Economic Literacy Exam
Preparation Guide
Course Introduction
Economic Literacy is an introductory course that equips students with a foundational understanding of key economic concepts and principles, such as supply and demand, market structures, opportunity cost, and the role of government in the economy. Through real-world examples and interactive discussions, students learn to interpret economic information, analyze the impact of economic decisions on individuals and society, and apply basic financial literacy skills to everyday life. The course aims to foster critical thinking and informed decision-making, preparing students to engage confidently with economic issues in both personal and professional contexts.
Recommended Textbook Survey of Economics 8th Edition by Irvin B. Tucker
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Page 2
Chapter 1: Introducing the Economic Way of Thinking
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Sample Questions
Q1) The silly clothes worn by a circus clown are an example of:
A) a natural resource.
B) capital goods.
C) labor.
D) entrepreneurship.
Answer: B
Q2) Which of the following is the best example of an activity that would be undertaken by an entrepreneur?
A) Buying and selling of stocks and bonds.
B) Starting a new business.
C) Working on an assembly line.
D) Running for political office.
Answer: B
Q3) Policies to determine the price of troll dolls are a concern of macroeconomics.
A)True
B)False
Answer: False
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Chapter 1: A: Appendix: Applying Graphs to Economics
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Sample Questions
Q1) Straight line AB in Exhibit 1A-3 shows that:
A) increasing values for X reduces the value of Y.
B) decreasing values for X increases the value of Y.
C) there is an inverse relationship between X and Y.
D) all of the above.
Answer: D
Q2) Direct relationships are illustrated using upward-sloping lines and curves.
A)True
B)False
Answer: True
Q3) The slope of a line is calculated as the ratio of the "rise" over the "run".
A)True
B)False
Answer: True
Q4) A downward-sloping straight line exhibits a direct relationship between two variables.
A)True
B)False Answer: False
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Chapter 2: Production Possibilities,Opportunity Cost,and Economic Growth
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Sample Questions
Q1) All points on the production possibilities curve are:
A) unattainable.
B) fair.
C) efficient.
D) optimal.
Answer: C
Q2) With time,which one of the following strategies would most likely result in an outward shift in the production possibilities curve of an economy?
A) passage of legislation reducing the workweek to 30 hours.
B) instituting a tax policy encouraging consumption at the expense of investment.
C) instituting a tax policy encouraging investment at the expense of consumption. D) an increase in the marginal income tax rate, which would reduce the work effort of individuals.
Answer: C
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Chapter 3: Part 1: Market Demand and Supply
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Sample Questions
Q1) Suppose that X and Y are complementary goods.If the price of good X decreases,we can expect the:
A) demand for good X to increase.
B) quantity demanded of good Y to decrease.
C) quantity demanded of good Y to increase.
D) demand for good Y to decrease.
E) demand for good Y to increase.
Q2) Assuming that travel from New York to Los Angeles is a normal good,a decrease in consumer income,other things being equal,will:
A) decrease the quantity demanded of travel to Los Angeles.
B) increase the demand for travel to Los Angeles.
C) decrease the demand for travel to Los Angeles.
D) increase the quantity of travel to Los Angeles demanded.
Q3) Substitute goods are goods that are:
A) jointly consumed.
B) competing for consumer spending.
C) used late in the game.
D) inferior.
E) normal.
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Chapter 3: Part 2: Market Demand and Supply
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Sample Questions
Q1) An equilibrium price is unaffected by nonprice factors.
A)True
B)False
Q2) Which of the following best explains the determination of the equilibrium price of a product?
A) Production costs.
B) The supply of a good.
C) The interaction of supply and demand.
D) The decisions of government.
Q3) Suppose A and B are complementary goods.Other things being equal,the demand curve for A will shift to the right when the price of B goes down.
A)True
B)False
Q4) In Exhibit 3-11,in Panel A the movement from A to C describes a(n):
A) ambiguous change in price and a decrease in quantity.
B) increase in price and an ambiguous change in quantity.
C) increase in both price and quantity.
D) decrease in both price and quantity.
E) change in supply that dominates a change in demand.
Q5) Discuss how a market reaches equilibrium.How is it expressed graphically?
Page 7
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Chapter 4: Markets in Action
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Sample Questions
Q1) Assume a price floor is set above the equilibrium price.The result is a surplus.
