Mid-Term Exam Macro McConnell 18th Edition

Student: ___________________________________________________________________________

1. When entering a building, Sam diverts his path to go through an open door rather than make the physical
effort to open the closed door that is directly in his path. This is an example of:
A. irrational behavior.
B. a lazy person.
C. marginal benefit-marginal cost analysis.
D. programmed learning.

2. Which of the following is a microeconomic statement?

A. The real domestic output increased by 2.5 percent last year.
B. Unemployment was 6.8 percent of the labor force last year.
C. The price of personal computers declined last year.
D. The general price level increased by 4 percent last year.

3. "Economics is concerned with how individuals, institutions, and society make optimal choices under
conditions of scarcity." This statement is:
A. positive, but incorrect.
B. positive and correct.
C. normative, but incorrect.
D. normative and correct.

4. Money is not an economic resource because:

A. money, as such, is not productive.
B. idle money balances do not earn interest income.
C. it is not scarce.
D. money is not a free gift of nature.
5. Which of the following will not produce an outward shift of the production possibilities curve?
A. an upgrading of the quality of a nation's human resources
B. the reduction of unemployment
C. an increase in the quantity of a society's labor force
D. the improvement of a society's technological knowledge

6. A typical concave (to the origin) production possibilities curve implies:

A. that economic resources are unlimited.
B. that society must choose among various attainable combinations of goods.
C. decreasing opportunity costs.
D. that society is using a market system to allocate resources.

7. Refer to the above diagram. Which one of the following would shift the production possibilities curve from
PP1 to PP2?
A. worsening of the AIDS epidemic
B. immigration of skilled workers into the economy
C. an increase in consumer prices
D. a reduction in hourly wages

8. A nation's production possibilities curve might shift to the left (inward) as a result of:
A. technological advance.
B. increases in the size of the labor force.
C. the depletion of its soil fertility due to overplanting and overgrazing.
D. investing in more capital goods.
9. If a positive relationship exists between x and y:
A. an increase in x will cause y to decrease.
B. a decrease in x will cause y to increase.
C. the relationship will graph as an upsloping line.
D. the vertical intercept must be positive.

Answer the next question(s) on the basis of the following five data sets wherein it is assumed that the variable
shown on the left is the independent variable and the one on the right is the dependent variable. Assume in
graphing these data that the independent variable is shown on the horizontal axis and the dependent variable on
the vertical axis.

10. Refer to the above data sets. The equation for data set 3 is:
A. P = 90 - .5N.
B. P = 90 + .5N.
C. P = .5N.
D. P = 40 + .5N.

11. If the equation y = -10 + 2.5x was plotted:

A. the vertical intercept would be -10.
B. the slope would be -7.5.
C. it would graph as a downsloping line.
D. the slope would be -10.

12. The two general types of economic systems that exist today are:
A. market systems and capitalism.
B. socialism and central planning.
C. market systems and command systems.
D. laissez faire systems and pure command systems.
13. Of the following countries, the one that best exhibits the characteristics of a market economy is:
A. Canada.
B. Cuba.
C. North Korea.
D. China.

14. Which of the following is a fundamental characteristic of the market system?

A. property rights.
B. central planning by government.
C. unselfish behavior.
D. government-set wages and prices.

15. Copyrights and trademarks are examples of:

A. capital goods.
B. human capital.
C. property rights.
D. public goods.

16. Specialization in production is important primarily because it:

A. results in greater total output.
B. allows society to avoid the coincidence-of-wants problem.
C. allows society to trade by barter.
D. allows society to have fewer capital goods.

17. Which of the following is not an economic cost?

A. wages.
B. rents.
C. economic profits.
D. payments made to the entrepreneur for organizing production.

Answer the next question(s) using the following data which show all available techniques for producing 20
units of a particular commodity:
18. Refer to the above data. In view of the indicated resource prices, the economically most efficient production
technique(s) is (are) technique(s):
A. #1.
B. #2 and #4.
C. #3.
D. #1 and #3.

