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Macroeconomics, 5e (Williamson)
Chapter 1 Introduction
1) In 2011, the per-capita GDP in the United States, in 2005 dollars, was about
- A) $17,500.
- B) $27,500.
- C) $43,000.
- D) $47,500.
Answer: C
Question Status: Revised
2) Which of the following topics is NOT a primary concern of macroeconomists?
- A) fluctuations in the level of economic activity
- B) differences in standards of living across countries
- C) relative wages of skilled and unskilled workers
- D) unemployment
Answer: C
Question Status: Previous Edition
3) Which of the following questions is of most interest for MACROECONOMISTS?
- A) Why is there inflation?
- B) Why does the steel industry want tariffs?
- C) What is the appropriate stance of antitrust policy?
- D) Why do foreigners immigrate to the United States?
Answer: A
Question Status: Previous Edition
4) Primarily, macroeconomists use microeconomic principles to study
- A) business cycles and trends in the stock market.
- B) long-run economic growth and antitrust policies.
- C) trends in the stock market and long-term economic growth.
- D) long-run economic growth and business cycles.
Answer: D
Question Status: Previous Edition
5) Which is a question of interest in this book?
- A) What causes illegal immigration?
- B) What mechanism could force people to pollute less?
- C) What causes economic fluctuations?
- D) What is the effect of penalties on crime?
Answer: C
Question Status: New
6) Which is a question of interest in this book?
- A) What causes growth in the long term?
- B) How should a labor contract be structured?
- C) How should a government be elected?
- D) What is the impact of government provided health care?
Answer: A
Question Status: New
7) Which is a question of interest in this book?
- A) Where is the stock market heading?
- B) What is the optimal inflation rate?
- C) How are stock options priced?
- D) What are commodity futures?
Answer: B
Question Status: New
8) The two most important American business cycle events of the twentieth century were
- A) the Great Depression and stagflation.
- B) World War II and the Great Depression.
- C) the productivity slowdown and the Great Depression.
- D) government budget deficits and World War II.
Answer: B
Question Status: Previous Edition
9) Over the course of the twentieth century, the typical American
- A) remained equally as rich.
- B) became twice as rich.
- C) became five times as rich
- D) became eight times as rich.
Answer: D
Question Status: Previous Edition
10) Which of the following assertions is false?
- A) The Great Depression was a typical business cycle.
- B) Very rapid growth occurred during World War II.
- C) Real GDP per capita dipped about 30% during the Great Depression.
- D) On average, the U.S. economy grows at a rate of 2.1%.
Answer: A
Question Status: Previous Edition
11) The relationship between the growth rate of an economic variable, gt, and its level, yt, can be approximated by
- A) gt= yt- yt – 1.
- B) gt= logt– log yt – 1.
- C) yt= log gt– log gt – 1.
- D) log gt= yt– yt – 1.
Answer: B
Question Status: Revised
12) The business cycle component of the log of real per-capita GNP is equal to
- A) log of actual real GNP – log of trend GNP.
- B) log of trend GNP ÷ log of actual real GNP.
- C) log of trend GNP – log of actual real GNP.
- D) log of actual real GNP ÷ log of trend GNP.
Answer: A
Question Status: Previous Edition
13) For the study of economic growth, it is most helpful to examine movements in ________; for the study of business cycles, it is most helpful to examine movements in ________.
- A) trend GNP; trend GNP
- B) trend GNP; deviations from trend in GNP
- C) deviations from trend in GNP; trend GNP
- D) deviations from trend in GNP; deviations from trend in GNP
Answer: B
Question Status: Previous Edition
14) Over the twentieth century, growth in per-capita GNP was highest
- A) immediately prior to the Great Depression.
- B) during World War II.
- C) during the 1960s.
- D) during the 1980s.
Answer: B
Question Status: Previous Edition
15) When we say the U.S. economy has grown on average at 2.1%, we mean
- A) the inflation rate.
- B) the growth rate of nominal GDP.
- C) the growth rate of per-capita nominal GDP.
- D) the growth rate of per-capita real GDP.
Answer: D
Question Status: Previous Edition
16) A useful macroeconomic model
- A) is extremely realistic.
- B) is simple.
- C) never generates testable hypotheses.
- D) provides a lot of intricate details.
Answer: B
Question Status: Previous Edition
17) Macroeconomic models are
- A) never wrong.
- B) accurate descriptions of the economy.
- C) simple abstractions of reality.
- D) consistent with all economic data.
Answer: C
Question Status: Revised
18) The structure of a macroeconomic model involves all of the following except
- A) the available technology.
