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ECO 405 Week 11 Quiz – Strayer University New

ECO/405 Week 11 Quiz – Strayer

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Quiz 10 Chapter 14 and 15

Government Spending, Taxation, And The National Debt: Who Wins And Who Loses?

Multiple Choice Questions

1. The Fears Of People Concerning The Size Of Government Are
A. Always Without Any Foundation
B. Well-Founded In Some Instances And Not Well-Founded In Some Instances
C. Difficult To Appreciate
D. Due To Low Income And Low Educational Levels Of Many People
E. Based Solely On Economic Efficiency

2. The Fears Of People Concerning Distribution Of Taxes Are Related To
A. Equity Or Justice In Taxation
B. Ample Evidence That There Are Tax Inequities In The Tax System At All Levels Of Government
C. The Complete Lack Of Understanding That People Have About The Purpose Of Taxes
D. Both (A) And (B)
E. All Of The Above

3. Total Government Expenditures Currently Represent Approximately What Percentage Of Gdp?
A. 20%
B. 30%
C. 40%
D. 50%
E. 10%

4. A Cash Payment From The Government To An Individual, Based On Need, Is An Example Of A
A. Transfer Payment
B. Government Purchase Of A Service
C. Government Purchase Of A Good
D. Transaction Payment
E. Government Receipt

5. A Payment From The Government To A Federal Employee Is A
A. Transfer Payment
B. Government Purchase Of A Service
C. Government Purchase Of A Good
D. Transaction Payment
E. Government Receipt

6. An Efficient Level Of Government Expenditures Is That Level Where
A. Total Costs Are Minimized
B. Total Benefits Are Maximized
C. Marginal Benefits Are Equal To Marginal Costs
D. Marginal Benefits Are Greater Than Marginal Costs
E. Marginal Benefits Are Less Than Marginal Costs

7. Public Goods And Services Have Characteristics That Make Them
A. Possible To Exclude People From Consuming Them
B. Less Available For One Person When Another Consumes Them
C. Easy To Provide Through Private Markets
D. All Of The Above
E. None Of The Above

8. The Size Of Government Is Growing At
A. A Slower Rate Than The Rest Of The Economy
B. Approximately The Same Rate As The Rest Of The Economy
C. A Faster Rate Than The Rest Of The Economy
D. Twice The Rate Of The Rest Of The Economy
E. A Negative Rate

9. Assuming Negative Externalities In Production, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be
A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs
B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs
C. A Subsidy To Consumers Equal To Marginal External Benefits
D. A Subsidy To Consumers Greater Than Marginal External Benefits
E. None Of The Above

10. Assuming Positive Externalities In Consumption, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be
A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs
B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs
C. A Subsidy On Each Unit Consumed Equal To Marginal External Benefits
D. A Subsidy On Each Unit Consumed Greater Than Marginal External Benefits
E. None Of The Above

11. Shifting Income From Those Who Are Relatively Productive To Those Who Are Relatively Unproductive, Say Through Taxes And Subsidies, Must Be Based On
A. Sound Economic Principles
B. The Laws Of Demand And Supply
C. The Values Of People As To What Constitutes A “Fair” Distribution Of Income
D. Marginal Cost And Marginal Benefit
E. Both (A) And (D)

12. A National Crime Lab Used To Prevent Criminal Activity Nationwide Is An Example Of A
A. Negative Externality
B. Positive Externality
C. Transfer Payment
D. Public Good
E. Private Good

13. Tax Equity Means That
A. All People Should Pay Equal Taxes
B. Only The “Rich” Should Pay Taxes
C. People In The Same Economic Circumstances Should Pay Equal Taxes, And People In Different Economic Circumstances Should Pay Unequal Taxes
D. The Distribution Of Income After Taxes Should Be Equal
E. None Of The Above

14. An Efficient Tax Would Be A Tax For Which
A. The Excess Burden” From Taxes Is Zero
B. Taxes Should Have A Neutral Effect On The Operation Of The Economy
C. Taxes Should Be Levied At Progressive Rates
D. (A) And (B)
E. All Of The Above

15. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Government Purchase Is
A. Greater Than The Benefit Of The Last Dollar Spent In The Private Sector
B. Less Than The Benefit Of The Last Dollar Spent In The Private Sector
C. Equal To The Benefit Of The Last Dollar Spent In The Private Sector
D. Paid For Out Of Current Tax Collections
E. None Of The Above

16. An Efficient Level Of Government Expenditures Is That Level At Which
A. Marginal Benefits Exceed Marginal Costs
B. Total Benefits Equal Total Costs
C. The Net Benefits To Society Are Maximized
D. The Total Costs Are Minimized
E. None Of The Above

17. Where Marginal Benefits Are Greater Than The Marginal Costs, Government Expenditures Should
A. Be Increased
B. Remain The Same
C. Be Decreased Then Increased To Their Original Level
D. Be Increased Then Decreased To Their Original Level
E. Do None Of The Above

18. Characteristics Of Public Goods And Services Include Which Of The Following?
A. The Demand For These Goods And Services Is Divisible On The Basis Of Individual Quantity Demanded
B. The Supply Of These Goods And Services Is Generally Not Divisible Into Small Units
C. These Goods And Services Are Easily Provided By The Market System
D. The Costs Of These Goods Fall On Other Than The Buyer
E. None Of The Above

19. Which Of The Following Is An Example Of A Public Good Or Service?
A. A Public Highway
B. Free Cheese Offered By The Government
C. Food Stamps
D. Social Security
E. Automobiles

Questions 20 – 24 Refer To The Graph Below.

20. Assuming No External Benefits Or Costs, The Efficient Price And Quantity Would Be
A. P2, Q2
B. P2, Q1
C. P1, Q1
D. P0, Q0
E. P0, Q2

21. Suppose There Are External Benefits Associated With The Production Of The Good. The Efficient Price And Quantity Are
A. P2, Q2
B. P2, Q1
C. P1, Q1
D. P0, Q0
E. P0, Q2

22. If External Benefits Are Associated With The Consumption Of The Good, Consumers Could Be Induced To Purchase The Efficient Quantity If The Price Were Set At
A. P2
B. P1
C. P0
D. 0
E. None Of The Above

23. To Assure Consumers Purchase The Efficient Quantity When There Are Positive External Benefits, The Government Would Lower Price To
A. P2
B. P1
C. P2- P1
D. P0- P1
E. P0

24. Marginal External Benefits Are Represented On The Graph As The Distance
A. Ab
B. Q2a
C. Ea
D. Cf
E. Af

25. Which Of The Following Is The Major Tax Source Of The Federal Government?
A. Income Taxes
B. Excise Taxes
C. Property Taxes
D. Wealth Taxes
E. Sales Taxes

26. A Progressive Tax Rate Means That The Ratio Of Tax Collections To Income
A. Falls As Income Rises
B. Rises As Income Rises
C. Remains The Same As Income Rises
D. Either (A) And (B)
E. May Fall, Rise, Or Remain The Same As Income Rises

27. In The Us, Major Sources Of Tax Revenues Are:
A. Income Taxes At The Federal Level, Property Taxes At The State Level
B. Sales Taxes At The Federal Level And Income Taxes And Property Taxes At The State Level
C. Income Taxes At The Federal Level And Income And Sales Taxes At The State Level
D. Income Taxes At The Federal Level And Payroll Taxes At The State Level

28. The Ability To Pay The Principle Of Taxation Suggests That People With More Income Should Pay More Taxes. This Means That
A. Progressive Income Rates Are Consistent With The Ability To Pay Principle
B. Proportional Income Rates Are Consistent With The Ability To Pay Principle
C. Regressive Income Rates May Or May Not Be Consistent With The Ability To Pay Principle Depending On The Rate Of Regression
D. Sales Taxes Are Consistent With The Ability To Pay Principle
E. None Of The Above

Questions 29 – 33 Refer To The Graph Below.

29. The Demand Curve For This Product Can Be Described As
A. Perfectly Elastic
B. Perfectly Inelastic
C. Unitary Elastic
D. Hyper Elastic
E. Price Elastic

30. Given Demand Curve D, If An Output Tax Per Unit Of P- P2 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. It Can Not Be Determined

31. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

32. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

33. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

Questions 34 – 38 Refer To The Graph Below.

34. The Demand Curve For This Product Can Be Described As
A. Perfectly Elastic
B. Perfectly Inelastic
C. Unitary Elastic
D. Hyper Elastic
E. Price Elastic

35. Given Demand Curve D, If An Output Tax Per Unit Of P- P1 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

36. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

37. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

38. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

39. An Output Tax Will Be Shifted Completely
A. Backward If Demand Is Price Inelastic
B. Forward If Demand Is Perfectly Price Inelastic
C. Forward If Demand Is Price Elastic
D. Backward, Regardless Of Elasticity
E. All Of The Above

40. A Tax Levied Independent Of Output, Such As A Tax Levied On Net Income Of Corporations, Will
A. Be Shifted If Demand Is More Elastic Than Supply
B. Be Shifted If Supply Is More Elastic Than Demand
C. Not Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax
D. Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax
E. Do None Of The Above

41. Government Borrowing Is Argued To Have The Effect Of Raising Interest Rates—The “Crowding-Out Effect.” In Conjunction With Government Spending, Does Government Spending And Borrowing Have A Positive Or Negative Impact On The Economy?
A. Negative, Since Borrowing Exceeds Spending
B. A Positive Impact, Since Expenditures Often Exceed Borrowing
C. A Neutral Effect, Since The Budget Is Always In Balance
D. Government Spending And Borrowing Have A Minimal Effect On The Economy
E. Government Spending And Borrowing Must Be Considered Separately

42. The Gasoline Tax Is Often Used To Illustrate The Benefits Received Principle Of Taxation Because
A. Everyone Benefits From The Gasoline Tax
B. Those Who Pay The Tax Receive Benefits, Since The Revenues Are Used For Road And Highway Construction And Maintenance
C. The Amount We Pay Is Consistent With Our Incomes
D. Everyone Knows When They Pay The Tax
E. The Gasoline Tax Is A Poor Example Of The Benefits Received Principle

43. Vertical Equity Implies That
A. People In Different States Should Pay The Same Taxes
B. People With Comparable Incomes Should Pay The Same Taxes
C. People In Different Economic Circumstances Should Pay Different Amounts
D. Taxes Should Rise As The Size Of Your Family Increases
E. Taxes Should Be Based Upon How Tall The Taxpayer Is

44. Proportional Tax Rates Mean That The Ratio Of Tax Collection To Income
A. Falls As Income Rises
B. Rises, As Income Rises
C. Remains The Same As Income Rises
D. Rises As Income Falls
E. Falls As Income Falls

45. Regressive Tax Rates Mean That The Ratio Of Tax Collections To Income
A. Falls As Income Rises
B. Rises As Income Rises
C. Remains The Same As Income Rises
D. Remains The Same As Income Falls
E. Falls As Income Falls

46. The Us Federal Personal Income Tax Is An Example Of A(N)
A. Regressive Tax Rate Structure
B. Proportional Tax Rate Structure
C. Progressive Tax Rate Structure
D. More Regressive Than Proportional Tax Rate Structure
E. Equitable Tax Rate Structure

47. If Demand For A Product Is Perfectly Inelastic, An Output Tax Will Be Shifted
A. Completely Backward
B. Completely Forward
C. Completely To The Poor
D. Completely To The Rich
E. Completely To The Producer

48. A Tax That Is Shifted Forward Is A Tax That Falls On
A. The Consumer In The Form Of Higher Prices
B. The Producer Through Lower Sales
C. The Government
D. Foreign Investors
E. None Of The Above

49. A Tax That Is Shifted Backward Is A Tax That Falls On
A. The Consumer In The Form Of Higher Prices
B. The Owners Of Resources In The Form Of Lower Resource Prices
C. The Government
D. Foreign Investors
E. None Of The Above

50. At The Federal Level, The Largest Revenue Generating Tax Is The
A. Corporate Income Tax
B. Personal Income Tax
C. Property Tax
D. Sales Tax
E. Customs Duty

51. If The Ratio Of Tax Collections To Income Rises As Income Rises, Then The Tax Rate Is
A. Regressive
B. Proportional
C. Progressive
D. Regressive Then Proportional
E. None Of The Above

52. The Federal Government Lowered Tax Rates In
A. 1986 And 2001
B. 1986
C. 2001
D. Neither Year
E. 1909 And Has Raised Them Ever Since

53. Suppose There Are Two Individuals Who Each Earn $25,000 Per Year. One Individual Pays $2,500 In Taxes And The Other Pays $2,000. This Is A Violation Of
A. The Benefits Received Principle
B. The Ability To Pay Principle
C. Vertical Equity
D. Horizontal Equity
E. None Of The Above

54. Suppose One Individual Earns $25,000 Per Year And Another Individual Earns $15,000 Per Year. If The Individual Earning $25,000 Per Year Pays $750 More Per Year In Taxes Than The Person Earning $15,000, This Is An Illustration Of
A. The Benefits Received Principle
B. The Ability To Pay Principle
C. The Equal Tax Treatment Principle
D. The Equitable Payment Doctrine
E. None Of The Above

55. If We Levy A Tax On Profits That Is Neither Shifted Neither Forward Nor Backward, It Is
A. An Output Tax
B. An Input Tax
C. A Tax Independent Of Output
D. A Tax Dependent On Output
E. None Of The Above

56. The Federal Tax System In The United States Can Be Described As
A. Regressive
B. Highly Progressive
C. Slightly Progressive
D. Proportional
E. None Of The Above

57. A Tax System That Will Not Alter The Distribution Of Income Is
A. Proportional
B. Regressive
C. Slightly Progressive
D. Very Progressive
E. None Of The Above
58. Which Of The Following Countries Has The Lowest Taxes Collected (As A Percent Of Gdp)?
A. The United States
B. Germany
C. Italy
D. France
E. The United Kingdom

59. The Highest Effective Federal Tax Rate In The United States Is Approximately
A. 10%
B. 15%
C. 20%
D. 24%
E. 34%
60. The Highest Effective Federal Tax Rate In The United States Falls On Which Income Category?
A. The Lowest Quintile
B. The Middle Quintile
C. The Top 10%
D. The Top 5%
E. The Top 1%

61. The Single Most Important Source Of Tax Revenue For The Local Governments In The United States Is The
A. Real Property Tax
B. Personal Income Tax
C. National Sales Tax
D. Cigarette Tax
E. Inheritance Tax

62. Enforcement And Collection Of Personal Income Taxes Is The Responsibility Of The
A. Treasury Department
B. Individual State Governments
C. Federal Reserve System
D. Internal Revenue Service
E. Department Of Labor

63. The Federal Government Uses Taxes To
A. Generate Revenue
B. Encourage Saving For Education And Retirement
C. Discourage Certain Behaviors
D. Promote The Purchase Of Houses
E. Do All Of The Above

64. The 1986 Tax Reform Act ________ The Number Of Tax Brackets And _______ The Highest Tax Bracket.
A. Increased; Increased
B. Increased; Decreased
C. Decreased; Increased
D. Decreased; Decreased
E. Decreased; Did Not Change

65. Since 2004, The Highest Personal Income Tax Bracket Has Been
A. 10%
B. 15%
C. 25%
D. 28%
E. 35%

66. The Economic Growth And Taxpayer Relief Reconciliation Act Passed By Congress And Signed By President George W. Bush Did Which Of The Following?
A. Immediately Cut Federal Tax Rates By One-Third
B. Gave A $300 Check To Each Taxpayer
C. Decreased The Tax On Income From Financial Investments
D. Decreased The Federal Budget Deficit
E. Increased The Number Of Personal Income Tax Brackets

67. The First Budget Surplus Since 1969 Occurred In
A. 1993
B. 1995
C. 1998
D. 1999
E. 2000

68. The Budget Surpluses Of The Late 1990’s And The Early 2000’s Could Be Attributed To Which Of The Following Government Policies?
A. The Value Added Tax Act
B. The Tax Reform Act Of 1986
C. The Economic Growth And Taxpayer Relief Reconciliation Act
D. Increased Government Debt
E. All Of The Above

69. If A Government Bond With A Maturity Value Of $10,000 Sells For $9,000 And Pays Annual Interest Of $1,000, What Is The Rate Of Interest On The Bond?
A. 1%
B. 10%
C. 11.1%
D. 88.9%
E. 90%

70. An Increase In Government Borrowing Will Cause Which Of The Following?
A. A Decrease In The Demand For Loanable Funds
B. A Decrease In The Supply Of Bonds
C. An Increase In The Interest Rate
D. An Increase In The Price Of Bonds
E. All Of The Above

71. Federal Debt Reduction Will Cause Which Of The Following?
A. A Decrease In The Interest Rate
B. An Increase In Private Investment
C. A Decrease In The Supply Of Bonds
D. An Increase In The Price Of Bonds
E. All Of The Above

72. The Federal Government Ended Its Most Recent Period Of Budget Surpluses And Returned To Deficits In
A. 1999
B. 2000
C. 2001
D. 2002
E. 2003

73. The Federal Deficit Was Increased In 2002 As A Result Of
A. The 2001 Recession
B. The War On Terrorism
C. The 2001 Tax Cut
D. Increased Defense Spending
E. All Of The Above

74. Retiring The Federal Debt Will
A. Decrease The Supply Of Government Bonds
B. Increase Government Bond Prices
C. Lower The Interest Rate On Government Bonds
D. Decrease The Demand For Money
E. Do All Of The Above

True / False Questions

75. The Fears That People Have Concerning Government Are Related To The Size Of Government And The Distribution Of Taxes.

76. Some Of The Fears That People Have Concerning Government Are Well-Founded And Some Are Not.

77. Government Expenditures Have Grown Faster Than The Gdp Since 1958, Representing About Fifty Percent Of Gdp Today.

78. Government Transfer Payments, Such As Public Assistance Payments And Social Security Payments, Have Been A Constant Percentage Of The Gdp Since 1960.

79. Government Purchases Of Goods And Services Have Remained A Constant Percentage Of The Gdp For The Last Two Decades.

80. Before An Intelligent Decision Can Be Made About Whether Government Is Too Large Or Small, The Benefits And Costs Must Be Weighed.

81. An Efficient Level Of Government Expenditures Is That Level Where Net Benefits To Society Are Maximized.

82. Public Goods And Services Can Be Supplied In The Market Because They Are Easily Divisible Into Small Units And Can Be Priced To The Individual Demander.

83. The Existence Of Externalities In Production Or Consumption Does Not Negate The Possibility That These Goods And Services Can Be Supplied Efficiently In The Market.

84. A Great Deal Of Government Activity Is Based On The Idea That People In Society Should Determine The Extent To Which The Distribution Of Income Should Be Altered.

85. The Major Tax Source Of The Federal Government Is The Highly Regressive Sales Tax.

86. The Federal Income Tax System Results In A Mildly Progressive Tax Structure.

87. The Major Tax Source Of State Governments Is The Property Tax.

88. Progressive Income Tax Rates Are Consistent With The Ability To Pay Principle Of Taxation But Are Inconsistent With The Tax Criterion Of Economic Efficiency.

89. The Relative Tax Treatment Doctrine Would Call For All Taxpayers To Pay Equal Taxes.

90. Since Gasoline Taxes Are Used Primarily To Finance Highways, Gasoline Taxes Can Be Defended On The Benefits Received Principle Of Taxation.

91. The Excess Tax Burden Is In The Form Of The Loss In Private Production That May Take Place If Incentives To Work And To Produce Are Discouraged.

92. A Tax Levied On Each Unit Produced Will Likely Be Shifted Forward And Backward Depending Upon The Elasticities Of Demand And Supply.

93. If An Output Tax Is Levied On A Product That Has A Perfectly Elastic Demand, The Tax Will Be Shifted Completely To The Consumer In The Form Of Higher Prices.

94. Federal Budget Deficits Occurred Throughout The 1970’s And 1980’s But In The Late 1990’s Deficits Turned Into Budget Surpluses.

95. The Tax Reform Act Of 1986 Increased The Highest Marginal Tax Rate To 50% From 38%.

96. In General, A Tax Levied On Net Income Of A Corporation Would Be Shifted To Consumers In The Short Run.

97. Tax Equity Would Probably Be Reduced If Federal Tax Exclusions, Such As Interest On State And Local Government Securities, Were Eliminated.

98. Demand For Public Goods And Services Is Not Generally Divisible On The Basis Of Individual Quantity Demanded.

99. The Tax Base Is What A Tax Is Levied On, Such As Income, Sales, Or The Value Of Property.

100. Regressive Tax Rates Mean That The Ratio Of Tax Collection To Income Rises As Income Rises.

101. Tax Equity Means That All People Should Pay Equal Taxes.

102. An Output Tax Will Be Shifted Completely Forward If Demand Is Price Elastic.

103. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Purchase Is Greater Than The Last Dollar Of Cost.

104. When Marginal Benefits Equal Marginal Costs Then Net Benefits Are Maximized.

105. Horizontal Equity Means That People In Identical Economic Positions Should Pay Equal Taxes.

106. Transfer Payments Are Government Expenditures For Currently Produced Goods And Services.

107. In The Absence Of Externalities, Government Actions Are Needed To Ensure The Efficiency Of The Market System.

108. According To The Equal Tax Treatment Doctrine, People In Identical Economic Circumstances Should Pay Equal Taxes.

109. The Equal Tax Treatment Doctrine Pertains To Vertical Equity.

110. The Federal Tax System Is Much More Progressive Than Is Generally Believed.

111. The Economic Growth And Taxpayer Relief Reconciliation Act, The Job Creation And Worker Assistance Act, And The Jobs And Growth Tax Relief Act Each Reduced Effective Tax Rates On Income.

112. The United States Has Not Had A Federal Budget Surplus Since The 1960s.

113. The Personal Income Tax Is The Single Most Important Source Of Tax Revenue For The Federal Government Of The United States.

114. The Enforcement And Collection Of The Personal Income Tax Is The Responsibility Of The Internal Revenue Service.

115. There Are Currently 14 Tax Brackets Ranging From 11% To 50%.

116. The Federal Government Uses The Tax Code To Encourage Certain Behaviors.

117. Bond Prices And Interest Rates Are Inversely Related.

118. The First Budget Surplus Since 1969 Occurred In 1998.

119. A Budget Deficit Occurs When Tax Revenues Exceed Government Spending.

120. A Lower Interest Rate Encourages Private Investment Spending.

121. The National Debt Is The Sum Of Past Budget Deficits.

122. The Government Owes Almost One Third Of The National Debt To Itself.

123. An Increase In Government Borrowing Increases The Demand For Loanable Funds.

124. An Increase In Government Borrowing Increases The Supply Of Loanable Funds.

125. The Federal Budget Has Been In Deficit Each Year Since The Beginning Of The 1970s.

Chapter 15

Social Security And Medicare: How Secure Is Our Safety Net For The Elderly?

Multiple Choice Questions

1. Government Programs That Guarantee Citizens Financial Benefits For Events Beyond Their Personal Control And That Are Financed Through Tax Revenues Are Called
A. Social Insurance Programs
B. Entitlement Programs
C. Private Insurance Programs
D. Welfare Programs
E. Transfer Programs

2. The Largest Social Insurance Program In The United States Is
A. Temporary Assistance For Needy Families
B. Social Security
C. Medicaid
D. Federal Flood Insurance
E. Job Corps

3. The Most Significant Factor That Threatens The Financial Stability Of The Social Security System Is The
A. Increasing Number Of Young Workers
B. Relatively High Rates Of Social Security Taxes
C. Population Bulge Created By The “Baby Boom” Generation
D. Generosity Of Current Social Security Benefits
E. Threat Of Foreign Workers Entering The U.S. Due To Nafta

4. Which Of The Following Nations Was The First To Offer Its Citizens A Modern Social Insurance Program?
A. United States
B. Great Britain
C. Russia
D. Germany
E. Japan

5. In The United States, Social Security Was Established In When President Signed The Social Security Act Into Law.
A. 1903; Theodore Roosevelt
B. 1929; Herbert Hoover
C. 1965; Lyndon Johnson
D. 1865; Abraham Lincoln
E. 1935; Franklin Roosevelt

6. Which Of The Following Statements Is Concerning The Scope Of The Social Security Program?
A. Social Security Has Narrowed Its Scope Over Time To Focus On The Economic Stability Of The Individual
B. The Scope Of Social Security Has Remained Constant Throughout Its History
C. Social Security Has Broadened Its Scope Over Time To Focus On The Economic Stability Of The Family
D. The Scope Of Social Security Has Always Focused On The Family Unit
E. None Of The Above

7. How Many Americans Receive A Monthly Check From The Social Security Administration?
A. Fewer Than 10 Million
B. More Than 50 Million
C. About 27 Million
D. Roughly 38 Million
E. More Than 100 Million

8. As Originally Designed, Social Security Was To Be Financed As A
A. Private Insurance Program
B. Pure Income Transfer Program
C. Pay-As-You-Go Insurance Program
D. Fully-Funded Insurance Program
E. Means-Tested Benefits Program

9. How Are Social Security Tax Revenues Allocated Today?
A. They Are Used To Pay Today’s Social Security Beneficiaries, And Any Extra Is Placed Into The Social Security Trust Fund
B. All Of Today’s Revenues Are Placed In The Social Security Trust Fund To Pay For Tomorrow’s Beneficiaries
C. Tax Revenues Are Placed Into Accounts For Each Worker Who Will Draw Upon The Balance When They Retire
D. The Revenues Are Invested In Government Securities And In The Stock Market
E. No One Really Knows

10. Current Projections Estimate That The Social Security Trust Fund Will Be Completely Depleted
A. In Late 2003
B. During 2010-2020
C. In About 100 Years
D. Around 2100
E. Before 2040

11. Given The Way Social Security Is Financed, Which Of The Following Is ?
A. Social Security Results In A Transfer Of Income From The Old To The Young
B. Social Security Results In A Transfer Of Income From The Young To The Old
C. Social Security Has A Neutral Effect On The Nation’s Income Distribution
D. The Purchasing Power Of The Elderly Has Been Diminished By Social Security Taxes
E. (A) And (D)

12. Social Security Taxes Are
A. Paid Only By Workers
B. Levied On Salaries And Wages
C. Paid Only By Employers
D. Paid By Both Workers And Employers
E. (B) And (D)

13. Currently, The Total Combined Tax Rate Collected By Social Security Is
A. 21.6% Of Earnings
B. 15.3% Of Earnings
C. 7.65% Of Earnings
D. 6.20% Of Earnings
E. 1.45% Of Earnings

14. Which Of The Following Is Concerning Social Security’s Retirement Benefit Structure?
A. All Eligible Retired Workers Are Entitled To The Same Benefits
B. High Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Low Wage Workers
C. Retired Female Workers Are Entitled To Higher Benefits Than Retired Male Workers
D. Low Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Do High Wage Workers
E. Retired Workers Living In Cities Receive Larger Benefits Than Those Living In Rural Areas

15. Most Of Today’s College Student Population Will Be Eligible To Receive Full Social Security Retirement Benefits When They Reach The Age Of
A. 62
B. 65
C. 67
D. 70
E. 72

16. The Cost Of Living Adjustment (Cola) Employed By Social Security Is Based On The
A. Current Level Of Gdp
B. Local Rate Of Inflation
C. Consumer Price Index
D. Producer Price Index
E. Annual Poverty Threshold

17. How Many Elderly Households Receive Social Security Benefits?
A. More Than 90%
B. Less Than 50%
C. About 75%
D. Only About 15%
E. None Of The Above

18. Which Of The Following Statements Is ?
A. 20% Of Elderly Households Receive Social Security As Their Only Source Of Income
B. Approximately 90% Of Elderly Households Receive Social Security Benefits
C. Just Under 30% Of Elderly Households Receive Private Pension Benefits
D. For Nearly Two Thirds Of Elderly Households, Social Security Represents More Than 50% Of Total Income
E. None Of The Above. All Are

19. If People Choose To Work Fewer Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The
A. Substitution Effect
B. Bequest Effect
C. Income Effect
D. Wealth Effect
E. Real Wage Effect

20. If People Choose To Work More Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The
A. Substitution Effect
B. Bequest Effect
C. Income Effect
D. Wealth Effect
E. Real Wage Effect

21. Empirical Evidence Suggests That Social Security Has _______ The Overall Supply Of Labor.
A. Had No Effect On
B. Reduced
C. Increased
D. Stimulated
E. Done None Of The Above To

22. Social Security May Increase The Level Of Personal Saving Due To
A. The Retirement Effect
B. The Bequest Effect
C. The Wealth Substitution Effect
D. (A) And (B)
E. (B) And (C)

23. Empirical Studies Indicate That Social Security Has
A. Increased The Level Of Personal Savings
B. Had A Neutral Effect On The Level Of Personal Savings
C. Reduced The Level Of Personal Savings
D. Increased The Number Of Older Workers
E. Raised The Average Age At Which Workers Choose To Retire

24. The Effect Of Social Security On Personal Savings Is Important Because
A. The Level Of Savings Determines The Pool Of Investment Funds
B. Savings Are Necessary To Finance The Social Security Trust Fund
C. Personal Savings Are Negatively Related To Economic Growth
D. Savings Are A Major Source Of Income For All Elderly Households
E. The Level Of Savings Reflects The Magnitude Of Future Consumption

25. Why Can’t Social Security Rely On A Strict Pay-As-You-Go Financial Structure?
A. The Current Generation Of Workers Is Too Small To Support Future Retirees
B. A Pay-As-You-Go Financial Structure Is Inherently Unstable
C. The Current Generation Of Retirees Will Bankrupt The System Before The “Baby Boom” Retires
D. Inflation Erodes The Value Of Contributions That Must Be Saved To Pay Future Retirees
E. None Of The Above

26. The Most Simple And Direct Way To Postpone The Looming Social Security Financial Crisis Is To
A. Invest Social Security Taxes In The Stock Market
B. Raise Social Security Taxes And/Or Lower Benefits
C. Privatize The Social Security Administration
D. Eliminate The Social Security System And Force Everyone To Buy Private Insurance
E. Subsidize Social Security With General Tax Revenues

27. The Most Significant Argument Against Privatizing Social Security Is That
A. Benefits Would Have To Be Cut
B. It Has Not Worked In Other Countries
C. Future Benefits Levels Cannot Be Guaranteed
D. It Is Too Complicated To Be Practical
E. Taxes Would Have To Be Raised

28. Why Do Some People Favor Investing The Social Security Trust Fund In The Stock Market?
A. Because For Most Beneficiaries The Historic Return On Their Social Security Taxes Has Been Less Than What Would Have Been Earned If Those Dollars Were Invested In The Stock Market
B. Because Investment In The Stock Market Will Guarantee Higher Rates Of Return Over The Long Run For All Retirees
C. Because Investments In The Stock Market Carry Very Little Risk And Offer The Potential For Excessive Short-Run Gains With Little Or No Potential For Loss
D. Because The Stock Market Offers The Safest Form Of Investment
E. All Of The Above

Questions 29 – 33 Refer To The Graph Below.

29. The Results Of The Retirement Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

30. The Results Of The Bequest Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

31. The Results Of The Wealth Substitution Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

32. A Change In Consumption From Ce To Cf Could Be Caused By Which Of The Following?
A. The Bequest Effect
B. The Retirement Effect
C. The Wealth Substitution Effect
D. All Of The Above
E. None Of The Above

33. A Movement From Point E To Point F As A Result Of Social Security Would Result In Which Of The Following Costs To Society? A Long-Run Movement To
A. Ppc Cd Rather Than Gh
B. Ppc Gh Rather Than Cd
C. Point B Rather Than Point A
D. Point A Rather Than Point B
E. If To Cf

34. If I Start Saving More During My Working Life Because I Anticipate Retiring Earlier Thanks To Social Security, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

35. If I Spend More Each Year Because I Know That I Will Receive Social Security Payments When I Retire, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

36. If I Put Extra Into A Savings Account So That I Can Leave Assets To My Children To Compensate Them For Their Payments Into The Social Security System, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

37. If Inflation Increases, What Will Happen To The Social Security Cola? It Will
A. Expire
B. Increase
C. Decrease
D. Be Divided Among Social Security Recipients
E. Be Added To The Social Security Trust Fund

38. “An Agreement To Pay A Premium To A Company In Return For A Guarantee Of Financial Benefits In The Event Of An Undesired Circumstance” Defines
A. Social Insurance
B. Private Insurance
C. Private Investment
D. Asset Management
E. Retirement Savings

39. Social Insurance Uses Tax Revenues To Guarantee Citizens Financial Benefits For Events Including
A. Old Age
B. Disability
C. Poor Health
D. Death Of A Spouse
E. All Of The Above

40. If A Program’s Benefits Are Funded By Interest Earned On Accumulated Payments, It Is Which Type Of System?
A. An Investment System
B. A Fully Funded Scheme
C. An Interest Scheme
D. A Pay-As-You-Go System
E. An Endowed System

41. If A Program’s Benefits Are Funded Out Of Current Payments, It Is Which Type Of System?
A. An Investment System
B. A Fully Funded Scheme
C. A Pyramid Scheme
D. A Pay-As-You-Go System
E. An Endowed System

42. When Was The Medicare Program Established?
A. 1935
B. 1945
C. 1955
D. 1965
E. 1975

43. Today, The Health Care Sector Of The U.S. Economy Accounts For About Percent Of National Income.
A. 3
B. 5
C. 8
D. 12
E. 18

44. A Person With Health Insurance Will Tend To
A. Have A Lower Demand For Health Care Services
B. Have A Much Greater Concern For Preventive Care
C. Buy A Lower Quantity Of Health Care At A Higher Price
D. Demand More Health Care Services Than A Person Without Insurance
E. Do None Of The Above

45. The Payment And Delivery Of Health Care Service Under A Managed Care System Is Based On
A. A Fee-For-Service Market Principle
B. A Prearranged Schedule Of Fixed Prices
C. The Ability To Pay Principle
D. Price Negotiation Between The Consumer And Provider
E. None Of The Above

46. The Medicare Program
A. Was Established As A Socialistic Takeover Of Health Care Providers
B. Has Reduced The Demand For Health Care Services
C. Affects Persons 65 And Older, Regardless Of Income
D. Enrolls All Poor People Regardless Of Age
E. Does None Of The Above

47. Part C Of The Medicare Program (Medicare + Choice)
A. Provides Health Care Plan Choices To The Beneficiaries Of Medicare
B. Restricts Medicare Beneficiaries To A Simple Fee-For-Service Health Care Plan
C. Provides Comprehensive Health Insurance Coverage For All Poor People
D. Is Only Available To Disabled Retirees Receiving Social Security
E. Does None Of The Above

48. A Potential Benefit Of Managed Care Plans To Medicare Enrollees Is That These Plans
A. Typically Require Less Cost Sharing
B. Provide A Higher Quality Of Health Care
C. Provide A Greater Quantity Of Health Care
D. Require Less Paper Work
E. Do All Of The Above

49. Part A Of The Medicare Program (Hospital Insurance) Is Financed Primarily By
A. A Monthly Premium
B. A 2.9% Tax Levied On Wages And Salaries
C. An Allocation From General Tax Revenues
D. User Fees Paid By Patients
E. Insurance Deductibles

50. What Percent Of The Average Health Care Dollar Spent In The United States Comes Directly From The Consumer?
A. 100
B. 83
C. 50
D. 34
E. 12

51. Which Of The Following Factors Has Contributed Most To The Tremendous Increase In Health Care Expenditures Experience In The U.S. During The Past Fifty Years?
A. Health Care Inflation
B. The Aging Of The Population
C. Increased Public Support For Health Care
D. Private Health Insurance
E. Growth In Medicaid

52. Which Of The Following Receives The Largest Share Of Expenditures Made On Health Care In The United States?
A. Physicians
B. Nursing Homes
C. Hospitals
D. Personal Health Care Product And Service Providers
E. Pharmacies

53. In A Fee-For-Service Health Care System, Consumers Pay The
A. Insurance Company A Fee Every Time They Use A Service
B. Full Cost Of The Services They Receive
C. Hmo When They Receive Care
D. Doctor A Small Payment Called A “Co-Pay.”
E. Prearranged, Fixed Fee For Services They Receive

54. How Are Payments To Health Care Providers Determined Under A Managed Care System? By The
A. Government
B. Market
C. Insurance Company And The Provider
D. Provider And The Consumer
E. Ama (American Medical Association)

55. Which Of The Following Is An Example Of A Managed Health Plan?
A. Hmo
B. Ppo
C. Pos
D. Physicians Network
E. All Of The Above

Questions 56 – 59 Refer To The Graph Below.

56. With A Market Allocation Of Medical Services, Equilibrium Quantity Will Be
A. 0
B. 50
C. 2,000
D. 2,800
E. 4,000

57. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Demanded?
A. 0
B. 2,000
C. 2,800
D. 4,000
E. An Infinite Amount

58. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Supplied?
A. 0
B. 50
C. 2,000
D. 2,800
E. 4,000

59. The Supply Of Medical Services In This Market Is
A. Elastic
B. Inelastic
C. Unit Elastic
D. Price Elastic
E. Infinite

60. Under Most Insurance Systems, Patients Are Responsible For Which Of The Following Payments For Health Care Services?
A. Deductible
B. Co-Insurance
C. Fee-For-Service Charges
D. All Of The Above
E. None Of The Above

61. A Patient May Be Required To Pay A Percentage Of The Cost Of Their Health Care Above The Fixed Fee They Pay. This Is Known As
A. The Deductible
B. Co-Insurance
C. Fee-For-Service
D. The Health Care Tax
E. Medicare Tax

62. If Your Insurance Company Agrees To Pay A Fixed Fee For You To Receive A Given Treatment (For Example, $5,000 For An Appendectomy), The Company Is Using Which Of The Following?
A. A Fee-For-Service System
B. A Managed Care System
C. A Co-Insurance System
D. A Prospective Payment System
E. A Social Insurance System

63. If Your Deductible Is $200 And You Pay Co-Insurance Of 20%, How Much Will You Have To Pay For A $3,000 Hospital Stay?
A. $200
B. $560
C. $600
D. $760
E. $800

64. If Your Deductible Is $400 And You Have Co-Insurance Of 25%, How Much Will You Have To Pay For A $5,000 Hospital Stay?
A. $400
B. $1,150
C. $1,250
D. $1,550
E. $1,650

Questions 65 – 69 Refer To The Graph Below.

65. If Patients Pay The Full Price For Office Visits, What Price Will Be Charged In The Market?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

66. If Patients Pay The Full Price For Of Office Visits, How Many Office Visits Will They Make?
A. 0
B. 30
C. 50
D. 70
E. More Than 70

67. If A Third Party Guarantees A Maximum Patient Price Of $25, What Quantity Of Office Visits Will Patients Demand?
A. 0
B. 30
C. 50
D. 70
E. More Than 70

68. If A Third Party Guarantees A Maximum Patient Price Of $25, What Total Price Must Be Paid Per Office Visit To Assure The Quantity Of Office Visits Demanded Will Be Provided?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

69. If A Third Party Guarantees A Maximum Patient Price Of $25, How Much Must The Third Party Pay Per Office Visit?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

70. Health Insurance Results In
A. An Increase In The Quantity Of Health Care Demanded
B. An Increase In The Quantity Of Health Care Provided
C. An Increase In The Total Cost Of Providing Health Care
D. All Of The Above
E. None Of The Above

71. The Medicare Modernization Act, Passed In 2003, Established
A. The First Long Term Care Coverage For Medicare Recipients
B. Lowered Deductibles For Most Medicare Recipients
C. Added A Prescription Drug Benefit To The Medicare Program
D. Instituted Stringent Price Controls On The Fees Doctors And Hospitals Can Charge
E. Restricted The Benefits That High Income Medicare Recipients Can Receive

72. The Prescription Drug Benefit That Is Part Of The Medicare Modernization Act Of 2003 Requires That Recipients Pay:
A. A Monthly Premium
B. A Co-Pay
C. A Deductible
D. All Of The Above
E. None Of The Above, These Benefits Are Provided To Recipients At No Charge

True / False Questions

73. Social Insurance Is Private Insurance Purchased By The Government.

74. Programs That Provide Citizens With Benefits For Events That Are Beyond An Individual Person’s Control Are Called Social Insurance Programs.

75. Both Social Security And Medicare Are Social Insurance Programs.

76. The Major Underlying Factor That Endangers Social Security’s Financial Stability Is The Population Bulge Created By The “Baby Boom” Generation.

77. The United States Was The First Nation To Provide Social Insurance Programs For Its Citizens.

78. The Original Design Of The Social Security System Called For A Pay-As-You-Go Financing Scheme.

79. The Social Security Act Was Signed Into Law By President Franklin Roosevelt In 1935.

80. Over Time, Social Security Has Evolved To Focus More On The Family And Less On The Individual.

81. Currently, About 20 Million Americans Receive Social Security Benefits.

82. All American Citizens Are Entitled To Receive Social Security And Medicare Benefits When They Retire.

83. Today, Social Security Is Financed Under A Pay-As-You-Go Financial System.

84. All Current Social Security Taxes Collected By The Government Are Used To Pay Current Beneficiaries, With Nothing Left Over.

85. Social Security And Medicare Are Financed Through A Flat Tax On Wages Paid Up To A Predetermined Limit.

86. Workers And Their Employers Share The Burden Of Social Security Taxes.

87. The Social Security Trust Fund Currently Has A Negative Balance.

88. Social Security Benefits Are Adjusted Each Year For Inflation Using The Consumer Price Index (Cpi).

89. About 50% Of All Elderly Households Receive Some Form Of Social Security Benefits.

90. Today, In The Aggregate, Social Security Accounts For Over 35% Of Senior Citizens’ Income.

91. Without Social Security, Nearly 50 Percent Of Elderly Households Would Live Below The Poverty Threshold.

92. The Substitution Effect Of Social Security Taxes Causes Some People To Work More Hours.

93. The Income Effect Of Social Security Taxes Causes Some People To Work Less Hours.

94. Studies Show That Social Security Has Caused Some Workers To Retire Earlier Than They Would If Social Security Did Not Exist.

95. The Bequest Effect Of Social Security Causes Some People To Save Less During Their Lifetimes.

96. The Empirical Evidence Suggests That, Overall; Social Security Causes People To Increase Their Personal Savings.

97. Because Social Security Increases Savings, More Funds Are Available For Investment In The Overall Economy.

98. Current Estimates Indicate That The Social Security Trust Fund Will Be Depleted Before 2040.

99. A Modest Increase In Taxes Could Postpone Social Security’s Financial Crisis For Decades.

100. Privatization Of The Social Security System Would Reduce The Financial Risks Faced By Retiring Workers.

101. Chile And Other Nations Have Successfully Privatized All Or Part Of Their Social Insurance Programs.

102. Oasdi Is Social Security’s Medical Insurance Program.

103. The Most Important Factor Explaining The Growth In Personal Health Care Expenditures On Hospital And Physician Services Is Higher Prices For These Services.

104. Third-Party Payments Increase The Efficiency Of Medical Markets.

105. A Dominant Feature Of The U.S. Health Care Industry Is Price Competition Among Providers.

106. Medicare And Medicaid Have Reduced The Demand For Health Care Services.

107. The Purpose Of A Prearranged Payment And Delivery System, Such As A Managed Care Plan, Is To Take Away Any Incentive For The Provider To Supply Unnecessary Care.