A)True
B)False
Q2) In Exhibit 4-9,if a price ceiling is set at $1.50 the market result after adjustment is:
A) a shortage of 150 units.
B) a surplus of 100 units.
C) shortage of 100 units.
D) equilibrium at 200 units.
Q3) In Exhibit 4-3,an increase in demand would cause a movement from which equilibrium point to another,other things being equal?
A) E to E .
B) E to E .
C) E to E .
D) E to E .
Q4) Negative externalities result in unfair,excessively high prices.
A)True
B)False
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Page 8
Chapter 5: Price Elasticity of Demand
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Sample Questions
Q1) If a demand curve for a good were completely vertical,it would be considered:
A) perfectly elastic.
B) perfectly inelastic.
C) of unitary elasticity.
D) relatively inelastic.
Q2) Demand price elasticity measures:
A) how much supply will change as price changes.
B) how consumers change their purchases in response to a change in income.
C) how consumers change their purchases in response to a change in the price of a substitute good.
D) how consumers change their purchases in response to a change in the price of a product.
E) the change in price brought about by a change in consumer demand.
Q3) The price elasticity of demand coefficient for a good will be lower:
A) if there are few substitutes for the good.
B) if expenditure on it is a small part of one's budget.
C) both a and b are true.
D) neither a nor b are true.
Q4) What are the characteristics of the product that has an inelastic demand?
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Chapter 6: Production Costs
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Sample Questions
Q1) In the long run,total fixed cost:
A) falls.
B) rises.
C) is constant.
D) does not exist.
Q2) Which of the following is most likely to be a fixed cost for a business?
A) expenditures on low-skill labor.
B) shipping charges for the delivery of products.
C) managerial salaries.
D) property taxes on the firm's buildings.
Q3) If a firm has total revenue of $200 million,explicit costs of $190 million,and implicit costs of $30 million,its economic profit is:
A) $200 million.
B) $70 million.
C) $10 million.
D) -$10 million.
E) -$20 million.
Q4) The marginal product curve rises when the marginal cost curve rises.
A)True
B)False
Page 10
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Chapter 7: Perfect Competition
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Sample Questions
Q1) Which of the following statements are false?
A)b and d.
B)Marginal cost is always rising.
C)Marginal and average total costs are equal at the most efficient production level.
D)The AFC and AVC curves do not cross.
E)The AFC and ATC curves do not cross.
Q2) In Exhibit 7-8,product price in this market is fixed at $35.This firm is currently operating where MR = MC.Which of the following is true?
A) Price < AVC and this firm should shut down.
B) This firm is earning a profit of zero.
C) This firm could increase profits by increasing output.
D) Price > ATC and the firm is earning a positive profit.
E) Price > AVC, and the firm should stay at its current output.
Q3) If a firm has no ability to select the price of its product,it:
A) will go out of business due to losses.
B) is a price-maker.
C) cannot maximize profit.
D) has a horizontal individual demand curve.
Q4) What are the characteristics of the perfectly competitive market?
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Chapter 8: Monopoly
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Sample Questions
Q1) A monopolist earning economic profit in the short run determines that at its present level of output,marginal revenue is $23 and marginal cost is $30.Which of the following should the firm do to increase profit?
A) Raise price and lower output.
B) Lower price and lower output.
C) Raise price and raise output.
D) Lower price and raise output.
E) Lower output, but leave price unchanged.
Q2) What is a natural monopoly? Why is government justified in regulating a natural monopoly?
Q3) A profit maximizing monopolist sets price and output so that it always operates on the elastic portion of its straight-line demand curve when in equilibrium.
A)True
B)False
Q4) The two theoretical extremes of the market structure spectrum are occupied at one end by perfect competition and on the other end by monopoly.
A)True
B)False
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Chapter 9: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) Product differentiation makes the demand for a monopolistically competitive firm's product:
A) perfectly elastic.
B) more elastic than for a monopoly.
C) more inelastic than for a monopoly.
D) perfectly inelastic.
Q2) The theory of monopolistic competition predicts that in long-run equilibrium a monopolistically competitive firm will:
A) produce at the level in which price equals long-run average cost.
B) operate at minimum long-run average cost.