- B) the behavior of consumers and firms.
- C) the preferences of consumers.
- D) the available resources.
Answer: B
Question Status: Previous Edition
19) What characterizes a competitive equilibrium?
- A) Markets are rationed.
- B) Governments stay out of the market.
- C) Economic agents are price-takers.
- D) It is costly to experiment with policies.
Answer: C
Question Status: Previous Edition
20) What do we assume about households and firms?
- A) They act irrationally.
- B) They do what the government tells them to do.
- C) They look after each other.
- D) They optimize.
Answer: D
Question Status: Previous Edition
21) The development most responsible for the wide-spread introduction of macroeconomic models built upon solid microeconomic foundations was the
- A) work of John Maynard Keynes.
- B) rational expectations revolution.
- C) popularization of supply-side economics.
- D) development of the Keynesian coordination failure model.
Answer: B
Question Status: Previous Edition
22) According to the Lucas critique, changes in economic policy are likely to have important effects on
- A) the available amounts of natural resources.
- B) the behavior of consumers and firms.
- C) the preferences of consumers.
- D) none of the above
Answer: B
Question Status: Previous Edition
23) Current macroeconomic models use microeconomic principles because
- A) they use the same language for all economists.
- B) they highlight the sociological aspects of production.
- C) the behavior of economic agents changes with policy.
- D) we live in a democratic society and everybody has a say.
Answer: C
Question Status: Previous Edition
24) Which aspect of macroeconomics generates the most controversy?
- A) economic growth
- B) the causes of business cycles
- C) supply and demand
- D) competitive equilibrium
Answer: B
Question Status: Revised
25) What is the key feature that differentiates business cycle theories?
- A) whether the theory was developed before or after the Great Depression.
- B) whether the theory is Keynesian or non-Keynesian.
- C) whether the theory also explains economic growth.
- D) whether the theory explains how monetary policy works.
Answer: B
Question Status: New
26) According to real business cycle theory, the primary causes of business cycles are
- A) shocks to aggregate demand.
- B) monetary factors.
- C) technology shocks.
- D) waves of self-fulfilling optimism and pessimism.
Answer: C
Question Status: Previous Edition
27) According to Keynesian coordination failure theory, the primary causes of business cycles are
- A) shocks to aggregate demand.
- B) monetary factors.
- C) technology shocks.
- D) waves of self-fulfilling optimism and pessimism.
Answer: D
Question Status: Previous Edition
28) The macroeconomic models that are most supportive of the role of government policy aimed at smoothing business cycles are
- A) real business cycle models.
- B) endogenous growth models.
- C) Keynesian models.
- D) Solow growth models.
Answer: C
Question Status: Previous Edition
29) Two important theories of unemployment are
- A) game theory and search theory.
- B) search theory and the efficiency wage theory.
- C) the efficiency wage theory and the quantity theory.
- D) the quantity theory and game theory.
Answer: B
Question Status: Previous Edition
30) What is produced and consumed in the economy is determined jointly by
- A) government policies and the economy’s productive capacity.
- B) the economy’s productive capacity and the preferences of consumers.
- C) the preferences of consumers and the behavior of business managers.
- D) the behavior of business managers and government policies.
Answer: B
Question Status: Previous Edition
31) Improvements in a country’s standard of living are brought about in the long run by
- A) technological progress.
- B) growth in the population.
- C) constructing more machines and buildings.
- D) immigration policy.
Answer: A
Question Status: Previous Edition
32) Business cycles are
- A) each unique, but all have a single cause.
- B) each unique and they can have many causes.
- C) similar, and they all have a single cause.
- D) similar, but they can have many causes.
Answer: D
Question Status: Previous Edition
33) Credit markets are
- A) bad, as they cause people to accumulate debt.
- B) not important for the financial crisis.
- C) important, but given too little attention in the past by macroeconomists.
- D) markets that work perfectly.
Answer: C
Question Status: New
34) In the long run, inflation is caused by
- A) aggressive labor unions.
- B) greedy monopolists.
- C) growth in the money supply.
- D) global warming.
Answer: C
Question Status: Previous Edition
35) For macroeconomics, banks
- A) are similar to other firms.
- B) can be abstracted away.
- C) play a key role.
- D) are similar to households.
Answer: C
Question Status: Previous Edition
36) In the long run, the quantity of money
- A) does not matter.
- B) influences GDP.
- C) influences unemployment.
- D) influences the business cycle.
Answer: A
Question Status: Previous Edition
37) Regarding money, what matters most?
