Applied Economics
Exam Solutions
Course Introduction
Applied Economics explores the practical application of economic theories and methodologies to real-world issues and decision-making. The course covers a range of topics including market analysis, policy evaluation, and resource allocation, emphasizing how economic principles are used to solve contemporary problems in areas such as business, healthcare, public policy, and finance. Students will develop analytical skills using statistical tools and case studies, enabling them to interpret data, assess economic outcomes, and make informed recommendations for businesses and governments. This course is designed to bridge the gap between economic theory and practice, preparing students for roles that require critical thinking and evidence-based analysis in various sectors.
Recommended Textbook
Economics for Today 5th Edition by Allan Layton
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Page 2
Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) Which one of the following is the most accurate definition of economics?
A) Economics is the study of stocks and bonds.
B) Economics is the study of how people allocate unlimited resources.
C) Economics is the study of how consumers choose to spend their unlimited income.
D) Economics is the study of how an individual agent/entity chooses to allocate scarce Resources.
Answer: D
Q2) Abstracting from reality is an important element of all economic models.
A)True
B)False
Answer: True
Q3) Scarcity:
A) is a problem only in the poorer countries of the world.
B) will disappear if the country is rich.
C) can be solved by rapid advances in technology.
D) is a problem that exists in every economy with limited resources.
E) is not a problem for the developed countries.
Answer: D
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3
Chapter 2: Applying Graphs to Economics
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Sample Questions
Q1) In Exhibit A1.3, the slope of straight line AB is:
A) variable.
B) zero.
C) negative.
D) positive.
E) not determinable from the information provided.
Answer: D
Q2) A positive relationship exists when:
A) there is no association between two variables.
B) one variable increases and there is no change in the other variable.
C) one variable increases and the other variable increases too.
D) one variable increases and the other variable decreases.
Answer: C
Q3) Straight line AB in Exhibit A1.1 shows which of the following?
A) There is no relationship between variable X and variable Y.
B) Decreasing values for X will cause the values of Y to increase.
C) There is a positive relationship between X and Y.
D) There is a negative relationship between X and Y.
Answer: C
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Chapter 3: Production Possibilities and Opportunity Cost
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Sample Questions
Q1) The rate of future economic growth will be greater if:
A) the economy is focused on the production of capital goods.
B) the existing resources are employed in the production of consumer goods rather than capital goods.
C) the existing resources are employed equally in the production of consumer goods and capital goods.
D) the existing resources are saved for later use.
Answer: A
Q2) In Exhibit 2.10, which of the following points on the production possibilities curve are full-employment production points?
A) A, B, C, D.
B) A, B, C, D, U.
C) E, U, W.
D) B, C, D, U.
E) A, B, C, U.
Answer: A
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Chapter 4: Market Demand and Supply
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Sample Questions
Q1) Suppose that X and Y are complementary goods. If the price of good X decreases, we can expect the:
A) demand for good X to increase.
B) quantity demanded of good Y to decrease.
C) quantity demanded of good Y to increase.
D) demand for good Y to increase.
Q2) The demand curve shows how the quantity demanded is related to the price. A change in other variables will:
A) shift the demand curve to the left.
B) shift the demand curve to the right.
C) not shift the demand curve.
D) shift the demand curve.
Q3) Which of the graphs in Exhibit 3.2 depicts the effect of new information about healing properties of honey on the demand curve for sugar?
A) Graph A.
B) Graph B
C) Graph C.
D) Graph D.
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6
Chapter 5: Markets in Action
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Sample Questions
Q1) Which of the following would raise both the equilibrium price and the equilibrium quantity of strawberries?
A) A decrease in the demand for strawberries.
B) An increase in the demand for strawberries.
C) A decrease in the supply of strawberries.
D) An increase in the supply of strawberries.
Q2) Demand for a normal good will increase at existing prices if:
A) there is a decrease in the population size.
B) there is an increase in income.
C) there is a decrease in wealth.
D) there is an increase in interest rates.
Q3) External benefits cause the market to:
A) under-allocate resources.
B) be more efficient.
C) set excessively high prices.
D) have persistent shortages.
Q4) Assume a price floor is set above the equilibrium price. The result is a surplus.
A)True
B)False
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Chapter 6: Elasticity of Demand and Supply
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Sample Questions
Q1) As one moves down a straight-line, down-sloping demand curve, price elasticity (measured by point elasticity method) will:
A) change from elastic to unit elastic, then to inelastic.
B) remain the same between any two points.
C) change from inelastic to elastic, then to unit elastic.
D) change from unit elastic to elastic, then to inelastic.
Q2) The price elasticity of demand formula includes:
A) percentage change in quantity demanded.
B) percentage change in quantity supplied.
C) difference in quantity demanded.
D) difference in price.
Q3) As price decreases and we move down further along a linear demand curve, the price elasticity of demand will:
A) decrease.
B) increase.
C) stay the same.
D) approach infinity.
