Econ Review
Just a review for me for my final tomorrow
- 1.
Michelle and Patrick plan on completing a painting project at home. However, their skills are not equal. Michelle can paint one wall in 20 minutes and she can 'cut-in' or edge one wall in 10 minutes. Patrick can paint one wall in 60 minutes and he can edge one wall in 20 minutes. Which person has the comparative advantage in each task?
- A.
Michelle has the comparative advantage in both tasks.
- B.
Michelle has the comparative advantage in painting and Patrick has the comparative advantage in edging.
- C.
Michelle has the comparative advantage in edging and Patrick has the comparative advantage in painting.
- D.
Patrick has the comparative advantage in both tasks.
Correct Answer
B. Michelle has the comparative advantage in painting and Patrick has the comparative advantage in edging.Explanation
Michelle has the comparative advantage in painting because she can paint one wall in 20 minutes, while Patrick takes 60 minutes to do the same task. This means Michelle is more efficient and productive in painting walls. On the other hand, Patrick has the comparative advantage in edging because he can complete the task in 20 minutes, whereas Michelle takes 10 minutes. This shows that Patrick is more skilled and efficient in edging walls.Rate this question:
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- 2.
It is not possible for one individual to have the comparative advantage over another individual in all areas.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The concept of comparative advantage suggests that individuals or countries specialize in producing goods or services in which they have a lower opportunity cost compared to others. Since individuals have different skills, knowledge, and resources, it is unlikely for one person to have a comparative advantage in all areas. Therefore, it is true that it is not possible for one individual to have the comparative advantage over another individual in all areas.Rate this question:
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- 3.
Based on the information below, which country has the absolute advantage producing each good? C Coffee Banana Q Coffee Banana 0 9 0 65 6 3 410 3 6 215 0 9 0
- A.
Columbia in coffee
- B.
Columbia in Bananas
- C.
Guatemala in coffee
- D.
Guatemala in both goods
- E.
Columbia in both goods
Correct Answer
E. Columbia in both goodsExplanation
Columbia has the absolute advantage in both goods because it has a higher quantity produced for both coffee and bananas compared to Guatemala. In the case of coffee, Columbia produces 410 units while Guatemala produces only 215 units. Similarly, for bananas, Columbia produces 65 units while Guatemala produces only 9 units. Therefore, Columbia has the absolute advantage in both goods.Rate this question:
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- 4.
It is not possible for one individual to have the absolute advantage over another individual in all areas
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because it is possible for one individual to have the absolute advantage over another individual in certain areas. Absolute advantage refers to the ability of an individual or country to produce a good or service more efficiently than others. While it may not be possible for one individual to have absolute advantage in all areas, it is certainly possible for them to have it in specific areas where they possess superior skills, resources, or technology. Therefore, the given statement is incorrect.Rate this question:
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- 5.
TJ and Colton have to fold letters and then seal envelopes for a political campaign. It takes TJ 40 seconds to fold a letter but it only takes Colton 20 seconds. It takes TJ 20 seconds to seal an envelope but it only takes Colton 5 seconds. Which person has the comparative advantage in each area?
- A.
TJ has the comparative advantage in both area.
- B.
TJ has the comparative advantage in folding letters and Colton has the comparative advantage in sealing envelopes.
- C.
TJ has the comparative advantage in sealing envelopes and Colton has the comparative advantage in folding letters.
- D.
Colton has the comparative advantage in both areas.
Correct Answer
B. TJ has the comparative advantage in folding letters and Colton has the comparative advantage in sealing envelopes.Explanation
TJ has the comparative advantage in folding letters because he can fold a letter in 40 seconds, while Colton takes 20 seconds. This means that TJ is more efficient and can fold more letters in the same amount of time. On the other hand, Colton has the comparative advantage in sealing envelopes because he can seal an envelope in 5 seconds, while TJ takes 20 seconds. This means that Colton is more efficient and can seal more envelopes in the same amount of time. Therefore, TJ has the comparative advantage in folding letters and Colton has the comparative advantage in sealing envelopes.Rate this question:
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- 6.