C) overutilize its insufficient capacity.
D) none of the above.
Q3) A monopolistic competitive firm is inefficient because the firm:
A) is not maximizing its profit.
B) is producing at an output where average total cost is not minimum.
C) earns positive economic profit in the long run.
D) none of the above.
Q4) What are the characteristics of monopolistic competition?
Q5) What are the characteristics of an oligopoly?
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Chapter 10: Labor Markets and Income Distribution
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Sample Questions
Q1) In Exhibit 10-3,suppose that in the interest of boosting incomes of the working poor,Congress imposes a minimum wage of $6.00 per hour.This minimum wage rate creates a(n):
A) new labor market equilibrium.
B) excess demand for labor of 10 thousand food servers.
C) excess supply of labor of food servers.
D) situation of full employment for food servers.
Q2) In a competitive labor market a firm will continue to employ workers for as long as an additional worker's marginal revenue product exceeds the wage rate.
A)True
B)False
Q3) In a competitive labor market a firm will continue to employ workers for as long as an additional worker's marginal revenue product is below the wage rate.
A)True
B)False
Q4) Medicaid is an example of a cash assistance poverty program.
A)True
B)False
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Chapter 11: Gross Domestic Product
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Sample Questions
Q1) In Exhibit 11-5,national income (NI)is:
A) $6,254 billion.
B) $6,495 billion.
C) $6,805 billion.
D) $7,082 billion.
E) $7,637.7 billion.
Q2) Which of the following expenditures would be included in GDP for this year?
A) The purchase of a new car.
B) The purchase of a new tire by General Motors for a new car.
C) The purchase of a used car.
D) All of the above would be included.
Q3) Using the expenditure approach,"gross private domestic investment" is the sum of:
A) newly produced capital goods.
B) fixed investment.
C) changes in business inventories.
D) all of the above.
Q4) Personal consumption expenditures are the largest component of GDP.
A)True
B)False
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Chapter 12: Business Cycles and Unemployment
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Sample Questions
Q1) Which of the following is true of the business cycle record of the United States?
A) Recessions have been lengthier during the last two decades than was true prior to 1980.
B) Real GDP contracted throughout most of the 1950s.
C) Real GDP in 2000 was approximately the same as 1950.
D) Since 1950, the fluctuations in GDP have been less severe than before 1950.
Q2) Which type of unemployment is most closely connected with the saying "you can't teach an old dog new tricks"?
A) Cyclical.
B) Frictional.
C) Structural.
D) Voluntary.
E) Seasonal.
Q3) How do we measure economic growth?
A) Increases in the price level, as indicated by the GDP chain price index.
B) Increases in nominal GDP.
C) Increases in real GDP.
D) Increases in the labor force.
Q4) What does the GDP gap measure?
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Chapter 13: Inflation
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Sample Questions
Q1) Inflation was a major problem in the United States during the early years of the Great Depression.
A)True
B)False
Q2) The Consumer Price Index compares the:
A) prices of all goods and services in the economy compared to the prices of those goods and services in a base year.
B) prices of consumer goods and services that a household purchases to the prices of those goods and services purchased in a base year.
C) prices of producer goods and services that are made for consumers to the prices of those goods and services in a base year.
D) prices of goods and services that are purchased by producers to the prices of those goods and services in a base year.
E) prices of goods and services that are purchased by consumer manufacturers to the prices of those goods and services in a base year.
Q3) Who is hurt and who benefits from inflation? Why?
Q4) What are some criticisms of the CPI as a measure of inflation?
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Chapter 14: Aggregate Demand and Supply
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Sample Questions
Q1) Which of the following could be expected to shift the aggregate demand curve?
A) An increase in government spending.
B) Consumption spending decreases.
C) Net exports fall.
D) All of the above.
Q2) In the aggregate demand/aggregate supply model,a country's full-employment real GDP is represented by:
A) prices.
B) aggregate demand.
C) aggregate supply.
D) an increase in the general level of prices.
Q3) The aggregate demand curve slopes downward because of the real balances,interest-rate,and net exports effects.
A)True
B)False
Q4) In the aggregate demand and supply model,the:
A) vertical axis measures the average price level.
B) horizontal axis measures real GDP.
C) aggregate supply curve is vertical at full-employment real GDP.
