Economics I Practice Exam
Course Introduction
Economics I provides an introduction to the fundamental principles of microeconomics, focusing on how individuals, firms, and governments make choices about the allocation of scarce resources. Topics covered include supply and demand, market equilibrium, elasticity, consumer and producer behavior, market structures, and the role of government in the economy. Through real-world examples and basic economic models, students develop an understanding of how markets function and the factors that influence decision-making in the economic environment.
Recommended Textbook
Macroeconomics 4th Edition by Glenn
P. Hubbard
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2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) The revenue received from the sale of ________ of a product is a marginal benefit to the firm.
A) an additional unit
B) the total number of units
C) no units
D) only profitable units
Answer: A
Q2) Arlene quits her $125,000-a-year job to take care of her ailing parents.What is the opportunity cost of her decision?
A) zero, since she will no longer be earning a salary
B) It depends on the "going rate" for home-care providers.
C) at least $125,000
D) the value she attributes to the satisfaction she receives from taking care of her parents
Answer: C
Q3) List the five main factors of production.
Answer: The five main factors of production are labor,capital,human capital,natural resources,and entrepreneurial ability.
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3
Chapter
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Sample Questions
Q1) In a production possibilities frontier model,a point ________ the frontier is productively inefficient.
A) along
B) inside
C) outside
D) at either intercept of
Answer: B
Q2) Economic decline (negative growth)is represented on a production possibilities frontier model by the production possibility frontier
A) shifting outward.
B) shifting inward.
C) becoming steeper.
D) becoming flatter.
Answer: B
Q3) A decrease in the unemployment rate may be represented as a movement from a point on the production possibilities frontier to a point outside the frontier.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) "Because apples and oranges are substitutes,an increase in the price of oranges will cause the demand for apples to increase.This initial shift in demand for apples results in a higher price for apples; this higher price will cause the demand curve for apples to shift to the right." Which of the following correctly comments on this statement?
A) The statement will be true if consumer tastes for apples and oranges do not change.
B) The statement is false because a change in the price of apples would not change the demand for apples.
C) The statement is false because oranges are inferior goods; apples are normal goods.
D) The statement is false because one cannot assume that apples and oranges are substitutes for all consumers.
Answer: B
Q2) Market equilibrium occurs where supply equals demand.
A)True
B)False
Answer: False
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Chapter 4: Economic Efficiency,government Price
Setting,and Taxes
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Sample Questions
Q1) Refer to Figure 4-4.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $3,what changes in the market would result in an economically efficient output?
A) The price would increase, the quantity supplied would decrease, and the quantity demanded would increase.
B) The quantity supplied would increase, the quantity demanded would decrease and the equilibrium price would increase.
C) The price would increase, the demand would decrease and the supply would increase.
D) The price would increase, the quantity demanded would decrease and the quantity supplied would increase.
Q2) Refer to Figure 4-3.What is the value of the deadweight loss at a price of $18?
A) $100
B) $180
C) $660
D) $1,040
Q3) The minimum wage is an example of a price ceiling.
A)True
B)False
Page 6
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Chapter 5: The Economics of Health Care
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Sample Questions
Q1) The Pre-Existing Condition Insurance Plan is a federally administered part of the Affordable Care Act,and is designed for people with pre-existing medical conditions to obtain insurance.By offering health insurance to all U.S.citizens with pre-existing medical conditions,the Pre-Existing Condition Insurance Plan eliminates ________ for both the insurer and the insured,and eliminates ________ for the issuer of the insurance policy.
A) the principal-agent problem; moral hazard
B) asymmetric information; adverse selection
C) adverse selection; the principal-agent problem
D) moral hazard; adverse selection
Q2) In markets with asymmetric information,
A) moral hazard causes adverse selection which in turn causes asymmetric information.
B) adverse selection causes moral hazard which in turn causes asymmetric information.
C) asymmetric information causes moral hazard and then it causes adverse selection.
D) asymmetric information causes adverse selection and then it causes moral hazard.
Q3) What is adverse selection?
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Chapter 6: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) The difference between a firm's assets and liabilities is its
A) accounting profit.
B) economic profit.
C) net worth.
D) implicit costs.
Q2) As a business type,corporations ________ in the United States.
A) earn the majority of revenues
B) are the most common
C) are the least common
D) are subject to the fewest taxes
Q3) Which type of business is the most difficult to set up?
A) sole proprietorship
B) partnership
C) corporation
D) There is no difference in the difficulty of establishment.
Q4) A firm's net income is also its
A) economic profit.
B) balance sheet.
C) accounting profit.
D) opportunity cost.
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Chapter 7: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Today,the United States charged an average tariff rate
A) that is more than its average tariff rate in 1930.
B) which is greater than any other high-income country.
C) of less than 2 percent.
D) that exceeds 50 percent.
Q2) An economic principle that explains why countries produce different goods and services is
A) absolute advantage.
B) trade as a percentage of GDP.
C) comparative advantage.
D) NAFTA.
Q3) Refer to Figure 9-3.What is the area that represents the deadweight loss as a result of the quota?
