Economic Principles and Problems
Pre-Test Questions
Course Introduction
This course provides a comprehensive introduction to the foundational concepts and analytical tools of economics, emphasizing both microeconomic and macroeconomic principles. Students will examine how individuals, firms, and governments make decisions regarding the allocation of scarce resources, and explore the functioning of markets, the impact of government intervention, and the causes of market failures. The course also addresses contemporary economic issues such as unemployment, inflation, economic growth, and international trade, equipping students with a framework to analyze real-world economic problems and policy debates critically.
Recommended Textbook
Survey of ECON 3rd Edition by Robert L. Sexton
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Page 2
Chapter 1: The Role and Method of Economics
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Sample Questions
Q1) "Wanting more goods makes us greedy." How would an economist respond to this statement?
Answer: Answers will vary. Economists do not view the unlimited human desire for goods and services to be an indication of "greediness." Economists assume that all individuals want more resources in order to reach greater levels of satisfaction. REJ: Please see the section "Economics: A Brief Introduction" for more information.
Q2) Normative statements are:
A)Normative statements are
B)descriptive, making claims about how the world is.
C)optimistic, putting the best possible interpretation on things.
D)statements that establish the production goals for an economy.
E)statements that establish the pattern for the distribution of income in an economy.
Answer: A
Q3) Normative analysis focuses on statements that can be tested against data.
A)True
B)False
Answer: False
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3
Chapter 2: The Economic Way of Thinking
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Sample Questions
Q1) Jamie and Danny both attend the same college and incur the same expenses for tuition, books, and school supplies. Jamie gave up a lucrative job modeling in Paris to attend school full-time, and Danny gave up a part-time job as a sales clerk in a department store. It follows that:
A)the opportunity cost of attending college is the same for both since they are enrolled at the same academic institution.
B)the opportunity cost of attending college is likely greater for Jamie than for Danny.
C)the opportunity cost of attending college is likely greater for Danny than for Jamie.
D)the opportunity cost is minimal for both, since, on average, college graduates are paid much higher than high school graduates.
E)the opportunity cost of attending college for both Jamie and Danny is equal to zero. Answer: B
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Chapter 3: Supply and Demand
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Sample Questions
Q1) Incorrect. If the demand for a good increases when incomes rise and decreases when incomes fall, the good is called a normal good. See 3-2: Demand
A)True
B)False
Answer: True
Q2) If the demand for apples increases at the same time the supply of apples falls, the price of apples will tend to fall
A)True
B)False
Answer: False
Q3) Which of the following would shift a supply curve for a good to the right?
A)An increase in taxes imposed on the production of the good
B)An increase in import restrictions on the good
C)an increase in import duties on the good
D)An increase in subsidies on the good
E)An increase in the price of the good
Answer: D
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Chapter 4: Using Supply and Demand
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Sample Questions
Q1) When the Blue Ocean Surfboard Company lowered the price of surfboards by 20 percent, it sold 10 percent more surfboards. The price elasticity coefficient for surfboards is _____.
A)2
B)0.5
C)1
D)20
E)10
Q2) When the price of ulcer medication increased by $20, the revenue of a drug company selling the medication increased by $10 million. Thus, it can be said that the company's elasticity of demand is:
A)equal to zero.
B)greater than one.
C)less than one.
D)infinitely large.
E)equal to one.
Q3) Arrange the following goods from the least to the most elastic, explaining your ordering: gasoline, Shell gasoline, and Shell gasoline at a particular gas station.
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Chapter 5: Market Failure and Public Choice
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Sample Questions
Q1) Moral hazard occurs when an informed party benefits in an exchange by taking advantage of knowing more than the other party.
A)True
B)False
Q2) What is the difference between private costs and social costs?
Q3) Why might voters tend to be relatively uninformed about political issues?
Q4) Why is television broadcasting over the air considered a public good?
Q5) Positive externalities include benefits received by a seller but not benefits received by a buyer.
A)True
B)False
Q6) Public goods are:
A)any goods that several members of the public produce.
B)those goods for which natural monopolies exist.
C)goods that cannot be successfully financed by private firms.
D)goods that cannot be easily produced through the market system.
E)those goods that generate externalities in production and consumption.
Q7) How do moral hazard and adverse selection differ in the timing of their effects?
Q9) What distinguishes public goods from private goods? Page 7
Q8) What is the difference between a public good and common resources?
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Page 8
Chapter 6: Production and Costs
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Sample Questions
Q1) David was taken to a concert by his friend who promised it would be very good. David paid for his own ticket. However, David did not like the concert and left before it ended. Therefore, David incurred a(n) _____ in buying the ticket
A)private cost
B)explicit cost
C)explicit cost.
D)implicit cost
E)sunk cost
Q2) How short is the short-run production period?
Q3) An example of an implicit cost of production is:
A)the cost of raw materials used to produce bread in a bakery.
B)the cost of labor in a factory that assembles DVD players.
C)the income an entrepreneur could have earned working for someone else.
D)the salary of a manager working in a multinational agency.
E)the hourly wage of a chef hired by a popular food chain.