- A) that is exists.
- B) that its quantity is known.
- C) that coins are available.
- D) that its quantity is stable.
Answer: A
Question Status: Previous Edition
38) The quantity of money in circulation in the United States is managed by
- A) The Securities Exchange Commission.
- B) The United States Treasury.
- C) The Federal Reserve System.
- D) Wall Street.
Answer: C
Question Status: Previous Edition
39) Considering the future
- A) is irrelevant to macroeconomics.
- B) is key to macroeconomic modelling.
- C) has a limited impact on macroeconomic analysis.
- D) matters only under special circumstances.
Answer: B
Question Status: Previous Edition
40) International trade between two countries
- A) benefits only the receiving country.
- B) benefits only the sending country.
- C) benefits both countries.
- D) benefits neither country.
Answer: C
Question Status: Previous Edition
41) Unemployment, at the aggregate level.,
- A) is avoidable.
- B) is part of a well-functioning economy.
- C) is always a sign of market failure.
- D) would not happen with good policy.
Answer: B
Question Status: Previous Edition
42) A trade-off between aggregate output and inflation
- A) is theoretically possible, but has never been observed in practice.
- B) may exist in the short run, but not in the long run.
- C) may exist in the long run, but not in the short run.
- D) exists in both the short run and the long run.
Answer: B
Question Status: Previous Edition
43) A good measure of productivity is
- A) the interest rate.
- B) the inflation rate.
- C) aggregate output divided by employment.
- D) the growth rate of aggregate output.
Answer: C
Question Status: Previous Edition
44) Which is not a cause for business cycles considered by macroeconomists?
- A) shocks to money supply
- B) greed
- C) shocks to technological ability
- D) variations in optimism
Answer: B
Question Status: Revised
45) A productivity slowdown was observed from the
- A) early 1950s to the late 1960s.
- B) early 1960s to the early 1970s.
- C) late 1960s to the early 1980s.
- D) mid-1980s to the late 1990s.
Answer: C
Question Status: Previous Edition
46) Two plausible hypotheses to explain the productivity slowdown are
- A) measurement problems and adjustments to new technologies.
- B) large government budget deficits and large balance of trade deficits.
- C) globalization of capital markets and reductions in tariffs.
- D) adjustments to new technologies and failures in the educational system.
Answer: A
Question Status: Previous Edition
47) The Beveridge curve is
- A) a positive relationship between unemployment and the inflation rate.
- B) a positive relationship between the government deficit and aggregate output.
- C) a negative relationship between the vacancy rate and the unemployment rate.
- D) a positive relationship between the inflation rate and the nominal interest rate.
Answer: C
Question Status: New
48) The Beveridge curve shifted outward during what period?
- A) during the Great Depression.
- B) during the Great Moderation.
- C) after January 2008.
- D) between January 2000 and December 2007.
Answer: C
Question Status: New
49) The major contributor to the long-run improvement of a country’s standard of living is
- A) low inflation.
- B) growth in government.
- C) population growth.
- D) technological progress.
Answer: D
Question Status: Previous Edition
50) Unemployment is good from a social point of view because
- A) it keeps wages in check.
- B) it allows for better matches between workers and firms.
- C) it provides free time.
- D) it keeps the least efficient workers out.
Answer: B
Question Status: Previous Edition
51) The U.S. government budget was
- A) continuously in surplus from 1959 to the late 1990s.
- B) in surplus for most of the period from 1959-1970, but was in deficit for most of the period from 1970 to the late 1990s.
- C) in deficit for most of the period from 1959-1970, but was in surplus for most of the period from 1970 to the late 1990s.
- D) continuously in deficit from 1959 to the late 1990s.
Answer: B
Question Status: Previous Edition
52) Over the long run, taxes and government expenses have
- A) remained relatively stable.
- B) decreased.
- C) increased.
- D) drifted apart.
Answer: C
Question Status: Previous Edition
53) A government deficit occurs when
- A) the government spends more than what it gets in taxes.
- B) public goods are worth less than what was paid for them.
- C) a government loses an election.
- D) the government still has Treasury bonds to reimburse.
Answer: A
Question Status: Previous Edition
54) In the 2008-09 recession, the government deficit
- A) stayed roughly constant.
- B) decreased.
- C) increased.
- D) would have increased if the government had intervened.
Answer: C
Question Status: New
55) The idea that government budget deficits do not matter under certain circumstances is
- A) called the Friedman-Lucas theory.
- B) called the Ricardian equivalence theorem.
