1. What is consumer surplus?
A. The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Correct
B. The number of buyers of a good minus the number of sellers
C. The number of goods for sale minus the number of goods buyers want to buy
D. The amount a seller is paid minus the cost of production
Explanation
Consumer surplus is a measure of the economic welfare that consumers gain from purchasing a good. It is defined as the difference between the maximum price a consumer is willing to pay and the actual price they pay. The other choices describe unrelated concepts: choice B describes a market participant count, choice C describes a potential surplus or shortage, and choice D defines producer surplus, which is the benefit for sellers.
2. Which good tends to have elastic demand?
A. A good with close substitutes Correct
B. A good with many complements
C. A good that is tangible
D. A good with few complements
Explanation
The price elasticity of demand measures how much the quantity demanded responds to a change in price. Demand is more elastic when close substitutes are available because consumers can easily switch to another product if the price rises. Goods with many complements (B) or few complements (D) are not necessarily elastic; elasticity depends on the availability of substitutes. Tangibility (C) does not directly determine elasticity.
3. What does the Fed do to expand aggregate demand? Choose two
A. Reduce the quantity of reserves
B. Increase the foreign exchange rate
C. Raise mortgage rates
D. Increase the money supply Correct
E. Decrease the money supply
F. Lower the interest rate
Explanation
To expand aggregate demand, the Federal Reserve uses expansionary monetary policy. This involves increasing the money supply (D), which typically leads to lower interest rates (F). Lower interest rates encourage borrowing and spending by both consumers and businesses, thus increasing aggregate demand. Reducing reserves (A) and decreasing the money supply (E) are contractionary policies. Raising mortgage rates (C) would discourage spending. The Fed does not directly control the foreign exchange rate (B).
4. When the Fed decreases the money supply, what is the result?
A. The aggregate demand for imports increases.
B. The quantity of goods and services demanded for any given price decreases. Correct
C. The efficiency of market corrections is reduced.
D. The quantity of goods and services demanded for one specific price increases.
Explanation
A decrease in the money supply is a contractionary monetary policy. It leads to higher interest rates, which reduce investment and consumption spending. This decrease in spending causes the aggregate demand curve to shift leftward. Consequently, at any given price level, the quantity of goods and services demanded is lower. It does not specifically target import demand (A) or affect market correction efficiency (C). Option D describes an increase in demand, which is the opposite effect.
5. Which methods does the Fed use to alter reserve quantities? Choose three.
A. Buying bonds Correct
B. Raising the discount rate
C. Selling bonds
D. Selling stock shares
E. Raising inflation
F. Raising income tax rates
Explanation
The Fed alters bank reserves primarily through open market operations and changing the discount rate. Buying bonds (A) injects reserves into the banking system. Selling bonds (C) drains reserves from the banking system. Raising the discount rate (B) makes it more expensive for banks to borrow reserves directly from the Fed, also discouraging lending and reducing the effective money supply. The Fed does not sell stock shares (D), as it is not a publicly traded company. Raising inflation (E) is an outcome, not a tool. Raising income tax rates (F) is a fiscal policy tool, not a monetary one.