1. The law of demand implies that: sellers will offer less on the market at lower prices. consumers will buy more at lower prices. sellers will offer more on the market at higher prices. consumers are not responsive to price changes. 2. An increase in the demand for gasoline today caused by concerns that gasoline prices will be higher tomorrow is most likely attributable to a change in: consumer preferences. consumer expectations. income. prices of other goods. 3. If the price of hamburger decreased, it would probably result in _____ in the demand for hamburger buns. random fluctuations no change an increase a decrease 4. A decrease in supply is caused by: an advancement in the technology for producing the good. an increase in the price of goods that are used in production. an increase in the number of producers. suppliers' expectations of lower prices in the future. 5. Figure: The Demand and Supply of Wheat Reference: Ref 3-6 (Figure: The Demand and Supply of Wheat) Look at the figure The Demand and Supply of Wheat. If a price of $8 temporarily exists in this market, a _____ of _____ bushels will result. surplus; 6,000 surplus; 4,000 shortage; 2,000 shortage; 4,000 6. If the market for buffalo meat is in equilibrium, the price of buffalo meat will probably _____ in the near future. decrease increase considerably increase not change 7. Figure: Four Markets for DVDs Reference: Ref 3-9 (Figure: Four Markets for DVDs) Look at the figure Four Markets for DVDs. Which of the graphs illustrates what may happen in the market for DVDs if D1 or S1 is the original curve and D2 or S2 is the new curve and if the cost of producing DVDs falls? C D A B 8. Figure: Shifts in Demand and Supply II Reference: Ref 3-11 (Figure: Shifts in Demand and Supply II) Look at the figure Shifts in Demand and Supply II. The graph shows how supply and demand might shift in response to specific events. Suppose scientists discover that eating pomegranates causes aging. Which panel BEST describes how this will affect the market for pomegranates? panel C panel B panel D panel A 9. Figure: Shifts in Demand and Supply III Reference: Ref 3-12 (Figure: Shifts in Demand and Supply III) Look at the figure Shifts in Demand and Supply III. The figure shows how supply and demand might shift in response to specific events. Suppose consumer incomes increase. Which panel BEST describes how this will affect the market for designer boots, a normal good? panel B panel C panel A panel D 10. For consumers, pizza and hamburgers are substitutes. A rise in the price of a pizza causes _____ in the equilibrium price of a hamburger and _____ in the equilibrium quantity of hamburgers. a rise; a decrease a fall; an increase a rise; an increase a fall; a decrease .

1. 1. The law of demand implies that:
sellers will offer less on the market at lower prices.
consumers will buy more at lower prices.
sellers will offer more on the market at higher prices.
consumers are not responsive to price changes.
2. An increase in the demand for gasoline today caused by
concerns that gasoline prices will be
higher tomorrow is most likely attributable to a change in:
consumer preferences.
consumer expectations.
income.
prices of other goods.
3. If the price of hamburger decreased, it would probably result
in _____ in the demand for
hamburger buns.

2. random fluctuations
no change
an increase
a decrease
4. A decrease in supply is caused by:
an advancement in the technology for producing the good.
an increase in the price of goods that are used in production.
an increase in the number of producers.
suppliers' expectations of lower prices in the future.
5. Figure: The Demand and Supply of Wheat
Reference: Ref 3-6
(Figure: The Demand and Supply of Wheat) Look at the figure
The Demand and Supply of
Wheat. If a price of $8 temporarily exists in this market, a
_____ of _____ bushels will

3. result.
surplus; 6,000
surplus; 4,000
shortage; 2,000
shortage; 4,000
6. If the market for buffalo meat is in equilibrium, the price of
buffalo meat will probably
_____ in the near future.
decrease
increase considerably
increase
not change
7. Figure: Four Markets for DVDs
Reference: Ref 3-9

4. (Figure: Four Markets for DVDs) Look at the figure Four
Markets for DVDs. Which of the
graphs illustrates what may happen in the market for DVDs if
D1 or S1 is the original curve
and D2 or S2 is the new curve and if the cost of producing
DVDs falls?
C
D
A
B
8. Figure: Shifts in Demand and Supply II
Reference: Ref 3-11
(Figure: Shifts in Demand and Supply II) Look at the figure
Shifts in Demand and Supply II.
The graph shows how supply and demand might shift in
response to specific events. Suppose
scientists discover that eating pomegranates causes aging.

