Fundamentals of Economics Exam Preparation Guide
Course Introduction
Fundamentals of Economics introduces students to the foundational concepts and principles of microeconomics and macroeconomics. The course explores topics such as supply and demand, market structures, consumer behavior, production and costs, as well as the roles of government and international trade in the economy. Students will also examine economic indicators, fiscal and monetary policy, and the impact of economic decisions on individuals, businesses, and societies. Through real-world examples and analytical tools, the course provides a solid understanding of how economic systems function and the factors that influence economic outcomes.
Recommended Textbook
Survey of ECON 3rd Edition by Robert L. Sexton
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Chapter 1: The Role and Method of Economics
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Q1) Which of the following forces us to choose among alternatives?
A)Marginal utility
B)Scarcity
C)Deflation
D)Rational ignorance
E)The fallacy of composition
Answer: B
Q2) A decrease in the price of corn signals to consumers and producers that:
A)consumers are buying more corn than before.
B)corn is relatively more abundant than before.
C)corn is relatively less abundant than before.
D)producers are stocking up on corn.
E)producers are more willing to supply corn in the current period.
Answer: B
Q3) It is possible to completely eliminate scarcity.
A)True
B)False
Answer: False
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Chapter 2: The Economic Way of Thinking
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Q1) Which of the following is most limited in scope under a pure market economy?
A)Freedom of choice
B)Consumer sovereignty
C)Entrepreneurship
D)Government
E)The labor force
Answer: D
Q2) Would it make good sense for a community to seek to reduce its levels of pollution to zero? Why or why not?
Answer: In general, it would not make sense for a community to seek to reduce pollution levels to zero because the costs involved would exceed the benefits received. REJ: Please see the section ''Marginal Thinking'' for more information.
Q3) Economic efficiency is defined as:
A)the maximization of output from available resources.
B)the maximization of revenue from available resources.
C)the maximization of inputs using available resources.
D)the creation of a surplus using available resources.
E)the minimization of cost using available resources.
Answer: A
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Chapter 3: Supply and Demand
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Sample Questions
Q1) A decrease in demand and an increase in supply are indicated by:
A)upward shifts in both curves.
B)downward shifts in both curves.
C)rightward shifts in both curves.
D)leftward shifts in both curves.
E)a downward shift in the demand curve, but an upward shift in the supply curve.
Answer: B
Q2) The quantity demanded of a good is the amount that buyers:
A)are willing to buy.
B)are willing and able to buy.
C)are willing, able, and need to buy.
D)are able to buy.
E)need for their subsistence.
Answer: B
Q3) If input prices fall, the cost of production will also fall, causing the supply curve to shift to the right.
A)True
B)False
Answer: True
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Chapter 4: Using Supply and Demand
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Sample Questions
Q1) For nondurable goods, _____.
A)the short-run demand curve is less elastic than the long-run demand curve
B)the short-run demand curve is more elastic than the long-run demand curve
C)the short-run demand curve is unit elastic
D)the short-run demand curve is perfectly elastic
E)the short-run demand curve is perfectly inelastic
Q2) A jeweler cut prices in his store by 20 percent, and the dollar value of his sales fell by 20 percent. This indicates a(n) _____ demand for the jewelry at the store.
A)elastic
B)inelastic
C)perfectly elastic
D)perfectly inelastic
E)unit elastic
Q3) The demand curve of a good or service represents a collection of minimum prices that consumers are willing and able to pay for additional quantities of a good or service.
A)True
B)False
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Chapter 5: Market Failure and Public Choice
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Q1) A public good is:
A)a good or service for which it is relatively easy to exclude nonpaying customers from consumption.
B)a good or service that can be consumed by both the paying and the nonpaying customers.
C)any good or service that is produced by the government.
D)any good or service that is consumed by private individuals and financed by private contributions.
E)a good or a service that is produced by public sector companies.
Q2) The individual consumption-payment link often breaks down for political goods.
A)True
B)False
Q3) Public goods:
A)suffer from the free-rider problem.
B)suffer from the tragedy of the commons.
C)are high priced and available only to the rich.
D)are low priced and available only to the poor.
E)act as a safety net for the unemployed people.
Q4) What is the difference between private costs and social costs?
Q5) What is the difference between a public good and common resources?
Page 7
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Chapter 6: Production and Costs
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Q1) The average fixed cost curve approaches the horizontal axis but never touches it A)True B)False
Q2) private costs are included in economic profit but not in accounting profit.
A)sunk costs are included in economic profit but not in accounting profit.
B)sunk costs are included in economic profit but not in accounting profit
C)external costs are included in economic profit but not in accounting profit.
D)cash payments are included in economic profit but not in accounting profit.
E)implicit costs are included in economic profit but not in accounting profit
Q3) A firm produces 200 units of output at a total cost of $1,000. The firm's total fixed cost equals $200.The firm's per-unit average variable cost is _____.