19. Which of the following best describes the invisible-hand concept?

A. The desires of resource suppliers and producers to further their own self-interest will automatically further
the public interest.
B. The nonsubstitutability of resources creates a conflict between private and public interests and calls for
government intervention.
C. The market system is the best system for overcoming the scarce resources-unlimited wants problem.
D. Central direction by the government will improve resource allocation in a capitalistic economy.

20. The invisible-hand concept suggests that:

A. changes in product demands are only randomly reflected in changes in the demands for resources.
B. profit maximization is inconsistent with an efficient allocation of resources.
C. government action is necessary to correct for market failures.
D. when firms maximize their profits, society's output will also be maximized.

21. In the resource market:

A. businesses borrow financial capital from households.
B. businesses sell services to households.
C. households sell resources to businesses.
D. firms sell raw materials to households.

22. (Consider This) Since World War II:

A. North Korea's command economy has significantly outperformed South Korea's market economy.
B. South Korea's command economy has significantly outperformed North Korea's market economy.
C. North Korea's market economy has significantly outperformed South Korea's command economy.
D. South Korea's market economy has significantly outperformed North Korea's command economy.

23. Which of the following will not cause the demand for product K to change?
A. a change in the price of close-substitute product J
B. an increase in consumer incomes
C. a change in the price of K
D. a change in consumer tastes
24. In 2007 the price of oil increased, which in turn caused the price of natural gas to rise. This can best be
explained by saying that oil and natural gas are:
A. complementary goods and the higher price for oil increased the demand for natural gas.
B. substitute goods and the higher price for oil increased the demand for natural gas.
C. complementary goods and the higher price for oil decreased the supply of natural gas.
D. substitute goods and the higher price for oil decreased the supply of natural gas.

25. The demand curve for a product might shift as the result of a change in:
A. consumer tastes.
B. consumer incomes.
C. the prices of related goods.
D. all of these.

26. Which of the following would mostly likely increase the demand for gasoline?
A. the expectation by consumers that gasoline prices will be higher in the future.
B. the expectation by consumers that gasoline prices will be lower in the future.
C. a widespread shift in car ownership from SUVs to hybrid sedans.
D. a decrease in the price of public transportation.

27. Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product
Z. An increase in the price of X can be expected to:
A. decrease the demand for Z.
B. increase the demand for Z.
C. have no effect on the demand for Z.
D. decrease the supply of Z.

28. If an economy produces its most wanted goods but uses outdated production methods, it is:
A. achieving productive efficiency, but not allocative efficiency.
B. not achieving productive efficiency.
C. achieving both productive and allocative efficiency.
D. engaged in roundabout production.

29. If the supply of a product decreases and the demand for that product simultaneously increases, then
equilibrium:
A. price must rise, but equilibrium quantity may rise, fall, or remain unchanged.
B. price must rise and equilibrium quantity must fall.
C. price and equilibrium quantity must both increase.
D. price and equilibrium quantity must both decline.
 In the following question(s) you are asked to determine, other things equal, the effects of a given change in a
determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X, (2) the
equilibrium price (P) of X and (3) the equilibrium quantity (Q) of X.

30. Refer to the above. Consumer expectations that the price of X will rise sharply in the future will:
A. increase S, increase P, and increase Q.
B. increase D, increase P, and increase Q.
C. decrease S, increase P, and increase Q.
D. increase D, decrease P, and increase Q.

(Advanced analysis) Answer the next question(s) on the basis of the following information. The demand for
commodity X is represented by the equation P = 100 - 2Q and supply by the equation P = 10 + 4Q.

31. Refer to the above information. If demand changed from P = 100 - 2Q to P = 130 - Q, we can conclude
that:
A. demand has increased.
B. demand has decreased.
C. supply has increased.
D. supply has decreased.

Government-set prices

32. In the above market, economists would call a government-set minimum price of $50 a:
A. price ceiling.
B. price floor.
C. equilibrium price.
D. fair price.

33. Consumers buy more of normal goods as their incomes rise.

(A) True (B) False
34. Income data that show how total income is distributed as wages, rents, interest, and profits describe the:
A. functional distribution of income.
B. horizontal distribution of income.
C. personal distribution of income.
D. vertical distribution of income.

