Economic Decision Making
Practice Questions
Course Introduction
Economic Decision Making is a course that delves into the principles and processes individuals, firms, and governments use to make choices in the face of scarcity and uncertainty. It explores key economic concepts such as opportunity cost, marginal analysis, incentives, and risk, providing students with the analytical tools needed to evaluate options and predict outcomes. Through case studies and real-world examples, the course examines how information, biases, and market forces influence decision-making. Students will learn to apply theories from behavioral and traditional economics to practical situations, enhancing their ability to analyze complex economic problems and make informed, rational decisions in both personal and professional contexts.
Recommended Textbook
Economics Private and Public Choice 14th Edition by David
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Page 2
A. Macpherson
Chapter 1: The Economic Approach
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Q1) In economics,the benefit (or satisfaction)that an individual gets from an activity is called
A)scarcity.
B)utility.
C)opportunity cost.
D)ceteris paribus.
Answer: B
Q2) The basic ingredients in any economic decision are
A)scarcity and choice.
B)surpluses and shortages.
C)market prices and the use of efficient production methods.
D)needs and wants.
Answer: A
Q3) Economists use the term ceteris paribus to indicate that A)supply and demand are in balance.
B)other things are assumed to be constant.
C)the analysis is true for the individual but not for the economy as a whole.
D)their conclusions are based on normative economics rather than positive economic analysis.
Answer: B
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Chapter 2: Asome Tools of the Economist
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Q1) The opportunity cost of an activity
A)depends on the individual's subjective values and opinions
B)is the same for everyone
C)must be calculated and known before undertaking that activity
D)is irrelevant to decision making
E)is not influenced by time costs
Answer: A
Q2) The law of comparative advantage explains why
A)specialization and exchange will make it possible for trading partners to expand their combined output.
B)there will be an inverse relationship between the price of a product and the quantity of it that will be demanded.
C)larger firms will have lower per unit costs than smaller firms.
D)an increase in the price of a good will lead to an expansion in the quantity supplied by business firms.
Answer: A
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Chapter 3: Asupply,demand,and the Market Process
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Sample Questions
Q1) If price rises,what happens to quantity supplied of a product?
A)It increases.
B)It decreases.
C)It does not change.
D)Quantity supplied is constant,but supply increases.
Answer: A
Q2) When experts first predicted major weather-related coffee crop failures in Central and South America in 1986,the price of coffee already on grocery shelves in the United States increased sharply.When coffee became temporarily more scarce,the usefulness to society of "coffee conservation" increased.The immediate sharp price increase (which soon leveled off)gave consumers an incentive to
A)buy all the coffee they could at the higher prices and hoard it,since there was obviously a shortage.
B)drink as much coffee as possible at the higher price.
C)start conserving coffee immediately and switch to other beverages if it was easy to do so.
D)ignore the price of coffee and drink it as they normally would.
Answer: C
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Chapter 4: Asupply and Demand: Applications and Extensions
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Q1) Refer to Figure 4-20.Suppose the same S and D curves apply,and a tax of the same amount per unit as shown here is imposed.Now,however,the sellers of the good,rather than the buyers,are required to pay the tax to the government.Now,relative to the case depicted in the figure,
A)the burden on buyers will be larger and the burden on sellers will be smaller.
B)the burden on buyers will be smaller and the burden on sellers will be larger.
C)the burden on buyers will be the same and the burden on sellers will be the same.
D)The relative burdens in the two cases cannot be determined without further information.
Q2) Refer to Figure 4-17.Which of the following price controls would cause a shortage of 10 units of the good?
A)a price ceiling of $5.50
B)a price floor of $5.50
C)a price ceiling of $6.50
D)a price floor of $6.50
Q3) Joanne states,"If raising the minimum wage to $10 an hour is good,like Senator Largess suggests,then raising it to $20 an hour would be twice as good." Is Joanne correct? Why or why not?
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Chapter 5: Difficult Cases for the Market and the Role of Government
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Q1) Which of the following provides the best example of a public good?
A)elementary and secondary education
B)residential trash pickups provided by a local government
C)an unscrambled television signal
D)the medical services provided by a local hospital
Q2) A market transaction causes an externality if someone
A)directly involved in the transaction receives uncompensated benefits or costs from it.
B)not directly involved in the transaction receives uncompensated benefits or costs from it.
C)directly involved in the transaction seeks legal assistance to ensure that the transaction is carried out.
D)not directly involved in the transaction interferes in it by imposing regulations or product standards.
Q3) Economic efficiency requires that
A)individuals produce at their maximum level.
B)only long-lasting,high-quality products be produced without regard to cost.
