Contemporary Economic Issues
Practice Questions
Course Introduction
Contemporary Economic Issues explores the major economic challenges and opportunities facing societies in the 21st century. The course examines topics such as globalization, income inequality, technological change, labor market dynamics, environmental sustainability, and the impact of government policies. Through analysis of current events, case studies, and economic data, students gain an understanding of the complex forces shaping modern economies and develop the critical thinking skills necessary to evaluate policy responses and solutions to these pressing issues.
Recommended Textbook Essentials of Economics 6th Edition by
R. Glenn Hubbard
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Chapter 1: Economics: Foundations and Models
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Q1) Which of the following is a normative economic statement?
A) The price of gasoline is too high.
B) The current high price of gasoline is the result of strong worldwide demand.
C) When the price of gasoline rises, the quantity of gasoline purchased falls.
D) When the price of gasoline rises, transportation costs rise.
Answer: A
Q2) In economics,tangible merchandise is referred to as A) invention.
B) human capital.
C) services.
D) goods.
Answer: D
Q3) Define macroeconomics.
Answer: Macroeconomics is the study of the economy as a whole,including topics such as inflation,unemployment,and economic growth.
Q4) Explain the term "economics."
Answer: Economics is the study of the choices people make to attain their goals,given their scarce resources.
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Q1) Refer to Figure 2-15.One segment of the circular flow diagram in the figure shows the flow of labor services from market K to economic agents J.What is market K and who are economic agents J?
A) K = factor markets; J = households
B) K = product markets; J = households
C) K = factor markets; J = firms
D) K = product markets; J = firms
Answer: C
Q2) Which of the following is an example of spending on factors of production in the circular flow model?
A) Tuan purchases a cappuccino at the student union.
B) Laurence rents a car to drive to a wedding in San Diego.
C) Yvette pays $50 to join a softball league.
D) The "Lucky Ducky" casino buys a new craps table for the casino floor.
Answer: D
Q3) A decrease in the labor force shifts the production possibilities frontier inwards over time.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Where Prices Come From: The Interaction of
Demand and Supply
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Q1) Assume that the demand curve for DVD players shifts to the left and the supply curve for DVD players shifts to the right,but the supply curve shifts more than the demand curve.As a result
A) both the equilibrium price and quantity of DVD players will decrease.
B) the equilibrium price of DVD players will decrease; the equilibrium quantity may increase or decrease.
C) the equilibrium price of DVD players may increase or decrease; the equilibrium quantity will increase.
D) the equilibrium price of DVD players will decrease; the equilibrium quantity will increase.
Answer: D
Q2) Refer to Figure 3-4.At a price of $25,how many units will be supplied?
A) 400
B) 500
C) 600
D) 800
Answer: D
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Chapter 4: Market Efficiency and Market Failure
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Q1) Refer to Figure 4-6.What area represents producer surplus at the equilibrium price of P ?
A) A + B + D
B) D + E
C) D + E + G + H
D) A + B + C + D + E
Q2) The marginal private cost of a good or service is the cost borne by the producer.
A)True
B)False
Q3) Price controls in Venezuela resulted in a thriving black market in many goods.The black market arose because the price controls that were implemented by the Venezuelan government were ________ which resulted in a ________ of products.
A) price floors; surplus
B) price floors; shortage
C) price ceilings; surplus
D) price ceilings; shortage
Q4) What is deadweight loss? When is deadweight loss equal to zero?
Q5) What is a black market?
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Chapter 5: The Economics of Health Care
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Q1) Briefly describe changes in life expectancy,average height,and infant mortality in the United States since 1850.
Q2) Two key consequences of asymmetric information are adverse selection and moral hazard.Define each concept,provide one example of each,and explain how the two concepts differ.
Q3) Replacing employment-based health care with a government-run system could reduce employers payments for their workers insurance,but the amount that they would have to pay in overall compensation
A) would remain essentially unchanged.