- C) attributed to Edward Prescott and Finn Kydland.
- D) preposterous.
Answer: B
Question Status: Previous Edition
56) In the second half of the twentieth century, the U.S. inflation rate was at its highest in the period from
- A) 1960 to the early 1970s.
- B) the mid-1970s to the early 1980s.
- C) the mid-1980s to the early 1990s.
- D) 1990-2000.
Answer: B
Question Status: Previous Edition
57) Average labor productivity is defined as
- A) per-capital real GDP divided by employment.
- B) nominal GDP divided by employment.
- C) per-capita nominal GDP divided by employment.
- D) real GDP divided by employment.
Answer: D
Question Status: Revised
58) A government surplus is
- A) when it spends more than its income.
- B) when it owes more than what it is owed.
- C) when its income is higher than its spending.
- D) when it is owed more than what it owes.
Answer: C
Question Status: Previous Edition
59) Government debt is different from individual debt because
- A) the government can always tax to reduce it.
- B) the government cannot declare bankruptcy.
- C) the government does not need to pay interest.
- D) the government can decide the interest rate.
Answer: A
Question Status: Revised
60) The real interest rate is
- A) always equal to the pure rate of time preference.
- B) equal to the rate of inflation minus the nominal rate of interest.
- C) equal to the nominal rate of interest minus the rate of inflation.
- D) less important for decision making than the nominal rate of interest.
Answer: C
Question Status: Previous Edition
61) The real interest rate is
- A) always positive.
- B) always negative.
- C) variable.
- D) zero.
Answer: C
Question Status: Revised
62) When there is positive inflation
- A) the nominal interest rate is approximately equal to the real interest rate.
- B) the real interest rate is greater than the nominal interest rate.
- C) the nominal interest rate is greater than the real interest rate.
- D) the real interest rate is negative.
Answer: C
Question Status: Revised
63) Real interest rates were negative during most of the
- A) 1960s.
- B) 1970s.
- C) 1980s.
- D) 1990s.
Answer: B
Question Status: Previous Edition
64) An increase in energy prices is a likely cause of
- A) Great Depression.
- B) Korean War inflation.
- C) the recession in 1973-1975.
- D) the Great Moderation.
Answer: C
Question Status: Revised
65) Which period was not a recession in the United States?
- A) 1974-1975
- B) 1990-1991
- C) 1984-1985
- D) 2001
Answer: C
Question Status: Previous Edition
66) Which was the deepest recession in the United States before the recession of 2008-09?
- A) 1978-1979
- B) 1981-1982
- C) 1990-1991
- D) 2001
Answer: B
Question Status: Revised
67) The most likely explanation of the recession of 1981-1982 was
- A) an increase in energy prices.
- B) a collapse in investment spending.
- C) that it was an unfortunate byproduct of a decrease in inflation.
- D) a dramatic decrease in stock prices.
Answer: C
Question Status: Previous Edition
68) A likely explanation for the 2008-2009 recession is
- A) an increase in energy prices.
- B) financial market problems.
- C) a drastic reduction in government expenses.
- D) an increase in taxes.
Answer: B
Question Status: Revised
69) Asymmetric information is:
- A) information revealed by economic agents turns out to be wrong.
- B) inflation forecasts are systematically to high or too low.
- C) some economic agents have more information than others.
- D) the government knows less about the economy than households and firms.
Answer: C
Question Status: Previous Edition
70) Limit commitment occurs when
- A) collateral is required to get a loan.
- B) one cannot borrow as much as necessary to conduct business.
- C) one cannot be forced to repay a loan.
- D) the bank can sell your loan to another bank.
Answer: C
Question Status: Previous Edition
71) Inflation is defined as
- A) the rate of increase in the government budget deficit.
- B) the increase in the money supply.
- C) the rate of change in the average level of prices.
- D) the nominal interest rate minus the price level.
Answer: C
Question Status: Revised
72) When a country has a current account deficit, the country
- A) is borrowing from abroad.
- B) is lending abroad.
- C) must have a government budget surplus.
- D) must have a government budget deficit.
Answer: A
Question Status: Revised
73) Between 1947 and 2011,
- A) Exports decreased and imports decreased.
- B) Exports and imports increased.
- C) The current account surplus rose.
- D) The current account deficit fell.
Answer: B
Question Status: New
Macroeconomics, 5e (Williamson)
Chapter 5 A Closed-Economy One-Period Macroeconomic Model
1) An economy that has no interaction with the rest of the world is called
- A) an isolated economy.
- B) a closed economy.
