Business Economics
Practice Exam
Course Introduction
Business Economics explores the principles and concepts of economic analysis as applied to business decision-making. The course examines how organizations utilize resources efficiently, respond to market forces, and assess the impact of government policies on operations. Students will learn about supply and demand analysis, production and cost structures, market behavior, pricing strategies, and the effects of global economic trends. Through real-world case studies and practical applications, this course equips learners with the analytical tools needed for informed decision-making in both local and international business environments.
Recommended Textbook
Principles of Macroeconomics 6th Edition by N. Gregory Mankiw
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Page 2
Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) The business cycle refers to fluctuations in economic activity such as employment and production.
A)True
B)False
Answer: True
Q2) An increase in the marginal cost of an activity necessarily means that people will no longer engage in any of that activity.
A)True
B)False
Answer: False
Q3) Using income tax revenue to fund the welfare system illustrates the conflict between efficiency and equality.
A)True
B)False
Answer: True
Q4) Tuition is the single-largest cost of attending college for most students.
A)True
B)False
Answer: False
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Chapter 2: Thinking Like an Economist
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Q1) Refer to Figure 2-10. The shift of the production possibilities frontier from A to B illustrates
A)simultaneous technological advances in the book and DVD industries.
B)a reallocation of resources away from the production of DVDs and toward the production of books.
C)economic growth.
D)All of the above are correct.
Answer: C
Q2) Where can an economy not produce?
A)inside its production possibilities frontier
B)on its production possibilities frontier
C)outside its production possibilities frontier
D)at the endpoints of its production possibilities frontier
Answer: C
Q3) In the circular-flow diagram, households and firms are the decision makers.
A)True
B)False
Answer: True
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Chapter 3: Interdependence and the Gains From Trade
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Q1) Refer to Table 3-1. For the rancher, the opportunity cost of 1 pound of meat is
A)0.4 pound of potatoes.
B)2.5 pounds of potatoes.
C)4 pounds of potatoes.
D)10 pounds of potatoes.
Answer: A
Q2) Suppose Jim and Tom can both produce two goods: baseball bats and hockey sticks. Which of the following is not possible?
A)Jim has an absolute advantage in the production of baseball bats and in the production of hockey sticks.
B)Jim has an absolute advantage in the production of baseball bats and a comparative advantage in the production of hockey sticks.
C)Jim has an absolute advantage in the production of hockey sticks and a comparative advantage in the production of baseball bats.
D)Jim has a comparative advantage in the production of baseball bats and in the production of hockey sticks.
Answer: D
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5
Chapter 4: The Market Forces of Supply and Demand
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Q1) Which of the following sets of events must cause an increase in the price of a new house?
A)higher wages for carpenters, higher wood prices, increases in consumer incomes, higher apartment rents, increases in population, and expectations of higher house prices in the future
B)lower wages for carpenters, lower wood prices, increases in consumer incomes, higher apartment rents, increases in population and expectations of higher house prices in the future
C)lower wages for carpenters, higher wood prices, decreases in consumer incomes, higher apartment rents, decreases in population and expectations of higher house prices in the future
D)higher wages for carpenters, lower wood prices, decreases in consumer incomes, lower apartment rents, decreases in population and expectations of lower house prices in the future
Q2) The law of demand states that, other things equal, when the price of a good rises, the quantity demanded of the good rises, and when the price falls, the quantity demanded falls.
A)True
B)False
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Page 6
Chapter 5: Elasticity and Its Application
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Q1) Refer to Figure 5-5. The maximum value of total revenue corresponds to a price of
A)$18.
B)$30.
C)$42.
D)$48.
Q2) If the cross-price elasticity of two goods is negative, then the two goods are A)necessities.
B)complements.
C)normal goods.
D)inferior goods.
Q3) Which of the following is likely to have the most price inelastic demand?
A)white chocolate chip with macadamia nut cookies
B)Mrs. Field's chocolate chip cookies
C)milk chocolate chip cookies
D)cookies
Q4) Along the elastic portion of a linear demand curve, total revenue rises as price rises.
A)True
B)False
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Chapter 6: Supply, Demand, and Government Policies
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Q1) Minimum-wage laws benefit society by creating a surplus of labor.
A)True
B)False
Q2) Rent control may lead to lower rents for those who find housing, but the quality of the housing may also be lower.
A)True
B)False
Q3) When a binding price ceiling is imposed on a market for a good, some people who want to buy the good cannot do so.
A)True
B)False
Q4) Buyers and sellers rarely share the burden of a tax equally.
A)True
B)False
Q5) Rent subsidies and wage subsidies are better than price controls at helping the poor because they have no costs associated with them.
