Economic Fundamentals
Question Bank
Course Introduction
Economic Fundamentals provides a comprehensive introduction to the core principles of economics, exploring the ways individuals, firms, and governments make choices in the presence of scarce resources. The course covers fundamental concepts such as supply and demand, market equilibrium, elasticity, opportunity costs, and the basics of macroeconomic and microeconomic analysis. Students gain insights into how markets operate, how prices are determined, and the role of incentives in shaping economic behavior. Through real-world applications and theoretical frameworks, the course equips students with the analytical tools needed to understand everyday economic issues and broader policy debates.
Recommended Textbook Essentials of Economics 3rd Edition by Glenn Hubbard
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Chapter 1: Economics: Foundations and Models
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Q1) Policies based on positive economic ideas tend to decrease economic efficiency and reduce equity.
A)True
B)False
Answer: False
Q2) Who receives the most of what is produced in a market economy?
A) Lawmakers and other politically favoured groups.
B) Those who are willing and able to buy it.
C) People who earn the highest incomes.
D) Everyone receives an equal amount.
Answer: B
Q3) The basic economic problem of ________ has always existed and will continue to exist.
A) scarcity
B) efficiency
C) inflation
D) recession
Answer: A
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Chapter
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Q1) Refer to Figure 2-7.Which country has a comparative advantage in the production of cashews?
A) Indonesia
B) They have equal productive abilities.
C) Pakistan
D) Neither country
Answer: C
Q2) In a production possibility frontier model,a point ________ the frontier is productively inefficient.
A) along
B) inside
C) outside
D) at either intercept of
Answer: B
Q3) Refer to Figure 2-6.What is the opportunity cost of 100 dozen roses?
A) 0.8 dozen orchids
B) 5 dozen orchids
C) 40 dozen orchids
D) 80 dozen orchids
Answer: C
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Q1) Which of the following statements is true?
A) An increase in demand causes a change in equilibrium price; the change in price does not cause a further change in demand or supply.
B) A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in demand.
C) If both demand and supply increase, there must be an increase in equilibrium price; equilibrium quantity may either increase or decrease.
D) If demand decreases and supply increases, one cannot determine if equilibrium price will increase or decrease without knowing which change is greater.
Answer: A
Q2) Behavioural economics helps explain why customers ________ at Big W.
A) favoured the policy of everyday low prices and not sales and coupons
B) favoured sales and coupons and not the policy of everyday low prices
C) were equally happy with sales and coupons and the policy of everyday low prices
D) responded negatively to both sales and coupons and the policy of everyday low prices
Answer: B
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Chapter 4: Market Efficiency and Market Failure
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Q1) Economists estimated that the price elasticity of beer is -0.30 and the income elasticity of beer is 0.09.This means that
A) an increase in the price of beer will increase the quantity demanded of beer, and beer is a normal good.
B) an increase in the price of beer will lead to an increase in revenue for beer sellers, and beer is a normal good.
C) a decrease in the price of beer will lead to an increase in revenue for beer sellers, and beer is an inferior good.
D) an increase in the price of beer will lead to a decrease in the quantity demanded of beer, and beer is a necessity.
Q2) Refer to Figure 4-2.Using the midpoint formula,calculate the absolute value of the price elasticity of demand between e and f.
A) 0.32
B) 0.4
C) 2.5
D) 3.125
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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Q1) Refer to Figure 5-1.If the market price is $2.00,what is the consumer surplus on the first burrito?
A) $0.50
B) $1.00
C) $2.00
D) $7.50
Q2) Suppose the demand curve for a product is vertical and the supply curve is upward sloping.If a unit tax is imposed in the market for this product,
A) sellers bear the entire burden of the tax.
B) buyers bear the entire burden of the tax.
C) the tax burden will be shared equally between buyers and sellers.
D) buyers share the burden of the tax with the government.