35. Corporate bonds are:

A. promises by a corporation to repay a loan.
B. also known as stocks.
C. illegal in the United States.
D. shares of ownership of a corporation.

36. If a market is competitive but externalities are present, the resulting equilibrium output:
A. will also be the most efficient output.
B. will always be less than the most efficient output.
C. will always be greater than the most efficient output.
D. may be either larger or smaller than the most efficient output.

37. A subsidy:
A. should be provided when there are external costs.
B. should be provided when there are external benefits.
C. should be provided only when a public good is being produced.
D. is appropriate when firms are guilty of pollution.

38. Unlike a private good, a public good:

A. produces no external benefits or external costs.
B. has no opportunity costs.
C. has benefits that are available to all, regardless of payment.
D. is characterized by rivalry and excludability.

39. A public good:

A. can be produced profitably by private firms.
B. is available to all and cannot be denied to anyone.
C. is characterized by rivalry and excludability.
D. produces no externalities.
40. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows.
Flow (1) might represent:
A. corporate income tax payments.
B. government provision of highways for truck transportation.
C. business property tax payments.
D. transfer payments to low-income families.

41. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows.
Flow (3) might represent:
A. government salaries paid to school teachers.
B. property tax payments.
C. a state university's purchase of computers.
D. social security payments to retirees.

42. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows.
Flow (8) might represent:
A. personal income taxes.
B. automobile purchases by the state of Maine.
C. the services of firefighters.
D. subsidies to farmers.

43. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. If
the economy were in a serious recession, it would be most appropriate for government to:
A. increase flows (3) and (7) and reduce flows (2) and (6).
B. decrease flows (3) and (7) and increase flows (2) and (6).
C. increase flows (2) and (3) and reduce flows (6) and (7).
D. increase all of the monetary flows.
44. The three most important sources of Federal tax revenue in order of descending importance are:
A. sales, payroll, and personal income taxes.
B. personal income, corporate income, and sales taxes.
C. personal income, corporate income, and payroll taxes.
D. personal income, payroll, and corporate income taxes.

45. Refer to the above data. The domestic opportunity cost of producing 1 ton of steel in Alpha is:
A. ½ ton of wheat.
B. 1 ton of wheat.
C. 15 tons of wheat.
D. 30 tons of wheat.

46. The primary benefits of international trade include:

A. the more efficient use of world resources and higher living standards.
B. greater stability of domestic output, employment, and the price level.
C. diminished dependence on foreign supplies of goods and materials.
D. greater economic security for our domestic producers.

Answer the next question(s) on the basis of the following production possibilities tables for countries Alpha
and Beta:
47. Refer to the above tables. Which one of the following terms of trade would be acceptable to both countries?
A. 1 unit of X for 3 units of Y
B. 1 unit of X for 5 units of Y
C. 1 unit of X for 12 units of Y
D. 1 unit of X for 1 unit of Y

48. Depreciation of the dollar will:

A. increase the prices of U.S. imports, but decrease the prices of U.S. exports.
B. decrease the prices of U.S. imports, but increase the prices of U.S. exports.
C. increase the prices of both U.S. imports and exports.
D. decrease the prices of both U.S. imports and exports.

49. All else equal, depreciation of the Mexican peso relative to the U.S. dollar would make a trip by:
A. an American to Mexico more expensive.
B. a Mexican to the United States less expensive.
C. an American to Mexico less expensive.
D. an Australian to the United States more expensive.

Answer the next question(s) on the basis of the following table which indicates the dollar price of luta, the
currency used in the hypothetical economy of Luteland:

50. Refer to the above table. The exchange rate in this market is:
A. 8 luta for one dollar.
B. 0.60 luta for one dollar.
C. 6 luta for one dollar.
D. 0.125 luta for one dollar.

51. If the dollar price of one yen is $.04, a Japanese good priced at 560 yen would cost an American:
A. $22.40.
B. $2240.
C. $14,000.
D. $2.40.
52. Refer to the above diagram. Which of the following would most likely cause an increase in the dollar price
of euros from $1.60 to $2.00?
A. An increased number of Euro Zone citizens visiting the United States.
B. Greater U.S. exports of financial services to Germany and France.
C. Rising incomes in Euro Zone nations.
D. Rising incomes in the United States.