Q4) The tax incidence indicates that tax is always paid by sellers.
A)True
B)False
Page 8
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Chapter 7: Production Costs
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Sample Questions
Q1) For a typical firm, the long-run average total cost curve:
A) is a tangent to the minimum point of each possible short-run average total cost curve.
B) is a tangent to each possible short-run average total cost curve at one point.
C) intersects each possible short-run average total cost curve at two points.
D) passes through the minimum points of all possible short-run average total cost curves.
Q2) If a firm increases output and its average total cost declines, then the firm is experiencing economies of scale.
A)True
B)False
Q3) As output increases:
A) ATC rises at first and then falls.
B) AFC falls at first and then rises.
C) AVC cuts ATC when MC is at its minimum.
D) AFC declines and the gap between ATC and AVC declines.
Q4) A zero economic profit is the same as a zero accounting profit.
A)True
B)False
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Chapter 8: Perfect Competition
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Sample Questions
Q1) The firm in a perfectly competitive market will:
A) set the price as high as possible to make maximum profit.
B) use different rules for loss minimisation and for profit maximisation.
C) use non-price competition techniques like advertising to sell more.
D) try to keep the average total cost below the market price.
Q2) The market curve derived for the perfectly competitive market is based on the following assumptions:
A) input prices remain unchanged as output expands.
B) output prices remain unchanged as output expands.
C) input prices reduce as output expands.
D) input prices increase as output expands.
Q3) Refer to Exhibit 7.6. If market price is $22, the firm should:
A) increase the price.
B) increase the output.
C) decrease the output.
D) shut down.
E) continue to operate.
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Chapter 9: Monopoly
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Sample Questions
Q1) Firms employ price discrimination because:
A) they want to give discounts whenever they can.
B) it prevents predatory pricing.
C) it increases profits.
D) they dislike arbitrage.
Q2) The condition/s required for a monopolist to engage in price discrimination is/are:
A) that buyers are not able to resell the good.
B) when it cannot identify specific groups of consumers with different elasticities.
C) that the demand curve must be perfectly elastic.
D) for potential competitors to threaten entry into the market.
Q3) A monopolist is always earning economic profits but a perfectly competitive firm is not.
A)True B)False
Q4) A monopoly earns the most profit by charging a price where demand is inelastic. A)True B)False
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11
Chapter 10: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) The short-run equilibrium for a monopolistically competitive firm is at P = $28.47, ATC = $22.13 and MC = MR = $17.47. Which of the following is true?
A) Per-unit profit is $11.
B) Additional firms will be attracted into the industry.
C) The firm could raise price and increase profits.
D) The firm could lower price and increase profits.
Q2) Under oligopoly, firms produce:
A) only a homogeneous product.
B) only a differentiated product.
C) a homogeneous product or a differentiated product.
D) an identical product.
Q3) The various strategies a firm can follow in an oligopolistic industry can be expressed in terms of:
A) the concentration ratio.
B) the pay-off matrix.
C) a cartel.
D) independence.
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12
Chapter 11: Policy Issues: Housing Affordability and Climate Change
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Sample Questions
Q1) In Exhibit 10.2, if the external cost is not included in the supply curve 'Supply 1', the market demand and market supply curve 'Supply 1' produce a/an:
A) socially desirable outcome.
B) efficient outcome.
C) inefficient outcome.
D) better outcome than an intersection of market demand and Supply 2.
Q2) Which of the following statements is true?
A) The reduced demand for permits would increase their price.
B) The reduced demand for permits would shift the industry supply curve for carbon intensive output to the left.
C) The increased demand for permits would increase firms' costs and shift the supply curve for carbon intensive outputs to the left.
D) The reduced demand for permits would lower their price, lower firms' costs, and shift the industry supply curve for carbon intensive outputs to the right.
Q3) Regulation is the best solution to climate change issues.
A)True
B)False
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Page 13
Chapter 12: Measuring the Size of the Economy
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Sample Questions
Q1) The circular flow model shows the flow of:
A) products from households to businesses and the flow of resources from businesses to households.
B) products from households to businesses and the flow of productive resources from households to businesses.
C) products from businesses to households and the flow of money from households to Businesses.
D) products from businesses to households and the flow of productive resources from households to businesses.
Q2) In the factor market, firms demand:
A) wages, rents, interest and profit.
B) goods and services.
C) material, land, labour, capital and entrepreneurship.
D) money for their goods and services.
Q3) The circular flow model represents the establishment of market value for:
A) goods and services only.
B) wages and salaries excluding goods and services.
C) profits and rents but not for wages and salaries.
D) profits and rents as well as wages and salaries.
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Page 14
Chapter 13: Business Cycles and Economic Growth
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Sample Questions
Q1) Which of the following is not an example of technological progress?
A) Better training for workers.
B) Improvements in the quality of capital.
C) Improvements in management practices.
D) Increases in the quantity of capital.
Q2) Variables that change before real GDP changes are measured by the:
A) personal income index.