C)income be distributed equally among consumers.
D)all economic activity generating more benefits than costs be undertaken.
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Chapter 6: The Economics of Collective Decision-Making
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Sample Questions
Q1) Economics indicates that government funding of special interest projects and favoritism of some business firms relative to others will lead to
A)efficient allocation of resources because the government action will correct the failures of the market.
B)the funding of productive projects that will improve the well-being of most citizens.
C)economic inefficiency because the funding will be driven by political rather than economic considerations.
D)a decline in political contributions and a reduction in the quality of the candidates willing to run for political office.
Q2) Which of the following is true regarding government expenditures in the United States?
A)As a share of GDP,government expenditures were higher in 1950 than 2010.
B)Government expenditures were more than 30 percent of GDP in 1930.
C)Government expenditures as a share of GDP grew rapidly between 1930 and 1980.
D)In 2010,government expenditures at all levels summed to approximately 10 percent of GDP.
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Chapter 7: Ataking the Nations Economic Pulse
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Q1) The primary value of data for real GDP lies in its ability to
A)reflect the welfare of a society relative to a previous period.
B)compare a nation's productivity during two periods widely separated in time.
C)indicate short-term changes in the output rate of a nation.
D)indicate how hard the people of a nation are working.
Q2) A Minnesota farmer buys a new tractor made in Iowa by a German company.As a result,
A)U.S.investment and GDP increase,but German GDP is unaffected.
B)U.S.investment and German GDP increase,but U.S.GDP is unaffected.
C)U.S.investment,U.S.GDP,and German GDP are unaffected,because tractors are intermediate goods.
D)U.S.investment,U.S.GDP,and German GDP all increase.
Q3) If the safety of the work environment has improved over time,
A)real GDP will understate the growth rate of real income.
B)real GDP will overstate the growth rate of real income.
C)the GDP deflator will overestimate inflation.
D)real GDP will overstate the growth rate of real income,and the GDP deflator will understate inflation.
Q4) Discuss the problems with GDP as a measure of a country's current production and income.
Page 9
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Chapter 8: Economic Fluctuations, unemployment, and Inflation
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Sample Questions
Q1) The stages of a business cycle,in order,are
A)expansion,contraction,recession,and boom.
B)contraction,recession,expansion,and boom.
C)boom,expansion,contraction,and recession.
D)recession,contraction,expansion,and boom.
Q2) The population (age 16 and over)of Yakutsk is 48 million;4 million are unemployed,and 40 million hold jobs.Indicate the rate of unemployment and the employment/population ratio of Yakutsk.
A)The unemployment rate is 10 percent,and the employment/population ratio is 75 percent.
B)The unemployment rate is 9.1 percent,and the employment/population ratio is 91.7 percent.
C)The unemployment rate is 10 percent,and the employment/population ratio is 83.3 percent.
D)The unemployment rate is 9.1 percent,and the employment/population ratio is 83.3 percent.
Q3) Describe two ways that public policy could reduce the natural rate of unemployment.
Q4) Discuss the dangers of inflation;that is,why may it hurt an economy?
Page 10
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Chapter 9: Aan Introduction to Basic Macroeconomic Markets
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Sample Questions
Q1) Within the aggregate demand/aggregate supply framework,the quantity produced and purchased in the goods and services market represents A)nominal output or nominal GDP.
B)the interest rate.
C)real output or real GDP.
D)the consumer price index.
Q2) Suppose U.S.consumers start buying more English shoes and fewer U.S.shoes.What impact will this trend have on the foreign exchange market?
A)The U.S.overall demand for foreign exchange,and British pounds,in particular,will increase.
B)The U.S.overall demand for foreign exchange,and British pounds,in particular,will decrease.
C)The U.S.demand for British pounds will increase,but the overall demand for foreign exchange will probably decrease.
D)The U.S.demand for British pounds will decrease,but the overall demand for foreign exchange will probably increase.
Q3) What are the three reasons why the aggregate demand curve slopes downward? Give an example of each.
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Chapter 10: Dynamic Change, economic Fluctuations, and the Ad-As Model
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Q1) Starting from long-run equilibrium at point F in Figure 10-4,at which of the following points would short-run equilibrium occur following a decrease in resource prices?
A)I
B)F
C)G
D)H
Q2) Within the AD/AS model,if an unanticipated reduction in aggregate demand results in less than the full-employment rate of output,
A)the natural rate of unemployment will increase.
B)long-run aggregate supply will increase.
C)lower resource prices and declining interest rates will direct the economy back to full employment.
D)higher resource prices and rising interest rates will direct the economy back to full employment.