B) would dramatically increase.
C) would fall to zero.
D) would dramatically decrease.
Q4) Of the following high-income countries,which has the highest male life expectancy at age 65?
A) Canada
B) Japan
C) the United Kingdom
D) the United States
Q5) What is asymmetric information?
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Chapter 6: Firms, The Stock Market, and Corporate Governance
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Q1) The minimum amount that investors must earn on the funds they invest in a firm,expressed as a percentage of the amount invested,is referred to as
A) the explicit costs of production.
B) net worth.
C) net income.
D) a normal rate of return.
Q2) Humberto is the chief operational officer (COO)of the SodaSopa Company and currently serves on the board of directors of the Helium Company of America.Humberto is considered ________ of the Helium Company of America.
A) a managing director
B) an inside director
C) an unpaid advisor
D) an outside director
Q3) Mortgage-backed securities are similar to bonds in that the investor who buys one receives
A) federal insurance to cover the value of the security.
B) partial ownership of the company that issued the security.
C) dividend payments.
D) regular interest payments.
Page 8
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Chapter 7: Consumer Choice and Elasticity
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Q1) A new area of economics studies situations in which people appear to be making choices that do not appear to be economically rational.This area is called
A) behavioral economics.
B) irrational economics.
C) social economics.
D) new wave economics.
Q2) Maurice Allais,Reinhard Selten,and Vernon Smith all were awarded the Nobel Prize in Economics in part because
A) of their work with experimental economics.
B) they discovered the first example of a Giffen good.
C) of their work on the substitution and income effects of price changes.
D) they proved that external economies would lead to market failure.
Q3) Along a downward-sloping,linear demand curve,total revenue is the greatest
A) where demand is normal.
B) where demand is the most inelastic.
C) where demand is the most elastic.
D) where demand is unit elastic.
Q4) Why might network externalities result in products that contain inferior technologies?
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Chapter 8: Technology,Production,and Costs
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Q1) A firm has successfully adopted a positive technological change when
A) it can produce more output using the same inputs.
B) it produces less pollution in its production process.
C) it can pay its workers less yet increase its output.
D) it sees an increase in worker productivity.
Q2) The law of diminishing marginal returns
A) sets in because not all workers are equally productive. B) applies only in the short run.
C) holds even when there are no fixed factors.
D) ultimately explains why production displays diseconomies of scale.
Q3) Are the costs of utilities always fixed,always variable,or can they be both? Briefly explain.
Q4) Refer to Table 8-6.Alicia Gregory owns a foot massage business.She leases 4 computer-controlled massage booths,for which she pays $125 per day.She cannot increase the number machines she leases without giving the manufacturer 3 months notice.She can hire as many workers as she wants at a cost of $75 per day per worker.These are the only two inputs she uses in her business.Use this information to fill in the columns in the above table.
Q5) What are economies of scale? What are diseconomies of scale?
Q6) What is the marginal product of labor and what is the average product of labor.
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Chapter 9: Firms in Perfectly Competitive Markets
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Q1) Refer to Figure 9-10.Total revenue at the profit-maximizing level of output is
A) $1,200.
B) $2,500.
C) $4,800.
D) $6,000.
Q2) If price = marginal cost at the output produced by a perfectly competitive firm and the firm is earning an economic profit,then
A) marginal revenue is less than price.
B) average total cost is at a minimum.
C) total revenue equals total cost.
D) price exceeds average total cost.
Q3) At the profit-maximizing level of output for a perfectly competitive firm,price equals marginal cost.Which of the following is also true?
A) The difference between total revenue and total cost is the greatest.
B) Total revenue equals total cost.
C) Average revenue equals average total cost.
D) Marginal profit equals marginal cost.
Q4) What is meant by allocative efficiency? How does a perfectly competitive firm achieve allocative efficiency?
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Chapter 10: Monopoly and Antitrust Policy
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Q1) Firms do not have market power in which of the following market structures?
