Foundations of Economics
Textbook Exam Questions
Course Introduction
Foundations of Economics introduces students to the core principles that underpin economic theory and practice. The course explores fundamental concepts such as scarcity, opportunity cost, supply and demand, market equilibrium, and the role of prices in resource allocation. Students will analyze how individuals, businesses, and governments make decisions in the face of limited resources and examine both microeconomic and macroeconomic perspectives. The course also provides an overview of economic systems, market structures, and the impact of policy on economic outcomes. Through real-world examples and case studies, students will develop critical thinking skills and a solid foundation for more advanced studies in economics.
Recommended Textbook
Economics 11th Edition by Roger A. Arnold
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Chapter 1: What Economics Is About
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Sample Questions
Q1) The absence of value judgments is the essence of
A) normative economics.
B) positive economics.
C) microeconomics.
D) macroeconomics.
Answer: B
Q2) Which of the following is a positive economic statement?
A) We should raise the minimum wage in order to provide a decent wage for more people.
B) Consumers bought fewer cars when the relative price of cars increased.
C) The budget deficit has been rising in recent years.
D) Federal government spending ought to be curtailed.
E) b and c
Answer: E
Q3) Explain why the ceteris paribus assumption is essential when assessing an economic theory. Give an example to help support your answer.
Answer: Economists use the ceteris paribus assumption to isolate the relationship between two variables.It allows them to see the cause and effect relationships,without being confused by other possible influences. Examples will vary.
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Chapter 2: Production Possibilities Frontier Framework
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Sample Questions
Q1) If the economy is on the production possibilities frontier (PPF),the economy is
A) productive inefficient.
B) operating with no unemployed resources.
C) productive efficient.
D) b and c
E) none of the above
Answer: D
Q2) Refer to Exhibit 2-2.If PPF? is the relevant production possibilities frontier,then point __________ is unattainable.
A) A
B) G
C) D
D) J
Answer: D
Q3) The point where the PPF intersects the vertical axis is A) unattainable.
B) attainable and productive efficient.
C) attainable but productive inefficient.
D) attainable and neither productive efficient nor productive inefficient.
Answer: B
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Chapter 3: Supply and Demand: Theory
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Sample Questions
Q1) If computers and software are complements,then
A) a fall in the price of computers will increase the demand for software and, ceteris paribus, the price of software will rise.
B) a rise in the price of computers will decrease the demand for software and, ceteris paribus, the price of software will rise.
C) a fall in the price of computers will decrease the demand for software and, ceteris paribus, the price of software will fall.
D) a rise in the price of software will increase the demand for computers and, ceteris paribus, the price of computers will rise.
E) a fall in the price of software will decrease the demand for computers and, ceteris paribus, the price of computers will fall.
Answer: A
Q2) In moving along a demand curve,everything is held constant except the prices of related goods.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Prices: Free, Controlled, and Relative
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Sample Questions
Q1) A minimum wage law (that sets the minimum wage above the equilibrium wage)can be expected to
A) clear the market for unskilled workers.
B) increase employment for unskilled workers.
C) increase the number of firms in those industries where the law is effective.
D) reduce the hours worked for some unskilled workers.
E) all of the above
Q2) Explain why it is important to differentiate between the "number of unskilled workers" and the "number of unskilled labor hours" when evaluating the impact on the market for unskilled labor of a change in minimum wage.
Q3) If the price of good X is $50 and the price of good Y is $25,it follows that the relative price of one unit of good X is _____________ unit(s)of good Y.
A) 1.00
B) 2.00
C) 0.75 D) 1.33
E) 0.50
Q4) List and describe the two major jobs performed by price.
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Chapter 5: Supply, Demand, and Price: Applications
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Sample Questions
Q1) Good weather in cities such as San Diego
A) is absolutely free for the residents of that city.
B) is allocated using a weather market.
C) imposes indirect payments for the residents of that city.
D) b and c
E) none of the above
Q2) Explain in detail how the legalization of marijuana would be expected to impact the equilibrium price and quantity for marijuana.