108. The Demand For Health Services Is Characterized By Well-Informed Consumers.

109. The Medicare Program Affects Persons Aged 65 And Older, Regardless Of Their Income Level.

110. A Consumer With Health Insurance Is Likely To Buy More Health Services Than One Who Is Not Insured.

111. A Reduction In The Price Of Medical Services Will Cause The Demand Curve To Shift To The Right.

112. Health Care Providers Are Paid The Amount Of A Patient’s Deductible By The Health Insurance Company.

113. The Amount A Patient Must Pay Above The Deductible Is Known As Co-Insurance.

114. Projections Indicate That The Medicare Hi Program Will Be Depleted Of Funds By 2025.

115. More Than 70% Of All Privately Insured Employees Are Covered By Managed Care Plans.

116. The Medicare Program Could Be Secured By An Increase In The Payroll Tax That Supports The Program.

117. The Medicare Program Could Be Secured By Increasing Premiums, Deductibles And Co Payments.

118. Medicare’s Fee-For-Service Plan Provides Incentives For Supplying Excessive Services.

119. Managed Care Plans Provide Incentives For Supplying Excessive Services.

120. Third-Party Payments For Health Care Increase The Quantity Of Services Demanded.

121. Third-Party Payments For Health Care Decrease The Price Consumers Pay For Services.

122. The Fee-For-Service Delivery And Payment System Is The Primary Means By Which Most Elderly Americans Receive Their Health Care.

123. Third-Party Payments For Health Care Result In Less Usage Of The Health Care System.

124. Managed Care Leads To Higher Costs Of Providing Health Care Services.

125. Investments Of Social Security Tax Payments Result In High Returns On The Contributions Made By Taxpayers.

ECO 305 Week 11 Quiz – Strayer University New

ECO/305 Week 11 Quiz – Strayer

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Quiz 10 Chapter 16 and 17

MACROECONOMIC POLICY IN AN OPEN ECONOMY

MULTIPLE CHOICE

1. A nation experiences internal balance if it achieves:
a. Full employment
b. Price stability
c. Full employment and price stability
d. Unemployment and price instability

2. A nation experiences external balance if it achieves:
a. No net changes in its international gold stocks
b. Productivity levels equal to those of its trading partners
c. An increase in its money supply equal to increases overseas
d. Equilibrium in its balance of payments

3. A nation experiences overall balance if it achieves:
a. Balance-of-payments equilibrium, full employment, and price stability
b. Balance-of-payments equilibrium, maximum productivity, and price stability
c. Full employment, price stability and no change in its money supply
d. Full employment, price stability, and maximum productivity

4. Most industrial countries generally considered ____ as the most important economic goal.
a. External balance
b. Internal balance
c. Maximum efficiency for business
d. Maximum efficiency for labor

5. Which policies are expenditure-changing policies?
a. Currency devaluation and revaluation
b. Import quotas and tariffs
c. Monetary and fiscal policy
d. Wage and price controls

6. Which policy is an expenditure-switching policy?
a. Increase in the money supply
b. Decrease in government expenditures
c. Increase in business and household taxes
d. Decrease in import tariffs

7. An expenditure-increasing policy would consist of an increase in:
a. Import tariffs
b. Import quotas
c. Governmental taxes
d. The money supply

8. An expenditure-reducing policy would consist of a decrease in:
a. The par value of a currency
b. Government expenditures
c. Import duties
d. Business or household taxes

9. Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to combat recession. These policies will also:
a. Increase both imports and exports
b. Increase exports and reduce imports
c. Reduce a balance-of-payments surplus
d. Reduce a balance-of-payments deficit

10. Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to combat inflation. These policies will also:
a. Reduce a balance-of-payments surplus
b. Reduce a balance-of-payments deficit
c. Increases both imports and exports
d. Decrease both imports and exports

11. The appropriate expenditure-switching policy to correct a current account surplus is:
a. Currency revaluation
b. Currency devaluation
c. Expansionary monetary policy
d. Contractionary fiscal policy

12. The appropriate expenditure-switching policy to correct a current account deficit is:
a. Contractionary monetary policy
b. Expansionary fiscal policy
c. Currency devaluation
d. Currency revaluation

13. Suppose the United States faces domestic recession and a current account deficit. Should the United States devalue the dollar, one would expect the:
a. Recession to become less severe–deficit to become less severe
b. Recession to become more severe–deficit to become less severe
c. Recession to become less severe–deficit to become more severe
d. Recession to become more severe–deficit to become more severe

14. Suppose the United States faces domestic inflation and a current account surplus. Should the United States revalue the dollar, one would expect the:
a. Inflation to become more severe–surplus to become less severe
b. Inflation to become less severe–surplus to become less severe
c. Inflation to become less severe–surplus to become more severe
d. Inflation to become more severe–surplus to become more severe

15. Suppose Brazil faces domestic recession and a current account surplus. Should Brazil revalue its currency, one would expect the:
a. Recession to become less severe–surplus to become less severe
b. Recession to become more severe–surplus to become more severe
c. Recession to become more severe–surplus to become less severe
d. Recession to become less severe–surplus to become more severe

16. Suppose that Brazil faces domestic inflation and a current account deficit. Should Brazil devalue its currency, one would expect the:
a. Inflation to become more severe–deficit to become less severe
b. Inflation to become more severe–deficit to become more severe
c. Inflation to become less severe–deficit to become less severe
d. Inflation to become less severe–deficit to become more severe

17. In a closed economy, which of the following will cause the economy’s aggregate demand curve to shift to the right?
a. decreases and wages and salaries paid to employees
b. increases in the prices of oil and natural gas
c. decreases in income taxes for households
d. decreases in the productivity of labor

18. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy’s expansionary effect on real output
b. cause aggregate demand to decrease, thus eliminating the policy’s expansionary effect on real output
c. have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect on real output
d. have conflicting effects on aggregate demand, thus strengthening the policy’s expansionary effect on real output

19. A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on:
a. Trade flows only
b. Capital flows only
c. both trade flows and capital flows
d. Neither trade flows nor capital flows

20. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy
a. cause aggregate demand to increase, thus strengthening the policy’s expansionary effect on real output
b. cause aggregate demand to decrease, thus eliminating the policy’s expansionary effect on real output
c. have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect on real output
d. have conflicting effects on aggregate demand, thus strengthening the policy’s expansionary effect on real output

21. A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession:
a. Expansionary fiscal policy
b. Expansionary monetary policy
c. Contractionary fiscal policy
d. Contractionary monetary policy

22. A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession:
a. Expansionary fiscal policy
b. Expansionary monetary policy
c. Contractionary fiscal policy
d. Contractionary monetary policy

23. Given an open economy with high capital mobility, all of the following statements are true except:
a. fiscal policy is strengthened under fixed exchange rates
b. monetary policy is weakened under fixed exchange rates
c. monetary policy is strengthened under floating exchange rates
d. fiscal policy is strengthened under floating exchange rates

24. Under a system of managed-floating exchange rates with heavy exchange rate intervention:
a. Fiscal policy is successful in promoting internal balance, while monetary policy is unsuccessful
b. Monetary policy is successful in promoting internal balance, while fiscal policy is unsuccessful
c. Both fiscal policy and monetary policy are successful in promoting internal balance
d. Neither fiscal policy nor monetary policy are successful in promoting internal balance

25. Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will cause
a. the dollar to appreciate and will decrease U.S. net exports
b. the dollar to appreciate and will increase U.S. net exports
c. the dollar to depreciate and will increase U.S. net exports
d. the dollar to depreciate and will decrease U.S. net exports

26. Given a system of floating exchange rates, a contractionary monetary policy by the Federal Reserve will cause
a. the dollar to appreciate and will decrease U.S. net exports
b. the dollar to appreciate and will increase U.S. net exports
c. the dollar to depreciate and will increase U.S. net exports
d. the dollar to depreciate and will decrease U.S. net exports

27. All of the following are obstacles to international economic policy coordination except:
a. Different national objectives and institutions
b. Different national political climates
c. Different phases in the business cycle
d. Different national currencies

28. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a rise in aggregate demand

29. At the ____, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S. dollar’s exchange value.
a. Plaza Agreement of 1985
b. Louvre Accord of 1987
c. Bonn Summit of 1978
d. Tokyo Summit of 1962

30. The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of:
a. Tariff trade barrier formation
b. Nontariff trade barrier formation
c. International economic policy coordination
d. Beggar-thy-neighbor policies

Exhibit 16.1

At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.

31. Refer to Exhibit 16.1. To help drive the dollar’s exchange value downward, the Federal Reserve would:
a. Reduce taxes
b. Increase taxes
c. Decrease the money supply
d. Increase the money supply

32. Refer to Exhibit 16.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar’s exchange value downward, it promotes an increase in the U.S.:
a. Rate of inflation
b. Budget deficit
c. Unemployment level
d. Economic growth rate

33. Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money supply leads to:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

34. Under a fixed exchange-rate system and high capital mobility, a contraction in the domestic money supply leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

35. Under a fixed exchange-rate system and high capital mobility, an expansionary fiscal policy leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

36. Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a:
a. Trade-account deficit and a capital-account surplus
b. Trade-account deficit and a capital-account deficit
c. Trade-account surplus and a capital-account surplus
d. Trade-account surplus and a capital-account deficit

37. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a fall in aggregate demand

38. Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency. This causes the
a. domestic money supply to decrease and a decline in aggregate demand
b. domestic money supply to increase and a decline in aggregate demand
c. domestic money supply to decrease and a rise in aggregate demand
d. domestic money supply to increase and a fall in aggregate demand

39. Assume a system of floating exchange rates. In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets. The result would be
a. a depreciation of the domestic currency and a rise in net exports
b. a depreciation of the domestic currency and a fall in net exports
c. an appreciation of the domestic currency and a rise in net exports
d. an appreciation of the domestic currency and a fall in net exports

40. Assume a system of floating exchange rates. In response to relatively high domestic interest rates, suppose that foreign investors place their funds in domestic capital markets. The result would be
a. a depreciation of the domestic currency and a rise in net exports
b. a depreciation of the domestic currency and a fall in net exports
c. an appreciation of the domestic currency and a rise in net exports
d. an appreciation of the domestic currency and a fall in net exports

41. When a nation realizes external balance
a. it can have a current account deficit
b. it can have a current account surplus
c. it has neither a current account deficit nor a current account surplus
d. Both a and b

42. Direct controls may take the form of
a. Tariffs
b. Export subsidies
c. Export quotas
d. All of the above

43. With a fixed exchange rate system, internal balance is most effectively achieved by using
a. Expansionary monetary policy to combat recession
b. Expansionary fiscal policy to combat inflation
c. Contractionary monetary policy to combat recession
d. Contractionary fiscal policy to combat recession

44. Policy coordination is complicated by
a. Different economic objectives
b. Different national institutions
c. Different phases in the business cycle
d. All of the above

TRUE/FALSE

1. A nation realizes internal balance if economy achieves full employment and price stability.

2. Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.

3. A nation realizes external balance when its current account is in equilibrium.

4. A nation realizes overall balance when it achieves full employment and current account equilibrium.

5. Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and imports.

6. Expenditure-switching policies include fiscal policy and monetary policy.

7. Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

8. Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported.

9. Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country’s aggregate demand for goods and services.

10. Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs, quotas, and subsidies.

11. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy’s expansionary effect.

12. Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy’s expansionary effect.

13. When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that is horizontal.

14. Changes in a country’s net exports, investment spending, or government spending will cause its aggregate demand curve to shift.

15. Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.

16. Given an open economy with high capital mobility, monetary policy is strengthened under fixed exchange rates.

17. Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit.

18. Exchange rate management policies require international policy coordination because a depreciation of one nation’s currency implies an appreciation of its trading partner’s currency.

19. Currency devaluation and revaluation primarily affect the economy’s current account and have secondary effects on domestic employment and inflation.

20. Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments.

21. The Group of five (G-5) nations include Japan, Germany, China, and Australia.

22. The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.

23. International policy coordination is plagued by differing national economic objectives, institutions, political climates, and phases in the business cycle.

24. The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress, promote world economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S. debt service.

SHORT ANSWER

1. What policy instrument should be used when demand-pull inflation exists?

2. What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary monetary policy is used?

ESSAY

1. Was the Plaza Agreement of 1985 a success?

2. What is international economic policy coordination?

CHAPTER 17—INTERNATIONAL BANKING: RESERVES, DEBT, AND RISK

MULTIPLE CHOICE

1. Which of the following assets makes use of the basket valuation technique?
a. Swap agreements
b. Oil facility
c. Buffer stock facility
d. Special drawing rights

2. Swap agreements are generally conducted by the:
a. Federal Reserve with foreign central banks
b. Federal Reserve with foreign commercial banks
c. U.S. Treasury with foreign central banks
d. U.S. Treasury with foreign commercial banks

3. Which of the following is a main central bank function of the International Monetary Fund?
a. The conduct of open market operations
b. The issuance of gold certificates
c. The provision of monetary policy for member nations
d. The granting of loans to member nations

4. The Federal Reserve’s swap network represents:
a. Efforts to stabilize only the value of the dollar
b. Efforts to stabilize only the value of foreign currencies
c. Long-term borrowing among countries
d. Short-term borrowing among countries

5. International trade and investment are most frequently financed by the U.S. dollar and the:
a. Japanese yen
b. British pound
c. Australian dollar
d. Swiss franc

6. The purpose of international reserves is to finance:
a. Short-term surpluses in the balance of payments
b. Long-term surpluses in the balance of payments
c. Short-term deficits in the balance of payments
d. Long-term deficits in the balance of payments

7. The currencies generally referred to as “reserve currencies” are the:
a. Japanese yen and U.S. dollar
b. Swiss franc and Japanese yen
c. British pound and U.S. dollar
d. Swiss franc and British pound

8. Which of the following does not represent a form of international liquidity?
a. IMF reserve positions
b. General arrangements to borrow
c. U.S. government securities
d. Reciprocal currency arrangements

9. Which of the following is not considered an “owned” reserve?
a. National currencies
b. Gold
c. Special drawing rights
d. Oil facility

10. Which of the following is not considered a “borrowed” reserve?
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangement

11. Eurodollars are:
a. Dollar-denominated deposits in overseas banks
b. European currencies used to finance transactions in the United States
c. Dollars that U.S. residents spend in Europe
d. European currencies used to finance imports from the United States

12. Which of the following is not a characteristic of the Eurodollar market? It:
a. Is mainly located in the United Kingdom and continental Europe
b. Operates as a financial intermediary, bringing together lenders and borrowers
c. Deals in interest-bearing time deposits and loans to governments
d. Grew in response to the deregulation of interest rate ceilings on U.S. savings accounts

13. Which of the following assets was (were) created in 1970 to provide additional international liquidity, in the belief that increasing world trade requires more liquidity for larger expected payments imbalances?
a. Eurodollar market
b. Special drawing rights
c. Reciprocal currency arrangements
d. General arrangements to borrow

14. Which of the following constitute(s) the largest component of the world’s international reserves?
a. Gold
b. Special drawing rights
c. IMF drawings
d. Foreign currencies

15. With an international gold standard, if a country ended up with a deficit from the balances on its current and capital accounts, it would:
a. Import gold to settle the balance
b. Export gold to settle the balance
c. Officially decrease the price of gold
d. Officially increase the price of gold

16. Which of the following is not a condition of the international gold standard? That a nation must:
a. Convert gold into paper currency, and vice versa, at a stipulated rate
b. Permit gold to be freely imported and exported
c. Tolerate wide fluctuations in its exchange rate
d. Define its monetary unit in terms of a stipulated amount of gold

17. All of the following exchange-rate systems require international reserves to finance balance-of-payments disequilibriums except:
a. Pegged or fixed exchange rates
b. Managed floating exchange rates
c. Adjustable pegged exchange rates
d. Freely floating exchange rates

18. A dollar shortage would indicate that the dollar is:
a. Undervalued in international markets
b. Overvalued in international markets
c. Overvalued in terms of gold
d. Overvalued in terms of special drawing rights

19. The U.S. gold outflow that began in the late 1940s and continued through the 1960s was due in part to:
a. Crawling pegged exchange rates
b. Freely floating exchange rates
c. An undervalued dollar
d. An overvalued dollar

20. The U.S. dollar glut of the 1960s was due in part to:
a. An undervalued dollar
b. An overvalued dollar
c. Freely floating exchange rates
d. Crawling pegged exchange rates

21. For developing countries such as Mexico and Brazil, severe economic problems in the 1980s were caused by:
a. A fall in the world demand for products produced by developing countries
b. High prices of basic raw materials and other commodities
c. Low real interest rates in the United States
d. High levels of income and imports for the United States

22. In response to the international debt problem, the United States set up a special fund in 1986 to help make up for lost oil revenues. Under the plan, the United States would make more money available as world oil prices fell. This plan was designed to help:
a. Argentina
b. Saudi Arabia
c. Mexico
d. Brazil

23. Which indicator of international debt burden schedules interest and principal payments on long-term debt as a percent of export earnings?
a. Debt service ratio
b. Debt-to-export ratio
c. Ratio of external debt to gross domestic product
d. Ratio of external debt to gross national product

24. Which term best describes the process in which the International Monetary Fund provides loans to countries facing balance-of-payments difficulties provided that they initiate programs holding promise of correcting these difficulties?
a. Conditionality
b. Debt service
c. Reciprocal currency arrangement
d. Swap agreement

25. All of the following are major goals of the International Monetary Fund except:
a. Promoting international cooperation among member countries
b. Fostering a multilateral system of international payments
c. Making long-term development and reconstruction loans
d. Promoting exchange-rate stability and the elimination of exchange restrictions

26. Which international reserve asset was officially phased out of the international monetary system by the United States in the early 1970s?
a. Special drawing rights
b. Swap agreements
c. General arrangements to borrow
d. Gold

27. Bilateral agreements between central banks, which provide for an exchange of currencies to help finance temporary balance-of-payments disequilibriums, are referred to as:
a. IMF drawings
b. Special drawing rights
c. Buffer stock facility
d. Swap agreements

28. Which organization is largely intended to make long-term reconstruction loans to developing nations?
a. Export-Import Bank
b. World Bank
c. International Monetary Fund
d. United Nations

29. “Owned” international reserves consist of:
a. Special drawing rights
b. Oil facility
c. IMF drawings
d. Reciprocal currency arrangements

30. “Borrowed” international reserves consist of:
a. IMF drawings
b. Foreign currencies
c. Gold
d. Special drawing rights

31. Concerning international lending risk of commercial banks, ____ refers to the probability that part/all of the interest/principal of a loan will not be repaid.
a. Country risk
b. Credit risk
c. Currency risk
d. Presidential risk

32. Concerning international lending risk of commercial banks, ____ is closely related to political developments in a borrowing country, especially the government’s views concerning international investments and loans.
a. Economic risk
b. Credit risk
c. Country risk
d. Currency risk

33. Concerning international lending risk of commercial banks, ____ is associated with possible changes in the exchange value of a nation’s currency.
a. Political risk
b. Country risk
c. Credit risk
d. Currency risk

34. To reduce their exposure to developing country debt, lending commercial banks have practiced all of the following except:
a. Making outright loan sales to other commercial banks
b. Reducing their capital base as a cushion against losses
c. Dealing in debt-for-debt swaps with foreign governments
d. Dealing in debt/equity swaps with foreign governments

35. To reduce losses on developing country loans, commercial banks sometimes sell their loans, at a discount, to a developing country government for local currency which is then used to finance purchases of ownership shares in developing country industries. This practice is known as:
a. Debt forgiveness
b. Debt buyback
c. Debt-for-debt swap
d. Debt/equity swap

36. Concerning international debt, ____ refers to a negotiated reduction in the contractual obligations of the debtor country and includes schemes such as markdowns and write-offs of debt.
a. Debt/equity swap
b. Debt-for-debt swap
c. Debt forgiveness
d. Debt sales

37. The exchange of borrowing country debt for an ownership position in the borrowing country is known as:
a. Debt forgiveness
b. Debt-for-debt swap
c. Debt reduction
d. Debt/equity swap

38. “Country risk” analysis is concerned with all of the following except:
a. Depreciation of the borrowing country’s currency
b. Political instability in the borrowing country
c. Economic growth in the borrowing country
d. External debt of the borrowing country

39. Debt reduction
a. Refers to any voluntary scheme that lessens the burden on the debtor nation
b. May be accomplished through debt rescheduling
c. May be achieved through debt/equity swaps
d. All of the above

40. Most analysts feel that the financial difficulties in East Asia were triggered by
a. Misallocation of investment
b. Unavailability of cheap foreign labor
c. Lack of alignment of the exchange rate with the dollar
d. Surpluses in the trade accounts of the Asian countries

41. A nation may experience debt-servicing problems because of
a. Pursuit of improper macroeconomic policies
b. Inadequate borrowing
c. Adverse economic events
d. Both a and c

42. Swap arrangements
a. Are agreements between governments
b. Require repayment within a stipulated period
c. Are usually multilateral agreements
d. Are never initiated by telephone

TRUE/FALSE

1. Under a system of fixed exchange rates, international reserves are needed to bridge the gap between monetary receipts and monetary payments.

2. International reserves allow a country to finance disequilibria in its balance-of-payments position.

3. An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.

4. With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.

5. When exchange rates are fixed by central bankers, the need for international reserves disappears.

6. When exchange rates are fixed by central bankers, international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.

7. There exists a direct relationship between the degree of exchange rate flexibility and the need for international reserves.

8. With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from D0 to D1.

Figure 17.1 Foreign Exchange Market

9. Refer to Figure 17.1. Under a fixed exchange rate system, U.S. monetary authorities would have to supply 8 million pounds in exchange for dollars to keep the exchange rate at $3 per pound.

10. Refer to Figure 17.1. If the exchange rate was allowed to rise to $4 per pound, U.S. monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

11. Refer to Figure 17.1. Under a floating exchange rate system, the exchange rate would rise to $4 and U.S. monetary authorities would have to supply 4 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

12. To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.

13. The greater a nation’s propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.

14. The demand for international reserves is negatively related to the level of world prices and income.

15. The demand for international reserves tend to increase with the level of world income and trade activity.

16. If a nation with a balance-of-payments deficit is willing and able to initiate quick actions to increase export receipts and decrease import payments, the amount of international reserves needed will be relatively large.

17. The supply of international reserves consists of owned reserves and borrowed reserves.

18. Foreign currencies constitute the smallest component of the world’s international reserves.

19. Gold constitutes the largest component of the world’s international reserves.

20. The U.S. dollar has been considered a reserve (key) currency because trading nations have been willing to hold it as an international reserve asset.

21. The U.S. dollar, Japanese yen, British pound, and Mexican peso are the major reserve currencies of the international monetary system.

22. By the 1990s, the British pound had replaced the U.S. dollar as the world’s key currency.

23. A goal of the International Monetary Fund is to make short-term loans to member nations so as to allow them to correct balance of payments disequilibriums without resorting to measures that would destroy national prosperity.

24. When granting loans to financially troubled nations, the International Monetary Fund requires some degree of conditionality, meaning that the borrowing nation must agree to implement economic policies as mandated by the IMF.

25. The International Monetary Fund has sometimes demanded that financially-troubled nations, that borrow from the IMF, undergo austerity programs including slashing of public spending and private consumption.

26. The main purpose of the International Monetary Fund is to grant long-term loans to developing nations to help them finance the development of infrastructure such as roads, dams, and bridges.

27. Gold is currently the most widely used asset in the international monetary system.

28. In 1974 the United States revoked a 41-year ban on U.S. citizen’s ownership of gold.

29. In 1975 the official price of gold was abolished as the unit of account for the international monetary system. As a result, gold was demonetized as an international reserve asset.

30. In the 1970s, the major industrial countries abandoned the managed-floating exchange rate system and adopted a system of fixed exchange rates tied to the price of gold.

31. Created by the International Monetary Fund, special drawing rights (SDRs) are unconditional rights to draw currencies of other nations, thus enabling countries to finance their current-account deficits.

32. The value of the SDR is tied to a currency basket consisting of the U.S. dollar, German mark, Japanese yen, French franc, and British pound.

33. The SDR has replaced the dollar, yen, and mark as the key asset of the international financial system.

34. Because the value of the SDR is tied directly to the value of the U.S. dollar, a 10 percent dollar depreciation would result in a 10 percent decrease in the SDR’s value.

35. A main purpose of the International Monetary Fund is to make loans of foreign currencies to member countries which are experiencing current-account surpluses.

36. When a deficit nation borrows from the International Monetary Fund, it purchases with its currency the foreign currency required to help finance the payments deficit.

37. The so-called General Arrangements to Borrow provide a permanent increase in the supply of international reserves.

38. Swap arrangements are bilateral agreements between central banks to allow countries to temporarily borrow funds to ease current-account deficits and discourage speculative capital flows.

39. IMF drawings, swap arrangements, buffer stock facility, and compensatory financing for exports are classified as owned reserves rather than borrowed reserves.

40. Concerning international lending risk, credit risk refers to the probability that part or all of the interest rate or principal of a loan will not be repaid.

41. Concerning international lending risk, country risk refers to the risk that part or all of the interest or principal of a loan will not be repaid.

42. Concerning international lending risk, currency risk is the risk of asset losses due to changing currency values.

43. A country with a high debt/export ratio and a high debt service/export ratio would likely be considered as an attractive place in which to invest by foreign residents.

44. A debt buyback is a debt-reduction technique in which a government of a debtor nation buys loans from commercial banks at a discount.

45. Under a debt-for-debt swap, a commercial bank sells its loans at a discount to a developing country government for local currency which it then uses to finance an equity investment in the debtor country.

46. A debt-equity swap results in a trade surplus nation forgiving the loans made to a trade-deficit nation.

47. Eurocurrencies are deposits, denominated and payable in dollars and other foreign currencies, in banks outside the United States, primarily in London, the market’s center.

SHORT ANSWER

1. Why do countries hold international reserves?

2. How can a bank reduce its exposure to the debt of developing nations?

ESSAY

1. Describe the eurocurrency market.

2. Are international reserve needs different for different exchange rate regimes?

ECO 405 Week 9 Quiz – Strayer University New

ECO/405 Week 9 Quiz – Strayer

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Quiz 8 Chapter 11 and 12

Economic Growth: Why Is The Economic Road So Bumpy?

Multiple Choice Questions

1. Which Of The Following Is Consistent With Economic Growth?
A. Lower Unemployment
B. Increased Gdp
C. Increased Aggregate Demand
D. Increased Sales
E. All Of The Above

2. Why Is Economic Growth An Important Economic And Social Issue?
A. Economic Growth Leads To Improvements In Our Standard Of Living
B. Lower Levels Of Unemployment And Poverty Can Be Achieved Through Economic Growth
C. A Growing Economy Provides Consumers With More Choices And Opportunities
D. All Of The Above
E. Economic Growth Is Not An Important Economic Issue

3. Which Of The Following Statements Is About Economic Growth?
A. Economic Growth Is A Short-Run Process
B. Growth Of An Economy Is Generally A Smooth Process That Occurs Over Time
C. Economic Growth Is A Long-Run Process Resulting From The Compounding Of Many Events
D. To Measure Economic Growth, Economists Analyze Changes In The National Debt
E. The U.S. Economy Has Never Experienced A Year Of Negative Economic Growth

4. Which Of The Following Is The Most Commonly Used Measurement Of Economic Growth? Changes In
A. Real Gdp
B. The Money Supply
C. Nominal Gdp
D. The Federal Government Debt
E. The Level Of International Trade

5. Why Do Small Differences In Economic Growth Rates Today Result In Significant Differences In The Level Of Economic Activity In The Future?
A. Growth Rates Discount Over Time
B. Economic Growth Compounds Year After Year
C. Economics Grow In An Arithmetic Fashion
D. Business Cycles Are Less Likely At Higher Rates Of Growth
E. All Of The Above

6. Countries A And B Start Out With Real Gdp Equal To $1,000. If Country A Grows At A Rate Of 5% While Country B Grows At A Rate Of 10%, What Is Country A’s Level Of Real Gdp After 3 Years?
A. $1,000
B. $1,050
C. $1,158
D. $1,500
E. $2,500

7. Countries A And B Start Out With Real Gdp Equal To $1,000. If Country A Grows At A Rate Of 5% While Country B Grows At A Rate Of 10%, What Is Country B’s Level Of Real Gdp After 3 Years?
A. $1,000
B. $1,100
C. $1,210
D. $1,300
E. $1,331

8. Of The Following, Which Of The Following Values Most Closely Approximates The Average Annual Rate Of Growth For The U.S. Economy Since 1960?
A. 1.65%
B. 10.22%
C. 5.35%
D. 4.02%
E. 3.26%

9. Which Decade Resulted In The Lowest Average Annual Rate Of Economic Growth In The U.S.?
A. 1950s
B. 1960s
C. 1970s
D. 1980s
E. Unknown

10. Which Of The Following Decades Had The Highest Average Annual Rate Of Economic Growth In The U.S.?
A. 1930s
B. 1960s
C. 1970s
D. 1980s
E. 1990s

11. What Term Is Used To Describe An Erratic Short-Run Fluctuation In Economic Activity Around The Long-Run Trend?
A. Economic Depression
B. Economic Boom
C. Business Cycle
D. Recession
E. Diminishing Returns

12. Which Of The Following Is Not A Phase Of Every Business Cycle?
A. Trough
B. Expansion
C. Contraction
D. Depressions
E. Peak

13. Which Of The Following Lists The Four Phases Of The Business Cycle In The Correct Sequence?
A. Expansion, Peak, Contraction, Trough
B. Expansion, Contraction, Peak, Trough
C. Expansion, Peak, Contraction, Depression
D. Expansion, Peak, Depression, Trough
E. Peak, Recession, Trough, Depression

14. Which Phase Of The Business Cycle Best Describes An Economy That Is Experiencing A Positive Rate Of Economic Growth?
A. Expansion
B. Peak
C. Contraction
D. Trough
E. Depression

15. When The Economy Ends An Expansion, It Enters Which Phase Of The Business Cycle?
A. Expansion
B. Peak
C. Contraction
D. Trough
E. Depression

16. A Decline In The Level Of Economic Activity Occurs During Which Phase Of The Business Cycle?
A. Expansion
B. Peak
C. Contraction
D. Trough
E. Depression

17. When Economic Output Hits A Short-Run Economic Low, The Economy Is In Which Phase Of The Business Cycle?
A. Expansion
B. Peak
C. Contraction
D. Trough
E. Depression

18. An Exceptionally Strong And Prolonged Contraction Is Known As
A. A Trough
B. A Recession
C. An Economic Bust
D. A Super Contraction
E. A Business Cycle

19. The Last Depression Experienced By The U.S. Economy Occurred
A. During The 1970s
B. In 1982
C. During The 1930s
D. Between 1974-1975
E. In 1990

20. What Is The Average Length Of A Typical Business Cycle In The Modern U.S. Economy?
A. 12 Months
B. 36 Months
C. 60 Months
D. 95 Months
E. 120 Months

21. Which Group Is Responsible For Announcing The Dates For Each Phase Of A U.S. Business Cycle?
A. The Federal Reserve
B. The National Bureau Of Economic Research
C. The Department Of Commerce
D. The Bureau Of Labor Statistics
E. The Federal Business Cycle Committee

22. The Most Commonly Used Tool To Forecast Future Changes In Economic Activity Is The
A. Leading Economic Indicators Index
B. Supply Of Money
C. Unemployment Rate
D. Lagging Economic Indicators Index
E. Federal Budget Deficit

23. The Economic Variables That Make Up The Leading Economic Indicators Index Tend To Move In The ______ Direction As Overall Economic Output And Do So _____ Changes In Real Gdp.
A. Opposite; Prior To
B. Same; After
C. Opposite; After
D. Same; Prior To
E. Same; Simultaneously As

24. Which Of The Following Is Not About Business Cycles?
A. All Business Cycles Have Four Distinct Phases
B. The Average Length Of A U.S. Business Cycle Is About 60 Months
C. Since 1960, The U.S. Has Experienced Six Complete Business Cycles
D. The Last Economic Depression In The U.S. Occurred In The 1930s
E. The Turning Points Of A Business Cycle Can Be Easily Predicted

25. What Do You Call Business Cycle Theories Based On The Belief That Economic Activity Follows General Trends Of Optimism And Pessimism?
A. Theories Of Expectations
B. Real Business Cycle Theories
C. Theories Of Innovation
D. Theories Of Externalities
E. Sunspot Theories

26. Which Of The Following Economists Is Associated With The Business Cycle Theory Of Innovations?
A. John Maynard Keynes
B. William Stanley Jones
C. Joseph Schumpeter
D. Ansel Sharp
E. Adam Smith

27. Monetary Theories Of The Business Cycle Postulate That Cycles Are Strongly Influenced By The Policy Actions Of The
A. U.S. Congress
B. Federal Reserve
C. World Trade Organization
D. National Bureau Of Economic Research
E. U.S. Department Of Commerce

28. Which Of The Following Focuses Primarily On Aggregate Supply Variables?
A. Theory Of Expectations
B. Exogenous Theories
C. Monetary Theories
D. Real Business Cycle Theories
E. Jevons’ Sunspot Theory

29. What Was The First Theory Put Forth By An Economist To Explain The Phenomena Of Business Cycles?
A. Inventory Theory
B. Schumpeter’s Theory Of Innovation
C. Real Business Cycle Theories
D. Theory Of Expectations
E. Jevons’ Sunspot Theory

30. What Are The Two Primary Determinants Of Economic Growth?
A. The Availability Of Resources And Productivity Factors
B. Technology And Money
C. The Quantity Of Capital And The Quantity Of Money
D. The Ability To Trade And The Size Of The Labor Force
E. Comparative Advantage And The Law Of Diminishing Returns

31. What Is The Result Of A Growing Labor Force?
A. Lower Rates Of Interest In The Capital Market
B. Higher Rates Of Unemployment
C. The Economy’s Production Possibilities Curve Shifts Outward
D. The Economy’s Production Possibilities Curve Shifts Inward
E. The Economy’s Rate Of Growth Must Slow To Accommodate More People

32. Which Of The Following Terms Is Used To Describe The Purchase Of Capital?
A. Savings
B. Consumption
C. Technology
D. Investment
E. Production

33. Why Does Spending On Capital Tend To Increase Economic Growth More Than Spending Of Consumption Goods? Because
A. Capital Lasts Longer Than Consumer Goods
B. Capital Can Be Used To Produce Future Goods And Services
C. Capital Puts Technology To Use
D. People Prefer To Invest In Capital In Order To Generate Income
E. Capital Purchases Are Taxed At A Lower Rate Than Consumption Purchases

34. What Was The Primary Opportunity Cost Of The Former Soviet Union’s Policy To Heavily Invest In Capital For Economic Growth?
A. An Inability To Trade With Other Nations
B. Democracy
C. Foregone Consumer Goods
D. Technological Innovations
E. Foregone Military Goods

35. Initially 10 Workers Produce 100 Units Of Output In An Economy. The Next Year, 20 Workers Produce 250 Units Of Output In The Same Economy. Productivity In The Economy Has
A. Doubled
B. More Than Doubled
C. Increased
D. Decreased
E. Not Changed

36. Which Of The Following Is The Best Definition Of “Productivity”?
A. A Measurement Of How Efficiently Resources Are Converted Into Goods And Services Through A Production Process
B. A Measurement Of How Technology Increases The Ability Of An Economy To Produce Goods And Services
C. The Ratio Of Inputs To Output
D. The Quantity Of Goods And Services Produced During A Given Period Of Time By Labor
E. The Total Output Produced In An Economy Given Its Set Of Resources And The Current State Of Technology

37. How Do You Calculate The Average Product Of Labor?
A. Total Quantity Of Inputs Divided By Total Output
B. The Average Number Of Workers Times The Average Level Of Output Produced
C. Total Output Produced Divided By Total Units Of Labor Employed
D. Total Units Of Labor Employed Divided By The Total Output Produced
E. The Average Number Of Labor Units Employed Times The Quantity Of Capital Employed

38. In An Economy, 100 Workers Can Produce 500 Units Of Output And 110 Workers Produce 600 Units Of Output. Which Of The Following Is ? The Average Product With
A. 100 Workers Is 500
B. 100 Workers Is 5
C. 110 Workers Is 600
D. 10 Workers Is 100
E. Both A) And C)

39. In An Economy, 10 Workers Can Produce 500 Units Of Output And 20 Workers Produce 800 Units Of Output. Which Of The Following Is ? The Average Product With
A. 10 Workers Is 500
B. 10 Workers Is 5
C. 20 Workers Is 800
D. 20 Workers Is 300
E. 20 Workers Is 40.

40. What Is Technology?
A. The Tools Of Production
B. The Human Input Of Production
C. Computers, Robots, And Factories
D. The Means And Methods Of Production
E. The Mix Of Labor And Capital Used In Production

41. Which Of The Following Is Cited As Contributing To The Recent Slowdown In Economic Growth?
A. Slower Rates Of Technological Advancement
B. Changes In Composition Of The Labor Force
C. Low Rates Of Saving And Investment
D. Government Regulation And Public Debt
E. All Of The Above

42. How Has The Increasing Importance Of The U.S. Service Sector Contributed To The Slowdown In Economic Growth?
A. Services Are Less Important To The Economy Than Goods
B. The Productivity Of The Service Sector Is Hard To Accurately Measure
C. Most Investment Takes Place In The Goods Producing Sector Of The Economy
D. Services Cannot Be Easily Exported To Foreign Nations
E. Technological Advances Have Had A Smaller Impact On The Service Sector

43. What Is The “Crowding Out” Effect?
A. Consumption Spending Is Reduced Because Of Spending On Capital
B. Capital Spending Is Reduced Because People Purchase Great Quantities Of Consumer Goods
C. Private Investment Is Reduced Because Government Borrowing Diverts Dollars Away
D. Government Spending Creates A Larger Demand For Capital Goods
E. Savings Is Insufficient To Support The Level Of Capital Investment In The Economy

44. Which Of The Following Is A “Pro-Growth” Economic Policy?
A. Raising The Tax On Capital Gains
B. Encouraging People To Save Less
C. Reducing Public Dollars Available For Education
D. Investing In Human Capital
E. None Of The Above

45. How Much Does The Federal Government Spend Annually On Research And Development?
A. Less Than 1% Of Gdp
B. About 10% Of Gdp
C. More Than 25% Of Its Budget
D. Zero
E. Exactly 5% Of Its Budget

46. Which Theories Concerning The Business Cycle Focus On Factors Outside Of The Economy?
A. Expectations Theories
B. Inventory Theories
C. Exogenous Theories
D. Monetary Theories
E. Theories Of Innovation

47. The Economic Growth Of An Economy Is Generally Measured By Examining Changes In
A. Employment
B. Real Gdp
C. Income
D. Government Revenues
E. Current Gdp

48. Which Of The Following Statements Is ?
A. The U.S. Economy Grew At A Higher Rate In The 1980s Than It Did In The 1960s
B. The Leading Economic Indicators Index Is Useful For Predicting Economic Recessions, But Not Economic Expansions
C. The Economist Most Often Associated With Theories Of Innovation Used To Explain Business Cycles Is Milton Friedman
D. A Small Reduction In Economic Growth Can Have Large Long-Run Effects On Real Gdp
E. All Of The Above Statements Are

49. How Many Complete Business Cycles Has The U.S. Experienced Since 1960?
A. 7
B. 1
C. 12
D. 2
E. 23

50. Relative To The Past, Business Cycles In The U.S. Are Becoming
A. Shorter In Duration
B. More Severe
C. Longer In Duration
D. (A) And (B)
E. Non-Existent

51. Which Of The Following Is Responsible For Officially Tracking The Index Of Leading Economic Indicators?
A. The U.S. Department Of Commerce
B. The Conference Board
C. The Bureau Of Labor Statistics
D. The Council Of Economic Advisors
E. The Federal Reserve Board Of Governors

52. Which Of The Following Is Not A Component Of The Index Of Leading Economic Indicators?
A. Stock Market Prices
B. An Index Of Consumer Expectations
C. New Building Permits Granted
D. Real Money Supply
E. None Of The Above. All Are Part Of The Index

53. In Response To An Economic Recession, Monetary Theories Of The Business Cycle Predict That The Federal Reserve Would
A. Increase The Supply Of Money To Create An Expansion
B. Reduce The Supply Of Money To Create An Expansion
C. Raise Interest Rates To Increase Real Economic Growth
D. Increase The Demand For Money To Bring About Economic Growth
E. Lower Taxes To Avoid A Full Depression

54. Which Famous Economist Is Associated With The Sunspot Theory Of Business Cycles?
A. Joseph Schumpeter
B. Milton Friedman
C. William Stanley Jevons
D. John Maynard Keynes
E. Charles Alan Register

55. Which Set Of Theories Can Be Used To Explain All Business Cycles?
A. Exogenous Theories
B. Theories Of Innovation
C. Inventory Theories
D. Monetary Theories
E. None Of The Above. No One Theory Can Explain Every Business Cycle

56. For An Economy To Expand Its Investment In The Production Of Capital Goods, It Must
A. Enhance Its Current Level Of Technology
B. Forego Some Production Of Consumer Goods And Services
C. Expand Its Geographic Territory
D. Increase Its Real Supply Of Money
E. Reduce The Level Of Savings By Consumers

57. The Quantity Of Capital In The U.S. Economy Has Grown At A Rate ________ The Growth In The Labor Force.
A. Slower Than
B. About The Same As
C. Faster Than
D. Only Half As Much As
E. Unknown

58. Human Capital Refers To
A. Foregone Earnings Of Students Enrolled In College
B. Money Required To Enroll In Educational Programs
C. Slaves Owned By Capitalists
D. Skills And Training That Increase A Worker’s Productivity
E. Factories And Equipment Owned By Workers

59. The First Decade Of The 21st Century Has Been Characterized By ______.
A. A Booming Economy Through The Period
B. A Recession At The Start Of The Decade, Followed By A Slow Recovery And Then A Second Recession
C. Stagflation
D. One Recession Followed By An Unprecedented Economic Boom
E. None Of The Above

60. Which Of The Following Statements Is ?
A. In The Foreseeable Future, Real Gdp Will Grow Slower Than The U.S. Population
B. Based On Past Economic Performance, It Is Likely That Standards Of Living In The U.S. Will Fall During The Early Part Of The 21st Century
C. Real Per Capita Gdp Will Likely Increase In The Near Future Due In Part To The Slowdown In The Rate Of Population Growth
D. In Economics, The Past Is A Very Poor Predictor Of The Future
E. The Rate Of Economic Growth Does Not Affect Individual People

Questions 61 – 65 Refer To The Graph Below.

61. An Economy’s Production Possibilities Curve Will Shift Out The Farthest In 2017 If It Chooses To Operate At Which Point In 2012?
A. A
B. B
C. C
D. F
E. E

62. An Increase In Labor Resources Will Cause Which Of The Following Shifts On The Graph?
A. Bf To Ag
B. Ag To Bf
C. D To C
D. C To D
E. D To E

63. Economic Growth Is Represented On The Graph As A Movement From
A. Bf To Ag
B. Ag To Bf
C. D To C
D. C To D
E. D To E

64. An Increase In Productivity Is Consistent With Which Of The Following Movements?
A. Bf To Ag
B. Ag To Bf
C. D To C
D. C To D
E. D To E

65. A Movement From Point D To Point C Is Consistent With
A. An Increase In Capital Goods Without A Decrease In Consumer Goods
B. Technological Change Between 2012 And 2017
C. An Increase In Productivity Between 2012 And 2017
D. All Of The Above
E. None Of The Above

Questions 66 – 70 Refer To The Graph Below.

