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Test Bank Exploring Macroeconomics 3rd Edition

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Chapter 1—The Role and Method of Economics

MULTIPLE CHOICE

1. What is economics most concerned with?

how to reduce inflation

how to profit from trading in the stock market

studying how we allocate scarce resources to satisfy unlimited wants

government taxation and spending

ANS: C

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

2. What is the central concern of economics?

how to regulate the supply of money

how to reduce the wants of individuals, businesses, and government

how to find more resources to satisfy everyone's wants

how to make the best use of scarce resources to satisfy our unlimited wants

ANS: D

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

3. Why is there scarcity?

because average costs may exceed average benefits

because human wants are limited

because theory dictates it

because our unlimited wants exceed our limited resources

ANS: D

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

4. Why does the problem of scarcity exist?

because resources are limited relative to wants

because governments fail to intervene in the market place

because resources are unlimited relative to wants

because the world has many poor people

ANS: A

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

5. What does scarcity result from?

government decision making

positive economics

wants that exceed the resources necessary to provide them

inappropriate normative judgments

ANS: C

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Comprehension

6. What causes scarcity?

the allocation of goods by prices

specialization and division of labour

unlimited wants and limited resources

the market mechanism

ANS: C

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

7. What does economics primarily explore?

how the government allocates its budget among competing political interests

how stock and bond prices fluctuate when there are changes in demand or supply

how goods and services are produced and distributed in a world with limited resources

how businesses market products under competitive conditions

ANS: C

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Comprehension

8. What is economics primarily the study of?

how firms compete for profits in the marketplace

how limited resources are allocated to satisfy unlimited wants

how we deal with unemployed resources

how prices are set in the marketplace

ANS: B

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Knowledge

9. What do economists mean when they state that a good is scarce?

People will want to buy more of the good regardless of price.

It is impossible to expand the availability of the good.

Our wants exceed our limited resources.

There is a shortage of the good at a sale price.

ANS: C

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Knowledge

10. Which of the following statements about scarcity is the most accurate?

It occurs only in centrally planned economies.

It will likely be eliminated by technological progress.

It occurs if there are insufficient resources to provide for human wants.

It exists only in poor nations.

ANS: C

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Application

11. According to most economists, what is the fundamental economic problem?

unemployment

government intervention into markets

poverty

scarcity

ANS: D

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

12. What do all economic problems arise from?

scarcity

too little currency available in circulation

high unemployment rates

competition

ANS: A

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

13. As defined by an economist, what does the word scarcity mean?

Consumers are too poor to purchase the available goods and services.

Demand exceeds supply at the current market price.

The desire for goods exceeds our ability to produce them with limited available resources.

Supply exceeds demand at the current market price.

ANS: C

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Knowledge

14. Which of the following statements best describes the problem of scarcity?

Scarcity means that shortages occur at the existing market price.

It is impossible to satisfy unlimited human wants with limited resources.

When there is scarcity, individuals do not face trade-offs.

As a result of scarcity, individuals do not have the ability to make choices.

ANS: B

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Knowledge

15. What problem is caused when not all human wants can be satisfied with current resources and technology?

scarcity

normative economics

the fallacy of composition

ceteris paribus

ANS: A

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Comprehension

16. What does economics primarily study?

how to interpret corporate balance sheets and income statements

how choices are made because of scarcity

how to make money in the stock market

how to operate a business

ANS: B

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

17. What do economists mean when they say goods are scarce?

Government programs are needed to lift families out of poverty.

At the current price, consumers are willing to buy more of a good than suppliers are willing to produce.

Consumers do not have enough money to purchase the goods.

The desire for goods and services exceeds our ability to produce them with limited resources.

ANS: D

PTS: 1

DIF: Difficult

REF: p. 1

BLM: Application

18. Which of the following statements about scarcity is the most accurate?

It is a problem that solely exits in the developing world.

It is only a problem in centrally planned economies.

It is a problem that necessitates making choices and trade-offs.

It is only a problem in modern industrialized economies.

ANS: C

PTS: 1

DIF: Easy

REF: p. 1

BLM: Comprehension

19. Which of the following statements best describes scarcity?

There will always be families living below the poverty line.

Human wants are limited.

Limited resources cannot satisfy all of our unlimited human wants.

Resources are unlimited.

ANS: C

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

20. What is economics the study of?

how people deal with limited human wants

how people cope with fluctuations in stock prices

how people deal with greed

how people cope with limited resources

ANS: D

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

21. Which of the following most accurately describes a “scarce” good?

a good for which available resources are insufficient to satisfy unlimited human desires for it

a good that is always in demand at any price

a good for which there is a shortage at the current market price

a good for which it is impossible to increase production any further given the available resources and technology

ANS: A

PTS: 1

DIF: Difficult

REF: p. 1

BLM: Comprehension

22. What question is economics fundamentally concerned with?

How can limited wants be used to satisfy limited resources?

How are limited resources allocated to satisfy unlimited wants?

How are scarce resources allocated to satisfy limited wants?

How are limited resources allocated to satisfy scarce wants?