Q3) How does the self-correcting mechanism act to pull the economy out of a recession?
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Chapter 11: Fiscal Policy: the Keynesian View and Historical Perspective
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Q1) If the economy is operating at a point where the aggregate expenditure line lies below the 45-degree line (AE = GDP),
A)total spending is more than total output.
B)unwanted business inventories will increase.
C)businesses will reduce their future production.
D)both b and c are correct.
Q2) As the marginal propensity to consume (MPC)decreases,the spending multiplier
A)increases.
B)decreases.
C)remains constant.
D)becomes indefinable.
Q3) When an economy expands into an economic boom,automatic stabilizers will tend to
A)enlarge the budget deficit (or reduce the surplus).
B)reduce the budget deficit (or increase the surplus).
C)ensure that the budget will remain in balance.
D)reduce the supply of money and,thereby,retard aggregate demand.
Q4) According to the Keynesian model,in what ways will expansionary fiscal policy stimulate aggregate demand?
Page 13
Q5) What is fiscal policy? What is the relationship between fiscal policy and the federal budget?
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Chapter 12: Fiscal Policy, incentives, and Secondary Effects
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Q1) Measured as a share of GDP,the net federal debt
A)increased during the 1990s,but fell sharply during 2001-2011.
B)fell during most of the 1990s,but rose sharply during 2001-2011.
C)was virtually unchanged during the 1990s,but fell sharply during 2001-2011.
D)fell during the 1990s,but was virtually unchanged during 2001-2011.
Q2) New classical economists stress that an increase in government expenditures financed by borrowing rather than taxes will
A)exert a strong expansionary impact on aggregate demand and real output.
B)affect the timing of taxes but not their magnitude.
C)lead to higher interest rates.
D)undermine confidence and reduce the level of private saving.
Q3) When government spending flows to areas where resources are already fully employed,
A)the additional spending will stimulate strong growth in those areas.
B)aggregate demand will place downward pressure on the general level of prices.
C)the coordination problem accompanying the composition of aggregate demand is likely to improve.
D)the coordination problem accompanying the composition of aggregate demand is likely to worsen.
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Chapter 13: Amoney and the Banking System
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Q1) The value (purchasing power)of each unit of money
A)does not depend on the amount of money in circulation.
B)tends to increase as the money supply expands.
C)increases as prices rise.
D)is inversely related to prices (in other words,money's value falls as prices rise and vice versa).
Q2) If the Fed wanted to expand the money supply as part of an antirecession strategy,it could
A)increase the reserve requirements.
B)buy U.S.securities on the open market.
C)raise the discount rate.
D)sell U.S.securities on the open market.
Q3) A system that permits banks to hold less than 100 percent of their deposits as reserves is called a
A)federal reserve system.
B)fractional reserve banking system.
C)partially funded deposit insurance system.
D)gold standard banking system.
Q4) Why is there more than one definition of the money supply? What is the difference between them?
Page 16
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Chapter 14: Modern Macroeconomics and Monetary Policy
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Q1) A shift to a more expansionary monetary policy will
A)increase the long-term growth rate of the economy.
B)reduce the future rate of inflation.
C)Stimulate output and employment almost immediately.
D)Stimulate output and employment,but only after a time lag that is generally long and variable.
Q2) Which of the following policies would be most likely to reduce the rate of inflation?
A)sale of government bonds by the Federal Reserve
B)a reduction in the discount rate
C)an increase in the size of the federal budget deficit
D)a reduction in the required reserves imposed on the banking system
Q3) If the Fed wanted to institute a more expansionary monetary policy,which of the following would it be most likely to do?
A)reduce taxes
B)increase government expenditures
C)buy government bonds from the public
D)raise the discount rate
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Chapter 15: Stabilization Policy, output, and Employment
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Q1) Starting from an initial long-run equilibrium,under the adaptive expectations hypothesis,a shift to a more expansionary policy will increase
A)prices and unemployment in the long run.
B)real output in the short run but not in the long run.
C)real output in the long run but not in the short run.
D)real output in both the long run and the short run.
Q2) As shown in Figure 15-3,if people behave according to adaptive expectations theory,an increase in the aggregate demand curve from AD to AD will cause the economy to move
A)directly from E to E and then remain at E .
B)directly from E to E and then remain at E .
C)from E to E initially and then eventually move back to E .
D)from E to E initially and then eventually move to E .
Q3) What is the Phillips curve? What is the difference between the original Phillips curve and the "modern" view of the Phillips curve? What problems caused the abandonment of the ideas behind the original Phillips curve?
Q4) How has macro-policy changed since the 1970s? How have the views of economists on the trade-off between inflation and unemployment changed?