Q3) What is the difference between a price ceiling and a price floor? Compared to the competitive equilibrium price,where must price ceilings and price floors be set to have an effect on the market?
Q4) If marginal benefit is greater than marginal cost,output is inefficiently high.
A)True
B)False
Q5) What is economic surplus? When is economic surplus at a maximum?
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Chapter 6: Firms,the Stock Market,and Corporate Governance
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Sample Questions
Q1) The explicit cost of production is also called A) variable cost.
B) accounting cost.
C) direct cost.
D) overhead cost.
Q2) In the long run,all of a firm's inputs are variable.
A)True
B)False
Q3) In economics,technology only refers to the development of new products.
A)True
B)False
Q4) In economics,what is the difference between the short run and the long run?
Q5) Refer to Figure 6-11.For output rates greater than 20 000 picture frames per month, A) the firm will not make a profit because the average cost of production will be too high.
B) the firm will experience diseconomies of scale.
C) the firm will experience diminishing returns.
D) the short-run average total cost will equal the long-run average total cost of production.
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Chapter 7: Consumer Choice and Elasticity
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Q1) Which of the following is not a characteristic of a monopolistically competitive market structure?
A) There is a large number of independently acting small sellers.
B) All sellers sell products that are differentiated.
C) There are low barriers to entry of new firms.
D) Each firm must react to actions of other firms.
Q2) Refer to Figure 7-5.If the market price is $20,what is the amount of the firm's profit?
A) $5400
B) $6750
C) $8100
D) $16 200
Q3) If the market price is $25,the average revenue of selling five units is
A) $5.
B) $12.50.
C) $25.
D) $125.
Q4) If firms do not earn economic profits in a competitive equilibrium,why would the firms choose to stay in business?
Q5) What is meant by the term 'long-run competitive equilibrium'?
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Chapter 8: Technology, production, and Costs
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Q1) What is perfect price discrimination and why do economists believe that no firm is able to practice perfect price discrimination?
Q2) A firm that has the ability to control to some degree the price of the product it sells A) is also able to dictate the quantity purchased.
B) faces a demand curve that is inelastic throughout the range of market demand. C) is a price maker.
D) faces a perfectly inelastic demand curve.
Q3) Economic efficiency in a free market occurs when A) consumer surplus is maximised.
B) producer surplus is maximised.
C) the sum of consumer surplus and producer surplus is maximised.
D) price is as low as possible.
Q4) Refer to Figure 8-10.What is the area that represents producer surplus under a monopoly?
A) The triangle 0P<sub>2</sub>E
B) The triangle 0P<sub>3</sub>H
C) The trapezium 0P<sub>1</sub>FH
D) The rectangle P<sub>1</sub>P<sub>3</sub>HF
Q5) Identify four reasons for high entry barriers.Briefly explain each reason.
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Chapter 9: Firms in Perfectly Competitive Markets
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Q1) Refer to Table 9-8.Does Baine have a dominant strategy and,if so,what is it?
A) Yes, Baine should increase its advertising budget.
B) Yes, Baine should keep its advertising budget as is.
C) There are two dominant strategies: if Alistair increases its advertising budget, then Baine's best bet is to keep its budget the same, but if Alistair does not increase its spending, then Baine should increase its advertising budget.
D) No, there is no dominant strategy.
Q2) Who won a Nobel Prize in economics for his work in the development of game theory?
A) John von Neuman
B) Oskar Morgenstern
C) John Nash
D) Howard Schultz
Q3) A profit-maximising monopolistically competitive firm produces and sells an allocatively efficient quantity of output.
A)True
B)False
Q4) Why do economists refer to the pricing strategies of oligopoly firms as a prisoner's dilemma game?
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Chapter 10: Monopoly and Antitrust
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Q1) Refer to Table 10-3.What is the amount of profit added as a result of hiring the 4th worker?
A) $7200
B) $1200
C) $800
D) $400
Q2) If the labour supply curve shifts to the left and the labour demand curve remains unchanged,what will happen to the equilibrium wage and the equilibrium level of employment? Illustrate your answer with a graph.
