Principles of Economics
Exam Answer Key
Course Introduction
Principles of Economics introduces students to the foundational concepts and analytical tools used to understand how economic systems function. The course covers fundamental topics such as supply and demand, market equilibrium, consumer behavior, production and costs, and the role of government in the economy. Students will also explore macroeconomic principles including national income determination, unemployment, inflation, fiscal and monetary policy, and international trade. Through a combination of theory and real-world applications, this course equips students with a solid grasp of how individuals, businesses, and governments make economic decisions and respond to changing economic conditions.
Recommended Textbook
Principles of Economics 5th Edition by Robert Frank
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26 Chapters
3218 Verified Questions
3218 Flashcards
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Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) If the marginal costs of 1,2,and 3 hours of talking on the phone are $50,$75,and $105 respectively,then the total costs are of 1,2 and 3 hours of talking on the phone are:
A)$50,$150,and $315 respectively.
B)$50,$41.67,and $115 respectively.
C)$50,$125,and $230 respectively.
D)$50,$175,and $405 respectively.
Answer: C
Q2) The seventh glass of soda that Tim consumes will produce an extra benefit of 10 cents and has an extra cost of zero (Tim is eating at the cafeteria).The cost-benefit principle predicts that Tim will:
A)realize he has had too much soda to drink and go home.
B)drink the seventh glass and continue until the marginal benefit of drinking another glass of soda is zero.
C)volunteer to empty out the fountain.
D)not drink the seventh glass.
Answer: B
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3
Chapter 2: Comparative Advantage
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Sample Questions
Q1) In general,individuals and nations should specialize in producing those goods for which they have a(n):
A)absolute advantage.
B)comparative advantage.
C)absolutely comparative advantage.
D)absolute advantage and a comparative advantage.
Answer: B
Q2) If Scout has an absolute advantage over Dill:
A)Scout has more money than Dill.
B)the problem of scarcity applies to Dill,but not to Scout.
C)the problem of scarcity applies to Scout,but not to Dill.
D)Scout can accomplish more in a given period of time than can Dill.
Answer: D
Q3) It was expected that consumers in _____ would benefit from reduced prices of goods that will be freely traded under the NAFTA.
A)Canada
B)the United States
C)China
D)Mexico
Answer: B
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Chapter 3: Supply and Demand
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Sample Questions
Q1) Suppose the local slaughterhouse gives off an unpleasant stench.The price of meat would then be _______ because not all of the _________ are accounted for in the marketplace.
A)too high;benefits
B)too low;benefits
C)too high;costs
D)too low;costs
Answer: D
Q2) You notice that your grocery store always has day-old bakery products at a reduced price.Why might that be?
A)At the original price,the quantity demanded was greater than the quantity supplied.
B)At the original price,there was a shortage of bakery products.
C)The original price was an equilibrium price because it was established in a free market.
D)At the original price,quantity supplied was greater than quantity demanded.
Answer: D
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Chapter 4: Elasticity
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Sample Questions
Q1) If a product has lots of substitutes:
A)its income elasticity will be high.
B)its price elasticity of demand will be low.
C)the cross-price elasticity among those substitutes will be negative.
D)the cross-price elasticity among those substitutes will be positive.
Q2) The demand for a good is unitary elastic with respect to price if the price elasticity of demand is:
A)equal to one.
B)greater than one.
C)less than one.
D)greater than negative one.
Q3) You read online that,at current rates of production,the yearly world supply of food is sufficient to feed the projected 2010 population of the earth,and that after 2010 there will be massive starvation.One assumption behind this prediction is that:
A)food supply is infinitely elastic.
B)the long run elasticity of supply of food is inelastic.
C)prices will allocate food supplies to only wealthy countries.
D)short run supply elasticity is greater than long run supply elasticity.
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6
Chapter 5: Demand
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Sample Questions
Q1) When the price of a good falls,the ratio of the marginal utility of that good divided by its price _______ and as a result,consumers purchase _______ of that good. A)rises;more B)falls;more C)rises;less D)falls;less
Q2) If the marginal utility per dollar is not the same for each good,the consumer could _____ her utility by spending ______ on goods for which the marginal utility per dollar is lower.