If one individual has the comparative advantage in one of two tasks then the other individual must have the comparative advantage in the other task.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
This statement is true because comparative advantage refers to the ability of an individual or country to produce a good or service at a lower opportunity cost than another individual or country. If one individual has a lower opportunity cost in one task, it means they can produce that task more efficiently than the other individual. Therefore, it follows that the other individual must have the comparative advantage in the other task, as they have a lower opportunity cost in that task compared to the first individual.Rate this question:
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- 7.
Assume Melody can edit a video file in 20 minutes and create a web page in 10 minutes. Further assume that Brandon can edit a video file in 36 minutes and create a web page in 12 minutes. What is Melody's opportunity cost of editing a video?
- A.
Creating 1/3 of a web page
- B.
Creating 1/2 of a web page
- C.
Creating 2 web pages
- D.
Creating 3 web pages
- E.
None of the above
Correct Answer
C. Creating 2 web pagesExplanation
Melody's opportunity cost of editing a video can be calculated by comparing the time it takes for her to edit a video with the time it takes for her to create a web page. Since Melody can edit a video in 20 minutes and create a web page in 10 minutes, the opportunity cost of editing a video is the equivalent time it would take for her to create a web page. In this case, it would be 2 web pages, as she can create 2 web pages in the same amount of time it takes her to edit a video.Rate this question:
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- 8.
If one individual has the absolute advantage in one of two tasks then the other individual must have the absolute advantage in the other task.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
This statement is false because having an absolute advantage in one task does not necessarily mean that the other individual will have the absolute advantage in the other task. Absolute advantage refers to the ability to produce more output in a given amount of time or using fewer resources. It is possible for one individual to have an absolute advantage in both tasks, or for neither individual to have an absolute advantage in either task.Rate this question:
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- 9.
Assume Melody can edit a video file in 20 minutes and create a web page in 10 minutes. Further assume that Brandon can edit a video file in 36 minutes and create a web page in 12 minutes. Based on this information, what is Brandon's opportunity cost of creating a web page?
- A.
Editing 1/3 of a video
- B.
Editing 1/2 of a video
- C.
Editing 2 videos
- D.
Editing 3 videos
- E.
None of the above
Correct Answer
A. Editing 1/3 of a videoExplanation
Brandon's opportunity cost of creating a web page is editing 1/3 of a video. This means that for every web page Brandon creates, he is giving up the opportunity to edit 1/3 of a video. In other words, if Brandon chooses to create a web page, he is sacrificing the ability to spend that time editing a portion of a video.Rate this question:
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- 10.
Assume Melody can edit a video file in 20 minutes and create a web page in 10 minutes. Further assume that Brandon can edit a video file in 36 minutes and create a web page in 12 minutes. Which of the following is true?
- A.
Melody has the absolute advantage in editing videos and the comparative advantage in creating web pages
- B.
Melody has the absolute advantage in editing videos and the comparative advantage in editing videos.
- C.
Brandon has the absolute advantage in editing videos and the comparative advantage in creating web pages.
- D.
Brandon has the absolute advantage in editing videos and the comparative advantage in editing videos.
- E.
None of the above
Correct Answer
B. Melody has the absolute advantage in editing videos and the comparative advantage in editing videos.Explanation
Since Melody can edit a video and also create a web page faster than Brandon, she has the absolute advantage in both areas. If Melody edits a video (20 min) her opportunity cost is two web pages; if Brandon edits a video (36 min) his opportunity cost is three web pages. Since her opportunity cost is less, she has the comparative advantage in editing videos. (This implies that Brandon has the comparative advantage in creating web pages.)Rate this question:
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- 11.
Assume Jake can complete a tax form in one hour and he can update a file in 20 minutes. Assume Samantha can complete a tax form in 40 minutes and update a file in 20 minutes. Which of the following is true?
- A.
Jake has an absolute advantage in completing tax forms.
- B.
Jake has an absolute advantage in updating files.
- C.
Jake has a comparative advantage in completing tax forms
- D.
Jake has a comparative advantage in updating files.
- E.
None of the above
Correct Answer
D. Jake has a comparative advantage in updating files.Explanation
If Jake completes a tax form it will take him 60 minutes. In that time he could have updated three files. Thus, his opportunity cost of completing one tax form is three files. If Samantha completes a tax form it will take her 40 minutes and in that time she could have updated two files. Thus, her opportunity cost of completing a tax return is two files. Since her opportunity cost of completing a tax form is lower, she has the comparative advantage in completing tax forms.Rate this question:
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- 12.
