Applied Economics Exam Preparation
Guide
Course Introduction
Applied Economics is a course that focuses on the practical application of economic theory and quantitative methods to real-world issues and policy problems. Students will explore how economic principles can be used to analyze and address issues such as market failures, government intervention, labor markets, environmental concerns, and international trade. The course emphasizes empirical techniques, data analysis, and the use of case studies to assess the effectiveness of various economic policies and business strategies. By integrating theoretical concepts with hands-on analysis, students develop the tools necessary to make informed decisions in both private and public sector contexts.
Recommended Textbook Economics for Today 5th Edition by Allan Layton
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Page 2
Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) Which of the following is a macroeconomics topic?
A) The effect of price change on the supply of tomatoes.
B) The market price of electricity.
C) The interest rate and unemployment.
D) The demand for fuel efficient cars.
E) Effects of farm subsidies on food prices.
Answer: C
Q2) The creative ability of individuals to combine and direct resources to produce new products is known as:
A) economising.
B) entrepreneurship.
C) value judgement.
D) product sensitivity.
Answer: B
Q3) Scarcity means that it is impossible to satisfy every desire.
A)True
B)False
Answer: True
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Chapter 2: Applying Graphs to Economics
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Sample Questions
Q1) A direct relationship is a relationship between two variables in which they move in different directions (if one increases, the other decreases).
A)True
B)False
Answer: False
Q2) As shown in Exhibit A1.3, the intercept of straight line AB is:
A)1.
B)10.
C)20.
D)30.
E) not determinable from the information provided.
Answer: B
Q3) In Exhibit A1.5, the slope of straight line A-D is:
A) positive.
B) zero.
C) negative.
D) variable.
Answer: B
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Chapter 3: Production Possibilities and Opportunity Cost
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Sample Questions
Q1) Along a production possibilities curve showing capital and consumption goods production, which of the following pairs are being held as fixed?
A) Unemployment and capital goods production.
B) Technology and number of resources.
C) Composition of the economy's output and number of resources.
D) Capital and consumption goods production.
Answer: B
Q2) Mikki decides to work five hours the night before her economics exam. She earns an extra $75, but her exam score is 10 points lower than it would have been had she stayed home and studied. Her opportunity cost of working more is the:
A) guilt she feels about neglecting her economics studies.
B) $75 she earned.
C) 10 points she lost on her exam.
D) time she could have spent watching television.
Answer: C
Q3) An increase in current consumption is necessary for economic growth.
A)True
B)False
Answer: False
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Chapter 4: Market Demand and Supply
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Sample Questions
Q1) A decrease in the demand for peanut butter, a normal good, can be caused by a/an:
A) decrease in consumer income.
B) increase in the price of jams and preserves.
C) decrease in the price of bread.
D) drought in Queensland that destroyed 30 per cent of the peanut crop.
Q2) Suppose there are only three people in the economy: Jane, Harry and Bob. The individual demand for corn for each of these consumers is given in Exhibit 3.1. The total quantity of corn demanded if the market price is $4 is _____.
A) three
B) eight
C) 17
D) 25
E) 36
Q3) If goods X and Y are complements, then a reduction in the price of good X decreases the demand for good Y.
A)True
B)False
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Chapter 5: Markets in Action
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Sample Questions
Q1) Which of the following would result in a temporary surplus of desk top computers at the price associated with the initial equilibrium?
A) A decrease in the price of desk top computers.
B) A decrease in the price of laptops.
C) An increase in the price of laptops.
D) No change.
Q2) Assuming supply is held constant, an increase in demand for a product will cause a decrease in the market price and the amount bought and sold.
A)True
B)False
Q3) If the equilibrium price of good X is $15 and a price ceiling is imposed at $14, the result will be:
A) an accumulation of inventories of unsold X.
B) difficult to determine.
C) a surplus.
D) a shortage.
Q4) A price ceiling set below the equilibrium price creates a shortage.
A)True
B)False
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Chapter 6: Elasticity of Demand and Supply
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Sample Questions
Q1) If the price elasticity of demand for football tickets is estimated to be 4.5, then a 10 per cent increase in football ticket prices would be expected to cause a:
A) 4.5 per cent decrease in quantity demanded.
B) 4.5 per cent increase in quantity demanded.
C) 45 per cent decrease in quantity demanded.
D) 45 per cent increase in quantity demanded.
Q2) When the price of bread increases by 5 per cent, the quantity demanded of crackers increases by 2 per cent. The cross elasticity of demand between crackers and bread is:
A) 0.67.
B) 1.5.
C) 2.5.
D) 0.4.
Q3) Demand sensitivity depends on all of the following except:
A) how low the price of the good is.
B) the sensitivity of a firm's output to changes in its price.
C) the consumer's income.
D) the availability and closeness of substitutes.