66. An Economic Expansion Is Illustrated On The Graph
A. At Point T2
B. At Point T3
C. Between T1 And T2
D. Between T2 And T3
E. Along The Straight Line

67. An Economic Contraction Is Illustrated On The Graph
A. At Point T2
B. At Point T3
C. Between T1 And T2
D. Between T2 And T3
E. Along The Straight Line

68. A Peak In The Business Cycle Is Illustrated On The Graph
A. At Point T2
B. At Point T3
C. Between T1 And T2
D. Between T2 And T3
E. Along The Straight Line

69. A Trough In The Business Cycle Is Illustrated On The Graph
A. At Point T2
B. At Point T3
C. Between T1 And T2
D. Between T2 And T3
E. Along The Straight Line

70. The Straight Line On The Graph Represents
A. An Economic Expansion
B. An Economic Contraction
C. A Business Cycle
D. A Long-Run Growth Trend
E. A Boom Period

71. The Longest Sustained Period Of Economic Growth In Modern U.S. History Occurred During The
A. 1920s
B. 1950s
C. 1960s
D. 1980s
E. 1990s

72. Which Of The Following Factors Was Not One Of The Reasons Why A Recession Started In 2008?
A. The Collapse Of A Speculative Bubble In The Real Estate Market
B. A Spike In Interest Rates
C. A Significant Rise In The World Price Of Oil
D. A Series Of Financial Fraud Schemes In The Financial Industry
E. All Of The Above

73. The Decline That Occurred In Real Gdp In The Fourth Quarter Of 2008 Was ________ .
A. The Smallest Decrease On Record
B. The Average Reduction
C. Smaller Than The Decrease In The Third Quarter
D. The Largest In Over 50 Years
E. There Was No Decline In Real Gdp During 2008
74. Which Of The Following Contributed To The Inflation-Free Economic Expansion Of The 1990s And Early 2000s?
A. Fed Policies To Raise Interest Rates
B. An Increase In Aggregate Supply
C. Improvements In Productivity
D. Improvements In Technology
E. All Of The Above

75. Productivity Gains In The 1990s Were A Result Of Which Of The Following?
A. Capital Investment
B. Improved Labor Quality
C. Technological Progress
D. Increased Use Of Computers
E. All Of The Above

76. Saving In An Economy Is Important For Economic Growth Because
A. If Households Don’t Save, They Cannot Consume In The Future
B. Without Saving, Aggregate Demand Increases
C. One Person’s Saving Is Another Person’s Consumption
D. It Is The Source Of Funds For Investment
E. Of None Of The Above; Saving Is Not Important For Economic Growth

77. Which Of The Following Is Not Something That Will Increase Economic Growth?
A. Expenditures On Research And Development
B. Increased Education
C. Using Resources To Develop Additional Capital
D. Replacing Old Machinery
E. All Of The Above Will Increase Economic Growth

78. According To Real Business Cycle Theory, The Primary Factor That Increases Aggregate Supply Is
A. Savings
B. Increases In The Size Of The Labor Force
C. Technological Improvements
D. Government Spending
E. Reductions In Regulation

True / False Questions

79. Economic Growth Is Necessary To Create New Jobs, Increase Incomes, And Raise Standards Of Living.

80. Economic Growth Is An Important Social Issue, But It Is Not Related To Other Problems Such As Unemployment And Poverty.

81. Economists Consider Economic Growth As A Short-Run Process.

82. Between 1960 And The Mid-1990s, The American Economy More Than Tripled Its Level Of Real Gdp.

83. During The Past Three Decades, The U.S. Economy Experienced Significant Periods Of Growth Without Interruption.

84. Even Small Differences In Growth Rates Can Result In Significant Gaps In Gdp Between Two Countries Over The Long Run.

85. Economic Growth Compounds Over Time.

86. The U.S. Economy Has Never Experienced A Year Of Negative Economic Growth.

87. U.S. Economic Growth Rates In The 1990s Have Been Higher Than Those Experienced In The 1960s.

88. An Erratic Short-Run Fluctuation In Economic Activity Around The Long-Run Trend Is Called A Business Cycle.

89. Every Business Cycle Has Four Distinct Phases; Expansion, Peak, Contraction, And Trough.

90. Strong Economic Expansions Are Sometimes Referred To As Economic Booms.

91. Another Name For The Trough Of A Business Cycle Is Recession.

92. Each Phase Of A Business Cycle Has Approximately The Same Duration.

93. Since Wwii, The Average Length Of A Typical U.S. Business Cycle Is Approximately 60 Months.

94. Given Modern Data Collection Techniques, It Is Very Easy To Identify When The Economy Is About To Move Into The Next Phase Of A Business Cycle.

95. In The U.S., The Official Dates For Each Phase Of A Business Cycle Are Determined After The Fact By The National Bureau Of Economic Research (Nber).

96. The Index Of Leading Economic Indicators Is Used By Economists To Forecast Changes In Economic Performance Over Time.

97. The Components Of The Index Of Leading Economic Indicators Tend To Change Prior To Changes In The Economy As A Whole.

98. The Components Of The Index Of Leading Economic Indicators Lead Changes In The Aggregate Economy, But Move In An Opposite Direction.

99. Economists Have Agreed Upon One Widely Accepted Theory To Explain Business Cycle Behavior.

100. Expectations About The Future Influence The Economic Decisions That People Make Today.

101. Joseph Schumpeter Theorized That Business Cycles Were Determined Primarily By Long-Run Waves Of Innovation.

102. Monetary Theories Of Business Cycles Are Based On How The Federal Reserve Manages The Money Supply In Response To Changing Economic Conditions.

103. Real Business Cycle Theorists Postulate That Economic Fluctuations Are Primarily Due To Changes In Aggregate Demand.

104. Jevons’ Sunspot Theory Of The Business Cycle Is Widely Used By Economists Today To Forecast Future Levels Of Economic Activity.

105. The Primary Determinants Of Economic Growth Include The Availability Of Resources And Productivity Factors.

106. As An Economy’s Labor Force Increases In Size, Its Production Possibilities Frontier Shifts Outward.

107. The U.S. Labor Force Has Not Grown Substantially During The Past Four Decades.

108. The Term Investment Is Used To Describe The Purchase Of Consumer Goods By Households In The Economy.

109. Investments In Capital Goods Increase An Economy’s Ability To Produce Consumer Goods In The Future.

110. In Recent Years, Capital Has Grown At A Slower Rate Than The Labor Force Within The U.S. Economy.

111. Productivity Is A Measure Of How Efficiently Resources Are Converted Into Goods And Services Through A Production Process.

112. The Total Output Produced Divided By The Total Units Of Labor Employed Is Called The Average Product Of Labor.

113. Productivity Is Not Influenced By The Law Of Diminishing Returns.

114. The Average Level Of Educational Attainment In The U.S. Has Been Gradually Declining Since The Mid-1970s.

115. Technology Refers To The Means And Methods Of Production.

116. On Average, The U.S. Economy Has Grown About 3.12% Annually Since 1960.

117. The U.S. Economy Grew At A Faster Rate In The 1980s Relative To The 1960s.

118. In The 1990s, The U.S. Economy Grew At An Average Annual Rate Of Only 2.1%.

119. The Rate Of Technological Growth In The U.S. Economy Is Higher Today Than It Was In The 1960s.

120. Capital Accumulation In An Economy Is Dependent Upon Savers To Provide Funds For Investors.

121. The Increasing Importance Of The Service Sector In The American Economy May Lead To An Overestimation Of Economic Growth.

122. Some Forms Of Government Regulation Of Business May Reduce Productivity And Therefore Contribute To The Slowdown Of Economic Growth.

123. “Crowding Out” Occurs When Government Borrowing To Finance Its Debt Diverts Funds Away From The Private Sector.

123. The Size Of The American Economy Will Double Within The Next Ten Years.

125. Currently, The Population Of The U.S. Is Growing At A Faster Rate Than Real Gdp Is Growing.

126. To Stimulate Additional Economic Investment, Some Policy Makers Favor Increasing The Tax Rate On Capital Gains.

127. Government Policies That Subsidize Higher Education Should Stimulate Labor Productivity And Enhance Long-Run Economic Growth.

128. The U.S. Government Spends Less Than 1% Of Gdp On Research And Development Each Year.

129. In Economics, The Past Is A Very Poor Predictor Of The Future.

130. The Slowdown In The Rate Of Population Growth Has Increased The Growth Rate In The Real Per Capita Gdp For The U.S.

131. The Rate Of Economic Growth Affects Everyone Living In An Economy.

132. Most Economic Forecasts Of The Near Future Predict That The Standard Of Living In The United States Will Fall.

133. One Strategy To Promote Economic Growth Is To Encourage People To Save More.

134. Savings Can Only Occur When The Economy Is In The Expansion Phase Of A Business Cycle.

135. A Reduction In Savings Will Lead To A Reduction In The Level Of Investment.

136. The Average Annual Rate Of Growth For The U.S. Economy During The Twentieth Century Was Between 3% And 3.5%.

137. The Most Important Determinants Of Economic Growth Are The Availability Of Resources And Productivity Factors.

138. Close Examination Of The Recent History Of Real Gdp In The U.S. Reveals That The Rate Of Economic Growth Has Been Diminishing Over Time.

Chapter 12

Money, Banking, And The Financial System: Old Problems With New Twists

Multiple Choice Questions

1. Commercial Banks Operate
A. By Attracting Deposits And Making Loans
B. Both Pay And Charge Interest
C. By Engaging In Financial Intermediation
D. All Of The Above
E. Under The Control Of State Governments

2. Commercial Banks
A. Attract Deposits By Offering To Pay Interest
B. Sell New Issues Of Stocks And Bond
C. Operate On A Non-Profit Basis
D. Attract Deposits By Offering Free Toasters
E. None Of The Above

3. Commercial Banks
A. Started By Offering Credit To Wealthy Landowners
B. Began As Goldsmiths That Provided Receipts To Customers Who Stored Their Gold With The Goldsmith
C. Operate In Both The Primary And Secondary Financial Markets
D. Operate Only In Cities With Major Financial Markets
E. Began In Germany

4. A Financial Intermediary
A. Seeks Deposits
B. Makes Loans
C. Matches Up Savers And Borrowers
D. All Of The Above
E. Operates In Between Two Banks

5. Investment Banks
A. Make Loans To Individual Households To Buy Houses And Cars
B. Work With Corporations To Finance Their Operations Through Primary Financial Markets
C. Work With Corporations To Finance Their Operations Through Secondary Financial Markets
D. Work With Investments From Private Individuals
E. None Of The Above

6. A Stock Is
A. A Financial Instrument That Provides Ownership Rights To Shareholders
B. A Financial Instrument That Provides Annual Payments Of Interest
C. A Financial Instrument That Is Traded Only In Primary Financial Markets
D. A Financial Instrument That Is Bought And Sold By Commercial Banks
E. All Of The Above

7. A Dividend
A. Must Be Paid By A Commercial Banks
B. Must Be Paid By Corporations To Owners Of The Company’s Stock
C. Is A Distribution Of A Corporation’s Profits To Stockholders
D. Is A Financial Instrument That Is Bought And Sold By Commercial Banks
E. None Of The Above

8. Corporations Raise Funds In
A. The Money Market
B. The Primary Financial Market
C. The Secondary Financial Market
D. Both The Primary And Secondary Financial Markets
E. None Of The Above

9. When A Person Buys A Stock On A Stock Exchange They Are Participating In
A. The Money Market
B. The Primary Financial Market
C. The Secondary Financial Market
D. Both The Primary And Secondary Financial Markets
E. None Of The Above

10. Insurance Policies
A. Require An Initial, One-Time Payment By Policy Holders But No Further Outlay
B. Make Payments To Policy Holders On A Monthly Basis
C. Require A Regular Payment Of Insurance Premiums By Policy Holders
D. Require An Initial Payment And Regular Payments Of Insurance Premiums By Policy Holders
E. None Of The Above

11. The Financial Crisis Of 2008 Affected
A. Only Commercial Banks
B. Only Investment Banks
C. Only Insurance Companies
D. All Of The Above
E. The Revenues Of Only State Governments

12. In The Early Years Of The American Republic, The First Bank Of The United States Was Established Through The Efforts Of
A. Thomas Jefferson
B. George Washington
C. James Madison
D. Alexander Hamilton
E. Aaron Burr

13. During Most Of The 1800s, The Federal Monetary Authority Was Called
A. The Bank Of America
B. The Bank Of Washington
C. The First National Bank
D. The Third Bank Of The United States
E. None Of The Above

14. Throughout The History Of The U.S., Until The Creation Of The Federal Reserve System In 1913, The Monetary System Was
A. Characterized By A Series Of Panics And Periods Of Instability
B. Under The Control Of The Second Bank Of The United States
C. The Product Of The Work Of President Andrew Jackson
D. Based Upon The English System
E. Under The Supervision Of The Us Mint

15. Prior To The Creation Of The Federal Reserve System, The Money Supply
A. Was Very Stable And Highly Valued
B. Was Comprised Of Currency Printed By The Department Of The Treasury
C. Was Produced By Local Banks And Often Traded At A Discount
D. Was Available Only To Bank Depositors
E. Was Comprised Of Gold

16. Money Serves As
A. A Unit Of Account
B. A Store Of Value
C. A Medium Of Exchange
D. All Of The Above
E. An Emblem Of Personal Wealth

17. When You Use Dollar Bills To Pay For A Purchase At A Store, Money Is Serving Which Function?
A. A Medium Of Exchange
B. A Measure Of Value
C. A Store Of Value
D. A Barter Facilitator
E. All Of The Above

18. When You Compare A Dollar’s Worth Of Apples To A Dollar’s Worth Of Oranges, Money Is Serving Which Function?
A. A Medium Of Exchange
B. A Measure Of Value
C. A Store Of Value
D. A Barter Facilitator
E. A Measure Of Wealth

19. If You Keep Some Cash In A Safe Place So That You Have It To Use Later, Money Is Serving Which Function?
A. A Medium Of Exchange
B. A Measure Of Value
C. A Store Of Value
D. A Barter Facilitator
E. All Of The Above

20. Banking Regulation Is Intended To Prevent
A. Bank Failures
B. Excess Bank Profits
C. Bank Losses
D. Banks From Selling Securities
E. Banking Monopolies

21. The Gramm-Leach-Bliley Act Allows Banks To
A. Sell Insurance
B. Underwrite Insurance
C. Sell Securities
D. Invest In Real Estate
E. Do All Of The Above

22. Money Is “Liquid” Because
A. It Loses Value With Inflation
B. Coins Can Be Melted To Use Their Metal To Make Goods
C. It Serves As A Measure Of Value
D. It Does Not Have To Be Sold To Buy Goods And Services
E. It Is A Valuable Asset

23. Which Of The Following Is Of A Fractional Reserve Banking System?
A. Banks Must Hold All Of Depositors’ Deposits In Their Vaults
B. Banking Is Only A Fraction Of The Services Banks Provide To Their Customers
C. Banks Lend Out Part Of Their Depositors’ Deposits
D. The Reserve Ratio Is 100%
E. Banks May Not Hold Excess Reserves

24. If The Reserve Ratio Is 10% And A New Demand Deposit Of $10,000 Is Made, What Is The Maximum Deposit Creation Possible?
A. $1,000
B. $9,000
C. $10,000
D. $90,000
E. $100,000

25. If The Reserve Ratio Is 10% And A New Demand Deposit Of $5,000 Is Made, What Is The Maximum Deposit Creation Possible?
A. $500
B. $4,500
C. $5,000
D. $45,000
E. $50,000

26. If The Reserve Ratio Is 20% And A New Demand Deposit Of $10,000 Is Made, What Is The Maximum Deposit Creation Possible?
A. $1,500
B. $10,000
C. $15,000
D. $40,000
E. $50,000

27. Money Does Not Serve As A
A. Medium Of Exchange
B. Store Of Value
C. Measure Of Value
D. Price Index
E. It Serves As All Of The Above

28. M1 Includes
A. Currency And Coins In Circulation, Traveler’s Checks, Demand Deposits At Commercial Banks, And Other Checkable Deposits
B. Currency And Coins In Circulation, All Demand Deposits, And All Time Deposits
C. All Demand Deposits And All Time Deposits
D. Just Currency And Coins In Circulation
E. None Of The Above

29. Banks Make Loans From Their
A. Required Reserves
B. Excess Reserves
C. Net Worth
D. U.S. Government Securities
E. None Of The Above

30. Which Of The Following Is Among The Assets Of A Commercial Bank?
A. Demand Deposits
B. Net Worth
C. Any Liability
D. Loans And Investments
E. Time Deposits

31. M2 Includes
A. M1, Plus Savings And Time Deposits Of Small Denomination, And Money Market Mutual Funds
B. M1 Plus Savings And Time Deposits Of Large Denomination (Over $100,000)
C. M1 Plus Banks Acceptances And Treasury Bills
D. M1 Plus Currency And Demand Deposits
E. None Of The Above

32. The Basic Money Supply Is
A. Composed Of Small Denomination Time Deposits Plus Coin And Currency Held By The Nonbank Public
B. Composed Of Assets That Are Completely Liquid And Easily Accessible
C. Our Broadest Measure Of Money
D. Simply The Coins And Currency Held By The Nonbank Public
E. None Of The Above

33. Excess Reserves Refer To
A. Reserves That Banks Are Required By Law To Hold
B. The Major Assets Of The Bank
C. Reserves A Bank Holds In Case Of Unexpected Case Needs
D. Reserves Over And Above The Bank’s Required Reserves
E. None Of The Above

34. The Money Multiplier Is
A. 1/R
B. Er
C. R/E
D. E/R
E. 1+1/Er

35. Suppose The Legal Reserve Requirement Is 0.20, And A Bank Has Excess Reserves Of $1,000,000. The Ultimate Increase In The Money Supply Will Be
A. $2,000,000
B. $200,000
C. $800,000
D. $5,000,000
E. $500,000

36. The Inflation Rate And The Growth In The Money Supply Are
A. Usually Inversely Related
B. Usually Directly Related
C. Never Directly Related
D. Not Related To One Another
E. Negatively Related

37. Who Controls The Aggregate Volume Of Demand Deposits In The Banking System?
A. The U.S. Treasury
B. The Federal Reserve Board Of Governors
C. Congress
D. Bankers
E. The President Of The United States

38. To Reduce Inflationary Pressures, The Federal Reserve Authorities Should
A. Sell Government Securities, Raise Reserve Requirements, And Lower The Discount Rate
B. Sell Government Securities, Lower Reserve Requirements, And Lower The Discount Rate
C. Buy The Government Securities, Raise Reserve Requirements, And Raise The Discount Rate
D. Sell Government Securities, Raise Reserve Requirements, And Raise The Discount Rate
E. Buy Government Securities, Decrease Reserve Requirements, Decrease The Discount Rate

39. If The Open Market Committee Of The Federal Reserve Sells Securities, This Action Will
A. Decrease The Money Supply
B. Increase The Money Supply
C. Reduce The Reserve Requirement
D. Decrease The Discount Rate
E. Do None Of The Above

40. When A Central Bank Wants To Increase The Money Supply, It
A. Sells Bonds
B. Buys Bonds
C. Sells Good And Services
D. Buys Goods And Services
E. Does None Of The Above

41. The Federal Reserve Can Decrease The Supply Of Money By
A. Selling U.S. Government Securities
B. Buying U.S. Government Securities
C. Selling Goods And Services
D. Buying Goods And Services
E. Decreasing The Reserve Requirement

42. The Federal Open Market Committee (Fomc) Is Highly Concerned With
A. The National Unemployment Rate
B. The Growth Of Real Gdp
C. Interest Rates
D. The Level Of The Stock Market
E. All Of The Above

43. When The Open Market Committee (Fomc) Purchases Government Securities, Their Actions Are An Attempt To
A. Raise Interest Rates
B. Lower Interest Rates
C. Reduce Borrowing
D. Raise The Inflation Rate
E. Influence Voters In The Next Presidential Election

44. When The Fed Increases The Money Supply, It Generally Has The Effect Of
A. Making Banks More Profitable
B. Increasing The Value Of Stocks
C. Lowering Interest Rates
D. Lowering The Inflation Rate
E. Increasing The Size Of Bank Deposits

45. When The Fed Wishes To Increase The Money Supply, It Can Do So By
A. Purchasing Government Securities Through Open Market Operations
B. Lowering The Discount Rate
C. Reducing The Reserve Requirement
D. All Of The Above
E. Increasing The Size Of Bank Deposits

Questions 46 – 49 Refer To The Graph Below.

46. Suppose That The Fed Has Increased The Money Supply. This Is Shown In The Diagram By
A. Q1 To Q0
B. Q0 To Q1
C. Ms1
D. Ms2
E. None Of The Above

47. Based On The Diagram, The Opportunity Cost Of Money Is Higher If
A. The Interest Rate Is I0
B. The Interest Rate Is I1
C. The Money Supply Is Curve Ms1
D. The Money Supply Is Curve Ms2
E. The Opportunity Cost Of Money Is Not Shown In The Diagram

48. A Shift From Ms1 To Ms2 Would Be The Result Of
A. An Increase In Aggregate Demand
B. An Increase In Aggregate Supply
C. A Decision By The Fed To Purchase Government Securities By The Fomc
D. A Decision By The Fed To Sell Government Securities By The Fomc
E. A Change In The Stock Market

49. If The Fed Wanted To Stimulate Business Investment, It Could Do So By
A. Increasing Interest Rates From I1 To I0
B. Decreasing The Money Supply From Ms2 To Ms1
C. Increasing The Money Supply From Ms1 To Ms2
D. Raising The Reserve Requirement
E. Increasing The Discount Rate

50. The Equation Of Exchange Is
A. Mp = Qv
B. Mv = Pq
C. M = V/Pq
D. P = Q/Mv
E. Pv = Qm

51. The Value Of Money Varies
A. Directly With The Interest Rate
B. Directly With The Price Level
C. Directly With The Volume Of Employment
D. Inversely With The Price Level
E. With None Of The Above

52. According To The Equation Of Exchange,
A. The Right-Hand Side Will Equal The Left-Hand Side Only If Velocity Does Not Change From Year To Year
B. Velocity Must Be Constant
C. An Increase In The Quantity Of Money Will Lead To An Increase In The Price Level, Other Things Constant
D. Prices Cannot Change
E. All Of The Above

53. The Quantity Theory Of Money Emphasizes
A. Government Taxation Policies
B. Government Spending Policies
C. Labor Productivity
D. Changes In The Money Supply
E. None Of The Above

54. A Key Assumption In The Quantity Theory Of Money Is That
A. The Supply Of Money Is Increasing At A Constant Rate
B The Price Level Is Stable Over Long Periods Of Time
C. The Level Of Output Of Goods And Services Changes Frequently In Response To Changes In Velocity
D. The Velocity Of Money Is Constant
E. None Of The Above

55. The Residential Housing Market Saw Remarkable Increases In
A. Housing Prices At The End Of The 1990’s And Through The First Half Of The 2000’s
B. Housing Prices At The End Of The 1980’s And Beginning Of The 1990’s
C. Foreclosure Rates At The End Of The 1990’s And Through The First Half Of The 2000’s
D. Foreclosure Rates At The End Of The 1980’s And Beginning Of The 1990’s
E. Both A And C

56. The Growth In The Residential Real Estate Market Is Largely A Product Of
A. A Large Increase In The Demand For Housing
B. An Unexpected Growth In Us Population
C. A Decline In Housing Prices
D. A Tightening Of Government Policies That Restrict Homeownership
E. A Decrease In Mortgage Availability

57. The Federal National Mortgage Association (Or Fannie Mae) Was Created To
A. Make Mortgages Hard To Obtain
B. Make Mortgages Less Likely To Go Into Foreclosure
C. Make A Larger Market In Mortgages By Establishing A Secondary Financial Market In Mortgages
D. Make Mortgages Available To New Immigrants To The Us
E. None Of The Above

58. A Mortgage Backed Security Is
A. A Share Of Common Stock Based Upon Home Mortgages
B. A Financial Instrument That Reduces Risk By Pooling Together A Large Number Of Mortgages Into One Asset
C. A Financial Instrument Developed To Reduce Liquidity In The Housing Market
D. A Financial Instrument That Is The Combination Of Only Subprime Mortgages
E. All Of The Above

59. A Subprime Mortgage
A. Made Obtaining A Mortgage Easier For Low Income Households
B. Is A Mortgage That Does Not Meet The Requirements For A Conventional Mortgage
C. Is Usually Structured As An Adjustable Rate Mortgage
D. All Of The Above
E. Is No Different From A Conventional Mortgage

60. A Collateralized Debt Obligation (Or Cdo)
A. Is Generally Riskier Than A Single Debt Of An Equal Value
B. Sells For A Lower Price Than Re-Sales Of Individual Mortgages That Comprise Them
C. Is Sold In The Primary Financial Market
D. Is A Financial Instrument That Obscures The Underlying Risks Of The Mortgages That Comprise Them
E. Is Always A Bad Financial Investment

61. The Interest Rate On An Adjustable Rate Mortgage (Arm) Is
A. Set To Equal The Fed Funds Rate
B. Adjusted On A Daily Basis
C. Set To Rise At The End Of Every Year For The Life Of The Mortgage
D. Adjusted Periodically Based Upon Current Market Conditions
E. Adjusted Based Upon The Value Of The House Purchase

62. Home Equity Loans
A. Allow A Home Owner To Recapture Some Of The Increase In The Value Of Their Home Without Selling The Home
B. A Way For Homeowners To Issue Stock, Or Equity, In Their Home
C. Only Used When Home Prices Are Increasing
D. A Way For The Market To Eliminate Paper Profits
E. None Of The Above

63. Besides Homeowners, Who Attempted To Profit From Increasing Home Prices During The Housing Bubble In The Early Part Of The 2000s?
A. Large Corporations
B. Speculators
C. Foreign Investors
D. Individuals Who Had Low Incomes
E. All Of The Above

64. A Credit Default Swap
A. Is What Happens When Homeowners Swap Their Mortgages With Their Neighbors
B. Is A Way For Investors In Collateralized Debt Obligations (Or Cdo’s) To Make Even More Money
C. Is A Way For Investors In Collateralized Debt Obligations (Or Cdo’s) To Reduce The Risk Of An Increase In Mortgage Foreclosures
D. Is A Way For Investors To Increase The Risks To Homeowners
E. Exists Only In Markets With Subprime Mortgages

65. Assets That Are “Marked To Market” Will Be Priced At
A. Their Original Purchase Price
B. Their Original Purchase Price Less The Depreciation Of The Asset
C. A Price That Is Equal To The Original Purchase Price Plus The Rate Of Inflation
D. A Price That Is Based Upon The Asset’s Current Market Value
E. A Price Determined In The Stock Market

66. Many Large Banks And Wall Street Investment Firms Got Into Financial Problems Due To
A. Investments In Subprime Mortgages
B. Required Payments On Credit Default Swaps
C. Failures Of Collateralized Debt Obligations Resulting From Home Foreclosures
D. Having To Mark Down A Significant Number Of Their Assets Due To The “Mark To Market” Accounting Requirement
E. All Of The Above

67. The Federal Government Stepped In During 2008 To Prevent Several Commercial Banks And Investment Banks From Failing Based Upon The Idea That
A. They Were “Too Big To Fail”
B. Any Business Failure Would Hurt Shareholders
C. These Banks Made Large Political Contributions And This Was A Way For Politicians To Pay Them Back
D. Government Would Make Large Profits By Doing So
E. None Of The Above

68. In Late 2008, The Us Treasury Department Began
A. Closing Banks That Were Not Following Regulations
B. To Implement The Troubled Asset Relief Program (Tarp)
C. Raising Interest Rates To Stimulate The Economy
D. Engaging In Open Market Operations
E. To Implement The Opening Of A New Bank Of The United States

69. Each Of The Following Is A Financial Intermediary Except
A. Commercial Banks
B. Investment Banks
C. Insurance Companies
D. Credit Unions
E. All Of The Above Are Financial Intermediaries

70. A Capital Gain Exists
A. When One Political Party Increases The Number Of Its Members In Congress
B. When An Interest Payment Is Made
C. When The Price Of An Asset Goes Up
D. When The Price Of An Asset Exceeds The Price Paid For It
E. When Taxes Are Paid On The Asset

71. Liquidity Of An Asset Increases When
A. It Is Easier To Convert The Asset Into Cash
B. The Asset’s Value Is Below Its Original Price
C. The Asset Is Purchased
D. The Asset Depreciates
E. The Asset Is Put On The Market

72. When A Share Of Stock Is Sold On The New York Stock Exchange, It Is Traded
A. In A Prime Financial Market
B. In A Primary Financial Market
C. For A Promise To Pay A Fixed Return
D. To Another Stock Exchange
E. In A Secondary Financial Market

73. The Financial Crisis That Began In 2008 Is A Result Of All Of The Following Except
A. The Bursting Of The Dot.Com Bubble
B. Problems In The Residential Real Estate Market
C. Changes In Accounting Rules About Asset Valuation
D. Large Firms Taking On Assets Whose Value Was Not Well Determined
E. Policies That Allowed Many Unqualified Homebuyers To Receive Mortgages That They Could Not Pay

74. Historically, Many Commercial Banks Began As
A. Coffee Houses And Taverns Where Stocks Were Traded
B. Jewelry Stores That Specialized In The Sale Of Precious Stones
C. Businesses That Engaged In Small Loans
D. Goldsmiths That Held Stores Of Gold For Their Customers
E. None Of The Above

75. An Increase In The Reserve Requirement Can
A. Decrease Interest Rates
B. Increase Liquidity
C. Decrease The Money Supply
D. Increase The Money Supply
E. Decrease The Profits Of Banks

True / False Questions

76. Commercial Banks Are Financial Intermediaries But Insurance Companies Are Not.

77. Investment Banks Assist Corporations In Issuing Stocks And Bonds In The Primary Financial Market.

78. Silversmiths Became Banks When They Started Lending Out Money Based Upon The Excess Silver That They Held For Their Customers.

79. Residential Real Estate Is Generally Considered To Be More Liquid Than A Savings Account.

80. The Us Has, Over Its History, Had Only One National Bank, That Is, A Bank Of The United States.

81. The Most Important Function Of Money Is As A Medium Of Exchange.

82. If The Supply Of Money Decreases, The Value Of A Dollar Increases.

83. The Key To The Federal Reserve’s Control Over The Money Supply Is Its Ability To Create Money By Making Loans.

84. A Commercial Banking System With Excess Reserves Has The Ability To Create Money In The By Making Loans.

85. A Credit Union, Unlike A Bank, Is Not A Financial Intermediary, Since It Is A Cooperative Banking Venture.

86. In The U.S. Banking System, The Ratio Of A Bank’s Reserves And Its Outstanding Deposits Is Usually Less Than One.

87. During Inflationary Periods, The Federal Reserve Should Lower The Discount Rate So That Member Banks May More Easily Obtain Needed Reserves To Enable Them To Increase Their Loans.

88. The Money Supply Consists Primarily Of Gold, Silver, And Other Metals Held By The Government.

89. Monetary Policy Refers To Control Of The Money Supply By The Federal Reserve Authorities.

90. Appropriate Federal Reserve Actions To Combat Inflation Are An Increase In The Discount Rate, An Increase In The Reserve Ratio And The Sale Of Government Securities.

91. The Reserve Ratio Is The Rate Of Interest Charged Commercial Banks When They Borrow From The Federal Reserve.

92. During Inflationary Periods, The Federal Reserve Should Buy Securities So That Commercial Banks Will Have More Reserves To Loan Out.

93. One Of The Main Functions Of Banks Is To Create Money.

94. When A Bank Makes A Loan To One Of Its Customers, It Increases Its Liabilities.

95. The Maximum Demand Deposit Creation Possible From A New Deposit Is Derived From The Equation D = E X 1/R.

96. The Discount Rate Is The Ratio Of Demand Deposits To Reserves That Banks Have To Maintain.

97. Policy Actions That Affect Changes In The Growth Rate Of The Money Supply To Keep Interest Rates At Levels That Promote Economic Stability And Growth Are Called “Fine Tuning” Policies.

98. The Issue Of The Appropriate Monetary Policy Target Has Been Resolved To The Satisfaction Of All Policy Makers.

99. The Quantity Theory Of Money States That Increases In The Money Supply Cause Increases In Both The Price Level And Output.

100. A Credit Union Is A Cooperative Banking Venture Where The Members Or Owners Of The Organization Have A Common Employer Or Union.

101. The Main Purpose Of The Fed Is To Control The Rate Of Interest.

102. The Annual Growth Rate In The Money Supply Has Been Held Constant By The Federal Reserve.

103. The Quantity Theory Of Money Stresses The Importance Of The Velocity Of Money.

104. The Money Multiplier Is Derived From The Legal Reserve Requirement.

105. An Increase In The Supply Of Money Will Decrease Interest Rates.

106. The Federal Reserve Open Market Committee’s Primary Function Is To Open New Banks.

107. The Discount Rate Charged By The Federal Reserve, Is Lower For More Creditworthy Banks.

108. Any Time The Discount Rate Increases, The Money Supply Also Increases.

109. If The Required Reserve Ratio Is Increased By The Fed, One Could Assume That The Fed Is Attempting To Control Inflation.

110. Prior To The Enactment Of The Monetary Control Act Of 1980, State-Chartered Banks Had The Option Of Whether Or Not They Wanted To Be A Member Of The Federal Reserve System.

111. Interest Rates Increase Or Decrease So That An Equilibrium Exists In The Money Market.

112. The Federal Government, Through The Work Of Agencies Like The Federal National Mortgage Association, Has Worked To Increase The Supply Of Funds Available To Mortgage Lenders.

113. A Policy Implemented By The Clinton Administration Resulted In Tighter Financial Requirements For Less Creditworthy Borrowers, So That Financial Markets Were Less Risky.

114. A Subprime Mortgage Is A Mortgage Issued To A Highly Qualified Borrower At Reduced Interest Rates.

115. Subprime Mortgages And Home Equity Loans Contributed Little To The Increase In The Demand For Residential Real Estate, Increasing Prices Dramatically.

116. A Homeowner Whose House Is Worth $500,000 But Who Owes $600,000 On Their Mortgage Is A Good Candidate For A Home Equity Loan, So That The Homeowner Can Build Their Equity.

117. Collateralized Debt Obligations Are A Way That Lenders Can Reduce The Risk Of Individual Mortgage Lending.

118. Collateralized Debt Obligations Always Exclude Subprime Mortgages, Because These Are Too Risky For Most Investors.

119. A Credit Default Swap Is One Way That Lenders Can Offset Some Of The Risks Associated With Investing In Subprime Mortgages.

120. A Number Of Banks Encountered Problems Because A Change In Accounting Rules Required Firms To Mark Assets At Their Original Purchase Price.

121. Borrowers Who Obtain A Mortgage Will Always Find That Their Mortgage Payments Rise Over Time.

122. The Definition Of The Money Supply Called M1 Includes All Of The Assets Included In The Definition Of M2.

123. An Increase In The Required Reserve Ratio Will Allow Banks To Create Less Money.

124. The Open Market Committee Of The Federal Reserve System Meets Regularly To Determine The Required Reserve Ratio.

125. Because Of Recent Changes In The Regulatory System, Commercial Banks Are Able To Offer A Smaller Variety Of Financial Products And Services Than In The Past.

126. The Distinctions Between Commercial Banks And Other Financial Institutions Has Blurred In Recent Years.

127. Large Corporations Enter The Secondary Financial Market To Provide Themselves Adequate Liquidity To Conduct Their Day To Day Operations.

128. Stockholders Can Receive A Capital Gain When They Purchase A Financial Asset.

129. Stocks And Bonds Are Essentially Interchangeable Financial Assets, Since Owners Of Both Of These Instruments Receive Regular Interest Payments.

130. When Ben Bernanke Became Fed Chairman, The Federal Reserve Began Explicitly Announcing Money Supply Targets.

ECO 305 Week 9 Quiz – Strayer University New

ECO/305 Week 9 Quiz – Strayer

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Quiz 8 Chapter 12 and 13

EXCHANGE-RATE DETERMINATION

MULTIPLE CHOICE

1. The relationship between the exchange rate and the prices of tradable goods is known as the:
a. Purchasing-power-parity theory
b. Asset-markets theory
c. Monetary theory
d. Balance-of-payments theory

2. If the exchange rate between Swiss francs and British pounds is 5 francs per pound, then the number of pounds that can be obtained for 200 francs equals:
a. 20 pounds
b. 40 pounds
c. 60 pounds
d. 80 pounds

3. Low real interest rates in the United States tend to:
a. Decrease the demand for dollars, causing the dollar to depreciate
b. Decrease the demand for dollars, causing the dollar to appreciate
c. Increase the demand for dollars, causing the dollar to depreciate
d. Increase the demand for dollars, causing the dollar to appreciate

4. High real interest rates in the United States tend to:
a. Decrease the demand for dollars, causing the dollar to depreciate
b. Decrease the demand for dollars, causing the dollar to appreciate
c. Increase the demand for dollars, causing the dollar to depreciate
d. Increase the demand for dollars, causing the dollar to appreciate

5. Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists in Japan. According to the purchasing-power parity theory, the dollar would be expected to:
a. Appreciate by 8 percent against the yen
b. Depreciate by 8 percent against the yen
c. Remain at its existing exchange rate
d. None of the above

6. In the presence of purchasing-power parity, if one dollar exchanges for 2 British pounds and if a VCR costs $400 in the United States, then in Great Britain the VCR should cost:
a. 200 pounds
b. 400 pounds
c. 600 pounds
d. 800 pounds

7. If wheat costs $4 per bushel in the United States and 2 pounds per bushel in Great Britain, then in the presence of purchasing-power parity the exchange rate should be:
a. $.50 per pound
b. $1.00 per pound
c. $2.00 per pound
d. $8.00 per pound

8. A primary reason that explains the appreciation in the value of the U.S. dollar in the 1980s is:
a. Large trade surpluses for the United States
b. Relatively high inflation rates in the United States
c. Lack of investor confidence in the U.S. monetary policy
d. Relatively high interest rates in the United States

9. The high foreign exchange value of the U.S. dollar in the early 1980s can best be explained by:
a. Additional investment funds made available from overseas
b. Lack of investor confidence in U.S. fiscal policy
c. Market expectations of rising inflation in the United States
d. American tourists overseas finding costs increasing

10. When the price of foreign currency (i.e., the exchange rate) is below the equilibrium level:
a. An excess demand for that currency exists in the foreign exchange market
b. An excess supply of that currency exists in the foreign exchange market
c. The demand for foreign exchange shifts outward to the right
d. The demand for foreign exchange shifts backward to the left

11. When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level:
a. An excess supply of that currency exists in the foreign exchange market
b. An excess demand for that currency exists in the foreign exchange market
c. The supply of foreign exchange shifts outward to the right
d. The supply of foreign exchange shifts backward to the left

12. The appreciation in the value of the dollar in the early 1980s is explained by all of the following except:
a. The United States being considered a safe haven by foreign investors
b. Relatively high real interest rates in the United States
c. Confidence of foreign investors in the U.S. economy
d. Relatively high inflation rates in the United States

13. Suppose Mexico and the United States were the only two countries in the world. There exists an excess supply of pesos on the foreign exchange market. This suggests that:
a. Mexico’s current account is in surplus
b. Mexico’s current account is in deficit
c. The U.S. current account is in deficit
d. The U.S. current account is in equilibrium

14. If Canada runs a trade surplus with Mexico and exchange rates are floating:
a. The peso will depreciate relative to the dollar
b. The dollar will depreciate relative to the peso
c. The prices of all foreign goods will fall for Canadians
d. The prices of all foreign goods will rise for Canadians

15. If Mexico’s labor productivity rises relative to Europe’s labor productivity:
a. The peso tends to depreciate against the euro in the short run
b. The peso tends to appreciate against the euro in the short run
c. The peso tends to depreciate against the euro in the long run
d. The peso tends to appreciate against the euro in the long run

16. The international exchange value of the U.S. dollar is determined by:
a. The rate of inflation in the United States
b. The number of dollars printed by the U.S. government
c. The international demand and supply for dollars
d. The monetary value of gold held at Fort Knox, Kentucky

17. For the United States, suppose the annual interest rate on government securities equals 8 percent while the annual inflation rate equals 4 percent. For Japan, suppose the annual interest rate on government securities equals 10 percent while the annual inflation rate equals 7 percent. These variables would cause investment funds to flow from:
a. The United States to Japan, causing the dollar to depreciate
b. The United States to Japan, causing the dollar to appreciate
c. Japan to the United States, causing the yen to depreciate
d. Japan to the United States, causing the yen to appreciate

18. For the United States, suppose the annual interest rate on government securities equals 12 percent while the annual inflation rate equals 8 percent. For Japan, suppose the annual interest rate equals 5 percent. These variables would cause investment funds to flow from:
a. The United States to Japan, causing the dollar to depreciate
b. The United States to Japan, causing the dollar to appreciate
c. Japan to the United States, causing the yen to depreciate
d. Japan to the United States, causing the yen to appreciate

19. Given a system of floating exchange rates, stronger U.S. preferences for imports would trigger:
a. An increase in the demand for imports and an increase in the demand for foreign currency
b. An increase in the demand for imports and a decrease in the demand for foreign currency
c. A decrease in the demand for imports and an increase in the demand for foreign currency
d. A decrease in the demand for imports and a decrease in the demand for foreign currency

20. Given a system of floating exchange rates, weaker U.S. preferences for imports would trigger:
a. An increase in the demand for imports and an increase in the demand for foreign currency
b. An increase in the demand for imports and a decrease in the demand for foreign currency
c. A decrease in the demand for imports and an increase in the demand for foreign currency
d. A decrease in the demand for imports and a decrease in the demand for foreign currency

21. Under a system of floating exchange rates, relatively low productivity and high inflation rates in the United States result in:
a. An increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
b. An increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar
c. A decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
d. A decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar

22. Under a system of floating exchange rates, relatively high productivity and low inflation rates in the United States result in:
a. An increase in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
b. An increase in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar
c. A decrease in the demand for foreign currency, a decrease in the supply of foreign currency, and a depreciation in the dollar
d. A decrease in the demand for foreign currency, an increase in the supply of foreign currency, and an appreciation in the dollar

23. Which example of market expectations causes the dollar to appreciate against the yen–expectations that the U.S. economy will have:
a. Faster economic growth than Japan
b. Higher future interest rates than Japan
c. More rapid money supply growth than Japan
d. Higher inflation rates than Japan

24. Which example of market expectations causes the dollar to depreciate against the yen–expectations that the U.S. economy will have:
a. Faster economic growth than Japan
b. Higher future interest rates than Japan
c. Less rapid money supply growth than Japan
d. Lower inflation rates than Japan

25. For an American investor, the expected rate of return on European securities depends on all of the following factors except the:
a. Rate of return on equivalent American securities
b. The current exchange rate between the dollar and the pound
c. Exchange rate anticipated to prevail when the securities mature
d. Interest rate paid on European securities

26. Which of the following is likely to result in long-run depreciation of the U.S. dollar relative to the euro?
a. Relatively low interest rates in the United States
b. Relatively high labor productivity in the United States
c. Tariffs levied by the United States on steel imports from Europe
d. Stronger American preferences for goods produced in Europe

27. Which of the following is likely to result in long-run appreciation of the U.S. dollar relative to the peso?
a. Relatively high interest rates in Mexico
b. Relatively high labor productivity in Mexico
c. Tariffs applied by Mexico on computer imports from the United States
d. Stronger Mexican preferences for goods produced in the United States

28. Long-run determinants of the dollar’s exchange value include all of the following except:
a. Preferences of Americans for foreign produced goods
b. U.S. tariffs placed on imports of foreign produced goods
c. Productivity of the American worker
d. Interest rates in U.S. financial markets

29. Which theory of exchange-rate determination best views the foreign exchange market as being similar to a stock exchange where future expectations are important and prices are volatile?
a. Balance-of-payments approach
b. Purchasing-power-parity approach
c. Asset-markets approach
d. Monetary approach

30. According to the purchasing-power-parity theory, the U.S. dollar maintains its purchasing-power parity if it depreciates by an amount equal to the excess of:
a. U.S. interest rates over foreign interest rates
b. Foreign interest rates over U.S. interest rates
c. U.S. inflation over foreign inflation
d. Foreign inflation over U.S. inflation

31. An exchange rate is said to ____ when its short-run response to a change in market fundamentals is greater than its long-run response.
a. Overshoot
b. Undershoot
c. Depreciate
d. Appreciate

32. Concerning exchange rate forecasting, ____ is a common sense approach based on a wide array of political and economic data.
a. Econometric analysis
b. Technical analysis
c. Judgmental analysis
d. Sunspot analysis

33. Concerning exchange rate forecasting, ____ involves the use of historical exchange rate data to estimate future values, while ignoring the economic determinants of exchange rate movements.
a. Econometric analysis
b. Judgmental analysis
c. Technical analysis
d. Sunspot analysis

34. Concerning exchange rate forecasting, ____ relies on econometric models which are based on macroeconomic variables likely to affect currency values.
a. Fundamental analysis
b. Technical analysis
c. Judgmental analysis
d. Sunspot analysis

35. Concerning exchange-rate determination, “market fundamentals” include all of the following except:
a. Monetary policy and fiscal policy
b. Profitability and riskiness of investments
c. Speculative opinion about future exchange rates
d. Productivity changes affecting production costs

36. In the short run, exchange rates respond to market forces such as:
a. Inflation rates
b. Expectations of future exchange rates
c. Investment profitability
d. Government trade policy

37. Long-run exchange rate movements are governed by all of the following except:
a. National productivity levels
b. Consumer tastes and preferences
c. Rates of inflation
d. Interest rate levels

38. Exchange rate determination in the short run is underlied by which of the following assumptions:
a. Tariffs and quotas affect trade patterns only in the short run
b. Prices of goods and services affect trade patterns only in the short run
c. Expected returns on financial assets affect investment flows in the short run
d. Preferences for goods and services affect trade flows only in the short run

39. That identical goods should cost the same in all nations, assuming it is costless to ship goods between nations and there are no barriers to trade, is a reflection of the:
a. Monetary approach to exchange-rate determination
b. Law of one price
c. Fundamentalist approach to exchange-rate determination
d. Exchange-rate-overshooting principle

40. The Canadian dollar would depreciate on the foreign exchange market if:
a. Canadian consumer tastes change in favor of goods produced domestically
b. The profitability of assets in Canada rises relative to the profitability of assets abroad
c. Canada experiences a disastrous wheat-crop failure, leading to imports of more wheat
d. Canada realizes technological improvements in the production of manufactured goods, leading to relatively low costs for Canada

41. The demand in the United States for yen will increase if, other things remaining equal:
a. Labor costs rise in Japan
b. Income rises in Japan
c. Prices rise in Japan
d. Interest rates rise in Japan

42. The quantity of Canadian dollars supplied to the foreign exchange market would increase if, other things remaining equal:
a. Preferences for imports rise in Canada
b. Labor productivity increases in Canada
c. Prices of goods and services decrease in Canada
d. Import tariffs rise in Canada

43. The U.S. demand for pesos would shift to the right if there occurred a (an):
a. Change in preferences toward U.S. manufactured goods
b. Increase in the dollar/peso exchange rate
c. Decrease in the U.S. population
d. Increase in the U.S. price level

44. The supply of francs, would shift to the right for all of the following reasons except:
a. An increase in Swiss real income
b. An increase in Swiss prices
c. An increase in the Swiss population
d. An increase in Swiss interest rates

The figure below illustrates the supply and demand schedules of Swiss francs in a market of freely-floating exchange rates.