A)decrease,less B)increase,more C)maximize,more D)increase,less
Q3) You are trying to decide how to spend your last lunch dollar.You should use that dollar to buy more of A)the item that costs the least.
B)the item that you have already consumed the most of. C)the item that will give you the greatest marginal utility per dollar spent. D)the item from which you have gained the greatest total utility already.
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Page 7
Chapter 6: Perfectly Competitive Supply
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Sample Questions
Q1) The location of a firm will be a _________ factor of production in ________ run. A)variable;the short B)fixed;both the short and long C)variable;the long D)fixed;the long
Q2) Jenny sells lemonade by the street during the summer time.Several other kids also sell lemonade in Jenny's neighborhood.
Refer to the information above.Suppose that the first week of summer,Jenny charged 25 cents for an 8-ounce cup of lemonade,her next-door neighbor Sam charged 50 cents for an 8-ounce cup of lemonade,and Alex across the street charged 15 cents for an 8-ounce cup of lemonade.What is most likely to happen?
A)Everyone will start to charge 50 cents to maximize revenue.
B)A price war will break out,and all of the kids will gradually increase their prices.
C)Each kid will keep his or her price at the original amount,because they had chosen those prices to maximize profits.
D)Eventually prices will equalize at all three lemonade stands.
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Chapter 7: Efficiency, Exchange, and the Invisible Hand in Action
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Sample Questions
Q1) Ingrid has been waiting for the show "Mamma Mia!" to come to town.When it finally does come,ticket prices are $60.Ingrid's reservation price is $75.But when Ingrid tries to buy a ticket,they are sold out.
Refer to the information above.The fact that Ingrid cannot buy a ticket to "Mamma Mia!" is evidence of:
A)Pareto efficiency in this market.
B)A price ceiling above the equilibrium price.
C)A situation that is not Pareto efficient.
D)The benefits of allocating resources on the first-come,first-served basis.
Q2) An example of an implicit cost is:
A)interest paid on a bank loan.
B)wages paid to a family member.
C)the value of a spare bedroom turned into a home office.
D)operating costs of a company-owned car.
Q3) Free entry of firms is a characteristic of:
A)all industries in the U.S.economy.
B)perfectly competitive industries.
C)centralized economies.
D)industries in which firms are earning positive economic profit.
Page 9
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Chapter 8: Monopoly, Oligopoly, and Monopolistic Competition
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Sample Questions
Q1) Comparing the non-price discriminating monopoly outcome to the perfectly price discriminating monopoly outcome,profits are:
A)the same.
B)less when price discriminating.
C)greater when price discriminating.
D)greater when charging a uniform price.
Q2) Suppose a monopolist charges a uniform price of $10 based on profit maximization and has constant marginal costs of $3.Cody is willing to pay $6 for the monopolist's output.Therefore:
A)the monopolist should lower its price to $6 for all consumers.
B)the monopolist should ignore Cody's want;it is already profit maximizing.
C)if resale of the output is impossible,the monopolist should lower its price to $6 just for Cody.
D)the monopolist will not be better off if it lowers its price to $6 just for Cody.
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Chapter 9: Games and Strategic Behavior
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Sample Questions
Q1) The three elements of a game are:
A)the firm,the consumers,and the profit.
B)the players,the strategies,and the payoffs.
C)the model,the graph,and the costs.
D)the costs,the revenue,and the profit.
Q2) A monopolistically competitive firm:
A)sells products that are perfect substitutes for its competitors' products,so must compete on the basis of location.
B)sells products that are close substitutes for its competitors' products,so will locate as far away from its competitors as possible.
C)sometimes distinguishes its output from that of its competitors by locating in a more convenient place.
D)will be more successful the more similar its output is to its competitors' output.
Q3) A purely self-interested diner is more likely to tip:
A)never.
B)only when dining in a very up-scale restaurant.
C)only when dining in a restaurant at which he often eats.
D)always,to assure good service.
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11
Chapter 10: Externalities and Property Rights
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Sample Questions
Q1) Suppose that in most car collisions between cars of unequal size,the smaller car sustains the most damage and its occupants suffer the most injury.In answering the following question,assume that,on average,smaller cars generate less air pollution and that every person in the economy drives at least one car.