Assume that Alex can wash a car in 12 minutes and wax a car in 36 minutes. Further assume that Bill can wash a car in 8 minutes and wax a car in 16 minutes. Which of the following is true?
- A.
Alex has an absolute advantage washing cars.
- B.
Alex has an absolute advantage waxing cars.
- C.
Alex has a comparative advantage waxing cars.
- D.
Alex has a comparative advantage waxing cars
- E.
None of the Above
Correct Answer
C. Alex has a comparative advantage waxing cars.Explanation
If Alex waxes a car it will take him 36 minutes. In that time he could have washed three cars. Thus, his opportunity cost of waxing a car is washing three cars. If Bill waxes a car it will take him 16 minutes and in that time he could have washed two cars. Thus, his opportunity cost of waxing a car is washing two cars. Since Bill's opportunity cost of waxing a car is lower, he has the comparative advantage in waxing cars.Rate this question:
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- 13.
If Lucy can make a box of chocolate in 3 minutes and squeeze a gallon of juice in 12 minutes and Ethel can make a box of chocolate in 5 minutes and squeeze a gallon of juice in 15 minutes, which of the following is true?
- A.
Lucy has the absolute advantage and comparative advantage in making chocolate.
- B.
Lucy has the absolute advantage in making chocolate and a comparative advantage making juice.
- C.
Ethel has the absolute advantage and the comparative advantage in making juice.
- D.
Ethel has the absolute advantage making chocolate and comparative advantage in making juice.
- E.
Ethel has the absolute advantage making juice and comparative advantage in making chocolate.
Correct Answer
A. Lucy has the absolute advantage and comparative advantage in making chocolate.Explanation
Since Lucy can make a box of chocolate faster than Ethel and Lucy can make juice faster than Ethel, Lucy has the absolute advantage in both goods.
To determine comparative advantage, we must compute opportunity cost. If Lucy makes a gallon of juice it will take her 12 minutes. In that time she could have made four boxes of chocolate, so her opportunity cost of one gallon of juice is four boxes of chocolate. If Ethel makes a gallon of juice it will take her 15 minutes. In that time she could have made three boxes of chocolate, so her opportunity cost of one gallon of juice is three boxes of chocolate. Since Ethel has a lower opportunity cost, she has the comparative advantage in making juice. As a result, Lucy must have the comparative advantage making chocolate.Rate this question:
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- 14.
Consumer Sovereignty is found in which types of economies?
- A.
Socialist economies.
- B.
Command economies.
- C.
Market economies.
- D.
Comparative economies.
Correct Answer
C. Market economies.Explanation
Consumer sovereignty refers to the power of consumers to determine what goods and services are produced through their purchasing decisions. In market economies, consumers have the freedom to choose what to buy and producers respond to these choices by producing the goods and services that are in demand. This allows consumers to have control over the economy and influence the production process. In contrast, socialist and command economies have more centralized control over production and consumer choices are limited, reducing consumer sovereignty. Comparative economies is not a recognized term in economics, so it is not applicable to this question.Rate this question:
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- 15.
Bob is a popular hairdresser with a long waiting-list of clients who want him to style their hair. Bob earns $50 per hour as a hairdresser. Bob is also an excellent housekeeper and can clean his entire house in 1 hour. Bob's neighbor Jack (who lives next door with his parents) tutors high school students in math at his house and makes $20 an hour. Jack, who has less experience cleaning houses, would take 2 hours to clean Bob's house.
- A.
Bob should pay Jack $26 dollars an hour to clean his house.
- B.
Bob should clean his own house to save $40.
- C.
Bob should pay Jack more than $20 an hour but less than $25 per hour to clean his house.
- D.
Bob should pay Jack more than $25 an hour but less than $50 per hour to clean his house.
Correct Answer
C. Bob should pay Jack more than $20 an hour but less than $25 per hour to clean his house.Explanation
Bob should pay Jack more than $20 an hour but less than $25 per hour to clean his house. This is because Jack takes 2 hours to clean Bob's house, so if he were to be paid $20 an hour, it would cost Bob $40. However, since Bob is an experienced housekeeper and can clean his own house in 1 hour, he would save $40 by doing it himself. Therefore, it would make sense for Bob to pay Jack an amount that is more than $20 an hour but less than $25 per hour, in order to make it a fair and beneficial arrangement for both of them.Rate this question:
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- 16.