A)True
B)False
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Chapter 7: Consumers, Producers, and the Efficiency of Markets
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Sample Questions
Q1) Refer to Table 7-8. If Evan, Selena, Angie, and Kris sell the good, and the resulting producer surplus is $700, then the price must have been
A)$200.
B)$300.
C)$500.
D)$700.
Q2) Refer to Table 7-3. If the price is $20, then consumer surplus in the market is
A)$20, and Wilbur and Ming-la purchase the good.
B)$45, and Carlos and Quilana purchase the good.
C)$45, and Quilana, Wilbur, and Ming-la purchase the good.
D)$55, and Carlos, Wilbur, and Ming-la purchase the good.
Q3) On a graph, the area below a demand curve and above the price measures
A)producer surplus.
B)consumer surplus.
C)deadweight loss.
D)willingness to pay.
Q4) In order to conclude that markets are efficient, we assume that they are perfectly competitive.
A)True
B)False
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Chapter 8: Application: The Costs of Taxation
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Sample Questions
Q1) Refer to Figure 8-10. Suppose the government imposes a tax that reduces the quantity sold in the market after the tax to Q2. With the tax, the consumer surplus is
A)(P0-P2) x Q2.
B)x (P0-P2) x Q2.
C)(P0-P5) x Q5.
D)x (P0-P5) x Q5.
Q2) Refer to Figure 8-7. Before the tax is imposed, the equilibrium price is
A)$16, and the equilibrium quantity is 15.
B)$12, and the equilibrium quantity is 15.
C)$12, and the equilibrium quantity is 25.
D)$8, and the equilibrium quantity is 15.
Q3) When a good is taxed, the tax revenue collected by the government equals the decrease in the welfare of buyers and sellers caused by the tax.
A)True
B)False
Q4) A tax on a good causes the size of the market to shrink.
A)True
B)False
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Page 10
Chapter 9: Application: International Trade
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Q1) When a country allows trade and becomes an importer of a good,
A)domestic producers become better off, and domestic consumers become worse off.
B)domestic producers become worse off, and domestic consumers become better off.
C)domestic consumers become better off, but the effect on the well-being of domestic producers is ambiguous.
D)domestic producers become worse off, but the effect on the well-being of domestic consumers is ambiguous.
Q2) NAFTA is an example of a multilateral approach to achieving free trade.
A)True
B)False
Q3) The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive from participating in a market.
A)True
B)False
Q4) Refer to Figure 9-12. Consumer surplus before trade is
A)$3,600.
B)$4,200.
C)$5,400.
D)$6,000.
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Chapter 10: Measuring a Nations Income
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Sample Questions
Q1) The inflation rate is the
A)absolute change in real GDP from one period to another.
B)percentage change in real GDP from one period to another.
C)absolute change in the price level from one period to another.
D)percentage change in the price level from one period to another.
Q2) Jackie, a Canadian citizen, works only in the United States. The value of the output she produces is
A)included in both U.S. GDP and U.S. GNP.
B)included in U.S. GDP, but it is not included in U.S. GNP.
C)included in U.S. GNP, but it is not included in U.S. GDP.
D)included in neither U.S. GDP nor U.S. GNP.
Q3) If nominal GDP doubles and the GDP deflator doubles, then real GDP
A)remains constant.
B)doubles.
C)triples.
D)quadruples.
Q4) Explain why it is the case that the value of intermediate goods produced and sold during the year is not included directly as part of GDP, but the value of intermediate goods produced and not sold is included directly as part of GDP.
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Chapter 11: Measuring the Cost of Living
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Sample Questions
Q1) Suppose the quality of televisions changes over time, but the quality change goes unmeasured for the purpose of computing the consumer price index. In which of the following instances would the bias resulting from the unmeasured quality change be most severe?
A)The quality of televisions deteriorates and televisions become more expensive relative to other goods.
B)The quality of televisions improves and televisions become less expensive relative to other goods.
C)The quality of televisions improves and televisions become more expensive relative to other goods.
D)The quality of televisions deteriorates and the price of televisions relative to other prices remains unchanged.
Q2) Which of the following is correct?
A)Nominal and real interest rates always move together.
B)Nominal and real interest rates never move together.
C)Nominal and real interest rates do not always move together.
D)Nominal and real interest rates always move in opposite directions.
Q3) Why does the GDP deflator give a different rate of inflation than the CPI?
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Chapter 12: Production and Growth
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Q1) Countries that grew the fastest over the last 100 or so years had growth rates of real income per person of about
A)0.5 percent per year.
B)1.5 percent per year.
C)2.0 percent per year.
D)2.5 percent per year.
