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Question
When the price of golf clubs falls, which of the following will most likely happen?
| A. The supply of golf clubs will increase | |
| B. Racquetball will become more popular in the short term | |
| C. Golf instructors will charge less for golf lessons | |
| D. The demand for golf balls will increase | |
| E. The quantity of golfing accessories supplied will decrease |
Explanation
The demand for goods and services is driven by various determinants of demand, including prices of related products—substitute goods and complementary goods. A complementary good is commonly purchased along with another good.
For example, golf balls and golf clubs are complementary. If the price of golf clubs remains unchanged, no significant changes can be expected in golf ball demand. However, if the price of golf clubs decreases, there will likely be an increased demand for golf balls.
The lower club price leads to higher quantity demanded QD, per the law of demand as more people purchase golf clubs the need for golf balls increases, and the demand curve shifts outward.
|
Connections between complementary goods can be either strong or weak. The stronger the connection, the more likely that a change in the price of good A will impact the demand for good B. |
(Choice A) A change in a product's price never shifts its supply and demand; curves. Therefore, a change in golf club supply is a cause, not an effect, of a price change.
(Choice B) The popularity of racquetball would likely decrease as the price of golf clubs falls and more people spend time playing golf.
(Choice C) A decrease in the price of clubs would lead to an increased interest in playing golf, likely resulting in a higher equilibrium price for golf lessons.
(Choice E) The quantity of golfing accessories supplied would increase as golf club prices decrease, as more people would take up golf and would also demand golf accessories.
Things to remember:
Certain conditions including consumers' interest in a complementary good determine demand for a product.
Question
A market is at its equilibrium price when
| A. price and quantity demanded increase | |
| B. quantity demanded equals quantity supplied | |
| C. the production possibilities curve shifts outward | |
| D. the price cannot fall without shifting the demand curve left | |
| E. producers have the same rate of output |
Explanation
The laws of supply and demand state there is a positive relationship between price and quantity supplied and a negative relationship between price and quantity demanded. At a low price, people demand more of an item, yet fewer producers are motivated to supply it. Conversely, at a high price, people demand less of a good, yet more producers are willing to supply it.
At $3, the quantity demanded and the quantity supplied are both 30, meaning there is no surplus or shortage. On the graph above, $3 is the price where the supply and demand curves intersect. The market is at its equilibrium price when quantity demanded equals quantity supplied.
(Choice A) The law of demand states that when price increases, quantity demanded decreases.
(Choice C) Equilibrium price relates to demand and supply and isn't shown on a production possibilities curve (PPC).
(Choice D) A demand curve shifting left represents decreased demand for an item due to a change in a determinant of demand.
(Choice E) Equilibrium doesn't require production rates to be equal.
Things to remember:
Equilibrium is achieved at the price where quantity supplied is equal to quantity demanded.
Question
If a restaurant owner in France imports steaks produced in Texas, which of the following will occur in the US?
| A.An increase in gross domestic product and a decrease in imports | |
| B. A decrease in gross domestic product and an increase in net exports | |
| C. An increase in both gross domestic product and net exports | |
| D. A decrease in both gross domestic product and net exports | |
| E. An increase in gross domestic product and an increase in consumption |
Explanation
An economy's total output can be measured by its gross domestic product (GDP), comprised of the production of goods and services reported to the government. The expenditure method of calculating GDP includes:
- household consumption (C).
- investment spending (I), funded by savings.
- government spending (G), primarily funded by taxes.
- the foreign sector, comprised of exports (X) minus imports (M), or net exports (NX).
Stated mathematically, GDP = C + I + G + (X − M). In a four-sector model 'open' circular flow diagram, these sectors interact as:
In the scenario provided, US-produced steaks should be counted as increasing the GDP because they would be included as exports when sold to a foreign consumer. Stated another way, because NX = X − M, the US net exports would increase, thereby increasing the GDP.
(Choice A) The export of US goods doesn't decrease imports; it only contributes positively to NX.
(Choices B and D) The Texas steaks increase, not decrease, the US GDP because they are domestic production reported to the government.
(Choice E) The export of US goods isn't related to domestic consumption.
Things to remember:
Gross domestic product (GDP), when measured by the expenditure method, has four primary components: household consumption (C), firms' investment spending (I), government spending (G), and net exports (NX).
Question
Which of the following would result from unemployed workers becoming discouraged workers?
| A. A decrease in the number of employed workers and a decrease in the unemployment rate | |
| B. No change in the number of employed workers and an increase in the unemployment rate | |
| C. A decrease in the number of employed workers and no change in the unemployment rate | |
| D. No change in the number of employed workers and no change in the unemployment rate | |
| E. No change in the number of employed workers and a decrease in the unemployment rate |
Explanation
For a person to be considered unemployed, they must:
- not be working.
- be looking for a job.
- be available to work.
Workers who have stopped job searching—discouraged workers—are no longer part of the labor force and are not counted as unemployed.