Currently there are more than one billion people living in India and 300 million people in the United States. Generally speaking, workers in the United States make higher wages and enjoy a higher standard of living than workers in India. We would expect rug producers in the United States to be more likely to use _____________ methods of production and rug producers in India to be more likely to use _____________ methods of production.
- A.
Capital-intensive; labor-intensive
- B.
Comparative; absolute
- C.
Labor-intensive; capital-intensive
- D.
Capital-intensive; land-intensive
Correct Answer
A. Capital-intensive; labor-intensiveExplanation
Given that workers in the United States make higher wages and enjoy a higher standard of living than workers in India, it is reasonable to expect that rug producers in the United States would be more likely to use capital-intensive methods of production. Capital-intensive methods rely heavily on machinery and technology, which can be more expensive but also more efficient. On the other hand, rug producers in India, where labor costs are lower, would be more likely to use labor-intensive methods of production. Labor-intensive methods rely on a larger workforce and manual labor, which can be more cost-effective in countries with lower wages.Rate this question:
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- 17.
In a market economy, who receives the goods produced?
- A.
Everyone who was part of the production process.
- B.
Everyone who wants the goods and has sufficient income to buy them
- C.
Everyone shares equally, at least in theory.
- D.
Everyone who deserves the goods.
Correct Answer
B. Everyone who wants the goods and has sufficient income to buy themExplanation
In a market economy, the goods produced are received by everyone who wants them and has enough income to purchase them. This is because in a market economy, individuals have the freedom to make choices about what goods they want to buy and are able to afford. The distribution of goods is determined by the demand and purchasing power of consumers.Rate this question:
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- 18.
Governments may intervene in markets when
- A.
Goods are scarce.
- B.
Goods are not scarce.
- C.
Non-necessities are scarce.
- D.
Necessities are scarce
Correct Answer
D. Necessities are scarceExplanation
Governments may intervene in markets when necessities are scarce because in such situations, there is a risk of the basic needs of the population not being met. When necessities like food, water, or healthcare become scarce, it can lead to social unrest and inequality. To ensure the well-being of the population, governments may intervene by implementing policies such as price controls, subsidies, or rationing to ensure that everyone has access to these essential goods and services.Rate this question:
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- 19.
It is not possible for one individual to have the comparative advantage over another individual in all areas.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The concept of comparative advantage states that individuals or countries should specialize in producing goods or services in which they have a lower opportunity cost compared to others. This means that individuals cannot have a lower opportunity cost in all areas compared to another individual. It is highly unlikely for one person to be more efficient or skilled in every single task or area of expertise. Therefore, it is true that it is not possible for one individual to have the comparative advantage over another individual in all areas.Rate this question:
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- 20.
Production at a point lying outside a production possibilities curve is
- A.
Not possible
- B.
Possible
- C.
Not efficient
- D.
Efficient
- E.
Both possible and efficient
Correct Answer
A. Not possibleExplanation
Production at a point lying outside a production possibilities curve is not possible because the curve represents the maximum potential output that can be achieved given the available resources and technology. Any point outside the curve would require more resources or better technology than currently available, making it unattainable.Rate this question:
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- 21.
An increase in prices across a nation will lead to an increase in that nation's PPC.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Higher prices do not lead to an increase in productive capacity. Factors that could increase the PPC include a larger labor force, improved technology, greater access to natural resources, an increase in the number of capital goods, and increased productivity of resources.Rate this question:
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- 22.
A point lying inside the production possibilities curve is
- A.
Not possible
- B.
Possible
- C.
Possible and efficient
- D.
Possible but not efficient
- E.
Not efficient
Correct Answer
D. Possible but not efficientExplanation
A point lying inside the production possibilities curve indicates that it is possible to produce the combination of goods represented by that point. However, it is not efficient because it is not utilizing all available resources to their full potential. This could be due to factors such as inefficiencies in production or underutilization of resources. Therefore, while it is possible to produce at that point, it is not the most efficient use of resources.Rate this question:
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- 23.