Q4) One would expect to observe a diminishing marginal product of labor when the office space is overcrowded
A)True
B)False
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Chapter 7: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Perfect competition is characterized by a large number of buyers and sellers with identical products and no significant barriers to entry.
A)True
B)False
Q2) In a perfectly competitive industry, influence over price is exerted by:
A)individual sellers.
B)individual buyers.
C)the largest firms.
D)the forces of market supply and demand.
E)the largest buyer.
Q3) Who among the following is most likely a price taker?
A)A respected heart surgeon
B)An ice cream shop owner located in Atlanta, Georgia
C)A skilled cab driver
D)A Kansas wheat farmer
E)A used car shop owner in New York
Q4) In the long run, a perfectly competitive firm is expected to generate high economic profits.
A)True
B)False
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Chapter 8: Monopoly
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Sample Questions
Q1) Allocative efficiency occurs in a monopoly when:
A)price is less than marginal cost.
B)price is greater than marginal cost.
C)price is equal to marginal cost.
D)price is equal to average cost.
E)marginal revenue is equal to marginal cost.
Q2) If a profit-maximizing monopolist is currently operating on the inelastic region of its demand curve, it should:
A)increase price and decrease output.
B)decrease both price and output.
C)increase both price and output.
D)decrease price and increase output.
E)decrease price while keeping output constant.
Q3) A monopolistic firm is a:
A)price taker that faces a horizontal market supply curve.
B)price taker that faces a horizontal market demand curve.
C)price maker that faces a upward-sloping market supply curve.
D)price maker that faces a horizontal market demand curve.
E)price maker that faces a downward-sloping market demand curve.
Q4) Does the monopolist have an incentive to reduce cost under average cost pricing?
Page 11
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Chapter 9: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) During the past 20 years, Marzi Corp., a large firm in an oligopolistic industry, has changed prices a number of times. Each time it does so, the other firms in the industry follow suit. Marzi Corp. is a _____.
A)monopolist
B)perfectly competitive firm
C)price leader
D)price follower
E)monopolistically competitive firm
Q2) What are the characteristics of oligopoly?
Q3) When a firm's demand curve is tangent to its average total cost curve, _____.
A)the firm is operating in a monopolistically competitive market
B)economic profits are zero
C)the firm is earning economic profits
D)the firm is incurring economic losses
E)price is equal to the marginal cost of production
Q4) Define monopolistic competition.
Q5) There are significant technological barriers to entry that help make the automobile industry oligopolistic.
A)True
B)False
Page 12
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Chapter 10: Labor Markets, Income Distribution, and Poverty
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Sample Questions
Q1) A typical 50-year-old male earns:
A)one-third more than a male in his early 20s in the United States.
B)nearly three times the income of a male in his early 20s in the United States.
C)one-third less than workers over 65 in the United States.
D)nearly twice the income of workers over 65 in the United States.
E)almost one-third more than workers over 65 in the United States.
Q2) Which of the following will shift an individual's labor supply curve to the left?
A)Winning a lottery
B)A decrease in nonwage income
C)High wage rates
D)A decrease in derived demand
E)An increase in the number of leaves of absence in a job
Q3) The equilibrium wage and quantity in competitive markets for labor are determined by:
A)the government
B)labor unions.
C)the interaction of the demand and the supply of a good
D)the supply of the fixed resources of production.
E)the intersection of the labor demand and labor supply curves.
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Page 13
Chapter 11: Introduction to Macroeconomics:
Unemployment, Inflation, and Economic Fluctuations
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Sample Questions
Q1) Seasonal unemployment is the temporary unemployment that results from the search time that people require when searching for suitable jobs and that firms require when looking for suitable workers.
A)True
B)False
Q2) Why does the term full employment imply an unemployment rate greater than zero? Discuss your answer in terms of the types of unemployment.
Q3) If the nominal interest rate is 6% and the inflation rate is 3%, the real interest rate is
A)2%
B)3%
C)6%
D)9%
E)10%
Q4) New inventions may displace some workers, resulting in structural unemployment. A)True
B)False
Q5) What are the three major macroeconomic goals?
Q6) What are the three major types of unemployment? What are their causes?
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Chapter 12: Economic Growth
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Sample Questions
Q1) The net national product (NNP) is the:
A)difference between gross domestic product and depreciation.
B)difference between gross national product and depreciation
C)sum of gross domestic product and depreciation
D)sum of gross domestic product indirect business taxes
E)difference between gross domestic product and net income of foreigners.
Q2) Gross domestic product calculations include:
A)the opportunity cost of leisure
B)activities in an underground economy
C)positive externalities.
D)government purchases of goods and services.
E)nonmarket transactions
Q3) The faster the rate of technological progress:
A)the higher the rate of economic growth.
B)the lower the rate of economic growth.
C)the higher the rate of population growth
D)the lower the rate of growth of money supply.
E)the higher the rate of inflation
Q4) State the formula for the expenditure approach to GDP accounting.
Q5) What is the relationship between savings, capital formation, and consumption?