5. Which panel BEST describes how
this will affect the market for pomegranates?
panel C
panel B
panel D
panel A
9. Figure: Shifts in Demand and Supply III
Reference: Ref 3-12
(Figure: Shifts in Demand and Supply III) Look at the figure
Shifts in Demand and Supply
III. The figure shows how supply and demand might shift in
response to specific events.
Suppose consumer incomes increase. Which panel BEST
describes how this will affect the
market for designer boots, a normal good?
panel B

6. panel C
panel A
panel D
10. For consumers, pizza and hamburgers are substitutes. A rise
in the price of a pizza causes
_____ in the equilibrium price of a hamburger and _____ in the
equilibrium quantity of
hamburgers.
a rise; a decrease
a fall; an increase
a rise; an increase
a fall; a decrease
11. A decrease in supply with no change in demand will lead to
_____ in equilibrium quantity
and _____ in equilibrium price.
a decrease; a decrease

7. an increase; an increase
an increase; a decrease
a decrease; an increase
12. The market for corn is in equilibrium. Which of the
following is most likely to INCREASE
the equilibrium price of corn?
a decrease in the price of wheat, a substitute in consumption
increasing production of corn-based ethanol
a bountiful harvest
decreasing household incomes, with corn being a normal good
13. You notice that the price of Blu-ray players falls and the
quantity of Blu-ray players sold
increases. You suspect that _____ Blu-ray players shifts to the
_____.
demand for; left.
supply of; left.
demand for; right.
supply of; right.

8. 14. The market for milk is initially in equilibrium. Milk
producers successfully advertise to
encourage milk drinking. At the same time, more milk
producers enter the market. Standard
demand and supply analysis tells us that:
the equilibrium quantity of milk will rise, but we can't
determine how the equilibrium
price will be affected.
the equilibrium price and quantity of milk will rise.
the equilibrium price and quantity of milk will fall.
the equilibrium price of milk will rise, but we can't determine
how the equilibrium
quantity will be affected.
15. In the local market for coffee, a normal good, the price will
_____ and the quantity will
_____ if new coffee shops open and consumers' incomes
decrease because of a recession.
decrease; be indeterminate

9. increase; be indeterminate
be indeterminate; increase
be indeterminate; decrease
16. Suppose the local real estate market is in equilibrium. A
recession causes local household
incomes to decline. At the same time, construction of a large
subdivision of new homes has
just been completed. Given these two changes and assuming that
real estate is a normal
good, we can predict that the price of real estate will _____ and
the quantity of real estate
bought and sold will _____.
rise; fall or rise
fall; fall
fall; rise or fall
fall; rise
17. An ambiguous change in price and a decrease in quantity
are most likely caused by:

10. a shift to the left in supply and a shift to the right in demand.
no shift in supply and a shift to the left in demand.
a shift to the right in supply and a shift to the left in demand.
a shift to the left in supply and a shift to the left in demand.
18. Figure: Supply, Demand, and Equilibrium
Reference: Ref 3-18
(Figure: Supply, Demand, and Equilibrium) Look at the figure
Supply, Demand, and
Equilibrium. In the figure, there will be excess demand for the
good at a price of P3.
True
False
19. Good X and good Y are related goods. Holding everything
else constant, if the price of X
decreases and the demand for Y increases, X and Y are
probably:

11. inferior.
substitutes.
normal.
complements.
20. Holding all other things constant, if ramen noodles are an
inferior good to Vanessa, then as
her income increases, her demand curve for ramen noodles:
may shift left or right, but we're not sure by how much.
will shift left.
will shift right.
will not shift at all.
21.
Reference: Ref 3-19
(Table: Competitive Market for Good Z) Look at the table
Competitive Market for Good Z.
If the supply curve for good Z is linear, it can be expressed as:

12. Qs = 100 – 2P.
Qs = 50 – 2P.
Qs = Qd
Qs = 3P.
22. When a market is in equilibrium, the quantity:
demanded is equal to zero.
demanded is greater than quantity supplied.
supplied is zero.
demanded is equal to quantity supplied.
23. Suppose people expect the price of MP3 players to rise next
year. As a result of this
expectation, people will most likely:
purchase fewer MP3 players this year.
purchase the same amount of MP3 players, since this
expectation will have no effect
on consumers this year.