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Chapter 16: Creating an Environment for Growth and Prosperity
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Q1) Which of the following would be most likely to help the residents of a nation produce a larger output and consume a wide variety of products at economical prices?
A)imposition of tariffs on imported goods
B)quotas that protect domestic businesses against foreign producers that pay workers low wages
C)free trade
D)exchange rate controls
Q2) Which of the following policies would be most likely to reduce the efficiency of a country's economic organization?
A)a legal structure that establishes secure property rights
B)imposition of tariffs and other barriers limiting international trade
C)competitive markets
D)a stable monetary system
Q3) Economic growth will
A)reduce the future real GDP of an economy.
B)expand the production possibilities of an economy.
C)increase an economy's nominal income,but not its real income.
D)increase real output,but the real income level of the country will decline.
Q4) Are abundant natural resources good or bad for economic growth?
Page 19
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Chapter 17: Institutions,policies,and Cross-Country
Differences in Income and Growth
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Q1) The purchasing power parity (PPP)method
A)calculates the cost of purchasing a specific bundle of goods and services in each country and uses this measure to convert the incomes of different countries to a common currency.
B)calculates how much the general price level has increased within one specific country through time.
C)calculates how much the average standard of living across all countries has changed through time.
D)is used when one wants to compare dollar values from today with those from more than 100 years ago.
Q2) According to the Economic Freedom of the World (EFW)rating,which of the following countries has the lowest level of economic freedom?
A)Singapore
B)Switzerland
C)Zimbabwe
D)Mexico
Q3) How do growth rates vary across countries? Are the rich countries getting richer while the poor are getting poorer?
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Chapter 18: Gaining From International Trade
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Q1) If the country illustrated in Figure 17-12 is initially trading without restrictions at a world price of $1.00,the government revenue from a tariff of $0.50 per unit is represented by area
A)c
B)e + g
C)i + e + f
D)d + e
E)e
Q2) Which of the following is a partially valid economic argument for restricting free trade?
A)Restrictions on foreign trade will increase employment and permanently reduce unemployment.
B)Removal of restrictions that have existed for years will initially cause inflation.
C)Infant industries need permanent protection to develop and gain productive efficiency.
D)A nation needs to protect industries that are vital to national defense in case of future international conflict.
Q3) What is the difference between a tariff and a quota?
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Chapter 19: International Finance and the Foreign Exchange Market
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Q1) What are the three categories of transactions in the balance of payments? Give an example of each.
Q2) If the dollar price of the English pound increases from $1.50 to $1.75,the dollar has
A)appreciated relative to the pound,and English goods have become less expensive to U.S.consumers.
B)depreciated relative to the pound,and English goods have become less expensive to U.S.consumers.
C)appreciated relative to the pound,and English goods have become more expensive to U.S.consumers.
D)depreciated relative to the pound,and English goods have become more expensive to U.S.consumers.
Q3) Which of the following would most likely cause a nation's currency to appreciate?
A)an increase in inflation of the nation's trading partners
B)an increase in the nation's domestic inflation rate
C)a decrease in domestic real interest rates
D)an increase in real interest rates abroad
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Page 22
Chapter 20: Consumer Choice and Elasticity
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Q1) Refer to Figure 7-11.As price falls from PA to PB,which demand curve represents the most elastic demand?
A)D
B)D
C)D
D)All of the above are equally elastic.
Q2) Ceteris paribus,an increase in the price of a good will cause the
A)quantity demanded of the good to increase.
B)quantity supplied of the good to decrease.
C)consumer surplus derived from the good to decrease.
D)demand of the good to increase.
Q3) If Mr.Smith thinks the last dollar spent on shirts yields more satisfaction than the last dollar spent on cola,and Smith is a utility-maximizing consumer,he should
A)decrease his spending on cola.
B)decrease his spending on cola and decrease his spending on shirts.
C)decrease his spending on shirts.
D)increase his spending on cola and decrease his spending on shirts.
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Chapter 21: Acosts and the Supply of Goods
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Q1) If fixed costs are $200,000 and variable costs are $30 per unit over the relevant range of output,when 10,000 units are produced,the average total cost will be
A)$20.
B)$30.
C)$50.
D)$70.
Q2) Which of the following explains most accurately why the firm's short-run marginal cost curve will eventually rise?
A)As more of the variable factor is used,its price will rise.
B)When diminishing marginal returns set in,it will take ever-larger quantities of the variable resources to produce an additional unit of output.
C)As the variable factor is used more intensely,its marginal product will rise,causing an increase in marginal costs.
D)As the size of the firm increases,the operational efficiency of the firm declines,causing an increase in marginal costs.