Figure 12.1 The Market for Francs

45. Refer to Figure 12.1. Should preferences for imports rise in the United States and fall in Switzerland, there would occur a (an):
a. Increase in the demand for francs–decrease in the supply of francs-depreciation of the dollar
b. Increase in the demand for francs–decrease in the supply of francs-appreciation of the dollar
c. Decrease in the demand for francs–decrease in the supply of francs-appreciation of the dollar
d. Decrease in the demand for francs–increase in the supply of francs-depreciation of the dollar

46. Refer to Figure 12.1. Should real interest rates in the United States rise relative to real interest rates in Switzerland, there would occur a (an):
a. Increase in the demand for francs–decrease in the supply of francs-depreciation of the dollar
b. Increase in the demand for francs–decrease in the supply of francs-appreciation of the dollar
c. Decrease in the demand for francs–increase in the supply of francs-appreciation of the dollar
d. Decrease in the demand for francs–decrease in the supply of francs-depreciation of the dollar

47. Refer to Figure 12.1. Should the U.S. price level rise relative to the Swiss price level, there would occur a (an):
a. Increase in the demand for francs–increase in the supply of francs-appreciation of the dollar
b. Decrease in the demand for francs–decrease in the supply of francs-depreciation of the dollar
c. Increase in the supply of francs–decrease in the demand for francs-appreciation of the dollar
d. Decrease in the supply of francs–increase in the demand for francs-depreciation of the dollar

48. Refer to Figure 12.1. Should the United States impose tariffs on imports from Switzerland, there would occur a (an):
a. Increase in the demand for francs and a depreciation of the dollar
b. Decrease in the demand for francs and an appreciation of the dollar
c. Decrease in the supply of francs and an appreciation of the dollar
d. Increase in the supply of francs and a depreciation of the dollar

49. Refer to Figure 12.1. Should Swiss labor productivity rise, leading to a decrease in Swiss manufacturing costs, there would occur a (an):
a. Increase in the supply of francs and a depreciation of the dollar
b. Increase in the supply of francs and an appreciation of the dollar
c. Decrease in the demand for francs and an appreciation of the dollar
d. Increase in the demand for francs and a depreciation of the dollar

50. Refer to Figure 12.1. If Switzerland experienced a disastrous wheat-crop failure, leading to additional wheat imports from the United States, there would occur an:
a. Increase in the supply of francs and an appreciation of the dollar
b. Increase in the supply of francs and a depreciation of the dollar
c. Increase in the demand for francs and a depreciation of the dollar
d. Increase in the demand for francs and an appreciation of the dollar

51. Given floating exchange rates, if Japan increases its demand for Canadian goods at the same time that Canada increases its demand for Japanese goods, then we would expect the yen’s exchange value to:
a. Appreciate against the dollar
b. Depreciate against the dollar
c. Remain constant against the dollar
d. Appreciate, depreciate, or remain constant against the dollar

52. Given floating exchange rates, assume that the Swiss decrease their import purchases from Italy while at the same time the Italians increase their purchases of Swiss government securities. The first action by itself would lead to a (an) ____ of the franc against the lira while the second action by itself would lead to a (an) ____ of the franc against the lira.
a. Appreciation, appreciation
b. Depreciation, depreciation
c. Appreciation, depreciation
d. Depreciation, appreciation

53. Given floating exchange rates, a simultaneous decrease in the Canadian demand for British products and increase in the British desire to invest in Canadian government securities would cause a (an):
a. Appreciation of the pound against the dollar
b. Depreciation of the pound against the dollar
c. Unchanged pound/dollar exchange rate
d. None of the above

54. Assume a system of floating exchange rates. Due to a high savings rate, suppose the level of savings in Japan is in excess of domestic investment needs. If Japanese residents invest abroad, the yen’s exchange value will ____ and the Japanese trade balance will move toward ____.
a. Appreciate, deficit
b. Appreciate, surplus
c. Depreciate, deficit
d. Depreciate, surplus

55. Given a system of floating exchange rates, assume that Boeing Inc. of the United States places a large order, payable in yen, with a Japanese contractor for jet engine parts. The immediate effect of this transaction will be a shift in the:
a. Supply curve of yen to the left which causes the dollar to appreciate against the yen
b. Supply curve of yen to the right which causes the dollar to depreciate against the yen
c. Demand curve for yen to the left which causes the dollar to appreciate against the yen
d. Demand curve for yen to the right which causes the dollar to depreciate against the yen

56. For purchasing-power parity to exist:
a. Flows of currency in the trade account must be offset by flows of currency in the capital account
b. The nominal interest rate must be equal to the real interest rate in all countries
c. Converting a sum of funds from one currency to another does not alter its purchasing power
d. A country’s trade account must always be in balance

57. Assume that interest rates in the United States and Britain are the same. If a U.S. resident anticipates that the exchange value of the dollar is going to appreciate against the pound, she should:
a. Borrow needed funds from British banks rather than U.S. banks
b. Borrow needed funds from U.S. banks rather than British banks
c. Convert U.S. dollars into British pounds
d. Any of the above

58. Given a system of floating exchange rates, if Canada’s labor productivity rises relative to the labor productivity of its trading partners:
a. Canadian imports will fall and the dollar will appreciate
b. Canadian imports will fall and the dollar will depreciate
c. Canadian imports will rise and the dollar will appreciate
d. Canadian imports will rise and the dollar will depreciate

59. Assume that labor productivity growth is slower in the United States than in its trading partners. Given a system of floating exchange rates, the impact of this growth differential for the United States will be:
a. Increased exports and an appreciation of the dollar
b. Increased exports and a depreciation of the dollar
c. Increased imports and an appreciation of the dollar
d. Increased imports and a depreciation of the dollar

60. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing-power parity, if the price of traded goods rises by 10 percent in the United States and remains constant in Japan, the exchange rate will become
a. 72 yen per dollar
b. 81 yen per dollar
c. 99 yen per dollar
d. 108 yen per dollar

61. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing-power parity, if the price of traded goods rises by 5 percent in the United States and 15 percent in Japan, the exchange rate will become:
a. 72 yen per dollar
b. 81 yen per dollar
c. 99 yen per dollar
d. 108 yen per dollar

62. Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to purchasing power parity, if the price of traded goods falls by 5 percent in the United States and rises by 5 percent in Japan, the exchange rate will become:
a. 72 yen per dollar
b. 81 yen per dollar
c. 99 yen per dollar
d. 108 yen per dollar

63. Suppose that the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar. One can say that the:
a. Yen has appreciated against the dollar and the dollar has depreciated against the yen
b. Yen has depreciated against the dollar and the dollar has appreciated against the yen
c. Yen has appreciated against the dollar and the dollar has appreciated against the yen
d. Yen has depreciated against the dollar and the dollar has depreciated against the yen

64. Given a floating exchange rate system an increase in ____ would cause the dollar to appreciate against the euro.
a. U.S. labor costs
b. The U.S. money supply
c. U.S. prices of goods
d. U.S. real interest rates

65. Under a system of floating exchange rates, a Japanese trade surplus against Canada would result in a (an):
a. Rise in the dollar price of the yen
b. Fall in the dollar price of the yen
c. Rise in the yen price of the dollar
d. Unchanged dollar/yen exchange rate

66. When deciding between U.S. and British government securities, an American investor typically considers:
a. U.S. and British interest rates and anticipated changes in the exchange rate
b. Budget deficits of the U.S. government and British government
c. Shifts in the demand for U.S. goods and British goods
d. U.S. and British inflation rates and anticipated changes in the exchange rate

67. In the long run, exchange rates are primarily determined by:
a. Agreements among governments of the world’s industrial countries
b. Relative interest rates in developing countries and industrial countries
c. Economic fundamentals such as relative productivity levels
d. The rate at which country’s currencies exchange for gold

68. Increased tariffs on U.S. steel imports cause the dollar to ____ in the ____.
a. Appreciate, long run
b. Depreciate, long run
c. Appreciate, short run
d. Depreciate, short run

69. Lower tariffs on U.S. agricultural imports cause the dollar to ____ in the ____.
a. Appreciate, long run
b. Depreciate, long run
c. Appreciate, short run
d. Depreciate, short run

70. Relatively high interest rates in the United States causes the dollar to ____ in the ____.
a. Appreciate, long run
b. Depreciate, long run
c. Appreciate, short run
d. Depreciate, short run

71. The asset market theory of exchange rate determination suggests that the most important factor influencing the demand for domestic and foreign securities is:
a. Expected return on these assets relative to one another
b. Ability of these assets to easily be converted into cash
c. Riskiness of these assets relative to one another
d. Level of government restrictions on trade and investment flows

72. With floating exchange rates, easy credit and low short term interest rates lead to
a. Exchange rate depreciation in the short run
b. Exchange rate appreciation in the short run
c. Exchange rate depreciation in the long run
d. Exchange rate appreciation in the long run

73. With floating exchange rates, relatively high productivity growth for a nation leads to
a. Exchange rate depreciation in the short run
b. Exchange rate appreciation in the short run
c. Exchange rate depreciation in the long run
d. Exchange rate appreciation in the long run

74. All of the following are important long-run determinants of exchange rates except
a. Consumer tastes
b. Trade policy
c. Labor productivity
d. Interest rates

75. The purchasing-power parity theory suffers from the problem
a. Of choosing the appropriate price index
b. That it overlooks the influence of capital flows
c. That government policy may modify exchange rates
d. All of the above

TRUE/FALSE

1. In a free market, exchange rates are determined by market fundamentals and market expectations.

2. Concerning exchange-rate determination, market fundamentals include inflation rates, productivity levels, and speculative opinion about future exchange rates.

3. Market expectations include news about market fundamentals, speculative opinion about future exchange rates, and profitability and riskiness of investments.

4. In a free market, the equilibrium exchange rate occurs at the point where the quantity demanded of a foreign currency equals the quantity of that currency supplied.

5. Exchange rates are determined by the unregulated forces of supply and demand for foreign currencies as long as central banks do not intervene in the foreign exchange markets.

6. Over the long run, foreign exchange rates are determined by transfers of bank deposits that respond to differences in real interest rates and to shifting expectations of future exchange rates.

The figure below illustrates the supply and demand schedules of Swiss francs under a system of floating exchange rates.

Figure 12.2. The Market for Swiss Francs

7. Refer to Figure 12.2. If the United States decreases tariffs on imports from Switzerland, there would occur a decrease in the demand for francs and a decrease in the dollar price of the franc.

8. Refer to Figure 12.2. If Swiss manufacturing costs increase relative to those of the United States, there would occur an increase in the supply of francs and an appreciation in the dollar’s exchange value.

9. Refer to Figure 12.2. If the Federal Reserve adopts a restrictive monetary policy that leads to relatively high interest rates in the United States, the demand for francs would decrease, the supply of francs would increase, and the dollar’s exchange value would appreciate.

10. Refer to Figure 12.2. As the profitability of assets in Switzerland rises relative to the profitability of assets in the United States, U.S. residents make additional investments in Switzerland; this leads to an increased demand for francs and a depreciation of the dollar’s exchange value.

11. Refer to Figure 12.2. If the rate of inflation in the United States is higher than the rate of inflation in Switzerland, the demand for francs decreases, the supply of francs increases, and the dollar’s exchange value appreciates.

12. Under floating exchange rates, short-run exchange rates are primarily determined by national differences in real interest rates and shifting expectations of future exchange rates.

13. Day-to-day influences on foreign exchange rates always cause rates to move in the same direction as changes in long-term market fundamentals.

14. With floating exchange rates, a country experiencing faster economic growth than its trading partners find its currency’s exchange value appreciating.

15. If U.S. labor productivity growth is 2 percent per annum and Swiss labor productivity growth is 6 percent per annum, the dollar will depreciate against the franc under a system of floating exchange rates.

16. In 1985 and 1986 U.S. interest rates fell relative to interest rates in Japan. Under floating exchange rates, this would lead to the dollar’s exchange value depreciating against the yen.

17. A country having stronger preferences for imports than its trading partners have for its exports finds its demand for foreign exchange rising more rapidly than its supply of foreign exchange.

18. Economies with relatively high growth rates in labor productivity tend to find their currencies’ exchange values appreciating under a floating exchange-rate system.

19. Under floating exchange rates, relatively low domestic interest rates tend to promote depreciation of a currency’s exchange value while relatively high domestic interest rates lead to currency appreciation.

20. Suppose expansionary monetary policy in the United States leads to interest rates falling to 2 percent while tight monetary policy in Switzerland leads to interest rates rising to 8 percent. With floating exchange rates, the dollar would appreciate against the franc.

21. The purchasing-power-parity theory is used to predict exchange-rate movements in the short run.

22. According to the law of one price, identical goods should cost the same in all nations, assuming there are no shipping costs nor trade barriers.

23. The purchasing- power-parity theory predicts that if the U.S. inflation rate exceeds the Japanese inflation rate by 4 percent, the dollar’s exchange value will appreciate by 4 percent against the yen.

24. Assume the initial yen/dollar exchange rate to be 100 yen per dollar. If the U.S. inflation rate is 2 percent and the Japanese inflation rate is 7 percent, the exchange rate should move to 105 yen per dollar according to the purchasing-power-parity theory.

25. Assume the initial dollar/pound exchange rate to be $2 per pound. If the U.S. inflation rate is 8 percent and the U.K. inflation rate is 3 percent, the exchange rate should move to $2.10 per pound according to the purchasing-power-parity theory.

26. If consumer tastes in the United States change in favor of goods produced in France, the demand for francs will increase which causes an appreciation of the dollar against the franc under a floating exchange rate system.

27. As the profitability of Japanese assets rises relative to the profitability of Australian assets, Australian residents will make additional investments in Japan; this results in an increased demand for yen and a depreciation of the dollar under a system of floating exchange rates.

28. If the United States experiences an enormous wheat crop failure, it will have to import more wheat and the dollar’s exchange value will depreciate under a system of floating exchange rates.

29. If Japan realizes technological improvements in the production of automobiles, which lowers its production costs relative to foreign producers, Japanese exports will rise and the yen’s exchange value will appreciate under a system of floating exchange rates.

30. If Mexico applies tariffs to imports of manufactured goods, Mexico’s demand for foreign exchange will rise and the peso will depreciate under a system of floating exchange rates.

31. According to the “Big Mac” index, if a Big Mac costs $2.28 in the United States and 25.75 krone in Denmark (equivalent to $4.25), the Danish krone is an undervalued currency.

32. According to the “Big Mac” index, if a Big Mac costs $2.28 in the United States and 48 baht in Thailand (equivalent to $1.91), the baht is an undervalued currency.

33. Long-run determinants of exchange rate include labor productivity levels, inflation rates, consumer preferences for goods and services, and trade barriers.

34. In the short run, exchange rates are primarily determined by investor expectations of returns on assets such as government securities and bank accounts.

35. Changes in market expectations have their greatest impact on exchange-rate changes over the long run as opposed to the short run.

36. If it is widely expected that the British economy will experience more rapid inflation than the Australian economy, the pound will depreciate against the dollar under a system of floating exchange rates.

37. According to the asset-markets approach, adjustments among financial assets are a key determinant of long-run movements in exchange rates.

38. The asset-markets approach views exchange-rate determination as similar to the stock market in which prices are volatile and expectations are important.

39. According to the principle of exchange-rate overshooting, a short-run depreciation of a currency is likely to be greater than a long-run depreciation of that currency.

40. Exchange-rate overshooting is based on the notion that the supply schedule of a currency is more elastic in the short run than in the long run.

41. According to exchange-rate overshooting, an appreciation of the Australian dollar is likely to be greater over a long time period than over a short time period.

42. Concerning exchange rate forecasting, fundamental analysis involves consideration of a variety of macroeconomic variables and policies that tend to affect currency values.

43. Econometric models are best suited for forecasting long-run exchange rates rather than short-run exchange rates.

44. Concerning exchange rate forecasting, technical analysis extrapolates from past exchange-rate trends while ignoring economic and political determinants of exchange rates.

45. Given an efficient foreign exchange market, the spot rate is the rational approximation of the markets expectation of the forward rate that will exist at the end of the forward period.

46. A forward premium on the British pound serves as a rough benchmark of the expected rate of appreciation in the pound’s spot rate.

47. A forward discount on Mexico’s peso serves as a rough benchmark of the expected appreciation in the peso’s spot rate.

48. If you were considering hiring a forecasting firm to predict future spot rates of the yen, you would hope that the firm could predict better what would be implied by the yen’s forward rate.

49. Although the law of one price predicts that identical goods should cost the same in all nations, transportation costs and tariffs tend to prevent this prediction from actually occurring.

50. If real interest rates decline in the United States relative to real interest rates abroad, the dollar’s exchange value will appreciate under a floating exchange-rate system.

SHORT ANSWER

1. What is the purchasing power parity approach to exchange rate determination?

2. What is exchange rate overshooting?

ESSAY

1. In a free market, what determines exchange rates in the long run and the short run?

2. What is the asset market approach to exchange rate determination?

CHAPTER 13—BALANCE-OF-PAYMENTS ADJUSTMENTS

MULTIPLE CHOICE

1. Which of the following does not represent an automatic adjustment in balance-of-payments disequilibrium? Variations in:
a. Domestic income
b. Foreign prices
c. Domestic prices
d. Foreign par values

2. The balance-of-payments adjustment mechanism developed during the 1700s by the English economist David Hume is the:
a. Income-adjustment mechanism
b. Flexible-exchange-rate-adjustment mechanism
c. Price-adjustment mechanism
d. Rank-reserve-adjustment mechanism

3. Which chain of events would promote payments equilibrium for a surplus nation, according to the price-adjustment mechanism?
a. Increasing money supply–increasing domestic prices–rising imports–falling exports
b. Increasing money supply–falling domestic prices–rising imports–falling exports
c. Decreasing money supply–increasing domestic prices–falling imports–rising exports
d. Decreasing money supply–decreasing domestic prices–falling imports–rising exports

4. Which chain of events would promote payments equilibrium for a deficit nation, according to the price-adjustment mechanism?
a. Increasing money supply–increasing domestic prices–rising imports–falling exports
b. Increasing money supply–falling domestic prices–rising imports–falling exports
c. Decreasing money supply–increasing domestic prices–falling imports–rising exports
d. Decreasing money supply–decreasing domestic prices–falling imports–rising exports

5. During the gold standard era, central bankers agreed to react positively to international gold flows so as to reinforce the automatic adjustment mechanism. Which of the following best represents the above statement?
a. Income-adjustment mechanism
b. Price-adjustment mechanism
c. Rules of the game
d. Discretionary fiscal policy

6. During the gold standard era, the “rules of the game” suggested that:
a. Surplus countries should increase their money supplies
b. Deficit countries should increase their money supplies
c. Surplus and deficit countries should increase their money supplies
d. Surplus and deficit countries should decrease their money supplies

7. Which of the following balance-of-payments adjustment mechanisms is most closely related to the quantity theory of money?
a. Income-adjustment mechanism
b. Price-adjustment mechanism
c. Interest-rate-adjustment mechanism
d. Output-adjustment mechanism

8. Under the gold standard, a surplus nation facing a gold inflow and an increase in its money supply would also experience a:
a. Rise in its interest rate and a short-term financial inflow
b. Rise in its interest rate and a short-term financial outflow
c. Fall in its interest rate and a short-term financial inflow
d. Fall in its interest rate and a short-term financial outflow

9. Under the gold standard, a deficit nation facing a gold outflow and a decrease in its money supply would also experience a:
a. Rise in its interest rate and a short-term financial inflow
b. Rise in its interest rate and a short-term financial outflow
c. Fall in its interest rate and a short-term financial inflow
d. Fall in its interest rate and a short-term financial outflow

10. Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates increase to levels higher than those abroad. For Canada, this tends to promote:
a. Net financial inflows
b. Net financial outflows
c. Net merchandise exports
d. Net merchandise imports

11. Assume that Canada initially faces payments equilibrium in its merchandise trade account as well as in its capital and financial account. Now suppose that Canadian interest rates fall to levels below those abroad. For Canada, this tends to promote:
a. Net financial inflows
b. Net financial outflows
c. Net merchandise exports
d. Net merchandise imports

12. Suppose the United States levies an interest equalization tax, which taxes Americans on dividend and interest income from foreign securities. Such a tax would be intended to:
a. Encourage financial movements from the United States to overseas
b. Discourage financial movements from the United States to overseas
c. Discourage financial movements from overseas to the United States
d. None of the above

13. Assume that interest rates on comparable securities are identical in the United States and foreign countries. Now suppose that investors anticipate that in the future the U.S. dollar will appreciate against foreign currencies. Investment funds would thus be expected to:
a. Flow from the United States to foreign countries
b. Flow from foreign countries to the United States
c. Remain totally in foreign countries
d. Not be affected by the expected dollar appreciation

14. Suppose Japan increases its imports from Sweden, leading to a rise in Sweden’s exports and income level. With a higher income level, Sweden imports more goods from Japan. Thus a change in imports in Japan results in a feedback effect on its exports. This process is best referred to as the:
a. Monetary approach to balance-of-payments adjustment
b. Discretionary income adjustment process
c. Foreign repercussion effect
d. Price-specie flow mechanism

Exhibit 13.1

Assume the marginal propensity to consume for U.S. households equals 0.9, and the marginal propensity to import for the United States equals 0.1. Suppose there occurs an increase in investment of $10 billion at each level of income.

15. Refer to Exhibit 13.1. The value of the multiplier for the United States equals:
a. 2
b. 3
c. 4
d. 5

16. Refer to Exhibit 13.1. The change in the level of U.S. income resulting from the additional investment spending equals
a. $20 billion
b. $30 billion
c. $40 billion
d. $50 billion

17. Refer to Exhibit 13.1. The change in the level of U.S. imports resulting from the rise in U.S. income equals:
a. $5 billion
b. $10 billion
c. $15 billion
d. $20 billion

18. The monetary approach to balance-of-payments adjustments suggests that all payments deficits are the result of:
a. Too high interest rates in the home country
b. Too low interest rates in the home country
c. Excess money supply over money demand in the home country
d. Excess money demand over money supply in the home country

19. The monetary approach to balance-of-payments adjustments suggests that all payments surpluses are the result of:
a. Too high interest rates in the home country
b. Too low interest rates in the home country
c. Excess money supply over money demand in the home country
d. Excess money demand over money supply in the home country

20. Starting from a position where the nation’s money demand equals the money supply, and its balance of payments is in equilibrium, economic theory suggests that the nation’s balance of payments would move into a deficit position if there occurred in the nation a:
a. Decrease in the money supply
b. Increase in the money demand
c. Decrease in the money demand
d. None of the above

21. Which approach to balance-of-payments adjustment suggests that balance-of-payments surpluses are the result of excess money demand in the home country?
a. Absorption approach
b. Elasticities approach
c. Monetary approach
d. Purchasing-power-parity approach

22. According to the “rules of the game” of the gold standard era, a country’s central bank agreed to react to international gold flows so as to:
a. Officially devalue a currency during eras of payments surpluses
b. Officially revalue a currency during eras of payments deficits
c. Offset the automatic-adjustment mechanism (e.g., prices)
d. Reinforce the automatic-adjustment mechanism

23. According to the quantity theory of money, a change in the domestic money supply will bring about:
a. Inverse and proportionate changes in the price level
b. Inverse and less-than-proportionate changes in the price level
c. Direct and proportionate changes in the price level
d. Direct and less-than-proportionate changes in the price level

24. The formulation of the so-called income adjustment mechanism is associated with:
a. Adam Smith
b. David Ricardo
c. David Hume
d. John Maynard Keynes

25. The value of the foreign trade multiplier equals the reciprocal of the sum of the marginal propensities to:
a. Save plus import
b. Import plus invest
c. Consume plus export
d. Save plus import

26. Starting from a position where the nation’s money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation’s balance of payments would move into a deficit position if there occurred in the nation:
a. An increase in the money supply
b. A decrease in the money supply
c. An increase in money demand
d. None of the above

27. Starting from a position where the nation’s money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation’s balance of payments would move into a surplus position if there occurred in the nation:
a. A decrease in the money supply
b. An increase in the money supply
c. A decrease in the money demand
d. None of the above

28. Starting from a position where the nation’s money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation’s balance of payments would move into a surplus position if there occurred in the nation:
a. An increase in the money demand
b. A decrease in the money demand
c. An increase in the money supply
d. None of the above

29. Assume identical interest rates on comparable securities in the United States and foreign countries. Suppose investors anticipate that in the future the U.S. dollar will depreciate against foreign currencies. Investment funds would tend to:
a. Flow from the United States to foreign countries
b. Flow from foreign countries to the United States
c. Remain totally in foreign countries
d. Remain totally in the United States

30. Suppose that rising U.S. income leads to higher sales and profits in the United States. This would likely result in:
a. Increasing portfolio investment into the United States
b. Decreasing portfolio investment into the United States
c. Increasing direct investment into the United States
d. Decreasing direct investment into the United States

Figure 13.1. U.S. Capital and Financial Account

31. Refer to Figure 13.1. Upward movements along U.S. capital and financial account schedule CA0 would be caused by:
a. U.S. interest rates rising relative to foreign interest rates
b. U.S. interest rates falling relative to foreign interest rates
c. Taxes placed on income earned by U.S. residents from their foreign investments
d. Taxes placed on income earned by foreign residents from their U.S. investments

32. Refer to Figure 13.1. Downward movements along U.S. capital and financial account schedule CA0 would be caused by:
a. U.S. interest rates rising relative to foreign interest rates
b. U.S. interest rates falling relative to foreign interest rates
c. Taxes placed on income earned by U.S. residents from their foreign investments
d. Taxes placed on income earned by foreign residents from their U.S. investments

33. Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA0 to CA1 if:
a. U.S. interest rates exceeded foreign interest rates
b. Foreign interest rates exceeded U.S. interest rates
c. Taxes were placed on income earned by U.S. residents from their foreign investments
d. Taxes were placed on income earned by foreign residents from their U.S. investments

34. Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA0 to CA1 if:
a. U.S. residents receive subsidies to invest in foreign nations
b. U.S. interest rates rise relative to foreign interest rates
c. Taxes are reduced on income earned by U.S. residents from their foreign investments
d. Expected profits decline on U.S. investments in foreign manufacturing

35. Refer to Figure 13.1. The U.S. capital and financial account schedule would shift upward from CA0 to CA1 for all of the following reasons except:
a. U.S. political stability improves relative to foreign political stability
b. U.S. interest rates fall relative to foreign interest rates
c. Taxes are placed on income earned by U.S. residents from foreign investments
d. Restrictions are imposed on foreign loans granted by U.S. banks

36. Refer to Figure 13.1. U.S. capital and financial account schedule CA0 would shift upwards, or downwards, for all of the following reasons except:
a. U.S. residents being taxed on income earned from foreign investments
b. U.S. banks being restricted on loans that can be made abroad
c. U.S. political stability changing relative to foreign political stability
d. U.S. interest rates changing relative to foreign interest rates

Table 13.1. Canada’s Saving, Investment, Import, and Export Functions (in billions of dollars) Under a System of Fixed Exchange Rates

Export Function X = 3000
Investment Function I = 1000
Saving Function S = -1000 + 0.2Y
Import Function M = 500 + 0.25Y

37. Referring to Table 13.1, if Canada’s income rises by $200 billion, saving would rise by:
a. $10 billion
b. $20 billion
c. $30 billion
d. $40 billion

38. Referring to Table 13.1, if Canada’s income rises by $200 billion, imports would rise by:
a. $50 billion
b. $75 billion
c. $100 billion
d. $125 billion

39. Referring to Table 13.1, Canada’s foreign trade multiplier equals:
a. 1.75
b. 2.05
c. 2.22
d. 2.64

40. Referring to Table 13.1, Canada’s equilibrium level of income is:
a. $8000 billion
b. $9000 billion
c. $10,000 billion
d. $11,000 billion

41. Refer to Table 13.1. If improved business optimism leads to increases in Canada’s planned investment spending from $1000 billion to $1200 billion, Canada’s equilibrium income rises by approximately:
a. $444 billion
b. $555 billion
c. $666 billion
d. $777 billion

42. Refer to Table 13.1. If weak economic conditions abroad result in Canada’s exports falling from $3000 billion to $2500 billion, Canada’s equilibrium income falls by approximately:
a. $888 billion
b. $990 billion
c. $1110 billion
d. $1220 billion

Figure 13.2. Australian Economy Under a Fixed Exchange Rate System

43. Refer to Figure 13.2. The slope of the (X-M) schedule and (S-I) schedule indicates that Australia’s foreign trade multiplier is:
a. 0.5
b. 1.0
c. 1.5
d. 2.0

44. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that improving economic conditions abroad lead to an autonomous increase in Australian exports of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, surplus of $2.5 billion
b. Rises to $60 billion, surplus of $5 billion
c. Falls to $40 billion, deficit of $2.5 billion
d. Falls to $40 billion, deficit of $5 billion

45. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S- I)0 intersects (X-M)0, suppose that worsening economic conditions abroad lead to an autonomous decrease in Australian exports of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, surplus of $2.5 billion
b. Rises to $60 billion, surplus of $5 billion
c. Falls to $40 billion, deficit of $2.5 billion
d. Falls to $40 billion, deficit of $5 billion

46. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that improving profit expectations lead to an autonomous increase in Australian investment of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, deficit of $2.5 billion
b. Rises to $60 billion, deficit of $5 billion
c. Falls to $40 billion, surplus of $2.5 billion
d. Falls to $40 billion, surplus of $5 billion

47. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that worsening profit expectations lead to an autonomous decrease in Australian investment of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, deficit of $2.5 billion
b. Rises to $60 billion, deficit of $5 billion
c. Falls to $40 billion, surplus of $2.5 billion
d. Falls to $40 billion, surplus of $5 billion

48. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that increased thriftiness leads to an autonomous increase in Australian saving of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, deficit of $2.5 billion
b. Rises to $60 billion, deficit of $5 billion
c. Falls to $40 billion, surplus of $2.5 billion
d. Falls to $40 billion, surplus of $5 billion

49. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that dwindling thriftiness leads to an autonomous decrease in Australian saving to $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, deficit of $2.5 billion
b. Rises to $60 billion, deficit of $5 billion
c. Falls to $40 billion, surplus of $2.5 billion
d. Falls to $40 billion, surplus of $5 billion

50. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that changing preferences lead to an autonomous increase in Australian imports of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, surplus of $2.5 billion
b. Rises to $60 billion, surplus of $5 billion
c. Falls to $40 billion, deficit of $2.5 billion
d. Falls to $40 billion, deficit of $5 billion

51. Refer to Figure 13.2. Starting at equilibrium income $50 billion, where (S-I)0 intersects (X-M)0, suppose that changing preferences lead to an autonomous decrease in Australian imports of $5 billion. Australian income thus ____ which leads to Australia’s trade account moving to a ____.
a. Rises to $60 billion, surplus of $2.5 billion
b. Rises to $60 billion, surplus of $5 billion
c. Falls to $40 billion, deficit of $2.5 billion
d. Falls to $40 billion, deficit of $5 billion

52. In explaining balance-of-payments adjustments, the classical economists
a. Focused on interest rates exclusively
b. Remained aware of the role of interest rates
c. Only focused their attention on short-term interest rates
d. Paid exclusive attention to long-tem interest rates

53. J. M. Keynes suggested that a trade deficit nation
a. Would experience a fall in income
b. Would experience a decline in imports
c. Would require active intervention by the government
d. Both a and b

54. The classical gold standard
a. Existed from early 1800’s to early 1900’s
b. Did not allow for imports and exports of gold
c. Led to the outflow of gold from surplus nations
d. Led to the inflow of gold to deficit nations

55. The classical economists assumed
a. That the volume of final output is fixed at the full-employment level in the long-run
b. The velocity of money is constant
c. The velocity of money depends on physical, structural, and institutional factors
d. All of the above

TRUE/FALSE

1. Under a fixed exchange rate system, adjustment mechanisms work for the automatic return to current-account balance after the initial balance has been disrupted.

2. When a country’s current account moves into disequilibrium, automatic adjustments in tariffs and quotas occur which move the current account back into equilibrium.

3. Prices, interest rates, and income are the automatic adjustment variables that help restore current-account equilibrium under a system of fixed exchange rates.

4. That the balance of payments could be adjusted by prices and interest rates, under a fixed exchange rate system, originated with Keynesian theory during the 1930s.

5. David Hume’s price-adjustment mechanism supported the mercantilist view that a nation could maintain a trade surplus indefinitely.

6. Under the price-adjustment mechanism, a government’s efforts to maintain a current-account surplus is self defeating over the long run because a nation’s current account automatically moves toward equilibrium.

7. Under the gold standard of the 1800s, exchange rates were allowed to float freely in the currency markets.

8. Under the gold standard, each participating nation defined the mint price of gold in terms of its national currency was prepared to buy and sell gold at that price.

9. Under the gold standard, a nation with a current-account surplus would realize gold outflows, a decrease in its money supply, and a fall in its domestic price level.

10. The essence of the classical price-adjustment mechanism is embodied in the quantity theory of money.

11. According to the equation of exchange, the total expenditures on final goods equals the monetary value of the final goods sold.

12. Regarding the equation of exchange, the classical economists assumed that final output was below its maximum level while the velocity of money was volatile.

13. According to the quantity theory of money, a change in the money supply will induce an inverse and less-than-proportionate change in the price level.

14. Under the price-adjustment mechanism, a trade-surplus nation would realize gold inflows, an increase in its money supply, and a loss of international competitiveness.

15. The price-adjustment mechanism’s relevance to the real world has been questioned on the grounds that national output is generally not at the full-employment level and that the velocity of money is not always constant.

16. According to the price-adjustment mechanism, trade deficits can occur only in the long run rather than in the short run.

17. Under the price-adjustment mechanism, trade-deficit nations realize price inflation and a loss of competitiveness while trade surplus nations realize price deflation and an improvement in competitiveness.

18. Under the classical gold standard, adjustments in domestic prices and short-term interest rates automatically promoted balance-of-payments equilibrium over the long run.

19. Under the classical gold standard, a trade surplus nation would realize gold inflows, an increase in its money supply, rising interest rates, and net investment inflows.

20. The gold standard’s “rules of the game” required central bankers in a surplus country to initiate contractionary monetary policies which lead to higher interest rates and net investment inflows.

21. The gold standard’s “rules of the game” required central bankers in a trade deficit nation to expand the money supply, leading to falling interest rates and net investment outflows.

22. The “rules of the game” served to reinforce and speed up the interest-rate-adjustment mechanism under a system of fixed exchange rates.

Figure 13.3. U.S. Capital and Financial Account Under a Fixed Exchange Rate System

23. Refer to Figure 13.3. As U.S. interest rates rise relative to foreign interest rates, the U.S. slides upward along schedule CA0, thus moving towards capital and financial account surplus.

24. Refer to Figure 13.3. Decreases in U.S. interest rates relative to foreign interest rates would shift U.S. capital and financial account schedule CA0 downward toward CA1, resulting in net financial outflows from the United States.

25. Refer to Figure 13.3. Falling investment profitability in the United States, relative to investment profitability abroad, would shift the U.S. capital and financial account schedule downward from CA0 to CA1, resulting in net financial outflows from the United States.

26. Refer to Figure 13.3. As the U.S. government decreases taxes on income earned by U.S. residents from foreign investments, the U.S. capital and financial account schedule shifts downward from CA0 to CA1 and the United States realizes net financial outflows.

27. Refer to Figure 13.3. If the political and economic stability of foreign countries worsens relative to that of the United States, the U.S. capital and financial account schedule would shift downward from CA0 to CA1, resulting in net financial outflows from the United States.

28. According to the Keynesian income-adjustment mechanism, income differentials among nations guarantee current-account equilibrium in a world of fixed exchange rates.

29. Keynesian theory asserts that, under a system of fixed exchange rates, the influence of income changes in surplus and deficit countries will automatically promote current-account equilibrium.

30. The Keynesian income-adjustment mechanism contends that a trade-surplus nation tends to realize falling income and falling imports, thus accentuating the trade surplus.

31. The foreign-trade multiplier equals the sum of the marginal propensity to import and the marginal propensity to save.

32. If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3, the foreign-trade multiplier equal 2.0.

33. For an open economy subject to international trade, equilibrium income occurs where saving plus investment equals imports plus exports.

34. If the marginal propensity to save equals 0.1 and the marginal propensity to import equals 0.3, an autonomous increase in exports of $1,000 would expand domestic income by $2,500 which leads to an increase in imports of $750.

35. If the marginal propensity to save equals 0.2 and the marginal propensity to import equals 0.3, an autonomous decrease in investment spending of $1 million leads to a $2 million decrease in domestic income and a $600,000 decrease in imports.

36. For the income adjustment mechanism to reverse a trade deficit, economic policymakers must be willing to permit domestic income to increase which leads to rising imports.

37. Reliance on an automatic adjustment process tends to be unacceptable in trade-deficit nations since it requires them to accept price deflation and/or falling income as a cost of reducing imports.

38. An “automatic” adjustment mechanism would require a trade-surplus nation to accept price deflation and/or falling income as the cost of increasing imports.

Figure 13.4. Canadian Economy Under a Fixed Exchange Rate System

39. Referring to Figure 13.4, Canada’s marginal propensity to save equals 0.25 and marginal propensity to import equal 0.5.

40. Referring to Figure 13.4, Canada’s foreign-trade multiplier equals 2.0.

41. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S – I)0 intersects (X – M)0, an autonomous decrease in Canadian imports of $10 billion leads to a $20 billion decrease in income and a trade deficit of $5 billion.

42. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S – I)0 intersects (X – M)0, an autonomous increase in Canadian investment of $10 billion leads to a $20 billion increase in income and no change in the country’s trade account.

43. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S – I)0 intersects (X – M)0, an autonomous decrease in saving of $10 billion leads to a $20 billion increase in income and a trade deficit of $5 billion.

44. Refer to Figure 13.4. Starting at equilibrium income $100 billion, where (S – I)0 intersects (X – M)0, an autonomous decrease in Canadian exports of $10 billion leads to a $20 decrease in income and a trade deficit of $5 billion.

45. According to the monetary approach, balance-of-payments disequilibriums are the result of imbalances in a country’s money supply and money demand.

46. The monetary approach contends that, under a fixed exchange rate system, an excess supply of money leads to a trade surplus.

47. The monetary approach contends that, under a fixed exchange rate system, an excess demand for money leads to a trade deficit.

48. The monetary approach contends that, under a fixed exchange rate system, policies that increase the supply of money relative to the demand for money lead to a trade surplus.

SHORT ANSWER

1. Compared to classical economists, how did Keynesian economics change the discussion of trade adjustment?

2. What is the foreign repercussion effect?

ESSAY

1. Explain David Hume’s theory of automatic adjustment for balance of payments disequilibria.

2. Is the monetary approach to the balance-of-payments part of the traditional adjustment theories?

ECO 405 Week 8 Quiz – Strayer University New

ECO/405 Week 8 Quiz – Strayer

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Quiz 7 Chapter 10

Chapter 10

Competition In The Global Marketplace: Should We Protect Ourselves From International Trade?