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8
Chapter 7: Production Costs
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Sample Questions
Q1) In Exhibit 6.5, by filling in the blanks it can be determined that the fixed costs for the second unit are
A) $0.
B) $200.
C) $900.
D) $1000.
Q2) A fixed input is any resource for which the quantity can:
A) change any time.
B) change during a specific time.
C) not change at all.
D) not change during a specific time.
Q3) As shown in Exhibit 6.6, the average total cost of producing five units is:
A) $0.
B) $27.
C) $50.
D) $100.
Q4) Costs that do not vary as output varies and that must be paid even if output is zero are called total fixed costs.
A)True
B)False
Page 9
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Chapter 8: Perfect Competition
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Sample Questions
Q1) If a competitive firm suffers loss, it should:
A) always shut down.
B) shut down if its losses are greater than total fixed costs.
C) shut down if its total fixed costs are greater than losses.
D) raise its price.
Q2) In Exhibit 7.1, the firm will produce at which level of output:
A) zero.
B)150.
C)350.
D) 250.
Q3) In long-run equilibrium, which of the following is not equal to price for a perfectly competitive firm?
A) Short-run average variable cost.
B) Long-run average total cost.
C) Short-run marginal cost.
D) Short-run average total cost.
Q4) If a competitive firm charges more than the market price, then it makes a profit and gains more customers.
A)True
B)False
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Chapter 9: Monopoly
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Sample Questions
Q1) Suppose a monopolist's demand curve lies below its average variable cost curve. The firm will:
A) stay in operation in the short run.
B) increase the price.
C) earn an economic profit in the long run.
D) shut down.
Q2) The physical production of medicinal drugs is often only a very small fraction of the eventual price consumers pay. Which of the following may explain this?
A) Monopolists can charge whatever they want.
B) The high price allows the company to recoup their substantial research and development costs.
C) The company must have engaged in price discrimination.
D) The company must have engaged in predatory pricing.
Q3) Monopoly is a market structure characterised by:
A) a couple of large sellers.
B) a high quality product.
C) a high entry barrier to the market.
D) many close substitutes.
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11
Chapter 10: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) In the long run in monopolistic competition:
A) economic profits are zero.
B) P = MC.
C) P = minimum ATC.
D) firms have an incentive to leave.
Q2) In monopolistically competitive industry, the long-run outcome is:
A) zero accounting profit.
B) zero economic profit.
C) positive economic profit.
D) negative economic profit.
Q3) Game theory includes which of the following rules?
A) It has to follow the rules of competitive market.
B) It always has negative pay-offs.
C) It does not have any strategies.
D) It must have a set of players, strategies and payoffs where each player is rational and chooses strategy to win the game.
Q4) A monopolistically competitive firm, although inefficient, still operates where price equals marginal cost.
A)True
B)False
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Chapter 11: Policy Issues: Housing Affordability and Climate Change
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Sample Questions
Q1) In Exhibit 10.4, if the demand for permits is 'Demand 1', the price of permits is equal to:
A) $50.
B) $30.
C) $20.
D) $10.
Q2) In Exhibit 10.2, what is the quantity of carbon intensive outputs if the supply is 'Supply 1'?
A) 60.
B) 40.
C) 20.
D) 80.
Q3) Emissions trading schemes require government to set the appropriate level of carbon tax.
A)True
B)False
Q4) The external cost of carbon emissions is not included in the market supply curve of private firms.
A)True
B)False
Page 13
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Chapter 12: Measuring the Size of the Economy
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Sample Questions
Q1) Australian gross domestic product is the market value of all final goods and services:
A) produced in Australia by Australian citizens during a year.
B) produced in Australia during a year.
C) produced outside of Australia during a year.
D) produced outside Australia by Australian citizens during a year.
Q2) The difference between gross investment and net investment is the stock of inventory.
A)True
B)False
Q3) Because GDP does not account for improvements in the quality of goods, the GDP calculation:
A) tends to overstate the true value of output in Australia.
B) tends to understate the true value of output in Australia.
C) provides an accurate value of output in Australia.
D) provides the best measure of output in Australia.
Q4) Actual measured saving and measured investment are equal.
A)True
B)False
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14
Chapter 13: Business Cycles and Economic Growth
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Sample Questions
Q1) The Solow growth model explains:
A) how consumption, saving, capital, labour and technological change combine in the short term to determine economic growth.
B) how consumption, saving, capital, labour and technological change combine in the longer term to determine economic growth.
C) how history changes economic growth.
D) how net exports determine economic growth.
Q2) The phase in the business cycle in which real GDP declines is called a:
A) trendline.
B) peak.
C) recession.
D) recovery.
Q3) A country can increase its real GDP per person by:
A) reducing the quantity of production factors.
B) increasing the number of holidays.
C) reducing its spending.
D) using more productive technology.
