Business Economics
Exam Answer Key
Course Introduction
Business Economics explores the application of economic theories and principles to real-world business decision-making. The course examines how firms operate within various market structures, optimize production and pricing strategies, and respond to changing economic environments. Key topics include demand and supply analysis, cost and revenue concepts, market equilibrium, and the impact of government policy on business activities. Through case studies and practical examples, students learn to analyze business problems, forecast market trends, and make informed managerial decisions in today's dynamic economic landscape.
Recommended Textbook Macroeconomics 12th Edition by Michael Parkin
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Page 2
Chapter 1: What Is Economics?
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Q1) Differences in income are most directly related to which of the following economic question?
A) What goods and services are produced?
B) In what quantities are various goods and services produced?
C) How are goods and services produced?
D) Who consumes the goods and services that are produced?
Answer: D
Q2) Which of the following best defines capital as a factor of production?
A) the gifts of nature that businesses use to produce goods and services
B) the knowledge and skills that people obtain from education and use in production of goods and services
C) financial assets used by businesses
D) instruments, machines, and buildings used in production
Answer: D
Q3) The slope of a straight line increases as the numbers on the x-axis become larger.
A)True
B)False
Answer: False
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3
Chapter 2: The Economic Problem
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Q1) Jean can either type her term paper or create Web pages during the limited time she has available. The table above shows her PPF.
a)Can Jean type 90 pages and create 2 Web pages?
b)Use the above numbers to calculate the opportunity cost of a typed page as she increases her time typing and decreases time creating a Web page.
Answer: a)Jean cannot type 90 pages and create 2 Web pages because, as row D shows, that combination is beyond her PPF.
11ea1607_da18_5067_ba9d_1b9d47b236ff_TB3035_00 b)The opportunity cost is the ratio of the decrease in the number of Web pages divided by the increase in the number of typed pages. The table above gives the opportunity cost for typed pages.
Q2) Individual economic decisions are coordinated by
A) markets through adjustments in sales levels.
B) markets through adjustments in prices.
C) government through adjustments in sales taxes.
D) government through adjustments in income taxes.
Answer: B
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Chapter 3: Demand and Supply
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Q1) When demand increases, the equilibrium price ________ and the equilibrium quantity ________.
A) rises; decreases
B) falls; decreases
C) rises; increases
D) falls; increases
Answer: C
Q2) After 2009, the price of tablets fell each year and manufacturers of tablets produced and sold more tablets each year. This result is because the
A) "law of supply" does not apply to companies in the "high-tech" sector of the economy.
B) "law of demand" does not apply to customers in the "high-tech" sector of the economy.
C) supply curve of tablets shifted rightward.
D) demand curve for tablets shifted leftward.
Answer: C
Q3) What leads to a decrease in the quantity demanded of a good or service?
Answer: The quantity demanded of a good or service decreases when the price of the product increases.
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Chapter 4: Measuring GDP and Economic Growth
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Q1) In the national income accounts, the purchase of a new house counts as
A) consumption expenditure.
B) investment.
C) a transfer.
D) an addition to inventory.
Q2) In the above figure, flow B represents ________.
A) household purchases of goods and services
B) household borrowing
C) household income
D) firms' payments for labor services
Q3) Neither intermediate goods nor used goods are included in GDP. Explain why these expenditures are not included in GDP.
Q4) How does the income approach measure GDP?
Q5) All economic activity in the underground economy represents the production of illegal goods and services.
A)True
B)False
Q6) Is every product produced in the United States included in U.S. gross domestic product?
Q7) What is "underground production"? Is it included in GDP?
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Chapter 5: Monitoring Jobs and Inflation
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Q1) Assume that after you graduate, you move to a simple economy in which only three goods are produced and consumed: fish, fruit, and meat. Suppose that on January 1, fish sold for $2.50 per pound, meat was $3.00 per pound, and fruit was $1.50 per pound. At the end of the year, you discover that the catch was low and that fish prices had increased to $5.00 per pound, but fruit prices stayed at $1.50 per pound, and meat prices had actually fallen to $2.00. Can you say what happened to the overall CPI, in terms of whether it increased, decreased, or stayed the same? Do you have enough information to calculate the inflation rate? Note, this problem requires no calculation; just state and explain your answers.
Q2) If the labor force participation rate is rising and the working-age population is not changing, then the
A) size of the labor force is rising.
B) number of unemployed people is rising and the size of the labor force is falling. C) size of the labor force is falling.
D) number of unemployed people is falling and the size of the labor force is rising.