A) G + H
B) G + H + I + J
C) E + I + J + M
D) E + M
Q4) In the United States,imports and exports make up more than half of GDP.
A)True
B)False
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Chapter 8: Gdp: Measuring Total Production and Income
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Sample Questions
Q1) The purchase of a new house is included in
A) consumption expenditures.
B) investment expenditures.
C) government purchases.
D) net exports.
Q2) Refer to Table 19-10.Real GDP for Vicuna for 2009 using 2011 as the base year equals
A) $4,620.
B) $5,100.
C) $5,650.
D) $5,850.
Q3) Which of the following is not an example of a transfer payment?
A) unemployment insurance payments
B) health insurance payments to an army private
C) social security payments to retirees
D) social security payments to disabled persons
Q4) Since real GDP is adjusted for inflation and nominal GDP is not,nominal GDP must always be higher than real GDP.Do you agree or disagree? Why?
Q5) If the value added of a firm is positive,will the firm necessarily have positive profits?
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Chapter 9: Unemployment and Inflation
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Sample Questions
Q1) In the United States,the typical person who has lost his or her job finds another one in a few months except during severe recessions.
A)True
B)False
Q2) Refer to Table 20-10.Calculate the real median salary of the New York Yankees in both 1982-1984 dollars and 2009 dollars.Calculate the percentage increase in the median salary of the Yankees from 1989 to 2009 in both nominal terms and in real terms.
Q3) Which of the following statements is true about the U.S.economy?
A) Each year, many new jobs are created, but few existing jobs are destroyed, and the unemployed find jobs quickly.
B) Each year, few new jobs are created, but few existing jobs are destroyed, keeping unemployment low.
C) Each year, many new jobs are created and many existing jobs are destroyed.
D) Each year few jobs are created, and therefore it takes the unemployed a long time to find a new job.
Q4) When the actual inflation rate turns out to be greater than the expected inflation rate,who gains -- the borrower or the lender -- and who loses? Explain why.
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Chapter 10: Economic Growth, the Financial System, and Business Cycles
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Sample Questions
Q1) Which of the following would you expect to increase the equilibrium interest rate?
A) an increase in the percentage of income after net taxes that households save
B) an increase in the budget deficit
C) a decrease in the profitability of investment projects firms are considering
D) a change from an income tax to a consumption tax
Q2) Increases in real GDP since 1900 can actually underestimate growth in the standard of living for Americans since 1900 because
A) the level of pollution in 1900 was much higher than it is today.
B) the crime rate was higher in 1900 than it is today.
C) goods and services are more expensive today as compared to 1900.
D) the quality of health care that exists today was not available in 1900.
Q3) If labor productivity growth slows down in a country,this will
A) accelerate the increase in real GDP per capita.
B) accelerate the increase in nominal GDP.
C) slow down the increase in real GDP per capita.
D) slow down the increase in nominal GDP.
Q4) What factors increase potential GDP? Include a definition of potential GDP in your answer.
Q5) How are unemployment,inflation,and the business cycle related?
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Chapter 11: Long-Run Economic Growth: Sources and Policies
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Sample Questions
Q1) When an economy faces diminishing returns,
A) the slope of the per-worker production function becomes steeper as capital per hour worked increases.
B) the slope of the per-worker production function becomes flatter as capital per hour worked increases.
C) the per-worker production function shifts to the left.
D) the per-worker production function shifts to the right.
Q2) Relative to productivity growth in the United States,which of the following countries experienced the largest decline in productivity growth from 1990 to 2010?
A) Canada
B) Japan
C) Germany
D) the United Kingdom
Q3) Which of the following policies would not help promote economic growth?
A) a law requiring that the funds in an individual retirement account be taxed
B) a law restricting elected officials from accepting expensive gifts and trips from private individuals
C) a law that funds prenatal care for all expectant mothers
D) a law that subsidizes research in nanotechnology
Page 13
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Chapter 12: Aggregate Expenditure and Output in the Short Run
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Sample Questions
Q1) U.S.net export spending rises when
A) the price level in the United States rises relative to the price level in other countries.
B) the growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.
C) the value of the U.S. dollar increases relative to other currencies.
D) the inflation rate is higher in the United States relative to other countries.
Q2) If firms are more optimistic that future profits will rise and remain strong for the next few years,then
A) investment spending will fall.
B) investment spending will rise.
C) investment spending will remain unaffected.
D) investment spending will rise and then fall.
Q3) Actual investment spending does not include
A) spending on consumer durable goods.
B) spending on new capital equipment.
C) spending on new houses.
D) changes in inventories.
Q4) Why do economists care about aggregate expenditures?
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Chapter 13: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) The long-run aggregate supply curve will shift to the right if the economy
A) experiences technological change.
B) has a decrease in population.
C) experiences high levels of inflation.
D) net exports decrease.
Q2) If full-employment GDP is equal to $4.2 trillion,what does the long-run aggregate supply curve look like?
A) It is a horizontal line at $4.2 trillion of GDP.
B) It is a vertical line at a level of GDP below $4.2 trillion.
C) It is a vertical line at $4.2 trillion of GDP.