ANS: B

PTS: 1

DIF: Easy

REF: p. 1

BLM: Knowledge

23. Which of the following statements best describes the study of scarcity?

using limited resources in order to best satisfy our unlimited desires

using limited resources in order to promote full employment and price stability

using unlimited resources in order to promote full employment and price stability

using unlimited resources in order to best satisfy our unlimited desires

ANS: A

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Knowledge

24. What is the primary concern of economics?

studying limited desires in the face of unlimited resources

studying problems such as poverty and unemployment

studying production and distribution of goods in a world of unlimited resources

studying production and distribution of goods in a world of limited resources

ANS: D

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Knowledge

25. Which of following statements about economics is the most accurate?

It explores how choices are made between conflicting wants and desires in a world of scarcity.

It relies entirely upon normative analysis.

It typically uses controlled experiments to learn about consumer and firm behaviour.

It uses models that cannot be tested empirically due to the complex nature of the economy.

ANS: A

PTS: 1

DIF: Difficult

REF: p. 1

BLM: Comprehension

26. What is the solution to solving the fundamental economic problem?

to allocate limited resources among competing uses

to guarantee everyone on the planet a minimum level of food, shelter, and clean water

to eliminate poverty in the developing world

to increase the amount of leisure time available to people

ANS: A

PTS: 1

DIF: Moderate

REF: p. 1

BLM: Comprehension

27. Which of the following statements about economics is the most accurate?

It is concerned with predicting business conditions in the future, not with the current state of the stock market.

It is a natural science like biology and chemistry.

It is composed of two main branches known as positive and normative economics.

It is a science concerned with reaching generalizations about human behaviour, not unlike sociology or psychology.

ANS: D

PTS: 1

DIF: Difficult

REF: p. 3

BLM: Application

28. Which of the following statements about economics is the most accurate?

It concerns itself only with monetary decisions.

It says very little about "everyday life."

It is a narrowly focused discipline.

It is a broad-ranging, problem-solving discipline.

ANS: D

PTS: 1

DIF: Difficult

REF: p. 3

BLM: Comprehension

29. Which of the following would be studied in a microeconomics course?

how the economy's total output is measured

the amount of unemployment in Canada

the production decisions made by individual firms

the effect of a recession on the economy

ANS: C

PTS: 1

DIF: Easy

REF: p. 3

BLM: Comprehension

30. Who makes economic decisions?

They are only made by government leaders.

They are made in both the private and public sectors.

They are only made where monetary exchanges take place.

They are only made at the management level of corporations.

ANS: B

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Application

31. What is the basic difference between macroeconomics and microeconomics?

Microeconomics explores the causes of inflation, while macroeconomics focuses on the causes of unemployment.

Microeconomics concentrates on the behaviour of individual consumers, while macroeconomics focuses on the behaviour of firms.

Microeconomics concentrates on the behaviour of individual consumers and firms, while macroeconomics focuses on the performance of the entire economy.

Microeconomics concentrates on individual markets, while macroeconomics focuses primarily on international trade.

ANS: C

PTS: 1

DIF: Difficult

REF: p. 3

BLM: Knowledge

32. What two main branches of study can economics be divided into?

capitalism and communism

microeconomics and macroeconomics

demand and supply

capitalism and socialism

ANS: B

PTS: 1

DIF: Easy

REF: p. 3

BLM: Knowledge

33. Which of the following is most likely a topic of discussion in macroeconomics?

an increase in the price of food

a decrease in the production of DVD players by a consumer electronics company

a decrease in the unemployment rate

an increase in the wage rate paid to automobile workers

ANS: C

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Application

34. What is the term for the branch of economics that studies the decisions made by individual firms and consumers?

microeconomics

normative economics

macroeconomics

positive economics

ANS: A

PTS: 1

DIF: Easy

REF: p. 3

BLM: Knowledge

35. What is the term for the branch of economics that studies the aggregate decisions of all households and all firms?

normative economics

microeconomics

positive economics

macroeconomics

ANS: D

PTS: 1

DIF: Easy

REF: p. 3

BLM: Knowledge

36. Which of the following statements most likely lies within the realm of microeconomics?

An increase in government spending will increase the aggregate demand for goods and services in the economy.

An increase in labour costs will increase the cost of producing another airplane.

Unemployment rises during a recession and falls during an expansion.

A rapid acceleration of the supply of money may create inflation.

ANS: B

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Application

37. Which of the following statements most likely lies within the realm of macroeconomics?

Due to process innovations in computer chip manufacturing, the market supply of computers increased.

Due to an economic recession, manufacturing firms began implementing layoffs of their workforces.

An increase in the price of automobiles will lead to a decrease in the quantity of automobiles demanded.

Anticipating that the benefits would outweigh costs involved, an undergraduate student purchases the course textbook.