Q3) If the purchase and sale of marijuana becomes legalized
A) the equilibrium price and quantity will both rise.
B) the equilibrium price will fall, but the change in equilibrium quantity depends upon whether the demand curve shifts rightward more or the supply curve shifts rightward more.
C) the equilibrium quantity will rise, but the change in equilibrium price depends upon whether the demand curve shifts rightward more or the supply curve shifts rightward more.
D) the equilibrium price and quantity will both fall.
Q4) Using proper economic terminology,describe why Mexican restaurants often provide chips and salsa for free to their customers.
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Chapter 6: Macroeconomic Measurements: Prices and Unemployment
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Sample Questions
Q1) Refer to Exhibit 6-2.How many people are not in the labor force in year 1?
A) 25 million
B) 50 million
C) 75 million
D) 175 million
E) 200 million
Q2) When making historical comparison's of one's income,is it better to use real income or nominal income for the basis of your comparison? Explain why one makes a better comparison than the other.
Q3) Which of the following statements is false?
A) The sum of the unemployment rate and the employment rate always equals 100 percent.
B) The sum of the number of employed persons and the number of unemployed persons equals the civilian non-institutional population.
C) The labor force participation rate equals the number of persons in the civilian labor force divided by the number of persons in the total population.
D) a and b
E) a, b and c
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Chapter 7: Macroeconomic Measurements: GDP and Real GDP
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Sample Questions
Q1) Gross Domestic Product (GDP)is the total market value of all
A) final goods and services produced annually within a country's borders.
B) final and intermediate goods and services produced annually within a country's borders.
C) intermediate goods and services produced annually within a country's borders.
D) final goods and services produced every month within a country's borders.
Q2) Refer to Exhibit 7-1.Which of the following summations represents net domestic product?
A) GDP - $222
B) GDP - $331
C) GDP - $412
D) GDP - $295
E) GDP + $134
Q3) With respect to the business cycle,describe the difference between the expansion phase and the recovery phase.
Q4) If the GDP in one year is greater than it was in the previous year,then economic growth must have occurred.
A)True
B)False
Q5) Explain why GDP figures do not necessarily measure happiness or well-being.
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Chapter 8: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) A rise in wage rates
A) causes the AD curve to shift leftward.
B) causes the short-run aggregate supply (SRAS) curve to shift rightward.
C) does not affect the present position of the SRAS curve.
D) causes the AD curve to shift rightward.
E) causes the SRAS curve to shift leftward.
Q2) If aggregate quantity demanded is greater than aggregate quantity supplied at a particular price level,then
A) consumers will bid prices upward, and a greater quantity of output will be supplied.
B) the shortage will likely be eliminated.
C) a and b
D) none of the above
Q3) The aggregate demand (AD)curve shifts to the right.This is a result of
A) total expenditures increasing at a given price level.
B) total expenditures decreasing at a given price level.
C) the real balance effect.
D) the interest rate effect
E) b and c
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Chapter 9: Classical Macroeconomics and the Self Regulating Economy
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Sample Questions
Q1) According to Say's law,in a money economy a reduction in consumption spending causes a __________ shift of the saving curve and therefore a __________ in the interest rate.
A) leftward; rise
B) leftward; fall
C) rightward; rise
D) rightward; fall
Q2) When consumers start to spend less and save more,classical macroeconomists believe that interest rates will then ______________ resulting in a(n)________________ in investment.
A) rise; increase
B) fall; increase
C) fall; decrease
D) rise; decrease
Q3) Describe the difference between business-cycle macroeconomics and economic-growth macroeconomics.
Q4) According to classical economists,Say's law applies to a barter economy,but it does not apply to a money economy.
A)True
B)False
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Chapter 10: Keynesian Macroeconomics and Economic
Instability: A Critique of the Self-Regulating Economy
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Sample Questions
Q1) Refer to Exhibit 10-9.What is the value of the marginal propensity to save (MPS)that would correctly fill in blank (A)and the multiplier that would correctly fill in blank (B)?