Q3) Suppose you are planning to open a lemonade stand.List separately all the explicit and implicit costs that might be involved.
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Chapter 22: Aprice Takers and the Competitive Process
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Q1) In some industries,like insurance,both small and very large firms coexist and compete quite effectively in the market.This indicates that the long-run average total cost curve in these industries
A)is "U" shaped.
B)is downward sloping over all levels of output.
C)exhibits constant returns to scale over a wide range of output.
D)exhibits diseconomies of scale beginning at a low rate of output.
Q2) A firm in competitive price-taker market is maximizing profit at Q = 3,000.Then its fixed cost increases.The profit-maximizing output is now
A)greater than 3,000 and profit decreases
B)less than 3,000 and profit decreases
C)greater than 3,000 and profit is unchanged
D)equal to 3,000 and profit decreases
E)equal to 3,000 and profit increases
Q3) In the short run,a firm that is a price taker will stay in business as long as
A)price equals average revenue.
B)marginal revenue is greater than or equal to marginal cost.
C)price exceeds average variable cost.
D)price is less than average variable cost.
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Chapter 23: Price-Searcher Markets With Low Entry Barriers
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Q1) Refer to Figure 10-14.In the long run,we would expect
A)more firms to enter this industry until zero economic profits are restored.
B)firms to exit this industry until zero economic profits are restored.
C)the number of firms to remain constant and existing firms will continue to suffer economic losses in the long run.
D)the number of firms to remain constant and existing firms will continue to earn economic profits in the long run.
Q2) When an entrepreneur introduces a new improved product that is highly valued relative to cost
A)consumers will be worse off.
B)the demand for the products that are good substitutes for the new product will increase.
C)some of the existing products will become obsolete and businesses producing those products will fail.
D)total employment will decline if there are business failures.
Q3) When you go to a grocery store,most candy bars of a given size sell for virtually the same price.Can we conclude that this is evidence of collusion on the part of candy bar manufacturers?
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Chapter 24: Aprice-Searcher Markets With High Entry
Barriers
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Q1) When members of an oligopolistic industry agree to collude,raising their product price substantially above average cost,the passage of time (months and years)
A)is usually needed for the members to solidify their cooperation.
B)usually results in finer control of prices and markets by the group and larger profit margins.
C)is likely to erode the agreement,as ways to cheat are developed by some participants and new entry is encouraged by the high price.
D)seldom has any impact on the agreement,as long as the participants maintain high profit levels as a result of the agreement.
Q2) In the short run,the monopolist depicted in Figure 11-19 should
A)shut down because P < AVC at some output levels.
B)shut down because P < ATC at all output levels.
C)continue producing because P > AVC at some output levels.
D)continue producing because P > ATC at all output levels.
E)continue producing because monopolists never shut down.
Q3) One answer to the problem of natural monopoly is provision of the good by a government-owned and operated firm.Why is that option not used very often?
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Chapter 25: The Supply of and Demand for Productive Resources
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Q1) If a profit-maximizing firm hires an additional unit of labor,what must be true about labor's wage and marginal revenue product?
A)Its wage always equals its marginal revenue product.
B)Its wage is always greater than its marginal revenue product.
C)Its wage is always total revenue minus marginal revenue product.
D)Its wage is always less than or equal to its marginal revenue product.
Q2) A decrease in the demand for a final product will cause
A)a decrease in demand for the resources used to produce the good.
B)an increase in demand for the resources used to produce the good.
C)firms to expand production of the good.
D)an increase in the supply of resources used to produce the good.
Q3) A profit-maximizing restaurant owner will hire more busboys to keep more tables clean and quickly available to new customers,as long as the
A)marginal product of busboys exceeds the marginal product of other employees.
B)hourly wage of busboys is lower than that of cashiers and cooks.
C)marginal revenue product of busboys exceeds their wage rate.
D)wage of busboys exceeds the wage of other employees.
Q4) There is an Italian soccer player who makes more than $10 million a year.Why?
Page 28
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Chapter 26: Earnings, productivity, and the Job Market
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Q1) The linkage between high productivity and high earnings is vitally important because
A)it provides individuals with a strong incentive to develop skills and engage in activities that others value highly.
B)high productivity (a large output per hour worked)is the key to high living standards.
C)it brings the self-interest of individuals into harmony with economic progress.
D)all of the above are true.
Q2) A compensation structure that generates much higher pay rates for the top performers,while those whose productivity is only a little lower receive substantially less compensation,is called
A)tournament pay.
B)competing differentials.
C)dueling executives.
D)winner take all.