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Chapter 14: Inflation and Unemployment
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Sample Questions
Q1) Cyclical unemployment can occur:
A) when the demand for certain goods and services depends on the current stage of the business cycle.
B) when the demand for certain goods and services depends on the workers' skill levels.
C) when the demand for certain goods and services has declined due to the recession.
D) when the demand for certain goods and services declines over time.
Q2) Which of the following categories of people are in the labour force?
A) The armed forces.
B) Household workers.
C) Students.
D) Unemployed.
Q3) Demand-pull inflation is due to:
A) minimum wage laws.
B) labour cost increases.
C) excess total spending.
D) tax increases.
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Chapter 15: A Simple Model of the Macro Economy
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Sample Questions
Q1) The theory that supply creates its own demand is called Say's Law.
A)True
B)False
Q2) As the aggregate demand curve shifts from AD<sub>1</sub> to AD<sub>2</sub> in Exhibit 14.3, the economy experiences:
A) cost-push inflation.
B) demand-pull inflation.
C) wage-push inflation.
D) hyperinflation.
Q3) Demand-pull inflation is caused by a leftward shift of the aggregate demand curve.
A)True
B)False
Q4) The concurrent problems of inflation and unemployment are termed:
A) depression.
B) downturn.
C) deflation.
D) stagflation.
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Chapter 16: The Monetary and Financial System
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Sample Questions
Q1) The money supply known as M3:
A) includes large-denomination time deposits.
B) excludes interest-earning cheque accounts in savings and loans.
C) does not include money-market mutual accounts.
D) includes savings accounts and small-denomination time deposits.
Q2) The RBA will:
A) follow the federal government's instructions.
B) follow the Treasury Department's instructions.
C) consult the Australian Prudential Regulation Authority.
D) act as a banker to the federal government.
Q3) Fiat money has no redeemability or intrinsic value.
A)True
B)False
Q4) Fractional reserve banking is a system that allows:
A) banks to keep all their deposits on reserve as deposits at the central bank.
B) banks to create money.
C) banks to keep a very large percentage of their deposits on reserve as vault cash or as deposits at the central bank.
D) banks to keep all of their deposits on reserve as vault cash or as deposits at the central bank.
Page 18
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Chapter 17: Macroeconomic Policy I: Monetary Policy
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Sample Questions
Q1) If the RBA believes the economy is likely to fall into a recession over the next two quarters, its likely response to this will be to:
A) sell government securities to banks in order to increase interest rates.
B) sell government securities to banks in order to decrease interest rates.
C) buy government securities from banks in order to decrease interest rates.
D) buy government securities from banks in order to increase interest rates.
Q2) If the velocity of money is 5 and the supply of money is $200 billion, then real GDP is:
A) $66.67 billion.
B) $200 billion.
C) $600 billion.
D) indeterminate as there is no information about nominal GDP.
Q3) 'Smoothing' operations by the RBA are intended to provide a long-term solution for a volatile foreign exchange market.
A)True
B)False
Q4) Monetarists argue that velocity is reasonably predictable.
A)True
B)False
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Page 19
Chapter 18: Macroeconomic Policy II: Fiscal Policy
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Sample Questions
Q1) It is inflationary for government to increase spending if:
A) it also cuts taxes.
B) the aggregate supply curve is flat.
C) the economy is at full employment.
D) the equilibrium real GDP is well below full employment.
Q2) If government deficits stimulate the private economy:
A) 'crowding out' must be zero.
B) investment may rise.
C) 'crowding out' is more than offset by increases in investment demand.
D) 'crowding out' and 'crowding in' cancel each other out.
Q3) Unemployment benefits act as automatic stabilisers by:
A) allowing for more consumer spending during prosperity.
B) increasing spending during a recession.
C) making the unemployment rate worse during a recession.
D) allowing for less consumer spending during a recession.
Q4) The introduction of the GST in Australia is an example of:
A) a restructuring.
B) a microeconomic reform.
C) a monetary policy.
D) a fiscal policy.
Page 20
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Chapter 19: International Trade and Finance
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Sample Questions
Q1) Jan, a lawyer, can type faster than Jill, her secretary. Jill, on the other hand, does not have the ability or skills to practice law. Applying the principles of international trade to this situation, an economic consultant advises Jan to:
A) fire Jill, practice law during the day and do her own typing at night.
B) practice law and leave all the typing to Jill.
C) divide her time equally between typing and practicing law.
D) quit practicing law and take a job as a secretary.
Q2) Free trade allows countries to specialise in producing goods and services they have an absolute advantage in, without restrictions or taxes and subsidies applied to their flow.
A)True
B)False
Q3) In Exhibit 18.1, the production possibilities curves of wheat and corn for Nabia and Pada are presented. Suppose Nabia produces at point A on its PPF. How many units of wheat is the country able to produce?
A)15.
B)60.
C)5.
D) 20.
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Page 21