Q2) Country A has a population of 1,000, of whom 700 worked an average of 8 hours a day and had a productivity of 2.5. Country B has a population of 800, of whom 560 worked 8 hours a day and had productivity of 3.0. The country with the higher real GDP was
A)country A, and the country with higher real GDP per person was country A.
B)country A, and the country with higher real GDP per person was country B.
C)country B, and the country with higher real GDP per person was country A.
D)country B, and the country with higher real GDP per person was country B.
Q3) If a country's saving rate declined, then other things the same, in the long run the country would have
A)lower productivity, but not lower real GDP per person.
B)lower productivity and lower real GDP per person.
C)lower real GDP per person, but not lower productivity
D)neither lower productivity nor lower real GDP per person.
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Chapter 13: Saving, Investment, and the Financial System
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Q1) Refer to Figure 13-3. Which of the following movements would be consistent with the government budget going from deficit to surplus and the simultaneous enactment of an investment tax credit?
A)a movement from Point A to Point C
B)a movement from Point B to Point A
C)a movement from Point B to Point F
D)a movement from Point C to Point B
Q2) Most entrepreneurs finance their purchases of real capital using their past saving.
A)True
B)False
Q3) Refer to Figure 13-4. Regard the position of the Supply curve as fixed, as on the graph. If the real interest rate is 4 percent, the inflation rate is 2 percent, and the market for loanable funds is in equilibrium, then the position of the demand-for-loanable-funds curve must be
A)D<sub>1</sub>
B)D<sub>2</sub>
C)betweenD<sub>1</sub>andD<sub>2</sub>
D)to the left of D<sub>1</sub>
Q4) Draw and label a graph showing equilibrium in the market for loanable funds.
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Chapter 14: The Basic Tools of Finance
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Sample Questions
Q1) As the number of stocks in a portfolio rises,
A)both firm-specific risks and market risk fall.
B)firm-specific risks fall; market risk does not.
C)market risk falls; firm-specific risks do not.
D)neither firm-specific risks nor market risk falls.
Q2) Compounding refers directly to
A)finding the present value of a future sum of money.
B)finding the future value of a present sum of money.
C)changes in the interest rate over time on a bank account or a similar savings vehicle.
D)interest being earned on previously-earned interest.
Q3) At which interest rate is the present value of $360 three years from today equal to about $310 today?
A)4.7 percent
B)5.1 percent
C)5.5 percent
D)5.9 percent
Q4) List three different ways that a risk-averse person can reduce financial risk.
Q5) Give an example of adverse selection and an example of moral hazard using homeowners insurance.
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Chapter 15: Unemployment
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Sample Questions
Q1) Refer to Table 15-1. The unemployment rate of Aridia in 2012 was
A)6.25%.
B)11.1%.
C)12.5%.
D)56.25%.
Q2) Most economists agree that eliminating unemployment insurance would increase the nation's overall level of well-being.
A)True
B)False
Q3) Marginally attached workers are people who
A)are looking for a better job than they currently have.
B)are not working and are not looking for work, but would work if asked.
C)are working part-time while they go to school or get training for a better job.
D)are only a few years from retirement.
Q4) The unemployed who quit their jobs, were fired for cause, or just entered the labor force are not eligible for unemployment insurance.
A)True
B)False
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Chapter 16: The Monetary System
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Q1) Which of the following is included in M1 and M2?
A)traveler's checks
B)savings deposits
C)money market mutual funds
D)small time deposits
Q2) Refer to Table 16-5. If the Fed's reserve requirement is 9 percent, then what quantity of excess reserves does the Bank of Pleasantville now hold?
A)$200
B)$250
C)$400
D)$1,000
Q3) Suppose the Fed requires banks to hold 10 percent of their deposits as reserves. A bank has $20,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves?
A)$29,000
B)$28,100
C)$19,100
D)$11,000
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18
Chapter 17: Money Growth and Inflation
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Q1) The data on hyperinflation show a clear link between the quantity of money and A)the price level.
B)growth rate of GDP.
C)unemployment rate.
D)velocity.
Q2) If Y and M are constant and V doubles, the quantity equation implies that the price level
A)falls to half it's original level.
B)doubles.
C)more than doubles.
D)does not change.
Q3) For a given level of money and real GDP, an increase in velocity would lead to an increase in the price level.
A)True
B)False
Q4) The quantity theory of money implies that if output and velocity are constant, then a 50 percent increase in the money supply would lead to less than a 50 percent increase in the price level.
A)True
B)False
Page 19
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Chapter 18: Open-Economy Macroeconomic Models
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Q1) The country of Wiknam has net capital outflow of $1,000, government purchases of $5,000 and consumption of $20,000. Which of the following is correct?
A)If its domestic investment is $1,000, its GDP is $26,000.