Refer to the information above.Individuals have a private incentive to:
A)buy smaller cars so that all collisions will be between owners of smaller vehicles.
B)buy smaller cars because they pollute less.
C)buy larger cars so that they are safer in the event of a collision.
D)not change the size of their cars because their original choice reflected an optimal choice.
Q2) From the individual's standpoint,participating in a positional arms race is a _________.From society's point of view,it is __________.
A)dominant strategy;efficient
B)tit-for-tat strategy;efficient
C)dominant strategy;inefficient
D)tit-for-tat strategy;inefficient
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Chapter 11: The Economics of Information
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Sample Questions
Q1) There are two employers in Bucolic that hire people who do not have a high school degree: a grocery store and a hardware store.The grocery store pays $5.00 per hour and the hardware store pays $6.00 per hour.People who work at either store can work as many hours as they want at those wages.Assume that it takes two hours to interview for a job.Lee works at the grocery store,but would like to work at the hardware store.If Lee interviews at the hardware store,there is a 10% probability of being hired.Assume that Lee is risk-neutral.
What is Lee's expected hourly benefit if Lee interviews at the hardware store?
A)$6
B)60 cents
C)10 cents
D)$1.00
Q2) Suppose Ginger is going to buy a house and a dishwasher.Assuming the marginal cost of searching for both is the same,one can predict that Ginger will A)spend more time searching for the house than the dishwasher.
B)spend more time searching for the dishwasher than the house.
C)spend equal amounts of time searching for the dishwasher and the house.
D)trust the information from her real estate agent but not from the dishwasher salesperson.
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Page 13
Chapter 12: Labor Markets, Poverty, and Income Distribution
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Sample Questions
Q1) Differences in wage rates associated with differences in working conditions are called
A)compensating income differentials.
B)equalizing wage ratios.
C)conditional differentials.
D)compensating wage differentials.
Q2) In order to maximize profits or minimize losses,a firm facing a perfectly competitive labor market must hire workers until
A)the extra revenue from the last worker equals the extra profit.
B)the extra revenue from the last worker equals the extra cost.
C)the marginal wage rate equals marginal product.
D)the marginal product of workers begin to decline.
Q3) The union wage premium refers to
A)the dues one must pay in order to join a union.
B)the union wage rate minus union membership dues.
C)the deduction for union insurance.
D)the amount by which union wages exceed nonunion wages.
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14
Chapter 13: The Environment, Health, and Safety
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Sample Questions
Q1) Public schools require proof that a child has been immunized against several diseases before enrolling.Why?
A)It serves as an entry barrier and so screens out children who are harder to educate.
B)It is a costly to fake signal that a child is healthy.
C)Since most children attend school,it is an efficient way to publicize the need for immunizations.
D)Failure to be immunized imposes external costs on other children and teachers.
Q2) The textbook cites a study comparing a group of consumers with first-dollar coverage and a group with a $1000 deductible.The study results indicate that those with the deductible used __________ amount of medical services and had __________ health outcomes.
A)a smaller;the same
B)a larger;better
C)a larger;the same
D)a smaller;worse
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15
Chapter 14: Public Goods and Tax Policy
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Sample Questions
Q1) The state of New Porkswick is one of ten states in the democratic nation of Fatlandia.Each state has ten thousand residents.Although incomes vary,each Fatlandian pays a tax equal to the total cost of all government projects divided by the number of residents in the country.Fatlandia currently has one army base in each of two states and is considering establishing some new ones.An army base adds $250,000 to a state's local economy each year.The total cost of one army base is estimated to be $1,000,000 per year.The increased security of having additional army bases equals $10,000,000(3,000,000 * the number of bases)per year.
Suppose the department of defense in Fatlandia decides to add two additional bases for a total of four bases and New Porkswick is one of the states that will get a base.The local economy will benefit by ______ per resident,and each resident's taxes will increase by
A)$20;$25
B)$250;$200
C)$25;$20
D)$2.50;$2
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Chapter 15: Spending, Income, and GDP
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Sample Questions
Q1) In 2010,Janice Quinn sells a five-year-old car to Used Car,Inc.for $3,000.In the same year,Used Car,Inc.resells the car to Hilda Quinn Goner for $3,500.What is the contribution of these transactions to GDP in the year 2010?