Q3) Most economists believe that only a small gap between the wages of white males and the wages of other groups is due to education.Most of the gap is explained by discrimination.
A)True
B)False
Q4) All else being equal,a decrease in the supply of labour will shift the labour supply curve to the left and decrease the equilibrium wage.
A)True
B)False
Q5) What is a monopsony?
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Chapter 11: Monopolistic Competition and Oligopoly
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Q1) The social cost of a good or service is the cost borne by the producer.
A)True
B)False
Q2) What does the phrase 'internalising an external cost' mean?
A) Limiting the extent to which domestic firms can outsource production.
B) Prohibiting economic activities that create externalities.
C) Forcing producers to factor into their production costs the cost of the externalities created in the production of their output.
D) Finding a way to address cross-border pollution.
Q3) Policies that mandate the installation of specific pollution control devices are called A) command and control policies.
B) benefit policies.
C) welfare policies.
D) incentive policies.
Q4) Some environmentalists have criticised tradable emissions allowances on the grounds that they give permit holders a licence to pollute.Furthermore,environmentalists argue that those who sell their permits receive a monetary benefit from their contribution to polluting the environment.Use economic reasoning to evaluate this criticism.
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Chapter 12: GDP: Measuring Total Production and Income
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Q1) Suppose that real GDP for 2012 was $10 000 billion and real GDP for 2013 was $11 000 billion.What is the rate of growth of real GDP?
A) 10 per cent
B) 1 per cent
C) 5 per cent
D) 2 per cent
Q2) An economic growth model explains changes in
A) nominal GDP per capita in the long run.
B) real GDP per capita in the long run.
C) nominal GDP per capita in the short run.
D) real GDP per capita in the short run.
Q3) In the circular flow,________ supply the factors of production,and ________ goods and services.
A) households; sell
B) households; buy
C) firms; sell
D) firms; buy
Q4) Explain the difference between gross domestic product and gross national income.
Q5) What is the economic growth model?
Q6) Outline the trend in real GDP per capita in Australia from 1901 to 2013.
Page 14
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Chapter 13: Unemployment and Inflation
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Q1) Which of the following is an example of a worker experiencing cyclical unemployment?
A) A worker who changes jobs to move closer her family.
B) An assembly line worker who loses his job because of automation.
C) A freightliner employee who was sacked because of a recession.
D) A worker who quits his job because he does not get along with his boss.
Q2) Which of the following statements is false?
A) Whether you gain or lose during a period of inflation depends on whether your income rises faster or slower than the prices of things you buy.
B) Inflation that is higher than expected benefits debtors, and inflation that is lower than expected benefits creditors.
C) When unanticipated inflation occurs regularly, the degree of risk associated with investments in the economy increases.
D) There are no costs or losses associated with inflation when it is fully anticipated.
Q3) Explain how the rate of unemployment is measured and discuss the weaknesses of this method of measurement.
Q4) Why is frictional unemployment unavoidable?
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Chapter 14: Economic Growth, the Financial System and Business Cycles
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Q1) The Australian federal government lowered personal income taxes numerous times throughout the 2000s.Explain how this policy affected the aggregate demand curve.
Q2) Outline the phases of the business cycle.
Q3) Explain the three reasons the aggregate demand curve slopes downward.
Q4) The international-trade effect states that,ceteris paribus,an increase in the price level will
A) increase net exports.
B) decrease net exports.
C) increase exports.
D) decrease imports.
Q5) The long-run aggregate supply curve shows the relationship between the ________ and ________.
A) inflation rate; quantity of real GDP demanded
B) real interest rate; quantity of real GDP supplied
C) nominal interest rate; quantity of real GDP supplied
D) price level; quantity of real GDP supplied
Q6) Starting from long-run equilibrium,use the basic (static)aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth.