- C) a parochial economy.
- D) a rogue nation.
Answer: B
Question Status: Previous Edition
2) An economy that engages in international trade is called
- A) a cooperative economy.
- B) a modern economy.
- C) an engaged economy.
- D) an open economy.
Answer: D
Question Status: Previous Edition
3) A closed economy is characterized by
- A) the absence of trade with other economies.
- B) the absence of use of money for transactions.
- C) no growth in population.
- D) a Cobb-Douglas production function.
Answer: A
Question Status: Previous Edition
4) In an economic model, an exogenous variable is
- A) a stand-in for more complicated variables.
- B) determined by the model itself.
- C) determined outside the model.
- D) a variable that has no effect on the workings of the model.
Answer: C
Question Status: Previous Edition
5) In an economic model, an endogenous variable is
- A) a stand-in for more complicated variables.
- B) determined by the model itself.
- C) determined outside the model.
- D) a variable that has no effect on the workings of the model.
Answer: B
Question Status: Previous Edition
6) In a one-period economic model, the government budget constraint requires that government spending
- A) = taxes + transfers.
- B) = taxes + borrowing.
- C) > 0.
- D) = taxes.
Answer: D
Question Status: Previous Edition
7) Which of the following relationships does not hold in the one-period model?
- A) G=T
- B) Y=C+G
- C) Y=zF(K,N)
- D) π=Y-wN-C
Answer: D
Question Status: Previous Edition
8) Fiscal policy refers to a government’s choices over its
- A) expenditures, taxes, transfers, and borrowing.
- B) expenditures, taxes, issuance of money, and borrowing.
- C) expenditures, foreign affairs, issuance of money, and borrowing.
- D) issuance of money, taxes, environmental regulations, and foreign affairs.
Answer: A
Question Status: Previous Edition
9) Fiscal policy encompasses all of the following except
- A) expenditures by the government.
- B) monetary injection by the government.
- C) taxation by the government.
- D) borrowing by the government.
Answer: B
Question Status: Previous Edition
10) Making use of an economic model is a process of
- A) solving hundreds of simultaneous equations.
- B) running experiments to determine how changes in the endogenous variables will change the exogenous variables.
- C) running experiments to determine how changes in the exogenous variables will change the endogenous variables.
- D) resolving inconsistencies in the actions of economic agents.
Answer: C
Question Status: Previous Edition
11) Which of the following is not a property of a competitive equilibrium?
- A) markets clear.
- B) consumers and firms optimize given market prices.
- C) the government budget constraint is satisfied.
- D) increasing total factor productivity.
Answer: D
Question Status: New
12) A competitive equilibrium is a state of affairs in which
- A) markets clear, and output is maximized.
- B) output is maximized, and all agents are equally well-off.
- C) all agents are equally well-off and agents are price-takers.
- D) economic agents are price takers and markets clear.
Answer: D
Question Status: Previous Edition
13) For a competitive equilibrium to occur, all of the following has to happen except
- A) agents are price takers.
- B) the government sets taxes at zero.
- C) markets clear.
- D) the actions of all agents are consistent.
Answer: B
Question Status: Previous Edition
14) In a general equilibrium model
- A) all markets but one clear.
- B) there are no fluctuations.
- C) all prices are exogenous.
- D) all prices are endogenous.
Answer: D
Question Status: Previous Edition
15) In a competitive equilibrium all these relationships hold but one. Which one?
- A) Nd=Ns
- B) Y=G+C
- C) G=T
- D) w=z
Answer: D
Question Status: Previous Edition
16) In the one-period competitive model we have been studying
- A) both consumption and total factor productivity are exogenous.
- B) consumption is exogenous and total factor productivity is endogenous.
- C) consumption is endogenous and total factor productivity is exogenous.
- D) both consumption and total factor productivity are endogenous.
Answer: C
Question Status: Previous Edition
17) A relationship that shows the technological possibilities for an economy as a whole is called a
- A) production function.
- B) utility possibilities frontier.
- C) production possibilities frontier.
- D) budget constraint.
Answer: C
Question Status: Previous Edition
18) The production possibilities frontier in the one-period model is a
- A) behavioral relationship between consumption and leisure.
- B) behavioral relationship between consumption and government spending.
- C) technological relationship between consumption and leisure.
- D) technological relationship between consumption and government spending.
Answer: C
Question Status: Previous Edition
19) The production possibilities frontier represents
- A) all combinations of consumption and leisure for fixed output.
- B) all equally affordable combinations of consumption and leisure for a given wage.