A) 0.20; 5
B) 0.08; 8
C) 0.08; 12.5
D) 0.05; 0.95
Q2) Describe the three basic points that Keynes made regarding consumption. Briefly explain why consumption was such a main concern in the Keynesian model.
Q3) According to efficiency wage models,labor productivity depends on
A) the number of employees at a firm; the smaller the number of employees, the more productive each employee is.
B) the amount of capital that employees have to work with.
C) the wage rate the firm pays its employees; a cut in wages can cause labor productivity to decline.
D) whether or not the economy is currently producing Natural Real GDP.
E) none of the above
Q4) Discuss how the Great Depression contributed to the development of Keynesian economics.
Page 12
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Chapter 11: Fiscal Policy and the Federal Budget
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Sample Questions
Q1) Suppose the economy is in a recessionary gap. If government expenditures are currently $1.4 trillion and tax revenues are currently $1 trillion,the (total)budget deficit is _____________. Assume that economists estimate that if the economy were operating at full employment
Government expenditures would be $1.2 trillion and tax revenues would be $1.1 trillion. The structural deficit is _________________ and the cyclical deficit is
A) $2.4 trillion; $2.2 trillion; $200 billion
B) $400 billion; $300 billion; $100 billion
C) $400 billion; $100 billion; $300 billion
D) $300 billion; $100 billion; $400 billion
Q2) The AD curve shifts to the left with a __________ in government purchases (G)or a __________ in taxes.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Q3) A subsidy is the same thing as a tax deduction
A)True
B)False
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Chapter 12: Money, Banking,and the Financial System
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Sample Questions
Q1) Bank A has checkable deposits of $800,000 and total reserves of $200,000.If the required reserve ratio is 0.15,the bank has required reserves of
A) $600,000.
B) $120,000.
C) $90,000.
D) $30,000.
Q2) Barter is
A) the exchange of money for goods and then the exchange of those goods for money. B) the exchange of money for money, or the exchange of money for stocks and bonds.
C) the exchange of goods and services for goods and services without the use of money. D) any exchange, with or without the use of money, in which the participants negotiate (or barter) the price of the goods to be exchanged.
Q3) The existence and use of the Internet has lowered the transaction costs of making some exchanges.
A)True
B)False
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Chapter 13: The Federal Reserve System
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Sample Questions
Q1) Which of the following Fed actions will increase the money supply?
A) open market purchases of Treasury notes
B) an increase in the required reserve ratio
C) an increase in the discount rate
D) all of the above
E) none of the above
Q2) When the Federal Open Market Committee (FOMC)votes on policy,they do so
A) in the following order: the chair, the vice chair, the remaining FOMC members in alphabetical order.
B) in order based on seniority at the Fed.
C) in the following order: the chair, the vice chair, the remaining FOMC members by seniority at the Fed.
D) in alphabetical order.
Q3) When one commercial bank borrows from another commercial bank,it pays the __________ rate.
A) discount
B) bank interest
C) federal funds
D) prime
E) none of the above
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Chapter 14: Money and the Economy
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Sample Questions
Q1) In the monetarist version of the AD-AS framework,starting from long-run equilibrium,an increase in the money supply produces
A) no change in Real GDP in the short run or the long run.
B) a rise in Real GDP in both the short run and the long run.
C) a rise in Real GDP in the short run, but not in the long run.
D) a rise in Real GDP in the long run, but not in the short run.
Q2) In the monetarist version of the AD-AS framework,an increase in the money supply produces a __________ shift of the __________ curve.
A) rightward; AD
B) rightward; SRAS
C) leftward; AD
D) leftward; SRAS
Q3) Explain how a change in the money supply can affect the following in the short run:a.
The supply of loanable funds b.
Real GDP c.
The price level d.
The expected inflation rate
Q4) Describe the expectations (or Fisher)effect.