Page 15
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Chapter 13: Aggregate Demand and Aggregate Supply
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Q1) A disaster that destroys a large part of the agricultural output of a country will not change long-run aggregate supply, while a disaster that destroys the capital stock in a major city will reduce long-run aggregate supply.
A)True
B)False
Q2) The long-run level of real GDP changes whenever the aggregate demand curve shifts.
A)True
B)False
Q3) Why do increases in input prices impact the long-run aggregate supply only if they reflect permanent reductions in the supply of those inputs?
Q4) Describe the difference between a microeconomic demand curve and an aggregate demand curve.
Q5) The aggregate demand curve portrays the relationship between price level and real GDP. What are the three reasons why this relationship is a negative or inverse relationship? Provide brief illustrations of each.
Q6) Discuss the impact of efficiency wages on unemployment and wage inflexibility.
Q7) Explain how changes in the stock of capital affect aggregate supply.
Page 16
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Chapter 14: Fiscal Policy
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Sample Questions
Q1) When payroll taxes and Medicare are taken into consideration, the tax system in the United States becomes more progressive than when viewing the federal income tax individually
A)True
B)False
Q2) Which of the following is one of the most important automatic stabilizers?
A)Open market operations
B)The reserve requirement ratio
C)The tax system
D)Deficit spending
E)Quantitative easing
Q3) Most flat tax proposals call for exempting income up to a certain minimum level
A)True
B)False
Q4) In 2012-13, more than one quarter of federal government spending went to Social Security and income security programs in the United States.
A)True
B)False
Q5) Why doesn't the U.S. government print money in order to solve its debt problems?
Page 17
Q6) What are the advantages of a flat tax system?
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Chapter 15: Monetary Institutions
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Sample Questions
Q1) Banks create money when they increase demand deposits through the process of creating loans.
A)True
B)False
Q2) In the years leading up to the financial crisis of 2008, financial institutions made negative profits.
A)True
B)False
Q3) In general, a bank that held excess reserves would earn higher profits as a result.
A)True
B)False
Q4) A bank's capital is:
A)the value of all its assets, including loans.
B)the value of all its assets, excluding loans.
C)the value of its physical plant, including buildings, computers, and automatic teller machines.
D)the difference between its assets and liabilities.
E)the sum of its assets and liabilities.
Q5) What is fiat money? Why is fiat money important in the United States today?
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Chapter 16: The Federal Reserve and Monetary Policy
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Sample Questions
Q1) The major objective of the Federal Reserve System is to:
A)make substantial profits for its member banks.
B)help in generating stabilization policies for the economy.
C)distribute paper money and coins to banks and retail stores
D)prevent the closure of individual member banks
E)frame sustainable public distribution schemes.
Q2) When the economy is initially at full employment, an:
A)expansionary monetary policy will tend to increase the price level in the short run and the long run.
B)expansionary monetary policy will tend to increase the price level in the short run but not in the long run
C)expansionary monetary policy will tend to increase the price level in the long run but not in the short run
D)expansionary monetary policy will not tend to decrease the price level in the short run and the long run
E)expansionary monetary policy will not tend to decrease the price level in the short run but not in the long run.
Q3) What can the Fed do to restore stable prices during a period of persistent, high inflation
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Page 19
Chapter 17: Issues in Macroeconomic Theory and Policy
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Q1) The crowding-out effect:
A)increases the demand for money and increases private investment.
B)increases the demand for money and increases consumption expenditure.
C)increases the demand for money and decreases consumption expenditure.
D)decreases the demand for money and increases private investment.
E)decreases the demand for money and increases consumption expenditure.
Q2) Which of the following was believed to have started the global economic crisis of 2008?
A)The absence of depositor insurance
B)Excessive transfer payments made by the government
C)A sudden and sharp increase in oil prices
D)Lack of financial aids to banks
E)A sudden fall in housing prices
Q3) One main argument against indexing is that:
A)it can worsen inflation.
B)it can reduce asset prices.
C)it can reduce net exports.
D)it can lead to deflation.
E)it can lead to hyperinflation.
Q4) Can monetary policy be used to successfully fine-tune the economy?
Page 20
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Chapter 18: International Economics
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Sample Questions
Q1) At one time, it was believed that the way for a nation to prosper was to export as much as possible while importing as little as possible. In this way, more money would flow into a country than out of a country. Is this really a sound economic strategy?
Q2) The imposition of a tariff on widgets by the U.S. government is likely to:
A)increase the consumer surplus for domestic consumers.
B)result in higher prices and revenues to foreign producers
C)result in higher prices and revenues to foreign producers.
D)increase the quantity of widgets demanded.
E)decrease the total quantity of widgets sold.
Q3) Which of the following transactions would be recorded as a credit in the U.S. current account?
A)A U.S. consumer buying a television set made in Malaysia
B)Singapore Airlines buying a jumbo jet made in the United States
C)A U.S. investor purchasing British government bonds
D)An American citizen flying to Lithuania by Lithuanian Airlines
E)An American automobile distributor importing Honda trucks from Japan
Q4) What is consumer surplus? How is it different from producer surplus?
Q5) Why is the demand for foreign currencies known as a derived demand?
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