53. The nations of the Euro Zone have:

A. abandoned their national currencies and switched to a common currency.
B. abandoned their national currencies and switched to American dollars.
C. formed a single country called the Union of European Nations (UEN).
D. recently admitted 10 new members.

54. Critics of the North American Free Trade Agreement (NAFTA) feared that it would:
A. increase the flow of illegal Mexican immigrants to the United States.
B. cause the European Union and Japan to raise trade barriers against U.S. goods.
C. cause a massive loss of U.S. jobs to Mexico.
D. increase foreign ownership of assets in the United States.

55. Trade Adjustment Assistance:

A. helps worker dislocated by international trade without erecting barriers that impede foreign trade.
B. subsidizes new firms trying to compete in international markets.
C. protects domestic jobs by reducing imports.
D. establishes a series of gradually loosened import quotas so that domestic firms have time to improve their
international competitiveness or transition to new markets.
56. Which of the following is most closely related to recessions?
A. positive long-run economic growth
B. rapid growth in the price level
C. falling rates of unemployment
D. negative growth in output

57. If the prices of all goods and services rose, but the quantity produced remained unchanged, what would
happen to nominal and real GDP?
A. nominal and real GDP would both rise.
B. nominal and real GDP would both be unchanged.
C. real GDP would rise, but nominal GDP would be unchanged.
D. nominal GDP would rise, but real GDP would be unchanged.

58. When economists refer to "investment," they are describing a situation where:
A. people are buying shares of corporate stock.
B. resources are devoted to increasing future output.
C. money is saved in a bank account.
D. financial assets are purchased in the hope of a monetary gain.

59. Which of the following is an example of a demand shock?

A. Hurricane Harry knocks out oil drilling platforms in the Gulf of Mexico.
B. Consumers become worried about job loss and buy fewer goods and services than expected.
C. Floods in the Midwest destroy crops.
D. The Federal government unexpectedly requires automobile producers to raise fuel efficiency standards.

60. Suppose that Techno TV produces LCD televisions. At a price of $2000 per television, Techno determines
that its optimal output is 3000 television sets per week. If prices are sticky and fears of a recession reduce
demand for LCD televisions, we would expect Techno to:
A. reduce output in the long run.
B. reduce output in the short run.
C. raise prices in the short run to compensate for lost revenue.
D. lower prices in the short run to offset the reduced demand.

61. Which of the following results from firms holding inventories?

A. The economy is much more susceptible to business cycle fluctuations.
B. Demand shocks occur with greater frequency.
C. Demand shocks occur less frequently.
D. Firms can maintain production levels and adjust inventories in response to demand shocks.
62. For which of the following goods are services are prices least sticky?
A. Taxi fares
B. Haircuts
C. Microwave ovens
D. Airlines tickets

63. The average number of months between price changes for gasoline is:
A. 0.2
B. 0.6
C. 1.0
D. 1.8

64. Prices tend to be sticky because:

A. firms are worried about frequent price changes that would annoy consumers.
B. most firms have agreements with each other to fix prices at profit-maximizing levels.
C. government controls most prices.
D. foreign competition discourages domestic firms from price changes.

65. Which of the following statements best describes price flexibility in the economy?
A. Prices tend to be sticky in the short run and stuck in the long run.
B. Prices tend to be just as sticky in the short run as in the long run.
C. Prices tend to be sticky in the short run, but become more flexible over time.
D. Prices tend to be flexible in the short run, but become more sticky over time.

66. (Last Word) Many economists believe that the widespread use of computerized inventory control systems:
A. has contributed to reduced severity in the business cycle.
B. will magnify recessions by triggering automatic reductions in output any time inventories begin to
accumulate.
C. has eliminated price stickiness.
D. will eventually prevent recessions from occurring.

67. Suppose that inventories were $40 billion in 2007 and $50 billion in 2008. In 2008, accountants would:
A. add $10 billion to other elements of investment in calculating total investment.
B. subtract $10 billion from other elements of investments in calculating total investment.
C. add $45 billion (= $90/2) to other elements of investment in calculating total investment.
D. subtract $45 billion (= $90/2) from other elements of investment in calculating total investment.
68. In national income accounting, government purchases include:
A. purchases by Federal, state, and local governments.
B. purchases by the Federal government only.
C. government transfer payments.
D. purchases of goods for consumption, but not public capital goods.