A)$4
B)$5
C)$7
D)$10
E)$8
Q4) When marginal cost is below average total cost, average total cost must be increasing A)True B)False
Page 8
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Chapter 7: Firms in Perfectly Competitive Markets
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Q1) In the short run, if a firm's price is greater than its AVC but less than its ATC, the firm should:
A)shut down immediately because it is generating an economic loss.
B)shut down temporarily because it is generating an economic loss.
C)continue operating at the same level of output because it is generating an economic profit.
D)continue operating even though it is generating an economic loss.
E)increase its output in order to earn more profits.
Q2) In a constant-cost industry, the cost curves of individual firms will shift upward as the industry output expands.
A)True
B)False
Q3) If a perfectly competitive industry is neither expanding nor contracting, we would typically expect:
A)accounting profits to be zero.
B)economic profits to be positive.
C)that the price of the good will increase.
D)that the price of the good will decrease.
E)that the price of the good will be stable.
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Chapter 8: Monopoly
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Q1) Many people believe that a monopolist can set its own price, for which consumers have little recourse but to pay, and thereby reap enormous profits. Is this true?
Q2) Which of the following is consistent with a monopoly?
A)A horizontal demand curve
B)The free entry of competitive firms
C)An increase in average total cost with increase in output
D)Marginal revenue that is less than the selling price
E)A single buyer
Q3) The welfare loss from monopoly is not really a loss to society as a whole since it is just a transfer from consumers to producers.
A)True
B)False
Q4) Which of the following types of firms do not practice price discrimination?
A)Airlines
B)Movie theaters
C)Colleges
D)Amusement parks
E)Soft drink companies
Q5) How can economies of scale lead to monopoly?
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Chapter 9: Monopolistic Competition and Oligopoly
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Q1) The key difference between oligopoly and other market structures is the interdependence among producers.
A)True
B)False
Q2) 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
Q3) Unlike perfectly competitive firms, monopolistically competitive firms do not attain productive efficiency.
A)True
B)False
Q4) Which of the following is not a source of product differentiation?
A)Physical differences in products
B)Differences in the services provided by firms
C)Differences in the location of sales outlets
D)Prestige considerations in products
E)Differences in the cost of production of products
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Chapter 10: Labor Markets, Income Distribution, and Poverty
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Q1) The market labor supply curve shows the relationship between:
A)the wage rate and the number of employees firms are willing to hire.
B)the price of output and the number of employees firms are willing to hire.
C)the wage rate and the quantity of labor that workers are willing to supply
D)the price of output and the quantity of labor that workers are willing to supply.
E)the marginal cost of output and the quantity of labor that workers are willing to supply.
Q2) A set of money income thresholds, established by the federal government, that vary by family size is called:
A)the poverty rate
B)the federal tax system.
C)the poverty line.
D)a transfer payment.
E)an in-kind transfer program.
Q3) What is meant by "derived demand," and how does it relate to the factors of production?
Q4) Why does an increasing divorce rate tend to increase income inequality?
Q5) Would an increase in the productivity of labor lead to an increase or a decrease in the demand for labor? Why?
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Chapter 11: Introduction to Macroeconomics:
Unemployment, Inflation, and Economic Fluctuations
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Q1) Economists use the term "business cycle" to refer to:
A)the growth of small businesses into major corporations.
B)qualitative changes in products resulting from improved technology.
C)fluctuations in economic activity, measured by GDP or unemployment.
D)increases or decreases in the rate of inflation.
E)big business houses taking over small inefficient firms.
Q2) The current cost of a market basket of goods is $9,000. The cost of the same basket of goods in the base year was $3,000. The current price index is:
A) 900.
B)300.
C)166.
D)133.
E)400.
Q3) Nearly every society desires to achieve the macroeconomic goals of high employment, a stable price level, and high economic growth.
A)True
B)False
Q4) What are the four phases of the classical business cycle and how is employment typically affected during each phase?
Page 13
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Chapter 12: Economic Growth
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Q1) Generally, there is an inverse relationship between savings and long-term economic growth
A)True
B)False
Q2) Which of the following is true of the production possibilities curve of an economy?
A)Along the curve, the economy produces at its potential output.
B)An increase in the stock of capital in the economy results in a downward movement along the curve.
C)An improvement in the productive skills of labor results in an upward movement along the curve.
D)A decrease in the availability of land due to a natural calamity results in a downward movement along the curve.
E)An increase in the quantity supplied of consumption goods shifts the production possibilities curve outward.
Q3) Capital formation is a key component of economic growth.
A)True
B)False
Q4) Differentiate between personal income and disposable personal income.
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Chapter 13: Aggregate Demand and Aggregate Supply
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Q1) The long-run aggregate supply curve is the relationship between the price level and the quantity of real GDP that is supplied once input prices have had time to fully adjust to that price level.
A)True
B)False
Q2) Describe the difference between a microeconomic demand curve and an aggregate demand curve.
