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1) Assuming cigs generate negative externalities, a market economy without any govt.

intervention, will produce- too

many cigs
2) The full employment unemployment rate will be greater than 0% b/c- at any point in time, there are always at
least some members of the labor force who are not employed b/c they are moving from one job to another
3) When the Fed increases the money supply, the most immediate and direct impact is that- interest rates fall and
spending rises
4) A paper manufacturing company discharges waste products into a river and causes higher costs and discomfort for
downstream users of the water for which they are not compensated. If free markets determine the amount of copper
that is produced- too many of societys resources will be used to produce paper
5) Is it possible for too much a good be produced from the standpoint of efficiency- Yes if the good in question has
negative externalities associated with it
6) One of the reasons that many colleges receive a govt. subsidies is that it is believed that education creates positive
externalities, and therefore without subsidies the quantity produced would be less than the socially optimal
7) The tendency of people or firms to try to consume a good without paying for it is the free-rider problem
8) Rent seeking behavior occurs when- people manipulate the legal and/or political environment in an attempt to
reduce competition and increase their incomes.
9) The Broken Window fallacy, when it is used correctly suggests that- Increases in GDP that result from
rebuilding things after a natural disaster do not create higher living standards for society as a whole
10) AD-As analysis suggests that decreasing the level of govt. spending in the midst of a recession will- Worsen the
11) Fiscal policy refers to- The control of govt. spending and taxation
12) Monetary policy attempts to affect the overall level of spending in the economy by changes in- The money supply
and interest rates
13) Fiscal policy attempts to affect the overall level of spending in the economy through- Changes in tax policy or
govt. spending
14) In AD-AS framework, a large increase in taxes will- Decrease AD, causing falling GDP and an Increase in
15) Recessions are periods when- Output is falling and unemployment is rising
16) The alternation between recessions and expansions in the overall economy is known as- The business cycle
17) Long-run per capita GDP growth can only happen if- GDP is growing at a faster rate than the rate of
population growth
18) Which of the following is true about inflation and deflation- Both inflation and deflation create winners and
19) Inflation affects people adversely b/c- inflation causes the value of money in terms of goods and services to fall
20) Deflation hurts certain producers since- The Value of many goods and services in terms of money is decreasing
21) Many economists believe that the CPI overstates inflation b/c- The unchanging content of the CPI market
basket doesnt reflect the fact that consumers shift consumption away from more expensive goods
22) To be counted as officially unemployed one must- be part of the adult population that is actively seeking
employment but not currently employed
23) Suppose that 4 mil people in an economy are looking for jobs during one month. The following month, 2 mil of
those stop looking for work while the number of employed people does not change- It will fall
24) The presence of discouraged workers in the economy means that- The official unemployment rate probably
understates the unemployment problem and The official labor force will be significantly lower than the adult
25) The unemployment rate can actually rise during the beginning of an economic expansion b/c- Formerly
discouraged workers enter the labor force but have yet to find jobs
26) When inflation rises quickly an unexpectedly- Lenders will be hurt and borrowers will benefit
27) In class it was suggested that one of the most important parts of parenting is reducing your childs naturally high
rate of time preference. This mainly involves- Teaching your children to delay gratification
28) If oil prices increase dramatically b/c of a war in the Middle east- The economy will experience an adverse
supply shock resulting in both higher inflation and higher unemployment
29) Economies with higher rates of inflation tend to be those that have- Very high rates of money growth
30) The economy is in a recession. Which of the following is a fiscal policy that the govt. should adopt to strengthen
the economy in the short run- An increase in govt. purchases of goods and services
31) One of the major lessons of AD-AS analysis is that when people and business become more pessimistic- GDP will
fall and unemployment will rise, even if the nations stock of productive resources remains unchanged
32) If devoting more resources toward reducing drug abuse entails decreasing marginal benefits and increasing
marginal costs- A certain amount of drug abuse is optimal from the standpoint of efficient resource use