Aggregate demand represents that amount of goods and services that consumers want to buy over a range of different price levels.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Aggregate demand represents the total demand for goods and services in an economy at various price levels. It reflects the willingness and ability of consumers to purchase goods and services. As the price level decreases, consumers are more likely to demand a higher quantity of goods and services, and vice versa. Therefore, the statement "Aggregate demand represents that amount of goods and services that consumers want to buy over a range of different price levels" is true.Rate this question:
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- 24.
Short run aggregate supply refers to the amounts that producers want to sell over a range of prices.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
This definition is close but not quite accurate. SRAS does refer to the amount that producers want to sell but we must also specify that the timing involved. SRAS refers to the amounts that producers want to sell before any adjustment in resource prices.Rate this question:
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- 25.
Which of the following are arguments that there will be a downward slope on the SRAS curve?
- A.
The international substitution effect
- B.
The interest rate effect
- C.
The real balance effect
- D.
All of the above
- E.
None of the above
Correct Answer
E. None of the aboveExplanation
The SRAS curve has a positive slope - it moves up as we move from left to right on the graph. These factors are all valid arguments for the downward slope of the aggregate demand curve indicating that consumer will want to buy more goods and services as prices decrease.Rate this question:
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- 26.
Which of the following explains the downward slope on the AD curve as indicated by the real balance effect?
- A.
Higher prices in the U.S. cause consumers to buy more goods from other countries which means they buy fewer goods from within the U.S.
- B.
Higher domestic prices reduce the purchase power of all deposits which means that consumers buy fewer goods.
- C.
Higher prices mean that consumers hold more money which reduces the supply of loanable funds which increases interest rates which causes consumers to buy fewer goods
- D.
All of the above
Correct Answer
B. Higher domestic prices reduce the purchase power of all deposits which means that consumers buy fewer goods.Explanation
All of these are reasons for the downward slope of the AD curve but only answer B is the explanation as indicated by the real balance effect. Answer A is the international substitution effect and answer C is the interest rate effect.Rate this question:
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- 27.
The vertical shape of the LRAS curve is caused by the fact that
- A.
Resource prices do not change in the short run but will change in the long run.
- B.
Resource prices do not change in the long run but will change in the short run.
- C.
Resource prices change in both the short run and the long run.
- D.
Resource prices change in neither the short run nor the long run.
Correct Answer
A. Resource prices do not change in the short run but will change in the long run.Explanation
Resources prices will not adjust immediately; in the short run we say resource prices are fixed. As a result, the SRAS curve slopes upward because producers will want to sell more goods and services when the price of the goods and services increases because costs will not increase immediately.
However, if we wait a longer time period, the price of resources like labor, land, and natural resources will change. When the price of these resources increases, the costs to producers increases. Thus, in the long run higher prices are likely to cause higher costs, so producers have little if any incentive to produce more goods and services. That is why the LRAS curve is vertical.Rate this question:
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- 28.
An increase in consumer confidence would lead to
- A.
An increase in AD.
- B.
An increase in SRAS
- C.
An increase in AD and SRAS
- D.
An increase in AD and a decrease in SRAS
- E.
An increase in AD, SRAS, and LRAS.
Correct Answer
A. An increase in AD.Explanation
Greater consumer confidence means that individuals will buy more of all goods and services at any given price level. This is represented by a shift to a new AD curve farther to the right.
SRAS does not increase (new curve) but there is an increase in the quantity of SRAS (movement along the existing curve).Rate this question:
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- 29.
An increase in the exchange rate value of the dollar would lead to
- A.
An increase in AD.
- B.
An increase in SRAS
- C.
A decrease in AD
- D.
A decrease in SRAS.
- E.
An increase in AD, SRAS, and LRAS.
Correct Answer
C. A decrease in ADExplanation
An increase in the exchange rate value of the dollar makes foreign goods less expensive to U.S. consumers, so we buy more from other countries and less from inside the U.S. At the same time, U.S. goods become more expensive to foreign consumers, so they buy less from the U.S. Each of these factors decreases AD moving us to a new curve farther to the left. SRAS does not change (new curve) but there is a decrease in the quantity of SRAS (movement along the existing curve).Rate this question:
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- 30.
An increase in expected (future) inflation would lead to
- A.
An increase in AD
- B.
