Macro Practice Test 1

Spam and ramen noodles would most likely be an inferior good because they are low-cost food items that are often associated with lower-income individuals. As income increases, people tend to consume higher-quality food items, making Spam and ramen noodles less desirable. On the other hand, luxury automobiles, steaks, and DVD players are typically considered normal or even superior goods, as they are associated with higher levels of income and are often seen as more desirable as income increases.

The opportunity cost of producing a unit of X for nation A is 0.8 units of Y. This can be determined by calculating the ratio of the units of Y that nation A can produce to the units of X that nation A can produce. In this case, nation A can produce 16 units of Y for every 20 units of X, which simplifies to a ratio of 0.8 units of Y per unit of X. Therefore, the correct answer is A) 0.8 of a unit of Y.

A nation that does not trade with other nations will have its citizens consuming at a lower standard of living than if it traded. This is because trade allows countries to specialize in producing goods and services that they have a comparative advantage in, leading to increased efficiency and productivity. By engaging in international trade, countries can access a wider variety of goods at lower prices, leading to a higher standard of living for their citizens.

Economists make the assumption that people are rational and respond to incentives. This means that individuals make choices based on their own self-interest and are motivated by the potential benefits or rewards they can receive. This assumption is foundational in economic theory and is used to analyze and predict human behavior in various economic situations. It helps economists understand how individuals make decisions regarding consumption, production, investment, and other economic activities.

When the price of a good increases, the quantity demanded will decrease. This is because as the price of a good goes up, consumers are less willing and able to purchase it, resulting in a decrease in the quantity demanded.

The production possibilities frontier shows the attainable combinations of two products that may be produced with available resources. This means that it represents the different combinations of goods or services that can be produced given the available resources and technology. It illustrates the trade-offs and opportunity costs involved in producing one product over another. It does not represent the distribution of products among citizens or the products that can be produced now and in the future.

When there is a surplus for a good at a given price, it means that the quantity supplied of that good is greater than the quantity demanded. In order to clear the surplus, sellers will have to lower the price of the good. This will cause the market price to fall. Additionally, since there is a surplus, sellers will decrease the quantity supplied of that good in order to match the lower demand. Therefore, the correct answer is A) market price to fall and quantity supplied of that good to decrease.

When market demand doubles and market supply decreases by 30 percent, the equilibrium price will rise and the equilibrium quantity will increase. This is because with an increase in demand and a decrease in supply, there will be more competition for the limited supply, leading to an increase in price. As a result, the equilibrium quantity will also increase as suppliers try to meet the higher demand at the new equilibrium price.

A tariff on an imported good reduces the amount of imports and raises the domestic price of the good. This is because the tariff increases the cost of importing the good, making it less attractive for foreign producers to export to the tariff imposing nation. As a result, the quantity of imports decreases, leading to a decrease in supply and an increase in price in the domestic market.

The correct answer is A. If real GDP increases from one year to the next, we know that production of goods and services has risen. This is because real GDP adjusts for changes in prices, allowing us to measure the actual increase in the quantity of goods and services produced. Nominal GDP, on the other hand, does not account for changes in prices and can be influenced by inflation or deflation. Therefore, real GDP is a more accurate measure of economic growth.

The unemployment rate can be calculated by dividing the number of unemployed individuals by the total labor force (employed + unemployed) and multiplying by 100. In this case, the number of unemployed is given as 10 million and the number employed is given as 190 million, so the total labor force is 200 million. Dividing 10 million by 200 million and multiplying by 100 gives a result of 5%. Therefore, the correct answer is B) 5%.

Market demand shows the quantities that all buyers will buy at all possible prices. This means that it represents the total demand from all buyers in the market for a particular product or service. It takes into account the various price levels and the corresponding quantities that buyers are willing and able to purchase. The market demand curve shows the relationship between price and quantity demanded, indicating the overall demand for a product in the market.

When the price of a good decreases, the quantity demanded will increase. This is because as the price decreases, consumers are more willing and able to purchase the good, leading to an increase in demand for it. The inverse relationship between price and quantity demanded is known as the law of demand.

As the population increases, the demand for all normal goods will increase. This is because with a larger population, there will be more people who need and want these goods, leading to an increase in demand.

A transfer payment is a payment made by the government to an individual without receiving a good or service in return. This means that the government is providing financial assistance or support to the individual, such as welfare benefits or social security payments. It is not a payment for an investment good, a service, a debt owed, or a consumption good. The correct answer is A) for which the government does not receive a good or service in return.