33) A negative externality clearly occurs when- a persons actions unintentionally imposes costs on other people
34) President Obamas new proposed budget includes an increase in the Fed. Govt. Excise tax of approx. $1 per pack
of cigs? This increase in taxes on a single product is most likely motivated by the govt.s desire to- Reduce the
level of an activity (smoking) that many people think generates significant negative externalities
35) The type of market failure associated with goods that generate negative externalities is that- Too much of the
good is produced and consumed from the standpoint of efficiency
36) Which of the following is the major economic disadvantage of the command-and-control approach to the problem
of pollution- It fails to consider less costly ways of reducing environment pollution
37) The Prisoners Dilemma Problem results in- Too little of a good being produced from the standpoint of
efficiency b/c people think they will not get the good whether they pay for it or not
38) Politicians have often kissed babies to improve their re-election prospects. Economic theory suggests that the
rational politician will kiss babies as long as- The marginal benefits are greater than the marginal costs
39) The major difference between coercion and persuasion is that- Coercion induces cooperation by threatening to reduce options,
persuasion by promising to expand options
40) The important difference between national defense and food that explains why national defense is commonly
provided by govt. while the food is not that food- can easily be withheld from those who wont pay for it
41) Economic theory suggest that legislators in a democracy are more likely to support special interests than the broad
interests of citizens generally b/c- they pay attention to the people paying attention to them
42) Economic theory strongly suggests that all ignorance is ultimately- Rational
43) If congress conducted public hearings to decide whether tariffs should be raised significantly on rice imported into
the US, tax payers would not be well represented at the hearings b/c- Single taxpayers are not likely to have a
large enough stake in the issue to justify the cost of attending the hearings
44) In the AD-AS framework, a decrease in the money supply will- Decrease AD, causing a decrease in GDP
45) Why would an economist tend to reject the statement Anything worth doing is doing well- B/c things are worth
doing only as long as the marginal benefit is greater than the marginal cost, which in the case of many things
might involve stopping before the thing is done well
46) This problem that results from an adverse supply shock (A decrease in AS in the AD-AS framework) is-
Stagflation, which means a rising price level along with lower GDP
47) If the US economy was currently in the midst of a recession, the policy change that would be most likely to move
the economy back toward full employment would be- A tax cut
48) A person with a high rate of time preference will be more likely than people with a low rate of time preference to-
Want their dessert before dinner and borrow heavily, adding to the debt they must service in the future
1) Assuming that education generates positive externalities, a market economy without any government intervention,
will produce: A) too little education.
2) The Fed decreases the money supply when it B) sells U.S. government bonds in the open market.
3)When the Fed increases the money supply, the most immediate and direct is that B) interest rates fall.
4) A copper mining operation discharges waste products into a river and cause higher costs and discomfort to
downstream users of water, who are not compensated. If free markets determine the amount of copper that is
produced: B) too many of societys resources will be used to produce copper.
25) If the natural rate of unemployment is 5%, and the current unemployment rate is 8% then: Cyclical
unemployment is 3%
27) The chain weighted CPI will rise more slowly than the current CPI. Since many government spending programs
increase at the same rate as the official price index, using the chain weighted CPI as the official measure of
inflation will result in: Less govt. Spending and lower real incomes among recipients of govt. spending
programs that increase by the same rate as the Chain Weighted CPI
31) If the Fed increases the money supply: Interest rates decrease, investment increases, and GDP increases
32) If devoting more resources toward reducing drug abuse entails decreasing marginal benefits and increasing
marginal costs: D) all the above.
44) In the AD-AS framework, an increase in the money supply will: D) increase AD, causing an increase in GDP.
47) The concept of automatic stabilizers suggests that: The govt. Budget deficit will automatically increase
during a recession
49) If the Fed wants to decrease interest rates in the short run it should: C) increase the money supply.
50) The theory of Money Neutrality suggests that in the long run, an increase in the money supply will result mainly
in: A) higher inflation.