An increase in SRAS
- C.
An increase in AD and a decrease in SRAS
- D.
A decrease in AD and a decrease in SRAS.
- E.
A decrease in AD and a increase in SRAS and LRAS.
Correct Answer
C. An increase in AD and a decrease in SRASExplanation
If consumers expect inflation to increase in the future - for example in three months - they are likely to try to purchase more items now before prices rise. This suggests an increase in AD (new curve farther to the right).
At the same time, if producers expect prices to rise in the future, they would want to wait and sell their goods and services in the future, which means they are less likely to sell now. This suggest a decrease in SRAS (a new curve farther to the left).Rate this question:
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- 31.
An increase in the price of an important resource like oil would lead to
- A.
An increase in AD
- B.
An increase in SRAS.
- C.
A decrease in AD.
- D.
A decrease in SRAS
- E.
An increase in SRAS and LRAS
Correct Answer
D. A decrease in SRASExplanation
Higher resource costs will decrease the profitability of various firms. As a result, as a group they will want to sell fewer goods at any given price level. (Some producers may even be forced out of business.) This suggest a decrease in the SRAS curve (new curve farther to the left).
The resource costs would not impact the LRAS curve because changes in resource costs are typically temporary suggesting only a short run change.
Producers would likely try to pass along the higher costs to consumers in the form of higher prices on the final goods. However, this would not lead to a change in AD (new AD curve) but it would decrease the quantity of AD (movement along the existing AD curve).Rate this question:
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- 32.
Stronger environmental regulations on industrial pollution would lead to
- A.
A decrease in AD.
- B.
A decrease in SRAS.
- C.
A decrease in AD and SRAS
- D.
A decrease in SRAS and LRAS
- E.
A decrease in AD, SRAS, and LRAS
Correct Answer
D. A decrease in SRAS and LRASExplanation
Stronger environmental regulations will create greater costs for producers. As a result, they will decrease their willingness to sell in both the short-run and the long-run since this change in regulations will not be temporary.
AD does not decrease (new curve) but there would likely be a decrease in the quantity of AD (movement along the existing curve) because producers would have to raise their prices in response to the higher costs.Rate this question:
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- 33.
A decrease in national income caused by an economic downturn would lead to
- A.
A decrease in AD.
- B.
A decrease in SRAS.
- C.
A decrease in AD and SRAS.
- D.
A decrease in SRAS and LRAS.
- E.
A decrease in AD, SRAS, and LRAS.
Correct Answer
A. A decrease in AD.Explanation
The lower income levels would effect consumers' willingness to purchase goods and services no matter what the price level is. As a result, we would expect to see a decrease in AD.
If consumers buy less then producers will provide less. However, this does not mean that there will be a decrease in SRAS (new curve). Rather, there would likely be a decrease in the quantity of SRAS (movement along the existing curve) because of the reduction in AD.Rate this question:
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- 34.
An improvement in the productivity of all workers caused by improved computer technology would lead to
- A.
An increase in AD
- B.
An increase in SRAS
- C.
An increase in AD and SRAS
- D.
An increase in SRAS and LRAS
- E.
An increase in AD, SRAS, and LRAS
Correct Answer
D. An increase in SRAS and LRASExplanation
Improved productivity across the labor force will be a significant benefit for producers. As a result, they will increase their willingness to sell in both the short-run and the long-run since the improved productivity will not be temporary.
AD does not increase (new curve) but there would likely be an increase in the quantity of AD (movement along the existing curve) because producers may lower their prices in order to sell more of their increases output.Rate this question:
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- 35.
Which of the following would increase AD?
- A.
A decrease in consumer confidence
- B.
An increase in national income
- C.
A decrease in resource costs
- D.
An unfavorable supply show such as a horrible weather event
- E.
None of the above
Correct Answer
B. An increase in national incomeExplanation
An increase in national income would increase aggregate demand (AD) because it means that people have more money to spend on goods and services. When national income increases, individuals and businesses have more disposable income, which leads to higher consumption and investment spending. This increased spending stimulates economic activity and increases the overall demand for goods and services in the economy. As a result, aggregate demand rises.Rate this question:
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- 36.
Which of the following would lead to an increase in both LRAS and SRAS?
- A.
A decrease in interest rates
- B.
