Question: An American buys a pair of shoes

> If the interest rate is zero, then $100 to be paid in 10 years has a present value that is a. less than $100. b. exactly $100. c. more than $100. d. indeterminate.

> What factors should a stock analyst think about in determining the value of a share of stock?

> Ken walks into an ice-cream parlor. Waiter: “We have vanilla and chocolate today.” Ken: “I’ll take vanilla.” Waiter: “I almost forgot. We also have strawberry.” Ken: “In that case, I’ll take chocolate.” What standard property of decision making is Ken vi

> Comparing stocks and government bonds, which type of asset has more risk? Which pays a higher average return?

> What is diversification? Does a stockholder get a greater benefit from diversification going from 1 to 10 stocks or going from 100 to 120 stocks?

> According to an old myth, Native Americans sold the island of Manhattan about 400 years ago for $24. If they had invested this amount at an interest rate of 7 percent per year, how much, approximately, would they have today?

> A company faces two kinds of risk. A firm-specific risk is that a competitor might enter its market and take some of its customers. A market risk is that the economy might enter a recession, reducing sales. Which of these two risks would more likely caus

> From 2008 to 2012, the ratio of government debt to GDP in the United States a. increased markedly. b. decreased markedly. c. was stable at a historically high level. d. was stable at a historically low level.

> If the business community becomes more optimistic about the profitability of capital, the _________ curve for loanable funds would shift, driving the equilibrium interest rate _________. a. supply, up b. supply, down c. demand, up d. demand, down

> The government spends $3 billion to buy police cars. Explain why aggregate demand might increase by more than $3 billion. Explain why aggregate demand might increase by less than $3 billion.

> If a popular TV show on personal finance convinces more Americans about the importance of saving for retirement, the _________ curve for loanable funds would shift, driving the equilibrium interest rate _________. a. supply, up b. supply, down c. demand,

> A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of $250. What is private saving? a. $100 b. $200 c. $300 d. $400

> If the government collects more in tax revenue than it spends, and households consume more than they get in after-tax income, then a. private and public saving are both positive. b. private and public saving are both negative. c. private saving is positi

> Nina wants to buy and operate an ice-cream truck but doesn’t have the financial resources to start the business. She borrows $5,000 from her friend Max, to whom she promises an interest rate of 7 percent, and gets another $10,000 from her friend David, t

> The labor-supply curve slopes upward if a. leisure is a normal good. b. consumption is a normal good. c. the income effect on leisure is greater than the substitution effect. d. the substitution effect on leisure is greater than the income effect.

> What is investment? How is it related to national saving in a closed economy?

> What is a government budget deficit? How does it affect interest rates, investment, and economic growth?

> Describe a change in the tax code that might increase private saving. If this policy were implemented, how would it affect the market for loanable funds?

> Thomas Robert Malthus believed that population growth would a. put stress on the economy’s ability to produce food, dooming humans to remain in poverty. b. spread the capital stock too thinly across the labor force, lowering each worker’s productivity. c

> 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 GDP and GNP of the United States? a. GDP rises and GNP falls. b. GNP rises and GDP falls. c. GDP shows a larger incre

> Use the theory of liquidity preference to explain how a decrease in the money supply affects the aggregate demand curve.

> Because capital is subject to diminishing returns, higher saving and investment does not lead to higher a. income in the long run. b. income in the short run. c. growth in the long run. d. growth in the short run.

> 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, ri

> The world’s rich countries, such as Japan and Germany, have income per person that is about ________ times the income per person in the world’s poor countries, such as Pakistan and India. a. 3 b. 6 c. 12 d. 36

> Over the past century, real GDP per person in the United States has grown about ________ percent per year, which means it doubles about every ________ years. a. 2, 14 b. 2, 35 c. 5, 14 d. 5, 35

> In what way is a college degree a form of capital?

> If the price of pasta increases and a consumer buys more pasta, we can infer that a. pasta is a normal good, and the income effect is greater than the substitution effect. b. pasta is a normal good, and the substitution effect is greater than the income

> Describe two ways the U.S. government tries to encourage advances in technological knowledge.

> How does the rate of population growth influence the level of GDP per person?

> Why would removing a trade restriction, such as a tariff, lead to more rapid economic growth?

> Henry Ford paid his workers $5 a day in 1914. If the consumer price index was 10 in 1914 and 230 in 2012, how much is the Ford paycheck worth in 2012 dollars?

> An economy is operating with output $400 billion below its natural level, and fiscal policymakers want to close this recessionary gap. The central bank agree to adjust the money supply to hold the interest rate constant, so there is no crowding out. The

> You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the consumer price index rises from 200 to 204. In this case, the nominal interest rate is _________ percent, and the real interest rate is _________ percent. a. 1, 5 b

> If the consumer price index is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as _________ today. a. $400 b. $500 c. $700 d. $900

> 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.

