Q: Suppose the Consumer Price Index (CPI) in Year 1 is 120 and in Year 2 is 126. What is the inflation rate between these two years?

$$\frac{126 - 120}{120} \times 100 = 5\%$$

Question 1

Which of the following best describes the concept of opportunity cost?

Accepted Answer

The value of the next best alternative forgone when making a choice.

Question 2

Suppose the economy of Country X produces only two goods: computers and wheat. If Country X is operating on its production possibility frontier (PPF), which of the following statements is true?

Accepted Answer

Country X is experiencing productive efficiency.

Question 3

If the marginal benefit of producing one more unit of a good is less than its marginal cost, what should a rational producer do?

Accepted Answer

Decrease production of the good.

Question 4

Which of the following is the correct formula for calculating GDP using the expenditure approach?

Accepted Answer

$$GDP = C + I + G + (X - M)$$

Question 5

Why is real GDP preferred over nominal GDP when comparing economic output over time?

Accepted Answer

Real GDP adjusts for changes in the price level, removing the effects of inflation.

Question 6

A country experiences an increase in the working-age population and an increase in labor productivity. According to the two-component model of potential GDP, what is the likely effect?

Accepted Answer

Potential GDP will increase.

Question 7

Which of the following best explains the concept of comparative advantage?

Accepted Answer

The ability to produce a good at a lower opportunity cost than another producer.

Question 8

If the unemployment rate is calculated as $$\frac{Number\ of\ Unemployed}{Labor\ Force} 	imes 100$$, which of the following would cause the unemployment rate to understate the true level of underutilization in the labor market?

Accepted Answer

Excluding marginally attached workers from the labor force.

Question 9

Suppose the Consumer Price Index (CPI) in Year 1 is 120 and in Year 2 is 126. What is the inflation rate between these two years?

Accepted Answer

$$\frac{126 - 120}{120} 	imes 100 = 5\%$$

Question 10

Which of the following would shift the demand curve for loanable funds to the right?

Accepted Answer

An increase in expected profits.

Question 11

If the government runs a budget deficit ($$T - G \u003c 0$$), what is the likely effect on the loanable funds market?

Accepted Answer

The demand for loanable funds increases, raising the interest rate.

Question 12

Which of the following is NOT a function of money?

Accepted Answer

Source of economic growth

Question 13

If the Federal Reserve conducts an open market purchase, what is the immediate effect on the banking system?

Accepted Answer

The quantity of money increases and nominal interest rates fall.

Question 14

According to the quantity theory of money, if the money supply grows by 6% per year and real GDP grows by 2% per year, what is the implied inflation rate?

Accepted Answer

$$6\% - 2\% = 4\%$$

Question 15

If the marginal propensity to consume (MPC) is 0.8 and there are no taxes or imports, what is the value of the expenditure multiplier?

Accepted Answer

$$\frac{1}{1 - 0.8} = 5$$

Question 16

Which of the following best describes the adjustment process in the short run if the economy is in a recessionary gap?

Accepted Answer

Money wages decrease, shifting SRAS to the right.

Question 17

Which of the following scenarios illustrates demand-pull inflation?

Accepted Answer

An increase in government spending shifts aggregate demand to the right, raising the price level.

Question 18

The Laffer curve illustrates the relationship between:

Accepted Answer

Tax rates and tax revenue.

Question 19

Which of the following is a supply-side effect of fiscal policy?

Accepted Answer

A decrease in income tax increases the incentive to work, raising potential GDP.

Question 20

Which of the following is a primary objective of U.S. monetary policy as set by the Federal Reserve's dual mandate?

Accepted Answer

Maintaining full employment and keeping inflation in check.

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