Multiple Choice Questions

1. Which Of The Following Statements Is Most Accurate?
A. Historically, There Has Been Conflict Between Groups Wanting To Suppress Trade And Groups Wanting To Peg Exchange Rates
B. Since The Late 1940s, Import Restrictions Have Fallen
C. Resentment Of Imports Always Increases During Economic Expansions
D. The U.S. Government Engaged In A Free Trade Campaign Up To The End Of World War Ii
E. None Of The Above

2. Which Of The Following Is Part Of The “Protectionist” Perspective On International Trade?
A. Imports Are Responsible For Crowding Out Domestic Goods From The Market And Thereby Reduce American Jobs
B. Trade Restrictions Are Needed To Protect Key Industries Vital To National Security
C. Imports Should Be Restricted To Remedy The Balance Of Trade Deficit
D. Both (A) And (C)
E. All Of The Above

3. In A Free Market, Who Benefits From Voluntary Exchange?
A. Buyers
B. Sellers
C. Both Buyers And Sellers
D. The Government Only
E. Nobody

4. Why Is International Trade Important? International Trade
A. Increases The Variety And Availability Of Consumer Goods In An Economy
B. Expands The Production Possibilities Of A Nation’s Economy
C. Increases An Economy’s Gdp
D. Allows Nations To Specialize In The Production Of Goods According To Comparative Advantage
E. Does All Of The Above

5. Which Of The Following Is Not Used As A Protectionist Argument?
A. Imports Crowd U.S. Goods Out Of The Market
B. Imports Reduce The Demand For Domestic Labor Leading To Higher Unemployment
C. Our Industries Cannot Compete Successfully Against Those In Other Countries That Pay Much Lower Wages
D. Imports Raise Living Standards Above What They Would Otherwise Be
E. All Of The Above Are Used As Protectionist Arguments

6. The Fundamental Reason Countries Engage In Trade Is That
A. It Enables Each Country To Improve Its Standard Of Living
B. Domestic Markets Are Continually Shrinking
C. Powerful Special Interest Groups Benefit From Exchange
D. Trade Allows Countries To Save Some Of Their Resources For The Future
E. All Of The Above

7. Omega Can Produce Either Two Microcomputers Or Ten Tv Sets. Alpha Can Produce One Microcomputer Or Five Tv Sets. Which Of The Following Statements Is Correct?
A. Alpha Has A Comparative Disadvantage In Producing Both Products
B. Both Countries Have A Comparative Advantage In Producing Microcomputers
C. The Countries Are Unlikely To Engage In Trade In These Two Items
D. Labor Costs Are Obviously Too High In Alpha
E. All Of The Above

8. Which Of The Following Will Give Rise To U.S. Demand For Foreign Exchange?
A. U.S. Sales Of Airplanes To Japanese Buyers
B. U.S. Investments Abroad
C. U.S. Purchases Of French Perfume
D. Both (B) And (C)
E. All Of The Above

9. A Country Has A Comparative Advantage In The Production Of Any Good That It Can Produce
A. At A Lower Absolute Cost Than Can Other Countries
B. With Less Labor Than Can Other Countries
C. With A Smaller Sacrifice Of Some Alternative Good Or Service Than Can Other Countries
D. For Export
E. All Of The Above

10. Which Of The Following Is Not A Reason That Countries Have Comparative Advantages In The Production Of Some Goods And Comparative Disadvantages In The Production Of Other Goods? Differences In
A. Technological “Know-How.”
B. Exchange Rates
C. Literacy Rates
D. Natural Resources
E. Labor Force Quality

Questions 11 – 15 Refer To The Graph Below.

11. Assuming An Initial Combination Of 75 Million Loaves Of Bread And 150 Million Gallons Of Milk, The Country Represented Would Refuse To Enter Into Any Trade Relationships In Which The Cost Of Importing
A. Bread Exceeds Two Gallons Of Milk Per Loaf
B. Milk Exceeds One Loaf Of Bread Per Gallon
C. Milk Exceeds Two Loaves Of Bread Per Gallon
D. Both (A) And (B)
E. None Of The Above

12. The Opportunity Cost Of A Million Gallons Of Milk Is How Many Millions Of Loaves Of Bread For This Country?
A. 0.5
B. 1
C. 2
D. 150
E. 300

13. The Opportunity Cost Of A Million Loaves Of Bread Is How Many Millions Of Gallons Of Milk For This Country?
A. .5
B. 1
C. 2
D. 150
E. 300

14. If This Country Has A Comparative Advantage In The Production Of Bread And Produces Only Bread While Trading With Another Country For Milk, Which Of The Following Is Of Its Consumption Possibilities Curve?
A. It Shifts Out Parallel To The Ppc
B. Its Vertical Intercept Increases
C. Its Horizontal Intercept Increases
D. All Of The Above
E. None Of The Above

15. If This Country Has A Comparative Advantage In The Production Of Milk And Produces Only Milk While Trading With Another Country For Bread, Which Of The Following Is Of Its Consumption Possibilities Curve?
A. It Shifts Out Parallel To The Ppc
B. Its Vertical Intercept Increases
C. Its Horizontal Intercept Increases
D. All Of The Above
E. None Of The Above

Questions 16 – 20 Refer To The Graph Below.

16. Without Trade, The Republic Of Alpha’s Production Possibilities Curve Is Ab. If Consumption Along The Curve A1b Is Possible With Trade, Alpha Must Have A Comparative Advantage In The Production Of
A. Bread
B. Milk
C. Both Bread And Milk
D. Neither Bread Nor Milk
E. It Cannot Be Determined With The Information Given

17. Without Trade, The Republic Of Alpha’s Production Possibilities Curve Is Ab. With No Trade, Alpha’s Consumption Possibilities Curve Is
A. Ab
B. A1b
C. Cb
D. C1b
E. Cc1

18. Without Trade, The Republic Of Alpha’s Production Possibilities Curve Is Ab. The Cost Of Producing Bread In Alpha (In Terms Of Millions Of Gallons Of
Milk) Is
A. .5
B. 1
C. 2
D. 100
E. 200

19. Without Trade, The Republic Of Alpha’s Production Possibilities Curve Is Ab. For Alpha To Be Willing To Trade Milk For Bread, A Million Loaves Of Bread Would Have To Cost Less Than
A. 0.5 Million Gallons Of Milk
B. 1 Million Gallons Of Milk
C. 2 Million Gallons Of Milk
D. 0.5 Million Loaves Of Bread
E. Alpha Would Not Trade Milk For Bread

20. If Alpha Produces 100 Million Loaves Of Bread, With Trade (And Consumption Possibilities Curve A1b) It Can Consume How Many Gallons Of Milk?
A. 0
B. 100
C. 200
D. 300
E. 400

21. An Exchange Rate Is
A. The Price Of One Country’s Currency In Terms Of The Monetary Units Of Another Country
B. The Rate At Which One Good Exchanges For Another
C. The Price Of Gold In Terms Of The U.S. Dollar
D. The Fee Charged For Exchanging One Currency For Another
E. None Of The Above

22. Which Of The Following Demands Kenyan Shillings?
A. U.S. Importers Of Kenyan Goods
B. U.S. Investors In Kenya
C. U.S. Tourists Visiting Kenya
D. All Of The Above
E. None Of The Above

23. Which Of The Following Supplies Kenyan Shillings?
A. U.S. Exporters To Kenya
B. Kenyan Tourists Returning Home
C. U.S. Importers Of Kenyan Goods
D. All Of The Above
E. None Of The Above

24. The Largest Part Of U.S. Demand For Foreign Currencies Arises From
A. Increases In Investments Abroad
B. Imports Of Merchandise
C. Gifts That Persons In The U.S. Sent Abroad
D. Foreign Aid Transfers From The U.S. To Developing Countries
E. None Of The Above

25. The Largest Part Of The U.S. Supply Of Foreign Currency Arises From
A. Investments Made By Foreigners In The U.S
B. Exports Of Merchandise
C. Net Investment Income
D. Gifts That Persons Abroad Send Persons In The U.S
E. None Of The Above

Questions 26 – 30 Refer To The Graph Below.

26. In Equilibrium, The Price Of A British Pound, In Terms Of U.S. Dollars, Is
A. $1.50
B. $1.25
C. $.8
D. $.67
E. None Of The Above

27. In Equilibrium, The Price Of A U.S. Dollar, In Terms Of British Pounds, Is
A. $1.50
B. $1.25
C. $.8
D. $.67
E. None Of The Above

28. Which Of The Following Could Cause An Increase In The Equilibrium Exchange Rate?
A. An Increase In U.S. Investment In Britain
B. An Increase In U.S. Imports From Britain
C. An Increase In The Number Of U.S. Tourists Traveling To Britain
D. All Of The Above
E. None Of The Above

29. Pegging The Exchange Rate At $1.25
A. Imposes A Price Floor
B. Results In A Balance Of Payments Problem
C. Will Increase British Demand For U.S. Exports
D. Will Increase U.S. Demand For British Imports
E. Will Do Of The Above

30. Pegging The Exchange Rate At $1.25 Will Result In
A. A Shortage Of ≤20 Million Pounds Per Month
B. A Surplus Of ≤20 Million Pounds Per Month
C. A Shortage Of ≤40 Million Pounds Per Month
D. A Surplus Of ≤40 Million Pounds Per Month
E. None Of The Above

Questions 31 – 35 Refer To The Graph Below.

31. If D And S Are The Relevant Supply And Demand Curves, An Increase In Nigerian Travelers To The U.S. Would Result In Which Of The Following Changes In The Graph? A Movement From
A. S To S1
B. S1 To S
C. R1 To R
D. Q2 To Q1
E. Q To Q

32. Which Of The Following Could Cause A Shift In The Supply Curve From S To S1? An Increase In
A. U.S. Exports To Nigeria
B. Nigerian Exports To The U.S
C. U.S. Travelers To Nigeria
D. All Of The Above
E. None Of The Above

33. An Increase In U.S. Investment In Nigeria Will Have Which Effect On R? It Will
A. Increase
B. Decrease
C. Remain The Same
D. Be Pegged At R1
E. Not Be Able To Be Determined

34. If D And S Are The Relevant Demand And Supply Curves, Pegging The Exchange Rate At R1. Will Result In
A. A Shortage Of Q2q Niara Per Month
B. A Surplus Of Q2q Niara Month
C. A Shortage Of Q2q1 Niara Per Month
D. A Surplus Of Q2q1niara Pounds Per Month
E. None Of The Above

35. If D And S Are The Relevant Demand And Supply Curves, Pegging The Exchange Rate At R1
A. Imposes A Price Floor
B. Results In A Balance Of Payments Problem
C. Will Increase British Demand For U.S. Exports
D. Will Increase U.S. Demand For British Imports
E. Will Do All Of The Above

36. Import Restrictions, Like Tariffs And Quotas, Can Protect Domestic Jobs
A. At A Low Price
B. By Changing The Consumption Tastes Of Domestic Buyers
C. At A High Price
D. Without Any Effect On An Economy
E. By Changing The Structure Of The Economy

37. Free Trade Can Result In What Impact On An Economy?
A. A Net Increase Or Decrease In Overall Employment
B. A Reduction In The Efficiency Of An Economy
C. Free Trade Always Harms An Economy
D. Free Trade Always Increases Total Employment
E. No Impact At All

38. The Exchange Rate Ceiling On The Dollar Price Of The Pound Will Result In
A. A Surplus Of Pounds
B. A Balance Of Payments Deficit
C. A Balance Of Payments Surplus
D. An Increase In U.S. Exports To Great Britain
E. Undervaluation Of The Dollar Relative To The Pound

39. Which Of The Following Curves Represents The Maximum Combination Of Goods And Services That Can Be Consumed In An Economy When All Its Resources Are Efficiently Used?
A. Market Demand Curve
B. Production Possibilities Curve
C. Market Supply Curve
D. Consumption Possibilities Curve
E. Resource Possibilities Curve

40. With International Trade, Which Of The Following Curves For An Economy Will Shift Outward?
A. Consumption Possibilities
B. Production Possibilities
C. Demand
D. Supply
E. Marginal Revenue

41. A Nation That Enjoys A Lower Opportunity Cost In The Production Of Goods, Relative To Another Nation, Is Said To Have A(N)
A. Market Advantage
B. Absolute Advantage
C. Comparative Advantage
D. Relative Cost Advantage
E. Production Advantage

42. Suppose That On Mars, Martians Must Give Up 2 Widgets To Produce 1 Gadget. On Venus, Venusians Must Give Up ½ Widget To Produce 1 Gadget. Which Of The Following Is ?
A. Venus Has A Comparative Advantage In Gadgets
B. Mars Has A Comparative Disadvantage In Gadgets
C. Venus Should Specialize In Gadgets And Trade With Mars For Widgets
D. Mars Should Specialize In Widgets And Trade With Venus For Gadgets
E. All Of The Above

43. The Price Of One Nation’s Currency In Terms Of Another Is Called
A. The Exchange Rate
B. The International Trade Rate
C. A Tariff
D. A Balance Of Trade Account
E. The Capital Account

44. Assuming Everything Else Constant, An Increase In The Demand For Russian Rubles Will
A. Reduce The Price Of Rubles
B. Increase The Exchange Rate For Rubles
C. Cause A Surplus Of Rubles
D. Reduce Exports To Russia
E. All Of The Above

45. Economists Generally Agree That International Trade Restrictions
A. Improve Economic Well-Being And The General Standard Of Living
B. Generate Significant Costs To Consumers In The Form Of Higher Prices And Reduced Quantity Of Goods
C. Increase Gross Domestic Product And Lower The Rate Of Unemployment In The Long Run
D. Are Important To The Overall Health Of The Economy
E. Reduce The Severity Of Business Cycles By Limiting Recessions

46. The Primary Factor Affecting The Demand For Any Nation’s Currency Is
A. The Nation’s Current Standing With The United Nations
B. The Demand For The Products Produced By That Nation
C. The Size Of The Nation’s Domestic Economy
D. The Amount Of Gold Reserves Held By That Nation
E. None Of The Above

47. Which Of The Following Are Forms Of International Trade Restrictions?
A. Tariffs
B. Quotas
C. Voluntary Restraint Agreements
D. All Of The Above
E. None Of The Above

48. What Do You Call Taxes Placed On Imports?
A. Tariffs
B. Quotas
C. Voluntary Restraint Agreements
D. Exchange Rates
E. Dumping Taxes

49. Which Of The Following Will Occur When A Tariff Is Placed On Imported Sugar?
A. The Price Of Imported Sugar Will Rise
B. The Price Of Domestic Sugar Will Rise
C. The Price Of Imported And Domestic Sugar Will Rise
D. The Price Of Sugar Will Fall
E. More Sugar Will Become Available In The Marketplace

50. Which Of The Following Is A Statement?
A. Quotas Increase The Availability Of Imported Goods
B. Tariffs Reduce The Price Of Domestically Produced Goods
C. Unlike Tariffs, Quotas Will Reduce The Price Of Imports
D. Quotas Result In Greater Profits For Foreign Producers
E. A $1,000 Tariff On Japanese Cars Will Result In A $1,000 Increase In Their Price

51. A Tariff Leads To A Leftward Shift Of The _______Curve, Resulting In ______ Prices And __________ Imports.
A. Demand; Lower; Greater
B. Supply; Lower; Lower
C. Supply; Higher; Lower
D. Demand; Higher; Lower
E. Consumption Possibilities; Higher; Lower

52. Which Of The Following Will Not Result From A Tariff?
A. Higher Import Prices
B. Higher Prices Of Goods For Consumers
C. Less Availability Of Goods For Consumers
D. Price Increases For Exported Goods
E. Import Duty Revenue For The Government

53. When A Quota Is Enforced On An Imported Good, The Supply Curve For That Good
A. Shifts To The Left
B. Becomes Horizontal At The Import’s Price
C. Becomes Vertical At The Quota Limit
D. Shifts To The Right
E. Becomes Non-Existent

54. Which Of The Following Statements About Quotas Is ? Quotas
A. Reduce The Availability Of Imported Goods For Consumers
B. Reduce The Profits Of Foreign Producers
C. Increase The Price Of Imports
D. Increase The Price Of Domestically Produced Substitutes
E. Are Used As A Means To Restrict International Trade

55. Which Of The Following Is A Likely Result Of A Country Engaging In Free Trade?
A. Jobs Are Lost In The Export Sector
B. Jobs Are Gained In The Import Sector
C. The Price Of Imports Falls
D. Product Variety Decreases
E. All Of The Above

56. Protecting An Industry That Is Vital To National Security From International Competition Is
A. The Infant Industry Argument
B. An Economic, Rather Than Political, Argument
C. The Key Industry Argument
D. An Argument Against Protectionism
E. None Of The Above

57. A New Industry Producing Cutting-Edge Products Should
A. Be Protected From International Competition, According To The Key Industry Argument
B. Be Protected From International Competition, According To The Infant Industry Argument
C. Not Be Protected Until Later Stages, When The Market Is Fully Developed
D. Not Be Protected, According To The Infant Industry Argument
E. None Of The Above

58. Environmental Damage Must Be Addressed In International Trade Agreements When A Country’s Actions Create
A. Property Rights
B. Negative Externalities
C. Positive Externalities
D. Private Goods
E. Military Output

59. Which Of The Following Is Used As An Argument Against Free Trade By Protectionists?
A. Environmental Quality
B. Human Rights
C. Infant Industries
D. Key Industries
E. All Of The Above

60. Which Of The Following Statements Regarding Human Rights And International Trade Is Correct?
A. Protectionists Believe Free Trade Leads To Exploitation Of Workers In Ldcs
B. Free Trade Advocates Believe It Is Efficient To Exploit Workers In Ldcs
C. Protectionists Believe Free Trade Leads To Increased Opportunity For Poor Workers
D. Free Trade Advocates Believe Trade Decreases Job Growth In Ldcs
E. The Wto Estimates That Free Trade Has Led To An Increase In Poverty Rates In Ldcs

61. What Do You Call It When Producers Sell Abroad At A Price Below Their Cost Of Production Or Their Domestic Price?
A. Limit Pricing
B. Voluntary Restraint Of Trade
C. Price Discrimination
D. Dumping
E. Gouging

62. Which Organization Is Charged With Settlement Of International Trade Disputes?
A. The Wto
B. The Eu
C. Nafta
D. Gatt
E. The Un

63. What Do You Call An Alliance Of Nations That Share Common External Tariffs? A(N)
A. Free Trade Area
B. International Trade Consortium
C. Customs Union
D. Trade Pact Area
E. Cartel Of Nations

64. Which Of The Following Best Describes Nafta? It Is A(N)
A. Free Trade Area
B. International Trade Consortium
C. Customs Union
D. Trade Pact Area
E. Cartel Of Nations

65. Most __________ Have Been Banned Under The World Trade Organization.
A. Tariffs
B. Voluntary Restraint Agreements
C. Quotas
D. Import Duties
E. Customs Unions

66. The European Union Is An Example Of A(N)
A. Free Trade Area
B. International Trade Consortium
C. Customs Union
D. Trade Pact Area
E. Cartel Of Nations

67. The Multi-National Currency Adopted By Members Of The European Union Is Called The
A. Euro
B. Dollar
C. Ruble
D. Franc
E. Peso

68. Which Of The Following Statements Is ?
A. The Euro Increases The Cost Of International Trade Between Members Of The European Union
B. The European Union Is A Free Trade Zone And Not A Customs Union
C. The Euro Reduces The Cost Of Trade Between Members Of The European Union
D. Common Market Treaties Are Becoming Less Popular Around The World
E. All Of The Above Statements Are

69. In Which Part Of The Globe Are You Most Likely To Find Nations Belonging To A Common Market Treaty?
A. North America
B. Asia
C. Europe
D. Africa
E. Everywhere

70. Which Of The Following Statements About Nafta Is ?
A. Nafta Is A Free Trade Zone And Not A Customs Union
B. Canada, Mexico, And The U.S. Are The Only Three Members Of Nafta
C. It Is Difficult To Empirically Measure The Economic Effects Of Nafta On The U.S. Economy
D. In The Long Run, Nafta Will Increase The Number Of Low-Paid Jobs In The U.S
E. Nafta Is Based On The Belief That Nations, In The Aggregate, Gain Economically From Free International Trade

71. What Have Researchers Concluded About The Net Effect Of Nafta On The Number Of Jobs In The U.S. Economy?
A. Nafta Has Increased The Number Of U.S. Jobs
B. Nafta Has Had No Effect On The Number Of U.S. Jobs
C. Nafta Has Significantly Reduced The Number Of U.S. Jobs
D. The Number Of U.S. Jobs Has Increased In Some Sectors Of The Economy, While In Other Sectors It Has Reduced The Number Of Jobs
E. No One Has Examined This Issue Yet

72. What Should Happen Once The Euro Has Been Completely Integrated Into The Economies Of The European Union (Eu)?
A. International Trade Between Eu Members Will Increase Due To Lower Transaction Costs Of Trade
B. Consumer Prices Will Increase And Income Will Fall
C. Trade Between Eu Members Will Decrease Due To The Increased Costs Of Using A Multi-National Currency
D. Eu Members Will Only Trade With Other Members And Stop Trading With The Rest Of The World
E. None Of The Above

73. Which Of The Following Is A Customs Union Of Nations?
A. Nafta
B. Wto
C. Eu
D. Gatt
E. Un

74. Which Of The Following Established A Free Trade Zone?
A. Eu
B. Gatt
C. Un
D. Wto
E. Nafta

75. Since The Introduction Of The General Agreement On Tariffs And Trade (Gatt) In The 1940s,
A. Tariffs And Import Quotas Have Increased Dramatically
B. Tariffs Around The World Have Fallen From An Average Of 40% To About 4%
C. Common Market Treaties Have Become More Difficult To Negotiate And Enforce
D. The Imposition Of Tariffs Has Been Declared To Be “Unfair” In Most Situations
E. Dumping Has Become A Widespread Practice Between Member Nations

76. The United States Currently Enforces An Embargo Against
A. Cuba
B. Saudia Arabia
C. The European Union
D. A) And B) Only
E. All Of The Above

77. Embargos
A. Are Import Quotas Set To 0
B. Are Export Quotas Set To 0
C. May Be Imposed For Political Reasons
D. May Be Imposed For Economic Reasons
E. All Of The Above

78. Outsourcing Is The Practice Of
A. Obtaining Raw Materials From Suppliers In Other Countries
B. Manufacturing Product In Another Country By Opening A Factory In That Nation
C. Purchasing Customer Services From Suppliers In Another Country Where The Costs Of These Services Are Lower Than Domestic Suppliers
D. Selling Goods To Another Country
E. Answers B And C Are Both Examples Of Outsourcing

79. The World Trade Organization, Or Wto, Has Been Unpopular With Many Environmentalists Because
A. It Produces A Great Deal Of Pollution
B. It Does Not Do Enough In Its Activities To Enforce Pollution Regulations
C. It Is Allowing Pollution Rights Licenses To Be Sold By Nations To One Another
D. It Encourages Developing Nations To Emphasize Jobs At The Expense Of Environment
E. The Wto Does Not Have A Pollution Control Agency

True / False Questions

80. Protectionists Want To Reduce Foreign Competition With U.S. Goods And Services.

81. Support For Protectionism Increases During Economic Expansions.

82. Free Traders Maintain That World Output Is Greatest If All Countries Are Free To Engage In Voluntary Exchanges.

83. A Country Should Strive To Export More Than It Imports Over Time.

84. Engaging In Exchange Enables A Country To Shift Its Production Possibilities Curve Outward.

85. Countries Should Trade For Goods In Which They Have A Comparative Advantage.

86. If A Country Has A Comparative Advantage In The Production Of One Good, It Must Have A Comparative Disadvantage In The Production Of Some Other Good.

87. It Is Efficient For An Economy To Save Service Jobs By Preventing Outsourcing.

88. An Exchange Rate Is The Price Of One Country’s Currency In Terms Of The Currency Of Another.

89. A Country’s Population As A Whole Will Benefit From Import Restrictions.

90. Everyone In The Economy Benefits From Free Trade.

91. For Many Years, U.S. Citizens Have Earned More Investment Income Abroad Than Foreigners Have Earned In The U.S.

92. Foreign Investment In The U.S. Provides Foreign Currencies To Import Goods.

93. Trade Deficits Are Important Only To The Extent That They Lead To Overall Balance Of Payments Problems.

94. To Preserve Jobs In The U.S., The U.S. Should Enact Legislation Lowering The Quantities Of Japanese Autos That It Imports.

95. Engaging In Trade Allows A Country To Shift Its Consumption Possibilities Curve Outward But Leaves Its Production Possibilities Curve Unchanged.

96. In Terms Of The Value Of Jobs Saved, The Voluntary Restrictions On Japanese Cars Imported To The U.S. In The Early 1980s Were Efficient.

97. Free Trade Would Reduce U.S. Well-Being Because We Could Not Compete With The Low-Wage Countries Of The World.

98. International Trade Makes It Possible For An Economy To Shift Its Production Possibilities Curve Outward.

99. As With Trade Between Regions Of One Country, Trade Between Countries Benefits Both.

100. Since Resources Are Sent Out Of The Country, International Trade Generally Results In A Reduction In An Economy’s Gdp.

101. International Trade Increases The Variety And Availability Of Consumer Goods In An Economy.

102. Free Trade Arguments Are Sound Only If Trade Is Between Countries Whose Workers Earn Roughly The Same.

103. Trade Between Individuals In Two Different Countries Would Not Occur Unless Both Parties Believed That It Made Them Better Off.

104. Tariffs Increase Both The Price Of Imports And Domestically Produced Goods.

105. A $100 Per Unit Tariff On South African Diamonds Will Increase The Price By $100.

106. Both Tariffs And Quotas Result In Higher Prices And Lower Quantities For Consumers.

107. Foreign Producers Who Hold Quota Rights May Earn Greater Profits With The Imposition Of A Quota.

108. A Voluntary Restraint Agreement Is A Quota Without The Force Of Law.

109. Quotas Result In Lower Prices Of Both Imported And Domestically Produced Goods.

110. All Forms Of International Trade Restrictions Result In Higher Prices And Lower Quantities Of Goods For Domestic Consumers.

111. Pegging The Exchange Rate Will Eliminate Balance Of Payment Deficits.

112. Pegging The Exchange For French Francs Below Its Equilibrium Level Will Generate A Shortage Of Francs.

113. Nafta Is A Customs Union Between The U.S., Canada, And Mexico.

114. The European Union Is A Free Trade Area.

115. International Trade Disputes Between Nations Are Settled Through The Actions Of The World Trade Organization.

116. Dumping Occurs When Producers Sell Abroad At A Price Below The Cost Of Production.

117. Dumping Is Not Considered An Unfair Trade Practice In Most Parts Of The World.

118. Members Of The Wto Must Agree To Treat All Other Members As Equals And Provide Them With “Most Favored Nation” Status.

119. The Wto Prohibits Member Nations From Imposing Tariffs On Other Members.

120. There Is More International Trade Today Than At Any Time In The Past.

121. Since The 1940s, Tariffs Around The World Have Fallen From An Average Of 40 Percent.

122. The Euro Will Increase The Transaction Costs Of Trade Between Nations Who Are Members Of The European Union (Eu).

123. The Euro Will Be Integrated Into The Economies Of Western Europe With Very Few Costs.

124. Common Market Treaties Are Decreasing In Popularity And Importance Around The World.

125. Most Tariffs Have Been Outlawed By The World Trade Organization (Wto).

126. Very Few Members Of The World Trade Organization (Wto) Are Also Members Of A Common Market Treaty.

127. Today, Custom Unions Or Free Trade Zones Can Be Found On Every Populated Continent Of The World.

128. In The Short-Run, Common Market Treaties Such As Nafta Both Create And Destroy Jobs In Member Nations.

129. In Recent Years, “Protectionists” Have Won The Battle With “Free Traders.”

130. An Embargo Occurs When One Nation Volunteers To Restrict Its Exports Of A Product.

131. The Intent Of An Embargo Is To Raise The Price Of A Country’s Exports.

ECO 305 Week 8 Quiz – Strayer University New

ECO/305 Week 8 Quiz – Strayer

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Quiz 7 Chapter 10 and 11

CHAPTER 10

THE BALANCE OF PAYMENTS

MULTIPLE CHOICE

1. On the balance-of-payments statements, merchandise imports are classified in the:
a. Current account
b. Capital account
c. Unilateral transfer account
d. Official settlements account

2. The balance of international indebtedness is a record of a country’s international:
a. Investment position over a period of time
b. Investment position at a fixed point in time
c. Trade position over a period of time
d. Trade position at a fixed point in time

3. Which balance-of-payments item does not directly enter into the calculation of the U.S. gross domestic product?
a. Merchandise imports
b. Shipping and transportation receipts
c. Direct foreign investment
d. Service exports

4. Which of the following is considered a capital inflow?
a. A sale of U.S. financial assets to a foreign buyer
b. A loan from a U.S. bank to a foreign borrower
c. A purchase of foreign financial assets by a U.S. buyer
d. A U.S. citizen’s repayment of a loan from a foreign bank

5. Which of the following would call for inpayments to the United States?
a. American imports of German steel
b. Gold flowing out of the United States
c. American unilateral transfers to less-developed countries
d. American firms selling insurance to British shipping companies

6. In a country’s balance of payments, which of the following transactions are debits?
a. Domestic bank balances owned by foreigners are decreased
b. Foreign bank balances owned by domestic residents are decreased
c. Assets owned by domestic residents are sold to nonresidents
d. Securities are sold by domestic residents to nonresidents

7. Which of the following is classified as a credit in the U.S. balance of payments?
a. U.S. exports
b. U.S. gifts to other countries
c. A flow of gold out of the U.S.
d. Foreign loans made by U.S. companies

Table 10.1 gives hypothetical figures for U.S. International Transactions.

Table 10.1. U.S. International Transactions

Amount
Transaction (billions of dollars)

Merchandise imports 110
Military transactions, net -5
Remittances, pensions, transfers -20
U.S. private assets abroad -50
Merchandise exports 115
Investment income, net 15
U.S. government grants -5
(excluding military)
Foreign private assets in the U.S. 25
Compensation of employees -5
Allocation of SDRs 5
Travel and transportation receipts, net 20

8. Referring to Table 10.1, the goods and services balance equals:
a. $5 billion
b. $15 billion
c. $20 billion
d. $25 billion

9. Referring to Table 10.1, the current account balance equals:
a. $5 billion
b. $10 billion
c. $15 billion
d. $20 billion

10. Unlike the balance of payments, the balance of international indebtedness indicates the international:
a. Investment position of a country at a given moment in time
b. Investment position of a country over a one-year period
c. Trade position of a country at a given moment in time
d. Trade position of a country over a one-year period

11. Which of the following indicates the international investment position of a country at a given moment in time?
a. The balance of payments
b. The capital account of the balance of payments
c. The current account of the balance of payments
d. The balance of international indebtedness

12. Concerning the U.S. balance of payments, which account is defined in essentially the same way as the net export of goods and services, which comprises part of the country’s gross domestic product?
a. Merchandise trade account
b. Goods and services account
c. Current account
d. Capital account

13. If an American receives dividends from the shares of stock she or he owns in Toyota, Inc., a Japanese firm, the transaction would be recorded on the U.S. balance of payments as a:
a. Capital account debit
b. Capital account credit
c. Current account debit
d. Current account credit

14. If the United States government sells military hardware to Saudi Arabia, the transaction would be recorded on the U.S. balance of payments as a:
a. Current account debit
b. Current account credit
c. Capital account debit
d. Capital account credit

15. The U.S. balance of trade is determined by:
a. Exchange rates
b. Growth of economies overseas
c. Relative prices in world markets
d. All of the above

16. U.S. military aid granted to foreign countries is entered in the:
a. Merchandise trade account
b. Capital account
c. Current account
d. Official settlements account

17. If the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on:
a. The official settlements account
b. The capital account
c. Either the official settlements account or the capital account
d. Both the official settlements account and the capital account

18. The current account of the U.S. balance of payments does not include:
a. Investment income
b. Merchandise exports and imports
c. The sale of securities to foreigners
d. Unilateral transfers

19. The U.S. has a balance of trade deficit when its:
a. Merchandise exports exceed its merchandise imports
b. Merchandise imports exceed its merchandise exports
c. Goods and services exports exceed its goods and services imports
d. Goods and services imports exceed its goods and services exports

20. The value to American residents of income earned from overseas investments shows up in which account in the U.S. balance of payments?
a. Current account
b. Trade account
c. Unilateral transfers account
d. Capital account

Table 10.2. International Investment Position of the United States

U.S. assets abroad
U.S. government assets $800 billion
U.S. private assets $200 billion

Foreign assets in the U.S.
Foreign official assets $600 billion
Foreign private assets $300 billion

21. Consider Table 10.2. The U.S. balance of international indebtedness suggests that the United States is a net:
a. Debtor
b. Creditor
c. Spender
d. Exporter

22. For the first time since World War I, in 1985 the United States became a net international:
a. Exporter
b. Importer
c. Debtor
d. Creditor

23. A country that is a net international debtor initially experiences:
a. An augmented savings pool available to finance domestic spending
b. A higher interest rate, which leads to lower domestic investment
c. A loss of funds to trading partners overseas
d. A decrease in its services exports to other countries

24. Credit (+) items in the balance of payments correspond to anything that:
a. Involves receipts from foreigners
b. Involves payments to foreigners
c. Decreases the domestic money supply
d. Increases the demand for foreign exchange

25. Debt (-) items in the balance of payments correspond to anything that:
a. Involves receipts from foreigners
b. Involves payments to foreigners
c. Increases the domestic money supply
d. Decreases the demand for foreign exchange

26. When all of the debit or credit items in the balance of payments are combined:
a. Merchandise imports equal merchandise exports
b. Capital imports equal capital exports
c. Services exports equal services imports
d. The total surplus or deficit equals zero

27. In the balance of payments, the statistical discrepancy is used to:
a. Ensure that the sum of all debits matches the sum of all credits
b. Ensure that trade imports equal the value of trade exports
c. Obtain an accurate account of a balance-of-payments deficit
d. Obtain an accurate account of a balance-of-payments surplus

28. All of the following are credit items in the balance of payments, except:
a. Investment inflows
b. Merchandise exports
c. Payments for American services to foreigners
d. Private gifts to foreign residents

29. All of the following are debit items in the balance of payments, except:
a. Capital outflows
b. Merchandise exports
c. Private gifts to foreigners
d. Foreign aid granted to other nations

30. The role of ____ is to direct one nation’s savings into another nation’s investments:
a. Merchandise trade flows
b. Services flows
c. Current account flows
d. Capital flows

31. When a country realizes a deficit on its current account:
a. Its net foreign investment position becomes positive
b. It becomes a net demander of funds from other countries
c. It realizes an excess of imports over exports on goods and services
d. It becomes a net supplier of funds to other countries

32. Reducing a current account deficit requires a country to:
a. Increase private saving relative to investment
b. Increase private consumption relative to saving
c. Increase private investment relative to consumption
d. Increase private investment relative to saving

33. Reducing a current account deficit requires a country to:
a. Increase the government’s deficit and increase private investment relative to saving
b. Increase the government’s deficit and decrease private investment relative to saving
c. Decrease the government’s deficit increase private investment relative to saving
d. Decrease the government’s deficit and decrease private investment relative to saving

34. Reducing a current account surplus requires a country to:
a. Increase the government’s deficit and increase private investment relative to saving
b. Increase the government’s deficit and decrease private investment relative to saving
c. Decrease the government’s deficit and increase private investment relative to saving
d. Decrease the government’s deficit and decrease private investment relative to saving

35. Concerning a country’s business cycle, rapid growth of production and employment is commonly associated with:
a. Large or growing trade deficits and current account deficits
b. Large or growing trade deficits and current account surpluses
c. Small or shrinking trade deficits and current account deficits
d. Small or shrinking trade deficits and current account surpluses

36. The burden of a current account deficit would be the least if a nation uses what it borrows to finance:
a. Unemployment compensation benefits
b. Social Security benefits
c. Expenditures on food and recreation
d. Investment on plant and equipment

37. Concerning a country’s business cycle, ____ is commonly associated with large or growing current account deficits:
a. Rapid growth rates of production and employment
b. Slow growth rates of production and employment
c. Falling interest rates on government securities
d. Falling interest rates on corporate securities

38. According to researchers at the Federal Reserve, the loss of jobs associated with a deficit in the current account tends to be:
a. Offset by the increase of jobs associated with a surplus in the capital account
b. Reinforced by the decrease of jobs associated with a surplus in the capital account
c. A threat to the level of employment for the economy as a whole
d. Of no long-run economic consequence for workers who lose their jobs

TRUE/FALSE

Table 10.3 shows hypothetical transactions, in billions of U.S. dollars, that took place during a year.

Table 10.3. International Transactions of the United States

Amount
(billions of dollars)
Transaction

Allocation of SDRs 10
Changes in U.S. assets abroad 100
Statistical discrepancy -15
Merchandise imports -400
Payments on foreign assets in U.S. -20
Remittances, pensions, transfers -60
Travel and transportation receipts, net 30
Military transactions, net -10
Investment income, net 100
Merchandise exports 350
U.S. government grants (excluding military) -20
Changes in foreign assets in the U.S. 190
Other services, net 80
Receipts on U.S. investments abroad 30
Compensation of employees -10

1. Refer to Table 10.3. The merchandise-trade balance registered a deficit of $50 billion.

2. Refer to Table 10.3. The services balance registered a surplus of $100 billion.

3. Refer to Table 10.3. The goods-and-services balance registered a surplus of $50 billion.

4. Refer to Table 10.3. The unilateral-transfers balance registered a deficit of $40 billion.

5. Refer to Table 10.3. The current-account balance registered a surplus of $30 billion.

6. Refer to Table 10.3. The “net exports” component of the U.S. gross domestic product registered $-110 billion.

7. Refer to Table 10.3. The payments data suggest that the United States was a “net demander” of $30 billion from the rest of the world.

8. The balance of payments refers to the stock of trade and investment transactions that exists at a particular point in time.

9. Referring to the balance-of-payments statement, an international transaction refers to the exchange of goods, services, and assets between residents of one country and those abroad.

10. The balance of payments includes international transactions of households and businesses, but not government.

11. Because the balance of payments utilizes double-entry accounting, merchandise exports will always be in balance with merchandise imports.

12. On the U.S. balance-of-payments statement, the following transactions are credits, leading to the receipt of dollars from foreigners: merchandise exports, transportation receipts, income received from investments abroad, and investments in the United States by foreign residents.

13. On the U.S. balance of payments, the following transactions are debits, leading to payments to foreigners: merchandise imports, travel expenditures, gifts to foreign residents, and overseas investments by U.S. residents.

14. The “goods and services” account of the balance of payments shows the monetary value of international flows associated with transactions in goods, services, and unilateral transfers.

15. An increase in import restrictions by the U.S. government tends to promote a merchandise-trade surplus.

16. Services transactions on Canada’s balance-of-payments statement would include Canadian ships transporting lumber to Japan, foreign tourists spending money in Canada, and Canadian engineers designing bridges in China.

17. On the balance-of-payments statement, dividend and interest income are classified as capital-account transactions.

18. A surplus on Germany’s goods-and-services balance indicates that Germany has sold more goods and services to foreigners than it has bought from them over a one-year period.

19. The merchandise-trade account on the balance-of-payments statement is defined the same way as “net exports” which constitutes part of the nation’s gross domestic product.

20. A positive balance on the goods-and-services account of the balance of payments indicates an excess of exports over imports which must be added to the nation’s gross domestic product.

21. For the United States, merchandise trade has generally constituted the largest portion of its goods-and-services account.

22. Unilateral transfers refer to two-sided transactions, reflecting the movement of goods and services in one direction with corresponding payments in the other direction.

23. Unilateral transfers consist of private-sector transfers, such as church contributions to alleviate starvation in Africa, as well as governmental transfers, such as foreign aid.

24. Current-account transactions include direct foreign investment, purchases of foreign government securities, and commercial bank loans made abroad.

25. On the U.S. balance-of-payments statement, a capital inflow would occur if a Swiss resident purchases the securities of the U.S. government.

26. If Toyota Inc. of Japan builds an automobile assembly plant in the United States, the Japanese capital account would register an outflow.

27. If Bank of America receives repayment for a loan it made to a Mexican firm, the U.S. capital account would register an inflow.

28. On the balance-of-payments statement, a capital inflow can be likened to the import of goods and services.

29. The capital account of the balance of payments includes private-sector transactions as well as official-settlements transactions of the home country’s central bank.

30. If the current account of the balance of payments registers a deficit, the capital account registers a surplus, and vice versa.

31. Concerning the balance of payments, a current-account surplus means an excess of exports over imports of goods, services, investment income, and unilateral transfers.

32. If a country realizes a current-account deficit in its balance of payments, it becomes a net supplier of funds to the rest of the world.

33. Concerning the balance of payments, a current-account deficit results in a worsening of a country’s net foreign investment position.

34. In the balance-of-payments statement, statistical discrepancy is treated as part of the merchandise trade account because merchandise transactions are generally the most frequent source of error.

35. Because a large number of international transactions fail to get recorded, statisticians insert a residual, known as statistical discrepancy, to ensure that total debits equal total credits.

36. Concerning the balance of payments, the goods-and-services balance is commonly referred to as the “trade balance” by the news media.

37. Since the 1970s, the merchandise trade account of the U.S. balance of payments has registered deficit.

38. Although the United States has realized merchandise trade deficits since the early 1970s, its goods-and-services balance has always registered surplus.

39. In the past two decades, the U.S. services balance has generally registered surplus.

40. The U.S. unilateral-transfers balance has consistently registered surplus in the past two decades.

41. Because the balance of payments is a record of the economic transactions of a country over a period of time, it is a “flow” concept.

42. The United States would be a “net creditor” if the value of U.S. assets abroad exceeded the value of foreign assets in the United States.

43. If a country consistently realizes a current-account surplus in its balance of payments, it likely will become a “net debtor” in its balance of international indebtedness.

44. By the mid-1980s, the United States had evolved from the status of a net-creditor nation to a net-debtor nation in its balance of international indebtedness.

45. The net-debtor status, that the United States achieved in its balance of international indebtedness by the mid-1980s, reflected the continuous current-account surplus that the United States attained in its balance of payments during the 1970s.

46. Although a net-debtor country may initially benefit from an inflow of savings from abroad, over the long run continued borrowing results in growing dividend payments to foreigners and a drain on the debtor-country’s economic resources.

47. The official reserve assets of the United States consist of holdings of gold and foreign corporate securities.

48. That U.S. importers purchase bananas from Brazil constitutes a debit transaction on the U.S. balance of payments.

49. That German investors collect interest income on their holdings of U.S. Treasury bills constitutes a credit transaction on the U.S. balance of payments.

50. That U.S. charities donate funds to combat starvation in Africa constitutes a debit transaction on the U.S. balance of payments.

51. To reduce a current account deficit, a country should either decrease the budget deficit of its government or reduce investment spending relative to saving.

52. Most economists belief that in the 1980s, a massive outflow of capital caused a current account deficit for the United States.

53. A current account deficit for the United States necessarily reduces the standard of living for American households.

54. Rapid growth of production and employment is commonly associated with large or growing trade surpluses and current account surpluses.

55. Often, countries realizing rapid economic growth rates possess long-run current account deficits.

56. For the United States, a consequence of its current account deficit is a growing foreign ownership of the capital stock of the United States and a rising fraction of U.S. income that must be diverted abroad in the form of interest and dividends to foreigners.

57. Most economists contend that any reduction in the current account deficit is better achieved through increased national saving than through reduced domestic investment.

SHORT ANSWER

1. What are the components of the current account of the balance of payments?

2. Concerning the balance of international indebtedness, when is a country a net creditor or a net debtor?

ESSAY

1. How do we measure the international investment position of the United States at any point in time? How did the U.S. become a net debtor nation so rapidly?