> 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

> 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.

> The consumer price index measures approximately the same economic phenomenon as a. nominal GDP. b. real GDP. c. the GDP deflator. d. the unemployment rate.

> Charlie buys only milk and cereal. Milk is a normal good, while cereal is an inferior good. When the price of milk rises, Charlie buys a. less of both goods. b. more milk and less cereal. c. less milk and more cereal. d. less milk, but the impact on cere

> Explain the meaning of nominal interest rate and real interest rate. How are they related?

> Over a long period of time, the price of a candy bar rose from $0.20 to $1.20. Over the same period, the consumer price index rose from 150 to 300. Adjusted for overall inflation, how much did the price of the candy bar change?

> Which do you think has a greater effect on the consumer price index: a 10 percent increase in the price of chicken or a 10 percent increase in the price of caviar? Why?

> Before selling anyone a health insurance policy, the Kramer Insurance Company requires that applicants undergo a medical examination. Those with significant preexisting medical problems are charged more. This is an example of a. moral hazard. b. adverse

> Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain. a. the invention of the cell phone b. the introduction of air bags in cars c. increased personal computer purchases in response to a d

> The New York Times cost $0.15 in 1970 and $2.00 in 2011. The average wage in manufacturing was $3.36 per hour in 1970 and $23.09 in 2011. a. By what percentage did the price of a newspaper rise? b. By what percentage did the wage rise? c. In each year, h

> Why should policymakers care about GDP?

> List the four components of expenditure. Which is the largest?

> If all quantities produced rise by 10 percent and all prices fall by 10 percent, which of the following occurs? a. Real GDP rises by 10 percent, while nominal GDP falls by 10 percent. b. Real GDP rises by 10 percent, while nominal GDP is unchanged. c. Re

> Which is the largest component of GDP? a. consumption b. investment c. government purchases d. net exports

> Matthew and Susan are both optimizing consumers in the markets for shirts and hats, where they pay $100 for a shirt and $50 for hat. Matthew buys 4 shirts and 16 hats, while Susan buys 6 shirts and 12 hats. From this information, we can infer that Matthe

> Which of the following does NOT add to U.S. GDP? a. Air France buys a plane from Boeing, the U.S. aircraft manufacturer. 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 g

> 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?

> When the economy goes into a recession, real GDP _________ and unemployment _________. a. rises, rises b. rises, falls c. falls, rises d. falls, falls

> If the price of a hot dog is $2 and the price of a hamburger is $4, then 30 hot dogs contribute as much to GDP as _________ hamburgers. a. 5 b. 15 c. 30 d. 60

> Many years ago, Peggy paid $500 to put together a record collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?

> A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP?

> Which contributes more to GDP—the production of an economy car or the production of a luxury car? Why?

> Explain why an economy’s income must equal its expenditure.

> Goods and services that are not sold in markets, such as food produced and consumed at home, are generally not included in GDP. Can you think of how this might cause the numbers in the second column of Table 3 to be misleading in a comparison of the econ

> The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded.

> Describe at least three ways in which human decision making differs from that of the rational individual of conventional economic theory.

> 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.

> A public school district is deciding on the school budget and the resulting student–teacher ratio. A poll finds that 20 percent of the voters want a ratio of 9:1, 25 percent want a ratio of 10:1, 15 percent want a ratio of 11:1, and 40 percent want a rat

> The idea that economic downturns result from an inadequate aggregate demand for goods and services is derived from the work of which economist? a. Adam Smith b. David Hume c. David Ricardo d. John Maynard Keynes

> The experiment called the ultimatum game illustrates that people a. are overconfident in their own abilities. b. play the Nash equilibrium in strategic situations. c. care about fairness, even to their own detriment. d. make inconsistent decisions over t

> According to traditional Keynesian analysis, which has a larger impact on GDP—a dollar of tax cuts or a dollar of additional government spending? Why?

> Advocates of taxing consumption rather than income argue that a. a consumption tax is a better automatic stabilizer. b. taxing consumption does not cause any deadweight losses. c. the rich consume a higher fraction of income than the poor. d. the current

> Throughout U.S. history, what has been the most common cause of substantial increases in government debt? a. recessions b. wars c. financial crises d. tax cuts

> Which of the following is NOT an argument for maintaining a positive rate of inflation? a. It permits real interest rates to be negative. b. It allows real wages to fall without cuts in nominal wages. c. It increases the variability of relative prices. d

> Advocates for setting monetary policy by rule rather than discretion often argue that a. central bankers with discretion are tempted to renege on their announced commitments to low inflation. b. central bankers following a rule will be more responsive to

> According to traditional Keynesian analysis, which of the following will increase aggregate demand the most? a. $100 billion increase in taxation b. $100 billion decrease in taxation c. $100 billion increase in government spending d. $100 billion decreas

> Approximately how long does it take a change in monetary policy to influence aggregate demand? a. one month b. six months c. two years d. five years

> Some income from capital is taxed twice. Explain.

