Contemporary Economic Issues
Final Test Solutions
Course Introduction
Contemporary Economic Issues examines the most pressing and relevant economic challenges facing societies today. The course explores topics such as globalization, income inequality, unemployment, environmental sustainability, fiscal and monetary policies, healthcare economics, and digital transformation. Through case studies and current events, students analyze the causes and consequences of these issues, evaluate policy responses, and develop the critical thinking skills needed to assess their impact on individuals, businesses, and governments in an increasingly interconnected world.
Recommended Textbook Essentials of Economics 3rd Edition by Glenn Hubbard
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Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) What is meant by the statement that 'optimal decisions are made at the margin'?
Answer: In economics,the word 'marginal' means 'extra' or 'additional'.Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost,so optimal decisions are made at the point where the extra benefit received from an activity is equal to the extra cost associated with that activity.
Q2) Scarcity refers to a situation in which unlimited wants exceed the limited resources available to fulfill those wants.
A)True
B)False
Answer: True
Q3) Refer to Figure 1-1.Using the information in the figure above,calculate the percentage change in sales of alcoholic beverages between 2008 and 2011.
A) 23.1%
B) 23.8%
C) 30%
D) 42.9%
Answer: D
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Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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Sample Questions
Q1) The opportunity cost of taking a semester-long economics class is
A) the cost of tuition and fees only.
B) the value of the time spent in the classroom.
C) zero because there is no admission charged if you are enrolled in the course.
D) equal to the highest value of an alternative use of the time and money spent on the class.
Answer: D
Q2) Which of the following would shift a nation's production possibility frontier outward?
A) Discovering a cheap way to convert sunshine into electricity.
B) An increase in demand for the nation's products.
C) A decrease in the unemployment rate.
D) A law requiring workers to retire at age 50.
Answer: A
Q3) The basis for trade is comparative advantage,not absolute advantage.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Figure 3-5.At a price of $10,the quantity sold
A) is 2 units.
B) is 4 units.
C) is 6 units.
D) is 8 units.
Answer: B
Q2) If the demand for a product increases and the supply of the product does not change,equilibrium price and equilibrium quantity will both increase.
A)True
B)False
Answer: True
Q3) A decrease in the equilibrium price for a product will result
A) when the quantity demanded for the product exceeds the quantity supplied. B) when there is a decrease in supply and a decrease in demand for the product.
C) when there is an increase in supply and a decrease in demand for the product.
D) when there is a decrease in demand and a decrease in the number of firms producing the product.
Answer: C
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Chapter 4: Market Efficiency and Market Failure
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Sample Questions
Q1) When demand is elastic,a fall in price causes total revenue to rise because
A) when price falls, quantity sold increases so total revenue automatically rises.
B) the increase in quantity sold is large enough to offset the lower price.
C) the percentage increase in quantity demanded is less than the percentage fall in price.
D) the demand curve shifts.
Q2) Shifts in the supply of oil have caused large changes in price since the 1970s because
A) the supply of oil is very inelastic while the demand for oil is very elastic over short periods of time.
B) the supply of oil is very elastic while the demand for oil is inelastic over short periods of time.
C) both the supply of oil and the demand for oil are inelastic over short periods of time.
D) the supply of oil and the demand for oil are perfectly elastic over short periods of time.
Q3) Briefly explain the economic concept of elasticity.
Q4) Explain the relationship between price elasticity of demand and total revenue.
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Chapter 5: The Economics of Healthcare
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Sample Questions
Q1) Refer to Figure 5-3.What is the value of producer surplus at a price of $18?
A) $240
B) $300
C) $340
D) $720
Q2) Refer to Table 5-3.The table above lists the marginal cost of cowboy hats by The Waco Kid,a firm that specialises in producing fancy dress costumes.If the market price of cowboy hats is $35,The Waco Kid will produce
A) 1 hat.
B) 2 hats.
C) 3 hats.
D) 4 hats.