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Q1) A barter economy is an economy where
A) goods and services are exchanged for money.
B) money is exchanged for goods and services.
C) goods and services are exchanged for other goods and services.
D) goods and services are exchanged for liabilities.
Q2) Retained earnings are usually sufficient to finance a firm's rapid expansion in a high-growth economy.
A)True
B)False
Q3) The simple deposit multiplier is the ratio of the amount of
A) new reserves created by the banks to the amount of deposits.
B) new reserves created by the banks to the amount of loans.
C) deposits created by the banks to the amount of new reserves.
D) deposits created by the banks.
Q4) As credit is now the main measure of monetary movements used by the Reserve Bank of Australia,credit is now defined as money.
A)True
B)False
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Q5) What is the main monetary policy tool used by the Reserve Bank of Australia (RBA)and why?
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Chapter 16: Money, banks, and the Federal Reserve System
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Q1) An increase in the real interest rate does which of the following?
A) Reduces the demand for loanable funds
B) Reduces saving
C) Reduces consumption spending
D) Increases the demand for loanable funds
Q2) Give an example of a monetary policy target.Explain which monetary policy target the Reserve Bank of Australia (RBA)uses and why the RBA uses a policy target.
Q3) Refer to Figure 16.4.In this figure,suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B.Which of the following policies could the Reserve Bank of Australia use to move the economy to point C?
A) Decrease income taxes
B) Increase government spending
C) Buy financial securities
D) Sell financial securities
Q4) What is the argument against the independence of the Reserve Bank of Australia?
Q5) Rising nominal GDP will increase the demand for money and short-term interest rates.
A)True
B)False
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Chapter 17: Monetary Policy
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Q1) Discretionary fiscal policy is when
A) existing taxation policy automatically smooths out business cycle fluctuations in the economy.
B) the government changes the level of expenditure or taxation to achieve a macroeconomic aim.
C) policy is left to the discretion of the Reserve Bank of Australia.
D) politicians are discrete about policy changes, and do not advise consumers or producers of new policies.
Q2) Assume that the federal government gives a $5 billion tax cut.Assume that tax rates are fixed,the economy is closed,and the marginal propensity to consume is 0.75.What happens to equilibrium GDP?
A) There is a $20 billion increase in equilibrium GDP.
B) There is a $20 billion decrease in equilibrium GDP.
C) There is a $15 billion increase in equilibrium GDP.
D) There is a $15 billion decrease in equilibrium GDP.
Q3) Government budget deficits can lead to higher real interest rates,which will reduce private investment.
A)True
B)False
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Chapter 18: Fiscal Policy
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Q1) What is a tariff?
Q2) A quota is the same as a voluntary export restraint.
A)True
B)False
Q3) Which of the following is not a source of comparative advantage?
A) Relative abundance of labour and capital
B) Technology
C) Climate and natural resources
D) A strong foreign currency exchange rate
Q4) Goods and services bought domestically but produced in other countries are referred to as
A) exports.
B) imports.
C) transfer payments.
D) foreign consumption.
Q5) If a country has an absolute advantage in producing a product,it must also have a comparative advantage in producing that product.
A)True
B)False
Q6) Why do domestic firms offshore production processes?
Page 20
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Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Q1) A country that allows its exchange rate to be determined by the market,without government intervention,has a
A) floating currency.
B) fixed currency.
C) managed float exchange rate system.
D) gold standard.
Q2) What is the difference between net exports and the current account balance?
Q3) An appreciation of a country's currency is likely to
A) increase the rate of growth in GDP.
B) decrease the rate of growth in GDP.
C) decrease imports.
D) increase exports.
Q4) During the 1980s,Australia ________ twin deficits and in the 1990s,Australia ________ twin deficits.
A) experienced; experienced
B) experienced; did not experience
C) did not experience; experienced
D) did not experience; did not experience
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Q5) What is the real exchange rate and how is it calculated?
Q6) When can foreign debt become a problem for a country?
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