Macroeconomics 4th Edition Krugman Test Bank
Macroeconomics 4th Edition Krugman Test Bank
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1. The topics studied in macroeconomics include:
A) inflation.
B) unemployment.
C) economic growth.
D) inflation, unemployment, and economic growth.
Page 1
7. Which is a microeconomic question rather than a macroeconomic question?
A) Will a decrease in the income tax rate lift the nation out of a recession?
B) Will an increase in consumer spending cause inflation?
C) Will a decrease in the income tax rate lead to a government budget deficit?
D) Will an increase in the cigarette tax reduce the number of packs sold?
8. How the actions of individuals and firms interact to produce a particular economy-wide
level of performance is the focus of:
A) macroeconomics.
B) fiscal policy.
C) monetary policy.
D) microeconomics.
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13. Promotion of employment and growth in the economy as a whole is the focus of:
A) macroeconomics.
B) fiscal policy.
C) monetary policy.
D) microeconomics.
14. “Macroeconomics is nothing but a simple aggregation of all the microeconomic parts.”
Do you agree or disagree with this statement?
A) Don't agree; there is a lot more to the study of macroeconomics than the sum of its
microeconomic parts.
B) Agree; macroeconomics is exactly equal to the total of all microeconomic units.
C) Don't agree; these two disciplines deal with completely independent issues.
D) Don't agree; microeconomics is an aggregation of all the macroeconomic parts.
15. If all of the households and businesses start saving more during economic hard times,
then aggregate income will fall, hurting everyone in the economy. This is known as:
A) the quantity theory.
B) the crowding-out theory.
C) the paradox of thrift.
D) the permanent income hypothesis.
16. The concept that the whole is greater than the sum of its parts best characterizes:
A) microeconomics.
B) supply and demand.
C) macroeconomics.
D) business forecasting.
17. A key insight into macroeconomics is that in the short run the combined effect of
individual decisions:
A) is always the same as what one individual intended.
B) may be very different from what any one individual intended.
C) is always beneficial to the economy as a whole.
D) is always detrimental to the economy as a whole.
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19. What do a rubbernecking traffic jam and the paradox of thrift have in common?
A) Individual behavior has large negative consequences for the whole of society.
B) Seemingly bad behavior ends up harming everyone.
C) Seemingly careless behavior leads to good times for all.
D) Government intervention can only make matters worse.
21. In contrast to the conclusions drawn from microeconomics, many economists argue that
in macroeconomics, government:
A) control of rent prices increases overall economic activity.
B) intervention in markets usually leaves society as a whole worse off.
C) taxation of goods and services does not cause a deadweight loss of economic
welfare.
D) intervention in markets can prevent or reduce the effects of adverse events on the
macroeconomy.
22. Which of the following areas is most likely to suggest a limited role for government?
A) microeconomics
B) macroeconomics
C) behavioral economics
D) labor economics
23. The view that the government should take an active role in the macroeconomy dates to:
A) the Civil War.
B) World War I.
C) the Great Depression.
D) the Vietnam War.
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24. Changing the level of government spending is an example of _____ policy.
A) fiscal
B) interest rate
C) monetary
D) exchange rate
25. The modern macroeconomic tools used by the government are _____ policy and _____
policy.
A) tax; antitrust
B) fiscal; monetary
C) monetary; exchange rate
D) capital; labor
27. Fiscal policy refers to changes in _____ to affect overall spending in the economy:
A) interest rates
B) government spending and taxation
C) the quantity of money
D) interest rates and of government spending
28. The economist whose writings in the 1930s argued that the cause of an economic
depression is inadequate spending was:
A) Herbert Hoover.
B) John Maynard Keynes.
C) Andrew Mellon.
D) Joseph Schumpeter.
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30. Among the tools available to macroeconomic policy makers is:
A) fiscal policy, for use in manipulating government spending and taxation.
B) antitrust policy, to break up monopolies.