B) real GDP index.
C) forecasting gauge.
D) index of leading indicators.
Q3) Endogenous growth theory tries to highlight the importance of capital and labour at the expense of technological progress.
A)True
B)False
Q4) Changing the long-term growth trajectory includes:
A) microeconomic and macroeconomic policies.
B) only macroeconomic policies.
C) only microeconomic policies.
D) only normative economic policies.
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Chapter 14: Inflation and Unemployment
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Sample Questions
Q1) Demand-pull inflation is due to:
A) minimum wage laws.
B) labour cost increases.
C) excess total spending.
D) tax increases.
Q2) The civilian labour force consists of:
A) all civilians over the age of 16.
B) the employed plus the unemployed who are not in the military.
C) only individuals who are actually at work during a given week.
D) civilians who are not in prisons or mental hospitals.
Q3) The CPI (using a 1982 base year) for 1951 is 26. Suppose a household's annual take home pay in 1951 was $8320. What would be an equivalent home pay in 1982?
A) $10 483.
B) $21 632.
C) $23 680.
D) $32 000.
Q4) Cost-push inflation is a result of an increase in overspending.
A)True
B)False
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Chapter 15: A Simple Model of the Macro Economy
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Sample Questions
Q1) If your disposable personal income increases from $30 000 to $40 000 and your savings increase from $2000 to $4000, your marginal propensity to save (MPS) is:
A) 0.2.
B) 0.4.
C) 0.5.
D) 0.8.
Q2) Which of the following is not a component of the aggregate demand curve?
A) Government spending (G).
B) Investment (I).
C) Consumption (C).
D) Saving.
Q3) The effect of an increase in investment on real GDP will be greater, the larger the:
A) MPC.
B) APC.
C) MPS.
D) APS.
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Chapter 16: The Monetary and Financial System
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Sample Questions
Q1) The RBA uses the short-term money market in order to influence:
A) banks' capital adequacy requirements.
B) the buying and selling of foreign exchange.
C) the monetary base.
D) bank profitability.
Q2) Treasury notes issued by the government are:
A) considered to be high risk.
B) long-term financial instruments.
C) sold by the Treasury at a face value.
D) freely traded in financial markets once issued.
Q3) In case of unresolvable disagreement between the RBA board and the government, the ________ view will prevail.
A) government's
B) the RBA board's
C) majority of the banks'
D) ACCC's
Q4) Credit cards are money because they serve the three functions of money.
A)True
B)False
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Chapter 17: Macroeconomic Policy I: Monetary Policy
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Sample Questions
Q1) The V in the equation of exchange represents the:
A) variation in the GDP.
B) variation in the CPI.
C) variation in real GDP.
D) average number of times per year a dollar is spent on final goods and services.
Q2) To influence the cash rate, the RBA:
A) purchases real estate and other non-liquid assets.
B) sets the unemployment rate.
C) carries out close-market operations in the money markets.
D) carries out open-market operations in the money markets.
Q3) The monetarists argued that to avoid inflation and unemployment, that:
A) the money supply growth rate has to be maintained at the highest level.
B) the money demand growth rate has to be maintained at the proper level.
C) the money supply growth rate has to be maintained at the proper level.
D) the interest rates have to be maintained at the proper level.
Q4) Modern monetary policy in Australia is implemented by the RBA seeking to maintain the overnight cash rate at a pre-announced level.
A)True
B)False
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Chapter 18: Macroeconomic Policy II: Fiscal Policy
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Sample Questions
Q1) The difference between the domestic deficit and the overall deficit is:
A) revenue collected from overseas.
B) government spending on imports.
C) tax revenue minus government spending.
D) inflation.
E) automatic stabilisers.
Q2) Australian microeconomic reforms can be viewed as:
A) new demand-side reforms.
B) strictly political decision.
C) supply-side fiscal policies.
D) unnecessary spending.
Q3) Suppose the economy in Exhibit 17.1 is in equilibrium at point E<sub>1</sub> and the marginal propensity to consume (MPC) is 0.8. Following Keynesian economics, to restore full employment, the government should increase its spending by:
A) $200 billion.
B) $250 billion.
C) $500 billion.
D) $1 trillion.
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20
Chapter 19: International Trade and Finance
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Sample Questions
Q1) An embargo is:
A) an ad valorem tariff.
B) the strongest limit on trade.
C) a law that allows free trade with another country.
D) a direct tax on production.
Q2) In Exhibit 18.3, Australia has an absolute advantage in producing:
A) potatoes.
B) wheat.
C) both potatoes and wheat.
D) neither potatoes nor wheat.
Q3) If country A lowers its tariffs even if country B doesn't, then:
A) only country A will be at a disadvantage.
B) both countries will be worse off.
C) both countries will be better off.
D) country A will be better off than if it kept tariffs high.
Q4) In Exhibit 18.4, the equilibrium exchange rate is:
A)5.
B)4.
C)3.
D) 2.
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