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Chapter 15: Monetary Policy
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Sample
Questions
Q1) Refer to Exhibit 15-4. In the row of this table containing blank (C),people are holding ______________ of their wealth in bonds and ________________ of their wealth in money.
A) too much; too little
B) too little; too much
C) just the right amount; too little
D) just the right amount; too much
E) just the right amount; just the right amount
Q2) According to the Keynesian transmission mechanism,if the Fed conducts an open market sale of government securities,it may cause which of the following in the investment goods market?
A) a rightward shift in the investment demand curve
B) a leftward shift in the investment demand curve
C) a movement down and along a given investment demand curve
D) a movement up and along a given investment demand curve
Q3) The money supply curve is usually horizontal.
A)True
B)False
Q4) Describe the monetary policy known as inflation targeting. What are the three major issues that surround this practice?
Page 17
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Chapter 16: Expectations Theory and the Economy
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Sample Questions
Q1) Refer to Exhibit 16-1.According to new classical macroeconomists,if increases in aggregate demand are correctly anticipated,then the economy will move from point A to
A) point B.
B) point C.
C) some point on SRPC<sub>2</sub>, above C.
D) some point on SRPC<sub>1</sub>, below A.
Q2) The economy was in long-run equilibrium when aggregate demand increased.At this point in time,the expected inflation has started to adjust to the new higher actual inflation rate.According to the (Friedman)natural rate theory,this means the unemployment rate in the economy must currently be A) decreasing.
B) increasing.
C) higher than it was in long-run equilibrium.
D) equal to what it was in long-run equilibrium.
E) There is not enough information to answer the question.
Q3) Rational expectations theory is also known as the Friedman fooling theory.
A)True
B)False
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Page 18
Chapter 17: Economic Growth: Resources, Technology, Ideas,
and Institutions
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Sample Questions
Q1) In the production function Real GDP = T (L,K),the T stands for tax coefficient.
A)True
B)False
Q2) If an economy can increase its steady annual growth rate from 2 percent to 3.5 percent,this reduces the time it takes for the economy to double in size by __________ years.
A) 5
B) 8
C) 10
D) 15
E) 20
Q3) Using the labor market,the production function Real GDP = T (L,K),and the LRAS curve,describe the process by which a decrease in income taxes impacts economic growth.
Q4) Real GDP in a small country is worth $8 billion.The population of the country is 200,000.What is per capita Real GDP?
A) $30,000
B) $40,000
C) $60,000
D) $300,000
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Chapter 18: The Financial Crisis of 2007-2009
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Sample Questions
Q1) During the Great Recession,the growth rate of Real GDP _________________ and the inflation rate ___________________.
A) increased; declined B) declined; increased C) declined; also declined D) increased; also increased
Q2) In the 1990s and early 2000s,mortgage lending standards ______________ in the United States. In general,there was a move _____________ traditional lending practices during this period.
A) declined; away from B) declined; towards more C) became more strict; away from D) became more strict; towards more
Q3) Collateralized debt obligations are
A) like mortgage-backed securities except that the slices are equal.
B) like mortgage-backed securities except that the slices are unequal. C) an asset for persons who buy them.
D) b and c
E) a and c
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Chapter 19: Debates in Macroeconomics Over the Role and Effects
of Government
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Sample Questions
Q1) Suppose that a $30 billion increase in government spending increases Real GDP by $150 billion,and that a $10 billion tax reduction increases Real GDP by $60 billion. In this situation,the tax multiplier is _______________ the government spending multiplier. A) less than B) greater than C) equal to D) none of the above
Q2) If the (average)tax rate falls by 10% and as a result the tax base rises by 8%,then tax revenues will A) rise.
B) decline.
C) remain unchanged.
D) There is not enough information given to answer this question.
Q3) The stimulus bill passed by the U.S.Congress in February 2009,is an example of A) expansionary monetary policy. B) contractionary monetary policy.
C) contractionary fiscal policy.
D) expansionary fiscal policy.