Q3) Will equilibrium in a market always result in an outcome that is economically efficient? Explain.
Q4) The division of the burden of a tax between buyers and sellers in a market is called tax allocation.
A)True
B)False
Q5) What is 'tax incidence'? What determines tax incidence in a competitive market?
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Chapter 6: Firms,the Stock Market,and Corporate
Governance
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Sample Questions
Q1) Refer to Table 6-4.The table above shows the relationship between hours spent fishing and the quantity of fish caught for Juan,a commercial fisherman.
a.Complete the Marginal Product column in Table 6-4.
b.Characterise the production function,i.e.does the production function display increasing marginal returns,diminishing marginal returns,etc.
c.Using the data above,graph Juan's marginal product curve.Be sure to label the horizontal and vertical axes.Is your graph consistent with your answer to part (b)? Explain.
d.Juan uses the following inputs for fishing - a small wooden boat (B),a fishing pole (P)and of course,his labour (L).Treating the boat and the fishing pole as fixed inputs and using the data above,graph Juan's Total Product of Labour curve.Be sure to label the horizontal and vertical axes.
e.(Extra Credit)The opportunity cost of Juan's time is $8 per hour.If Juan receives $2 per kilogram for his fish,what is the optimal number of hours he should spend fishing? Explain how you arrived at your answer.Hint: Recall marginal benefit and marginal cost analysis.
Q2) What is the difference between total costs,variable costs and fixed costs?
Q3) Describe the difference between technology and positive technological change.
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) When plasma television sets were first introduced,prices were high and few firms were in the market.Later,economic profits attracted new firms,and the price of plasma televisions fell.This example illustrates A) a decreasing-cost industry.
B) that consumers receive this new technology 'free of charge' in the sense that they only have to pay a price for plasma televisions equal to the lowest production cost.
C) an industry with a low minimum efficient scale.
D) how fickle consumer demands are.
Q2) If price is equal to average variable cost,a perfectly competitive firm breaks even.
A)True
B)False
Q3) Refer to Figure 7-9.If this is a constant-cost industry,what is the market price in the long-run equilibrium?
A) $5
B) $14
C) $15
D) $20
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Chapter 8: Technology, production, and Costs
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Sample Questions
Q1) The demand curve for a monopoly firm
A) is perfectly inelastic.
B) lies below its marginal revenue curve.
C) is the same as the market demand curve.
D) is horizontal.
Q2) Refer to Figure 8-11.If the firm maximises its profits,the deadweight loss to society due to this monopoly is equal to the area
A) ABF.
B) ABEG.
C) ACE.
D) EFG.
Q3) A monopolist's demand curve is the same as the marginal revenue curve for the product.
A)True
B)False
Q4) Refer to Figure 8-9.What is the economically efficient output level?
A) 600 units
B) 800 units
C) 940 units
D) 1160 units
Page 10
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Chapter 9: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) When a monopolistically competitive firm breaks even in the long run,this is equivalent to earning a zero accounting profit.
A)True
B)False
Q2) Which of the following is not an example of a monopolistically competitive market?
A) Automobile producers
B) Supermarkets
C) Video stores
D) Makers of women's clothing
Q3) One reason why,in the last four decades,the number of new auto makers in the world has been very small compared to the past is that
A) the automobile cannot be improved upon in any way by new producers.
B) new auto makers cannot obtain necessary inputs to produce new cars.
C) governments restrict who can produce automobiles.
D) new producers cannot match the economies of scale of existing auto makers.
Q4) Explain how collusion makes firms better off.Given the incentives to collude,briefly explain why every industry does not become a cartel.
Q5) What is the difference between explicit collusion and implicit collusion?
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Chapter 10: Monopoly and Antitrust
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Sample Questions
Q1) Refer to Figure 10-1.If the wage rate is $40,how many workers should Dale hire?
A) 6 labour units
B) 5 labour units
C) 4 labour units
D) 3 labour units
Q2) A commission system of compensation reduces the risk to workers during seasonal periods when business is sluggish.