C) environmental policy, to clean up the economy.
D) improving standards for food and drugs.
31. In 1936 economic theory changed dramatically with the publication of:
A) The General Theory of Employment, Interest, and Money, by John Maynard
Keynes.
B) The Wealth of Nations, by Adam Smith.
C) The Road to Serfdom, by F. A. Hayek.
D) Principles of Economics, by Paul Samuelson.
33. Which of the following are considered to be the two types of macroeconomic policies?
A) monetary and fiscal policy
B) monetary and regulation policy
C) fiscal and regulation policy
D) fiscal policy and price controls
34. Fiscal policy attempts to affect the level of overall spending by making changes in:
A) the interest rate.
B) the money supply.
C) banking regulations.
D) taxes and spending.
35. Monetary policy attempts to affect the overall level of spending by making changes in:
A) taxes.
B) taxes and spending.
C) taxes and interest rates.
D) interest rates and the quantity of money.
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36. Monetary policy attempts to affect the overall level of spending through:
A) changes in the inflation rate.
B) changes in the quantity of money and the interest rate.
C) changes in tax policy or government spending.
D) discretionary regulation of profits and wages.
37. Fiscal policy attempts to affect the overall level of spending through:
A) changes in the inflation rate.
B) changes in the quantity of money or the interest rate.
C) changes in tax policy or government spending.
D) discretionary regulation of profits and wages.
38. If macroeconomic policy has been successful over time, it is likely that the economy has
not seen:
A) any inflation.
B) any severe recessions.
C) any unemployment.
D) a business cycle.
41. When the Great Depression reached its trough in 1933, the unemployment rate was
approximately:
A) 5%.
B) 10%.
C) 25%.
D) 50%.
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42. The onset of the Great Depression:
A) was not a shock to anyone, since most economists predicted the roaring '20s were
bound to end in disaster.
B) caused a disagreement between the Hoover administration and conventional
economists because Hoover wanted the government to intervene much more
quickly than most others.
C) came as a considerable shock to the conventional wisdom of economics at that time
and opened the door for critiques of mainstream thought by economists like John
Maynard Keynes.
D) was in 1918 at the end of World War I.
43. The General Theory of Employment, Interest, and Money, written by _____ and
published in _____, transformed the way economists thought about macroeconomics.
A) Milton Friedman; 1946
B) Paul Samuelson; 1940
C) John Maynard Keynes; 1936
D) Paul Lucas; 1966
44. The General Theory of Employment, Interest, and Money was written by:
A) Robert Lucas.
B) David Ricardo.
C) John Maynard Keynes.
D) Thomas Malthus.
46. In recent times, the U.S. government has been trying to help the economy through one
of the worst economic slumps ever. The policies used are based on _____ theory.
A) Keynesian
B) classical
C) supply-side
D) trickle-down
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47. Keynesian economics promotes ideas:
A) that government intervention can be destabilizing.
B) that the government can help a depressed economy via fiscal and monetary
policies.
C) that the private sector is perfectly capable of regulating itself.
D) that the free market system will always prevail.
48. Changing the quantity of money, hence the interest rate, hence overall spending in the
economy, is use of _____ policy.
A) monetary
B) fiscal
C) free-market
D) trickle-down
49. Changing government spending and taxes to affect overall spending is use of _____
policy.
A) tax-and-spend
B) monetary
C) fiscal
D) free-trade
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53. Recessions are periods when:
A) output rises.
B) the aggregate price level rises.
C) the unemployment rate is falling.
D) output and employment are falling.
54. The short-run alternation between economic downturns and recessions, then economic
upturns and expansions is known as the _____ cycle.
A) business
B) contractionary
C) expansionary
D) disequilibrium
55. If during several months the economy is simultaneously increasing its levels of output
and employment, then the economy is in a(n):
A) depression.
B) expansion.
C) recession.
D) turning point between a recovery and a downturn.