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Chapter 20: Elasticity
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Sample Questions
Q1) If the price of good X rises and the demand for good X is inelastic,then the percentage fall in quantity demanded is __________ the percentage rise in price,and total revenue __________.
A) greater than; rises
B) less than; falls
C) equal to; remains constant
D) greater than; falls
E) none of the above
Q2) Refer to Exhibit 20-3.If price decreases from $5.50 to $4.50,total revenue along the demand curve
A) increases to $67.50.
B) increases to $87.50.
C) remains at $87.50.
D) decreases to $67.50.
E) decreases to $27.50.
Q3) As the price of a product rises the product will become more elastic in demand,assuming that the demand curve for the product is a downward-sloping straight line.
A)True
B)False
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Chapter 21: Consumer Choice: Maximizing Utility and Behavioral Economics
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Sample Questions
Q1) Consumer equilibrium exists when the
A) slope of the indifference curve is greater than the slope of the budget constraint.
B) consumer is on his highest indifference curve.
C) marginal rate of substitution equals the slope of the budget constraint.
D) slope of the indifference curve equals the slope of the budget constraint.
E) c and d
Q2) Economists assume that the goal of consumers is to maximize marginal utility.
A)True
B)False
Q3) For the consumer,a point on an indifference curve that lies farther from the origin is preferable compared to those points that are closer to the origin.
A)True
B)False
Q4) Refer to Exhibit 21-5. What value goes in blank (B)?
A) 27
B) 38
C) 40
D) 35
E) There is not enough information to answer this question.
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Chapter 22: Production and Costs
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Sample Questions
Q1) Refer to Exhibit 22-4.Curve D is a(n)__________ cost curve.
A) marginal
B) average variable
C) average total
D) average fixed
Q2) The marginal physical product (MPP)of a variable input is
A) total output divided by the quantity of the input used.
B) the change in total output that results from changing the variable input by one unit.
C) the change in total revenue that results from changing the variable input by one unit.
D) the change in total output that results from changing the fixed input by one unit.
E) the change in total costs that results from a change in output.
Q3) Refer to Exhibit 22-11.Average variable cost at three units of output is
A) $50.
B) $60.
C) $93.33.
D) $110.
E) There is not enough information provided to answer this question.
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24
Chapter 23: Perfect Competition
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Q1) If an industry is in long-run competitive equilibrium and experiences a decrease in demand,then as a result the equilibrium price will __________,which will cause the representative firm's __________ curve to shift downward and some firms will __________ the industry.
A) rise; marginal cost; enter B) fall; marginal cost; enter C) rise; marginal revenue; enter D) fall; demand; exit
E) fall; marginal cost; exit
Q2) Refer to Exhibit 23-7.At the profit-maximizing output level,average fixed cost is A) $2.00.
B) $4.00.
C) $5.00.
D) $6.00.
E) This cannot be determined based on the information provided.
Q3) In long-run competitive equilibrium,no firm has an incentive to change its plant size.
A)True
B)False
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Chapter 24: Monopoly
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Sample Questions
Q1) Refer to Exhibit 24-9.A single-price monopolist that seeks to maximize profits by setting MR equal to MC will sell __________ units and charge a per-unit price of __________ dollars.
A) 20; 9
B) 40; 7
C) 50; 6
D) 10; 10
E) 7; 40
Q2) The perfectly price-discriminating monopolist achieves resource allocative efficiency,while the single-price monopolist does not.
A)True
B)False
Q3) A single-price monopolist
A) must lower price on all previous units to sell an additional unit of output. B) is a price taker.
C) finds that its marginal revenue and price are the same for the first unit of the good it sells.
D) necessarily faces a perfectly inelastic demand curve.
E) a and c
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Chapter 25: Monopolistic Competition, Oligopoly, and Game Theory
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Sample Questions
Q1) The monopolistic competitor's demand curve is
A) perfectly elastic because of the many buyers and sellers in the market.
B) downward sloping because of product differentiation.
C) perfectly elastic because of identical products.
D) downward sloping because of the few buyers and sellers in the market.
