A tax equal to the external cost on firms that emit pollutants would:
a. provide firms with the incentive to increase the level of activity creating the pollution.
b. provide firms with the incentive to decrease the level of activity creating the pollution.
c. provide firms with little incentive to search for less environmentally damaging production methods.
d. not reduce pollution levels at all.
Question 2If the shifts in AD that will result from policy changes are fully and accurately anticipated, a decrease in government purchases or an increase in taxes would result in which of the following in the short run?
a. a higher level of real output and a higher price level
b. a higher level of real output but no change in the price level
c. a higher price level and a reduced level of real output
d. none of the above.
Question 3Which of the following is an example of a speculative attack on a currency?
a. National governments decide to engage in competitive devaluations against a given country.
b. International organizations such as the WTO and the IMF attempt to reorder the currency's system.
c. Private investors sell domestic currency and buy foreign currency, betting that the domestic currency will soon be devaluated.
d. Casinos in Las Vegas allow the proliferation of bets for and against a given currency.
e. A country is at war, and the enemy country freezes all the accounts denominated in the local currency.
Question 4Which of the following would be an example of a nongovernmental solution to a problem associated with externalities?
a. society's preference to drive large cars and SUVs
b. new stricter anti-litter laws
c. a general moral commitment against using sprinklers during a drought
d. tax credits for the purchase of hybrid autos
Question 5If the shifts in AD that will result from policy changes are fully and accurately anticipated, an increase in government purchases or a decrease in taxes would result in which of the following in the short run?
a. a higher level of real output and a higher price level
b. a higher level of real output but no change in the price level
c. a higher price level and a reduced level of real output
d. a higher price level but no change in real output
Question 6As the Asian financial crisis of 1997 began to spread, it became obvious to investors that Korean investments would provide lower returns than expected. What was the impact of such a realization on the foreign exchange market?
a. The supply of Korean won decreased as people tried to withdraw their Korean investments.
b. The price of dollar in terms of Korean currency decreased as people invested more in U.S. assets.
c. The demand for dollars decreased as investors realized that there is a worldwide crisis going on.
d. The demand for dollars increased as investors put their money in U.S. and other foreign assets.
e. The demand for Korean won increased as investors decided to invest in Korean assets.
Question 7If there are significant external costs associated with the production of a product, it can be said that the private cost of production to the firm ____ the cost to society associated with this product and output should ____ to move toward the efficient situation.
a. overstates; increase
b. understates; increase
c. overstates; decrease
d. understates; decrease
Question 8If the public has rational expectations, an attempt to increase aggregate demand to stimulate the economy will:
a. be less inflationary in the short run than if the public alters their expectations slowly in response to changes in government policy.
b. be more effective if the public alters their expectations quickly in response to changes in government policy.
c. be ineffective if the shift in aggregate demand is predictable.
d. all of the above.
Question 9Suppose, before the Asian financial crisis, the Thai baht was fixed against the dollar at a rate of 26 bahts for one U.S. dollar. If the exchange rate were allowed to float freely, the market would then set the rate at 35 bahts for one dollar. Under these circumstances, we say that the baht was:
a. about to appreciate.
b. fixed below its par value.
c. overvalued.
d. undervalued.
e. revalued.
Question 10If there are significant external benefits associated with the consumption of a product, it can be said that the private benefit to the consumer ____ the relative importance of this product to society and output should ____ to move toward the efficient situation.
a. overstates; increase
b. understates; increase
c. overstates; decrease
d. understates; decrease
Question 11With rational expectations, a policy that would decrease AD would lead to:
a. lower inflation and lower unemployment in the short run if people underestimated the effect of the policy on inflation.
b. lower inflation and higher unemployment in the short run if people underestimated the effect of the policy on inflation.
c. lower inflation and an indeterminate effect on unemployment in the short run, if people's expectations were correct.
d. both (b) and (c).
Question 12To counteract the depreciation of the national currency against the U.S. dollar, the central bank of a country can intervene in the foreign exchange market. Which of the following imposes a restriction on this ability of the central banks to maintain a fixed exchange rate?
a. The central banks have a limited amount of international reserve.
b. The central banks have a limited amount of domestic currency.
c. Unrestricted sale of foreign currency will cause inflation in the domestic economy.
d. The supply of dollars is perfectly elastic in the foreign exchange market.
e. The central banks need to maintain a certain amount of its assets in the form of gold.
Question 13Suppose that firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. If this is the case in a competitive market, how will the price and output of the chemical products compare with their values under conditions of ideal economic efficiency?
a. Price is too low; output is too large.
b. Price is too high; output is too large.
c. Price is too low; output is too small.
d. Price is too high; output is too small.
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