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59. In a typical business cycle, the peak is immediately followed by the:
A) recession.
B) trough.
C) expansion.
D) depression.
60. An economic expansion in the United States is typically associated with a(n):
A) falling inflation rate.
B) increase in the poverty rate.
C) falling unemployment rate.
D) decrease in corporate profits.
61. Economists have identified several consecutive months of falling employment, and
forecasts for the next few months suggest more of the same. The economy is at the
_____ stage of the business cycle.
A) recession
B) expansion
C) peak
D) trough
62. For the past several months, per capita output has increased at a slower and slower rate.
Over the same period, the unemployment rate has been falling, but it appears to have
leveled off and may soon rise. Where in the business cycle is the economy?
A) peak
B) recession
C) trough
D) expansion
63. The point at which a recession ends and the expansion begins is called the:
A) trough.
B) downturn.
C) peak.
D) lag.
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65. A period of rising real GDP is a(n):
A) peak.
B) trough.
C) expansion.
D) recession.
68. The point on a business cycle when real GDP stops rising and begins falling is a(n):
A) peak.
B) trough.
C) expansion.
D) recession.
69. The point on a business cycle when real GDP stops falling and begins rising is a(n):
A) peak.
B) expansion.
C) trough.
D) recession.
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71. Rising total output accompanied by increasing employment is generally known as:
A) stagflation.
B) recession.
C) inflation.
D) expansion.
72. A country's real gross domestic product (GDP), undergoes periodic fluctuations called
a(n):
A) recession.
B) business cycle.
C) expansion.
D) trough.
73. (Figure: The Business Cycle) Look at the figure The Business Cycle. Point B on this
graph shows a(n):
A) peak.
B) trough.
C) expansion.
D) recession.
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74. (Figure: The Business Cycle) Look at the figure The Business Cycle. The movement
from point B to C is called a(n):
A) trough.
B) expansion.
C) depression.
D) peak.
76. In the United States, recessions are typically associated with a(n):
A) falling unemployment rate.
B) decrease in the number of people living in poverty.
C) decrease in the percentage of Americans with health insurance.
D) increase in corporate profits.
79. In many countries, economists adopt the rule that a recession is a period of at least
_____ during which aggregate output falls.
A) one quarter
B) two consecutive quarters
C) three consecutive quarters
D) a full year
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80. The most widely used indicator of the conditions in the labor market is the:
A) unemployment rate.
B) population growth rate.
C) inflation rate.
D) trade deficit.
81. An independent panel of economic experts at the _____ analyzes the macroeconomy
and determines when recessions begin and end.
A) Bureau of the Census
B) President's Council of Economic Advisers
C) Treasury Department
D) National Bureau of Economic Research
83. According to official statistics for the United States, since the Great Depression:
A) economists are confident that the business cycle has been tamed.
B) the economy has constantly had positive real GDP growth rates.
C) the economy had longer recessions than expansions only during the 1960s and
1990s.
D) the economy has not had another severe and prolonged economic downturn
comparable to it.
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86. Long-run growth is the:
A) sustained upward trend in aggregate output per person over several decades.
B) expansion phase of business cycles.
C) downturn phase of business cycles.
D) sustained downward trend in the employment rate over several decades.
88. Historical evidence shows that for determining a country's living standards, over:
A) an extended period, long-run growth is just as important as the business cycle.
B) short periods, long-run growth is less important than the business cycle.
C) an extended period, long-run growth is much more important than the business
cycle.
D) long periods, it is difficult to determine whether the business cycle or long-run
growth is more important.
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92. Economists use the term long-term growth to indicate:
A) the expansion phase of the business cycle.
B) growth of the economy over several decades.
C) growth of the economy over one to five years.
D) long-run growth of the value of a company.
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97. Which of the following is TRUE?
A) Inflation means an increase in the overall level of prices.
B) Deflation refers to a decrease in prices only in the energy and transportation
sectors.