D) It is a vertical line at a level of GDP above $4.2 trillion.
Q3) The international trade effect states that
A) an increase in the price level will raise net exports.
B) an increase in the price level will lower net exports.
C) an increase in the price level will raise exports.
D) an increase in the price level will lower imports.
Q4) Beginning with long-run equilibrium,use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a negative supply shock.
Q5) Briefly describe monetarism and the monetary growth rule.
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Chapter 14: Money,banks,and the Federal Reserve System
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Sample Questions
Q1) The largest liability on the balance sheet of most banks is its
A) loans.
B) holdings of securities.
C) deposits with the Federal Reserve.
D) checking account and savings account deposits of its customers.
E) vault cash.
Q2) If credit card balances rise in the economy,then M1 will ________ and M2 will ________.
A) increase; increase
B) not change; increase
C) decrease; increase
D) not change; not change
E) increase; decrease
Q3) Economies where goods and services are traded directly for other goods and services are called ________ economies.
A) trade
B) barter
C) direct
D) seigniorage
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Page 16
Chapter 15: Monetary Policy
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Sample Questions
Q1) The Federal Reserve cannot target both the money supply and the interest rate because it does not control
A) bank reserves.
B) money demand.
C) the discount rate.
D) open market operations.
Q2) Using the money demand and money supply model,an increase in money demand would cause the equilibrium interest rate to A) decrease.
B) increase.
C) not change.
D) increase, then decrease.
Q3) The Fed can increase the federal funds rate by
A) selling Treasury bills, which increases bank reserves.
B) buying Treasury bills, which increases bank reserves.
C) selling Treasury bills, which decreases bank reserves.
D) buying Treasury bills, which decreases bank reserves.
Q4) The Fed can directly lower the inflation rate.
A)True
B)False
Page 17
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Chapter 16: Fiscal Policy
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Sample Questions
Q1) Proponents of spending on infrastructure as a means to stimulate the economy note that the multiplier effect for ________ is estimated to be larger than the multiplier effect for ________,and would therefore have a greater impact on expanding GDP.
A) increases in government spending; tax cuts
B) tax increases; increases in government spending
C) decreases in government spending; a balanced budget
D) a balanced budget; tax increases
Q2) A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
E) increase; not change
Q3) Why will there be less crowding out of private spending by government spending the less sensitive consumption,investment,and net exports are to changes in interest rates?
Q4) What is expansionary fiscal policy? What is contractionary fiscal policy?
Q5) List the five categories of federal government expenditures.
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Chapter 17: Inflation, unemployment, and Federal Reserve Policy
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Sample Questions
Q1) A "long-run exploitable Phillips curve" refers to a Phillips curve that in the long run is ________ rather than ________.
A) vertical; horizontal
B) upward sloping; vertical
C) horizontal; upward sloping
D) downward sloping; vertical
Q2) The major criticism of real business cycle models is
A) negative technology shocks are uncommon and can't explain all business cycle fluctuations.
B) positive technology shocks actually push real GDP above the economy's potential GDP.
C) negative technology shocks actually push real GDP below the economy's potential GDP
D) this model relies too heavily on monetary explanations for fluctuations in real GDP.
Q3) A decrease in expected inflation will
A) reduce real wages.
B) increase the natural rate of unemployment.
C) shift the long-run Phillips curve to the left.
D) shift the short-run Phillips curve to the left.
19
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Chapter 18: Macroeconomics in an Open Economy
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Sample Questions
Q1) Assuming no change in the nominal exchange rate,how will a decrease in the price level in the United States relative to France affect the real exchange rate between the two countries? (Assume the United States is the "domestic" country.)
A) The real exchange rate will rise.
B) The real exchange rate will fall.
C) The real exchange rate will be unaffected.
D) The impact on the real exchange rate cannot be predicted.
Q2) Assume the United States is the "domestic" country and China is the "foreign" country.Which of the following might increase the real exchange rate between the United States and China?
A) an appreciation of the yuan
B) a depreciation of the dollar
C) an increase in the price level in the United States.
D) an increase in the price level of China
Q3) Explain why the budget deficit and the trade deficit are sometimes referred to as the "twin deficits."
Q4) Why is the balance of payments always zero?
Q5) How is the impact of contractionary monetary policy different in an open economy than in a closed economy?
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Chapter 19: The International Financial System
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Sample
Questions
Q1) Refer to Figure 30-5.The Chinese government pegs the yuan to the dollar,at one of the specified exchange rates on the graph,such that it undervalues its currency.Using the figure above,this would generate a
A) a shortage of yuan equal to 400 million.
B) a shortage of yuan equal to 200 million.
C) a surplus of yuan equal to 200 million.
D) a surplus of yuan equal to 400 million.
E) a surplus of yuan equal to 300 million.
Q2) If a country's currency is "pegged" to the dollar,its exchange rate is A) floating.
B) flexible.
C) fixed.
D) undervalued.
Q3) One reason purchasing power parity does not exactly hold is that many goods are not traded internationally.
A)True
B)False
Q4) Why are foreign investors more likely to invest in U.S.government bonds than in U.S.corporate stocks and bonds?
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