All of the statements A, C, and D are correct. Economics is indeed a decision science that studies the tradeoffs we make due to scarcity. Every individual, regardless of their wealth, has to make tradeoffs. And anytime we have to make a decision, we are faced with an economic tradeoff. Therefore, option B, which states that all of these statements are correct, is the correct answer.

In a market economy, consumers ultimately decide what goods and services will be produced. This is because consumers have the power to determine the demand for different products and services through their purchasing decisions. If consumers demand a certain product or service, businesses will respond by producing more of it to meet the demand. Conversely, if consumers do not demand a certain product or service, businesses will be less likely to produce it. Therefore, the choices and preferences of consumers play a crucial role in shaping the production decisions in a market economy.

A time series graph is a type of graph that shows the amount of outsourcing over a period of time, specifically in the last ten years. This graph would plot the outsourcing data on the y-axis and the years on the x-axis, allowing for a visual representation of the trend in outsourcing over time. The other options, such as the demand curve for outsourcing, pie chart, and supply curve of outsourcing, do not accurately describe a graph that shows the amount of outsourcing over time.

The manager of the local tire shop, a drill press in a machine shop, and an acre of farmland are all examples of factors of production. These are resources or inputs used in the production process to create goods and services. However, $1,000 is not a factor of production. It is a form of financial capital or money, which is used to purchase the factors of production but is not a factor itself.

Economists do not support saving domestic jobs by tariffs or quotas because it leads to several negative consequences. One reason is that the cost to consumers is often much higher than the wages earned in the jobs that are saved. This means that consumers end up paying more for goods and services, which can harm the overall economy. Additionally, if workers were instead moved into industries where they have a comparative advantage, they would be able to earn higher wages. Lastly, implementing tariffs or quotas creates deadweight losses, which refers to the inefficiency and economic loss caused by restricting trade. Therefore, all of these reasons contribute to economists' lack of support for saving domestic jobs through tariffs or quotas.

The total cost of protectionism is very large, but because the per unit cost is so small for each consumer, most buyers do not notice it and therefore do not make the connection. This explains why more people do not support free trade, as they are not aware of the significant overall cost of protectionism.

The correct answer is d) the cost of a speed boat purchased at Bob's Boats and used by drug smugglers. This is counted in GDP because it represents a legal transaction for the purchase of a good, even though it is being used for illegal activities. GDP measures the total value of goods and services produced within a country's borders, regardless of their intended use or legality.

Nominal GDP refers to the total value of goods and services produced in a country, measured in current prices. This means that it does not account for inflation or changes in purchasing power over time. Therefore, the correct answer is C) current dollar GDP, as it accurately describes what nominal GDP represents.

Economics assumes that individuals act rationally in their decision-making process, even though they may not behave rationally all the time. This means that people consider the costs and benefits of their choices and make decisions that maximize their own self-interest. While other factors such as emotions and social influences may also play a role in decision-making, the assumption of rational behavior is still considered useful in explaining the choices people make.

Option B is a normative statement because it expresses a value judgment or opinion about the price of gasoline being too high. It is subjective and reflects the speaker's personal belief rather than stating a factual observation. Options A, C, and D are not normative statements as they either state a factual observation (option A) or include all possible options (option C) or none of the options (option D).

At full employment, an economy is already utilizing all of its available resources and labor. Therefore, if the economy wants to produce more war goods, it would have to reallocate resources from the production of other goods. This means that the production of other goods would have to be cut back in order to increase the production of war goods.

The correct answer is B) there is an inverse or downsloping relationship between price and quantity. The law of demand states that as the price of a good or service increases, the quantity demanded decreases, and vice versa. This is because consumers are generally willing to buy more of a good when it is cheaper, and less of it when it is more expensive. This relationship is represented by a downward-sloping demand curve.

An advance in technology increases supply because it allows for an increase in labor productivity and a decrease in per-unit costs of production. With new technology, workers can produce more goods in less time, leading to an increase in supply. Additionally, the use of technology can help streamline production processes and reduce costs, making it more efficient and cost-effective to produce goods. Therefore, option C is the correct answer.

The correct answer is D. The substitution effect refers to the change in consumer behavior when the price of a substitute good rises. In this case, buyers will choose to buy more of a relatively cheaper good instead of the substitute. This is because the substitute has become more expensive, making the cheaper good a more attractive option. So, the substitution effect leads to buyers buying more of a relatively cheaper good when the price of a substitute rises.