- C) all technologically feasible combinations of consumption and leisure.
- D) all equally liked combinations of consumption and leisure.
Answer: C
Question Status: Revised
20) Which of the following is not a reason for solving the model with a PPF?
- A) It merges the household and firm problems into one graph.
- B) It is simpler to solve the social planner problem.
- C) It highlights the fact that the marginal rate of substitution should equal the marginal rate of transformation.
- D) It highlights the fact that firms make no profit in equilibrium.
Answer: D
Question Status: Previous Edition
21) The PPF determines
- A) all possible outcomes for a given wage.
- B) the set of feasible outcomes.
- C) given leisure, how much consumption a household wants.
- D) the share of consumption in output.
Answer: B
Question Status: Revised
22) PPF is the
- A) price parity formula.
- B) possible production function.
- C) producer’s preferred frontier.
- D) production possibilities frontier.
Answer: D
Question Status: Previous Edition
23) The rate at which one good can be converted technologically into another is called
- A) the marginal rate of transformation.
- B) the marginal rate of substitution.
- C) the marginal product of labor.
- D) the rate of conversion.
Answer: A
Question Status: Previous Edition
24) Points on the production possibilities frontier have the property that they
- A) are inherently unattainable.
- B) show the maximum amount of leisure that can be consumed for given amounts of goods consumed.
- C) show the maximum amount of goods that can be consumed for given amounts of government spending.
- D) show the maximum amount of leisure that can be consumed for given amounts of hours worked.
Answer: B
Question Status: Previous Edition
25) A competitive equilibrium has all of the following properties except
- A) MPN= slope of PFF.
- B) MRS1,C = MRT1,C.
- C) MRT1,C= MPN.
- D) MPN= w.
Answer: A
Question Status: Previous Edition
26) A competitive equilibrium is Pareto optimal if there is no way to rearrange or to reallocate goods so that
- A) anyone can be made better off.
- B) no one can be made worse off.
- C) someone can be made better off without making someone else worse off.
- D) someone can be made better off without making everyone else worse off.
Answer: C
Question Status: Previous Edition
27) Which of the following is not equal to the others in equilibrium?
- A) the real wage
- B) the marginal rate of substitution between leisure and consumption
- C) the marginal product of labor
- D) the price of consumption
Answer: D
Question Status: Previous Edition
28) A Pareto optimum is a point that
- A) a malevolent dictator would choose.
- B) a cooperative coalition of some altruistic consumers would choose.
- C) a cooperative coalition of some socially responsible firms would choose.
- D) a social planner would choose.
Answer: D
Question Status: Previous Edition
29) A Pareto optimum requires all of the following except
- A) = -slope of PPF.
- B) MRS1,C = MRT1,C.
- C) MRS1,C = MPN.
- D) MPN= w.
Answer: D
Question Status: Previous Edition
30) Much of the writings of Adam Smith are in close agreement with
- A) the necessity of trade restrictions.
- B) the first fundamental theorem of welfare economics.
- C) the second theorem of welfare economics.
- D) both B and C above.
Answer: B
Question Status: Previous Edition
31) The first fundamental theorem of welfare economics states that
- A) under certain conditions, a competitive equilibrium is Pareto optimal.
- B) a competitive equilibrium is always Pareto optimal.
- C) under certain conditions, a Pareto optimum is a competitive equilibrium.
- D) a Pareto optimum is always a competitive equilibrium.
Answer: A
Question Status: Previous Edition
32) The second fundamental theorem of welfare economics states that
- A) under certain conditions, a competitive equilibrium is Pareto optimal.
- B) a competitive equilibrium is always Pareto optimal.
- C) under certain conditions, a Pareto optimum is a competitive equilibrium.
- D) a Pareto optimum is always a competitive equilibrium.
Answer: C
Question Status: Previous Edition
33) The concept of Pareto optimality is a
- A) utopian concept.
- B) useful concept because it guarantees economic equality.
- C) useful concept because it defines economic efficiency.
- D) useful concept that carefully balances a society’s desires for equality and efficiency.
Answer: C
Question Status: Revised
34) A competitive equilibrium
- A) is always economically efficient.
- B) is efficient only if there is an externality.
- C) is economically efficient only given some special conditions.
- D) does not exist without government taxation.
Answer: C
Question Status: New
35) Under a Pareto Optimum
- A) it is always possible to improve someone’s welfare.
- B) it is never possible to improve someone’s welfare.
- C) one can only reduce someone’s welfare.
- D) it is impossible to reduce someone’s welfare.