69. The ZZZ Corporation issued $25 million in new common stock in 2008. It used $18 million of the proceeds
to replace obsolete equipment in its factory and $7 million to repay bank loans. As a result, investment:
A. of $7 million has occurred.
B. of $25 million has occurred.
C. of $18 million has occurred.
D. has not occurred.

Answer the next question(s) on the basis of the following data. All figures are in billions of dollars:

70. Refer to the above data. GDP is:

A. $116.
B. $121.
C. $125.
D. $150.

Answer the next question(s) on the basis of the following data. All figures are in billions of dollars.
71. Refer to the above data. NDP is:
A. $370.
B. $402.
C. $392.
D. $467.

Answer the next question(s) on the basis of the following data. All figures are in billions of dollars.

72. Refer to the above data. Disposable income is:

A. $83.
B. $73.
C. $75.
D. $77.

Answer the next question(s) on the basis of the following data. All figures are in billions of dollars.

73. Refer to the above data. The gross domestic product is:
A. $326.
B. $282.
C. $307.
D. $300.
 Answer the next question(s) on the basis of the following national income data. All figures are in billions of
dollars.

74. Refer to the above data. U.S. imports are:

A. $26.
B. $16.
C. $24.
D. $14.

75. Refer to the above data. Personal income is:

A. $229.
B. $253.
C. $274.
D. $243.

76. Suppose nominal GDP was $360 billion in 1990 and $450 billion in 2000. The appropriate price index
(1985 = 100) was 120 in 1990 and 125 in 2000. Between 1990 and 2000 real GDP:
A. increased by $60 billion.
B. decreased by $32 billion.
C. increased by $100 billion.
D. increased by $117 billion.

77. The fact that nominal GDP has risen faster than real GDP:
A. suggests that the base year of the GDP price index has been shifted.
B. tells us nothing about what has happened to the price level.
C. suggests that the general price level has fallen.
D. suggests that the general price level has risen.
78. Which of the following best measures improvements in the standard of living of a nation?
A. growth of nominal GDP
B. growth of real GDP
C. growth of real GDP per capita
D. growth of national income

79. If a nation's real GDP is growing by 5 percent per year, its real GDP will double in approximately:
A. 22 years.
B. 20 years.
C. 14 years.
D. 8 years.

80. Under what circumstances do rates of economic growth understate the growth of economic well-being?
A. Economic growth has occurred because of increased length of the workweek
B. Product quality has improved
C. Air quality has declined as real GDP has increased
D. Population has grown faster than real output.

81. For which of the following reasons do economic growth rates tend to understate the growth of economic
well-being?
A. Products and services tend to improve over time.
B. Leisure time increases over time.
C. New cleaner technologies often replace older, less environmentally-friendly technology.
D. All of these.

82. Economic growth rates in follower countries:

A. tend to be lower than in leader countries because labor forces in follower countries are too small.
B. tend to exceed those in leader countries because followers can cheaply adopt the new technologies that
leaders developed at relatively high costs.
C. will never bring real GDP per capita up to the same levels as in leader countries, even if follower growth
rates are greater than those in leader countries.
D. typically average about 2 percent per year.
 Use the list below to answer the following questions:
1. Improvements in technology
2. Increases in the supply (stock) of capital goods
3. Purchases of expanding output
4. Obtaining the optimal combination of goods, each at least-cost production
5. Increases in the quantity and quality of natural resources
6. Increases in the quantity and quality of human resources

83. Which set of items in the above list would move an economy from a point inside its production possibilities
curve to a point on its production possibilities curve?
A. 1, 2, 5, and 6 only
B. 3 and 4 only
C. 3 only
D. 1, 3, 4 only

84. Suppose that an economy's labor productivity and total worker-hours each grew by 3 percent between year 1
and year 2. We could conclude that this economy's:
A. real GDP remained constant.
B. capital stock increased by 3 percent.
C. production possibilities curve shifted inward.
D. production possibilities curve shifted outward.