2. What does a current account deficit mean?

CHAPTER 11—FOREIGN EXCHANGE

MULTIPLE CHOICE

1. Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days. You can remove the risk of loss due to a devaluation of the pound sterling by:
a. Selling sterling in the forward market for 60-day delivery
b. Buying sterling now and selling it at the end of 60 days
c. Selling the dollar equivalent in the forward market for 60-day delivery
d. Keeping the sterling in Britain after it is delivered to you

2. Which of the following tends to cause the U.S. dollar to appreciate in value?
a. An increase in U.S. prices above foreign prices
b. Rapid economic growth in foreign countries
c. A fall in U.S. interest rates below foreign levels
d. An increase in the level of U.S. income

3. Concerning the covering of exchange market risks–assuming that a depreciation of the domestic currency is anticipated, one can say that there is an incentive for:
a. Exporters to rush to cover their future needs
b. Importers to rush to cover their future needs
c. Both exporters and importers to rush to cover their future needs
d. Neither exporters nor importers to rush to cover their future needs

4. When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a:
a. Increase in the spot price of the yen
b. Increase in the forward price of the dollar
c. Sale of dollars in the forward market
d. Purchase of yen in the spot market

5. An appreciation in the value of the U.S. dollar against the British pound would tend to:
a. Discourage the British from buying American goods
b. Discourage Americans from buying British goods
c. Increase the number of dollars that could be bought with a pound
d. Discourage U.S. tourists from traveling to Britain

6. Concerning the foreign exchange market, one can best say that:
a. There is a spot market for virtually every currency in the world
b. The market is highly centralized like the stock exchange
c. Most foreign exchange payments are made with bank notes
d. The values of the forward and spot rates are always in agreement

7. Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice. This finding would likely result in a (an):
a. Increase in the demand for Swiss francs
b. Decrease in the demand for Swiss francs
c. Increase in the supply of Swiss francs
d. Decrease in the supply of Swiss francs

8. Suppose that real incomes increase more rapidly in the United States than in Mexico. In the United States, this situation would likely result in a (an):
a. Increase in the demand for pesos
b. Decrease in the demand for pesos
c. Increase in the supply of pesos
d. Decrease in the supply of pesos

9. A depreciation of the dollar refers to:
a. A fall in the dollar price of foreign currency
b. An increase in the dollar price of foreign currency
c. A loss of foreign-exchange reserves for the U.S.
d. An intervention in the international money market

10. If Canadian speculators believed the Swiss franc was going to appreciate against the U.S. dollar, they would:
a. Purchase Canadian dollars
b. Purchase U.S. dollars
c. Purchase Swiss francs
d. Sell Swiss francs

11. A major difference between the spot market and the forward market is that the spot market deals with:
a. The immediate delivery of currencies
b. The merchandise trade account
c. Currencies traded for future delivery
d. Hedging of international currency risks

12. The exchange rate is kept the same in all parts of the market by:
a. Forward cover
b. Hedging
c. Exchange speculation
d. Exchange arbitrage

13. If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by:
a. Buying dollars in the forward market for delivery in 30 days
b. Selling dollars in the forward market for delivery in 30 days
c. Buying the pounds in the forward market for delivery in 30 days
d. Selling the pounds in the forward market for delivery in 30 days

14. An increase in the dollar price of other currencies tends to cause:
a. U.S. goods to be cheaper than foreign goods
b. U.S. goods to be more expensive than foreign goods
c. Foreign goods to be more expensive to residents of foreign nations
d. Foreign goods to be cheaper to residents of the United States

15. The balance on merchandise trade:
a. Must be negative
b. Must be positive
c. Must be zero
d. May be negative, positive, or zero

16. Which of the following would not induce the U.S. demand curve for foreign exchange to shift backward to the left?
a. Worsening American tastes for goods produced overseas
b. Increasing interest rates in the U.S. compared to those overseas
c. A fall in the level of U.S. income
d. A depreciation in the U.S. dollar against foreign currencies

17. A U.S. export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by:
a. Buying today 1 million pounds in the forward market for delivery in six months
b. Buying 1 million pounds in the spot market for delivery in six months
c. Selling 1 million pounds in the spot market for delivery in six months
d. Selling today 1 million pounds in the forward market for delivery in six months

18. Over time, a depreciation in the value of a nation’s currency in the foreign exchange market will result in:
a. Exports rising and imports falling
b. Imports rising and exports falling
c. Both imports and exports rising
d. Both imports and exports falling

19. Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and:
a. Reduce the demand for dollars
b. Increase the demand for dollars
c. Reduce the supply of dollars
d. Increase the supply of dollars

20. Suppose the exchange rate between the Japanese yen and the U.S. dollar is 100 yen per dollar. A Japanese stereo with a price of 60,000 yen will cost:
a. $60
b. $600
c. $6000
d. None of the above

21. The supply of foreign currency may be:
a. Upward-sloping
b. Backward-sloping
c. Vertical
d. None of the above

22. Suppose that a Swiss watch that costs 400 francs in Switzerland costs $200 in the United States. The exchange rate between the franc and the dollar is:
a. 2 francs per dollar
b. 1 franc per dollar
c. $2 per franc
d. $3 per franc

23. In the early 1980s, the Federal Reserve pursued a tight monetary policy. All else being equal, the impact of that policy was to ____ interest rates in the United States relative to those in Europe and cause the dollar to ____ against European currencies.
a. Decrease, depreciate
b. Decrease, appreciate
c. Increase, depreciate
d. Increase, appreciate

24. Under a system of floating exchange rates, the Swiss franc would depreciate in value if which of the following occurs?
a. Price inflation in France
b. An increase in U.S. real income
c. A decrease in the Swiss money supply
d. Falling interest rates in Switzerland

25. A depreciation of the dollar will have its most pronounced impact on imports if the demand for imports is:
a. Constant
b. Inelastic
c. Elastic
d. Unitary elastic

26. During the era of dollar appreciation, from 1981 to 1985, a main reason why the dollar did not fall in value was:
a. Flows of foreign investment into the United States
b. Rising price inflation in the United States
c. A substantial decrease in U.S. imports
d. A substantial increase in U.S. exports

27. Which financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a couple of years?
a. Letter of credit
b. Foreign currency option
c. Cable transfer
d. Bill of exchange

28. Given the foreign currency market for the Swiss franc, the supply of francs slopes upward, because as the dollar price of the franc rises:
a. America’s demand for Swiss merchandise rises
b. America’s demand for Swiss merchandise falls
c. Switzerland’s demand for American merchandise rises
d. Switzerland’s demand for American merchandise falls

29. In a supply-and-demand diagram for Japanese yen, with the exchange rate in dollars per yen on the vertical axis, the demand schedule for yen is drawn sloping:
a. Upward
b. Vertical
c. Downward
d. Horizontal

30. Suppose there occurs an increase in the Canadian demand for Japanese computers. This results in:
a. An increase in the demand for yen
b. A decrease in the demand for yen
c. An increase in the supply of yen to Canada
d. A decrease in the supply of yen to Canada

Table 11.1 gives the exchange rate quotations for the U.S. dollar and the British pound.

Table 11.1. Foreign Exchange Quotations

U.S. Dollar Currency Per
Equivalent U.S. Dollar

Tuesday Monday Tuesday Monday

Britain (Pound) 1.4270 1.4390 .7008 .6949
30-day Forward 1.4211 1.4333 .7037 .6977
60-day Forward 1.4090 1.4220 .7097 .7032
180-day Forward 1.3930 1.4070 .7179 .7107

31. Consider Table 11.1. If one were to buy pounds for immediate delivery, on Tuesday the dollar cost of each pound would be:
a. $0.7008
b. $0.7037
c. $1.4211
d. $1.4270

32. Consider Table 11.1. If one were to sell dollars for immediate delivery, on Tuesday the pound cost of each dollar would be:
a. .7008 pounds per dollar
b. .7037 pounds per dollar
c. 1.4270 pounds per dollar
d. 1.4211 pounds per dollar

33. Consider Table 11.1. Comparing Tuesday to the previous Monday, by Tuesday the dollar had:
a. Depreciated against the pound
b. Appreciated against the pound
c. Not changed against the pound
d. None of the above

34. Consider Table 11.1. Concerning the Tuesday quotations: compared to the cost of buying 100 pounds on the spot market, if 100 pounds were bought for future delivery in 180 days the dollar cost of the pounds would be:
a. $3.40 higher
b. $3.40 lower
c. $6.80 higher
d. $6.80 lower

35. Which method of trading currencies involves the conversion of one currency into another at one point in time with an agreement to reconvert it back to the original currency at some point in the future?
a. Forward transaction
b. Futures transaction
c. Spot transaction
d. Swap transaction

36. Most foreign exchange trading occurs between banks and:
a. National governments
b. Other banks
c. Corporations
d. Household investors

37. The most important (in terms of dollar value) type of foreign exchange transaction by U.S. banks is the:
a. Spot transaction
b. Forward transaction
c. Swap transaction
d. Option transaction

38. In the interbank market for foreign exchange, the ____ refers to the price that a bank is willing to pay for a unit of foreign currency.
a. Offer rate
b. Bid rate
c. Spread rate
d. Transaction rate

39. In the interbank market for foreign exchange, the ____ refers to the price for which a bank is willing to sell a unit of foreign currency.
a. Offer rate
b. Option rate
c. Futures rate
d. Bid rate

40. In the interbank market for foreign exchange, the ____ refers to the difference between the offer rate and the bid rate.
a. Cross rate
b. Option
c. Arbitrage
d. Spread

41. A corporation dealing in foreign exchange may desire to obtain an exchange quote between the pound and franc, whose values are both expressed relative to the dollar. ____ are used to determine such a relationship.
a. Spot exchange rates
b. Forward exchange rates
c. Cross exchange rates
d. Option exchange rates

42. Suppose the exchange value of the British pound is $2 per pound while the exchange value of the Swiss franc is 50 cents per pound. The cross exchange rate between the pound and the franc is:
a. 1 franc per pound
b. 2 francs per pound
c. 3 francs per pound
d. 4 francs per pound

Exhibit 11.1

Assume the following: (1) the interest rate on 6-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today’s spot price of the pound is $1.50 while the 6-month forward price of the pound is $1.485.

43. Refer to Exhibit 11.1. By investing in U.K. treasury bills rather than U.S. treasury bills, and not covering exchange rate risk, U.S. investors earn an extra return of:
a. 4 percent per year, 1 percent for the 6 months
b. 4 percent per year, 2 percent for the 6 months
c. 2 percent per year, 0.5 percent for the 6 months
d. 2 percent per year, 1 percent for the 6 months

44. Refer to Exhibit 11.1. If U.S. investors cover their exchange rate risk, the extra return for the 6 months on the U.K. treasury bills is:
a. 1.0 percent
b. 1.5 percent
c. 2.0 percent
d. 2.5 percent

45. Refer to Exhibit 11.1. If the price of the 6-month forward pound were to ____, U.S. investors would no longer earn an extra return by shifting funds to the United Kingdom.
a. Rise to $1.52
b. Rise to $1.53
c. Fall to $1.48
d. Fall to $1.47

46. Assume that you are the Chase Manhattan Bank of the United States, and you have 1 million Swiss francs in your vault that you will need to use in 30 days. Moreover, you need 500,000 British pounds for the next 30 days. You arrange to loan your francs to Barclays Bank of London for 30 days in exchange for 500,000 pounds today, and reverse the transaction at the end of 30 days. You have just arranged a:
a. Forward contract
b. Futures contract
c. Spot contract
d. Currency swap

Figure 11.1 illustrates the supply and demand schedules for the Swiss franc. Assume that exchange rates are flexible.

Figure 11.1. Supply and Demand Schedules of Francs

47. Refer to Figure 11.1. At the equilibrium exchange rate of ____ per franc, ____ francs will be purchased at a total dollar cost of ____.
a. $.50, 5 million, $2.5 million
b. $.50, 5 million, $1.5 million
c. $.70, 3 million, $2.1 million
d. $.70, 7 million, $4.9 million

48. Refer to Figure 11.1. Suppose the exchange rate is $.70 per franc. At this exchange rate there is an ____ of francs which leads to a ____ in the dollar price of the franc, a (an) ____ in the quantity of francs supplied, and a (an) ____ in the quantity of francs demanded.
a. Excess demand, rise, increase, decrease
b. Excess demand, rise, decrease, increase
c. Excess supply, fall, decrease, increase
d. Excess supply, fall, increase, decrease

49. Refer to Figure 11.1. Suppose the exchange rate is $.30 per franc. At this exchange rate there is an ____ of francs which leads to a ____ in the dollar price of the franc, a (an) ____ in the quantity of francs supplied, and a (an) ____ in the quantity of francs demanded.
a. Excess demand, rise, increase, decrease
b. Excess demand, rise, decrease, increase
c. Excess supply, fall, decrease, increase
d. Excess supply, fall, increase, decrease

50. Refer to Figure 11.1. Suppose the exchange rate is $.70 per franc. Free-market forces would lead to a (an) ____ of the dollar against the franc and a (an) ____ in U.S. international competitiveness.
a. Depreciation, improvement
b. Depreciation, worsening
c. Appreciation, improvement
d. Appreciation, worsening

51. Refer to Figure 11.1. Suppose the exchange rate is $.30 per franc. Free-market forces would lead to a (an) ____ of the dollar against the franc and a (an) ____ in U.S. international competitiveness:
a. Depreciation, improvement
b. Depreciation, worsening
c. Appreciation, improvement
d. Appreciation, worsening

The figure below illustrates the market for Swiss francs in a world of market-determined exchange rates. Assume the equilibrium exchange rate is $0.5 per franc, given by the intersection of schedules S0 and D0.

Figure 11.2. Market for Francs

52. Refer to Figure 11.2. A shift in the demand for francs from D0 to D1 or a shift in the supply of francs from S0 to S2, would result in a (an):
a. Depreciation in the dollar against the franc
b. Appreciation in the dollar against the franc
c. Unchanged dollar/franc exchange rate
d. None of the above

53. Refer to Figure 11.2. A shift in the demand for francs from D0 to D2, or a shift in the supply of francs from S0 to S1, would result in a (an):
a. Depreciation in the dollar against the franc
b. Appreciation in the dollar against the franc
c. No change in the dollar/franc exchange rate
d. None of the above

54. A (An) ____ is an arrangement by which two parties exchange one currency for another and agree that the exchange will be reversed at a stipulated date in the future:
a. Arbitrage
b. Swap
c. Option
d. Hedge

Table 11.2. Supply and Demand of British Pounds

Quantity Dollars Quantity
of Pounds per of Pounds
Supplied Pound Demanded

1,000 2.00 200
800 1.80 400
600 1.60 600
400 1.40 800
200 1.20 1,000

55. Refer to Table 11.2. The equilibrium exchange rate equals:
a. $1.20 per pound
b. $1.40 per pound
c. $1.60 per pound
d. $1.80 per pound

56. Refer to Table 11.2. At the exchange rate of $1.40 per pound, there is an ____ for pounds. This imbalance causes ____ in the price of the pound, which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded.
a. Excess supply, a decrease, an increase, a decrease
b. Excess supply, an increase, a decrease, an increase
c. Excess demand, an increase, an increase, a decrease
d. Excess demand, an increase, a decrease, an increase

57. Refer to Table 11.2. At the exchange rate of $1.80 per pound, there is an ____ for pounds. This imbalance causes ____ in the price of the pound, which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded.
a. Excess supply, a decrease, a decrease, an increase
b. Excess supply, an increase, a decrease, an increase
c. Excess demand, an increase, an increase, a decrease
d. Excess demand, an increase, a decrease, an increase

Table 11.3. Key Currency Cross Rates

Dollar Euro Pound Swiss Franc

Canada 1.5326 1.4400 2.2362 0.9790
Japan 124.48 116.96 181.63 79.515
Mexico 9.7410 9.1526 14.213 6.2223
Switzerland 1.5655 1.4709 2.2842 ……….
U.K. .68540 .6440 ………. .4378
Euro 1.06430 ………. 1.5529 .67984
U.S. ………. .9396 1.4591 .63877

58. Referring to Table 11.3, the cross exchange rate between the euro and Swiss franc is approximately:
a. .68 euros per franc
b. .68 francs per euro
c. .64 euros per franc
d. .64 francs per euro

59. Referring to Table 11.3, the yen cost of purchasing 100 British pounds is roughly:
a. 18,000 yen
b. 19,000 yen
c. 20,000 yen
d. 21,000 yen

Table 11.4. Forward Exchange Rates

U.S. Dollar Equivalent

Wednesday Tuesday

Switzerland (Franc) .6598 .6590
30-day Forward .6592 .6585
90-day Forward .6585 .6578
180-day Forward .6577 .6572

60. Refer to Table 11.4. On Wednesday, the 30-day forward franc was selling at a:
a. 1 percent premium per annum against the dollar
b. 2 percent premium per annum against the dollar
c. 1 percent discount per annum against the dollar
d. 2 percent discount per annum against the dollar

61. Refer to Table 11.4. On Wednesday, the 90-day forward franc was selling at a:
a. 0.8 percent premium per annum against the dollar
b. 1.6 percent premium per annum against the dollar
c. 0.8 percent discount per annum against the dollar
d. 1.6 percent discount per annum against the dollar

62. Refer to Table 11.4. On Wednesday, the 180-day forward franc was selling at a:
a. 0.6 percent premium per annum against the dollar
b. 1.6 percent premium per annum against the dollar
c. 0.6 percent discount per annum against the dollar
d. 1.6 percent discount per annum against the dollar

63. Refer to Table 11.4. Comparing the franc’s forward rates against the franc’s spot rate, the exchange market’s consensus is that over the period of a forward contract, the franc’s spot rate will:
a. Depreciate against the dollar
b. Appreciate against the dollar
c. Remain constant against the dollar
d. None of the above

64. The offer rate
a. Is the price at which the bank is willing to sell a unit of foreign currency
b. Is the price that the bank is willing to pay for a unit of foreign currency
c. Is synonymous with the spread rate
d. None of the above

65. When the dollar depreciates
a. U.S. exporters tend to sell more goods in foreign markets
b. U.S. consumers travel abroad more cheaply
c. More foreign tourists can afford to visit the United States
d. both a and c

66. When the dollar gets stronger
a. U.S. firms become more competitive in international market
b. Foreign tourists travel in the U.S. at a higher cost
c. U.S. inflation increases
d. U.S. consumers face higher prices on foreign goods

TRUE/FALSE

1. Similar to stock and commodity exchanges, the foreign exchange market is an organized structure with a central meeting place and formal licensing requirements.

2. Most foreign exchange transactions are conducted between commercial banks and household customers.

3. Foreign-exchange brokers help commercial banks carry out foreign exchange trading and maintain desired balances of foreign exchange.

4. A person needing foreign exchange immediately would purchase it on the spot market.

5. Most foreign exchange trading is carried out in the forward market.

6. Swap transactions among commercial banks involve the conversion of one currency to another at one point with an agreement to reconvert it back into the original currency at some point in the future.

7. The bid rate refers to the price at which a bank is willing to sell a unit of foreign currency; the offer rate is the price at which a bank is willing to buy a unit of foreign currency.

8. A commercial bank profits from foreign-exchange trading when its bid rate exceeds its offer rate.

9. The “spread” is a bank’s profit margin on foreign exchange trading and equals the difference between the bid rate and the offer rate.

10. If Citibank quoted bid and offer rates for the Swiss franc at $.4850/$.4854, the bank would be prepared to buy, say, 1 million francs for $485,000 and sell them for $485,400.

11. If Chase Manhattan Bank quotes bid and offer rates for the Swiss franc at $.5250/$.5260, the bank would realize profits of $1,000 on the purchase and sale of 1 million francs.

12. If a Citibank dealer expects the Swiss franc to appreciate against the U.S. dollar, she will attempt to lower both bid and offer rates for the franc, attempting to persuade other dealers to buy francs from Citibank and dissuade other dealers from selling francs to Citibank.

13. If a Citibank dealer expects the Swiss franc to depreciate in the future, he will lower bid and offer rates for the franc in order to discourage other dealers from selling francs to Citibank and persuade other dealers to buy francs from Citibank.

14. If it takes $0.18544 to purchase 1 French franc, it takes 5.3926 francs to purchase $1.

15. If it takes 113.28 yen to buy $1, it takes $.009624 to buy 1 yen.

16. If it takes $1.5515 to buy 1 pound and $0.6845 to buy 1 franc, it takes 2.27 francs to buy 1 pound.

17. “Futures” currency contracts are issued by commercial banks and are tailored in size to the needs of the exporter or importer, while “forward” currency contracts are issued by the International Monetary Market in standardized round lots.

18. A foreign currency option is an agreement between a holder (corporation) and a writer (commercial bank) giving the holder the right to buy or sell a certain amount of foreign currency at any time through some specified date.

19. A “call” option gives General Motors the right to sell pounds at a specified price, while a put option gives General Motors the right to buy pounds at a specified price.

20. The demand for foreign exchange is derived from credit transactions on the balance of payments.

21. The U.S. demand for pounds is derived from U.S. exports to the United Kingdom, U.K. investments in the United States, and U.K. tourist expenditures in the United States.

22. As the dollar’s exchange value appreciates against the pound, U.S. residents tend to import more British goods and thus demand more pounds.

23. As the dollar depreciates against the peso, U.S. residents tend to import more Mexican goods and thus demand more pesos.

24. The supply of francs is derived from the desire of the Swiss to purchase German goods, make investments in Germany, repay debts to German lenders, and extend transfer payments to German residents.

25. The demand schedule for Swiss francs is always downsloping while the supply schedule of francs is always upsloping.

26. The supply schedule of yen has a positive-sloping region which corresponds to the inelastic region on the Japanese demand schedule for foreign currency.

27. The supply schedule of pesos has a negative-sloping region corresponding to the inelastic region on the Mexican demand schedule for foreign currency.

28. If the Swiss demand for dollars is elastic, a depreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

29. If the Swiss demand for dollars is inelastic, an appreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

30. If the Swiss demand for dollars is elastic, an appreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

31. If the Swiss demand for dollars is inelastic, a depreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

32. Movements along the demand schedule for pounds are caused by changes in the pound’s exchange rate.

33. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the demand schedule causes an appreciation of the dollar against the pound.

34. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, a decrease in the demand schedule causes an appreciation of the dollar against the pound.

35. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the supply schedule causes an appreciation of the dollar against the pound.

36. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, a decrease in the supply schedule causes an appreciation of the dollar against the pound.

37. The trade-weighted dollar is the weighted average of the exchange rates between the dollar and the most important industrial-country trading partners of the United States.

38. If the trade-weighted dollar moves from an index value to 100 to 110, the dollar depreciates by 10 percent against the trade-weighted averages of the exchange rates of the major trading partners of the United States.

39. An increase in the trade-weighted value of the dollar indicates a dollar appreciation relative to the currencies of its major trading partners and a worsening of U.S. international competitiveness.

40. With arbitrage, a trader attempts to purchase a foreign currency at a low price and, at a later date, resell the currency at a higher price in order to make a profit.

41. Arbitrage results in a riskless profit since a trader purchases a currency at a low price and simultaneously resells it at a higher price.

42. If the exchange rate is $0.01 per yen in New York and $0.015 per yen in Tokyo, an arbitrager could profit by buying yen in Tokyo and simultaneously sell them in New York.

43. Currency arbitrage tends to result in identical yen/dollar exchange rates in New York and in Tokyo.

44. In the forward market, the exchange rate is agreed on at the time of the currency contract, but payment is not made until the future delivery of the currency actually takes place.

45. If the spot price of the Swiss franc is $0.4020 and the 90-day forward franc sells for $0.4026, the franc is at a 90-day forward discount of $0.0006, or at a 0.2 percent forward discount per annum against the dollar.

46. Suppose that Sears owes 1 million yen to a Japanese electronics manufacturer in 3 months. It could hedge against the risk of a depreciation of the dollar against the yen by contracting to purchase 1 million yen in the forward market, at today’s forward rate, for delivery in 3 months.

47. Assume that Boeing anticipates receiving 20 million yen in 3 months from exports of jumbo jets to a Japanese airline. The firm could hedge against the risk of a depreciation of the dollar against the yen by contracting to sell its expected yen proceeds for dollars in the forward market at today’s forward rate.

48. A U.S. investor’s extra rate of return on an investment in France, as compared to the United States, equals the interest-rate differential adjusted for any change in the dollar/franc exchange rate.

49. A currency speculator’s goal is to buy a currency at a low price and immediately resell it at a higher price, thus realizing a riskless profit.

50. Stabilizing speculation reinforces market forces by intensifying an appreciation or a depreciation in a currency’s exchange value.

SHORT ANSWER

1. What foreign exchange transactions do banks typically engage in?

2. How is the equilibrium rate of exchange determined?

ESSAY

1. Is it possible to trade foreign exchange in the futures market? How does such trading differ from the forward market?

2. Where are foreign currency options traded?

ECO 405 Week 5 Quiz – Strayer University New

ECO/405 Week 5 Quiz – Strayer

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Chapter 06

The Economics Of Education: Crisis And Reform

Multiple Choice Questions

1. According To The Census Bureau, High School Graduates Can Expect To Earn How Much During Their Working Years?
A. $45,000
B. $1.2 M
C. $2.1 M
D. $2.5 M
E. $4.4 M

2. According To The Census Bureau, A College Education Adds How Much To Earnings Over A Person’s Work-Life?
A. Nearly $1m
B. $2.1 M
C. $2.5m
D. $4.4 M
E. Over $5 M

3. According To The Census Bureau, Someone With A Professional Degree Can Earn Approximately How Much During A Typical Work-Life?
A. $1 M
B. $1.2 M
C. $2.5 M
D. $4.4 M
E. Over $5m

4. Where Did U.S. Eighth Grade Students Rank Internationally In Terms Of Average Math Scores In 2007?
A. At The Top
B. Second
C. Near The Middle
D. Next To The Bottom
E. At The Bottom

5. Where Did U.S. Eighth Grade Students Rank Internationally In Terms Of Average Science Scores In 2007?
A. At The Top
B. Second
C. In The Middle
D. In The Bottom Half
E. At Bottom

6. Which Of The Following Is An Important Difference Between The United States And Other Countries In Terms Of Their K-12 Education System?
A. The United States Spends Less On Education Per Pupil Than Most Other Countries
B. The United States Spends A Higher Percentage Of Its Gdp On Education Than Other Countries
C. The United States Has A Shorter School Year Than Most Other Countries
D. The United States Has A Purely Private Market For Education
E. All Of The Above

7. About How Much Does The United States Spend On Education, Per Pupil?
A. $6,000
B. $7,000
C. $8,000
D. $9,000
E. $10,000

8. Approximately What Percent Of Its Gdp Does The United States Spend On Education?
A. 2.0
B. 3.0
C. 3.9
D. 4.2
E. 5.3

9. Which Of The Following Best Describes The U.S. K-12 Educational System?
A. It Is Largely Private
B. It Is Mainly Private With Some Public Education
C. It Is About Half Public And Half Private
D. It Is Predominantly Public
E. It Is Exclusively Public

10. Which Of The Following Is Of The U.S. K-12 Education System Relative To The K-12 Education System Of Other Developed Countries?
A. It Has Lower Expenditures Per Pupil And Lower Achievement
B. It Has Lower Expenditures Per Pupil And Higher Achievement
C. It Has Higher Expenditures Per Pupil And Lower Achievement
D. It Has Higher Expenditures Per Pupil And Higher Achievement
E. It Has Equivalent Expenditures Per Pupil And Achievement

11. In 2003, Approximately What Percent Of School Aged Children Attended Public Schools?
A. 90%
B. 75%
C. 50%
D. 25%
E. 10%

Questions 12 – 17 Refer To The Graph Below.

12. What Assumption Is Shown By The Fact That Mpc = Msc On The Graph?
A. This Graph Is For Public Education
B. There Are No Positive Externalities Associated With Education
C. Education Has Positive Spillover Benefits For Society
D. The Market Will Produce The Socially Optimal Quantity Of Education
E. This Graph Illustrates A Private Market For Education

13. What Is This Family’s Willingness To Pay For A First Year Of Education?
A. $0
B. $4,000
C. $6,000
D. $8,000
E. $10,000

14. What Is The Equilibrium Level Of Education In This Market?
A. 0 Years
B. 1 Year
C. 12 Years
D. 16 Years
E. Between 12 And 16 Years

15. What Tuition Would Result In The Family Demanding 16 Years Of Education?
A. $0
B. Less Than $4,000
C. $4,000
D. $6,000
E. $10,000

16. Which Of The Following Is For The First Years Of Education?
A. Mpb < Mpc B. Mpb > Mpc
C. Msb > Msc
D. Msb < Msc
E. Mpb = Msb

17. Which Of The Following Is For The 16th Year Of Education?
A. Mpb < Mpc B. Mpb > Mpc
C. Msb > Msc
D. Msb < Msc E. Mpb = Msb Questions 18 – 23 Refer To The Graph Below. 18. For Which Level Of Education Is The Family’s Mpb > Mpc?
A. 1 Year
B. Between 0 And E1 Years
C. Between E1 And E* Years
D. Exactly E1 Years
E. Exactly E* Years

19. The Negative Slope Of The Demand Curve Shows That
A. The Marginal Cost Of Education Increases As More Is Purchased
B. The Marginal Benefit Of Education Increases As More Is Purchased
C. The Marginal Benefit Of Each Additional Year Of Education Decreases
D. There Are Positive Spillover Benefits Of Education
E. Tuition Can Be Raised Above T1 Dollars

20. The Socially Optimal Level Of Education
A. Is 0 Years
B. Is 1 Year
C. Is E1 Years
D. Is E* Years.
E. Cannot Be Determined From The Diagram.

21. For Which Year Of Education Is The Family’s Mpb < Mpc? A. 0 Years B. 1 Year C. E1 Years D. E* Years E. None Of The Above 22. The Slope Of The Supply Curve Indicates That The A. Marginal Cost Of A Year Of Education Is Constant B. Marginal Benefit Of An Additional Year Of Education Increases C. Marginal Benefit Of An Additional Year Of Education Is Constant D. Marginal Benefit Of An Additional Year Of Education Increases E. Cost Of Education Is Subsidized By The Public 23. In The Diagram, The Equilibrium Level Of Education Is A. 0 Years B. 1 Year C. E1 Years D. E* Years E. Between E1 And E* Years 24. What Happens To The Marginal Benefit Of Education As A Child Gets More Schooling? It Will A. Increase B. Decrease C. Stay The Same D. Become Infinite E. Become Negative 25. Which Of The Following Is A Benefit Of Increased Education? A. Improved Literacy B. Increased Earnings C. Improved Health D. Greater Satisfaction E. All Of The Above 26. A Family’s Demand For Education For A Child Reflects The Family’s A. Income B. Preferences For Education C. Mpb Received From The Education D. Opportunity Cost Of Tuition E. All Of The Above 27. Which Of The Following Happens As Tuition Increases? A. The Demand For Education Increases B. The Demand For Education Decreases C. The Supply Of Education Increases D. The Years Of Education Demanded Fall E. The Cost Of Education Increases 28. The Supply Of Private Education Is Represented By A. The Mpb Curve B. The Mpc Curve C. The Msc Curve D. The Msb Curve E. None Of The Above 29. An Increase In The Demand For Education Will A. Increase The Supply Of Education B. Decrease The Equilibrium Tuition C. Decrease The Equilibrium Quantity Of Education D. Increase The Equilibrium Quantity Of Education E. Shift The Demand Curve For Education To The Left 30. A Decrease In The Cost Of Education Will A. Increase The Supply Of Education B. Increase The Equilibrium Tuition C. Decrease The Equilibrium Quantity Of Education D. Increase The Equilibrium Quantity Of Education E. Shift The Demand Curve For Education To The Left 31. Which Of The Following Will Decrease The Equilibrium Quantity Of Education In A Market? A. An Increase In The Demand For Education B. A Decrease In The Demand For Education C. A Decrease In Production Costs D. An Increase In The Supply Of Education E. None Of The Above 32. An Increase In Family Income Will A. Increase The Demand For Education B. Decrease The Demand For Education C. Increase The Quantity Of Education Supplied D. Increase The Quantity Of Education Demanded E. Decrease The Equilibrium Level Of Tuition 33. An Increase In The Marginal Benefit Of Education Will Cause Which Of The Following? A. The Demand Curve For Education Shifts Right B. The Demand Curve For Education Shifts Left C. The Supply Curve For Education Shifts Right D. The Supply Curve For Education Shifts Left E. The Equilibrium Number Of Years Of Education Will Decrease 34. The Creation Of New Learning Technologies Will Cause Which Of The Following To Decrease? A. The Demand For Education B. The Supply Of Education C. The Cost Of Education D. The Equilibrium Quantity Of Education E. The Number Of Children In School   35. If The Earnings Expected From A College Education Increase, It Will Lead To An Increase In A. The Demand For K-12 Education B. The Supply Of K-12 Education C. The Cost Of Education D. The Teacher Salaries E. All Of The Above 36. Education Is Said To Be Which Of The Following? A. Individually Consumed B. Individually Produced C. A Semi-Private Good D. A Private Good E. A Public Good 37. I Benefit Because You Become More Educated. This Is An Example Of A A. Negative Externality In Consumption B. Spillover Cost C. Positive Externality In Production D. Positive Externality In Consumption E. Negative Externality In Production 38. As The Number Of Years Of Education Increases, The Spillover Benefits Will A. Increase B. Decrease C. Stay The Same D. Become Negative E. None Of The Above 39. Which Of The Following Is An Example Of A Possible Spillover Benefit From Education? A. An Improved Democratic Process B. Improved Health C. Improved Public Safety D. More Charitable Giving E. All Of The Above 40. Students Learn About Health And Nutrition In School. This Provides A A. Positive Externality In Production B. Positive Externality In Consumption C. Negative Externality In Production D. Negative Externality In Consumption E. Cost To Society 41. Marginal Social Benefits Equal A. Mpb + Spillover Benefits B. Mpb – Spillover Benefits C. Mpcs D. Total Benefits + Positive Externalities In Consumption E. None Of The Above 42. With Positive Externalities In Consumption, The Market Equilibrium Quantity Will Be A. Greater Than Socially Optimal B. Less Than Socially Optimal C. Equal To The Socially Optimal Level D. Higher Than Otherwise E. None Of The Above 43. Educated Citizens Are More Likely To Be Informed Voters. This Is An Example Of A A. Positive Externality In Production B. Positive Externality In Consumption C. Negative Externality In Production D. Negative Externality In Consumption E. Cost To Society. 44. To Be Socially Optimal, Education Should Be Provided To The Point Where A. Mpb = Mpc B. Mpb = Msc C. Msb = Mpc D. Msb = Msc E. Mpb = Msb   45. The Existence Of Spillover Benefits Results In An Equilibrium Quantity In The Market That Is Socially Optimal. A. Higher Than B. Lower Than C. Equal To D. Better Than E. More Expansive Than 46. The Argument For Government Provision Of Education Hinges On The Existence Of A. Spillover Costs. B. Spillover Benefits. C. Voucher Programs. D. Negative Externalities In Production. E. Negative Externalities In Consumption Questions 47 – 50 Refer To The Graph Below. 47. The Socially Optimal Years Of Education Is A. 1 B. Between 1 And 11 C. 11 D. 12 E. 16 48. What Is The Equilibrium Number Of Years Of Education The Market Will Provide? A. 0 B. 1 C. 11 D. 12 E. 16 49. Which Of The Following Government Actions Will Move The Market Equilibrium To The Socially Optimal Number Of Years Of Education? A. A Tax On Education Equal To $1,000 B. A Tax On Education Equal To $3,000 C. A Tuition Subsidy Equal To $1,000 D. A Tuition Subsidy Equal To $3,000 E. Government Provision Of All Education 50. A Tuition Subsidy Of $6,000 Would Lead To A. The Socially Optimal Quantity Of Education B. Greater Than The Socially Optimal Quantity Of Education C. Less Than The Socially Optimal Quantity Of Education D. More Public Education E. A Budget Surplus Questions 51 – 54 Refer To The Graph Below. 51. The Socially Optimal Level Of Education Is A. 0 B. Between 0 And E1 C. E1 D. E2 E. E3 52. The Market Equilibrium Level Of Education Is A. 0 B. Between 0 And E1 C. E1 D. E2 E. E3 53. A Tuition Subsidy Equal To How Much Will Move The Market To The Socially Optimal Level Of Education? A. T3 – T2 B. T2 – T1 C. T3 – T1 D. T1 E. T2 54. A Tuition Subsidy Equal To T3 Would Result In Which Of The Following? A. The Socially Optimal Quantity Of Education B. Greater Than The Socially Optimal Quantity Of Education C. Less Than The Socially Optimal Quantity Of Education D. More Public Education E. A Budget Surplus 55. Greater Segregation Along Racial Lines Is A Likely Result Of A. Purely Private K-12 Education B. No Public K-12 Education C. Voucher Programs D. Tuition Subsidies E. All Of The Above 56. A Purely Private K-12 System Will Lead To A. Lower Private Costs B. Increased Public Costs C. Decreased Racial Segregation D. Increased Inequality E. Greater Social Benefits 57. In A Purely Private K-12 Education System, Spaces Would Be Allocated Based On A. Ability B. Equity C. Income D. Geographic Boundaries E. None Of The Above 58. In The Existing Public K-12 Education System, Spaces Are Allocated Based On A. Ability B. Equity C. Income D. Geographic Boundaries E. None Of The Above 59. A Program To Provide Public Funding For Students In Poor Performing Public Schools To Attend Other Schools Is Known As A. A Voucher Program B. A Charter School C. A Tuition Tax D. A Welfare Program E. Privatization 60. The Current K-12 Education System Can Be Described As A. Private B. Centralized C. Decentralized D. State Owned E. None Of The Above 61. Centralized Planning Leads To Which Of The Following? A. Limited Consumer Choice B. Decreased Quality C. Increased Prices D. Lack Of Responsiveness E. All Of The Above 62. Schools In Which Parents Or Other Groups Were Permitted To Create A New School With State Funding And Were Given Control Over Operations Are Known As A. Private Schools B. Voucher Schools C. Magnet Schools D. Experimental Schools E. Charter Schools 63. The Empirical Evidence Of The Effectiveness Of Voucher Programs Is Best Described As A. Positive B. Negative C. Inconsistent D. Substantial E. Nonexistent 64. Which Of The Following Is An Argument Against Voucher Programs? A. Cream Skimming B. Reduced Social Segregation C. Decreased Efficiency D. Increased Special Education E. All Of The Above 65. The Cream Skimming Argument Says That The Students Who Choose A Voucher Program Will Be A. Higher Income B. Lower Income C. Higher Achieving D. Non-Minority E. None Of The Above 66. Poor Students Are Less Likely To Participate In Voucher Programs Because Of A. Less Information B. Higher Transportation Costs C. Fewer Financial Resources D. A Weaker Tradition Of Education E. All Of The Above 67. Private School Cost Per Pupil Is Lower Because Of A. Fund Raising B. Private Contributions C. Student Fees D. Volunteer Labor E. All Of The Above 68. What Is The Relationship Between School Funding And Student Achievement? A. Positive B. Negative C. Mixed D. Unrelated E. Inverse 69. What Is The Relationship Between Student Achievement And Teacher Pay? A. Positive B. Negative C. Mixed D. Unrelated E. Inverse 70. What Is The Relationship Between Teacher Pay And A Shortage Of Teachers? A. Positive B. Negative C. Mixed D. Unrelated E. Direct 71. Public Schools Must Pay For Which Of The Following Expenses That Private Schools Do Not? A. Transportation B. Food C. Special Education D. All Of The Above E. None Of The Above 72. A Reduction In Class Size Should Be Undertaken As Long As The Marginal Benefit Of The Decrease Is A. Positive B. Negative C. Greater Than The Marginal Cost D. Less Than The Marginal Cost E. Increasing 73. Decreasing Average Class Size Without Changing Teacher Pay Leads To A. Lower Quality Teachers B. A Surplus Of Teachers C. Lower Costs Per Pupil D. Increased Segregation E. All Of The Above 74. Which Of The Following Statements Does Not Enjoy Widespread Agreement? A. Achievement Per Dollar In U.S. Education Is Too Low B. Reform Of The U.S. Education System Is Necessary To Maintain High Level Human Capital C. Smaller Class Sizes Can Improve Student Performance D. Voucher Programs Are The Most Effective Way To Improve The U.S. Education System E. Increased Teacher Pay Increases Teacher Quality 75. Education Could Be Considered A Semi-Private Good, Since A. There Are Spillover Benefits To Other Members Of Society Resulting From The Education Of A Child B. Education Of The Population Improves Everyone’s Lives Since It Results In Greater Productivity And Income For All Members Of Society C. There Are Benefits To Society From Education, Since It Reduces The Crime Rate D. Education Produces Positive Externalities To Society E. All Of The Above 76. If Government Wishes To Increase The Quantity Of Higher Education Consumed, What Can Be Done To Accomplish This? A. Charge Tuition That Is Below The Full Costs Of Providing The Educational Services B. Operate Public Colleges C. Provide Reduced Tuition To Students D. Any Of The Above Alternatives Would Increase The Consumption Of Education E. The Government Should Not Attempt To Increase Education, Since It Is A Private Good 77. Studies Of Voucher Programs Indicate That The Effects Of Vouchers On Student Achievement A. Are Small But Have Negative Impact On Student Performance B. Are Received Primarily By African-American And Economically Disadvantaged Children C. Have Yet To Be Examined In Large-Scale Programs D. Both B And C E. None Of The Above 78. Research On The Effects Of Charter Schools Show A. There Are Significantly Positive Impacts On Student Performance B. There Are Significantly Negative Impacts On Student Performance C. There Are Mixed Results, With Positive Impacts In Some Schools And Negative In Others D. Research Has Yet To Be Undertaken On These New Types Of Schools E. None Of The Above True / False Questions 79. A College Education Does Not Improve Earnings Over A High School Degree. 80. A Master’s Degree Increases Lifetime Earnings Over A Bachelor’s Degree By $2.5m Over High School Graduates. 81. More Education Will Increase The Revenue A Worker Adds To A Firm. 82. Improved Education Will Lead To Higher Economic Growth In A Country. 83. American High School Graduates Outperform All Other Countries On Math And Science Exams. 84. The Length Of The School Year In The United States Is Longer Than In Most Other Developed Countries. 85. The United States Spends Over $8,000 Per Pupil On Secondary Education. 86. The United States Is Toward The Middle Of Countries In Rankings Of Percent Of Gdp Per Capita Spent On Education. 87. Ninety Percent Of School-Aged Children Attend Public Schools In The United States. 88. There Are Approximately 50 Million School-Aged Children In The United States. 89. The Marginal Benefit Of Education Increases As A Student Completes More Years Of Education. 90. More Education Leads To Improved Decision-Making In Families. 91. The Move From Illiteracy To Literacy Has High Marginal Benefits. 92. A Family’s Demand For Education Comes From Its Marginal Private Benefits. 93. The Demand Curve For Education Has A Positive Slope. 94. Lower Tuition Rates Lead To Less Education. 95. Without Public Schools, There Would Be No K-12 Education. 96. Without Market Provision Of Education, There Is No Mechanism For Quality Control. 97. A Family Will Purchase Private Education As Long As The Mpb > Mpc.

98. Increased Income Will Increase The Demand For Education.

99. New Learning Technologies Will Increase The Cost Of Providing K-12 Education.

100. Everyone Agrees That Education Provides Significant Positive Spillover Benefits.

101. Years Of Education Completed Are Negatively Related To Criminal Activities.

102. The Greatest Positive Externalities Accrue In The Early Years Of K-12 Education.

103. Msb Of Education = Mpb + Positive Externalities.

104. If There Are Positive Externalities From Education, The Market Will Not Produce The Socially Optimal Level Of Education.