Answer: C
Question Status: Previous Edition
36) A competitive equilibrium may fail to be Pareto optimal due to all of the following except
- A) inequality.
- B) externalities.
- C) distorting taxes.
- D) non-price-taking firms.
Answer: A
Question Status: Previous Edition
37) An externality is any activity for which an individual firm or consumer does not take into account all
- A) of the ramifications of its actions on others.
- B) associated costs.
- C) associated benefits.
- D) associated costs and benefits.
Answer: D
Question Status: Previous Edition
38) A competitive equilibrium fails to be a Pareto Optimum with a distorting tax because
- A) the consumer’s budget constraint has an additional kink.
- B) the firm is no longer maximizing profits.
- C) the government wastes its revenue.
- D) the consumer faces a different effective wage than the firm.
Answer: D
Question Status: Revised
39) The presence of a distorting tax on wage income can result in
- A) MPN< MRT1,C.
- B) MRT1,C< MRS1,C.
- C) MPN< w.
- D) MRS1,C < MPN
Answer: D
Question Status: Previous Edition
40) Relative to the social optimum, monopoly power tends to lead to
- A) underproduction.
- B) overproduction.
- C) too much leisure.
- D) too little leisure.
Answer: A
Question Status: New
41) An increase in government spending shifts the PPF
- A) upward, but does not change its slope.
- B) upward, and also changes its slope.
- C) downward, but does not change its slope.
- D) downward, and also changes its slope.
Answer: C
Question Status: Previous Edition
42) An increase in government spending
- A) increases consumption, increases hours worked, and increases the real wage.
- B) reduces consumption, increases hours worked, and increases the real wage.
- C) reduces consumption, increases hours worked, and reduces the real wage.
- D) reduces consumption, reduces hours worked, and reduces the real wage.
Answer: C
Question Status: Previous Edition
43) An increase in government spending
- A) increases consumption and output.
- B) increases consumption, decreases output.
- C) decreases consumption, increases output.
- D) decreases consumption and output.
Answer: C
Question Status: Previous Edition
44) Changes in government spending are not likely causes of business cycles because changes in government spending predict
- A) countercyclical real wages.
- B) procyclical real wages.
- C) countercyclical employment.
- D) procyclical employment.
Answer: A
Question Status: Revised
45) Changes in government spending are not likely causes of business cycles because changes in government spending predict
- A) countercyclical consumption.
- B) procyclical consumption.
- C) countercyclical employment.
- D) procyclical employment.
Answer: A
Question Status: Revised
46) Which feature of the business cycle does the one-period model replicate with shocks to government expenditures?
- A) procyclical employment
- B) procyclical consumption
- C) procyclical real wages
- D) countercyclical prices
Answer: A
Question Status: Previous Edition
47) An increase in total factor productivity shifts the PPF
- A) upward, but does not change its slope.
- B) upward, and also changes its slope.
- C) downward, but does not change its slope.
- D) downward, and also changes its slope.
Answer: B
Question Status: Previous Edition
48) An increase in total factor productivity
- A) increases consumption, increases output, and increases the real wage.
- B) reduces consumption, increases output, and increases the real wage.
- C) reduces consumption, increases output and reduces the real wage.
- D) reduces consumption, reduces output, and reduces the real wage.
Answer: A
Question Status: Previous Edition
49) Suppose total factor productivity increases. Which of the following is incorrect?
- A) Households are better off.
- B) Consumption goes up.
- C) The real wage goes down.
- D) Output goes up.
Answer: C
Question Status: Revised
50) In response to an increase in total factor productivity
- A) both the substitution effect and the income effect suggest that hours worked should increase.
- B) the substitution effect suggests that hours worked should increase, while the income effect suggests that hours worked should decrease.
- C) the substitution effect suggests that hours worked should decrease, while the income effect suggests that hours worked should increase.
- D) both the substitution effect and the income effect suggest that hours worked should decrease.
Answer: B
Question Status: Previous Edition
51) Changes in total factor productivity are plausible causes of business cycles because productivity-induced business cycles correctly predict
- A) real wages and total hours must be procyclical.
- B) real wages and consumption must be procyclical.
- C) total hours worked and consumption must be procyclical.
- D) consumption and government spending must be procyclical.
Answer: B
Question Status: Previous Edition
52) Changes in total factor productivity are plausible causes of business cycles because
- A) of the welfare theorems.
- B) the U.S. government is following supply-side economic policy.
- C) the model matches many stylized facts.
- D) prices are countercyclical.