An increase in discouraged workers decreases the number of unemployed workers and the size of the labor force. Because both the numerator and denominator decrease by the same amount, the unemployment rate lowers when unemployed workers become discouraged workers.
(Choices A and C) Neither unemployed workers nor discouraged workers are considered employed, so unemployed workers becoming discouraged workers will not change the number of employed workers.
(Choices B and D) When an unemployed worker becomes a discouraged worker, the unemployment rate will decrease—it does not increase or stay the same—because the labor force does not include discouraged workers.
Things to remember:
An unemployed worker who gives up job searching and becomes a discouraged worker is no longer counted as unemployed. Consequently, both the number of unemployed workers and the size of the labor force decrease, lowering the unemployment rate.
Question
Which of the following is a defining characteristic of frictional unemployment?
| A. The changes in technology that lead to industrial reorganization | |
| B. The process of people moving from one job to another | |
| C. The lack of enough full-time work or jobs that fully utilize employees' skills | |
| D. The decrease in labor demand at specific times of the year or as a result of weather changes | |
| E. The forces that cause expansions and contractions of the business cycle |
Explanation
An economy's performance can be measured using a variety of information, including unemployment data. Various factors produce distinguishable patterns of unemployment, ranging from fluctuations in the business cycle to changes in technologies that impact production. Another cause of unemployment is when people are frictionally unemployed in a healthy economy.
A key characteristic of frictional unemployment is when people are 'between jobs,' as they move from one job to another. For example, in an organization's normal turnover of workers, an individual's employment may end, followed by that person eventually securing another position.
 |
With frictional unemployment, the number of jobs available is roughly equal to the number of job seekers, but it takes time to match them up. Coordination and communication problems between employers and job seekers can cause an increase in frictional unemployment. |
(Choice A) Structural unemployment is characterized by industrial reorganization caused by broader changes, such as shifts in technology or consumer preferences.
(Choice C) Underemployment relates to people who can find only part-time work or employees whose skills aren't fully utilized.
(Choice D) Decreased labor demand at specific times of the year, or as a result of weather changes, is classified as seasonal unemployment.
(Choice E) Cyclical unemployment is caused by forces—primarily changing aggregate demand—that produce expansions and contractions in the business cycle.
Things to remember:
Frictional unemployment is characterized by people who are 'between jobs'—moving from one job to another—in a healthy economy.
Question
When the consumer price index (CPI) increases, which of the following will result?
| A. Funds distributed to social security recipients will decrease | |
| B. The base interest rate will decrease | |
| C. The unemployment rate will increase | |
| D. Demand for goods and services will increase | |
| E. Households' purchasing power will decrease |
Explanation
The consumer price index (CPI) is the most commonly cited gauge of inflation. The CPI includes the prices of thousands of items in a basket of goods and services consumers commonly purchase across eight major categories, each with a specific weighting.
The CPI is calculated as:
The CPI formula is used to calculate inflation between two years:
Inflation between two years reduces the power of $1 to purchase the same amount of goods and services as it could the previous year. In other words, as long as all else—particularly consumer income—remains equal, when the CPI increases, households' purchasing power will decrease.
(Choice A) As a matter of policy, funds distributed to social security recipients increase in response to rising consumer prices.
(Choice B) The Federal Reserve tends to increase the interest rate to slow the inflation indicated by a rising CPI.
(Choice C) When the CPI increases, the unemployment rate tends to decrease in the short run.
(Choice D) Increasing demand for goods and services is a cause, rather than an effect, of inflation.
Things to remember:
An increase in inflation between two years reduces the power of $1 to purchase the same amount of goods and services as it could the previous year. As inflation increases, consumers' purchasing power decreases.
Question
Assume the cost of a fixed basket of goods has risen from $200 in the year 2021 to $240 in the year 2022. If the consumer price index (CPI) in 2021 is 140, then the CPI in 2022 is
| A. 116.67 | |
| B. 168 | |
| C. 180 | |
| D. 200 | |
| E. 280 |
Hint :
CPI for a given time period = (Market basket cost at given period / Market basket cost at base period) × 100
Explanation
The consumer price index (CPI) measures inflation by tracking the cost of a market basket of goods over time.
The CPI begins with a base-year cost against which future costs are compared, and the graphic above demonstrates that the base-year CPI must equal 100.
The table above illustrates that increases in the CPI reflect increases in the market basket cost. The CPI's rise from 100 to 140—a 40% increase—from the base year to 2021 means the cost of the market basket rose by 40% in that time span. Therefore, a market basket costing $200 in 2021 had a cost of $142.86 in the base year.
Similarly, the 20% increase in the market basket cost from 2021 to 2022 ($200 to $240) equals a 20% CPI increase from 140 to 168 in that time.
The following miscalculate the 2022 CPI:
- (Choice A) 116.67 results from multiplying the 2021 CPI (140) by the ratio of the 2021 market basket cost to the 2022 market basket cost ($200 / $240, or 5 / 6).
- (Choice C) 180 results from adding the difference between the 2021 and 2022 market basket costs ($40) to the 2021 CPI.