C) During inflation most people enjoy an increase in their standard of living even if
their wages don't increase.
D) Inflation was a problem for the first time in the recession of 1929–1933.
98. Inflation:
A) is a movement of the economy toward economic growth.
B) can be thought of as an increase in a nation's standard of living.
C) is a sustained fall in the overall level of prices.
D) is an increase in the overall level of prices.
99. If the economy grew at 3% this year and average prices increased _____, people would
be better off this year than last year.
A) 3%
B) faster than 3%
C) less than 3%
D) faster than 10%
100. If wages grew at 5% last year and average prices grew at 3%, then the average worker:
A) is better off.
B) is worse off.
C) has lost purchasing power.
D) is unaffected.
101. If workers' nominal wages have risen by 50% over a 10 years and prices have increased
by 40% in that same period, then we can safely conclude that the amount of goods and
services workers can buy has:
A) fallen.
B) increased.
C) not changed.
D) decreased in quality.
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103. During inflation the _____ price level _____.
A) average; falls
B) average; increases
C) average; remains constant
D) real; falls
104. The annual percentage change in the aggregate price level is negative when there is:
A) deflation.
B) disinflation.
C) inflation.
D) spiraling inflation.
106. Inflation:
A) raises the cost of making purchases.
B) can result in a decrease in barter transactions.
C) encourages people to hold cash.
D) is caused by changes in interest rates.
107. In the long run the overall price level is mainly determined by:
A) the business cycle.
B) the price of crude oil.
C) changes in the money supply.
D) the government's budgetary policies.
108. Deflation:
A) raises the cost of making purchases.
B) can result in an increase in employment.
C) encourages people to hold cash rather than invest.
D) is caused by changes in interest rates.
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109. With regard to the aggregate price level, economists generally believe:
A) price stability is desirable.
B) inflation is worse than deflation.
C) deflation is worse than inflation.
D) inflation benefits most retired people.
114. If a country sells more goods and services to the rest of the world than it purchases from
the other countries, then the country has a:
A) trade deficit.
B) budget deficit.
C) trade surplus.
D) budget surplus.
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115. If a country has a trade deficit, does it indicate that the country has a serious problem?
A) No. Trade deficits occur when a country's investment spending is higher than its
level of saving.
B) Yes. Trade deficits occur when a country has low productivity.
C) Yes. Trade deficits occur when a country does not have a comparative advantage in
production.
D) Yes. Trade deficits occur when a country has a high budget surplus.
116. Goods and services that are produced in a foreign country but consumed domestically
are called:
A) exports.
B) imports.
C) investment goods.
D) consumer durables.
118. A nation whose value of imports exceeds its value of exports is said to have:
A) hyperinflation.
B) a trade deficit.
C) price stability.
D) a trade surplus.
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121. The trade balance is the difference between the value of:
A) the trade deficit and the budget deficit.
B) exports and the imports.
C) the exchange rates of two countries that are engaged in international trade.
D) the national debt and the foreign debt.
122. The additional profit earned by Microsoft Corporation by marketing and using a
proprietary method of coding software is a microeconomic issue.
A) True
B) False
123. Fiscal policy entails changes in the quantity of money or the interest rate.
A) True
B) False
124. Monetary and fiscal policy are tools to reduce the severity of recessions.
A) True
B) False
127. The business cycle is the long-run alternation between downturns and upturns.
A) True
B) False
128. Expansions are periods when real GDP and employment are growing.
A) True
B) False
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129. Recessions are periods in which output and employment are falling.
A) True
B) False
130. Business cycles are defined by the expansion, contraction, then expansion again of
nominal GDP.
A) True
B) False
132. The peak of the business cycle provides evidence that the recession is over.
A) True
B) False
133. Between 1980 and 2014, inflation wiped out most of the wage gains of the typical
worker.