A)$0
B)$500
C)$3,000
D)$6,500
Q2) Changes in business inventories are:
A)classified as consumption expenditures.
B)classified as investment expenditures.
C)classified as government purchases.
D)excluded from GDP.
Q3) ______ is/are the market value of final goods and services produced within a country during a given period of time.
A)GDP
B)Consumption
C)Value added
D)Transfer payments
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17
Chapter 16: Inflation and the Price Level
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Sample Questions
Q1) When inflation turns out to be different from what was expected,purchasing power is
A)destroyed
B)redistributed
C)increased
D)decreased
Q2) In 1929,the CPI equaled 0.171 and in 1930,the CPI equaled 0.167.These data provide evidence of a period of:
A)inflation.
B)deflation.
C)trade deficit.
D)expansion.
Q3) A relative price is:
A)the rate of inflation.
B)a measure of overall prices at a particular point in time.
C)the percentage change in a price index such as the CPI.
D)the price of a specific good in comparison to the prices of other goods and services.
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Page 18
Chapter 17: Wages and Unemployment
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Sample
Questions
Q1) Holding other factors constant,if oil prices rise relative to the prices of other products,then the real wages of oil workers will ______ and employment of oil workers will _____.
A)increase;increase
B)increase;decrease
C)decrease;not change
D)decrease;increase
Q2) Data for an economy shows that the unemployment rate is 10%,the participation rate 80 percent,and 200 million people 16 years or older are not in the labor force.How many people are in the working-age population in this economy?
A)250 million
B)800 million
C)1.0 billion
D)1.6 billion
Q3) Leaving the labor force or finding a job are two ways that:
A)a person can become a discouraged worker.
B)a person can become an involuntary part-time worker.
C)an unemployment spell can begin.
D)an unemployment spell can end.
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Page 19
Chapter 18: Economic Growth
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Sample
Questions
Q1) An example of a government policy to increase physical capital formation is:
A)the construction of an interstate highway system.
B)government support for basic research.
C)maintaining a well-functioning legal system.
D)the provision of publicly-funded education.
Q2) ______ start new economic enterprises,while ______ run the enterprises on a day-to-day basis.
A)Entrepreneurs;managers
B)Mangers;entrepreneurs
C)Mangers;laborers
D)Entrepreneurs;laborers
Q3) Diminishing returns to capital is a consequence of firms' incentives to use each piece of capital as productively as possible and illustrates the:
A)principle of comparative advantage.
B)principle of increasing opportunity costs.
C)scarcity principle.
D)cost-benefit principle.
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Chapter 19: Saving, Capital Formation, and Financial Markets
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Sample Questions
Q1) Holding other factors constant,if terrorist attacks increase the desire for precautionary saving,then the real interest rate will ______ and the equilibrium quantity of saving and investment will _______.
A)increase;increase
B)decrease;decrease
C)increase;decrease
D)decrease;increase
Q2) Holding other factors constant,if new technology becomes available that allows machines to produce manufactured goods more quickly and with fewer defects,then the real interest rate will ______ and the equilibrium quantity of national saving and investment will ____.
A)increase;increase
B)increase;decrease
C)increase;not change
D)decrease;increase
Q3) Which of the following policies would be expected to increase private saving?
A)Replacing the income tax with a consumption tax
B)Increasing the tax rate on capital gains
C)Providing more generous Social Security retirement benefits
Page 21
D)Reducing the size of down payments needed to buy a house
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Chapter 20: Money, Prices, and the Financial System
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Sample Questions
Q1) The introduction of credit cards and debit cards has ______ velocity.
A)increased
B)decreased
C)had no impact on
D)eliminated
Q2) An open-market purchase of government securities by the Fed will:
A)increase bank reserves,and the money supply will increase.
B)decrease bank reserves,and the money supply will increase.
C)increase bank reserves,and the money supply will decrease.
D)decrease bank reserves,and the money supply will decrease.
Q3) The amount of money in the United States is determined by:
A)the Federal Reserve.