D) All of the above.
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Chapter 14: A: Appendix: The Self-Correcting Aggregate
Demand and Supply Model
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Sample Questions
Q1) Beginning from long-run equilibrium at point E in Exhibit 14A-1,the aggregate demand curve shifts to AD .The real GDP and price level (CPI)in short-run equilibrium will be:
A) $12 billion and 200.
B) $8 billion and 250.
C) $8 billion and 150.
D) $12 billion and 250.
Q2) In Exhibit 14A-2,the long-run aggregate supply curve represents:
A) potential real GDP output for this economy.
B) that the economy is experiencing zero inflation.
C) that the economy is experiencing a recessionary gap.
D) the level of real GDP where the unemployment rate is zero.
Q3) The long-run aggregate supply curve is:
A) upward-sloping.
B) downward-sloping.
C) horizontal.
D) vertical.
E) none of the above.
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Chapter 15: Fiscal Policy
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Sample Questions
Q1) An expansionary fiscal policy may include:
A) increases in government spending.
B) discretionary increases in transfer payments.
C) reductions in taxes.
D) All of the above.
Q2) If the economy is experiencing unemployment,then the most appropriate government policy would be to:
A) shift the aggregate demand curve by using a tax increase coupled with spending cuts.
B) shift the aggregate demand curve by using a tax increase coupled with more spending.
C) shift the aggregate demand curve by using a tax cut coupled with spending cuts.
D) shift the aggregate demand curve by using a tax cut coupled with more spending.
E) shift the aggregate supply curve by using a tax cut coupled with spending cuts.
Q3) The tax multiplier is equal to the spending multiplier.
A)True B)False
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Chapter 16: The Public Sector
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Sample Questions
Q1) Which of the following countries had the lowest level of government expenditures as a share of GDP?
A) Sweden.
B) Japan.
C) United States.
D) Italy.
Q2) Public choice theory argues that one reason for rational voter ignorance is the indivisibility of public service.
A)True
B)False
Q3) A tax is structured so that the tax as a percentage of income declines as the level of income increases is called a(n):
A) flat tax.
B) regressive tax.
C) progressive tax.
D) excise tax.
Q4) What are the public choice theory arguments against government involvement in the economy?
Q5) Describe the two basic philosophies of taxation fairness.
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Chapter 17: Federal Deficits,Surpluses,and the National Debt
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Sample Questions
Q1) The federal government never has to pay off the national debt.
A)True
B)False
Q2) Crowding out refers to the situation in which:
A) borrowing by the federal government raises interest rates and causes firms to invest less.
B) foreigners sell their bonds and purchase U.S. goods and services.
C) borrowing by the federal government causes state and local governments to lower their taxes.
D) increased federal taxes to balance the budget causes interest rates to increase and consumer credit decreases.
Q3) If the national debt rises to the debt ceiling and there is currently a budget ____,the Congress and the President must agree to ____ the debt ceiling or else the federal government will have insufficient funds to pay its bills and will be forced to shut down.
A) surplus, lower
B) deficit, raise
C) surplus, lower.
D) none of the above
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Chapter 18: Money and the Federal Reserve System
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Sample Questions
Q1) The Federal Reserve System is owned by:
A) federal government agencies such as the Treasury.
B) the Congress of the United States.
C) the banks that are members of the Federal Reserve System.
D) anyone who buys stock over the counter.
E) people who have deposits in member banks.
Q2) The largest component of the M1 definition of the money supply is:
A) traveler's checks.
B) savings accounts.
C) money market accounts.
D) checkable deposits
Q3) The Fed:
A) has little control over the money supply.
B) serves as the central bank for the United States.
C) often uses a mix of lower taxes in its fiscal policy.
D) ensures commercial bank profitability.
Q4) By functioning as a unit of account,money provides a common measurement of the relative value of goods and services.
A)True
B)False
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Chapter 19: Money Creation
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Sample Questions
Q1) The required reserve ratio in Exhibit 19-4 is:
A) 5 percent.
B) 10 percent.
C) 15 percent.
D) 20 percent.
Q2) Assume that the Paris First National Bank's loan position contracted from $16 million to $12 million.If the required reserve ratio was increased from 20 percent to 40 percent,how much would the money supply shrink?
A) $5 million.