A) True
B) False
134. A newspaper article documents the closing of a factory and the many jobs that are lost.
A separate article describes the rising U.S. unemployment rate. Why is the first article a
microeconomic issue and the second article a macroeconomic issue?
135. The economy is in a recession and Congress passes legislation to reduce income taxes.
Tom, seeing an increase in his take-home pay, goes to Best Buy and purchases a new
television. Why is the tax cut a macroeconomic issue, while Tom's new TV is a
microeconomic issue?
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138. Suppose the business cycle is expanding. Predict how the economic indicators of real
gross domestic product, the unemployment rate, and the inflation rate are moving.
139. You read a newspaper article that says the unemployment rate rose this month. Are we
in a recession? Explain.
140. What is long-run economic growth, and why is it so important for a nation's economy?
141. Your boss is impressed with your performance over the past year and has decided to
give you a 5% increase in your salary. Are you unambiguously better off with your
increased salary? What factors must be considered?
142. In a typical business cycle recession, the unemployment rate rises and the inflation rate
falls. Explain these two trends.
143. The United States imports coffee from Brazil and exports cars to Brazil. Is this a
macroeconomic or microeconomic issue?
145. In macroeconomics:
A) aggregate data such as real GDP, the price level, and unemployment are analyzed.
B) individual and firm decisions regarding utility and profit maximization are studied.
C) long-term growth is not considered to be important.
D) market intervention from the government is not considered important.
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147. Fiscal and monetary policies:
A) have no role in macroeconomic policies.
B) have been used by the government for over 250 years.
C) are most effective in microeconomic settings.
D) are used to correct for short-term economic fluctuations.
150. Setting interest rates and the money supply in an effort to change overall spending in is
use of:
A) fiscal policy.
B) monetary policy.
C) investment.
D) the stock market.
151. Setting government spending and taxes in an effort to change overall spending in an
economy is use of:
A) fiscal policy.
B) monetary policy.
C) investment.
D) the stock market.
152. During the Great Depression, unemployment rates reached as high as:
A) 25%.
B) 50%.
C) 10%.
D) 60%.
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153. Recessions tend to be _____, and expansions tend to be _____.
A) short; short
B) long; long
C) short; long
D) long; short
156. One normally expects that unemployment increases while aggregate output and
aggregate incomes decrease during:
A) an expansion.
B) government intervention.
C) a recession.
D) the peak of the business cycle.
158. When an economy is operating between a trough and a peak of the business cycle, it is
in:
A) an expansion.
B) a contraction.
C) a short-run condition.
D) the beginning of a fall in aggregate spending.
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159. An economic recovery encompasses all of the following EXCEPT:
A) sustained economic growth.
B) a short-run increase in aggregate production.
C) a time of increasing employment.
D) the end of the business cycle.
160. When an economy is expanding, unemployment tends to _____ and overall prices tend
to _____.
A) fall; rise
B) fall; fall
C) rise; fall
D) rise; rise
161. When an economy's overall production grows faster than its population, it is
undergoing:
A) long-run growth per capita.
B) an increase in nominal GDP.
C) deflation.
D) the paradox of thrift.
163. When overall price levels rise over time, it is referred to as:
A) deflation.
B) inflation.
C) an increase in purchasing power.
D) the consumer price index.
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165. A trade surplus occurs:
A) during economic contractions only.
B) when the value of imports exceeds the value of exports.
C) when the value of imports is less than the value exports.
D) when unemployment is rising.
166. If the value of a country's exports is greater than the value of its imports, it is:
A) running a trade surplus.
B) running a trade deficit.
C) in an economic contraction.
D) likely to find its investment spending greater than its level of saving.