- (Choice D) 200 results from adding the numerical difference between the 2021 market basket cost and CPI (60) to the 2021 CPI.
- (Choice E) 280 results from doubling the 2021 CPI.
Things to remember:
The percentage change in the market basket cost equals the percentage change in the CPI during the same period.
Question
A government budget surplus occurs when
| A. income tax rates decrease | |
| B. consumption plus investment exceeds government spending | |
| C. changes in government borrowing result in crowding out | |
| D. government spending plus transfer payments are less than tax revenues | |
| E. a government has fully satisfied its debt obligations |
Explanation
A government's budget is balanced when tax revenues equal its spending, which includes transfer payments. A budget surplus results when the value of government spending is less than the value of tax revenues.
For example, a government that collects $200 in tax revenues and spends $100 on purchases and transfer payments experiences a budget surplus of $100.
|
Modern governments don't usually have budget surpluses. According to the CIA World Factbook, only about one in five countries had a budget surplus in 2017. |
(Choice A) A government's budget balance can't be determined without knowing the value of its spending.
(Choice B) The relative values of government spending and tax revenues, not consumption plus investment, determine a budget surplus.
(Choice C) Crowding out results from increased government borrowing, which is unlikely when a government has a budget surplus.
(Choice E) National debt accumulates on an ongoing basis, but government budgets apply to only the current fiscal year. Therefore, a government can have a current budget surplus despite having outstanding debts.
Things to remember:
A budget surplus results when government spending, including transfer payments, is less than tax revenues.
Question
Assume that two countries have the production possibilities curves (PPC) above. Mutually beneficial trade between the countries requires that the terms of trade be determined by
| A. the relationship between price and quantity supplied | |
| B. full-employment levels and scarcity | |
| C. absolute advantage and net exports | |
| D. production specialization and shortages | |
| E. comparative advantage and opportunity costs |
Explanation
For trade to be mutually beneficial between two countries, their terms of trade must surpass each country's respective opportunity costs. Each country's opportunity costs can be calculated from the values shown in their respective production possibilities curves (PPC).
- Country Y has an absolute advantage in producing both goods but a comparative advantage in producing hammers because it trades off fewer pumpkins than Country X for each hammer produced.
- Country X's comparative advantage is in pumpkin production because it foregoes fewer hammers than Country Y for each pumpkin produced.
Consequently, Country X and Country Y should specialize in the products for which they possess a comparative advantage. Then, the terms of trade between the countries can be established at any rate between their respective opportunity costs, for example, 1 hammer for 2.5 pumpkins.
Therefore, trade is mutually beneficial when the terms of trade between two countries are better than their respective opportunity costs.
(Choice A) The relationship between price and quantity supplied determines the upward slope of the supply curve, not the terms for mutually beneficial trade.
(Choice B) Full-employment levels are related to potential output, not opportunity costs and the terms of trade.
(Choice C) Mutually beneficial terms of trade determine the rate at which countries trade with each other. Net exports is a measure of only how much trade a single country conducts.
(Choice D) Shortages are related to supply and demand issues, not the terms of trade between two countries.
Things to remember:
The terms of mutually beneficial trade between two countries are determined by each country's comparative advantage and opportunity costs.
Question
The balance sheet above shows the assets and liabilities of a bank. Based on the data above, which of the following must be true?
| A. Additional deposits will result in a decrease in the bank's loans | |
| B. The bank's assets exceed its liabilities | |
| C. The value of loans must be greater than the value of securities | |
| D. The bank's equity must be 10% of its reserves | |
| E. The bank operates in a fractional reserve banking system |
Hint :
This question assumes a limited reserves environment with a required reserve ratio greater than zero.
Explanation
A primary function of a bank is to loan people money. To fund loans, the bank takes in deposits from customers and uses those deposits to back loans to other customers.
For example, when Michelle deposits $10,000 at UWBank, the bank assumes that it is unlikely that she will want to withdraw the entire $10,000 from her account. Therefore, the bank may decide to lend out $1,000 to Byron, and the bank will hold the remaining $9,000 in reserves available for Michelle to withdraw at a future time.
In a fractional reserve banking system, only a fraction of deposits made at the bank are held as reserves.
The balance sheet above indicates that the bank operates in a fractional reserve banking system because the bank's reserves of $100,000 are less than the $1,000,000 in deposits at the bank.
|
|
Click here for more information about balance sheets. |
(Choice A) Because banks hold only a portion of deposits as reserves, it is likely that this bank will make more loans when it receives additional deposits. There is no information on the bank's balance sheet to suggest that loans will decrease if additional deposits are made.
(Choice B) The values of assets and liabilities must be equal on a balance sheet.
(Choice C) The value of loans can exceed securities if the bank decides to allocate its assets in that way.
(Choice D) Equity is the difference between total assets and other liabilities on a balance sheet, not a fixed percentage of reserves.
Things to remember:
In a fractional reserve banking system, a bank takes in deposits and makes loans backed by those deposits, resulting in the bank's deposits exceeding the value of its reserves.
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