If the demand for good A decreases when the price of good B decreases, it implies that the two goods are substitutes. This means that consumers view good A and good B as interchangeable and are willing to switch from one to the other based on their relative prices. When the price of good B decreases, consumers find it more attractive and therefore demand less of good A. This relationship indicates that the goods are substitutes.

The correct answer is A. By having every nation produce the good it has a comparative advantage in producing. This means that each country should specialize in producing the goods or services that they can produce most efficiently compared to other countries. By doing so, resources are allocated more efficiently and productivity is maximized, leading to an increase in world output of goods and services.

The correct answer is D. This is because even if other nations do not eliminate trade barriers, the U.S. consumers would still benefit from lower prices of imported goods. Additionally, domestic resources that are competing with imports could be allocated to more efficient uses. Therefore, it is not necessary for other nations to eliminate trade barriers for the U.S. to do so.

In the 1930s, when the U.S. passed the highest tariffs ever, other nations raised tariffs in retaliation and international trade collapsed, causing unemployment in the U.S. to worsen.

Economic models fulfill multiple uses. They make economic ideas explicit and concrete for use by decision makers, simplify some aspect of economic life, and help answer economic questions. These models provide a framework for understanding and analyzing complex economic phenomena, allowing decision makers to make informed choices based on data and evidence. By simplifying economic concepts and relationships, these models make them more accessible and easier to comprehend. Ultimately, economic models serve the purpose of providing insights and guidance in the field of economics.

Economic growth is represented on a production possibilities frontier model by the production possibilities frontier shifting outward. This indicates that an economy is able to produce more goods and services over time, as resources are utilized more efficiently or new resources are discovered. This shift represents an increase in the economy's potential output and reflects economic growth.

The production of more physical and human capital will have multiple results. It will shift the future production possibilities frontiers outward, meaning that the economy will be able to produce more goods and services in the future. This will enhance future economic growth. However, in order to invest in physical and human capital, resources need to be allocated away from the production of goods for immediate consumption. Therefore, less goods for consumption today will be produced. Overall, all of these outcomes will occur when more physical and human capital is produced.

If the price of golden apples decreases, it is likely that consumers would switch to buying more golden apples instead of red apples since they are now relatively cheaper. This would result in a decrease in the demand for red apples. Therefore, option A is the correct answer.

To produce 10 more units of X, the firm has to reduce the production of Y by 10 units. Since the firm can produce 80 units of Y when producing 60 units of X, the opportunity cost of producing 10 more units of X is 20 units of Y. Therefore, the correct answer is B) 20 units of Y.

International trade enables nations to consume beyond their domestic production possibilities frontier, increase employment, income, and GDP, and use domestic resources more efficiently.

The correct answer is d) All of these explain why nations do not specialize completely. This is because there are multiple reasons why nations do not specialize 100 percent in reality. Firstly, as specialization advances, there is an increase in opportunity costs, which makes it too costly for exportation. Secondly, certain services such as medical services are difficult to export to other nations. Lastly, since tastes differ among nations, some products like autos are produced in many different nations. These factors contribute to the fact that most production in a nation is not completely specialized.

Foreign producers and exporters of the good with a tariff on it pay the tariff on an imported good. This is because the tariff is a tax imposed on the imported good by the importing country's government. The foreign producers and exporters are responsible for paying this tax when they bring their goods into the importing country.

Real GDP is the correct answer because it is a measure of total production that adjusts for inflation by using a base year and constant dollars. Real GDP is important because it allows for a more accurate comparison of economic output over time, as it removes the effects of inflation. Nominal GDP, on the other hand, does not adjust for inflation and reflects the current prices of goods and services. Underground GDP and value added GDP are not relevant to this question.

Voluntary exchange increases economic efficiency because both the buyer and the seller would only agree to a trade if they both benefit. This means that resources are allocated to their most valued uses, resulting in a more efficient allocation of goods and services.

If nominal GDP rises, it means that the total value of goods and services produced in an economy has increased. This could be due to an increase in production, an increase in prices, or both. Therefore, we can say that production has risen or prices have risen or both have risen.

The correct answer is b) the demand for sofas increased. This can be inferred from the fact that Ajax sold more sofas this year compared to last year, indicating an increase in demand. Additionally, the increase in price from $1,000 to $1,500 suggests that consumers were willing to pay a higher price for the sofas, further supporting the idea of increased demand.