An increase in the exchange rate value of the dollar
- C.
Lower resource costs
- D.
A decrease in taxes on corporations
- E.
An increase in environmental regulations
Correct Answer
D. A decrease in taxes on corporationsExplanation
A decrease in taxes on corporations would lead to an increase in both LRAS and SRAS. Lower taxes on corporations would incentivize investment and expansion, leading to an increase in the productive capacity of the economy in the long run (LRAS). In the short run (SRAS), lower taxes would increase the profitability of corporations, leading to an increase in output and supply.Rate this question:
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- 37.
What would cause the SRAS curve to shift to the right?an
- A.
An increase in consumer confidence
- B.
An increase in interest rates
- C.
An unfavorable weather event
- D.
A decrease in resource prices
- E.
None of the above
Correct Answer
D. A decrease in resource pricesExplanation
The graph depicts the SRAS shifting to the right, which indicates an increase in SRAS. Therefore the correct answer will be an event that is a positive impact on producers and is somewhat temporary in nature. Lower resource prices are a positive from producers' perspective and since resource prices can change frequently, the impact is temporary.Rate this question:
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- 38.
What could cause a shift in both the SRAS and the LRAS curves to the left?
- A.
An increase in consumer confidence
- B.
An increase in interest rates
- C.
An unfavorable weather event
- D.
A decrease in resource prices
- E.
A decrease in worker productivity
Correct Answer
E. A decrease in worker productivityExplanation
The graph depicts the LRAS and SRAS shifting to the left, which indicates a decrease in both curves. Therefore the correct answer will be an event that is a negative impact on producers and is not temporary in nature. Lower worker productivity is a negative from producers' perspectives and changes in productivity is a more permanent factor.Rate this question:
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- 39.
If AD increases, which of the following will result?
- A.
An increase in output and an increase in the price level
- B.
An increase in output and a decrease in the price level
- C.
A decrease in output and an increase in the price level
- D.
A decrease in output and a decrease in the price level
Correct Answer
A. An increase in output and an increase in the price levelExplanation
When aggregate demand (AD) increases, it means that there is an increase in the total demand for goods and services in an economy. This increase in demand leads to an increase in output because producers need to produce more to meet the higher demand. As a result, the level of output in the economy increases. Additionally, an increase in AD also leads to an increase in the price level. This is because when demand exceeds supply, producers can increase prices to maximize their profits. Therefore, both output and the price level increase when AD increases.Rate this question:
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- 40.
If SRAS increases, which of the following will result?
- A.
An increase in output and an increase in the price level
- B.
An increase in output and a decrease in the price level
- C.
A decrease in output and an increase in the price level
- D.
A decrease in output and a decrease in the price level
Correct Answer
B. An increase in output and a decrease in the price levelExplanation
If SRAS (Short-Run Aggregate Supply) increases, it means that the amount of goods and services that firms are willing and able to supply at a given price level has increased. As a result, there will be an increase in output, as firms are producing more. However, since the price level is determined by the intersection of aggregate demand and aggregate supply, an increase in SRAS will lead to a decrease in the price level. This is because the increase in supply will create downward pressure on prices, as firms compete to sell their increased output. Therefore, the correct answer is an increase in output and a decrease in the price level.Rate this question:
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- 41.
If LRAS decreases, which of the following will result?
- A.
An increase in output and an increase in the price level
- B.
An increase in output and a decrease in the price level
- C.
A decrease in output and an increase in the price level
- D.
A decrease in output and a decrease in the price level
Correct Answer
C. A decrease in output and an increase in the price levelExplanation
If LRAS decreases, then SRAS decreases with itRate this question:
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- 42.
A decrease in income will lead to which of the following?
- A.
An increase in both prices and output
- B.
An increase in prices and a decrease in output
- C.
A decrease in prices and an increase in output
- D.
A decrease in both prices and output
Correct Answer
D. A decrease in both prices and outputExplanation
A decrease in income will lead to a decrease in both prices and output. When people have less income, they are likely to reduce their spending. This decrease in demand leads to a decrease in prices as businesses try to attract customers. Additionally, businesses may also reduce their production levels in response to lower demand, resulting in a decrease in output. Therefore, a decrease in income has a negative impact on both prices and output.Rate this question:
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- 43.
