208 ❯ Step 5. Build Your Test-Taking Confidence
- E—The capacity to produce corn has increased,
but the capacity for tractor production is the
same. More effective pesticides do not improve
the ability to produce tractors but improve the
ability to harvest corn. - B—When the slope of the PPF increases, the
opportunity cost of producing the x-axis good
rises, while the opportunity cost of producing
the y-axis good falls. - E—Rising prices and rising quantities does not
disprove the law of demand; it simply reflects
a rightward shift in demand with a constant
supply curve. - A—Defines comparative advantage.
- D—Tariffs create inefficiency in the world steel
market. - C—The free market responds to changes in
consumer tastes, technology, and prices to pro-
duce “what” is most wanted by society. - A—Household production is not included in
GDP calculations. Second-hand sales are counted
the first time the good was produced. - C—Know the difference between types of
unemployment. - C—Human wants are neither scarce nor are
they economic resources. - A—Rising national debt increases interest rates
and attracts foreign investment in U.S. financial
assets. Greater demand for dollars appreciates
the dollar. - D—Nominal GDP rises with the price level. If
output increases at a slower rate than increases
in the price level, real GDP falls. - D—National income includes all sources of
income and depreciation is not a source of
income. - B—Know the factors critical to long-term eco-
nomic growth. - E—UR = U/LF and LF = (E + U).
15. C—Stocks, bonds, and money are all financial
assets. All else equal, rising demand for stocks
and bonds lowers the asset demand for money.
16. D—Lower taxes on personal income increase
consumption and AD.
17. C—Short-run equilibrium is where short-run
AS intersects AD, in this case, above full employ-
ment. In the long run, wages increase, shifting
SRAS leftward until settling at full employment
Q 1 and higher price P 3.
18. C—GDP includes all production or spend-
ing done in the United States, regardless of
nationality. A singer’s production of a concert
is counted in French GDP.
19. B—Supply-side economists prefer lower taxes
on saving to encourage saving. More saving
increases investment and, over time, increases
LRAS.
20. B—The equation of exchange says MV = PQ,
and it is assumed that Q and V are fairly con-
stant. Any increase in money supply (M) might
initially boost output, but it eventually results in
a higher price level (P).
21. D—Know the circular flow model.
22. E—This reclassification would not affect AD or
tabulation of GDP.
23. C—If income increases $100 and saving increases
by $10, the MPS = 0.10 and the MPC = 0.90.
24. B—If inventories unexpectedly fall, consump-
tion exceeds production, so expect production
to begin rising.
25. A—Stagflation is inflation with high unemploy-
ment, and this occurs when SRAS shifts to the
left.
26. A—The horizontal range of SRAS occurs when
resources are unemployed. If output rises, wages
do not rise and prices are constant.
27. D—Consumption spending is equal to dispos-
able income minus saving: C = DI - S.
28. D—Weak AD (contraction) causes job loss and
low inflation rates.
❯ Answers and Explanations