> Some economists say that the government can continue running a budget deficit forever. How is that possible?

> Stagflation is caused by a. a leftward shift in the aggregate-demand curve. b. a rightward shift in the aggregate-demand curve. c. a leftward shift in the aggregate-supply curve. d. a rightward shift in the aggregate-supply curve.

> Why are some economists against a target of zero inflation?

> Two political candidates are vying for town mayor, and the key issue is how much to spend on the annual Fourth of July fireworks. Among the 100 voters, 40 want to spend $30,000, 30 want to spend $10,000, and 30 want to spend nothing at all. What is the w

> What adverse effect might be caused by tax incentives to increase saving?

> Chapter 2 explains the difference between positive analysis and normative analysis. In the debate about whether the central bank should aim for zero inflation, which areas of disagreement involve positive statements and which involve normative judgments?

> Explain how each of the following policies redistributes income across generations. Is the redistribution from young to old or from old to young? a. an increase in the budget deficit b. more generous subsidies for education loans c. greater investments i

> The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, like new factories. a. If investors believed that capital taxes would rema

> The chapter suggests that the economy, like the human body, has “natural restorative powers.” a. Illustrate the short-run effect of a fall in aggregate demand using an aggregate-demand/aggregate supply diagram. What happens to total output, income, and e

> When the Federal Reserve increases the money supply, it __________ aggregate demand and moves the economy along the Phillips curve to a point with __________ inflation and __________ unemployment. a. expands, higher, higher b. expands, higher, lower c. e

> From one year to the next, inflation rises from 4 to 5 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change? a. The central bank increases the growth rate of the money supply. b. The go

> From one year to the next, inflation falls from 5 to 4 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change? a. The central bank increases the growth rate of the money supply. b. The go

> An increase in the aggregate demand for goods and services has a larger impact on output _________ and a larger impact on the price level _________. a. in the short run, in the long run b. in the long run, in the short run c. in the short run, also in th

> Advocates of the theory of rational expectations believe that a. the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation. b. if disinflation catches people by surprise, it will have minimal impact on unemployme

> When an adverse supply shock shifts the short-run aggregate-supply curve to the left, it also a. moves the economy along the short-run Phillips curve to a point with higher inflation and lower unemployment. b. moves the economy along the short-run Philli

> The Condorcet paradox illustrates Arrow’s impossibility theorem by showing that pairwise majority voting a. is inconsistent with the principle of unanimity. b. leads to social preferences that are not transitive. c. violates the independence of irrelevan

> If the Federal Reserve increases the rate of money growth and maintains it at the new higher rate, eventually expected inflation will __________ and the short-run Phillips curve will shift __________. a. decrease, downward b. decrease, upward c. increase

> If the central bank wants to expand aggregate demand, it can ________ the money supply, which would ________ the interest rate. a. increase, increase b. increase, decrease c. decrease, increase d. decrease, decrease

> Which of the following is an example of an automatic stabilizer? When the economy goes into a recession, a. more people become eligible for unemployment insurance benefits. b. stock prices decline, particularly for firms in cyclical industries. c. Congre

> If the central bank in the preceding question instead holds the money supply constant and allows the interest rate to adjust, the change in aggregate demand resulting from the increase in government purchases will be a. larger. b. the same. c. smaller bu

> Which of the following actions by the Fed would reduce the money supply? a. an open-market purchase of government bonds b. a reduction in banks’ reserve requirements c. an increase in the interest rate paid on reserves d. a decrease in the discount rate

> A bank has capital of $200 and a leverage ratio of 5. If the value of the bank’s assets decline by 10 percent, then its capital will be reduced to a. $100. b. $150. c. $180. d. $185.

> If the reserve ratio is ¼ and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by a. $90. b. $150. c. $160. d. $480.

> Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply _________, but if the bank lends out some of the $100, the money supply _________. a. increases, increa

> The money supply includes all of the following EXCEPT a. metal coins. b. paper currency. c. lines of credit accessible with credit cards. d. bank balances accessible with debit cards.

> What are reserve requirements? What happens to the money supply when the Fed raises reserve requirements?

> What is the discount rate? What happens to the money supply when the Fed raises the discount rate?