B)If its domestic investment is $2,000, its GDP is $28,000.
C)If its domestic investment is $5,000, its GDP is $29,000.
D)None of the above are correct.
Q2) After the 1980s, U.S. net capital outflow was
A)negative, meaning that foreigners were buying more capital assets from the United States than Americans were buying abroad.
B)negative, meaning that Americans were buying more capital assets abroad than foreigners were buying from the United States.
C)positive, meaning that foreigners were buying more capital assets from the United States than Americans were buying abroad.
D)positive, meaning that Americans were buying more capital assets abroad than foreigners were buying from the United States.
Q3) How do the nominal exchange rate and the real exchange rate differ?
Q4) How do we find the real exchange rate from the nominal exchange rate?
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Chapter 19: A Macroeconomic Theory of the Open Economy
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Q1) Suppose that the U.S. imposed an import quota on beef. Sales of U.S. beef producers would
A)rise and exports of other industries would increase.
B)rise and exports of other industries would decline.
C)not change, exports of other industries would increase.
D)not change, exports of other industries would decline.
Q2) Which of the following is included in the supply of U.S. dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?
A)A retail outlet in Canada wants to buy handbags from a U.S. manufacturer.
B)A U.S. bank loans dollars to Karen, a U.S. resident, who wants to purchase a car in the U.S.
C)A U.S. based law firm wants to build a new office in Japan.
D)All of the above are correct.
Q3) Which of the following would not be a consequence of an increase in the U.S. government budget deficit?
A)U.S. interest rates rise.
B)U.S. net capital outflow falls.
C)The real exchange rate of the U.S. dollar depreciates.
D)The U.S. supply of loanable funds shifts left.
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Page 21
Chapter 20: Aggregate Demand and Aggregate Supply
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Q1) When taxes increase, consumption
A)decreases as shown by a movement to the left along a given aggregate-demand curve.
B)decreases as shown by a shift of the aggregate demand curve to the left.
C)increases as shown by a movement to the right along a given aggregate-demand curve.
D)increases as shown by a shift of the aggregate demand curve to the right.
Q2) Which of the following shifts the short-run aggregate supply curve to the right?
A)a decrease in the actual price level
B)an increase in the actual price level
C)a decrease in the expected price level
D)an increase in the expected price level
Q3) Like real GDP, investment fluctuates, but it fluctuates much less than real GDP.
A)True
B)False
Q4) Which of the following would cause prices and real GDP to rise in the short run?
A)an increase in the expected price level
B)an increase in the money supply
C)a decrease in the capital stock
D)None of the above is correct.
Page 22
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Chapter 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) If the multiplier is 5, then the MPC is
A)0.05.
B)0.5.
C)0.6.
D)0.8.
Q2) If the Fed conducts open-market purchases, the money supply
A)increases and aggregate demand shifts right.
B)increases and aggregate demand shifts left.
C)decreases and aggregate demand shifts right.
D)decreases and aggregate demand shifts left.
Q3) Monetary policy and fiscal policy are the only factors that influence aggregate demand.
A)True
B)False
Q4) An increase in government spending
A)increases the interest rate and so investment spending increases.
B)increases the interest rate and so investment spending decreases.
C)decreases the interest rate and so increases investment spending increases.
D)decreases the interest rate and so investment spending decreases.
Q5) What is the difference between monetary policy and fiscal policy?
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Chapter 22: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) If monetary policy moves unemployment below its natural rate, both expected and actual inflation will rise.
A)True
B)False
Q2) On a given short-run Phillips curve which of the following is not held constant?
A)the level of GDP
B)the position of the aggregate-supply curve
C)expected inflation
D)the expected growth rate of the money supply
Q3) Refer to Figure 22-2. If the economy starts at C and 1, then in the short run, an increase in taxes moves the economy to
A)B and 2.
B)D and 3.
C)E and 2.
D)None of the above is correct.
Q4) The sacrifice ratio of the Volcker disinflation was larger than previous estimates had predicted.
A)True
B)False
24
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Chapter 23: Six Debates Over Macroeconomic Policy
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Q1) As it is usually practiced, inflation targeting sets
A)a specific inflation rate for the central bank to target and prohibits it from deviating from the target even when some shock pushes inflation away from that number.
B)a specific inflation rate for the central bank to target but allows it to deviate from the target when some shock pushes inflation away from that number.
C)sets some range of inflation rates for the central bank to target but prohibits it from deviating from that range even when some shock pushes inflation outside the range.
D)sets some range of inflation rates for the central bank to target but allows it to deviate from that range even when some shock pushes inflation outside the range.
Q2) The cost of inflation reduction is a large, permanent increase in unemployment.
A)True
B)False
Q3) Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.
A)True
B)False
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