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  • 1/60 Questions

    In any situation in which the long run aggregate supply curve shifts to the right the short run aggregate supply curve will also shift to the right.

    • True
    • False
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Economics Quizzes & Trivia
About This Quiz

This Econ Review quiz assesses understanding of comparative and absolute advantages in economics through practical examples involving individual and country-level production efficiencies.

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  • 2. 

    Aggregate demand represents that amount of goods and services that consumers want to buy over a range of different price levels.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    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.

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  • 3. 

    It is not possible for one individual to have the comparative advantage over another individual in all areas.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    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.

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  • 4. 

    It is not possible for one individual to have the comparative advantage over another individual in all areas.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    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.

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  • 5. 

    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.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    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.

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  • 6. 

    In order to find the equilibrium within the economy, within our graph we look at the intersection of AD and SRAS.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    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.

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  • 7. 

    A long run equilibrium exists if the AD and SRAS curves intersect along the LRAS curve.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    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.

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  • 8. 

    It is not possible for one individual to have the absolute advantage over another individual in all areas

    • True

    • False

    Correct Answer
    A. False
    Explanation
    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.

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  • 9. 

    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.

    • Capital-intensive; labor-intensive

    • Comparative; absolute

    • Labor-intensive; capital-intensive

    • Capital-intensive; land-intensive

    Correct Answer
    A. Capital-intensive; labor-intensive
    Explanation
    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.

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  • 10. 

    Which of the following would increase AD?

    • A decrease in consumer confidence

    • An increase in national income

    • A decrease in resource costs

    • An unfavorable supply show such as a horrible weather event

    • None of the above

    Correct Answer
    A. An increase in national income
    Explanation
    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.

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  • 11. 

    An increase in the price of oil from overseas as well as within the U.S. would lead to which of the following?

    • An increase in both prices and output

    • An increase in prices and a decrease in output

    • A decrease in prices and an increase in output

    • A decrease in both prices and output

    Correct Answer
    A. An increase in prices and a decrease in output
    Explanation
    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.)

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  • 12. 

    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?

    • Editing 1/3 of a video

    • Editing 1/2 of a video

    • Editing 2 videos

    • Editing 3 videos

    • None of the above

    Correct Answer
    A. Editing 1/3 of a video
    Explanation
    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.

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  • 13. 

    A decrease in interest rates will lead to which of the following?

    • An increase in both prices and output

    • An increase in prices and a decrease in output

    • A decrease in prices and an increase in output

    • A decrease in both prices and output

    Correct Answer
    A. An increase in both prices and output
    Explanation
    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.

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  • 14. 

    An increase in the price of a resource like crude oil will have what impact on the macroeconomy?

    • Increase price levels and increase output

    • Increase price levels and decrease output

    • Decrease price levels and increase output

    • Decrease price level and decrease output

    Correct Answer
    A. Increase price levels and decrease output
    Explanation
    An increase in the price of a resource like crude oil will lead to an increase in price levels as the cost of production for goods and services that rely on oil will rise. This increase in production costs will result in a decrease in output as businesses may reduce their production or pass on the higher costs to consumers through higher prices. Therefore, the macroeconomy will experience both higher price levels and lower output due to the increased price of crude oil.

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  • 15. 

    A decrease in interest rates will have what impact on the macroeconomy?

    • Increase price levels and increase output

    • Increase price levels and decrease output

    • Decrease price levels and increase output

    • Decrease price levels and decrease output

    Correct Answer
    A. Increase price levels and increase output
    Explanation
    A decrease in interest rates typically leads to an increase in borrowing and spending by both consumers and businesses. This increased spending stimulates economic activity and leads to an increase in output. Additionally, lower interest rates make it cheaper for businesses to borrow money for investment, which can further boost output. However, the increased spending can also lead to an increase in demand for goods and services, which can drive up prices, resulting in an increase in price levels. Therefore, a decrease in interest rates is expected to have a dual impact of increasing price levels and increasing output in the macroeconomy.

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  • 16. 

    If SRAS increases, which of the following will result?