ANS: B

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Application

38. What type of science do most people consider economics to be?

a social science

an accounting science

a physical science

an earth science

ANS: A

PTS: 1

DIF: Easy

REF: p. 3

BLM: Knowledge

39. Which topic does macroeconomics usually NOT include?

the rate of unemployment

the rate of inflation

the profit maximizing decisions of an individual manufacturer

economic growth

ANS: C

PTS: 1

DIF: Easy

REF: p. 3

BLM: Comprehension

40. Which of the following lies primarily within the realm of microeconomics?

an economic model forecasting the impact of a tax increase on consumer spending and national output

a model forecasting the impact of a change in interest rates on the level of investment in the economy

an empirical analysis of the relationship between the growth of the money supply and the rate of inflation

a study of supply and demand conditions in the market for orange juice

ANS: D

PTS: 1

DIF: Difficult

REF: p. 3

BLM: Application

41. Which of the following lies primarily within the realm of macroeconomics?

a study of the elasticity of demand for gasoline

a study of how tax cuts stimulate aggregate production

a study of the impact of "mad cow" disease on the price of beef worldwide

an analysis of supply and demand conditions in the electricity market

ANS: B

PTS: 1

DIF: Difficult

REF: p. 3

BLM: Application

42. Which of the following is most likely a topic of discussion in a microeconomics course?

an increase in the rate of inflation

an increase in the number of jobless individuals filing employment insurance claims

an increase in the price of lumber used to construct houses

a decrease in the share of national income paid to the government in taxes

ANS: C

PTS: 1

DIF: Difficult

REF: p. 3

BLM: Application

43. What is the basic difference between macroeconomics and microeconomics?

Microeconomics is concerned with the trees (individual markets), while macroeconomics is concerned with the forest (aggregate markets).

Macroeconomics is concerned with positive economics, while microeconomics is concerned with normative economics.

Macroeconomics is concerned with policy decisions, while microeconomics applies only to theory.

Microeconomics looks at the forest (aggregate markets), while macroeconomics is concerned with the trees (individual markets).

ANS: A

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Comprehension

44. What is the term for the branch of economics that focuses on outcomes in highly aggregated markets, such as the markets for labour or consumer products?

normative economics

macroeconomics

Marxian economics

positive economics

ANS: B

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Knowledge

45. What is the term for the branch of economics that focuses on the conduct of affairs within narrowly defined units, such as households or business firms?

macroeconomics

applied economics

socioeconomics

microeconomics

ANS: D

PTS: 1

DIF: Easy

REF: p. 3

BLM: Knowledge

46. What topic does microeconomics NOT usually include?

how firms choose output to maximize profits

how consumers maximize utility subject to a budget constraint

how wages are determined in the labour market

how national income is calculated

ANS: D

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Application

47. What is the term for the branch of economics that studies the economy as a whole?

positive economics

microeconomics

normative economics

macroeconomics

ANS: D

PTS: 1

DIF: Easy

REF: p. 3

BLM: Knowledge

48. Which of the following best describes macroeconomics?

It is narrower in scope than microeconomics.

It is concerned with the expansion of a small sole proprietorship into a large corporation.

It is concerned with the expansion and contraction of the overall economy.

It analyzes mergers and acquisitions between firms.

ANS: C

PTS: 1

DIF: Difficult

REF: p. 3

BLM: Application

49. Which topic does microeconomics NOT usually include?

the determinants of the demand for DVD players by consumers

the impact of large government budget deficits on private investment spending

the regulation of monopoly firms

the determinants of the supply of wheat by farmers

ANS: B

PTS: 1

DIF: Difficult

REF: p. 3

BLM: Application

50. Which topic does macroeconomics NOT generally include?

government spending and taxation

aggregate demand

the production decisions of individual firms

inflation

ANS: C

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Comprehension

51. Which area of study is most concerned with measuring the rate of inflation?

macroeconomics

microeconomics

normative economics

positive economics

ANS: A

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Comprehension

52. What area of economic study is most concerned with the determination of prices in the market for automobiles?

microeconomics

normative economics

macroeconomics

positive economics

ANS: A

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Comprehension

53. Which of the following statements about microeconomics is the most accurate?

It is a "positive" science, whereas macroeconomics is a "normative" science.

It provides an overall view of the economy and how it functions.

It explores the behaviour of individual consumers and firms when confronted with scarcity.

It examines the aggregate behaviour of consumers and firms when confronted with scarcity.

ANS: C

PTS: 1

DIF: Difficult

REF: p. 3

BLM: Comprehension

54. What does microeconomics primarily examine?

the behaviour of firms and how they interact with each other in the marketplace

the overall economy, especially fiscal and monetary policy

the behaviour of households but not firms

the behaviour of both firms and households and how they interact in the marketplace

ANS: D

PTS: 1

DIF: Easy

REF: p. 3

BLM: Knowledge

55. What does macroeconomics primarily examine?

broad issues such as national output, employment, and inflation

how prices are determined within individual markets

the behaviour of individual households and firms

the output levels that maximize the profits of business firms

ANS: A

PTS: 1

DIF: Easy

REF: p. 3

BLM: Knowledge

56. How do microeconomics and macroeconomics differ?

Microeconomics is concerned with consumer behaviour, while macroeconomics is concerned with firm behaviour.

Microeconomics utilizes positive economic analysis, while macroeconomics utilizes normative economic analysis.

Microeconomics studies aggregate decision making, while macroeconomics examines individual decision making.

Microeconomics studies individual decision making, while macroeconomics examines aggregate decision making.

ANS: D

PTS: 1

DIF: Moderate

REF: p. 3

BLM: Knowledge

57. How is an economic hypothesis tested?

by comparing the hypothesis's prediction to real-world data

by using a controlled experiment

by assessing the realism of its assumptions

by assessing the level of descriptive detail

ANS: A

PTS: 1

DIF: Difficult

REF: p. 4

BLM: Application

58. Which of the following statements most accurately describes the concept of economic theory?

It should be as detailed as possible in order to model the complexity of an economy.