Q3) What is inflation and how is it measured using the Consumer Price Index?
Q4) Why is there unemployment even when the economy is at "full employment"?
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Chapter 6: Economic Growth
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Q1) The demand for labor curve
A) is downward sloping because productivity of labor diminishes as more workers are employed.
B) is upward sloping and the supply curve of labor is downward sloping.
C) is upward sloping because productivity of labor diminishes as more workers are employed.
D) shifts rightward when the real wage rate rises.
Q2) If real GDP is $13,500 billion and aggregate hours are 110 billion, labor productivity equals
A) $6.75 per hour.
B) $104 per hour.
C) $123 per hour.
D) $675 per hour.
Q3) According to neoclassical growth theory, the higher real GDP per person from economic growth will
A) not last because the population will increase.
B) last because there is no link between growth and population.
C) last indefinitely regardless of any other factor.
D) last as long as technological change continues.
Q4) What is the effect on real GDP per person if labor productivity increases?
Page 8
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Chapter 7: Finance, Saving, and Investment
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Q1) When the real interest rate rises
A) there is a downward movement along the demand for loanable funds curve.
B) there is an upward movement along the demand for loanable funds curve.
C) the demand for loanable funds curve shifts rightward.
D) the demand for loanable funds curve shifts leftward.
Q2) The Ricardo-Barro effect holds that
A) equal increases in taxes and government expenditures have no effect on equilibrium real GDP.
B) government budget deficits have no effect on the real interest rate.
C) a government budget deficit crowds out private investment.
D) a government budget deficit induces a decrease in saving that magnifies the crowding out effect.
Q3) An increase in disposable income shifts the supply of loanable funds curve
A) leftward and decreases the real interest rate.
B) leftward and increases the real interest rate.
C) rightward and decreases the real interest rate.
D) rightward and increases the real interest rate.
Q4) "An increase in the real interest rate increases the quantity of investment." Is the previous statement correct or incorrect?
Q5) How does the real interest affect households' decisions about saving?
Page 9
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Chapter 8: Money, the Price Level, and Inflation
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Q1) The data show that money growth and inflation are
A) positively correlated.
B) negatively correlated.
C) not correlated.
D) independent phenomena.
Q2) Money market mutual funds invest in
A) residential mortgages.
B) commercial real estate.
C) long-term government securities.
D) highly liquid assets.
Q3) If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP?
A) $12 trillion
B) $6 trillion
C) $3 trillion
D) $333 billion
Q4) Discuss the quantity theory of money. Be sure to mention the velocity of circulation and the equation of exchange.
Q5) The desired reserve ratio is 10 percent. Fly By Night Bank has deposits of $250,000 and reserves of $25,000. What is the amount of its excess reserves?
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Chapter 9: The Exchange Rate and the Balance of Payments
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Q1) If the demand for a country's currency increases, the currency
A) appreciates.
B) depreciates.
C) stays the same.
D) could either appreciate, depreciate, or stay the same.
Q2) If X - M = $0 and the government sector has a deficit of $250 billion, the private sector
A) has a deficit that equals $250 billion.
B) has a deficit that equals $500 billion.
C) has a surplus that equals $250 billion.
D) has a surplus that equals $500 billion.
Q3) If the U.S. government increased its holdings of British pounds, definitely
A) the capital and financial account would increase.
B) the capital and financial account would decrease.
C) there would be an increase in U.S. official reserves.
D) there would be a decrease in U.S. official reserves.
Q4) If the current account balance is $235 billion and U.S. official reserves increased by $35 billion, what is the official settlements account balance and the capital account balance?
Q5) What role can the Fed play in the foreign exchange market?
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Chapter 10: Aggregate Supply and Aggregate Demand
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Q1) An economy is at full employment. Which of the following events can create a recessionary gap?
A) an increase in foreign income
B) an increase in taxes
C) a decrease in the quantity of capital
D) a decrease in money wages
Q2) In a change to immigration policy during 2012, "people younger than 30 who came to the United States before the age of 16, pose no criminal or security threat, and were successful students or served in the military can get a two-year deferral from deportation", Homeland Security Secretary Janet Napolitano said, according to CNN, 06/16/2012. If many of these immigrants had previously been afraid to work, now as a result of being able to work legally
A) the long-run aggregate supply curve shifts leftward and potential GDP decreases.
B) the short-run aggregate supply curve shifts rightward but potential GDP does not increase.
C) the long-run aggregate supply curve shifts rightward and potential GDP increases.
