Question 1

A tariff is a tax on raw materials and manufactured goods that are produced _________ and sold _________.

Accepted Answer

A tariff is a tax on raw and manufactured goods that are produced overseas and sold domestically.
Key Takeaway: World trade has allowed countries to exchange goods. To protect domestic producers, countries often charge a tax known as a tariff on goods that are produced overseas and sold domestically. Countries usually engage in trade agreements in order to manage the amount of tariffs charged on items imported to their individual countries.

Question 2

What is the effect of tariffs on the import of goods?

Accepted Answer

Tariffs reduce the quantity of imports.
Key Takeaway: Tariffs reduce the quantity of imports and move the domestic market closer to its equilibrium without trade. With the imposition of tariffs, total surplus in the market is reduced by a known quantity.

Question 3

Governments engage in _______ to increase aggregate demand during a recession and to invigorate the economy.

Accepted Answer

Governments engage in automatic stabilizers to increase aggregate demand during a recession and to invigorate the economy.
Key Takeaway: Automatic stabilizers such as the taxation system, as well as other forms of government investment increase aggregate demand during a recession. The goal behind using automatic stabilizers is to stimulate the economy without taking deliberate action.

Question 4

What term refers to a general right shift in the AS curve, meaning that the supply of all services and goods is increasing?

Accepted Answer

Positive supply shock refers to a general right shift in the AS curve, meaning that the supply of all services and goods is increasing.
Key Takeaway: Positive supply shock generally occurs when an economy is experiencing overall growth or progress in regard to technology. Additionally, finding additional supplies of natural resources can also stimulate production, leading to positive supply shock. If the AS decreases, creating a leftward shift, a negative supply shock can occur.

Question 5

If a government devises a plan to increase the amount of money that is spent on national infrastructure like bridges and roads, what is this called?

Accepted Answer

If a government devises a plan to increase the amount of money that is spent on national infrastructure like bridges and roads, this is called a fiscal policy.
Key Takeaway: Taxes and various kinds of government spending are the main tools of fiscal policy. Any time the government plans to change the level of taxes in the economy or changes expenditures in any way, economists say that the government is using or creating fiscal policy. Fiscal policy is only in the hands of Congress and the president.

Question 6

If the tax multiplier is ?4 and net taxes are reduced by $200 billion, what will the output be?

Accepted Answer

If the tax multiplier is ?4 and net taxes are reduced by $200 billion, output will be $800 billion.
Key Takeaway: Always think through these problems in a logical way. If taxes go down, consumers will be more likely to spend more money, AD will increase, and overall output will increase. In this question, the tax multiplier is ?4 and the net taxes are reduced by $200 billion. You can determine the change in output by applying the tax multiplier to the change in taxes: ?4 (?$200 billion) = $800 billion.

Question 7

What money supply is equal to all currency held outside the bank, plus demand deposits, travelers' checks, and other deposits?

Accepted Answer

The M1 money supply is equal to all currency held outside the bank, plus demand deposits, travelers' checks, and other deposits.
Key Takeaway: M1, commonly referred to as "narrow money" consists of the most liquid forms of money, such as currency, deposits, coins, and travelers' checks. The other type of money, M2 or "broad money" includes all of M1 plus money market funds. The M2 money supply is also sometimes called "near money" because it is less liquid than the M1 supply.

Question 8

If the required reserve ratio is 20%, then what is the money multiplier?
A)5
B))5
C)2
D))2

Accepted Answer

If the required reserve ratio is 20%, the money multiplier is 5.
Key Takeaway: To figure out this question, you should use the formula for the money multiplier 1/RRR, where RRR is the required reserve ratio. Remember to enter the required reserve ratio as a decimal (not the percentage). So for this question, use: 1/.2 = 5.

Question 9

If one currency increases in value relative to another currency, economists say that the currency that increased in value has ___________.

Accepted Answer

If one currency increases in value relative to another currency, economists say that the currency that increased in value has appreciated.
Key Takeaway: When the price of a currency, in particular the U.S. dollar, rises in relation to another currency, economists say that the currency has appreciated. Depreciation is the opposite-when the currency decreases relative to another currency.

Question 10

If the dollar appreciates relative to the Philippine peso, then which of the following is true?

Accepted Answer

If the dollar appreciates relative to the Philippine peso, then goods from the United States sold in the Philippines would become more expensive.
Key Takeaway: In order for the Philippines to buy goods made in the United States, the Philippines needs U.S. dollars. So if the dollar appreciates (raises in value) against the Philippines peso, the same number of pesos would buy fewer U.S. dollars. Therefore, the Philippines would need more pesos to purchase the same amount of goods from the United States, making exports to the Philippines more expensive.

Question 11

Some exchange rates are determined by supply and demand, which are unregulated. What type of exchange rates are these?