It is an abstraction from reality.

It is only useful if it rests on realistic assumptions.

It is unrealistic and therefore of questionable usefulness in explaining what occurs in a complex economy.

ANS: B

PTS: 1

DIF: Difficult

REF: p. 4

BLM: Comprehension

59. What is the basis of a good economic theory?

It explains economic behaviour and predicts well.

It rests on assumptions.

It always provides a highly detailed analysis of an economic sector.

It can best be expressed mathematically.

ANS: A

PTS: 1

DIF: Moderate

REF: p. 4

BLM: Knowledge

60. What is the basis of a good economic theory?

It relies on simplifying assumptions in order to explain economic behaviour.

It does not rely on simplifying assumptions.

It includes every detail that affects the economic behaviour of interest.

It relies on conducting uncontrolled experiments.

ANS: A

PTS: 1

DIF: Difficult

REF: p. 4

BLM: Comprehension

61. Which of the following statements about testing an economic hypothesis is the most accurate?

It can be tested using empirical analysis.

It can be tested using normative analysis.

It cannot be tested since it is normative in nature.

It cannot be tested since it is a positive economic statement.

ANS: A

PTS: 1

DIF: Moderate

REF: p. 4

BLM: Knowledge

62. What is a hypothesis?

It is a normative economic statement.

It is a testable proposition.

It is a statement that cannot be evaluated using real-world data.

It is a model with no connection to the real world.

ANS: B

PTS: 1

DIF: Easy

REF: p. 4

BLM: Knowledge

63. What is the definition of a theory?

It is an untestable assertion or statement of untestable fact.

It is a normative statement that can be tested empirically through analysis of real-world data.

It is a testable statement that can be definitively proven to be true or false using empirical analysis.

It is a deliberate simplification of factual relationships that attempts to explain and predict how those relationships work.

ANS: D

PTS: 1

DIF: Difficult

REF: p. 4

BLM: Knowledge

64. How does an economist define a good economic theory?

an abstraction from reality useful for explaining but not predicting behaviour (since theories are too simplistic)

an opinion that can be tested against economic data

an abstraction for the sake of argument

a statement or relationship that is used to explain and predict human behaviour

ANS: D

PTS: 1

DIF: Difficult

REF: p. 4

BLM: Knowledge

65. How is an economic theory tested?

by assessing the realism of its assumptions

by comparing and contrasting its simplicity with related theories

by comparing its predictions with real-world observations

by polling economists to see if there is consensus as to the validity of the hypothesis

ANS: C

PTS: 1

DIF: Moderate

REF: p. 4

BLM: Knowledge

66. Why do economists need to develop abstractions?

to avoid analyzing real-world economic interactions, which are too complicated to understand

to understand and explain economic behaviour

to avoid committing the fallacy of composition

to distinguish normative economic behaviour from positive economic behaviour

ANS: B

PTS: 1

DIF: Difficult

REF: p. 4

BLM: Comprehension

67. What is the difference between a theory and a hypothesis?

A hypothesis is a testable proposition and is tentatively accepted as a theory.

A hypothesis abstracts from reality while a theory describes reality.

A theory is not an established explanation but a hypothesis is.

A theory abstracts from reality while a hypothesis describes reality.

ANS: A

PTS: 1

DIF: Moderate

REF: p. 4

BLM: Knowledge

68. Which of the following describes the chain of events involved in creating a theory?

Gather data, evaluate results, tentatively accept the theory, and support or refute the hypothesis.

Select a theory, create a hypothesis, and evaluate the evidence.

Formulate a hypothesis, gather data, evaluate the results, support or refute the hypothesis, and tentatively accept theory.

Predict behaviour, evaluate the results, and formulate a hypothesis.

ANS: C

PTS: 1

DIF: Moderate

REF: p. 4-5

BLM: Knowledge

69. An economist at the University of Alberta in Edmonton has been asked to explain why the price of Albertan crude oil has fallen recently. Which steps should the professor take in order to assemble a scholarly answer?

Develop a hypothesis, test the proposition by engaging in empirical analysis, and examine the data to see if it fits with the facts.

Gather data on crude oil prices and seemingly unrelated variables in order to look for associations, then formulate a hypothesis based on those unexpected associations.

The oil industry is controlled by a cartel and the economist should gather data from other similarly structured industries to determine a theory.

Use a questionnaire to determine why residents of Alberta are not purchasing oil and create a theory based on this data.

ANS: A

PTS: 1

DIF: Moderate

REF: p. 4-5

BLM: Application

70. Why is economics different from a "hard" science like physics?

Economists cannot easily control all the variables that might influence human behaviour.

Economists have to control fewer variables than what is found in a physics experiment.

Economic experiments are easier to conduct than those in physics.

Economists abstract from reality in creating their theories.

ANS: A

PTS: 1

DIF: Difficult

REF: p. 5

BLM: Comprehension

71. Which of the following statements describing the relationship between theory and hypothesis is most accurate?

A hypothesis is a theory whose formulation relies on mathematics.

A theory may result from a tested and confirmed hypothesis.

"Theory" and "hypothesis" are interchangeable terms meaning the same thing.

A hypothesis may result from a tested and confirmed theory.