E) none of the above
Q2) The excess capacity theorem states that a monopolistic competitor
A) will produce an output level smaller than the one that would minimize its unit costs.
B) will produce an output level where MR > MC.
C) generally does not attain long run equilibrium, and thus charges a higher price than it should.
D) typically produces too much of a good at too low a quality.
Q3) Which of the following assumptions do the market structures of monopolistic competition and perfect competition share?
A) many buyers and sellers
B) homogeneous products
C) difficult entry into the market
D) difficult exit from the market
Q4) List and describe the three assumptions upon which oligopoly behavior are based.
Page 27
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Chapter 26: Government and Product Markets: Antitrust and Regulation
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Q1) Evidence pertaining to the airline industry suggests that A) since the airlines have become deregulated, airline fares have increased steadily. B) under regulation the airlines' fares were low, which indicates that the regulators were doing a good job setting prices.
C) airline fares are no higher and no lower than they were when the industry was regulated.
D) deregulation of the airline industry has brought significant price reductions.
Q2) Refer to Exhibit 26-2.The industry's Herfindahl index in Year 5 was A) 2,000.
B) 3,000.
C) 4,000.
D) 1,000.
E) 5,000.
Q3) Thomas Edison constructed the first building that was used solely to make A) movies.
B) airplanes.
C) telephones.
D) cameras.
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Chapter 27: Factor Markets: With Emphasis on the Labor Market
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Q1) Given an 8 percent increase in wages,firm A cuts back on labor more than firm B.It follows that,ceteris paribus,
A) there are fewer substitutes for labor in firm B than A.
B) there are fewer substitutes for labor in firm A than B.
C) sunk costs are greater for firm A than B.
D) the demand for the product that firm A produces is less elastic than the product that firm B produces.
E) a and d
Q2) The demand for factors (which arises from the demand for the products that the factors help produce)is called a(n)__________ demand.
A) derived
B) indirect
C) secondary
D) expressed
Q3) What looks like discrimination in the labor markets is always just a problem of the high cost of information.
A)True
B)False
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Chapter 28: Wages,Unions,and Labor
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Sample Questions
Q1) Refer to Exhibit 28-10.If the firm in the exhibit is a monopsony,it will hire __________ quantity of labor and pay its workers the wage rate of __________.
A) Q<sub>2</sub>; W<sub>3</sub>
B) Q<sub>2</sub>; W<sub>1</sub>
C) Q<sub>1</sub>; W<sub>2</sub>
D) Q<sub>1</sub>; W<sub>4</sub>
E) none of the above
Q2) Refer to Exhibit 28-10.If the firm in the exhibit is a monopsony,then the curve represented by the number 1 is its
A) factor supply curve.
B) marginal factor cost curve.
C) marginal revenue product curve.
D) marginal cost curve.
E) average fixed cost curve.
Q3) As long as there are advancements in technology,some workers will be temporarily displaced.
A)True
B)False
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Chapter 29: The Distribution of Income and Poverty
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Sample Questions
Q1) A Gini coefficient of 1 means there is
A) perfect income equality.
B) perfect income inequality.
C) a more equal distribution of income than before.
D) a less equal distribution of income than before.
E) the same distribution of income as before.
Q2) Refer to Exhibit 29-2. This graph depicts the Lorenz curve for two countries,country 1 (Lorenz curve 1)and country 2 (Lorenz curve 2). The Gini coefficient associated with Lorenz curve 1 appears to be ____________ than the Gini coefficient associated with Lorenz curve 2. This information indicates that the income distribution is ______________ equal in country 2 than in country 1.
A) lower; less
B) higher; less
C) lower; more
D) higher; more
Q3) The closer the Gini coefficient is to zero,the
A) greater the degree of income inequality.
B) less the degree of income inequality.
C) greater the degree of discrimination.
D) less the degree of discrimination.
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Chapter 30: Interest, Rent, and Profit
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Sample Questions
Q1) An artificial rent is an economic rent that would not exist without government.