Q3) What happens to aggregate demand if the demand for consumption goods decreases? What happens if the demand for investment goods increases?
Q4) If the overall price level decreases, then the aggregate demand curve will shift to the right.
A)True
B)False
Q5) In the long run, the real output level _____.
A)varies positively with the price level
B)varies negatively with the price level.
C)is equal to the natural level of real output at all price levels
D)can be either greater than or less than the natural level of real output
E)is equal to the natural level of real output at all price levels.
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Chapter 14: Fiscal Policy
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Q1) How serious is the national debt to the economic stability of the United States?
Q2) Supply-side economics stresses that a tax cut and an investment tax credit would shift:
A)only the aggregate demand curve.
B)the short-run aggregate supply curve to the left.
C)both the aggregate supply and the aggregate demand curves.
D)neither the aggregate supply nor the aggregate demand curve.
E)the long-run aggregate supply curve to the left
Q3) Which policy would a supply-sider prefer-an across-the-board tax reduction in income tax rates or a package of tax-relief measures that would give every household a $200 tax rebate and allow them to deduct the interest they pay on credit card purchases?
Q4) Which of the following is not an option that could be used to save Social Security?
A)Decreasing the age required for full-time benefits
B)Implementing means testing
C)Allowing individuals to opt out of the Social Security system
D)Increasing the return to Social Security funds
E)Increasing the payroll tax rates
Q5) Does the benefits-received principle work well for all public goods?
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Chapter 15: Monetary Institutions
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Q1) Which of the following is the least liquid asset?
A)Gold
B)Traveler's check
C)Checkable deposits
D)Bonds
E)Time deposits
Q2) A depositor cannot directly write checks against:
A)demand deposits.
B)currency deposits.
C)nontransaction deposits.
D)money market mutual fund accounts.
E)traveler's checks.
Q3) M1 includes:
A)gold.
B)cash, checking account balances, and travelers' checks.
C)bank deposits.
D)time deposits.
E)noninstitutional money market mutual fund shares.
Q4) Explain Gresham's Law.
Q5) What are the inherent disadvantages of a barter system?
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Chapter 16: The Federal Reserve and Monetary Policy
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Q1) Which of the following will be a direct impact of the sale of a U.S. government bond to a bank by the Fed?
A)The supply of money will increase.
B)The supply of money will remain unchanged.
C)The supply of money will decrease.
D)The demand for money will increase
E)The demand for money will decrease
Q2) According to the equation of exchange, velocity will tend to rise when:
A)the price level falls, other things being equal
B)real GDP decreases, other things being equal.
C)the money supply increases, other things being equal
D). the price level rises, other things being equal
E)the level of investment decreases, other things being equal
Q3) If the Fed wanted to reduce the federal funds interest rate, it might:
A)increase the discount rate.
B)increase the required reserve ratio
C)buy government securities
D)sell government securities.
E)pay higher interest on banks' reserves
Q4) Name the six primary functions of the central bank of a country.
Page 18
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Chapter 17: Issues in Macroeconomic Theory and Policy
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Q1) If people respond quickly to policy changes that imply future inflation will increase, the short run aggregate supply curve will shift upward due to their changed expectations.
A)True
B)False
Q2) Which of the following is true?
A)When increased government purchases or expansionary monetary policy does give the economy a boost, no one knows precisely how long it will take to do so.
B)Given the difficulties of timing stabilization policy, a contractionary monetary policy intended to reduce the severity of a recession may instead add inflationary pressures to an economy that is already overheating.
C)If velocity changes but moves in a fairly predictable pattern, the connection between the money supply and GDP is still unpredictable.
D)When the economy is operating at levels significantly lower than the full-employment output, input prices are flexible.
E)Government estimates of the real GDP and the value of the multiplier are always correct.
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Chapter 18: International Economics
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Q1) Which of the following people would most likely be worse off if the U.S. dollar is weaker than other currencies?
A)Zelig replacing his 20-year-old Volkswagen with a Ford
B)Abbey buying a Chevrolet as an anniversary gift for his wife
C)Donna buying a pair of Jimmy Choo shoes for the prom night in her school
D)Neo buying a MacBook for his personal use
E)Ada deciding to apply for the graduate programs at University of California, Berkeley
Q2) Which of the following is true of U.S. international trade?
A)U.S. international trade represents about 50 percent of U.S. GDP.
B)Italy was one of the major trading partners of the U.S. in 2011.
C)U.S. exports include crude oil and refined petroleum.
D)The U.S. economy is a closed economy.
E)U.S. imports of goods and services in 2011 amounted to 18 percent of GDP.
Q3) A U.S. import tariff imposed on steel is likely to:
A)increase employment in the U.S. steel industry.
B)decrease the quantity of steel supplied by U.S. producers.
C)decrease the cost of production of steel-using American firms.
D)increase U.S. imports of steel.
E)increase consumer surplus for domestic consumers.
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