B) $10 million.
C) $15 million.
D) $20 million.
E) $24 million.
Q3) The buying and selling of government securities by the Fed is known as:
A) open market operations.
B) federal bond operations.
C) treasury bond operations.
D) open bonds operations.
E) discount rate operations.
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Chapter 20: Monetary Policy
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Q1) The quantity of money held in response to interest rates is the:
A) transactions motive for holding money.
B) precautionary motive for holding money.
C) speculative motive for holding money.
D) unit-of-account motive for holding money.
Q2) An increase in the supply of money will:
A) reduce the rate of interest and, thereby, trigger an increase in current spending by households and businesses.
B) reduce aggregate demand and real output.
C) increase only the general level of prices.
D) lead to a higher rate of unemployment.
Q3) The assumption that the velocity of money and the quantity being produced is constant is held by the:
A) Keynesian school.
B) supply-side school.
C) neo-Keynesian school.
D) rational expectations school.
E) classical school.
Q4) Contrast the Keynesian and Monetarist views on the effectiveness of fiscal policy?
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Chapter 20: A: Appendix: Policy Disputes Using the
Self-Correcting Aggregate Demand and Supply Model
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Q1) Assume the economy is in short-run equilibrium at a real GDP below its potential real GDP.According to Keynesian theory,which of the following policies should be followed?
A) The Federal Reserve should increase the money supply.
B) The federal government should increase spending.
C) The federal government should do nothing because the economy will self correct to potential real GDP.
D) All of the above.
Q2) If the economy is not operating at full-employment real GDP,classical economists prescribe a government policy of nonintervention.
A)True
B)False
Q3) Assuming the economy is in a recession,Keynesian economists predict that:
A) wages will remain fixed.
B) monetary policy will sell government securities.
C) higher wages will shift the short-run aggregate supply curve leftward.
D) lower wages will shift the short-run aggregate supply curve rightward.
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Chapter 21: International Trade and Finance
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Q1) Suppose a U.S.-made machine costs $500 and the exchange rate is 100 yen = $1.Now the exchange rate changes to 90 yen = $1.Then the:
A) machine would now cost more dollars.
B) machine would now cost the Japanese citizen less yen.
C) machine would now cost less dollars.
D) machine would now cost the Japanese citizen more yen.
E) yen has depreciated in value.
Q2) Specialization and trade allow an economy to expand its:
A) production possibilities.
B) consumption possibilities.
C) technological advantage.
D) absolute advantage.
Q3) If a Japanese stereo priced at 1,000,000 yen can be purchased for $1,000,the exchange rate is:
A) 1,000 yen per dollar.
B) 1,000 dollars per yen.
C) 0.001 dollars per yen.
D) none of the above.
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Chapter 22: Economies in Transition
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Q1) Socialism is correctly described by which of the following statements?
A) Central planning is used exclusively to answer the basic economic questions.
B) Markets are used exclusively to answer the basic economic questions.
C) Tradition is used exclusively to answer the basic economic questions.
D) Government ownership of many resources and centralized decision-making answers the basic economic questions.
Q2) Adam Smith wrote that the:
A) economic problems of eighteenth-century England were caused by free markets.
B) government should control the economy.
C) pursuit of private self interest promotes the public interest in a market economy.
D) public or collective interest is not promoted by people pursuing their self interest.
Q3) Who was one of the first proponents of employing market economies instead of command economies?
A) Robert Heilbroner.
B) Karl Marx.
C) Jeffrey Sachs.
D) Adam Smith.
Q4) Describe the differences between capitalism and socialism.
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Chapter 23: Growth and the Less-Developed Countries
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Q1) The vicious circle of poverty is the trap that parents with low education tend to have children with low education.
A)True
B)False
Q2) Political instability is a deterrent to long-term private investment.
A)True
B)False
Q3) A country cannot develop without a large natural resource base.
A)True
B)False
Q4) "Countries are poor because they cannot afford to save and invest" is called the:
A) vicious circle of poverty.
B) savings-investment trap.
C) LDC trap.
D) cycle of insufficient credit.
Q5) Most LDCs face the problems of low population growth and excessive saving.
A)True
B)False
Q6) Describe the vicious cycle of poverty.What are the consequences of this cycle?
Page 29
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