A)True
B)False
Q2) Suppose there are no barriers to competing for real rents.It follows that if real rents exist,people will compete for them
A) and in the process produce less of the good or service that is connected with the real rents.
B) and in the process produce more of the good or service that is connected with the real rents.
C) only if the real rents can be turned into artificial rents and therefore maintained over a long period of time.
D) only if the real rents are pure economic rents and not simply economic rents.
E) There is not enough information to answer the question.
Q3) If medical research were to find that grain consumption lowers human life expectancy,agricultural land rents would
A) increase.
B) decrease.
C) not be affected.
D) increase in the short run and decrease in the long run.
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Page 32
Chapter 31: Market Failure: Externalities, Public Goods, and
Asymmetric
Information
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Q1) The primary characteristic of a public good is that it is nonrivalrous in consumption.
A)True
B)False
Q2) To reduce pollution,economists generally prefer a corrective tax to a command-and-control policy because the same goals can be achieved but in an efficient manner with a corrective tax.
A)True
B)False
Q3) A side effect of an action that affects the well-being of third parties is
A) a marginal cost.
B) a marginal private benefit.
C) an externality.
D) a and b
E) all of the above
Q4) A public good can be excludable or nonexcludable.
A)True
B)False
Q5) Describe the Coase theorem and explain why it is significant in the analysis of externatility problems.
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Chapter 32: Public Choice and Special-Interest-Group
Politics
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Sample Questions
Q1) Refer to Exhibit 32-4. Suppose that producers of this good engage in rent seeking which results in the government imposing a price floor of P?. The loss of consumers' surplus that occurs due to the price floor is
A) B + C
B) A + B + C + D + E
C) A + B + C
D) C + E
E) A
Q2) People will be more likely to vote if they believe that their vote will determine the outcome of the election.
A)True
B)False
Q3) The state of choosing not to acquire information because the costs of acquiring the information are greater than the benefits is referred to as
A) logrolling.
B) rational ignorance.
C) market failure.
D) government failure.
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Chapter 33: Building Theories to Explain Everyday Life: From
Observations to Questions to Theories to Predictions
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Sample Questions
Q1) Theory B predicts that everything that happens,happens for a reason - although we may not know what the reason is. This theory
A) can be refuted.
B) probably cannot be refuted.
C) is a good explanation for what happens.
D) is the kind of theory that scientists like to build because it can explain so much.
Q2) Anna gives Billy a gift of $200. We can be sure that Billy will
A) spend the $200 on what Anna hopes that he will spend it on.
B) save the $200, and not spend it on anything.
C) spend the $200 on whatever is next on Billy's list of things to buy.
D) spend the $200 on something that Anna does not want him to spend it on.
Q3) Adrian reads about two theories,A and B. Theory A seems wrong to Adrian and theory B seems correct to Adrian. It follows that
A) theory B is correct, and theory A is not.
B) both theories may be correct.
C) both theories may be incorrect.
D) theory A is trying to explain something completely different than theory B.
E) b and c
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Chapter 34: International Trade
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Sample Questions
Q1) The answer is: "The difference between the price buyers pay for a good and the maximum or highest price they would have paid for the good." This is the definition for A) taxes.
B) producers' surplus.
C) consumers' surplus.
D) the sum of producers' and consumers' surpluses.
E) the welfare triangle.
Q2) Refer to Exhibit 34-7. The world price of X is $15. Under a policy of free trade,U.S.consumers will import ___________ units of X from abroad.
A) 50
B) 45
C) 40
D) 30
Q3) The answer is: "There is a net loss to society." What is the question?
A) What causes the distributional effects to outweigh the aggregate effects?
B) What is an effect of a reduction in producers' surplus?
C) What is an effect of consumers' surplus?
D) What is the effect of a tariff instead of a quota?
E) none of the above
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Page 36
Chapter 35: International Finance
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Sample Questions
Q1) You go on vacation to Mexico and take $1,000 with you.During your time in Mexico,the peso appreciates in value relative to the dollar.It follows that
A) you will be able to buy more goods and services in Mexico.