Accepted Answer

Floating exchange rates are determined by supply and demand, which are unregulated.
Key Takeaway: In most places, exchange rates are determined by supply and demand in the market. The opposite, fixed exchange rates, are set by government forces and were largely given up by the United States and most of the world's countries in the 1970s. Although governments still sometimes intervene in order to keep order, exchange rates world over are mainly determined by supply and demand.

Question 12

Jay quit his design job two weeks ago because he couldn't stand his co-workers. He had a job interview with Make It Work, Inc. last week, but has not yet heard back about the position. What is Jay's present unemployment status?

Accepted Answer

In this scenario, Jay is unemployed.
Key Takeaway: Jay has marketable skills and is voluntarily unemployed because he left his job for personal reasons. He would probably be described as being "between jobs" and is, therefore, frictionally unemployed.

Question 13

Julia got fired from her magazine publishing job in New York City about a year ago. She received unemployment compensation for six months, during which time she actively looked for a new position. After that time, Julia unfortunately had to move back in with her parents in Iowa at which time she stopped looking for work. What is Julia's present unemployment status?

Accepted Answer

In this situation, Julia is a discouraged worker and is not counted as unemployed.
Key Takeaway: Because Julia is not actively looking for a position, she is considered to be a discouraged worker. Discouraged workers are not included in labor statistics because they are difficult to count. They are, therefore, out of the labor force. Although Julia is technically unemployed by definition of the word, in economic terms, she does not count.

Question 14

Look at the following data set:
Total population = 60 million
Persons of proper working age (16-65) = 30 million
Persons employed = 20 million
Persons actively looking for work = 2 million
What is the size of the labor force for this economy?

Accepted Answer

The size of the labor force for this economy is 22 million.
Key Takeaway: According to the United States Department of Labor, the labor force is defined as the number of actual employed individuals, plus the number of people who are actively looking for work. In this scenario, the number of people employed is 20 million + 2 million looking for work = 22 million.

Question 15

Think of the expenditure approach for calculating GDP. In this approach, spending of firms, the government, individual households, and the rest of the world are added up using the formula:
GDP = C + I + G + (X-M)
What do X and M stand for, respectively?

Accepted Answer

In the expenditure approach to calculating GDP, X and M stand for exports and imports, respectively.
Key Takeaway: The expenditure approach is one of two main methods for calculating GDP. Using the equation GDP = C + I + G + (X-M), the equation adds up personal household consumption (C), investment in new forms of capital (I), government spending (G), and exports minus imports (X-M) to obtain the GDP. The other approach to calculating GDP is the income approach.

Question 16

Lori wants strawberries and grows apples. Fae wants apples and makes fantastic peach pie. Suzanne wants peach pie and grows strawberries. If the three of these women get what they want, which function of money would cater most directly to their situation?

Accepted Answer

In this situation, money would best suit them as a medium of exchange.
Key Takeaway: Because trading would not work in this situation, money would be best used as a medium of exchange. That way, each woman could receive money for the good that she grows or creates and pay another for what she wants. In so doing, no one would have to deal with the mismatched product interests of the other.

Question 17

Every choice that an individual makes results in a foregone best alternative choice. What do economists call this?

Accepted Answer

Every choice than an individual makes results in a foregone best alternative choice. Economists call this opportunity cost.
Key Takeaway: Opportunity cost refers to the concrete value of what you are giving up in the trade off (often in terms of time or money). Remember not to confuse this with "trade-off," which is the correct term for the simple act of giving one thing up for another.

Question 18

True or False:
Having a fractional reserve banking system means that the central bank holds a specific fraction of GDP on reserve at all times.

Accepted Answer

This is false.
Key Takeaway: Having a fraction reserve banking system actually means that a bank cannot lend out all of its deposits. In this situation, a fraction of total deposits must be held at all times and the rest can be lent out to consumers or businesses.

Question 19

Imagine that the consumer price index rises from 125 to 250. What can be concluded from this information?

Accepted Answer

In this scenario, all prices in the average consumer's market basket are doubled.
Key Takeaway: CPI is the term for the economic indicator that measures change in price over time, using a fixed market basket of average services and goods. To calculate the Consumer Price Index (CPI), you need to set up a ratio between the cost of the market basket of goods in the given year to the cost of those same goods in the base year.

Question 20

What is the correct term for an inflation caused by a decrease in AS and accompanied by a decrease in employment and real output?

Accepted Answer

Cost push inflation is an inflation caused by a decrease in AS and accompanied by a decrease in employment and real output.
Key Takeaway: According to the Triangle Model, there are three types of inflation: built-in, demand-pull, and cost-push. Increased individual and government spending leads to demand-pull inflation, while an overall reduction in materials and goods supplies leads to cost-push inflation. The overall reduction of goods and materials causes a decrease in AS, employment, and real output.

Quiz 30: (AP) Macroeconomics: Part A

A tariff is a tax on raw materials and manufactured goods that are produced _ and sold _.