105. The Government Can Increase The Equilibrium Quantity Of Education In A Market Through Tuition Subsidies.

106. A Significant Positive Externality Of Education Would Support The Argument Against Public Education.

107. Public K-12 Education Facilitates Equal Opportunity.

108. A Purely Private K-12 Education System Would Increase Existing Segregation.

109. Markets Ration Education Based On A Price/Quality Trade-Off.

110. Public Schools Ration Education Based On A Price/Quality Tradeoff.

111. Voucher Programs Fund Students To Attend Poor Performing Schools.

112. Charter Schools Are Privately Funded And Community Controlled.

113. High-Income Students And Their Families Are More Likely To Benefit From Voucher Programs.

114. Voucher Programs Have Been Accused Of “Cream Skimming.”

115. The Costs Of Private Schools Are Greater Than Their Tuition.

116. Private Schools Must Pay Some Types Of Costs That Public Schools Do Not.

117. Economists Agree That Voucher Programs Improve K-12 Education.

118. Smaller Class Size Increases Student Achievement.

119. Higher Teacher Salaries Do Not Change Student Achievement.

120. The Achievement Of Low-Income Students Improves More With Smaller Class Sizes, Relative To Higher Income Students.

121. Smaller Class Size Is Always Cost-Effective.

122. Increased School Funding Increases Student Achievement.

123. Increasing Teachers’ Salaries Does Not Affect Student Achievement.

124. The Opportunity Cost Of Becoming A Teacher Is The Salary Of Similarly Trained Professionals.

125. Increased Spending On K-12 Education Is Certain To Be Cost-Effective.

126. The United States’ K-12 Education System Has An Efficient Level Of Achievement Per Dollar Spent.

127. Increased Competition In K-12 Education Can Lead To An Improved Education System.

128. Targeting Increased Funding To Programs For Disadvantaged Children Is The Most Cost-Effective.

ECO 305 Week 5 Quiz – Strayer University New

ECO/305 Week 5 Quiz – Strayer

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CHAPTER 7

TRADE POLICIES FOR THE DEVELOPING NATIONS

MULTIPLE CHOICE

1. Which of the following is not a major factor that encourages developing nations to form international commodity agreements?
a. Inelastic commodity supply schedules
b. Inelastic commodity demand schedules
c. Export markets that tend to be unstable
d. Secular increases in their terms of trade

2. International commodity agreements do not:
a. Consist of consuming and producing nations who desire market stability
b. Levy export cutbacks so as to offset rising commodity prices
c. Utilize buffer stocks to generate commodity price stability
d. Increase the supply of commodities to prevent rising prices

3. Concerning the price elasticities of supply and demand for commodities, empirical estimates suggest that most commodities have:
a. Inelastic supply schedules and inelastic demand schedules
b. Inelastic supply schedules and elastic demand schedules
c. Elastic supply schedules and inelastic demand schedules
d. Elastic supply schedules and elastic demand schedules

4. If the demand schedule for bauxite is relatively inelastic to price changes, an increase in the supply schedule of bauxite will cause a:
a. Decrease in price and a decrease in sales revenue
b. Decrease in price and an increase in sales revenue
c. Increase in price and a decrease in sales revenue
d. Increase in price and an increase in sales revenue

5. A primary goal of international commodity agreements has been the:
a. Maximization of members’ revenues via export taxes
b. Nationalization of corporations operating in member nations
c. Adoption of tariff protection against industrialized nation sellers
d. Moderation of commodity price fluctuations when markets are unstable

6. Which device has the International Tin Agreement utilized as a way of stabilizing tin prices?
a. Multilateral contracts
b. Export subsidies
c. Buffer stocks
d. Export tariffs

7. Which method has not generally been used by the international commodity agreements to stabilize commodity prices?
a. Production quotas applied to the level of commodity output
b. Buffer stock arrangements among producing nations
c. Export restrictions applied to international sales of commodities
d. Measures to nationalize foreign-owned production operations

8. The OPEC nations during the 1970s manifested their market power by utilizing:
a. Export tariffs levied for revenue purposes
b. Export tariffs levied for protective purposes
c. Import tariffs levied for protective purposes
d. Import tariffs levied for revenue purposes

9. One factor that has prevented the formation of cartels for producers of commodities is that:
a. The demand for commodities tends to be price inelastic
b. Substitute products exist for many commodities
c. Commodity produces have been able to dominate world markets
d. Production of most commodities is capital intensive

10. Which device has been used by the International Wheat Agreement to stipulate the minimum prices at which importers will buy stipulated quantities from producers and the maximum prices at which producers will sell stipulated quantities to importers?
a. Buffer stocks
b. Export controls
c. Multilateral contracts
d. Production controls

11. If the bauxite exporting countries form a cartel to boost the price of bauxite so as to increase sales revenue, they believe that the demand for bauxite:
a. Is inelastic with respect to price changes
b. Is elastic with respect to price changes
c. Will increase in response to a price increase
d. Will not change in response to a price change

12. If the supply schedule for tin is relatively inelastic to price changes, a decrease in the demand schedule for tin will cause a:
a. Decrease in price and an increase in sales revenue
b. Decrease in price and a decrease in sales revenue
c. Increase in price and an increase in sales revenue
d. Increase in price and a decrease in sales revenue

13. Which of the following could partially explain why the terms of trade of developing countries might deteriorate over time?
a. Developing-country exports mainly consist of manufactured goods
b. Developing-country imports mainly consist of primary products
c. Commodity export prices are determined in highly competitive markets
d. Commodity export prices are solely determined by developing countries

14. Which terms-of-trade concept emphasizes a nation’s capacity to import?
a. Income terms of trade
b. Commodity terms of trade
c. Barter terms of trade
d. Price terms of trade

15. Which trade strategy have developing countries used to restrict imports of manufactured goods so that the domestic market is preserved for home producers, who thus can take over markets already established in the country?
a. International commodity agreement
b. Export promotion
c. Multilateral contract
d. Import substitution

16. Which trade strategy have developing countries used to replace commodity exports with exports such as processed primary products, semi-manufacturers, and manufacturers?
a. Multilateral contract
b. Buffer stock
c. Export promotion
d. Export quota

17. To help developing countries expand their industrial base, some industrial countries have reduced tariffs on designated manufactured imports from developing countries below the levels applied to imports from industrial countries. This scheme is referred to as:
a. Generalized system of preferences
b. Export-led growth
c. International commodity agreement
d. Reciprocal trade agreement

18. Which nation accounts for the largest amount of OPEC’s oil reserves and production?
a. Iran
b. Libya
c. Iraq
d. Saudi Arabia

19. Assuming identical cost and demand curves, OPEC as a cartel will, in comparison to a competitive industry:
a. Produce greater output and charge a lower price
b. Produce greater output and charge a higher price
c. Produce less output and charge a higher price
d. Produce less output and charge a lower price

20. Which of the following situations reduces the likelihood of successful operation of a cartel?
a. Cartel sales experience a rapid expansion
b. The demand for cartel output is price inelastic
c. The number of firms in the cartel is large
d. It is very difficult for new firms to enter the market

21. Which industrialization policy used by developing countries places emphasis on the comparative advantage principle as a guide to resource allocation?
a. Export promotion
b. Import substitution
c. International commodity agreements
d. Multilateral contract

22. A widely used indicator to differentiate developed countries from developing countries is:
a. International trade per capita
b. Real income per capita
c. Unemployment per capita
d. Calories per capita

23. Concerning the hypothesis that there has occurred a long-run deterioration in the developing countries’ terms of trade, empirical studies provide:
a. Mixed evidence that does not substantiate the deterioration hypothesis
b. Overwhelming support for the deterioration hypothesis
c. Overwhelming opposition to the deterioration hypothesis
d. None of the above

24. For the oil-importing countries, the increases in oil prices in 1973-1974 and 1979-1980 resulted in all of the following except:
a. Balance of trade deficits
b. Price inflation
c. Constrained economic growth
d. Improving terms of trade

25. Hong Kong and South Korea are examples of developing nations that have recently pursued industrialization policies.
a. Import substitution
b. Export promotion
c. Commercial dumping
d. Multilateral contract

26. Stabilizing commodity prices around long-term trends tends to benefit importers at the expense of exporters in markets characterized by:
a. Demand-side disturbances
b. Supply-side disturbances
c. Demand-side and supply-side disturbances
d. None of the above

27. Stabilizing commodity prices around long-term trends tends to benefit exporters at the expense of importers in markets characterized by:
a. Demand-side disturbances
b. Supply-side disturbances
c. Demand-side and supply-side disturbances
d. None of the above

28. To be considered a good candidate for an export cartel, a commodity should:
a. Be a manufactured good
b. Be a primary product
c. Have a high price elasticity of supply
d. Have a low price elasticity of demand

29. To be considered a good candidate for an export cartel, a commodity should:
a. Be a manufactured good
b. Be a primary product
c. Have a low price elasticity of supply
d. Have a high price elasticity of demand

30. To help developing nations strengthen their international competitiveness, many industrial nations have granted nonreciprocal tariff reductions to developing nations under the:
a. International commodity agreements program
b. Multilateral contract program
c. Generalized system of preferences program
d. Export-led growth program

The diagram below illustrates the international tin market. Assume that producing and consuming countries establish an international commodity agreement under which the target price of tin is $5 per pound.

Figure 7.1. Defending the Target Price in Face of Changing Demand Conditions

31. Consider Figure 7.1. Suppose the demand for tin increases from D0 to D1. Under a buffer stock system, the buffer-stock manager could maintain the target price by:
a. Selling 15 pounds of tin
b. Selling 30 pounds of tin
c. Buying 15 pounds of tin
d. Buying 30 pounds of tin

32. Consider Figure 7.1. Suppose the demand for tin decreases from D0 to D2. Under a buffer stock system, the buffer-stock manager could maintain the target price by:
a. Selling 15 pounds of tin
b. Selling 30 pounds of tin
c. Buying 15 pounds of tin
d. Buying 30 pounds of tin

33. Consider Figure 7.1. Suppose the demand for tin decreases from D0 to D2. Under a system of export quotas, the tin producers could maintain the target price by:
a. Increasing the quantity of tin supplied by 15 pounds
b. Increasing the quantity of tin supplied by 30 pounds
c. Decreasing the quantity of tin supplied by 15 pounds
d. Decreasing the quantity of tin supplied by 30 pounds

The diagram below illustrates the international tin market. Assume that the producing and consuming countries establish an international commodity agreement under which the target price of tin is $5 per pound.

Figure 7.2. Defending the Target Price in Face of Changing Supply Conditions

34. Consider Figure 7.2. Suppose the supply of tin increases from S0 to S1. Under a buffer stock system, the buffer-stock manager could maintain the target price by:
a. Purchasing 15 pounds of tin
b. Purchasing 30 pounds of tin
c. Selling 15 pounds of tin
d. Selling 30 pounds of tin

35. Consider Figure 7.2. Suppose the supply of tin decreases from S0 to S2. Under a buffer stock system, the buffer-stock manager could maintain the target price by:
a. Purchasing 15 pounds of tin
b. Purchasing 30 pounds of tin
c. Selling 15 pounds of tin
d. Selling 30 pounds of tin

36. Consider Figure 7.2. Assume there exists a cartel of several producers that is maximizing total profit. If one producer cheats on the cartel agreement by decreasing its price and increasing its output, rational action of the other producers is to:
a. Increase their price in order to regain sacrificed profits
b. Decrease their price as well
c. Keep on selling at the agreed-upon price
d. Give the product away for free

37. A reason why it is difficult for producers to maintain a cartel is that:
a. The elasticity of demand for the cartel’s output decreases over time
b. Producers in the cartel have the economic incentive to cheat
c. Economic profits discourage other producers from entering the industry
d. Producers in the cartel have the motivation to lower price but not to raise price

38. Once a cartel establishes its profit-maximizing price:
a. Entry into the industry of new competitors will not affect the cartel’s profits
b. Output changes by cartel members have no effect on the market price
c. Each cartel member is tempted to cheat on the cartel price in order to add to its profit
d. All cartel members have a strong incentive to adhere to the agreed-upon price

Figure 7.3. World Oil Market

39. Consider Figure 7.3. Under competitive conditions, the quantity of oil produced equals:
a. 40 barrels
b. 70 barrels
c. 90 barrels
d. 110 barrels

40. Consider Figure 7.3. Under competitive conditions, the price of a barrel of oil equals:
a. $7
b. $11
c. $12
d. $16

41. Consider Figure 7.3. Under competitive conditions, producer profits total:
a. $0
b. $140
c. $200
d. $280

42. Consider Figure 7.3. Under a profit-maximizing cartel, the quantity of oil produced equals:
a. 40 barrels
b. 70 barrels
c. 90 barrels
d. 110 barrels

43. Consider Figure 7.3. Under a profit-maximizing cartel, the price of a barrel of oil equals:
a. $7
b. $11
c. $16
d. $19

44. Consider Figure 7.3. Under a profit-maximizing cartel, producers realize:
a. Profits totaling $280
b. Profits totaling $360
c. Losses totaling $140
d. Losses totaling $180

45. Import substitution policies make use of:
a. Tariffs that discourage goods from entering a country
b. Quotas applied to goods that are shipped abroad
c. Production subsidies granted to industries with comparative advantages
d. Tax breaks granted to industries with comparative advantages

46. Export-led growth tends to:
a. Exploit domestic comparative advantages
b. Discourage competition in the global economy
c. Lead to unemployment among domestic workers
d. Help firms benefit from diseconomies of large-scale production

47. All of the following nations except ____ have recently utilized export-led (outward oriented) growth policies.
a. Hong Kong
b. South Korea
c. Argentina
d. Singapore

48. The characteristics that have underlaid the economic success of the “high-performing Asian Economies” have included all of the following except:
a. High rates of domestic investment
b. Diseconomies of scale occurring at low output levels
c. Large endowments of human capital
d. High levels of labor productivity

49. The development of countries like South Korea and Singapore has been underlaid by all of the following except:
a. High domestic interest rates
b. R&D and product innovation
c. Education and on-the-job training
d. High levels of saving and investment

50. For most developing countries:
a. Productivity is high among domestic workers
b. Population-growth and illiteracy rates are low
c. Saving and investment levels are high
d. Agricultural goods and raw materials constitute much of domestic output

51. East Asian economies have performed well by
a. Obtaining foreign technology
b. Remaining open to international trade
c. Investing in their people
d. All of the above

52. East Asian economies started enacting export-push strategies
a. By late 1950s and 1960s
b. Immediately after World War II
c. In the late 1980s
d. In the early 2000s

53. Prior to the formation of the Organization of Petroleum Exporting Countries, individual oil producing nations,
a. Operated like sellers in a competitive market
b. Behaved like individual sellers in a monopoly market
c. Had considerable control over the price of oil
d. Both b and c.

54. A key factor underlying the instability of primary product prices and export receipts of developing nations is the
a. Low price elasticity of the demand of primary products
b. High price elasticity of supply of primary products
c. High price elasticity of demand of primary products
d. None of the above

TRUE/FALSE

1. The developing nations are most of those in Africa, Asia, North America, and Western Europe.

2. Most developing-nation exports go to industrial nations while most developing-nation imports originate in industrial nations.

3. The majority of developing-nation exports are primary products such as agricultural goods and raw materials; of the manufactured goods exported by developing nations, most are labor-intensive goods.

4. Developing nations overwhelmingly acknowledge that they have benefited from international trade according to the principle of comparative advantage.

5. Among the economic problems facing developing countries have been low dependence on primary-product exports, unstable export markets, and worsening terms of trade.

6. For developing countries, a key factor underlying the instability of primary-product prices and export receipts is the high price elasticity of demand for products such as tin and copper.

7. Empirical research indicates that the demand and supply schedules for most primary products are relatively inelastic to changes in price.

8. If the demand for coffee is price inelastic, an increase in the supply of coffee leads to falling prices and rising sales revenues.

9. Not only do changes in demand induce relatively wide fluctuations in price when supply is inelastic, but changes in supply induce relatively wide fluctuations in price when demand is inelastic.

10. Developing countries have complained that because their commodity terms of trade has deteriorated in recent decades, they should receive preferential tariff treatment from industrialized countries.

11. To promote stability in commodity markets, International Commodity Agreements have utilized production and export controls, buffer stocks, and multilateral contracts.

12. During periods of falling demand for coffee, an International Commodity Agreement could offset downward pressure on price by implementing policies to increase the supply of coffee.

13. To prevent the market price of tin from rising above the target price, the manager of a buffer stock will purchase excess supplies of tin from the market.

14. To prevent the market price of tin from falling below the target price, the manager of a buffer stock would purchase any excess supply of tin that exists at the target price.

15. Prolonged defense of a price ceiling tends to increase the supply of a commodity held by a buffer stock manager, thus putting downward pressure on price.

16. Rather than conduct massive stabilization operations, buffer stock officials will periodically revise target prices should they move out of line with long-term price trends.

17. A multilateral contract stipulates the maximum price at which importing nations will purchase guaranteed quantities from producing nations and the minimum price at which producing nations will sell guaranteed amounts to importing nations.

18. It is widely agreed that import-substitution policies have been a main contributor to above-average growth rates in developing countries.

19. Under the Generalized System of Preferences program, the major industrial countries agree to temporarily reduce tariffs on designated imports from other industrial countries.

20. The “newly industrializing countries” of East Asia have emphasized the implementation of import-substitution policies to insulate their industries from international competition.

21. In recent decades, the East Asian “newly industrializing countries” have pursued export-led growth (outward orientation) as an industrialization strategy.

22. The purpose of a cartel is to support prices higher than would occur under more competitive conditions, thus increasing the profits of cartel members.

23. A cartel tends to be most successful in maximizing the profits of its members when there are a large number of producers in the cartel and these producers’ cost and demand conditions greatly differ from each other.

24. When cartel members agree to restrict output to increase the price of their product, a single member of the cartel has an economic incentive to violate the agreement by increasing its output so as to increase profits.

25. Developing countries have often felt that it is easier to protect their manufacturers, via import-substitution policies, against foreign competitors than to force industrial nations to reduce trade restrictions on products exported by developing countries.

26. Import-substitution policies are supported by the fact that many developing countries have small domestic markets and thus their producers enjoy the benefits of diseconomies of small-scale production.

27. Export-led growth industrialization suffers a major problem: it depends on the willingness and ability of foreign nations to absorb the goods exported by the country pursuing such a policy.

28. The so-called Four Tigers include Australia, South Korea, Taiwan, and Hong Kong.

29. By the 1990s, China had departed from a capitalistic economy and shifted to a Soviet-type economy encompassing small-scale, labor-intensive industry.

30. During the late 1980s and early 1990s, China dismantled much of its centrally-planned economy and permitted free enterprise to replace it.

31. In its transition toward capitalism, by the 1990s China permitted free enterprise as well as democracy for its people.

32. Most of China’s manufactured exports have constituted labor-intensive goods.

33. In 1999 the United States revoked the normal-trade-relations (most-favored-nation) status it provided China in retaliation for China’s suppression of human rights.

34. A multilateral contract specifies the maximum price at which exporting countries agree to sell a product and the minimum price at which importing countries agree to buy a product.

35. As a profit-maximizing cartel, the Organization of Petroleum Exporting Countries would produce a greater output and charge a lower price than what would occur in a competitive market.

36. The success of buffer stocks is limited by the fact that stockpiles of a product may be exhausted after prolonged sales, while funds may be exhausted after prolonged purchases.

37. The United Nation Conference on Trade and Development in 1964 was successful in convincing developing countries to switch from export-led industrialization to import-substitution industrialization.

38. Under the Generalized System of Preferences program, the industrialized countries agree to maintain lower tariffs on imports of natural resources and higher tariffs on imports of manufactured goods.

39. The replacement of imports of one nation with imports of another nation is known as “import substitution.”

40. During periods of weak demand, the Organization of Petroleum Countries has implemented production (export) quotas to ensure that excess oil supplies be kept off the market.

SHORT ANSWER

1. What are some major trade problems faced by developing nations?

2. Are economic downturns helpful to cartels?

ESSAY

1. What are some of the growth strategies that have been employed by the developing nations? How successful are these strategies?

2. Describe the flying-geese pattern of economic growth? What countries have pursued this strategy?

ECO 405 Week 11 Quiz – Strayer University – *New*

ECO 405 Week 11 Quiz – Strayer

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Chapter 14

Government Spending, Taxation, And The National Debt: Who Wins And Who Loses?

Multiple Choice Questions

1. The Fears Of People Concerning The Size Of Government Are
A. Always Without Any Foundation
B. Well-Founded In Some Instances And Not Well-Founded In Some Instances
C. Difficult To Appreciate
D. Due To Low Income And Low Educational Levels Of Many People
E. Based Solely On Economic Efficiency

2. The Fears Of People Concerning Distribution Of Taxes Are Related To
A. Equity Or Justice In Taxation
B. Ample Evidence That There Are Tax Inequities In The Tax System At All Levels Of Government
C. The Complete Lack Of Understanding That People Have About The Purpose Of Taxes
D. Both (A) And (B)
E. All Of The Above

3. Total Government Expenditures Currently Represent Approximately What Percentage Of Gdp?
A. 20%
B. 30%
C. 40%
D. 50%
E. 10%

4. A Cash Payment From The Government To An Individual, Based On Need, Is An Example Of A
A. Transfer Payment
B. Government Purchase Of A Service
C. Government Purchase Of A Good
D. Transaction Payment
E. Government Receipt

5. A Payment From The Government To A Federal Employee Is A
A. Transfer Payment
B. Government Purchase Of A Service
C. Government Purchase Of A Good
D. Transaction Payment
E. Government Receipt

6. An Efficient Level Of Government Expenditures Is That Level Where
A. Total Costs Are Minimized
B. Total Benefits Are Maximized
C. Marginal Benefits Are Equal To Marginal Costs
D. Marginal Benefits Are Greater Than Marginal Costs
E. Marginal Benefits Are Less Than Marginal Costs

7. Public Goods And Services Have Characteristics That Make Them
A. Possible To Exclude People From Consuming Them
B. Less Available For One Person When Another Consumes Them
C. Easy To Provide Through Private Markets
D. All Of The Above
E. None Of The Above

8. The Size Of Government Is Growing At
A. A Slower Rate Than The Rest Of The Economy
B. Approximately The Same Rate As The Rest Of The Economy
C. A Faster Rate Than The Rest Of The Economy
D. Twice The Rate Of The Rest Of The Economy
E. A Negative Rate

9. Assuming Negative Externalities In Production, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be
A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs
B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs
C. A Subsidy To Consumers Equal To Marginal External Benefits
D. A Subsidy To Consumers Greater Than Marginal External Benefits
E. None Of The Above

10. Assuming Positive Externalities In Consumption, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be
A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs
B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs
C. A Subsidy On Each Unit Consumed Equal To Marginal External Benefits
D. A Subsidy On Each Unit Consumed Greater Than Marginal External Benefits
E. None Of The Above

11. Shifting Income From Those Who Are Relatively Productive To Those Who Are Relatively Unproductive, Say Through Taxes And Subsidies, Must Be Based On
A. Sound Economic Principles
B. The Laws Of Demand And Supply
C. The Values Of People As To What Constitutes A “Fair” Distribution Of Income
D. Marginal Cost And Marginal Benefit
E. Both (A) And (D)

12. A National Crime Lab Used To Prevent Criminal Activity Nationwide Is An Example Of A
A. Negative Externality
B. Positive Externality
C. Transfer Payment
D. Public Good
E. Private Good

13. Tax Equity Means That
A. All People Should Pay Equal Taxes
B. Only The “Rich” Should Pay Taxes
C. People In The Same Economic Circumstances Should Pay Equal Taxes, And People In Different Economic Circumstances Should Pay Unequal Taxes
D. The Distribution Of Income After Taxes Should Be Equal
E. None Of The Above

14. An Efficient Tax Would Be A Tax For Which
A. The Excess Burden” From Taxes Is Zero
B. Taxes Should Have A Neutral Effect On The Operation Of The Economy
C. Taxes Should Be Levied At Progressive Rates
D. (A) And (B)
E. All Of The Above

15. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Government Purchase Is
A. Greater Than The Benefit Of The Last Dollar Spent In The Private Sector
B. Less Than The Benefit Of The Last Dollar Spent In The Private Sector
C. Equal To The Benefit Of The Last Dollar Spent In The Private Sector
D. Paid For Out Of Current Tax Collections
E. None Of The Above

16. An Efficient Level Of Government Expenditures Is That Level At Which
A. Marginal Benefits Exceed Marginal Costs
B. Total Benefits Equal Total Costs
C. The Net Benefits To Society Are Maximized
D. The Total Costs Are Minimized
E. None Of The Above

17. Where Marginal Benefits Are Greater Than The Marginal Costs, Government Expenditures Should
A. Be Increased
B. Remain The Same
C. Be Decreased Then Increased To Their Original Level
D. Be Increased Then Decreased To Their Original Level
E. Do None Of The Above

18. Characteristics Of Public Goods And Services Include Which Of The Following?
A. The Demand For These Goods And Services Is Divisible On The Basis Of Individual Quantity Demanded
B. The Supply Of These Goods And Services Is Generally Not Divisible Into Small Units
C. These Goods And Services Are Easily Provided By The Market System
D. The Costs Of These Goods Fall On Other Than The Buyer
E. None Of The Above

19. Which Of The Following Is An Example Of A Public Good Or Service?
A. A Public Highway
B. Free Cheese Offered By The Government
C. Food Stamps
D. Social Security
E. Automobiles

Questions 20 – 24 Refer To The Graph Below.

20. Assuming No External Benefits Or Costs, The Efficient Price And Quantity Would Be
A. P2, Q2
B. P2, Q1
C. P1, Q1
D. P0, Q0
E. P0, Q2

21. Suppose There Are External Benefits Associated With The Production Of The Good. The Efficient Price And Quantity Are
A. P2, Q2
B. P2, Q1
C. P1, Q1
D. P0, Q0
E. P0, Q2

22. If External Benefits Are Associated With The Consumption Of The Good, Consumers Could Be Induced To Purchase The Efficient Quantity If The Price Were Set At
A. P2
B. P1
C. P0
D. 0
E. None Of The Above

23. To Assure Consumers Purchase The Efficient Quantity When There Are Positive External Benefits, The Government Would Lower Price To
A. P2
B. P1
C. P2- P1
D. P0- P1
E. P0

24. Marginal External Benefits Are Represented On The Graph As The Distance
A. Ab
B. Q2a
C. Ea
D. Cf
E. Af

25. Which Of The Following Is The Major Tax Source Of The Federal Government?
A. Income Taxes
B. Excise Taxes
C. Property Taxes
D. Wealth Taxes
E. Sales Taxes

26. A Progressive Tax Rate Means That The Ratio Of Tax Collections To Income
A. Falls As Income Rises
B. Rises As Income Rises
C. Remains The Same As Income Rises
D. Either (A) And (B)
E. May Fall, Rise, Or Remain The Same As Income Rises

27. In The Us, Major Sources Of Tax Revenues Are:
A. Income Taxes At The Federal Level, Property Taxes At The State Level
B. Sales Taxes At The Federal Level And Income Taxes And Property Taxes At The State Level
C. Income Taxes At The Federal Level And Income And Sales Taxes At The State Level
D. Income Taxes At The Federal Level And Payroll Taxes At The State Level

28. The Ability To Pay The Principle Of Taxation Suggests That People With More Income Should Pay More Taxes. This Means That
A. Progressive Income Rates Are Consistent With The Ability To Pay Principle
B. Proportional Income Rates Are Consistent With The Ability To Pay Principle
C. Regressive Income Rates May Or May Not Be Consistent With The Ability To Pay Principle Depending On The Rate Of Regression
D. Sales Taxes Are Consistent With The Ability To Pay Principle
E. None Of The Above

Questions 29 – 33 Refer To The Graph Below.

29. The Demand Curve For This Product Can Be Described As
A. Perfectly Elastic
B. Perfectly Inelastic
C. Unitary Elastic
D. Hyper Elastic
E. Price Elastic

30. Given Demand Curve D, If An Output Tax Per Unit Of P- P2 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. It Can Not Be Determined

31. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

32. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

33. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

Questions 34 – 38 Refer To The Graph Below.

34. The Demand Curve For This Product Can Be Described As
A. Perfectly Elastic
B. Perfectly Inelastic
C. Unitary Elastic
D. Hyper Elastic
E. Price Elastic

35. Given Demand Curve D, If An Output Tax Per Unit Of P- P1 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

36. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

37. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

38. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

39. An Output Tax Will Be Shifted Completely
A. Backward If Demand Is Price Inelastic
B. Forward If Demand Is Perfectly Price Inelastic
C. Forward If Demand Is Price Elastic
D. Backward, Regardless Of Elasticity
E. All Of The Above

40. A Tax Levied Independent Of Output, Such As A Tax Levied On Net Income Of Corporations, Will
A. Be Shifted If Demand Is More Elastic Than Supply
B. Be Shifted If Supply Is More Elastic Than Demand
C. Not Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax
D. Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax
E. Do None Of The Above

41. Government Borrowing Is Argued To Have The Effect Of Raising Interest Rates—The “Crowding-Out Effect.” In Conjunction With Government Spending, Does Government Spending And Borrowing Have A Positive Or Negative Impact On The Economy?
A. Negative, Since Borrowing Exceeds Spending
B. A Positive Impact, Since Expenditures Often Exceed Borrowing
C. A Neutral Effect, Since The Budget Is Always In Balance
D. Government Spending And Borrowing Have A Minimal Effect On The Economy
E. Government Spending And Borrowing Must Be Considered Separately

42. The Gasoline Tax Is Often Used To Illustrate The Benefits Received Principle Of Taxation Because
A. Everyone Benefits From The Gasoline Tax
B. Those Who Pay The Tax Receive Benefits, Since The Revenues Are Used For Road And Highway Construction And Maintenance
C. The Amount We Pay Is Consistent With Our Incomes
D. Everyone Knows When They Pay The Tax
E. The Gasoline Tax Is A Poor Example Of The Benefits Received Principle

43. Vertical Equity Implies That
A. People In Different States Should Pay The Same Taxes
B. People With Comparable Incomes Should Pay The Same Taxes
C. People In Different Economic Circumstances Should Pay Different Amounts
D. Taxes Should Rise As The Size Of Your Family Increases
E. Taxes Should Be Based Upon How Tall The Taxpayer Is

44. Proportional Tax Rates Mean That The Ratio Of Tax Collection To Income
A. Falls As Income Rises
B. Rises, As Income Rises
C. Remains The Same As Income Rises
D. Rises As Income Falls
E. Falls As Income Falls

45. Regressive Tax Rates Mean That The Ratio Of Tax Collections To Income
A. Falls As Income Rises
B. Rises As Income Rises
C. Remains The Same As Income Rises
D. Remains The Same As Income Falls
E. Falls As Income Falls

46. The Us Federal Personal Income Tax Is An Example Of A(N)
A. Regressive Tax Rate Structure
B. Proportional Tax Rate Structure
C. Progressive Tax Rate Structure
D. More Regressive Than Proportional Tax Rate Structure
E. Equitable Tax Rate Structure

47. If Demand For A Product Is Perfectly Inelastic, An Output Tax Will Be Shifted
A. Completely Backward
B. Completely Forward
C. Completely To The Poor
D. Completely To The Rich
E. Completely To The Producer

48. A Tax That Is Shifted Forward Is A Tax That Falls On
A. The Consumer In The Form Of Higher Prices
B. The Producer Through Lower Sales
C. The Government
D. Foreign Investors
E. None Of The Above

49. A Tax That Is Shifted Backward Is A Tax That Falls On
A. The Consumer In The Form Of Higher Prices
B. The Owners Of Resources In The Form Of Lower Resource Prices
C. The Government
D. Foreign Investors
E. None Of The Above

50. At The Federal Level, The Largest Revenue Generating Tax Is The
A. Corporate Income Tax
B. Personal Income Tax
C. Property Tax
D. Sales Tax
E. Customs Duty

51. If The Ratio Of Tax Collections To Income Rises As Income Rises, Then The Tax Rate Is
A. Regressive
B. Proportional
C. Progressive
D. Regressive Then Proportional
E. None Of The Above

52. The Federal Government Lowered Tax Rates In
A. 1986 And 2001
B. 1986
C. 2001
D. Neither Year
E. 1909 And Has Raised Them Ever Since

53. Suppose There Are Two Individuals Who Each Earn $25,000 Per Year. One Individual Pays $2,500 In Taxes And The Other Pays $2,000. This Is A Violation Of
A. The Benefits Received Principle
B. The Ability To Pay Principle
C. Vertical Equity
D. Horizontal Equity
E. None Of The Above

54. Suppose One Individual Earns $25,000 Per Year And Another Individual Earns $15,000 Per Year. If The Individual Earning $25,000 Per Year Pays $750 More Per Year In Taxes Than The Person Earning $15,000, This Is An Illustration Of
A. The Benefits Received Principle
B. The Ability To Pay Principle
C. The Equal Tax Treatment Principle
D. The Equitable Payment Doctrine
E. None Of The Above

55. If We Levy A Tax On Profits That Is Neither Shifted Neither Forward Nor Backward, It Is
A. An Output Tax
B. An Input Tax
C. A Tax Independent Of Output
D. A Tax Dependent On Output
E. None Of The Above

56. The Federal Tax System In The United States Can Be Described As
A. Regressive
B. Highly Progressive
C. Slightly Progressive
D. Proportional
E. None Of The Above

57. A Tax System That Will Not Alter The Distribution Of Income Is
A. Proportional
B. Regressive
C. Slightly Progressive
D. Very Progressive
E. None Of The Above
58. Which Of The Following Countries Has The Lowest Taxes Collected (As A Percent Of Gdp)?
A. The United States
B. Germany
C. Italy
D. France
E. The United Kingdom

59. The Highest Effective Federal Tax Rate In The United States Is Approximately
A. 10%
B. 15%
C. 20%
D. 24%
E. 34%
60. The Highest Effective Federal Tax Rate In The United States Falls On Which Income Category?
A. The Lowest Quintile
B. The Middle Quintile
C. The Top 10%
D. The Top 5%
E. The Top 1%

61. The Single Most Important Source Of Tax Revenue For The Local Governments In The United States Is The
A. Real Property Tax
B. Personal Income Tax
C. National Sales Tax
D. Cigarette Tax
E. Inheritance Tax

62. Enforcement And Collection Of Personal Income Taxes Is The Responsibility Of The
A. Treasury Department
B. Individual State Governments
C. Federal Reserve System
D. Internal Revenue Service
E. Department Of Labor

63. The Federal Government Uses Taxes To
A. Generate Revenue
B. Encourage Saving For Education And Retirement
C. Discourage Certain Behaviors
D. Promote The Purchase Of Houses
E. Do All Of The Above

64. The 1986 Tax Reform Act ________ The Number Of Tax Brackets And _______ The Highest Tax Bracket.
A. Increased; Increased
B. Increased; Decreased
C. Decreased; Increased
D. Decreased; Decreased
E. Decreased; Did Not Change

65. Since 2004, The Highest Personal Income Tax Bracket Has Been
A. 10%
B. 15%
C. 25%
D. 28%
E. 35%

66. The Economic Growth And Taxpayer Relief Reconciliation Act Passed By Congress And Signed By President George W. Bush Did Which Of The Following?
A. Immediately Cut Federal Tax Rates By One-Third
B. Gave A $300 Check To Each Taxpayer
C. Decreased The Tax On Income From Financial Investments
D. Decreased The Federal Budget Deficit
E. Increased The Number Of Personal Income Tax Brackets

67. The First Budget Surplus Since 1969 Occurred In
A. 1993
B. 1995
C. 1998
D. 1999
E. 2000

68. The Budget Surpluses Of The Late 1990’s And The Early 2000’s Could Be Attributed To Which Of The Following Government Policies?
A. The Value Added Tax Act
B. The Tax Reform Act Of 1986
C. The Economic Growth And Taxpayer Relief Reconciliation Act
D. Increased Government Debt
E. All Of The Above

69. If A Government Bond With A Maturity Value Of $10,000 Sells For $9,000 And Pays Annual Interest Of $1,000, What Is The Rate Of Interest On The Bond?
A. 1%
B. 10%
C. 11.1%
D. 88.9%
E. 90%

70. An Increase In Government Borrowing Will Cause Which Of The Following?
A. A Decrease In The Demand For Loanable Funds
B. A Decrease In The Supply Of Bonds
C. An Increase In The Interest Rate
D. An Increase In The Price Of Bonds
E. All Of The Above

71. Federal Debt Reduction Will Cause Which Of The Following?
A. A Decrease In The Interest Rate
B. An Increase In Private Investment
C. A Decrease In The Supply Of Bonds
D. An Increase In The Price Of Bonds
E. All Of The Above

72. The Federal Government Ended Its Most Recent Period Of Budget Surpluses And Returned To Deficits In
A. 1999
B. 2000
C. 2001
D. 2002
E. 2003

73. The Federal Deficit Was Increased In 2002 As A Result Of
A. The 2001 Recession
B. The War On Terrorism
C. The 2001 Tax Cut
D. Increased Defense Spending
E. All Of The Above

74. Retiring The Federal Debt Will
A. Decrease The Supply Of Government Bonds
B. Increase Government Bond Prices
C. Lower The Interest Rate On Government Bonds
D. Decrease The Demand For Money
E. Do All Of The Above

True / False Questions

75. The Fears That People Have Concerning Government Are Related To The Size Of Government And The Distribution Of Taxes.

76. Some Of The Fears That People Have Concerning Government Are Well-Founded And Some Are Not.

77. Government Expenditures Have Grown Faster Than The Gdp Since 1958, Representing About Fifty Percent Of Gdp Today.

78. Government Transfer Payments, Such As Public Assistance Payments And Social Security Payments, Have Been A Constant Percentage Of The Gdp Since 1960.

79. Government Purchases Of Goods And Services Have Remained A Constant Percentage Of The Gdp For The Last Two Decades.

80. Before An Intelligent Decision Can Be Made About Whether Government Is Too Large Or Small, The Benefits And Costs Must Be Weighed.

81. An Efficient Level Of Government Expenditures Is That Level Where Net Benefits To Society Are Maximized.

82. Public Goods And Services Can Be Supplied In The Market Because They Are Easily Divisible Into Small Units And Can Be Priced To The Individual Demander.

83. The Existence Of Externalities In Production Or Consumption Does Not Negate The Possibility That These Goods And Services Can Be Supplied Efficiently In The Market.

84. A Great Deal Of Government Activity Is Based On The Idea That People In Society Should Determine The Extent To Which The Distribution Of Income Should Be Altered.

85. The Major Tax Source Of The Federal Government Is The Highly Regressive Sales Tax.

86. The Federal Income Tax System Results In A Mildly Progressive Tax Structure.

87. The Major Tax Source Of State Governments Is The Property Tax.

88. Progressive Income Tax Rates Are Consistent With The Ability To Pay Principle Of Taxation But Are Inconsistent With The Tax Criterion Of Economic Efficiency.

89. The Relative Tax Treatment Doctrine Would Call For All Taxpayers To Pay Equal Taxes.

90. Since Gasoline Taxes Are Used Primarily To Finance Highways, Gasoline Taxes Can Be Defended On The Benefits Received Principle Of Taxation.

91. The Excess Tax Burden Is In The Form Of The Loss In Private Production That May Take Place If Incentives To Work And To Produce Are Discouraged.

92. A Tax Levied On Each Unit Produced Will Likely Be Shifted Forward And Backward Depending Upon The Elasticities Of Demand And Supply.

93. If An Output Tax Is Levied On A Product That Has A Perfectly Elastic Demand, The Tax Will Be Shifted Completely To The Consumer In The Form Of Higher Prices.

94. Federal Budget Deficits Occurred Throughout The 1970’s And 1980’s But In The Late 1990’s Deficits Turned Into Budget Surpluses.

95. The Tax Reform Act Of 1986 Increased The Highest Marginal Tax Rate To 50% From 38%.

96. In General, A Tax Levied On Net Income Of A Corporation Would Be Shifted To Consumers In The Short Run.

97. Tax Equity Would Probably Be Reduced If Federal Tax Exclusions, Such As Interest On State And Local Government Securities, Were Eliminated.

98. Demand For Public Goods And Services Is Not Generally Divisible On The Basis Of Individual Quantity Demanded.

99. The Tax Base Is What A Tax Is Levied On, Such As Income, Sales, Or The Value Of Property.

100. Regressive Tax Rates Mean That The Ratio Of Tax Collection To Income Rises As Income Rises.

101. Tax Equity Means That All People Should Pay Equal Taxes.

102. An Output Tax Will Be Shifted Completely Forward If Demand Is Price Elastic.

103. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Purchase Is Greater Than The Last Dollar Of Cost.

104. When Marginal Benefits Equal Marginal Costs Then Net Benefits Are Maximized.

105. Horizontal Equity Means That People In Identical Economic Positions Should Pay Equal Taxes.

106. Transfer Payments Are Government Expenditures For Currently Produced Goods And Services.

107. In The Absence Of Externalities, Government Actions Are Needed To Ensure The Efficiency Of The Market System.

108. According To The Equal Tax Treatment Doctrine, People In Identical Economic Circumstances Should Pay Equal Taxes.

109. The Equal Tax Treatment Doctrine Pertains To Vertical Equity.

110. The Federal Tax System Is Much More Progressive Than Is Generally Believed.

111. The Economic Growth And Taxpayer Relief Reconciliation Act, The Job Creation And Worker Assistance Act, And The Jobs And Growth Tax Relief Act Each Reduced Effective Tax Rates On Income.

112. The United States Has Not Had A Federal Budget Surplus Since The 1960s.

113. The Personal Income Tax Is The Single Most Important Source Of Tax Revenue For The Federal Government Of The United States.

114. The Enforcement And Collection Of The Personal Income Tax Is The Responsibility Of The Internal Revenue Service.

115. There Are Currently 14 Tax Brackets Ranging From 11% To 50%.

116. The Federal Government Uses The Tax Code To Encourage Certain Behaviors.

117. Bond Prices And Interest Rates Are Inversely Related.

118. The First Budget Surplus Since 1969 Occurred In 1998.

119. A Budget Deficit Occurs When Tax Revenues Exceed Government Spending.

120. A Lower Interest Rate Encourages Private Investment Spending.

121. The National Debt Is The Sum Of Past Budget Deficits.

122. The Government Owes Almost One Third Of The National Debt To Itself.

123. An Increase In Government Borrowing Increases The Demand For Loanable Funds.

124. An Increase In Government Borrowing Increases The Supply Of Loanable Funds.

125. The Federal Budget Has Been In Deficit Each Year Since The Beginning Of The 1970s.

Chapter 15

Social Security And Medicare: How Secure Is Our Safety Net For The Elderly?