An increase in the price of soybeans will not increase the supply of soybeans. When the price of soybeans increases, farmers have an incentive to produce and sell more soybeans in order to maximize their profits. This would result in an increase in the supply of soybeans. Therefore, option D is the correct answer as it states that an increase in the price of soybeans will not increase the supply.

Intermediate goods are treated in the calculation of GDP by including their value as part of the value of the final good of which they are an input. This means that the value of intermediate goods is not counted separately but is included in the overall value of the final good. This is because the value of intermediate goods is already captured when the final good is produced and sold. Therefore, option C is the correct answer.

A change in demand represents a shift to a new demand curve, while a change in quantity demanded is a movement along one demand curve.

If the price of a product increases, the quantity supplied will increase. This is because suppliers are motivated by the higher price to produce and supply more of the product in order to maximize their profits. As a result, the quantity supplied in the market will increase.

If market demand is constant and market supply decreases, there will be a shortage in the market. This shortage will cause the equilibrium price to rise as consumers compete for the limited supply. At the same time, the equilibrium quantity will decrease because there is less supply available. Therefore, option C is the correct answer.

The widening gap between the wages of skilled and unskilled labor in the U.S. in recent years can be attributed to the greater demand for high skilled labor due to technological advances. As technology continues to advance, the need for skilled workers who can operate and maintain these technologies increases. This increased demand for skilled labor drives up their wages, while the wages of unskilled labor remain relatively stagnant.

The correct answer is D) GDP would increase reflecting the costs of cleanup, but the standard of living for the average person would decrease. This is because while the costs of cleanup would contribute to an increase in GDP, the overall impact of the hurricane on the economy would result in a decrease in the standard of living for the average person. The destruction caused by the hurricane would lead to a decrease in productive capacity and an increase in costs for individuals, leading to a lower standard of living.

A production possibilities frontier with a bowed outward shape indicates increasing opportunity costs as more and more of one good is produced. This means that as more units of one good are produced, the opportunity cost of producing additional units of that good increases. In other words, to produce more of one good, society must give up increasing amounts of the other good. This is represented by the curved shape of the production possibilities frontier.

As workers demand higher wages to produce automobiles, it would increase the costs of production. This would result in a decrease in market supply because the higher costs would make it more expensive for manufacturers to produce automobiles. Therefore, the correct answer is C) Market supply would decrease because costs of production would be higher.

Increasing opportunity cost illustrates the concept that the more resources are devoted to any activity, the smaller the payoff of devoting more resources to that activity. As resources are shifted from one activity to another, the opportunity cost of producing additional units of the original activity increases. This concept highlights the trade-offs and choices that individuals and societies face when allocating scarce resources.

Consumption expenditures refer to the spending by households on goods and services. The correct answer, "new houses," is not included in consumption expenditures because it falls under the category of investment spending, as it is considered a long-term asset rather than a consumable good or service. Medical care, durable goods, and education are all examples of goods and services that are typically included in consumption expenditures.

The nominal GDP in 2009 can be calculated by multiplying the quantity of each product produced in 2009 by its corresponding price in 2009, and then summing up the values.

For movies, the quantity produced in 2009 is 30 and the price is $7, so the contribution to GDP is 30 * $7 = $210.

For burgers, the quantity produced in 2009 is 90 and the price is $2.50, so the contribution to GDP is 90 * $2.50 = $225.

For bikes, the quantity produced in 2009 is 6 and the price is $1,100, so the contribution to GDP is 6 * $1,100 = $6,600.

Adding up these values, the nominal GDP in 2009 is $210 + $225 + $6,600 = $7,035.

If a U.S. firm produces Nova cars in Mexico, that production should count towards U.S. GNP. This is because GNP (Gross National Product) measures the total value of goods and services produced by the residents of a country, regardless of where the production takes place. Since the U.S. firm is based in the U.S., the production of Nova cars in Mexico by this firm would still be considered part of the U.S. GNP.

If the demand for good X increases when the price of good Y decreases, it suggests that goods X and Y are complementary goods. Complementary goods are products that are typically consumed together, such as bread and butter or coffee and cream. When the price of one of these goods decreases, it makes it more affordable and therefore increases the demand for the other good. In this case, the decrease in the price of good Y leads to an increase in the demand for good X, indicating that they are complementary goods.