B) you will be able to buy fewer goods and services in Mexico.
C) the purchasing power parity theory is incorrect.
D) Mexican workers, paid in pesos, will be able to buy fewer goods and services in Mexico.
Q2) If,under a fixed exchange rate system,the dollar price of a Mexican peso is above its equilibrium level,then the
A) dollar is overvalued.
B) peso is overvalued.
C) dollar has appreciated.
D) peso has depreciated.
Q3) Suppose that prices in Japan increase by 15 percent while prices in the United States remain stable.We would expect that
A) the dollar will appreciate and the yen will depreciate.
B) the dollar will depreciate and the yen will appreciate.
C) both the dollar and the yen will appreciate.
D) both the dollar and the yen will depreciate.
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Page 37
Chapter 36: Globalization and International Impacts on the Economy
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Sample Questions
Q1) Between 1940 and 2000,income per person in China
A) doubled.
B) tripled.
C) quadrupled.
D) decreased by 5 percent.
Q2) Which of the following is a general rule of business etiquette in the given city?
A) Beijing, China: If someone offers you his or her business car, accept it with both hands, read it immediately, and then present your business card to the person.
B) Hong Kong, China: It is considered impolite to run out of business cards.
C) Sydney, Australia: It is important to know about the latest sports matches.
D) Berlin, Germany: When out with German business associates, try not to talk about sports.
E) All of the above are examples of proper business etiquette around the world.
Q3) When real interest rates in the United States rise relative to real interest rates in Japan,what is the impact on the U.S.price level? Explain your answer using AD-SRAS analysis.
Q4) Describe at least three forces in the world which could change to push the world in the direction of antiglobalization.
Page 38
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Chapter 37: The Economic Case For and Against
Government: Five Topics Considered
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Sample Questions
Q1) Which of the following is false?
A) Government can remove individuals from a prisoner's dilemma setting and make both participants better off.
B) Government can define and enforce the property rights that individuals actually want defined and enforced.
C) Individuals in a prisoner's dilemma setting may want to get out of the prisoner's dilemma setting.
D) a and b
E) none of the above
Q2) If the government grants tax credits to first-time homebuyers,the supply of houses would increase and the price of housing would fall.
A)True
B)False
Q3) Which of the following is usually discussed in the case against government?
A) special interest groups and transfers
B) the unintended effects of governments actions
C) removal from the prisoner's dilemma
D) a and b
E) none of the above
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Chapter 38: Stocks, Bonds, Futures, and Options
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Sample Questions
Q1) Refer to Exhibit 38-1.The coupon rate for bond B is
A) 0.17 percent.
B) 16.7 percent.
C) 0.15 percent.
D) 17 percent.
E) none of the above
Q2) What is the Dow Jones Industrial Average (DJIA)? Give a description of why the DJIA was first created,how it is computed,and how it has evolved over time.
Q3) A low price-earnings ratio usually indicates that people believe that this corporation will have lower than average growth in earnings.
A)True
B)False
Q4) Refer to Exhibit 38-1.For which bond is the yield and the coupon rate the same?
A) Bond A
B) Bond B
C) Bond C
D) Bond D
E) Bond E
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Chapter 39: Agriculture: Problems, Policies, and Unintended Effects
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Sample Questions
Q1) The major way that the government supports crop prices is by granting nonrecourse loans to farmers.
A)True
B)False
Q2) The demand for farm goods is income inelastic if the percentage change in quantity demanded is __________ the percentage change in __________.
A) greater than; income
B) equal to; income
C) less than; income
D) greater than; revenue
E) less than; revenue
Q3) At the beginning of the 20th century one farmer in the U.S.produced enough to feed ____________ people,and at the end of the century,one farmer produced enough to feed ____________ people.
A) 20; 40
B) 7; 15
C) 12; 42
D) 8; 35
Q4) Explain how nonrecourse loans operate and how they help to support crop prices.
Page 41
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