A) perfect competition only
B) perfect competition and monopolistic competition
C) oligopoly
D) monopoly
Q2) Network externalities
A) can only exist when there are economies of scale.
B) prevent the dominance of a market by one firm.
C) exist when the usefulness of a product increases with the number of consumers who use it.
D) are created when celebrity endorsements of products lead to a surge in the demand for those products.
Q3) Refer to Figure 10-16.In the absence of any government regulation,the profit-maximizing owners of this firm will produce ________ units and charge a price of ________.
A) Q units; P
B) Q units; P
C) Q units; P
D) Q units; P
Q4) What happens to a monopoly's revenue when it sells more units of its product?
Page 12
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Chapter 11: Monopolistic Competition and Oligopoly
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Q1) Refer to Table 11-3.What is its average variable cost of production at its optimal output level?
A) $0 (because its optimal output = 0)
B) $15
C) $14.75
D) $29
Q2) In an oligopoly,firms can increase their market power by
A) selling to buyers who have market power.
B) pursuing dominant strategies.
C) colluding to set prices.
D) undertaking heavy advertising expenditure.
Q3) A set of actions that a firm takes to achieve a goal,such as maximizing profits,is called
A) a business strategy.
B) a payoff matrix.
C) the Porter's Competitive Forces plan.
D) game theory.
Q4) Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market,but by separate curves for a firm in a monopolistically competitive market?
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Chapter 12: GDP: Measuring Total Production and Income
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Q1) To make the calculation of real GDP more accurate,in 1996 the BEA switched to using A) base-year prices.
B) current prices.
C) chain-weighted prices.
D) market prices.
Q2) Gross national product (GNP)of the United States is the market value of all final goods and services
A) produced within the United States.
B) consumed within the United States.
C) produced by citizens of the United States anywhere in the world.
D) consumed by citizens of the United States anywhere in the world.
Q3) When the BEA calculates real GDP using the average of prices in the current year and the year preceding it,and this average changes from year to year,this is called calculating GDP using
A) chained-weighted prices.
B) fixed-weight prices.
C) current-year prices.
D) fixed base-year prices.
Q4) Give two reasons why GDP does not reflect total production in an economy.
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Chapter 13: Unemployment and Inflation
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Q1) What are menu costs?
A) the full list of a firm's costs of production
B) the costs to a firm of changing prices
C) the cost to a household of borrowing money when there is deflation
D) the opportunity cost of dining in a restaurant instead of at home
Q2) During the 1990s,Japan experienced periods of deflation and very low nominal interest rates,approaching zero percent.Why would lenders of money agree to a nominal interest rate of almost zero?
Q3) In 2017,Boeing announced that it was laying off 1,800 employees in addition to the 7,000 workers it had cut the year before.The laid-off employees who were not able to find jobs at another aircraft manufacturer due to a permanent decline in employee demand in the aircraft industry would be considered
A) structurally unemployed.
B) frictionally unemployed.
C) seasonally unemployed.
D) cyclically unemployed.
Q4) The full-employment rate of unemployment is zero.
A)True
B)False
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Chapter 14: Economic Growth, The Financial System, and Business Cycles
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Q1) India's rapid growth can be explained by
A) reduced regulations and market-based reforms.
B) investment in human capital from 1947 through 2017.
C) the movement of workers from the agricultural sector to the manufacturing sector.
D) an increase in labor force participation.
Q2) The effect of a recession on a company like General Motors Corporation is such that A) sales decline more sharply for General Motors as compared to firms that do not produce durable goods.
B) profits fall less sharply as compared to firms that do not produce durable goods.
C) the decline in sales is more short-lived as compared to firms that do not produce durable goods.
D) there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods.
Q3) Use the equations for public and private saving to demonstrate how total saving in the economy equals investment.
Q4) Outline the various actions the government sector could take to promote growth.