ANS: B

PTS: 1

DIF: Moderate

REF: p. 5

BLM: Comprehension

72. Which of the following is NOT a reason that economists use theories?

to explain and help predict human behaviour

to understand economic behaviour

to develop a testable hypothesis

to abstract from the complexities of the world

ANS: C

PTS: 1

DIF: Difficult

REF: p. 5

BLM: Comprehension

73. On what basis is the best test of an economic theory?

on the accuracy of its assumptions

on the rigour of its mathematical formulation

on the ability of it to explain and predict

on the level of real-world detail it captures

ANS: C

PTS: 1

DIF: Difficult

REF: p. 5

BLM: Comprehension

74. An economist might hypothesize that people will buy less gasoline at a price of $1.20 per litre than at $1.00 per litre. In order for the hypothesis to become a theory, it would have to be tested. Which of the following observations would seem to support this hypothesis?

Individuals buy less gas because they are purchasing more fuel-efficient vehicles.

Gasoline consumption varies with the quantity of cars purchased in each region.

Individuals in each region respond to an increase in price by purchasing less gasoline.

People in each region buy the same amount of gasoline regardless of the price.

ANS: C

PTS: 1

DIF: Moderate

REF: p. 5

BLM: Analysis

75. What does the term "ceteris paribus" mean when used by an economist?

Their conclusions are based on normative rather than positive economic analysis.

The causal relationship between two economic variables cannot be determined.

The analysis is true for the individual but not for the economy as a whole.

All other variables except the ones specified are assumed to be constant.

ANS: D

PTS: 1

DIF: Easy

REF: p. 5

BLM: Knowledge

76. What does the term "ceteris paribus" mean?

Everything is variable.

What is true for the individual is not necessarily true for the whole.

All variables except those specified are constant.

No one knows which variables will change and which will remain constant.

ANS: C

PTS: 1

DIF: Moderate

REF: p. 5

BLM: Comprehension

77. What do economists use the term "ceteris paribus" to indicate?

Supply and demand are in balance.

Their conclusions are based on normative rather than positive economic analysis.

Other things are assumed to remain constant.

The analysis is true for the individual but not for the economy as a whole.

ANS: C

PTS: 1

DIF: Easy

REF: p. 5

BLM: Knowledge

78. What does "ceteris paribus" mean?

If events A and B occur together, one must cause the other.

Other things are held constant.

What is true for the individual must be true for the whole.

All relevant details are included.

ANS: B

PTS: 1

DIF: Easy

REF: p. 5

BLM: Knowledge

79. Why is the ceteris paribus assumption important?

It allows one to separate normative economic issues from positive economic ones.

It allows one to analyze the relationship between two variables apart from the influence of other variables.

It allows one to hold all variables constant so the economy can be carefully observed in a suspended state.

It allows one to generalize from the whole to the individual.

ANS: B

PTS: 1

DIF: Moderate

REF: p. 5

BLM: Comprehension

80. A theory asserts that manufacturers are less willing to sell units of output as the price of goods decreases. However, as the price of computers fell throughout the 1990s, more computers were sold. Which of the following explanations of the apparent conflict between theory and data is most accurate?

It is likely that variables other than the price and quantity of computers sold were changing.

The theory must be invalid.

The theory rests on assumptions that are too simplistic.

All variables other than the price and quantity of computers sold were unchanged.

ANS: A

PTS: 1

DIF: Difficult

REF: p. 5

BLM: Analysis

81. A theory asserts that consumers will purchase less of a good at higher prices than they will at lower prices. However, when the average price of cars increased throughout the 1990s, more cars were purchased. Which of the following explanations of the apparent conflict between theory and data is most accurate?

The price and quantity data gathered by researchers was clearly measured incorrectly.

It is likely that variables other than the price and quantity of cars demanded were changing.

The ceteris paribus assumption is valid.

The theory must be invalid.

ANS: B

PTS: 1

DIF: Difficult

REF: p. 5

BLM: Analysis

82. A scientist is trying to test a theory about the relationship between people's consumption of alcohol and their longevity. Which of the following variables would the scientist NOT hold constant?

the past histories of heart and lung disease

the amount of dietary fat that people in the experimental group consumed

the amount of alcohol that people in the experimental group consumed

the amount of cigarettes that people in the experimental group smoked

ANS: C

PTS: 1

DIF: Moderate

REF: p. 5

BLM: Application

83. Which of the following statements describing correlation is the most accurate?

Two sets of phenomena may be related, but one does not necessarily cause the other.

When two phenomena are not observed together, one still causes the other.

When two phenomena are repeatedly observed together, one must cause the other.

Two sets of phenomena are not related and one may in fact cause the other.

ANS: A

PTS: 1

DIF: Moderate

REF: p. 6

BLM: Knowledge

84. If individuals who sit in the back of the classroom receive lower grades on average than the rest of the class, does that mean that sitting in the back of a classroom causes one to perform poorly on exams?

The reoccurrence of such a relationship is sufficient evidence that sitting in the back of a classroom will lead to lower grades.

It is not possible for an economist to determine causation between variables.

The reoccurrence of a certain relationship between two variables does not necessarily imply causation.

The reoccurrence of such a relationship is sufficient evidence that students who receive low grades prefer to keep a low profile and always sit in the back of the classroom.