B)the combined behavior of commercial banks and the public,as well as actions of the Federal Reserve.
C)the public.
D)the combined behavior of commercial banks and the public.
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22
Chapter 21: Short-Term Economic Fluctuations
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Sample Questions
Q1) Potential output is:
A)the same as actual output.
B)the same as the output gap.
C)the same as the natural rate of unemployment.
D)the maximum sustainable amount of output.
Q2) According to Okun's Law,when the output gap is positive,cyclical unemployment:
A)equals structural unemployment.
B)equals frictional unemployment.
C)equals zero.
D)is negative.
Q3) According to Okun's Law,when cyclical unemployment increases from 2 to 3 percent,the recessionary gap increases from ______ percent.
A)4 to 6
B)-2 to -3
C)0 to 1
D)-4 to -6
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Chapter 22: Spending, Output, and Fiscal Policy
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Sample Questions
Q1) If firms sell more output than expected,planned investment:
A)is greater than actual investment.
B)is less than actual investment.
C)equals actual investment.
D)equals zero.
Q2) In the Keynesian cross diagram,the vertical intercept of the expenditure line equals ______ and the slope of the expenditure line equals _____.
A)induced expenditures;autonomous expenditures
B)autonomous expenditures;induced expenditures
C)planned spending;unplanned spending
D)autonomous expenditures;the mpc
Q3) For an economy starting at potential output,an increase in autonomous expenditure in the short run results in a(n):
A)expansionary output gap.
B)recessionary output gap.
C)increase in potential output.
D)decrease in potential output.
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24
Chapter 23: Monetary Policy and the Federal Reserve
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Q1) If the Federal Reserve sets a target nominal interest rate,it can:
A)independently set a target money supply.
B)only set a money supply target that is consistent with the target nominal interest rate target.
C)achieve this target with any arbitrary supply of money.
D)shift the money demand curve to the right.
Q2) The money demand curve will shift to the left if:
A)the nominal interest rate increases.
B)the nominal interest rate decreases.
C)price level increases.
D)real income decreases.
Q3) Any value of the money supply chosen by the Federal Reserve implies a specific value for ______.
A)potential output
B)the nominal interest rate
C)government purchases
D)the budget deficit
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25
Chapter
Cycles
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Q1) A positive demand shock will shift the ______ curve to the ______.
A)AD;left
B)AD;right
C)AS;left
D)AS;right
Q2) If households and firms increase their expectation for the rate of inflation,the ______ curve will shift _____.
A)AD;rightward
B)AS;rightward
C)AS;leftward
D)AS;upward
Q3) A circle of low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.
A)large;high
B)large;low
C)small;low
D)small;high
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Page 26
Chapter 25: Macroeconomic Policy
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Sample Questions
Q1) The greater the credibility of monetary policy the ____ likely inflationary expectations are to be anchored and the _____ the recessions caused by adverse inflation shocks.
A)more;shorter
B)more;longer
C)less;shorter
D)less;longer
Q2) The delay between the date a policy change is needed and the date it is implemented is called the:
A)recessionary gap.
B)expansionary gap.
C)outside lag.
D)inside lag.
Q3) If the rate of inflation equals zero then the real rate of interest:
A)equals zero.
B)equals the nominal rate of interest.
C)can be negative.
D)equals the target real interest rate.
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Chapter 26: Exchange Rates, International Trade, and Capital Flows
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Sample Questions
Q1) International capital flows are:
A)purchases of foreign goods or services.
B)sales of domestic goods or services to foreigners.
C)exports plus imports.
D)purchases or sales of real and financial assets across international borders.
Q2) In an open economy with flexible exchange rates,monetary policy affects ______ through changes in the real interest rate and affects ______ through changes in the exchange rate.
A)taxes and saving;net exports
B)net exports;taxes and saving
C)productivity and growth;consumption
D)consumption and investment;net exports
Q3) Proponents of fixed exchange rates argue that the predictability of the fixed exchange rate:
A)allows monetary policy to be used to stabilize the domestic economy.
B)increases trade and economic integration.
C)decreases trade and economic integration.
D)prevents exchange rate overvaluation.
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