Multiple Choice Questions

1. Government Programs That Guarantee Citizens Financial Benefits For Events Beyond Their Personal Control And That Are Financed Through Tax Revenues Are Called
A. Social Insurance Programs
B. Entitlement Programs
C. Private Insurance Programs
D. Welfare Programs
E. Transfer Programs

2. The Largest Social Insurance Program In The United States Is
A. Temporary Assistance For Needy Families
B. Social Security
C. Medicaid
D. Federal Flood Insurance
E. Job Corps

3. The Most Significant Factor That Threatens The Financial Stability Of The Social Security System Is The
A. Increasing Number Of Young Workers
B. Relatively High Rates Of Social Security Taxes
C. Population Bulge Created By The “Baby Boom” Generation
D. Generosity Of Current Social Security Benefits
E. Threat Of Foreign Workers Entering The U.S. Due To Nafta

4. Which Of The Following Nations Was The First To Offer Its Citizens A Modern Social Insurance Program?
A. United States
B. Great Britain
C. Russia
D. Germany
E. Japan

5. In The United States, Social Security Was Established In When President Signed The Social Security Act Into Law.
A. 1903; Theodore Roosevelt
B. 1929; Herbert Hoover
C. 1965; Lyndon Johnson
D. 1865; Abraham Lincoln
E. 1935; Franklin Roosevelt

6. Which Of The Following Statements Is Concerning The Scope Of The Social Security Program?
A. Social Security Has Narrowed Its Scope Over Time To Focus On The Economic Stability Of The Individual
B. The Scope Of Social Security Has Remained Constant Throughout Its History
C. Social Security Has Broadened Its Scope Over Time To Focus On The Economic Stability Of The Family
D. The Scope Of Social Security Has Always Focused On The Family Unit
E. None Of The Above

7. How Many Americans Receive A Monthly Check From The Social Security Administration?
A. Fewer Than 10 Million
B. More Than 50 Million
C. About 27 Million
D. Roughly 38 Million
E. More Than 100 Million

8. As Originally Designed, Social Security Was To Be Financed As A
A. Private Insurance Program
B. Pure Income Transfer Program
C. Pay-As-You-Go Insurance Program
D. Fully-Funded Insurance Program
E. Means-Tested Benefits Program

9. How Are Social Security Tax Revenues Allocated Today?
A. They Are Used To Pay Today’s Social Security Beneficiaries, And Any Extra Is Placed Into The Social Security Trust Fund
B. All Of Today’s Revenues Are Placed In The Social Security Trust Fund To Pay For Tomorrow’s Beneficiaries
C. Tax Revenues Are Placed Into Accounts For Each Worker Who Will Draw Upon The Balance When They Retire
D. The Revenues Are Invested In Government Securities And In The Stock Market
E. No One Really Knows

10. Current Projections Estimate That The Social Security Trust Fund Will Be Completely Depleted
A. In Late 2003
B. During 2010-2020
C. In About 100 Years
D. Around 2100
E. Before 2040

11. Given The Way Social Security Is Financed, Which Of The Following Is ?
A. Social Security Results In A Transfer Of Income From The Old To The Young
B. Social Security Results In A Transfer Of Income From The Young To The Old
C. Social Security Has A Neutral Effect On The Nation’s Income Distribution
D. The Purchasing Power Of The Elderly Has Been Diminished By Social Security Taxes
E. (A) And (D)

12. Social Security Taxes Are
A. Paid Only By Workers
B. Levied On Salaries And Wages
C. Paid Only By Employers
D. Paid By Both Workers And Employers
E. (B) And (D)

13. Currently, The Total Combined Tax Rate Collected By Social Security Is
A. 21.6% Of Earnings
B. 15.3% Of Earnings
C. 7.65% Of Earnings
D. 6.20% Of Earnings
E. 1.45% Of Earnings

14. Which Of The Following Is Concerning Social Security’s Retirement Benefit Structure?
A. All Eligible Retired Workers Are Entitled To The Same Benefits
B. High Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Low Wage Workers
C. Retired Female Workers Are Entitled To Higher Benefits Than Retired Male Workers
D. Low Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Do High Wage Workers
E. Retired Workers Living In Cities Receive Larger Benefits Than Those Living In Rural Areas

15. Most Of Today’s College Student Population Will Be Eligible To Receive Full Social Security Retirement Benefits When They Reach The Age Of
A. 62
B. 65
C. 67
D. 70
E. 72

16. The Cost Of Living Adjustment (Cola) Employed By Social Security Is Based On The
A. Current Level Of Gdp
B. Local Rate Of Inflation
C. Consumer Price Index
D. Producer Price Index
E. Annual Poverty Threshold

17. How Many Elderly Households Receive Social Security Benefits?
A. More Than 90%
B. Less Than 50%
C. About 75%
D. Only About 15%
E. None Of The Above

18. Which Of The Following Statements Is ?
A. 20% Of Elderly Households Receive Social Security As Their Only Source Of Income
B. Approximately 90% Of Elderly Households Receive Social Security Benefits
C. Just Under 30% Of Elderly Households Receive Private Pension Benefits
D. For Nearly Two Thirds Of Elderly Households, Social Security Represents More Than 50% Of Total Income
E. None Of The Above. All Are

19. If People Choose To Work Fewer Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The
A. Substitution Effect
B. Bequest Effect
C. Income Effect
D. Wealth Effect
E. Real Wage Effect

20. If People Choose To Work More Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The
A. Substitution Effect
B. Bequest Effect
C. Income Effect
D. Wealth Effect
E. Real Wage Effect

21. Empirical Evidence Suggests That Social Security Has _______ The Overall Supply Of Labor.
A. Had No Effect On
B. Reduced
C. Increased
D. Stimulated
E. Done None Of The Above To

22. Social Security May Increase The Level Of Personal Saving Due To
A. The Retirement Effect
B. The Bequest Effect
C. The Wealth Substitution Effect
D. (A) And (B)
E. (B) And (C)

23. Empirical Studies Indicate That Social Security Has
A. Increased The Level Of Personal Savings
B. Had A Neutral Effect On The Level Of Personal Savings
C. Reduced The Level Of Personal Savings
D. Increased The Number Of Older Workers
E. Raised The Average Age At Which Workers Choose To Retire

24. The Effect Of Social Security On Personal Savings Is Important Because
A. The Level Of Savings Determines The Pool Of Investment Funds
B. Savings Are Necessary To Finance The Social Security Trust Fund
C. Personal Savings Are Negatively Related To Economic Growth
D. Savings Are A Major Source Of Income For All Elderly Households
E. The Level Of Savings Reflects The Magnitude Of Future Consumption

25. Why Can’t Social Security Rely On A Strict Pay-As-You-Go Financial Structure?
A. The Current Generation Of Workers Is Too Small To Support Future Retirees
B. A Pay-As-You-Go Financial Structure Is Inherently Unstable
C. The Current Generation Of Retirees Will Bankrupt The System Before The “Baby Boom” Retires
D. Inflation Erodes The Value Of Contributions That Must Be Saved To Pay Future Retirees
E. None Of The Above

26. The Most Simple And Direct Way To Postpone The Looming Social Security Financial Crisis Is To
A. Invest Social Security Taxes In The Stock Market
B. Raise Social Security Taxes And/Or Lower Benefits
C. Privatize The Social Security Administration
D. Eliminate The Social Security System And Force Everyone To Buy Private Insurance
E. Subsidize Social Security With General Tax Revenues

27. The Most Significant Argument Against Privatizing Social Security Is That
A. Benefits Would Have To Be Cut
B. It Has Not Worked In Other Countries
C. Future Benefits Levels Cannot Be Guaranteed
D. It Is Too Complicated To Be Practical
E. Taxes Would Have To Be Raised

28. Why Do Some People Favor Investing The Social Security Trust Fund In The Stock Market?
A. Because For Most Beneficiaries The Historic Return On Their Social Security Taxes Has Been Less Than What Would Have Been Earned If Those Dollars Were Invested In The Stock Market
B. Because Investment In The Stock Market Will Guarantee Higher Rates Of Return Over The Long Run For All Retirees
C. Because Investments In The Stock Market Carry Very Little Risk And Offer The Potential For Excessive Short-Run Gains With Little Or No Potential For Loss
D. Because The Stock Market Offers The Safest Form Of Investment
E. All Of The Above

Questions 29 – 33 Refer To The Graph Below.

29. The Results Of The Retirement Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

30. The Results Of The Bequest Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

31. The Results Of The Wealth Substitution Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

32. A Change In Consumption From Ce To Cf Could Be Caused By Which Of The Following?
A. The Bequest Effect
B. The Retirement Effect
C. The Wealth Substitution Effect
D. All Of The Above
E. None Of The Above

33. A Movement From Point E To Point F As A Result Of Social Security Would Result In Which Of The Following Costs To Society? A Long-Run Movement To
A. Ppc Cd Rather Than Gh
B. Ppc Gh Rather Than Cd
C. Point B Rather Than Point A
D. Point A Rather Than Point B
E. If To Cf

34. If I Start Saving More During My Working Life Because I Anticipate Retiring Earlier Thanks To Social Security, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

35. If I Spend More Each Year Because I Know That I Will Receive Social Security Payments When I Retire, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

36. If I Put Extra Into A Savings Account So That I Can Leave Assets To My Children To Compensate Them For Their Payments Into The Social Security System, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

37. If Inflation Increases, What Will Happen To The Social Security Cola? It Will
A. Expire
B. Increase
C. Decrease
D. Be Divided Among Social Security Recipients
E. Be Added To The Social Security Trust Fund

38. “An Agreement To Pay A Premium To A Company In Return For A Guarantee Of Financial Benefits In The Event Of An Undesired Circumstance” Defines
A. Social Insurance
B. Private Insurance
C. Private Investment
D. Asset Management
E. Retirement Savings

39. Social Insurance Uses Tax Revenues To Guarantee Citizens Financial Benefits For Events Including
A. Old Age
B. Disability
C. Poor Health
D. Death Of A Spouse
E. All Of The Above

40. If A Program’s Benefits Are Funded By Interest Earned On Accumulated Payments, It Is Which Type Of System?
A. An Investment System
B. A Fully Funded Scheme
C. An Interest Scheme
D. A Pay-As-You-Go System
E. An Endowed System

41. If A Program’s Benefits Are Funded Out Of Current Payments, It Is Which Type Of System?
A. An Investment System
B. A Fully Funded Scheme
C. A Pyramid Scheme
D. A Pay-As-You-Go System
E. An Endowed System

42. When Was The Medicare Program Established?
A. 1935
B. 1945
C. 1955
D. 1965
E. 1975

43. Today, The Health Care Sector Of The U.S. Economy Accounts For About Percent Of National Income.
A. 3
B. 5
C. 8
D. 12
E. 18

44. A Person With Health Insurance Will Tend To
A. Have A Lower Demand For Health Care Services
B. Have A Much Greater Concern For Preventive Care
C. Buy A Lower Quantity Of Health Care At A Higher Price
D. Demand More Health Care Services Than A Person Without Insurance
E. Do None Of The Above

45. The Payment And Delivery Of Health Care Service Under A Managed Care System Is Based On
A. A Fee-For-Service Market Principle
B. A Prearranged Schedule Of Fixed Prices
C. The Ability To Pay Principle
D. Price Negotiation Between The Consumer And Provider
E. None Of The Above

46. The Medicare Program
A. Was Established As A Socialistic Takeover Of Health Care Providers
B. Has Reduced The Demand For Health Care Services
C. Affects Persons 65 And Older, Regardless Of Income
D. Enrolls All Poor People Regardless Of Age
E. Does None Of The Above

47. Part C Of The Medicare Program (Medicare + Choice)
A. Provides Health Care Plan Choices To The Beneficiaries Of Medicare
B. Restricts Medicare Beneficiaries To A Simple Fee-For-Service Health Care Plan
C. Provides Comprehensive Health Insurance Coverage For All Poor People
D. Is Only Available To Disabled Retirees Receiving Social Security
E. Does None Of The Above

48. A Potential Benefit Of Managed Care Plans To Medicare Enrollees Is That These Plans
A. Typically Require Less Cost Sharing
B. Provide A Higher Quality Of Health Care
C. Provide A Greater Quantity Of Health Care
D. Require Less Paper Work
E. Do All Of The Above

49. Part A Of The Medicare Program (Hospital Insurance) Is Financed Primarily By
A. A Monthly Premium
B. A 2.9% Tax Levied On Wages And Salaries
C. An Allocation From General Tax Revenues
D. User Fees Paid By Patients
E. Insurance Deductibles

50. What Percent Of The Average Health Care Dollar Spent In The United States Comes Directly From The Consumer?
A. 100
B. 83
C. 50
D. 34
E. 12

51. Which Of The Following Factors Has Contributed Most To The Tremendous Increase In Health Care Expenditures Experience In The U.S. During The Past Fifty Years?
A. Health Care Inflation
B. The Aging Of The Population
C. Increased Public Support For Health Care
D. Private Health Insurance
E. Growth In Medicaid

52. Which Of The Following Receives The Largest Share Of Expenditures Made On Health Care In The United States?
A. Physicians
B. Nursing Homes
C. Hospitals
D. Personal Health Care Product And Service Providers
E. Pharmacies

53. In A Fee-For-Service Health Care System, Consumers Pay The
A. Insurance Company A Fee Every Time They Use A Service
B. Full Cost Of The Services They Receive
C. Hmo When They Receive Care
D. Doctor A Small Payment Called A “Co-Pay.”
E. Prearranged, Fixed Fee For Services They Receive

54. How Are Payments To Health Care Providers Determined Under A Managed Care System? By The
A. Government
B. Market
C. Insurance Company And The Provider
D. Provider And The Consumer
E. Ama (American Medical Association)

55. Which Of The Following Is An Example Of A Managed Health Plan?
A. Hmo
B. Ppo
C. Pos
D. Physicians Network
E. All Of The Above

Questions 56 – 59 Refer To The Graph Below.

56. With A Market Allocation Of Medical Services, Equilibrium Quantity Will Be
A. 0
B. 50
C. 2,000
D. 2,800
E. 4,000

57. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Demanded?
A. 0
B. 2,000
C. 2,800
D. 4,000
E. An Infinite Amount

58. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Supplied?
A. 0
B. 50
C. 2,000
D. 2,800
E. 4,000

59. The Supply Of Medical Services In This Market Is
A. Elastic
B. Inelastic
C. Unit Elastic
D. Price Elastic
E. Infinite

60. Under Most Insurance Systems, Patients Are Responsible For Which Of The Following Payments For Health Care Services?
A. Deductible
B. Co-Insurance
C. Fee-For-Service Charges
D. All Of The Above
E. None Of The Above

61. A Patient May Be Required To Pay A Percentage Of The Cost Of Their Health Care Above The Fixed Fee They Pay. This Is Known As
A. The Deductible
B. Co-Insurance
C. Fee-For-Service
D. The Health Care Tax
E. Medicare Tax

62. If Your Insurance Company Agrees To Pay A Fixed Fee For You To Receive A Given Treatment (For Example, $5,000 For An Appendectomy), The Company Is Using Which Of The Following?
A. A Fee-For-Service System
B. A Managed Care System
C. A Co-Insurance System
D. A Prospective Payment System
E. A Social Insurance System

63. If Your Deductible Is $200 And You Pay Co-Insurance Of 20%, How Much Will You Have To Pay For A $3,000 Hospital Stay?
A. $200
B. $560
C. $600
D. $760
E. $800

64. If Your Deductible Is $400 And You Have Co-Insurance Of 25%, How Much Will You Have To Pay For A $5,000 Hospital Stay?
A. $400
B. $1,150
C. $1,250
D. $1,550
E. $1,650

Questions 65 – 69 Refer To The Graph Below.

65. If Patients Pay The Full Price For Office Visits, What Price Will Be Charged In The Market?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

66. If Patients Pay The Full Price For Of Office Visits, How Many Office Visits Will They Make?
A. 0
B. 30
C. 50
D. 70
E. More Than 70

67. If A Third Party Guarantees A Maximum Patient Price Of $25, What Quantity Of Office Visits Will Patients Demand?
A. 0
B. 30
C. 50
D. 70
E. More Than 70

68. If A Third Party Guarantees A Maximum Patient Price Of $25, What Total Price Must Be Paid Per Office Visit To Assure The Quantity Of Office Visits Demanded Will Be Provided?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

69. If A Third Party Guarantees A Maximum Patient Price Of $25, How Much Must The Third Party Pay Per Office Visit?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

70. Health Insurance Results In
A. An Increase In The Quantity Of Health Care Demanded
B. An Increase In The Quantity Of Health Care Provided
C. An Increase In The Total Cost Of Providing Health Care
D. All Of The Above
E. None Of The Above

71. The Medicare Modernization Act, Passed In 2003, Established
A. The First Long Term Care Coverage For Medicare Recipients
B. Lowered Deductibles For Most Medicare Recipients
C. Added A Prescription Drug Benefit To The Medicare Program
D. Instituted Stringent Price Controls On The Fees Doctors And Hospitals Can Charge
E. Restricted The Benefits That High Income Medicare Recipients Can Receive

72. The Prescription Drug Benefit That Is Part Of The Medicare Modernization Act Of 2003 Requires That Recipients Pay:
A. A Monthly Premium
B. A Co-Pay
C. A Deductible
D. All Of The Above
E. None Of The Above, These Benefits Are Provided To Recipients At No Charge

True / False Questions

73. Social Insurance Is Private Insurance Purchased By The Government.

74. Programs That Provide Citizens With Benefits For Events That Are Beyond An Individual Person’s Control Are Called Social Insurance Programs.

75. Both Social Security And Medicare Are Social Insurance Programs.

76. The Major Underlying Factor That Endangers Social Security’s Financial Stability Is The Population Bulge Created By The “Baby Boom” Generation.

77. The United States Was The First Nation To Provide Social Insurance Programs For Its Citizens.

78. The Original Design Of The Social Security System Called For A Pay-As-You-Go Financing Scheme.

79. The Social Security Act Was Signed Into Law By President Franklin Roosevelt In 1935.

80. Over Time, Social Security Has Evolved To Focus More On The Family And Less On The Individual.

81. Currently, About 20 Million Americans Receive Social Security Benefits.

82. All American Citizens Are Entitled To Receive Social Security And Medicare Benefits When They Retire.

83. Today, Social Security Is Financed Under A Pay-As-You-Go Financial System.

84. All Current Social Security Taxes Collected By The Government Are Used To Pay Current Beneficiaries, With Nothing Left Over.

85. Social Security And Medicare Are Financed Through A Flat Tax On Wages Paid Up To A Predetermined Limit.

86. Workers And Their Employers Share The Burden Of Social Security Taxes.

87. The Social Security Trust Fund Currently Has A Negative Balance.

88. Social Security Benefits Are Adjusted Each Year For Inflation Using The Consumer Price Index (Cpi).

89. About 50% Of All Elderly Households Receive Some Form Of Social Security Benefits.

90. Today, In The Aggregate, Social Security Accounts For Over 35% Of Senior Citizens’ Income.

91. Without Social Security, Nearly 50 Percent Of Elderly Households Would Live Below The Poverty Threshold.

92. The Substitution Effect Of Social Security Taxes Causes Some People To Work More Hours.

93. The Income Effect Of Social Security Taxes Causes Some People To Work Less Hours.

94. Studies Show That Social Security Has Caused Some Workers To Retire Earlier Than They Would If Social Security Did Not Exist.

95. The Bequest Effect Of Social Security Causes Some People To Save Less During Their Lifetimes.

96. The Empirical Evidence Suggests That, Overall; Social Security Causes People To Increase Their Personal Savings.

97. Because Social Security Increases Savings, More Funds Are Available For Investment In The Overall Economy.

98. Current Estimates Indicate That The Social Security Trust Fund Will Be Depleted Before 2040.

99. A Modest Increase In Taxes Could Postpone Social Security’s Financial Crisis For Decades.

100. Privatization Of The Social Security System Would Reduce The Financial Risks Faced By Retiring Workers.

101. Chile And Other Nations Have Successfully Privatized All Or Part Of Their Social Insurance Programs.

102. Oasdi Is Social Security’s Medical Insurance Program.

103. The Most Important Factor Explaining The Growth In Personal Health Care Expenditures On Hospital And Physician Services Is Higher Prices For These Services.

104. Third-Party Payments Increase The Efficiency Of Medical Markets.

105. A Dominant Feature Of The U.S. Health Care Industry Is Price Competition Among Providers.

106. Medicare And Medicaid Have Reduced The Demand For Health Care Services.

107. The Purpose Of A Prearranged Payment And Delivery System, Such As A Managed Care Plan, Is To Take Away Any Incentive For The Provider To Supply Unnecessary Care.

108. The Demand For Health Services Is Characterized By Well-Informed Consumers.

109. The Medicare Program Affects Persons Aged 65 And Older, Regardless Of Their Income Level.

110. A Consumer With Health Insurance Is Likely To Buy More Health Services Than One Who Is Not Insured.

111. A Reduction In The Price Of Medical Services Will Cause The Demand Curve To Shift To The Right.

112. Health Care Providers Are Paid The Amount Of A Patient’s Deductible By The Health Insurance Company.

113. The Amount A Patient Must Pay Above The Deductible Is Known As Co-Insurance.

114. Projections Indicate That The Medicare Hi Program Will Be Depleted Of Funds By 2025.

115. More Than 70% Of All Privately Insured Employees Are Covered By Managed Care Plans.

116. The Medicare Program Could Be Secured By An Increase In The Payroll Tax That Supports The Program.

117. The Medicare Program Could Be Secured By Increasing Premiums, Deductibles And Co Payments.

118. Medicare’s Fee-For-Service Plan Provides Incentives For Supplying Excessive Services.

119. Managed Care Plans Provide Incentives For Supplying Excessive Services.

120. Third-Party Payments For Health Care Increase The Quantity Of Services Demanded.

121. Third-Party Payments For Health Care Decrease The Price Consumers Pay For Services.

122. The Fee-For-Service Delivery And Payment System Is The Primary Means By Which Most Elderly Americans Receive Their Health Care.

123. Third-Party Payments For Health Care Result In Less Usage Of The Health Care System.

124. Managed Care Leads To Higher Costs Of Providing Health Care Services.

125. Investments Of Social Security Tax Payments Result In High Returns On The Contributions Made By Taxpayers.

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ECO 405 Week 10 Quiz – Strayer

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Chapter 13

Unemployment And Inflation: Can We Find A Balance?

Multiple Choice Questions

1. A Person Is Considered Unemployed If The Person Is
A. Seeking A Job Requiring Greater Qualifications Than The Person Possesses And No One Is Willing To Hire The Person For Such A Job
B. Offered A Job For Which The Person Is Qualified But Prefers Not To Work
C. Qualified For A Job, Willing To Work, But Unable To Find Work For Over 30 Days
D. Out Of School During Christmas Vacation And Cannot Find Work During That Period
E. All Of The Above

2. Which Of The Following People Is Considered Unemployed?
A. A Truck Driver With A High School Education Who Has Been Laid Off His Job And Is Now Training To Be A Computer Programmer
B. An Individual Who Is Currently Not Working Nor Actively Seeking Employment
C. A Secretary Who Is Currently Not Working And Who Seeks Employment Using Secretarial Skills
D. All Of The Above
E. None Of The Above

3. An Auto Factory Worker Who Is Unemployed Because A Robot Now Has His Job Is A Victim Of
A. Structural Unemployment
B. Cyclical Unemployment
C. Underemployment
D. Frictional Unemployment
E. Seasonal Unemployment

4. Which Of The Following Individuals Is Considered Part Of The Labor Force?
A. An Unemployed Farmer
B. A College Graduate Looking For His First Job
C. A Retired Teacher Working As A Sales Clerk
D. A Department Store Santa During December
E. All Of The Above

5. When Individuals Want To Work, But Give Up Looking For A Job Because They Feel There Will Never Be One Available, They Are Considered
A. Pessimistic
B. Lazy
C. Discouraged
D. Part Of The Labor Force
E. Unemployed

6. Which Of The Following Individuals Is Part Of The Labor Force?
A. A 15-Year-Old Worker At A Fast Food Restaurant
B. A Paid Prison Worker At The Prison Carpentry Shop
C. A College Student Attending School Full-Time
D. A Stay-At-Home Dad
E. None Of The Above

7. The Unemployment Rate
A. For Blacks Is Roughly Twice The Rate For Whites
B. For Women Is Lower Than That Of Men
C. For Teenagers Is Below The Rate For The Labor Force As A Whole
D. Is Equal For Males And Females, Blacks And Whites, And Young And Old Workers
E. Is None Of The Above

8. Technological Change In An Industry That Historically Required Specific Labor Skills Will Lead To
A. Frictional Unemployment
B. Structural Unemployment
C. Cyclical Unemployment
D. Seasonal Unemployment
E. No Changes In Unemployment

9. People Who Are In The Process Of Changing Jobs Are Classified In The Category Of
A. Frictional Unemployment
B. Involuntary Unemployment
C. Structural Unemployment
D. Cyclical Unemployment
E. Seasonal Unemployment

10. A College Graduate Looking For Her First Job Is Considered
A. Frictionally Unemployed
B. Involuntarily Unemployed
C. Structurally Unemployed
D. Cyclically Unemployed
E. Seasonally Unemployed

11. A Farmer Who Has Lost His Farm Due To Increased Agricultural Productivity Is Considered
A. Frictionally Unemployed
B. Involuntarily Unemployed
C. Structurally Unemployed
D. Cyclically Unemployed
E. Seasonally Unemployed

12. A Factory Worker Who Loses A Job Because Of A Decrease In Aggregate Demand Is
A. Frictionally Unemployed
B. Involuntarily Unemployed
C. Structurally Unemployed
D. Cyclically Unemployed
E. Seasonally Unemployed

13. The Full-Employment Unemployment Rate Is
A. 0
B. Inconsistent With Price Stability
C. The Rate That Reflects Cyclical Unemployment
D. 10%
E. None Of The Above

14. Between 1960 And 2011, The Unemployment Rate Has
A. Steadily Increased
B. Steadily Fallen
C. Been Below 6% Over The Entire Period
D. Ranged From 1% To 12%
E. None Of The Above

15. Unemployment Rates Tend To Rise When
A. Inflation Rates Rise
B. Aggregate Demand Is High
C. The Economy Goes Through An Expansion
D. There Is A Recession
E. Interest Rates Are Low

16. A Major Cause Of Involuntary Unemployment Is
A. A Wage Rate Below Equilibrium
B. Not Enough Demand For Labor
C. Too Much Supply Of Labor
D. Laziness
E. A Wage Rate Above Equilibrium

17. The Unemployment Rate Will Not Fall To Zero Because Of
A. Cyclical Unemployment
B. Frictional Unemployment
C. Welfare
D. Voluntary Unemployment
E. All Of The Above

18. Which Of The Following Types Of Unemployment Is Considered Long-Term, Hardcore Unemployment?
A. Cyclical
B. Structural
C. Frictional
D. Seasonal
E. None Of The Above

19. A Poorly Educated, Unskilled Teenager Currently Unemployed Is An Example Of
A. Frictional Unemployment
B. Cyclical Unemployment
C. Structural Unemployment
D. Seasonal Unemployment
E. None Of The Above

20. People Who Are Unemployed Due To A Downturn In Economic Activity Are Classified In The Category Of
A. Frictional Unemployment
B. Structural Unemployment
C. Seasonal Unemployment
D. Cyclical Unemployment
E. Voluntary Unemployment

21. When General Motors Lays Workers Off Because Of A Decrease In Aggregate Demand, It Causes
A. Cyclical Unemployment
B. Frictional Unemployment
C. Seasonal Unemployment
D. Structural Unemployment
E. None Of The Above

22. Unemployment Below The Full Employment Rate Is A Measure Of
A. Underemployment
B. Structural Unemployment
C. Cyclical Unemployment
D. Seasonal Unemployment
E. None Of The Above

23. The Highest Unemployment Rate Is Found Among
A. People Between The Ages Of 16 And 19
B. Females
C. Ethnic Groups
D. The Elderly
E. Children

24. Which Of The Following Best Describes When The Economy Is Experiencing Inflation? When
A. The Price Of An Essential Good Increases Dramatically
B. The Prices Of Many Goods Go Up
C. There Is A Rise In The General Level Of Prices
D. All Prices Remain The Same Or Increase; No Prices Fall
E. The Value Of The Dollar Increases

25. Which Price Index Is Also Known As The Cost-Of-Living Index?
A. Consumer Price Index
B. Wholesale Price Index
C. Implicit Price Deflator
D. Gdp Deflator
E. All Of The Above

26. If Inflation Is Not Observable In The Form Of Rising Prices, It Is Called
A. Suppressed
B. Repressed
C. Deflation
D. Dynamic
E. None Of The Above

27. Price Index Numbers For A Series Of Years Show
A. If Money Gdp Is Growing
B. If Real Gdp Is Growing
C. If All Prices Are Rising
D. The Average Price Level For Each Year As A Percentage Of The Base Year
E. None Of The Above
28. If The Consumer Price Index Is 100 In 2010 And Is 120 In 2012, Then The Rate Of Inflation Between 2010 And 2012 Is
A. 10%
B. 20%
C. 15%
D. 5%
E. Unable To Be Calculated Without Further Information

29. The Best Description Of The Growth Of The Money Supply Since 1960 Is That It Has
A. Increased Steadily
B. Increased Rapidly During The 1980’s
C. Decreased Steadily
D. Decreased Rapidly During The 1960’s
E. Shown Patterns Of Both Fast And Slow Growth Over The Decades

30. When Inflation Redistributes Income From One Group In The Economy To Another, It Is An Example Of Which Effect?
A. Equity
B. Efficiency
C. Output
D. Input
E. None Of The Above

31. If Inflation Causes The Demand For Houses To Increase More Rapidly Than The Demand For Other Goods, The Economy Has Experienced Which Effect
Of Inflation?
A. Equity
B. Efficiency
C. Output
D. Input
E. None Of The Above

32. If Inflation Stimulates Production And Employment, The Economy Experiences Which Of The Following Effects Of Inflation?
A. Equity
B. Efficiency
C. Output
D. Input
E. None Of The Above

33. Which Of The Following Is Most Likely Be Hurt By Inflation?
A. People On Fixed Incomes
B. People Whose Wages Rise Faster Than Prices
C. Landholders
D. Borrowers
E. None Of The Above

34. Suppose A Family Spends $20,000 On A Basket Of Goods In 2011. Suppose The Same Basket Costs $22,000 In 2012. Using 2011 As The Base Year, The Price Index For 2012 Is
A. 105
B. 102
C. 111
D. 110
E. None Of The Above

35. The Effect Of Inflation On Production And Employment Is Known As
A. An Incomes Policy
B. The Equity Effects Of Inflation
C. The Efficiency Effects Of Inflation
D. The Output Effects Of Inflation
E. Fiscal Policy

36. Federal Income Taxes Are Levied On The Basis Of Nominally Stated Tax Brackets, And There Is A Nominal Upward Adjustment In Salaries And Wages During Inflation. Therefore, What Is Of Federal Tax Collections During Inflation? They Will
A. Decrease In Both Real And Nominal Terms
B. Increase In Both Real And Nominal Terms
C. Increase In Real Terms
D. Increase In Nominal Terms
E. Stay The Same

37. Which Of The Following Statements Is Correct? Inflation
A. Benefits Creditors At The Expense Of Debtors
B. Increases The Purchasing Power Of The Dollar
C. Increases The Real Value Of Savings
D. Arbitrarily “Taxes” Fixed Income Groups
E. Increases Real Wages

38. The Effects Of Inflation On The Distribution Of Income Are Called
A. An Incomes Policy
B. The Equity Effects Of Inflation
C. The Efficiency Effects Of Inflation
D. The Output Effects Of Inflation
E. None Of The Above
39. The Effect That Inflation Has On The Allocation Of Resources Is Known As
A. An Incomes Policy
B. The Equity Effects Of Inflation
C. The Efficiency Effects Of Inflation
D. The Output Effects Of Inflation
E. None Of The Above
40. In The Circular Flow Diagram, Economic Units Are Classified As
A. Imports And Exports
B. Households And Producers
C. Taxpayers And Governments
D. Subsidy Receivers And Taxpayers
E. Producers And Sellers
41. The Circular Flow Of Economic Activity Developed In The Text Is A Model Of The
A. Flow Of Goods, Resources, Payments And Expenditures Between The Sectors Of The Economy
B. Influence Of Government On Business Behavior
C. Influence Of Business On Consumers
D. Role Of Unions And Government In The Economy
E. Interaction Among Taxes, Prices, And Profits
42. Which Of The Following Statements Concerning The Circular Flow Is ?
A. The Circular Flow Of Economic Activity Shows How The Overall Economy Operates
B. The Circular Flow Emphasizes The Independence Of Economic Variables
C. There Are Two Circular Flows Involved In The Economy
D. The Circular Flow Shows That Real Income Is Determined By Physical Goods And Services Produced In The Economy
E. None Of The Above
43. Aggregate Demand
A. Represents The Sum Of The Demands By All Purchasers Of Goods And Services In An Economy
B. Is Comprised Of The Purchases Of Goods And Services Only By Consumers
C. Excludes Imports And Exports
D. Assumes That Governments Do Not Purchase Goods And Services
E. None Of The Above
44. The Aggregate Demand Curve Will Shift To The Right
A. When The Government Raises Taxes
B. If Investors Reduce Their Purchases Of Plant And Equipment
C. If Consumer Confidence Increases
D. If Prices Fall
E. None Of The Above

45. The Marginal Propensity To Consume Is
A. Consumption Divided By Income
B. The Change In Consumption
C. The Change In Consumption Divided By The Change In Income
D. Unaffected By Changes In Income
E. All Of The Above

46. The Marginal Propensity To Consume Plus The Marginal Propensity To Save
A. Represents What Happens As A Result Of Income Changes
B. Must Always Sum To 1
C. Must Always Sum To 0
D. A And B
E. None Of The Above

47. Investment Spending Is Sensitive To
A. Interest Rates
B. Expectations By Producers About The Return On Investment
C. The Confidence Of Investors
D. All Of The Above
E. None Of The Above

48. A Trade Deficit Will Occur In An Economy
A. When Spending Exceeds Income
B. When The Value Of Exports Exceeds The Value Of Imports
C. When The Value Of Exports Is Less Than The Value Of Imports
D. When An Economy Is Expanding
E. When An Economy Is In Recession
49. Assuming A Marginal Propensity To Consume Three-Fourths, The Spending Multiplier Is
A. 1
B. 2
C. 3
D. 4
E. None Of The Above
50. Assume That The Spending Multiplier Is 3. The Government Has Decided To Purchase New Computers To Improve Productivity And Will Spend $50 Billion On The Computer Equipment. The Resulting Increase In National Income Will Be
A. Zero
B. $200 Billion
C. $100 Billion
D. $150 Billion
E. It Cannot Be Determined

51. The Determinants Of Aggregate Supply Are
A. Resources, Prices, And Technology
B. Interest Rates
C. Consumer Wealth
D. Real Income
E. All Of The Above
52. Ameeta Spends $400 When Her Income Is $500. When She Receives A $100 Raise (Bringing Her Total Income To $600), She Spends $480. Her Mpc Is
A. 0.4
B. 0.5
C. 0.6
D. 0.8
E. 1.0

53. The Psychological Law Of Consumption Tells Us The Marginal Propensity To Consume Will Be
A. Less Than 0
B. Greater Than 0 But Less Than 1
C. Equal To 1
D. Greater Than 1 But Less Than 10
E. Greater Than 10

54. If The Mpc Is 0.8, The Spending Multiplier Equals
A. 0.2
B. 0.8
C. 1.25
D. 5.0
E. 8.0
55. If The Mps Is .4, The Spending Multiplier Equals
A. 0.4
B. 0.6
C. 1.67
D. 2.5
E. 4.0
56. Which Of The Following Is A Component Of Aggregate Demand?
A. Consumption
B. Investment
C. Government Spending
D. Exports And Imports
E. All Of The Above

Questions 57 – 62 Refer To The Graph Below.

57. Given Short Run Aggregate Supply S0, What Level Of Aggregate Demand Is Necessary For The Economy To Reach Full Employment?
A. Lower Than D1
B. D0
C. D1
D. D2
E. Higher Than D2

58. Given D0 And S0, An Increase In Aggregate Demand Would Lead To Which Of The Following?
A. Higher Unemployment
B. Lower Unemployment
C. Inflation
D. Deflation
E. Recession

59. Given S1 And D1, Which Of The Following Changes Reduces Unemployment? A Shift To
A. D0
B. D2
C. S0
D. All Of The Above
E. None Of The Above

60. Which Of The Following Would Cause A Shift From D1 To D2?
A. An Increase In Investment
B. A Decrease In Consumption
C. An Increase In Imports
D. An Increase In Saving
E. All Of The Above

61. Which Of The Following Would Cause A Shift From S1 To S0?
A. A Decrease In Resource Prices
B. An Decrease In Unemployment
C. An Increase In The Price Of Labor
D. An Increase In Consumption
E. All Of The Above

62. Demand-Pull Inflation Is Illustrated By A Movement From
A. S0 To S1
B. S1 To S0
C. D0 To D2
D. D1 To D0
E. Q1 To Q0
63. If The Economy Is Initially At Full Employment, An Increase In Aggregate Demand Will Result In
A. Demand-Pull Inflation
B. Profit-Push Inflation
C. Cost-Push Inflation
D. Unemployment
E. Underemployment

64. To Expand The Level Of Economic Activity, It Is Necessary That
A. Total Leakages Exceed Total Injections
B. Government Expenditures Exceed Tax Collections
C. Total Injections Exceed Total Leakages
D. Imports Exceed Exports
E. (C) And (D) Above

65. Leakages In The Circular Flow Consist Of
A. Savings, Taxes, And Exports
B. Savings, Investment, And Exports
C. Government Spending, Investment, And Exports
D. Savings, Taxes, And Imports
E. Investment, Taxes, And Imports

66. Injections In The Circular Flow Consist Of
A. Savings, Exports, And Investments
B. Savings, Exports, And Taxes
C. Government Spending, Savings, And Exports
D. Government Spending, Investment, And Exports
E. None Of The Above

67. Aggregate Supply Can Be Increased By
A. Reduced Incentives To Save
B. Higher Taxes
C. Increases In Government Spending
D. Policies To Induce More Saving
E. None Of The Above

68. The Phillips Curve Depicts The Relationship Between
A. Output And Inflation
B. Savings And Investment
C. Unemployment And Inflation
D. Imports And Exports
E. None Of The Above

69. Economists In The 1960s Believed That The Phillips Curve Relationship Would
A. Allow Governments To End Inflation
B. Provide Governments A Means To Control Recessions
C. Discourage Imports
D. Provide Policies That Would Trade Off Unemployment For Inflation
E. None Of The Above

70. Economic Policy Makers In The 1960s Held That Governments Could
A. Engage In Expansionary And Contractionary Policies To Manage The Economy
B. Spend Their Way Out Of Business Cycles
C. Eliminate Unemployment
D. Choose How Much To Produce
E. None Of The Above

71. After The Events Of The 1970s, Economists Learned That
A. Attempts To Trade Off Unemployment And Inflation Would Only Work For A Short Period Of Time
B. Shocks To The Aggregate Supply Could Alter The Relationships Between Unemployment And Inflation
C. The Phillips Curve Relationship Was Not Stable
D. The Phillips Curve Shifted Over Time
E. All Of The Above

72. By How Much Must Investment Spending Increase To Increase Output By $500 If The Mpc Is 0.8?
A. $100
B. $300
C. $400
D. $500
E. More Than $500

73. A Useful Measure Of The Size Of The Workforce, That Is, The Number Of Individuals Who Are Willing And Able To Work, Is
A. The Current Population Survey
B. The Unemployment Rate
C. The Rate Of Job Growth
D. The Labor Force Participation Rate
E. There Are No Useful Measures Of This Information, Due To The Difficulties Of Gathering The Sample

74. In An Economy Like That Of The Us, Due To A Variety Of Institutional And Social Factors, Wages Tend To Be
A. Very Flexible
B. Flexible During Recessions
C. Highly Rigid
D. Affected Only By Congressional Legislation
E. Sticky

75. Which Of The Following Factors In An Economy Contribute To “Sticky” Wages?
A. Flexible Working Conditions
B. Competitive Labor Markets
C. Collective Bargaining Agreements
D. Highly Mobile Capital Equipment
E. Investment Flexibility

True / False Questions

76. Unemployment Affects Both The Current And Future Production Of Goods And Services.

77. If Leakages Exceed Injections, Unemployment Will Result.

78. Involuntary Unemployment Occurs When Wage Rates Are Too Low, I.E., Below Competitive Levels.

79. Cyclical Unemployment Is Due Primarily To A Decline In Aggregate Supply.

80. Structural Unemployment Results From People Changing Jobs.

81. Frictional Unemployment Refers To Persons Who Are Unemployed Because The Economy Is In A Recession.

82. As An Economy Approaches Full Employment, Real Output Declines.

83. Frictional Unemployment Is A Long-Run Event For Particular Individuals.

84. The Unemployment Rate Is The Same For All Demographic Groups.

85. Full Employment Means That Everyone In The Labor Force Has A Job.

86. An Equilibrium Level Of National Income Implies The Economy Is Operating At Full Employment.

87. Frictional Unemployment Is Involuntary.

88. Structural Unemployment Results From The Economy Experiencing A Recession.

89. Cyclical Unemployment Occurs Because Workers Have No Marketable Job Skills.

90. A Certain Amount Of Frictional And Structural Unemployment Occurs Even At Full Employment.

91. Frictional Unemployment Can Be Reduced By Education And Training.

92. An Economy Reaches Full Employment When There Is No Cyclical Unemployment.

93. Full Employment May Be Reached Even Though There Is Frictional And Structural Unemployment.

94. Structural Unemployment Is A Long Run Event For Particular Individuals.

95. Frictional Unemployment Could Be Reduced By Decreasing The Minimum Wage.

96. All Unemployed Workers Are Unemployed For The Same Reason.

97. Cyclical Unemployment Is Involuntary.

98. When Frictional Unemployment Exists, Labor Services Are Voluntarily Unemployed.

99. As A Group, Women Suffer From The Highest Unemployment Rate.

100. The Lowest Unemployment Rate Is Found For Those Between The Ages Of 16 And 19.

101. Economic Growth Or Improved Technology Would Be Shown On An Aggregate Demand – Aggregate Supply Diagram As An Increase In Ad, As Remaining Constant.

102. An Increase In Government Purchases Financed By An Equal Increase In Tax Collections Will Increase National Income.

103. An Increase In The Marginal Propensity To Consume Will Increase The Size Of The Multiplier.

104. The Marginal Propensity To Consume Is Usually Greater Than One.

105. An Increase In Trade Deficit Will Increase Unemployment In The U.S.

106. An Increase In The Federal Budget Deficit Will Increase Unemployment.

107. An Increase In Imports Would Expand The Level Of Employment.

108. The Ad-As Relationship Is Not Affected By Circular Flow Relationships.

109. Inflation Means That Prices Are Too High.

110. A Price Index Shows The Absolute Changes In Price That Occur Over Time In A List Of Different Products And Services.

111. If The Economy Is Operating At A Less-Than-Full Employment Level, An Increase In Aggregate Demand May Result In An Increase In The Price Level As Well As An Increase In The Level Of Employment.

112. Inflation May Affect The Distribution Of Income In The Economy And May Increase National Output.

113. Inflation Is Not Equitable Because It Arbitrarily Changes The Pattern Of Income Distribution.

114. The Consumer Price Index Is A Cost-Of-Living Index.

115. Demand-Pull Inflation Ends Once Full Employment Is Reached.

116. During Inflation, Some Prices May Be Rising And Some May Be Falling.

117. The Effects Of Inflation On Resource Allocation Are The Equity Effects Of Inflation.

118. Inflation May Have A Stimulating Effect On Production And Employment.

119. The Labor Force Participation Rate Has Been Steadily Increasing In Recent Years.

120. Unemployment Rates Since 2007 Have Increased Due To Rising Structural Unemployment.

121. Since 1960, Inflation Rates Were Highest During The 1970s.

122. When A Phillips Curve Is Drawn, It Shows An Inverse Relationship Between Inflation And Unemployment Rates.

123. The Phillips Curve Is Another Name For A Production Possibilities Curve.

124. The Phillips Curve Has Displayed A Stable Relationship Between Inflation And Unemployment Since The 1960s.

125. Expansionary And Contractionary Policies Have Not Proved To Be Effective Tools To Control Unemployment And Inflation In The American Economy.

126. The Oil Embargo During The Early 1970s Showed How Stable The Relationship Is Between Unemployment And Inflation Rates.

127. Shifts In The Aggregate Supply Function Can Cause Shifts In The Phillips Curve.

128. The Relationship Shown By The Phillips Curve, Which Implies A Tradeoff Between Inflation And Unemployment Rates, Is A Long-Run Phenomenon.