ANS: C

PTS: 1

DIF: Difficult

REF: p. 6

BLM: Application

85. Ten-year-old Tommy observes that people who play hockey are larger than average and tells his mom that he's going to play hockey because it will make him big and strong. What is the problem with Tommy’s logic?

He is committing the fallacy of composition.

He is committing the fallacy of decomposition.

He is violating the ceteris paribus assumption.

He is mistaking correlation for causation.

ANS: D

PTS: 1

DIF: Moderate

REF: p. 6

BLM: Analysis

86. Many people have heard that the US stock market rises when a team from the National Football Conference (NFC) wins the Super Bowl, and falls when a team from the American Football Conference (AFC) is victorious. If you conclude that there is a causal relationship between the outcome of the Super Bowl and stock prices, you probably are making what mistake?

You are committing the fallacy of composition.

You are violating the ceteris paribus assumption.

You are confusing correlation with causation.

You are confusing the direction of causality; stock prices determine which team wins the Super Bowl.

ANS: C

PTS: 1

DIF: Moderate

REF: p. 6

BLM: Analysis

87. A student football team manager examined variables influencing the team's record and concluded that the best scores resulted when the "third-string" team played the most minutes. Therefore he recommended that the third-string team become the first team. Why is this conclusion probably erroneous?

He failed to recognize that correlation is not causation.

He did not review the entire game strategy carefully enough.

He committed the fallacy of composition.

He confused positive and normative analysis.

ANS: A

PTS: 1

DIF: Moderate

REF: p. 6

BLM: Analysis

88. If rain dancing is correlated with rain, does that necessarily mean rain dancing causes rain?

No. This is an example of the fallacy of composition.

No. Two variables may be correlated without one necessarily causing the other.

Yes. This is an example of a failure to properly employ the ceteris paribus assumption.

Yes. If it rains after individuals have engaged in rain dancing, then there is certainly causation at work.

ANS: B

PTS: 1

DIF: Moderate

REF: p. 6

BLM: Analysis

89. If Canadian consumers bought more gasoline in 2007 (when prices averaged $1.30 per litre) than they did in 1980 (when prices averaged $0.40 per litre), does that mean that people buy more gasoline at higher prices?

Yes, because gasoline is a luxury good that consumers willingly purchase—even at higher prices.

Yes, because gas is a necessity that is in short supply. Consumers are always willing to buy more gasoline—even at higher prices.

No, because there is too little information provided about inflation, consumer income and other variables to make an appropriate comparison.

No, because prices cannot be compared over time.

ANS: C

PTS: 1

DIF: Moderate

REF: p. 6

BLM: Analysis

90. What would an economist predict would happen if airfares to Europe were to increase?

Airlines would make significantly greater profits.

Most people would not change their travel and vacation plans.

More individuals would choose to fly to Europe because now it is a more valuable experience.

Many individuals would substitute toward other travel destinations.

ANS: D

PTS: 1

DIF: Moderate

REF: p. 6

BLM: Application

91. "When one hockey team spends a large sum of money acquiring better players, it is better off. If all teams do the same thing, all of them are better off." What is this statement an illustration of?

the fallacy of composition

the ceteris paribus condition

a misunderstanding of the direction of causality

confusing correlation with causation

ANS: A

PTS: 1

DIF: Moderate

REF: p. 7

BLM: Application

92. Which of the following best illustrates the fallacy of composition?

If Mr. Ahmad had more money, he would buy a new car; if he had a new car, he would have less money.

If Mr. Mua had more money, he could buy more goods; if the Mua family had more money, it could buy additional goods.

If Ms. Smith had more money, she would buy her children more gifts; if her children had more gifts, they would be happier.

If Ms. Shiflet had more money, she could buy more scarce goods; if the nation had more money, everyone could buy more scarce goods.

ANS: D

PTS: 1

DIF: Difficult

REF: p. 7

BLM: Application

93. What is the fallacy of composition?

the idea that correlation need not imply causation

the erroneous view that an economic activity can sometimes exceed the sum of its components

the view that the aggregation of economic activity will necessarily lead to an outcome that is different from the outcome generated by each individual in the group

the erroneous view that what is true for the individual will also be true for the group

ANS: D

PTS: 1

DIF: Easy

REF: p. 7

BLM: Knowledge

94. Which of the following best illustrates the fallacy of composition?

If the price of bread rose, consumers would buy less; if consumers bought less, the price of bread would rise.

If Mr. Lewis produces more, he can consume more; if Mr. Lewis consumes more, he can produce more.

If prices of houses went down, more people could afford houses; and if more people bought houses, the prices of houses would increase.

If Mr. Lewis had more money, he would be wealthier; if a nation's money supply were larger, the people of the nation would be wealthier.

ANS: D

PTS: 1

DIF: Moderate

REF: p. 7

BLM: Application

95. Which of the following is the erroneous view that is associated with the fallacy of composition?

An increase in the supply of money will cause a general increase in the level of prices.

When two events are correlated, the one observed first must have caused the second.

If something is true for an individual, then it must also be true for a group.

A small change in an economic variable will have an unrecognizable but significant effect on the economy.

ANS: C

PTS: 1

DIF: Easy

REF: p. 7

BLM: Knowledge

96. Which of the following best illustrates the fallacy of composition?

If I talk loudly at a party, I have a better chance of being heard by my listeners. If everyone at the party talks loudly, everyone can be heard more clearly.