A)True
B)False
Q3) If the demand for labour is unchanged,an increase in the supply of labour will lead to
A) a decrease in the quantity of labour demanded and a decrease in the equilibrium wage.
B) an increase in the quantity of labour demanded and a decrease in the equilibrium wage.
C) an increase in the quantity of labour demanded and an increase in the equilibrium wage.
D) a decrease in the quantity of labour demanded and an increase in the equilibrium wage.
Q4) What is a compensating differential?
Page 12
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Chapter 11: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) Refer to Figure 11-16.The current market equilibrium output is partly the result of overfishing.In that case,what does S<sub>1</sub> represent?
A) The private marginal benefit of harvesting salmon.
B) The social marginal benefit of harvesting salmon.
C) The private marginal cost of harvesting salmon.
D) The social marginal cost of harvesting salmon.
Q2) If there is pollution in producing a product,then the market equilibrium price is too high and equilibrium quantity is too low.
A)True
B)False
Q3) Refer to Figure 11-4.The efficient output level is
A) Qd.
B) Qb.
C) Qa.
D) Qb - Qd.
Q4) Health insurance companies impose deductibles on policies and co-payments on claims to reduce the problem of adverse selection.
A)True
B)False
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Chapter 12: GDP: Measuring Total Production and Income
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Sample Questions
Q1) Which of the following is not a policy that can increase the accumulation of knowledge capital?
A) Subsidised research and development.
B) Patent laws to encourage innovation.
C) Free provision of education.
D) Removing patent laws to allow for the spread of knowledge.
Q2) Long-run economic growth
A) is due to increases in capital productivity rather than labour productivity.
B) does not usually occur due to the economic recessions that occur as part of the business cycle.
C) depends more on increases in capital per hour worked than on technological change.
D) depends more on technological change than on increases in capital per hour worked.
Q3) The three main methods of measuring GDP are the
A) multiplier method, the production method, and the expenditure method.
B) goods and services method, the production method, and the expenditure method.
C) income method, the production method, and the expenditure method.
D) consumption method, the savings method, and the investment method.
Q4) What is the gross domestic product of a country?
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Page 14
Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) The unemployment rate is the
A) percentage of the labour force receiving unemployment benefits.
B) percentage of the population that is unemployed.
C) percentage of the working-age population that is unemployed.
D) percentage of the labour force that is unemployed.
Q2) To calculate real wages in Year 1,it is correct to divide nominal wages in Year 1 by the CPI in year 1,and multiply the resultant figure by 100.
A)True
B)False
Q3) In 1986,an Apple IIe computer with 65 kilobytes of memory cost around $1500.Today,a $1500 iMac computer (also made by Apple)comes with 4 gigabytes of memory.This illustrates the potential for what kind of bias in CPI calculations?
A) New product bias.
B) Increase in quality bias.
C) Substitution bias.
D) Outlet bias.
Q4) How has the labour force participation rate changed for men and women over the past 30 years in Australia?
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Page 15
Chapter 14: Economic Growth, the Financial System and Business Cycles
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Sample Questions
Q1) In Japan from the 1990s to the late 2000s,interest rates fell to very low levels.However,this failed to stimulate consumption or investment spending.Use the aggregate expenditure model to explain what might have happened.
Q2) Explain how each of the following events would affect the short-run aggregate supply curve.
a. A decrease in the price level.
b. A decrease in what the price level is expected to be in the future.
c. A price level that is currently lower than expected.
d. An unexpected decrease in the price of an important raw material.
e. A decrease in the labour force.
Q3) Explain whether it is possible for a long-run aggregate supply curve to shift leftwards.
Q4) The impact of a natural disaster on consumers in the economy can make them very pessimistic about their future incomes.How would an increase in pessimism affect the aggregate demand curve?
A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) Financial markets and financial intermediaries comprise the financial system in Australia.
A)True
B)False
Q2) ________ are financial securities that represent promises to repay a fixed amount of funds.