13. decide to wait and purchase the MP3 players next year.
observe higher prices for MP3 players this year.
24. Because of an increase in the price of wheat, an important
ingredient in the production of
bread, combined with an increase in the number of people
consuming bread:
equilibrium price will increase, but equilibrium quantity may
decrease, increase, or
stay the same.
both the equilibrium price and quantity will decrease.
both the equilibrium price and quantity will increase.
equilibrium quantity will decrease, but equilibrium price may
decrease, increase, or
stay the same.
25. In an economy with no taxes or imports, if the marginal
propensity to save decreases, the
marginal propensity to consume will:

14. fluctuate randomly.
increase.
decrease.
remain constant.
26. In an economy with no taxes and no imports, disposable
income increases from $2,000 to
$3,000. If consumption increases from $1,500 to $2,100, the
marginal propensity to
consume is:
0.50.
$600.
0.60.
0.71.
27. If the marginal propensity to consume is 0.5, the multiplier
is:
1.
0.5.

15. 2.
5.
28. If the marginal propensity to save is 0.5, the multiplier is:
5.
1.
0.5.
2.
29.
Reference: Ref 11-2
(Table: Individual and Aggregate Consumption Functions) Look
at the table Individual and
Aggregate Consumption Functions. Which of the following
represents Fred's individual
consumption function?
C = 0.80YD
C = 100 + 0.5YD

16. C = 150 + 0.8YD
C = 100 + 0.7YD
30. The most important determinant of consumer spending is:
the government budget deficit or surplus.
the price of gasoline.
the trade deficit.
disposable income.
31. In the consumption function, an individual household's
consumer spending:
is positively related to its current disposable income.
is negatively related to its autonomous consumption and its
marginal propensity to
consume.
is positively related to the interest rate.
is determined by the accelerator principle.

17. 32. If other things are equal, expectations of lower disposable
income would _____ and shift
the consumption function _____.
increase autonomous consumption; up
increase the marginal propensity to consume; up
decrease autonomous consumption; down
decrease the marginal propensity to consume; down
33. The level of productive capacity _____ planned investment
spending.
has no effect on
varies directly with
is negatively related to
is positively related to
34. Inventory investment is:
not a part of investment spending, as it can't be properly
planned.
a part of unplanned investment spending and may either be

18. positive or negative.
a part of planned investment spending and is always positive.
a part of consumption spending, as these are unsold goods.
35. An increase in the expected disposable income of
households _____ the planned aggregate
spending line.
shifts down
increases the slope of
shifts up
decreases the slope of
36. Figure: Aggregate Expenditures Curve I
Reference: Ref 11-16
(Figure: Aggregate Expenditures Curve I) Look at the figure
Aggregate Expenditures Curve
I. The equilibrium level of real GDP in the aggregate
expenditures model shown in this

19. figure is:
$1,000.
$3,200.
$1,600.
$800.
37. The marginal propensity to save is the increase in
household savings when investment
spending increases by $1.
True
False
38. In an economy with no taxes or imports, if disposable
income decreases by $2,000 and
consumption decreases by $1,400, the multiplier is 7.
False
True
39. A decrease in consumer spending is likely to be caused by:

20. expectation of a decrease in personal income taxes.
expectation of an increase in personal income taxes.
an increase in investment spending.
an increase in the multiplier.
40. If the stock of physical capital increases, all other things
unchanged, the aggregate demand
curve will:
shift to the left.
remain constant.
become positively sloped.
shift to the right.
41. Aggregate demand will increase if:
the public becomes more optimistic.
government spending is reduced.
the aggregate price level falls.

21. household wealth decreases.
42. Suppose the equilibrium aggregate price level and the
equilibrium level of real GDP are
both rising. This is probably the effect of a(n) _____ in
aggregate _____.
decrease; demand
decrease; supply
increase; supply
increase; demand
43. Figure: Policy Alternatives
Reference: Ref 12-9
(Figure: Policy Alternatives) Look at the figure Policy
Alternatives. Suppose that the initial
equilibrium is at real GDP level Y1 and price level P2 in panel
(a). At real GDP level Y1
there is:
a recessionary gap.

22. long-run equilibrium.
no gap.
an inflationary gap.
44. Figure: Policy Alternatives
Reference: Ref 12-9
(Figure: Policy Alternatives) Look at the figure Policy
Alternatives. Assume that the
economy depicted in panel (a) is in short-run equilibrium with
AD1 and SRAS1. If the
economy is left to correct itself:
lower wages will result in a gradual shift from SRAS1 to
SRAS2.
long-run equilibrium will be established at YP and P3.
real interest rates will fall, which will shift SRAS rightward.
the aggregate demand curve will shift leftward.

23. 45. An inflationary gap is automatically closed by _____ wages
that shift the SRAS curve
_____.
rising; leftward
falling; rightward
falling; leftward
rising; rightward
46. Figure: Policy Alternatives
Reference: Ref 12-16
(Figure: Policy Alternatives) Look at the figure Policy
Alternatives. If the economy is in
equilibrium at Y1 in panel (a) and the government does not
intervene, the result will likely
be:
a shift of LRAS to the left.
no change in AD or SRAS.