Resources are scarce; therefore, there is no such thing as a free lunch.

If the price of a product rises, the quantity supplied will decline.

The average wage rate tends to increase at approximately the same rate as inflation; hence, wage increases must cause inflation.

ANS: A

PTS: 1

DIF: Moderate

REF: p. 7

BLM: Application

97. Which of the following best illustrates the fallacy of composition?

A great many people have been immunized against polio because it can be such a devastating disease. As a result, I probably do not personally need to be immunized against polio.

I hate driving to work when the traffic is so heavy, so I decide to leave 30 minutes earlier than in the past. If everyone were to leave 30 minutes earlier for work, we'd all get to work faster.

Whenever I attend a hockey game at the local arena, the home team wins. Therefore, if I attend all of the team's local games, they will achieve a perfect winning record at home.

The parking at York University is in short supply on the main campus. It would be better for more people to ride the bus to school.

ANS: B

PTS: 1

DIF: Difficult

REF: p. 7

BLM: Application

98. Which of the following statements best illustrates the fallacy of composition?

the error of omitting relevant variables from an economic model

the error of confusing normative economics with positive economics

the error of generalizing from the individual to the whole

the error of confusing correlation with causation

ANS: C

PTS: 1

DIF: Moderate

REF: p. 7

BLM: Comprehension

99. “To do well and be at the top 10 percent of the class, one should study more. If everyone studies more then they all can do well and finish at the top of the class.” What is the problem with the logic in this statement?

There is causation but no correlation.

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With this new edition, Eric Chiang transforms CoreMacroeconomics into a text/media resource well attuned to today’s students. Long active in the economics education community, Chiang brings a contemporary teacher’s perspective to the book, supporting a variety of learning approaches by introducing modern topics, new pedagogy, a more visual presentation, and well-integrated media tools. All this while maintaining the book’s defining focus on just those topics instructors cover most often in the course.

Test Bank for CoreMacroeconomics 3rd Edition by Chiang

Table of Contents

Chap 1. Exploring Economics Chap 2. Production, Economic Growth, and Trade Chap 3. Supply and Demand Chap 4. Markets and Government Chap 5. Introduction to Macroeconomics Chap 6. Measuring Inflation and Unemployment Chap 7. Economic Growth Chap 8. Aggregate Expenditures Chap 9. Aggregate Demand and Supply Chap 10. Fiscal Policy and Debt Chap 11. Saving, investment, and the Financial System Chap 12. Money Creation and the Federal Reserve Chap 13. Monetary Policy Chap 14. Macroeconomic Policy: Challenges in a Global Economy Chap 15. International Trade Chap 16. Open Economy Macroeconomics

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Language: English ISBN-10: 1429278498 ISBN-13: 978-1429278492 ISBN-13: 9781429278492

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Test Bank Exploring Macroeconomics 3rd Edition Solution

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Part III Answer Key

Chapter 1

The Role and Method of Economics

Section 1.1 Economics: A Brief Introduction

1. The definition of economics must recognize the central parts of the economist’s point of view: Resources are scarce, scarcity forces us to make choices, and the cost of any choice is the cost of the lost opportunity with the highest value.

2. a. microeconomics

b. macroeconomics

c. microeconomics

d. macroeconomics

e. microeconomics

Section 1.2 Economic Theory

3. a. Both normative and positive statements. This first statement (positive statement) expresses a fact or a testable theory that a higher income tax rate would generate increased tax revenues. The second statement (normative statement) expresses an opinion regarding how any additional tax revenues should be used.

b. normative statements. Both statements are expressions of opinion, the first regarding the relative value of studying physics as opposed to sociology, and the second regarding the value of studying either physics or sociology.

c. positive statements. Both statements are expressions of facts or testable theories regarding the relationship between the price of wheat and how much wheat will be purchased and produced.

d. both normative and positive statements. The first statement (positive statement) expresses a fact or testable theory regarding the relationship between the price of butter and how much will be purchased. The second statement (normative statement) is an expression of opinion about the social value of buying butter.

e. positive statements. Both statements are expressions of fact or testable theory regarding demographic change.

4. a. Positive. The statement is a testable hypothesis.

b. Normative. Asserting that social assistance should be increased contains a value judgment about the costs and benefits of doing so.

c. Positive. The statement expresses a fact or a testable theory that higher tariffs will result in higher prices for domestic wine.

d. Positive. The statement could be confirmed or refuted by empirical data.

e. Normative. Placing provincial sales taxes will raise government revenue and level the playing field with non-Internet retailers at a cost of reducing total Internet-based sales and other negative effects. The statement implies a value judgment that the benefits outweigh the costs.

f. Positive. The statement is subject to empirical testing.

5. The statement illustrates the fallacy of composition—it assumes that what is true for one person must be true for all others.

6. a. This involves confusing correlation with causation.

b. This involves confusing correlation with causation.

c. This involves the fallacy of composition.

d. This is a violation of the ceteris paribus conditions.

e. There is no fallacy in this statement.

Section 1.3 Scarcity

7. Being poor means that you have access to few resources, which limits the goods and services you consume. Scarcity means you don’t have enough resources to do everything you want to do, so you have to make choices. Everyone experiences scarcity, because we can always think of more things that we want than we can produce with our resources.