D) neither the short-run nor the long-run supply curve shifts.
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Chapter 11: Expenditure Multipliers
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Q1) When disposable income increases from $7 trillion to $7.5 trillion, consumption expenditure increase from $6.5 trillion to $6.9 trillion. The MPS is equal to
A) 0.75.
B) 0.76.
C) 0.8.
D) 0.2.
Q2) Explain the relationship between real GDP and aggregate planned expenditure, AE. What change to inventories takes place when the two are not equal?
Q3) The sum of the components of aggregate expenditure that are not influenced by real GDP is called
A) induced expenditures.
B) the MPC.
C) autonomous expenditures.
D) autonomous consumption.
Q4) The multiplier is larger if the
A) marginal propensity to consume is larger.
B) marginal propensity to save is larger.
C) income tax rate is higher.
D) marginal propensity to import is larger.
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Chapter 12: The Business Cycle, Inflation, and Deflation
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Q1) In a cost-push inflation,
A) increases in AD lead to increases in SAS.
B) decreases in AD lead to increases in SAS.
C) increases in SAS lead to decreases in AD.
D) decreases in SAS lead to increases in AD.
Q2) Both new Keynesian and new classical cycle theories claim that ________.
A) animal spirits can trigger a business cycle
B) shifts in the SAS curve are the main impulse for a business cycle
C) unexpected changes in aggregate demand trigger a business cycle
D) expected changes in the quantity of money can trigger a business cycle
Q3) For a given level of anticipated inflation and natural unemployment rate, the short-run Phillips curve shows the relationship between A) potential GDP and real GDP.
B) real GDP growth and the unemployment rate.
C) inflation and money growth.
D) inflation and the unemployment rate.
Q4) Explain how the expected inflation rate affects the short-run Phillips curve. Be sure to mention the role played by the money wage rate.
Q5) Explain how the short-run and long-run Phillips curves are related.
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Chapter 13: Fiscal Policy
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Q1) The supply side effects of a change in taxes on labor income means that ________ in taxes on labor income will shift the ________.
A) an increase; labor supply curve rightward
B) an increase; labor supply curve leftward
C) a decrease; labor demand curve rightward
D) a decrease; labor demand curve leftward
Q2) In the above figure, if the economy is initially at point B and taxes are raised while potential GDP does not change, then the economy will
A) move to point C.
B) move to point A.
C) move to point D.
D) stay at point B.
Q3) A structural deficit occurs when the government budget has a deficit
A) even though real GDP is less than potential GDP.
B) even though real GDP is greater than structural GDP.
C) even though real GDP is equal to potential GDP.
D) that is nominal, as opposed to a real budget deficit.
Q4) What is the Laffer curve? Where on their Laffer curves are the United States, the United Kingdom and France located?
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Chapter 14: Monetary Policy
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Q1) In September 2012 the Fed announced that it would buy $40 billion of mortgage backed securities per month. One goal of this policy was to ________ the price of these securities and thereby help ________.
A) raise; prices of housing to fall to their new equilibrium
B) raise; lower long-term interest rates
C) lower; make the short-term interest rate more responsive to Fed actions
D) raise; raise long-term interest rates
Q2) In 2012, the Federal Reserve announced that it would hold the federal fund rates near 0 percent "at least through mid-2015." This policy attempted to shift the
A) aggregate demand curve leftward.
B) aggregate demand curve rightward.
C) aggregate supply curve leftward.
D) aggregate supply curve rightward.
Q3) Which of the following bodies are responsible for the conduct of monetary policy?
A) the Federal Reserve System
B) Congress
C) the President
D) Congress and the President, jointly
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Chapter 15: International Trade Policy
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Q1) Suppose that the country of Pacifica sold its cars in Atlantica for less than it costs to produce the cars. Pacifica could be accused of
A) avoiding import quotas.
B) increasing its gains from trade.
C) dumping.
D) engaging in learning-by-doing.
Q2) Consider a market that, with no international trade, is initially in equilibrium with quantity demanded equal to quantity supplied at a price of $20. If the world price of the good is $10 and the country opens up to international trade then in this market
A) imports will increase, price will fall, and quantity supplied will fall.
B) exports will increase, price will be unchanged, and quantity supplied will increase.
C) imports will increase, price will decrease, and the supply curve will shift to the left.
D) quantity demanded will decrease, quantity supplied will decrease, and price will decrease.
Q3) Define comparative advantage and discuss its role in international trade.
Q4) What is dumping?
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