A) Shares
B) Bonds
C) Savings accounts
D) Certificates of deposit
Q3) Assume that banks become more conservative in their lending policies and start holding some excess liquid assets.Compared to a situation in which banks are not holding excess reserves,the size of the deposit multiplier will be
A) larger.
B) smaller.
C) zero.
D) the same.
Q4) Why is the real-world deposit multiplier smaller than 1/RR,where RR is the reserve ratio?
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Chapter 16: Money, banks, and the Federal Reserve System
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Sample Questions
Q1) The money market model is concerned with ________ and the loanable funds market model is concerned with ________.
A) short-term real interest rates; long-term nominal interest rates
B) short-term nominal interest rates; long-term nominal interest rates
C) short-term real interest rates; long-term real interest rates
D) short-term nominal interest rates; long-term real interest rates
Q2) If technological change increases the profitability of new investment for firms,then the ________ curve for loanable funds will shift to the ________ and the equilibrium real interest rate will ________.
A) supply; right; fall
B) supply; left; rise
C) demand; right; rise
D) demand; left; fall
Q3) If the Reserve Bank of Australia raises the interest rate,this will ________ inflation and ________ the rate of growth of real GDP in the short run.
A) reduce; raise
B) increase; lower
C) increase; raise
D) reduce; lower
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Chapter 17: Monetary Policy
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Sample Questions
Q1) Increases in government spending will lower the long-term growth rate of GDP if it lowers ________ spending,and the government purchases ________ goods and not ________ goods.
A) net export spending; investment; consumption
B) consumption; investment; consumption
C) net export spending; consumption; investment
D) investment; consumption; investment
Q2) Which of the following is not an explanation for the decline in autonomous expenditure that occurred in Australia during the Great Depression of the 1930s?
A) A decline in consumption due to a decline in wealth.
B) A decline in investment expenditures due to a lack of money and credit caused by a banking crisis.
C) A rise in export prices which made exports less attractive.
D) A decline in government spending.
Q3) An appropriate fiscal policy response when aggregate demand is growing at a faster rate than aggregate supply is to increase interest rates.
A)True
B)False
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Chapter 18: Fiscal Policy
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Sample Questions
Q1) Japan has developed a comparative advantage in designing and producing automobiles.The source of its comparative advantage in these products is
A) abundant supplies of natural resources.
B) a favourable climate.
C) a strong central government.
D) technology.
Q2) Refer to Table 18-3.Select the statement that accurately interprets the data in the table.
A) Bryce has an absolute advantage in making candles and Tina has an absolute advantage in making soap.
B) Bryce has an absolute advantage in making soap and Tina has an absolute advantage in making candles.
C) Bryce has an absolute advantage in making soap.
D) Tina has an absolute advantage in making candles.
Q3) Between 1960 and 2010,Australia's imports increased from approximately
A) 15 per cent of GDP to 20 per cent of GDP.
B) 10 per cent of GDP to 18 per cent of GDP.
C) 24 per cent of GDP to 30 per cent of GDP.
D) 35 per cent of GDP to 50 per cent of GDP.
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Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Sample Questions
Q1) A country's balance of payments is best described as a system that records
A) the physical flow of goods and services between countries.
B) international trading, borrowing and lending flows.
C) only official transactions between the government and governments of other countries.
D) the flow of investment between countries.
Q2) Purchasing power parity is the theory that,in the long run,exchange rates move to equalise
A) nominal interest rates across countries.
B) real GDP across countries.
C) corporate profits across countries.
D) the relative purchasing power of currencies across countries.
Q3) In recent decades,Australia has incurred overall balance of payments deficits.
A)True
B)False
Q4) Suppose that large budget deficits in Australia lead to an increase in Australian interest rates.What effect will the increase in interest rates have on the value of the dollar relative to the $US? What will happen to net exports and aggregate demand as a result?
Q5) Describe how the Bretton Woods System operated.
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