1. The marginal social benefit of pollution abatement . a) increases at an increasing rate with the quantity of pollution abated. . b) increases at a decreasing rate with the quantity of pollution abated. . c) decreases in direct relation to the quantity of pollution abated. . d) is constant as the quantity of pollution abated increases. 2. Which of the following could reduce the effects of a negative externality to the socially optimal level? . a) converting an open-access resource to a privately owned resource . b) converting a privately owned resource to a government-owned resource . c) setting a tax equal to the marginal private cost of the externality . d) prohibiting production of the good 3. Assume the government has sold tradable pollution permits that set a maximum total allowable level of pollution that can be discharged into the Murray River. If a new firm wants to set up a factory along the river and wants to discharge effluence into the river, . a) it will be unable to do so. . b) it will be given a permit to pollute because it is new. . c) it will buy a permit from another firm as long as it values the discharge rights ?more than the firm currently holding the permit. . d) itwillsueandreceiveanotherfirmspermitifitcanproveitvaluesthepermit ?more than the firm that currently holds the permit. 4. If there is inflation, . a) nominal GDP grows faster than real GDP. . b) the CPI is falling . c) the real GDP grows faster than nominal GDP . d) production is rising but prices are held constant 5. Prices are sticky because . a) they never change . b) they adjust immediately to changes in demand . c) they are fixed in the short run but adjust over time . d) they can go up, but they never come down 6. International trade allocates existing goods more efficiently, as well as enabling a) b) c) d) 7. In a) b) c) d) monopoly profits?protection of domestic producers increased production?zero opportunity costs explaining comparative advantage, economists often use the concept of demandopportunitycosts monopoly gravity 8. In?cumulative movements in national income. In a simple two sector model, if policy makers want to stimulate growth of national income by $1 billion, they need only stimulate extra investment of $0.5 billion . a) if the value of the marginal propensity to consume is estimated to be 2.0 (i.e. mpc = b = 2). . b) if the value of the marginal propensity to consume is estimated to be 0.5 (i.e. mpc = b = 1?2). . c) if the value of the marginal propensity to save is estimated to be 1.0 (i.e. mps = 1). . d) botha)andc). 7. Should a balanced budget be a constitutional necessity as some US economists have recently argued? Conservative (anti-Keynesian) economists argued for a constitutional requirement to balance the budget on the grounds that . a) government intervention is rarely precise and almost always has unintended and undesirable side-effects. . b) any gains that might arise through discretionary manipulation of government budgets are more than outweighed by the costs. . c) conservative economists such as Milton Friedman argue that balancing the budget is more important than reducing its size. . d) both a) and b) . e) all three of a), b) and c). 8. The acceleration principle is relevant in the business cycle context since it helps explain turning points, as against cumulative movements. The implication of the accelerator principle is that . a) planned business investment is likely to rise when there is an acceleration in output growth. . b) there may be an actual upturn in planned business investment if the rate of growth of output (or national income) merely slows. . c) a mere slowdown in the rate of increase of output growth automatically causes an actual increase in investment levels, and thus a stabilisation of the economy. . d) both a) and c). 11. In mid-2003 the US Federal Reserve System cut its benchmark rate by 0.25% to an historically low 1%, following a long series of earlier cuts since early 2001. The Federal Reserve System did this because . a) investment growth remained excessive, continuing the investment bubble of the 1990s. . b) corporate scandals along with wars in Afghanistan and Iraq had unleashed an upsurge in consumer spending. . c) it feared that an even larger rate cut (by half a percentage point) would provide too much stimulus for a spluttering economy, since there was already considerable stimulus in the system, given a recent tax cut, falls in the USA exchange rate and already low interest rates. . d) alltheabove. 12. American action to rescue major private banks which find themselves in financial trouble in the wake of the sub-prime credit crisis 9. a) is unwarranted because the government should not even consider bailing out private sector banks, since that would give rise to a moral hazard problem thus benefitting vested interests without benefitting the general public 10. b) isunwarrantedbecausesuchactionwouldnow(March2008)plainlybetoolate anyway, given that the crisis started some months ago 11. c) is warranted to the extent that the stability of the financial system as a whole is important to all citizens, and in the case of the 2008 Bear Stearns collapse a way was found to protect the overall system without directly or significantly bailing out the owners of Bear Stearns itself. 