Answer: C
Question Status: Previous Edition
53) Real business cycle theory argues that the primary cause of business cycles is fluctuations in
- A) preferences.
- B) government spending.
- C) the importance of externalities.
- D) total factor productivity.
Answer: D
Question Status: Previous Edition
54) The variable G considered in the model encompasses
- A) government expenses on goods.
- B) government expenses on goods and services.
- C) government expenses on goods and services as well as transfers.
- D) government expenses on goods and services as well as transfers and public debt service.
Answer: B
Question Status: Previous Edition
55) A one-unit increase in government expenditures should, according to the model, increase GDP by
- A) 0.
- B) between zero and one unit.
- C) one unit.
- D) more than one unit.
Answer: B
Question Status: Revised
56) If the government replaces a lump sum tax with a proportional labor income tax, then
- A) employment and output increase.
- B) employment increases and output decreases.
- C) employment decreases and output increases.
- D) employment and output decrease.
Answer: D
Question Status: Previous Edition
57) Proportional income taxation is distorting because
- A) people do all they can to avoid paying taxes.
- B) the competitive equilibrium is not Pareto optimal.
- C) firms do all they can to avoid paying taxes.
- D) the government budget constraint does not hold.
Answer: B
Question Status: Previous Edition
58) With a linear production function in labor only, which of the following must be true?
- A) The representative household works as much as possible.
- B) The representative firm makes large profits.
- C) The real wage equals total factor productivity.
- D) The marginal product of labor exceeds the real wage.
Answer: C
Question Status: Previous Edition
59) How does an increase in the proportional labor income tax modify the consumer’s budget constraint?
- A) a parallel move up
- B) a parallel move down
- C) the slope decreases (constraint gets steeper)
- D) the slope increases (constraint gets flatter)
Answer: D
Question Status: Revised
60) At the competitive equilibrium with a positive proportional labor income tax
- A) the real wage after tax exceeds the marginal product of labor.
- B) the real wage after tax equals the marginal product of labor.
- C) the real wage after tax is lower than the marginal product of labor.
- D) We cannot say.
Answer: C
Question Status: Previous Edition
61) At the competitive equilibrium with a positive proportional labor income tax
- A) the real wage before tax exceeds the marginal product of labor.
- B) the real wage before tax equals the marginal product of labor.
- C) the real wage before tax is lower than the marginal product of labor.
- D) We cannot say.
Answer: B
Question Status: Previous Edition
62) The tax base is
- A) the average tax rate.
- B) the tax rate for the base year.
- C) the object being taxed.
- D) the lowest tax rate.
Answer: C
Question Status: Previous Edition
63) When the tax rate increases, the tax revenue
- A) always increases.
- B) does not change.
- C) always decreases.
- D) may increase or decrease.
Answer: D
Question Status: Previous Edition
64) The Laffer curve is a curve showing
- A) output as a function of the tax rate.
- B) tax revenue as a function of the tax rate.
- C) government expenses as a function of how liberal the government is.
- D) the tax rate as a function of government expenses.
Answer: B
Question Status: Previous Edition
65) Supply-side economists argue that
- A) one should get rid of all taxes.
- B) tax rates should not be progressive.
- C) increasing tax rates always hurts tax revenue.
- D) one can increase tax revenue by decreasing the tax rate.
Answer: D
Question Status: Previous Edition
66) In the model of public goods
- A) government spending is pure waste
- B) private consumption and government spending are equal.
- C) consumers benefit from private goods and public goods.
- D) the government provides goods at no cost to the public.
Answer: C
Question Status: New
67) In the model of public goods
- A) GDP is fixed.
- B) there is a production function.
- C) labor supply matters.
- D) public goods production is proportional to labor input.
Answer: A
Question Status: New
68) In the model of public goods, when the government chooses public goods provision optimally
- A) there is no public goods production.
- B) public goods are provided in an amount equal to private goods.
- C) the marginal rate of substitution of private goods for public goods equals the marginal rate of transformation.
- D) GDP is maximized.
Answer: C
Question Status: New
69) If GDP increases in the model of public goods
- A) people are richer, so they need less public goods.
- B) there is substitution from private goods to public goods.
- C) if the government provides public goods optimally, public and private goods production both increase.
- D) all of the increase in GDP goes into public goods.
Answer: C
Question Status: New
70) If public goods can be produced more efficiently, then
- A) public goods increase, and private goods may increase or decrease.
- B) public goods production stays the same, and private goods increase.
- C) public goods and private goods both increase.
- D) public goods production falls, and private goods production rises.
Answer: A
Question Status: New