markets are a good way to organize economic activity in developed nations, but not in less developed nations. ANSWER: a 10. Prior to the collapse of communism, communist countries worked on the premise that economic wellbeing could be best attained by a. a market economy. b. a strong reliance on prices and individuals’ selfinterests. c. a system of large privately-owned firms. d. the actions of government central planners. ANSWER: d 11. Communist countries worked under the premise that a. markets were the best way to organize economic activity. b. central planners were in the best position to determine the allocation of scarce resources in the economy. c. households and firms, guided by an “invisible hand,” could achieve the most efficient allocation of scarce resources. d. allowing the market forces of supply and demand to operate with no government intervention would achieve the most efficient allocation of scarce resources. ANSWER: b 12. The economy of the former Soviet Union is best described as a a. primitive economy. b. market economy. c. hybrid economy. d. centrally-planned economy. ANSWER: d 13. Air pollution from burning fossil fuels causes damages to crops and public health. This is an example of a. a market failure caused by an externality. b. a market failure caused by market power. c. a market failure caused by equality. d. There is no market failure in this case. ANSWER: a 14. The price of diamonds is high, in part because the majority of the world’s diamonds are controlled by a single firm. This is an example of a. a market failure caused by an externality. b. a market failure caused by market power. c. a market failure caused by equality. d. There is no market failure in this case. ANSWER: b 15. When a single person (or small group) has the ability to influence market prices, there is a. competition. b. market power. c. an externality. d. a lack of property rights. ANSWER: b 16. Which of these activities will most likely result in an external benefit? a. Ted purchases a dilapidated house and cleans up the yard and exterior of the house. b. Tim purchases an iPhone and downloads new apps. c. Terri purchases a new SUV and drives it to work every day. d. Thomas purchases a suit and wears it on his interviews. ANSWER: a 17. Which of these activities will most likely impose an external cost? a. Betty plants flowers in her garden. b. Bonnie gets a flu vaccine. c. Bridget drives her car after having too much alcohol to drink. d. Becky buys a new flat screen television. ANSWER: c 18. Which of the following is an example of an externality? a. A paper mill dumps waste into the river. b. A neighbor’s loud music disrupts sleep. c. A drunk driver causes an accident that injures another person. d. All of the above are correct. ANSWER: d 19. The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as a. productivity. b. an externality. c. market power. d. property rights. ANSWER: b 1. In 2011, the average American earned about $48,000 while the average Nigerian earned about $1,200. Which of the following statements is likely? a. The average American purchases more televisions than the average Nigerian. b. The average American has better nutrition and healthcare than the average Nigerian. c. The average American has a longer life expectancy than the average Nigerian. d. All of the above are correct. ANSWER: d 2. The term "productivity" a. means the same thing as "efficiency." b. is seldom used by economists, as its meaning is not precise. c. refers to the quantity of goods and services produced from each unit of labor input. d. refers to the variety of goods and services from which households can choose when they shop. ANSWER: c 3. What is the most important factor that explains differences in living standards across countries? a. the quantity of money b. the level of unemployment c. productivity d. equality ANSWER: c 4. What is the most important factor that explains differences in living standards across countries? a. the quantity of money b. the level of unemployment c. productivity d. equality ANSWER: c 5. The income of a typical worker in a country is most closely linked to which of the following? a. population b. productivity c. market power d. government policies ANSWER: b 6. A direct or positive relationship exists between a country's a. productivity and its standard of living. b. amount of government spending and its productivity. c. total population and its average citizen’s income. d. rate of population growth and the extent of its trade with other countries. ANSWER: a 7. To promote good economic outcomes, policymakers should strive to enact policies that a. enhance productivity. b. enhance individuals' market power. c. result in a rapidly-growing quantity of money. d. All of the above are correct. ANSWER: a 8. The short-run tradeoff between inflation and unemployment implies that, in the short run, a. a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate. b. an increase in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate. c. policymakers are able to reduce the inflation rate and, at the same time, reduce the unemployment rate. d. policymakers can influence the inflation rate, but not the unemployment rate. ANSWER: a 9. The combination of President Obama’s strategies and the Federal Reserve’s reaction to the deep economic downturn in the US in 2008 and 2009 a. intended to reduce unemployment. b. may lead to excessive inflation over time. c. resulted in higher taxes and an increased supply of money. d. Both a and b are correct. ANSWER: d 10. For a very long time the country of Zeeland has had an inflation rate of 9%. Suddenly its inflation rate drops to 3%. The drop in the inflation rate a. could be due to slower money supply growth. We would expect unemployment to be higher. b. could be due to slower money supply growth. We would expect unemployment to be lower. c. could be due to higher money supply growth. We would expect unemployment to be higher. d. could be due to higher money supply growth. We would expect unemployment to be lower. ANSWER: a 11. An increase in the overall level of prices in an economy is referred to as a. the income effect. b. inflation. c. deflation. d. the substitution effect. ANSWER: b 12. The business cycle is the a. relationship between unemployment and inflation. b. irregular fluctuations in economic activity. c. positive relationship between the quantity of money in an economy and inflation. d. predictable changes in economic activity due to changes in government spending and taxes. ANSWER: b 13. Both the production of goods and services and the unemployment rate are used to measure a. the business cycle. b. productivity. c. the interest rate. d. inflation. ANSWER: a