Points on a production possibilities frontier represent the maximum possible combinations of goods and services that can be produced given the available resources and technology. These points are considered attainable because they can be achieved through efficient allocation of resources. Both options A and B are correct because points within the area enclosed by the production possibilities frontier and combinations along the production possibilities frontier are both attainable production points.

Demand refers to the quantity of a good or service that buyers are willing and able to purchase at various prices. It represents the relationship between the price of a product and the quantity demanded by consumers. Option C correctly states that demand shows the quantities that buyers will buy at all possible prices, making it the correct answer. Options A and D are incorrect because they only focus on the sellers' perspective, while option B is incorrect because it does not encompass all possible prices.

A drop in the price of coffee would not increase the demand for coffee because when the price of a good decreases, people are more likely to buy it. Therefore, a drop in the price of coffee would actually increase the demand for coffee.

Nation B should produce good X and Nation A should produce good Y. This is because Nation B has a comparative advantage in producing good X, as it can produce 18 units compared to Nation A's 20 units. Similarly, Nation A has a comparative advantage in producing good Y, as it can produce 16 units compared to Nation B's 12 units. By specializing in the production of the good they have a comparative advantage in, both nations can maximize their overall production and efficiency.

Total production or GDP in the economy is measured as the current dollar value of all final goods and services produced in the economy in a given time period. This includes both goods and services, and the value is measured in terms of current prices. Therefore, option D is the correct answer as it accurately represents the measurement of GDP.

If a German firm produces BMW cars in the United States, the production should count towards U.S. GDP. This is because GDP measures the total value of goods and services produced within a country's borders, regardless of the nationality of the firm. Since the production is taking place in the United States, it contributes to the country's GDP.

If the government were to outlaw the consumption of potatoes, the likely consequence would be that the supply of potatoes would disappear. This is because if consumption is outlawed, farmers and suppliers would have no incentive to produce and distribute potatoes, leading to a decrease in the supply of potatoes in the market.

When there is a shortage for a good at a certain price, it means that the quantity demanded of that good exceeds the quantity supplied. In order to address this shortage, the market price will rise to incentivize suppliers to increase their quantity supplied. At the same time, the higher price will discourage some consumers from purchasing the good, leading to a decrease in quantity demanded. Therefore, the correct answer is D) market price to rise and quantity demanded of that good to decrease.

If market demand and market supply both increase by 25 percent, it means that both the quantity demanded and the quantity supplied have increased. This results in an increase in the equilibrium quantity. However, since the increase in demand and supply are equal, the equilibrium price remains constant. Therefore, the correct answer is D) Equilibrium price is constant and equilibrium quantity increases.

David Ricardo was the first economist to explain comparative advantage. Comparative advantage refers to the ability of a country to produce a good or service at a lower opportunity cost than another country. Ricardo's theory of comparative advantage stated that countries should specialize in producing goods or services in which they have a lower opportunity cost, and then trade with other countries to maximize efficiency and overall output. His work on comparative advantage laid the foundation for international trade theory and has had a significant impact on economics.

A fall in the price of bananas will not cause demand to increase for bananas. Typically, a decrease in price would lead to an increase in demand, as consumers are more likely to purchase a product that is cheaper. However, in this case, the question specifically asks for a factor that will not cause demand to increase. Therefore, option C is the correct answer.

An increase in the quantity supplied is caused by a higher market price. When the market price of a good or service increases, producers are incentivized to supply more of that good or service in order to maximize their profits. This is because they can now sell the good or service at a higher price, leading to an increase in the quantity supplied.

Normal goods are goods for which the demand decreases when income decreases. This means that buyers buy less of these goods when their incomes decrease.

An absolute advantage refers to the ability to produce a good or service with fewer resources or at a lower opportunity cost compared to others. Option C correctly identifies this concept by stating that you have an absolute advantage when you can produce something at a lower opportunity cost than others. This means that you can produce more of that particular good or service by sacrificing less of other goods or services. Therefore, option C is the correct answer.

A combination of output that is inside the production possibilities frontier is considered to be productively inefficient. This means that resources are not being fully utilized and there is potential to increase output without sacrificing the production of other goods.

The correct answer is D. Spending on new houses would not be included in the expenditure category called investment expenditures because it falls under the category of capital expenditures. Investment expenditures typically refer to purchases of financial assets or physical assets such as machinery, equipment, and vehicles, while spending on new houses would be classified as a capital expenditure in the real estate sector.