A decrease in interest rates will lead to which of the following?
- A.
An increase in both prices and output
- B.
An increase in prices and a decrease in output
- C.
A decrease in prices and an increase in output
- D.
A decrease in both prices and output
Correct Answer
A. An increase in both prices and outputExplanation
A decrease in interest rates will lead to an increase in AD as consumers are likely to purchase more of all goods and services due to the lower interest rates. If AD shifts to the right, then both the equilibrium price level and equilibrium output level will increase as indicated below.Rate this question:
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- 44.
An increase in the price of oil from overseas as well as within the U.S. would lead to which of the following?
- A.
An increase in both prices and output
- B.
An increase in prices and a decrease in output
- C.
A decrease in prices and an increase in output
- D.
A decrease in both prices and output
Correct Answer
B. An increase in prices and a decrease in outputExplanation
Oil is an important resource used in the production of many goods and the distribution many goods. Higher oil prices would lead to a decrease in SRAS, moving the curve to the left. If SRAS shifts to the left, then both the equilibrium price level will increase and the equilibrium output level will decrease as indicated below. (This graph depicts producers raising their prices in an effort to pass along the higher resource costs to consumers; the consumers then decrease the amount they purchase - decrease in quantity of AD - in response to the higher prices.)Rate this question:
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- 45.
If researchers developed a new, cost-effective energy source that could replace fossil fuels like oil, which of the following would occur?
- A.
An increase in both prices and output
- B.
An increase in prices and a decrease in output
- C.
A decrease in prices and an increase in output
- D.
A decrease in both prices and output
Correct Answer
C. A decrease in prices and an increase in outputExplanation
If we created a substitute for fossil fuels, there would be a positive impact on production that would be permanent for the most part. This translates to an increase in both LRAS and SRAS, which would increase the level of output and decrease price levels as depicted by the equilibrium points at the intersection of AD and SRAS below. (Note that this does not represent an increase in AD because we have not moved to an entirely new AD curve; consumers will buy more because of the lower prices but that would imply an increase in the quantity of AD.)Rate this question:
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- 46.
In order to find the equilibrium within the economy, within our graph we look at the intersection of AD and SRAS.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
The statement is true because in order to find the equilibrium within the economy, we need to determine the point where aggregate demand (AD) and short-run aggregate supply (SRAS) intersect on the graph. This intersection represents the point where the quantity of goods and services demanded equals the quantity of goods and services supplied in the short run. At this point, there is no pressure for prices to change, and the economy is in equilibrium.Rate this question:
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- 47.
A long run equilibrium exists if the AD and SRAS curves intersect along the LRAS curve.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
In the long run, the economy reaches equilibrium when the aggregate demand (AD) and short-run aggregate supply (SRAS) curves intersect along the long-run aggregate supply (LRAS) curve. This indicates that the economy is producing at its potential output level and there is no pressure for prices to change. Therefore, the statement is true.Rate this question:
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- 48.
If the AD and SRAS curve intersect along the LRAS curve, the economy is moving too slowly, representing a very unstable situation.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
If the economy is at a long run equilibrium - AD and SRAS intersect along the LRAS - then the economy is growing neither too slow nor too fast. This is a very stable situation in the economy, which is something we would prefer to see.Rate this question:
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- 49.
Demand pull inflation is caused by
- A.
An increase in AD
- B.
A decrease in AD
- C.
An increase in SRAS
- D.
A decrease in SRAS
- E.
An increase in LRAS
Correct Answer
A. An increase in ADExplanation
If AD increases, consumers want to buy more of all goods and services at any given price level. Their greater demand will lead producers to sell more goods but it will also cause producers to raise their prices as indicated in the graph below.Rate this question:
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- 50.
Cost push inflation is caused by
- A.
An increase in AD
- B.
A decrease in AD
- C.
An increase in SRAS
- D.
A decrease in SRAS
- E.
An increase in LRAS
Correct Answer
D. A decrease in SRASExplanation
If costs increase, producers decrease their willingness to sell, which equates to a decrease in SRAS - movement to the left. This would lead to a higher equilibrium price level as depicted in the graph below.Rate this question:
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Current Version
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Mar 15, 2023Quiz Edited by
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Jul 29, 2009Quiz Created by
Laurenmlbc
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