12. d) both (a) and (b) above. 13. The Chinese economy has grown very rapidly during the last decade. Nonetheless, China now faces some policy challenges, since . a) no one expects that rapid growth can continue in China for more than another year, given that it will inevitably succumb to the consequences of the sub-prime financial crisis . b) China is under pressure to appreciate its exchange rate, and that will curb its export success, and necessarily slash its exceptional economic growth rate . c) China is under pressure to appreciate its exchange rate, and although that will curb its export performance to some extent, there is widespread confidence that China will continue to grow at a very rapid growth rate, since there is capacity to rely increasingly on the domestic sector . d) thewaytheglobalenergycrisisaffectsChinaisthroughtheinflationaryeffects of a further boom in its energy exports, which threatens to worsen its already growing inflation problem. Chinas domestic economy faces no problem with rising energy prices and pollution issues, however, since it is already a very energy efficient economy. . e) Both (c) and (d) above. 14. If real GDP in a particular year is $80 billion, and nominal GDP is $240 billion, the price index for that year is: a) 100. b) 200. c) 240. d) 300. 13. When unanticipated inflation occurs: . a) both creditors and debtors benefit. . b) both creditors and debtors are hurt. . c) debtors are hurt, but creditors benefit. . d) creditors are hurt, but debtors benefit. 14. The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes: . a) the supply-side effects of fiscal policy. . b) built-in stability. . c) the crowding-out effect. . d) thenetexporteffect. 15. Suppose the economy is operating within the intermediate range of the short-run aggregate supply curve, and government increases both expenditures and taxes by $20 billion. We would expect: . a) no change in domestic output or the price level. . b) both the domestic output and the price level to rise. . c) the domestic output to fall, but the price level to rise. . d) the domestic output to rise, but the price level to fall. 16. The special-interest effect of protection emerges because: . a) the direct beneficiaries of protection may be few in number, with the benefits being very high to each member of the group, while the costs are diffused. . b) the direct beneficiaries of protection may be large in number, with the benefits being very low to each member of the group, while the costs are diffused. . c) the direct beneficiaries of protection may be few in number, with the benefits being very low to each member of the group, while the costs are diffused. . d) none of the answers given are correct. 19. A tariff is a tax placed on: . a) exported goods that lowers the domestic price below the world price. . b) exported goods that keeps the domestic price the same as the world price. . c) imported goods that lowers the domestic price below the world price. . d) imported goods that raises the domestic price above the world price. 17. A tariff of $20 on a competitive import will always: ?a) raise domestic prices by $20.?b) raise domestic prices by $20 or more. c) raise domestic prices by $20 or less. d) have no effect on domestic prices. 18. Which of the following isnota function of a bank? . a) To borrow on a short-term basis and lend long term. . b) To make loans in excess of its deposits. . c) To spread the risk of a borrower defaulting. . d) To transfer funds without the use of cash 19. The quantity of money demanded increases as the interest rate falls, because: . a) People need more money for transactions. . b) The opportunity cost of holding money falls. . c) People demand more financial assets. . d) The exchange rate will rise. 20. The nominal wage rate is $40 and the price index is 4. If the price index increases to 5, the real wage rate will: . a) Fall to $10. . b) Fall by $2. . c) Fall to $5. . d) Fall by $1. 24. Under a system of tradable permits for polluting, which type of firm will pay most for the permits? . a) Those who find it expensive to reduce pollution. . b) The most profitable firms. . c) Monopoly firms. . d) Those who pollute most. 25. Market failure occurs when: . a) perfectly competitive firms produce where marginal revenue equals marginal cost. . b) Firms that are incurring losses continue to produce. . c) Resources are misallocated or allocated inefficiently. . d) Firms are only able to earn a normal profit.
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