    • An increase in output and an increase in the price level

    • An increase in output and a decrease in the price level

    • A decrease in output and an increase in the price level

    • A decrease in output and a decrease in the price level

    Correct Answer
    A. An increase in output and a decrease in the price level
    Explanation
    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.

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  • 17. 

    If the AD and SRAS curve intersect along the LRAS curve, the economy is moving too slowly, representing a very unstable situation.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    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.

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  • 18. 

    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?

    • TJ has the comparative advantage in both area.

    • TJ has the comparative advantage in folding letters and Colton has the comparative advantage in sealing envelopes.

    • TJ has the comparative advantage in sealing envelopes and Colton has the comparative advantage in folding letters.

    • Colton has the comparative advantage in both areas.

    Correct Answer
    A. 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.

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  • 19. 

    An increase in prices across a nation will lead to an increase in that nation's PPC.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    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.

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  • 20. 

    In a market economy, who receives the goods produced?

    • Everyone who was part of the production process.

    • Everyone who wants the goods and has sufficient income to buy them

    • Everyone shares equally, at least in theory.

    • Everyone who deserves the goods.

    Correct Answer
    A. Everyone who wants the goods and has sufficient income to buy them
    Explanation
    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.

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  • 21. 

    Production at a point lying outside a production possibilities curve is

    • Not possible

    • Possible

    • Not efficient

    • Efficient

    • Both possible and efficient

    Correct Answer
    A. Not possible
    Explanation
    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.

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  • 22. 

    According to the real balance effect, the AD has an inverse relationship because

    • Higher prices in the U.S. lead to lesser spending by consumers

    • Higher prices in the U.S. reduce the purchasing power of consumers.

    • Higher prices in the U.S. cause consumers to hold more money which decreases loanable funds and increases interest rates.

    • Higher prices do not change the economy's output in the long run

    Correct Answer
    A. Higher prices in the U.S. reduce the purchasing power of consumers.
    Explanation
    According to the real balance effect, higher prices in the U.S. reduce the purchasing power of consumers. This means that as prices increase, the value of money decreases, and consumers are able to buy fewer goods and services with the same amount of money. This leads to a decrease in consumer spending, which in turn decreases aggregate demand (AD).

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  • 23. 

    Short run aggregate supply refers to the amounts that producers want to sell over a range of prices.

    • True

    • False

    Correct Answer
    A. False
    Explanation
    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.

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  • 24. 

    If AD increases, which of the following will result?

    • An increase in output and an increase in the price level

    • An increase in output and a decrease in the price level

    • A decrease in output and an increase in the price level

    • A decrease in output and a decrease in the price level

    Correct Answer
    A. An increase in output and an increase in the price level
    Explanation
    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.

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  • 25. 

    If LRAS decreases, which of the following will result?

    • An increase in output and an increase in the price level

    • An increase in output and a decrease in the price level

    • A decrease in output and an increase in the price level

    • A decrease in output and a decrease in the price level

    Correct Answer
    A. A decrease in output and an increase in the price level
    Explanation
    If LRAS decreases, then SRAS decreases with it

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  • 26. 

    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.

    • True

    • False

    Correct Answer
    A. True
    Explanation
    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.

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  • 27. 

    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?

    • Creating 1/3 of a web page

    • Creating 1/2 of a web page

    • Creating 2 web pages

    • Creating 3 web pages

    • None of the above

    Correct Answer
    A. Creating 2 web pages
    Explanation
    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.

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  • 28. 

    A decrease in taxes on corporations will have what impact on the macroeconomy?

    • Increase price levels and increase output

    • Increase price levels and decrease output

    • Decrease price levels and increase output

    • Decrease price levels and decrease output

    Correct Answer
    A. Decrease price levels and increase output
    Explanation
    A decrease in taxes on corporations will lead to an increase in their profits. This, in turn, will incentivize corporations to invest more in their businesses, leading to an increase in output. Additionally, with lower taxes, corporations may pass on some of the savings to consumers in the form of lower prices, resulting in a decrease in price levels. Therefore, a decrease in taxes on corporations will likely lead to a decrease in price levels and an increase in output in the macroeconomy.