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Answer Key
1. D
2. A
3. A
4. A
5. C
6. A
7. D
8. A
9. A
10. D
11. C
12. A
13. A
14. A
15. C
16. C
17. B
18. B
19. A
20. C
21. D
22. A
23. C
24. A
25. B
26. C
27. B
28. B
29. B
30. A
31. A
32. D
33. A
34. D
35. D
36. B
37. C
38. B
39. C
40. B
41. C
42. C
43. C
44. C
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45. A
46. A
47. B
48. A
49. C
50. A
51. A
52. C
53. D
54. A
55. B
56. D
57. C
58. D
59. A
60. C
61. A
62. A
63. A
64. D
65. C
66. D
67. C
68. A
69. C
70. C
71. D
72. B
73. B
74. B
75. D
76. C
77. B
78. A
79. B
80. A
81. D
82. D
83. D
84. B
85. A
86. A
87. A
88. C
89. A
90. A
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91. C
92. B
93. B
94. A
95. D
96. D
97. A
98. D
99. C
100. A
101. B
102. C
103. B
104. A
105. A
106. A
107. C
108. C
109. A
110. D
111. D
112. D
113. C
114. C
115. A
116. B
117. A
118. B
119. D
120. D
121. B
122. A
123. B
124. A
125. B
126. A
127. B
128. A
129. A
130. B
131. A
132. B
133. A
134. The two articles, a factory closing and the national unemployment rate rising, do seem
related. However an important distinction is that microeconomics is the study of how
individuals and firms make decisions. In this case, the factory owner has decided that
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the firm's optimal strategy is to shut down and exit this market. Macroeconomics
examines the overall behavior of the economy. The rising unemployment rate is a
function of many firms adding and subtracting jobs and many workers entering and
leaving the workforce.
135. The tax cut is an example of fiscal policy to stimulate the macroeconomy by giving
people like Tom more money to spend. Consumers like Tom take this additional income
and then make micro decisions about what to do with it.
136. During uncertain economic times, nervous consumers spend less and save more. This
thrift can actually worsen the economy because it stifles consumption and leads to
reduced spending.
137. John Maynard Keynes advocated an active role for the government when the economy
was in recession. He believed that economists and policy makers should use fiscal and
monetary policy to stimulate a weak economy, rather than standing by and allowing the
economy to self-correct.
138. When the economy is expanding, the nation's output is rising because consumers are
spending more of their income on goods and services (and income is rising). The
unemployment rate is falling because firms are hiring workers to produce those goods
and services. The inflation rate is rising because consumers have more money to spend,
which pushes up the overall price level.
139. Maybe; maybe not. Economists at the National Bureau of Economic Research consider
many factors, including unemployment, but identification of a recession entails more
than a single piece of information like the unemployment rate and requires more than
one month of data.
140. Long-run economic growth is the sustained rise in the quantity of goods and services the
economy produces. When long-run growth per capita is rising, each person's share of
the nation's output is rising. This is the key to higher wages and a rising standard of
living.
141. A 5% salary increase may or may not make you better off than you were last year. If
overall consumer prices have increased by less than 5%, there is a good chance that your
purchasing power has increased. An additional factor is the tax effect on your higher
salary and purchasing power.
142. Recessions are typically the result of a decrease in consumer spending. When
consumers buy fewer goods and services, firms produce fewer of those goods and
services. When firms decrease production, they usually decrease employment, and the
rate of unemployment rises. The weak consumer spending can leave a surplus of unsold
goods across the economy. A surplus of unsold goods (or excess inventories) is cleared
when prices fall. Overall prices may not fall (deflation), but they may rise more slowly,
and so the rate of inflation begins to fall.
143. This is a microeconomic issue of comparative advantage in products. Nations export
goods for which they have a comparative advantage and import goods for which they do
not. A nation's trade deficit or surplus with a trading partner depends upon the sum of
the goods that are exported minus the sum of the goods that are imported. The trade
deficit or surplus is a macroeconomic issue.
144. C
145. A
146. B
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147. D
148. B
149. B
150. B
151. A
152. A
153. C
154. B
155. D
156. C
157. B
158. A
159. D
160. A
161. A
162. B
163. B
164. B
165. C
166. A
167. A
168. A
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