Q3) Given the amount of time and other costs of investing in human capital that it takes to earn a Ph.D. ,why are college professors paid less than other occupations that require similar or lesser amounts of human capital?
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Chapter 27: Investment, the Capital Market, and the Wealth of Nations
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Q1) Ryan must decide whether or not to go to law school.He knows that he can earn
$50,000 per year with his bachelor's degree,but he expects to earn a minimum of $58,000 per year with the law degree.An economist would advise him to
A)take the job that just requires the bachelor's degree.
B)go to law school,but only if he can finish within 3 years.
C)go to law school.
D)consider costs,revenues,and any nonmonetary job considerations he might have also.
Q2) Which of the following is true of saving and investment?
A)There is no relationship between saving and investment;people can invest without having to save.
B)Saving and investment can never be undertaken together by the same person.
C)Saving and investment must always be undertaken by the same person.
D)If investment is going to be undertaken,someone must save.
Q3) When investment funds are allocated by government rather than by markets,
A)profitable investments are more likely to take place.
B)political influence replaces market return as the basis for allocating funds.
C)funds will consistently be channeled into wealth-creating projects.
D)projects that are political boondoggles will be unlikely to be undertaken.
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Chapter 28: Income Inequality and Poverty
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Q1) Assume that Peter is a single parent who is in poverty.He receives food stamps and Medicaid.For every $100 that he earns,Peter loses $35 of his food stamp benefits and $20 in his Medicaid benefits.Also,Peter's income is taxed at a rate of 10 percent.Then,Peter's effective marginal tax rate is
A)45 percent.
B)55 percent.
C)65 percent.
D)70 percent.
Q2) Since 1980,income inequality (as measured by the income share of the highest 20 percent of income earners relative to the lowest 20 percent)has
A)been virtually unchanged.
B)increased.
C)decreased.
D)fluctuated in a random pattern.
Q3) Which one of the following groups has a below-average incidence of poverty?
A)divorced or separated persons
B)African Americans and other minorities
C)families headed by a female
D)persons between the ages of 35 and 54
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Page 31
Chapter 29: Government Spending and Taxation
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Q1) The share of the personal income tax paid by the bottom half of earners
A)rose to an all-time high in 2008.
B)was substantially higher in 2008 than during the 1960s and 1970s.
C)was substantially lower in 2008 than during the 1960s and 1970s.
D)has been relatively constant during the last four decades.
Q2) For the first time in almost a century,
A)the rapid growth of federal spending stopped during the 1990s.
B)the slow growth of federal spending began to increase during the 1990s.
C)state and local governments spent more than the federal government during the 1990s.
D)national defense became the largest category of federal spending in the 1990s.
Q3) When the government borrows funds in order to pay for its current expenditures,
A)the government will have to repay the borrowed funds within five years.
B)the government can spend without having to increase taxes,either now or in the future.
C)future taxes will have to be higher in order to pay the interest on the borrowed funds.
D)the cost imposed on the private sector is virtually eliminated because taxes can remain constant.
Q4) Discuss how size of government can negatively affect economic growth.
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Page 32
Chapter 30: The Economics of Social Security
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Q1) Which of the following is true?
A)All of the current revenues flowing into the Social Security system are needed for benefit payments to current retirees.
B)If the Social Security surplus was used to pay down the privately held federal debt,this would reduce future taxes and,thereby,make it easier to deal with the retirement of the baby boomers.
C)During the 1980s and 1990s,most of the social security surplus was used to reduce the national debt.
D)When the Social Security surplus is used to cover the current operating expenses of the federal government,it will make it easier for future taxpayers to provide promised Social Security benefits to baby boomers.
Q2) By 2030,the number of workers per Social Security beneficiary will be approximately A)two. B)three.
C)four.
D)six.
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33
Chapter 31: The Stock Market: Its Function, Performance, and Potential As an Investment Opportunity
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Q1) During 1982-1997,stock prices increased substantially.Which of the following helped to boost stock prices during this period?
A)higher interest rates and rapid growth of corporate profits
B)lower interest rates and rapid growth of corporate profits
C)higher interest rates and slow growth of corporate profits
D)lower interest rates and slow growth of corporate profits
Q2) Which of the following is a risk that investors undertake when purchasing stocks?
A)An individual stock can rise and fall unpredictably.
B)Nearly all stocks in the stock market may rise or fall together,when expectations about the entire economy change.
C)Both a and b are true.
D)Neither a nor b is true.
Q3) Which of the following represents a method for a firm to obtain funds for growth and product development?