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  • 29. 

    A decrease in national income caused by an economic downturn would lead to

    • A decrease in AD.

    • A decrease in SRAS.

    • A decrease in AD and SRAS.

    • A decrease in SRAS and LRAS.

    • 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.

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  • 30. 

    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?

    • Lucy has the absolute advantage and comparative advantage in making chocolate.

    • Lucy has the absolute advantage in making chocolate and a comparative advantage making juice.

    • Ethel has the absolute advantage and the comparative advantage in making juice.

    • Ethel has the absolute advantage making chocolate and comparative advantage in making juice.

    • 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.

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  • 31. 

    If researchers developed a new, cost-effective energy source that could replace fossil fuels like oil, which of the following would occur?

    • An increase in both prices and output

    • An increase in prices and a decrease in output

    • A decrease in prices and an increase in output

    • A decrease in both prices and output

    Correct Answer
    A. A decrease in prices and an increase in output
    Explanation
    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.)

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  • 32. 

    A decrease in consumer confidence would lead to

    • A decrease in AD only

    • A decrease in SRAS only

    • A decrease in AD and SRAS

    • A decrease in AD, SRAS, and LRAS

    • None of the above

    Correct Answer
    A. A decrease in AD only
    Explanation
    A decrease in consumer confidence would lead to a decrease in aggregate demand (AD) only. When consumers have less confidence in the economy, they are less likely to spend money on goods and services, leading to a decrease in overall demand. This decrease in demand would not directly affect the short-run aggregate supply (SRAS) or the long-run aggregate supply (LRAS), as they are determined by factors such as input prices and productivity. Therefore, the correct answer is a decrease in AD only.

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  • 33. 

    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?

    • Alex has an absolute advantage washing cars.

    • Alex has an absolute advantage waxing cars.

    • Alex has a comparative advantage waxing cars.

    • Alex has a comparative advantage waxing cars

    • None of the Above

    Correct Answer
    A. 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.

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  • 34. 

    The vertical shape of the LRAS curve is caused by the fact that

    • Resource prices do not change in the short run but will change in the long run.

    • Resource prices do not change in the long run but will change in the short run.

    • Resource prices change in both the short run and the long run.

    • 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.

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  • 35. 

    An increase in consumer confidence would lead to

    • An increase in AD.

    • An increase in SRAS

    • An increase in AD and SRAS

    • An increase in AD and a decrease in SRAS

    • 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).

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  • 36. 

    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?

    • Melody has the absolute advantage in editing videos and the comparative advantage in creating web pages

    • Melody has the absolute advantage in editing videos and the comparative advantage in editing videos.

    • Brandon has the absolute advantage in editing videos and the comparative advantage in creating web pages.

    • Brandon has the absolute advantage in editing videos and the comparative advantage in editing videos.

    • None of the above

    Correct Answer
    A. 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.)

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  • 37. 

    Demand pull inflation is caused by

    • An increase in AD

    • A decrease in AD

    • An increase in SRAS

    • A decrease in SRAS

    • An increase in LRAS

    Correct Answer
    A. An increase in AD
    Explanation
    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.

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  • 38. 

    A decrease in resource prices will have what impact on the macroeconomy?

    • Increase price levels and increase output

    • Increase price levels and decrease output

    • Decrease price levels and increase output

    • Decrease price levels and decrease output

    Correct Answer
    A. Decrease price levels and increase output
    Explanation
    A decrease in resource prices will lead to a decrease in production costs for businesses. This will result in lower prices for goods and services, leading to a decrease in price levels. Additionally, with lower production costs, businesses will be able to increase their output as they can produce more for the same cost. Therefore, a decrease in resource prices will lead to a decrease in price levels and an increase in output in the macroeconomy.

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  • 39. 

    A point lying inside the production possibilities curve is

    • Not possible

    • Possible

    • Possible and efficient

    • Possible but not efficient

    • Not efficient

    Correct Answer
    A. Possible but not efficient
    Explanation
    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.