24. a shift of SRAS1 to SRAS2.
a shift of AD1 to the left.
47. The interest rate effect states that as the aggregate price
level rises, holding everything else
constant, people demand _____ money, which drives the interest
rate _____ and investment
_____.
less; down; up
more; up; down
more; down; down
less; up; down
48. The AD curve will shift to the left:
if the aggregate price level falls.
if the government decreases taxes paid by households.
if household wealth decreases.
because of the wealth and interest rate effects.

25. 49. An increase in the prices of goods in the short run will:
decrease producers' profit per unit.
increase producers' profit per unit.
reduce output.
lead to a movement along the AD curve.
50. Sticky wages and prices occur:
in the short run.
in the long run.
in both the short and long run.
only when the economy is operating above its potential real
GDP.
51. In the short run, when there is an increase in aggregate
demand, the aggregate price level
will _____ and the aggregate output level will _____.
rise; rise
fall; rise
fall; fall

26. rise; fall
52. A negative supply shock often results in:
a drop in the unemployment level.
an increase in the aggregate price level and a decrease in
aggregate output.
a leftward shift of the AD curve.
no change in the price level.
53. Which of the following is NOT an example of government
purchases of goods and
services?
a surgeon's bill reimbursed under the Medicare program
a federal prosecutor's salary
new pavement for interstate highway I-95
equipping U.S. air marshals with electroshock weapons
54. Figure: Short-Run Equilibrium

27. Reference: Ref 13-1
(Figure: Short-Run Equilibrium) Look at the figure Short-Run
Equilibrium. If the economy
is at equilibrium at Y1 and P1, the appropriate policy to return
the economy to potential
output would be a(n):
increase in government spending.
decrease in taxes.
increase in transfer payments.
increase in taxes.
55. Expansionary fiscal policy shifts the aggregate demand
curve to the _____ and is used to
close a(n) _____ gap.
right; recessionary
left; recessionary
right; inflationary

28. left; inflationary
56. Figure: Fiscal Policy Choices
Reference: Ref 13-7
(Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy
Choices. If the government
uses discretionary fiscal policy for the economy in panel (a)
when real GDP is Y1,
government spending is likely to be _____ and taxes are likely
to be _____.
reduced; cut
reduced; increased
increased; increased
increased; cut
57. Figure: AD–AS
Reference: Ref 13-9

29. (Figure: AD–AS) Look at the figure AD–AS. Consider an
economy that is producing an
output level of Y1. The economy has a(n) _____ gap, which can
be closed by _____ fiscal
policy.
inflationary; expansionary
recessionary; contractionary
recessionary; expansionary
inflationary; contractionary
58. Suppose the government increases spending more than is
necessary to close a recessionary
gap. What is the most likely result?
The price level will decline.
Inflation will increase.
The equilibrium real GDP will fall short of potential GDP.
The equilibrium real GDP will fall.
59. Which of the following is an automatic stabilizer?

30. disability payments to war veterans
military spending
Medicare payments
unemployment compensation payments
60. Most economists believe that a balanced budget
requirement would:
undermine the role of taxes and transfers as automatic
stabilizers.
enhance the effect of automatic stabilizers.
strengthen the ability of policy makers to conduct discretionary
fiscal policy.
not have any impact on the role of taxes and transfers as
automatic stabilizers.
61. The stability pact signed in 1999 by the European nations
that adopted the euro required
each country to:
supply a certain amount of euros each year.
keep its actual budget deficit below 3% of its GDP.

31. balance its budget annually.
keep its cyclically balanced budget below 3% of its GDP.
62. Real GDP equals $200 billion, the government collects 20%
of any increase in real GDP in
the form of taxes, and the marginal propensity to consume is
0.8. What is the value of the
expenditure multiplier?
2.8
2
1
5
63. Fiscal policy is the use of taxes, government transfers, or
government purchases to shift the
aggregate demand curve.
True
False

32. 64. Medicaid, food stamps, and sales taxes are all automatic
stabilizers.
True
False
65. A fiscal year for the federal government runs from January
1 to December 31.
False
True
66. Social insurance is:
available only when the economy is below the full employment
level.
essentially any type of spending by the federal government.
a government program designed to protect individuals or
families from economic
hardship.
available only when the economy is in an inflation.

33. 67. When the government decreases spending, the:
government debt will increase.
budget balance will move toward a deficit.
SRAS curve will shift to the left.
AD curve will shift to the left.