85. The percentage of the working-age population in the labor force (= employed + officially unemployed) is
called the:
A. labor force participation rate.
B. employment-population ratio.
C. work-activity rate.
D. work-nonwork ratio.

86. The historical reallocation of labor from agriculture to manufacturing in the United States has:
A. been inflationary.
B. had no effect on the average productivity of labor.
C. increased the average productivity of labor.
D. reduced the average productivity of labor.
87. Network effects are:
A. increases in the value of a product to each user, including existing users, as the total number of users rises.
B. reductions in per unit production cost as firms learn by doing.
C. increases in demand resulting from products being mentioned positively in a television program.
D. the change in real GDP resulting from a change in investment or government spending.

88. (Consider This) The Consider This box on patents and innovation demonstrates that:
A. Patent protection for U.S. companies may not be as effective when other countries do not respect or enforce
U.S. patent laws.
B. Patent laws are relatively uniform across nations.
C. Countries like India have no incentive to enact or enforce patent laws.
D. Follower countries tend to have stronger patent laws than leader countries.

89. As it relates to economic growth, the term long-run trend refers to:
A. the long-run increase in the relative importance of durable goods in the U.S. economy.
B. the long-term expansion or contraction of business activity that occurs over 50 or 100 years.
C. fluctuations in business activity that average 40 months in duration.
D. fluctuations in business activity that occur around Christmas, Easter, and so forth.

90. Which of the following statements is true about causes of business cycle fluctuations?
A. Economists all agree that supply shocks are the cause of most business cycle fluctuations.
B. Economists all agree that productivity shocks are the cause of most business cycle changes.
C. Economists all agree that monetary changes are primarily responsible for business cycle fluctuations.
D. There are a wide range of theories as to the underlying causes of business cycle movements.

91. Innovations such as the microchip and the Internet lead to business cycle variations because:
A. they cause prices to be sticky.
B. significant innovations occur irregularly and unexpectedly.
C. the central bank will often change the money supply in response.
D. they cause prices to be flexible.

92. The unemployment rate of:

A. women greatly exceeds that of men.
B. whites is roughly equal to that of African-Americans.
C. white-collar workers exceeds that of blue-collar workers.
D. teenagers is much higher than that of adults.
93. Which of the following types of unemployment is directly associated with insufficient overall demand for
goods and services?
A. Search unemployment
B. Wait unemployment
C. Cyclical unemployment
D. Frictional unemployment

94. If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is:
A. $415 billion.
B. $385 billion.
C. $15 billion.
D. $785 billion.

Answer the next question(s) on the basis of the following information for a specific year in a hypothetical
economy for which Okun's law is applicable:

95. Refer to the above data. If the unemployment rate in the above economy declined to 6 percent, we could
conclude that:
A. only structural unemployment remained.
B. the economy's production possibilities curve shifted outward.
C. the economy had moved from a point inside its production possibilities curve to a point on or near the curve.
D. nominal GDP would rise but real GDP would fall.

96. Okun's law:

A. measures the tradeoff between the rate of inflation and the rate of unemployment.
B. indicates the number of years it will take for a constant rate of inflation to double the price level.
C. quantifies the relationship between nominal and real incomes.
D. shows the relationship between the unemployment rate and the size of the negative GDP gap.

97. If Fred's annual real income rises by 8 percent each year, his annual real income will double in about:
A. 8-9 years.
B. 10-11 years.
C. 5-6 years.
D. 19-20 years.
98. Real income is found by:
A. dividing nominal income by 70.
B. multiplying nominal income by 1.03.
C. dividing the price index (in hundredths) by nominal income.
D. dividing nominal income by the price index (in hundredths).

99. Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises
from 100 to 105. The person's real income will:
A. fall by about 20 percent.
B. fall by about 2 percent.
C. rise by about 15 percent.
D. rise by about 25 percent.

100. Unanticipated inflation:

A. reduces the real burden of the public debt to the Federal government.
B. hurts borrowers and helps lenders.
C. hurts people whose sole source of income is from Social Security benefits.
D. helps savers.