A)use of retained earnings
B)borrowing money
C)selling stock
D)all of the above
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Chapter 32: Great Debates in Economics: Keynes Versus Hayek
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Q1) Adam Smith stated,"The man of system is apt to be very wise in his own conceit.He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board." Which is true of this statement?
A)Keynes would tend to agree with the statement;Heyek would disagree with it.
B)Keynes would tend to disagree with the statement;Hayek would agree with it.
C)As the rap video indicates,both Keynes and Hayek strongly agree with this statement.
D)As the rap video indicates,both Keynes and Hayek strongly disagree with this statement.
Q2) According to the Keynesian view,capitalism
A)is a highly productive form of economic organization that works best when government intervention is least.
B)experiences booms and busts because of the instability of private investment that is driven by fickle changes in business optimism.
C)experiences booms and busts that are primarily the result of inappropriate monetary policy.
D)experiences fluctuations in aggregate demand that cannot be controlled with fiscal policy.
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Chapter 33: The Crisis of 2008: Causes and Lessons for the Future
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Q1) Which of the following was a contributing factor to the housing boom and bust and the financial crisis of 2008?
A)An increase in the share of loans to sub-prime borrowers.
B)An increase in the share of loans extended to borrowers making only a small down payment.
C)An increase in adjustable-rate mortgages (ARMs)as a share of the total.
D)All of the above.
Q2) The bundling of mortgages together and the issuing of securities for their financing made it possible for investment banks to
A)reduce their exposure to risk in the event that the overall mortgage default rate rose.
B)reduce the amount of capital required to back these bundled securities.
C)build up large reserves so they would be able to meet their obligations even if the mortgage default rate rose substantially.
D)quickly access funds to meet short-term debt obligations.
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Chapter 34: Lessons From the Great Depression
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Q1) Which of the following is true?
A)The Great Depression re-enforces the view that raising taxes in the midst of a severe recession is a bad idea.
B)The Great Depression clearly indicates that a prolonged period of monetary contraction will keep inflation low and promote monetary stability.
C)The Great Depression illustrates that trade restrictions will protect domestic industry and save jobs.
D)The Great Depression demonstrates that the political incentive structure during a severe downturn will encourage politicians to avoid frequent policy changes.
Q2) The Agriculture Adjustment Act of the Roosevelt Administration attempted to boost prices of agriculture products by
A)increasing the money supply from year to year at a constant rate.
B)decreasing the money supply through a policy of monetary contraction.
C)increasing demand through lower taxes and budget deficits.
D)reducing supply through the planned destruction of agricultural crops and livestock.
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Chapter 35: Lessons From Japan and Canada
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Q1) Canada had a high rate of unemployment and sluggish economy during the first half of the 1990s.During the latter half of the 1990s,Canada
A)reduced government spending as a share of the economy,shifted the budget toward a surplus,and the economy achieved solid economic growth in the years that followed.
B)increased government spending as a share of the economy,shifted the budget toward a deficit,and the economy achieved solid economic growth in the years that followed.
C)reduced government spending as a share of the economy,shifted the budget toward a surplus,and the economy quickly fell into a severe recession.
D)increased government spending as a share of the economy,shifted the budget toward a deficit,and the inflation rate soared to double-digit levels.
Q2) Which of the following responded to an economic downturn with a shift to a more expansionary monetary policy?
A)Japan in the 1990s
B)the U.S.during the Great Depression
C)the U.S.in response to the recession of 2008-2009
D)none of the above
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Chapter 36: The Federal Budget and the National Debt
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Q1) Since 1970,the federal debt has expanded rapidly because A)revenues have gone down,while expenditures have gone up.
B)expenditures have risen faster than revenues.
C)expenditures have increased slightly,while revenues have remained about the same.
D)revenues have fallen faster than expenditures.
Q2) When government debt is financed internally,future generations will
A)inherit a higher tax liability without additional interest income.
B)inherit neither higher taxes nor additional interest income.
C)inherit both higher taxes and additional interest income.
D)receive lower interest income and a lower tax liability.
Q3) The new classical view of budget deficits assumes that
A)people view government bonds as an addition to their wealth.
B)individuals do not anticipate the tax liability implied by deficit spending.
C)increased government borrowing will raise the interest rate and retard private borrowing and capital formation.
D)if future taxes (debt)are substituted for current taxes,people will save the reduction in current taxes in order to pay the higher future taxes.
Q4) What is the difference between the federal budget deficit and the national debt?
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Chapter 37: The Economics of Healthcare
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Q1) Which of the following grew rapidly during the years following the passage of the Medicare and Medicaid programs?
A)the share of healthcare expenditures financed by third parties
B)the prices of healthcare relative to the prices of other goods and services
C)expenditures on healthcare as a share of the economy
D)all of the above
Q2) Why is the current U.S.tax-treatment of health insurance purchased through one's employer discriminatory?