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  • 40. 

    An increase in expected (future) inflation would lead to

    • An increase in AD

    • An increase in SRAS

    • An increase in AD and a decrease in SRAS

    • A decrease in AD and a decrease in SRAS.

    • A decrease in AD and a increase in SRAS and LRAS.

    Correct Answer
    A. An increase in AD and a decrease in SRAS
    Explanation
    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).

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  • 41. 

    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?

    • Michelle has the comparative advantage in both tasks.

    • Michelle has the comparative advantage in painting and Patrick has the comparative advantage in edging.

    • Michelle has the comparative advantage in edging and Patrick has the comparative advantage in painting.

    • Patrick has the comparative advantage in both tasks.

    Correct Answer
    A. 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.

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  • 42. 

    According to the interest rate effect, the AD has an inverse relationship because

    • Higher prices in the U.S. lead to lesser spending by consumers in the U.S. and more spending in other countries

    • Higher prices in the U.S. reduce the purchasing power of consumers.

    • Higher prices in the U.S. cause consumers to hold more money which decreases loanable funds and increases interest rates.

    • Higher prices do not change the economy's output in the long run

    • None of the above

    Correct Answer
    A. Higher prices in the U.S. cause consumers to hold more money which decreases loanable funds and increases interest rates.
    Explanation
    According to the interest rate effect, when prices in the U.S. increase, consumers tend to hold more money as their purchasing power decreases. This leads to a decrease in the amount of money available for lending, known as loanable funds, which in turn increases interest rates. This inverse relationship between prices and consumer spending affects the aggregate demand (AD) because higher interest rates discourage borrowing and spending, ultimately reducing the overall level of economic activity.

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  • 43. 

    Stronger environmental regulations on industrial pollution would lead to

    • A decrease in AD.

    • A decrease in SRAS.

    • A decrease in AD and SRAS

    • A decrease in SRAS and LRAS

    • A decrease in AD, SRAS, and LRAS

    Correct Answer
    A. A decrease in SRAS and LRAS
    Explanation
    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.

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  • 44. 

    Consumer Sovereignty is found in which types of economies?

    • Socialist economies.

    • Command economies.

    • Market economies.

    • Comparative economies.

    Correct Answer
    A. 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.

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  • 45. 

    Which of the following explains the downward slope on the AD curve as indicated by the real balance effect?

    • 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.

    • Higher domestic prices reduce the purchase power of all deposits which means that consumers buy fewer goods.

    • 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

    • All of the above

    Correct Answer
    A. 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.

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  • 46. 

    An improvement in the productivity of all workers caused by improved computer technology would lead to

    • An increase in AD

    • An increase in SRAS

    • An increase in AD and SRAS

    • An increase in SRAS and LRAS

    • An increase in AD, SRAS, and LRAS

    Correct Answer
    A. An increase in SRAS and LRAS
    Explanation
    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.

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  • 47. 

    What would cause the SRAS curve to shift to the right?an

    • An increase in consumer confidence

    • An increase in interest rates

    • An unfavorable weather event

    • A decrease in resource prices

    • None of the above

    Correct Answer
    A. A decrease in resource prices
    Explanation
    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.

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  • 48. 

    Which of the following would lead to an increase in both LRAS and SRAS?

    • A decrease in interest rates

    • An increase in the exchange rate value of the dollar

    • Lower resource costs

    • A decrease in taxes on corporations

    • An increase in environmental regulations

    Correct Answer
    A. A decrease in taxes on corporations
    Explanation
    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.

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  • 49. 

    Governments may intervene in markets when

    • Goods are scarce.

    • Goods are not scarce.

    • Non-necessities are scarce.

    • Necessities are scarce

    Correct Answer
    A. Necessities are scarce
    Explanation
    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.

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Quiz Review Timeline (Updated): Mar 15, 2023 +

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  • Current Version
  • Mar 15, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Jul 29, 2009
    Quiz Created by
    Laurenmlbc

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