8. The automobile freed Canadians to travel and helped to create the tourism business. New wants included motels, resorts, and theme parks. The increased importance of auto and truck transportation also created the desire for more and better roads and highways. The auto also allowed people to live farther from where they worked, so that people wanted more land and newer houses.

9. Scarce goods are those that people pay for in either time or money or, in other words, have an opportunity cost. Garbage and dirty air in the city are not scarce goods since we either pay to get rid of them or pay with the consequences of their presence. Similarly, salt water is not a scarce good—although it is in limited supply, there is no price you need to pay to obtain some (assuming you are on the shore). Clothes, clean air, and public libraries are scarce goods because their production requires the use of scarce resources that could be used for the production of other goods.

Section 1.4 Opportunity Cost

10. Since Sarah’s time is probably worth more during school (it would cost part of her salary), the opportunity cost of the trip is higher in February than in July.

11. No. First of all, Pizza Pizza uses scarce resources to produce the pizza slices, so a slice of pizza is not “free” to Pizza Pizza. Secondly, if people value their time at all, ten minutes standing in line to get the slice carries an opportunity cost equal to the value to those people of whatever else they could have done with the ten minutes.

12. a. The opportunity cost of going to college or university includes the income you could have earned by working instead, and money spent on school-specific expenses like tuition and textbooks. Room and board and transportation would not necessarily be included since you would need those services even if you were not going to school.

b. The opportunity cost of missing a lecture includes the potential damage to one’s grade in a course from not being present while important subject material is covered, as well as the knowledge’s forgone value in the “real world.” The magnitude of the opportunity cost depends partly on how much essential information the instructor provides during the missed class session.

c. The opportunity cost of spending $100 today is the $105 you could have spent next year. If you are withdrawing the money just to have cash in your pocket, the opportunity cost of holding money is the 5% interest you could have been earning.

d. The opportunity cost of snowboarding the weekend before examinations is the expected reduction in grades that will result, in addition to the cost of a lift ticket.

Section 1.5 Marginal Thinking

13. a. $50; $25

b. 3; 5; Mark would go as long as his marginal benefit was greater than the admission price.

c. Yes; 6; Mark would buy the pass because his total benefits exceed his total cost. Once he has the pass, the marginal cost of attending one more day becomes zero, so he will go as long as his marginal benefits exceed zero.

14. a. $57; $88

b. 43; 44; He would produce as long as the price (marginal benefit) exceeded the marginal cost.

15. The marginal benefits of jaywalking are the time savings and convenience of crossing the street where you want. The marginal costs are the additional risk of being hit by a car and the risk of being fined for jaywalking.

a. Increases cost by increasing the risk of being hit by a car.

b. Lowers cost by lowering the risk of being hit by a car and the risk of being fined.

c. Increases the benefit because of the higher value of time savings.

d. Increases cost because of a higher risk of receiving a fine.

e. The time and convenience benefits are larger.

f. The time and convenience benefits are smaller.

Section 1.6 Incentives Matter

16. Positive incentives are those that either increase benefits or reduce costs and thus tend to increase the level of an activity. Both of the following are examples of positive incentives: b. a trip to Hawaii paid for by your parents or significant other for earning an “A” in your economics course; d) a subsidy for installing solar panels on your house. Negative incentives either reduce benefits or increase costs, and thus tend to decrease the level of the related activity or behaviour. Both of the following are examples of negative incentives: a. a fine for not cleaning up after your dog defecates in the park; c. a higher tax on cigarettes and alcohol.

17. Singapore’s tough drug-trafficking penalty would clearly impact the cost-benefit ratios of would-be smugglers. Lighter sentences would probably result in more drug smuggling because the overall cost of breaking the law would be reduced.

Section 1.7 Specialization and Trade

18. Denying trade possibilities also eliminates the possibility of specialization. In autarky, a country must produce everything it consumes. Scarce resources will be wasted producing goods with higher opportunity costs. Trading would allow the country to produce more with the same resources.

19. The opportunity cost of growing soybeans is the lost value because Fran can’t grow corn worth $60. The opportunity cost of growing corn on her land is the lost opportunity to grow and sell soybeans, which equals $75. Fran should specialize in soybeans, which is the crop with the lowest opportunity cost. For each acre of corn Fran converts to soybeans, she will gain $15.

20. a. Canada has a comparative advantage in wheat.

b. Colombia has a comparative advantage in coffee.

c. British Columbia has a comparative advantage in lumber.

d. Alberta has a comparative advantage in oil.

21. If the country or region with the lower opportunity cost produces the good, the opportunity cost of consuming that good is minimized. Trade allows people, countries, and regions to specialize in producing those goods in which they have the lowest opportunity cost and so reducing trade restrictions will encourage specialization, thereby increasing efficiency.

Section 1.8 Market Prices Coordinate Economic Activity

22. Options a, b, and c would cause increases in the relative value and price of potatoes. In option d, the reduction in the prices of potato substitutes would make alternatives more attractive and reduce the relative value and price of potatoes.

23. a. Price of Jack Russell Terriers rises

b. price of housing in Tampa rises

c. price of coffee rises

d. price of wheat rises

e. wages of Canadian doctors fall

f. price of gasoline rises.

#Test Bank Exploring Macroeconomics 3rd Edition Solution

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