A)Health insurance should not be a tax-deductible expense for anyone.
B)The system gives preferential tax treatment to self-employed individuals.
C)The system imposes higher taxes on the direct purchase of health insurance because it is not tax deductible.
D)The system gives preferential tax treatment to people who purchase health insurance directly from a provider.
Q3) The only two options to control the growth of healthcare spending are
A)price controls and political rationing or competition and market prices.
B)taxation or political mandates.
C)subsidizing of healthcare insurance or government provision of healthcare.
D)free healthcare or subsidized healthcare.
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Page 40
Chapter 38: Education: Problems and Performance
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Sample Questions
Q1) When compared to the achievement scores of students in other nations,U.S.students are
A)well-below average.
B)well-above average.
C)about average.
D)above average in mathematics,but below average in science.
Q2) Increasing competition between schools will tend to
A)increase their cost.
B)decrease their cost.
C)decrease their quality.
D)do both b and c
Q3) In 2010,how many states permitted public school choice in some or all school districts?
A)10
B)30
C)40
D)45
Q4) What are some of the criticisms of voucher programs? How would a voucher program be modified to address these concerns?
Q5) What are charter schools? How do they differ from voucher programs?
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Chapter 39: Earnings Differences Between Men and Women
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Q1) Which of the following is true?
A)Due to anti-employment discrimination legislation that was passed in the early 1960s,there was a large increase in the earnings of women relative to men in the 1960s and 1970s.
B)The female/male earnings ratio for full-time workers has been virtually constant since 1980.
C)The number of women preparing for careers as professionals has increased substantially since the 1980s.
D)In recent years only about 40 percent of those completing college degrees were women.
Q2) Women earn less on average than men.Which of the following would be the logical conclusion?
A)Women must be the victim of employment discrimination.
B)Women must be less productive.
C)Men must be more highly motivated and materialistic.
D)Without consideration of preferences and productivity factors,differences in unadjusted mean earnings do not necessarily reflect employment discrimination.
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42
Chapter 40: Do Labor Unions Increase the Wages of Workers
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Q1) Which of the following factors will make it easier for a labor union to increase the wages of its members?
A)a highly inelastic demand for the products produced by the union labor
B)a readily available supply of similar products produced by nonunion labor
C)low tariffs and strong competition from foreign firms producing the products supplied by the union labor
D)a reduction in the demand for the products produced by the union labor
Q2) The experience of the Teamsters in the late 1970s and early 1980s suggests that A)there are few restraints on the ability of a strong union to increase the wages of its members.
B)product market competition with goods made from (or services provided by)nonunion labor significantly limits the ability of a union to get increased wages for its members.
C)higher wages tend to stimulate aggregate demand,which makes it easier for a union to gain still higher wages.
D)wages are established by the relative skill of union and management negotiators,independent of market conditions.
Q3) What common goals,if any,do labor and management share?
Q4) List some factors that might make the threat of a strike more effective.
Page 43
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Chapter 41: The Question of Resource Exhaustion
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Q1) Non-renewable resources are those that
A)are not renewed by nature,but their supply can be easily expanded by humans.
B)are naturally renewed by nature;timber provides an example.
C)are not renewed by nature,at a significant rate.
D)cannot be recycled,by their very nature.
Q2) Water,when it is not tradeable among current and potential users,is often kept that way
A)by governments who demand tight controls on who gets the water.
B)by nature,as water cannot be easily moved from place to place in large quantities.
C)to protect fish and other wildlife,rather than for any other reason.
D)by monopoly owners in the private sector.
Q3) Empirical evidence suggests that the relative scarcity of most resources is A)declining.
B)increasing slowly.
C)increasing rapidly.
D)largely unchanged.
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Chapter 42: Difficult Environmental Cases and the Role of Government
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Q1) (I)Richer people are more willing to make sacrifices to gain greater environmental quality.
(II)Poor countries are not as resilient when faced with the threats caused by environmental degradation.
A)Both I and II are true.
B)I is true;II is false.
C)I is false;II is true.
D)Both I and II are false.
Q2) When a park is funded by visitors but not by taxpayers in general,
A)there will be too few parks because most people will not pay to use a park.
B)visitors will be better served because poor service would lead to reductions in revenues.
C)park budgets will decline.
D)park quality will decline.
Q3) The scientific evidence on the causes and consequences of global warming A)is clear and indisputable.
B)has considerable uncertainty in its findings.
C)indicates global warming should be stopped regardless of cost.
D)is of no importance to economists.
Page 45
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