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Q1) Workers and firms both expect that prices will be 2.5% higher next year than they are this year.As a result
A) workers will be willing to take lower wages next year, but not lower than a 2.5 percent decrease.
B) the purchasing power of wages will rise if wages increase by 2.5%.
C) the short-run aggregate supply curve will shift to the left as wages increase.
D) aggregate demand will increase by 2.5%.
Q2) The real business cycle model focuses on how
A) wage and price stickiness explains fluctuations in real GDP.
B) the labor theory of value is the best measure of value of a good or service.
C) the Federal Reserve should adopt a monetary growth rule.
D) productivity shocks explain fluctuations in real GDP.
Q3) Refer to Figure 15-1.Ceteris paribus,a decrease in interest rates would be represented by a movement from
A) AD to AD .
B) AD to AD .
C) point A to point B.
D) point B to point A.
Q4) Explain how menu costs affect the slope of the short-run aggregate supply curve.
Page 17
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Chapter 16: Money,Banks,and the Federal Reserve System
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Q1) The Federal Open Market Committee consists of
A) the seven member Board of Governors of the Federal Reserve.
B) the 12 Federal Reserve Bank Presidents.
C) five of the Federal Reserve Bank Presidents.
D) the Board of Governors plus five of the Federal Reserve Bank Presidents.
Q2) Which of the following is counted as a liability for a bank?
A) customer deposits
B) bank reserves
C) securities
D) bank loans
Q3) Of the three primary tools the Federal Reserve uses to conduct monetary policy,the tool used most often is
A) open market operations.
B) discount policy.
C) setting reserve requirements.
D) acting as the lender of last resort.
E) check clearing.
Q4) Why is the real-world deposit multiplier smaller than 1/RR,where RR is the required reserve ratio?
Q5) How do open market operations work?
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Chapter 17: Monetary Policy
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Q1) Refer to Figure 17-4.In the figure above,a movement from point A to point B would be caused by
A) a decrease in real GDP.
B) an increase in the price level.
C) a decrease in the price level.
D) an increase in the interest rate.
Q2) Changes in interest rates affect all four components of aggregate demand.
A)True
B)False
Q3) Inflation targeting allows monetary policy to focus on inflation and inflation forecasts except during times of severe recession.
A)True
B)False
Q4) What is a banking panic,and what role did banking panics play in the decision by Congress to establish the Federal Reserve?
Q5) The Fed can directly lower the inflation rate.
A)True
B)False
Q6) List the Fed's four main monetary policy goals.
Page 19
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Chapter 18: Fiscal Policy
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Q1) The long-run growth rate of real GDP depends primarily on the growth in the number of hours worked and the growth rate of labor productivity.
A)True
B)False
Q2) Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Q3) The growth rate of hours worked depends on all of the following except A) the rate of population growth.
B) changes in the employment-population ratio.
C) changes in the hours each employee works.
D) changes in the worker-to-retiree ratio.
Q4) Suppose that the current equilibrium GDP is $14.5 trillion and that potential GDP is $14.3 trillion.Will decreasing government purchases by $200 billion,or raising taxes by $200 billion,restore the economy to potential GDP? Explain.
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Chapter 19: Comparative Advantage, International Trade, and Exchange Rates
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Q1) If the demand for the yen increases relative to the dollar,which of the following would occur?
A) The dollar will appreciate.
B) The yen will depreciate.
C) The dollar will depreciate.
D) The demand for the dollar will increase.
Q2) Explain and show graphically how an increase in incomes in the United States will affect equilibrium in the foreign exchange market?
Q3) Holding all else constant,a rise in interest rates in the United States will cause the dollar to appreciate in international exchange markets.
A)True
B)False
Q4) ________ is the ability of an individual,a firm,or a country to produce a good or service at a lower opportunity cost than competitors.
A) Absolute advantage
B) Specialization
C) Autarky
D) Comparative advantage
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