Economic Literacy
Final Exam Questions
Course Introduction
Economic Literacy provides students with a foundational understanding of key economic concepts and principles that influence both individual decision-making and global markets. The course covers essential topics such as supply and demand, the role of government in the economy, personal finance, economic systems, and the impact of economic policies on society. Through real-world examples and interactive activities, students develop the analytical skills needed to interpret economic information, make informed choices, and understand the economic forces shaping contemporary issues. This course equips learners with the knowledge to navigate everyday financial situations and critically evaluate economic news and trends.
Recommended Textbook
Survey of ECON 3rd Edition by Robert L. Sexton
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Chapter 1: The Role and Method of Economics
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Sample Questions
Q1) Darla is surprised to find that the quality of in-flight service has remained the same despite a steep hike in airfares recently. What could be wrong in her assumption that a higher price naturally translates into better quality?
Answer: Answers will vary. The fact that two variables might be related does not necessarily mean that one causes the other to occur. Darla could be ignoring other variables involved in this scenario. The increase in fares might have been caused by other factors such as an increase in aviation fuel prices and may not necessarily guarantee better services. REJ: Please see the section "Pitfalls to Avoid in Scientific Thinking" for more information
Q2) At the time of making their choices, people typically know with certainty which choice is best.
A)True
B)False
Answer: False
Q3) When two variables repeatedly change at the same time, there must be a causal relationship between them.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Economic Way of Thinking
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Sample Questions
Q1) Which of the following best defines rational behavior?
A)Analyzing the total costs of a decision
B)Analyzing the total benefits of a decision
C)Undertaking an activity as long as the total benefit of all activities exceeds the total cost of all activities
D)Undertaking activities whenever the marginal expected benefit exceeds the marginal expected cost
E)Undertaking activities whenever the average expected benefit exceeds the average expected cost
Answer: D
Q2) An economy that has many unemployed workers and idle factories is not operating efficiently.
A)True
B)False
Answer: True
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4
Chapter 3: Supply and Demand
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Sample Questions
Q1) Ceteris paribus, an increase in the equilibrium price and the equilibrium quantity would be caused by an increase in supply
A)True
B)False
Answer: False
Q2) Beach resorts raise their prices during the summer months, yet more people book rooms at those times. Is this a violation of the law of demand?
Answer: Answers will vary. No. During summer months, the demand for beach resort accommodations tends to increase, pushing both prices and occupancy up for the duration. An increase in demand (a shift of the curve) occurs. This does not violate the law of demand, which states that there is an inverse relationship between price and quantity demanded, all other things being equal. REJ: Please see the section ''Demand'' for more information.
Q3) Ceteris paribus, when a demand curve shifts, both the equilibrium price and quantity traded will change in the same direction as a result
A)True
B)False
Answer: True
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Chapter 4: Using Supply and Demand
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Sample Questions
Q1) If the short-run elasticity of demand for bus travel is 1.01, its long run elasticity of demand is likely to be _____.
A)unit elastic
B)greater than 1.01
C)equal to 1.01
D)less than 1.01
E)perfectly inelastic
Q2) The demand curve of a good or service represents a collection of minimum prices that consumers are willing and able to pay for additional quantities of a good or service.
A)True
B)False
Q3) If a consumer's total expenditure on a good does not vary with its price, then that consumer's demand curve is unit elastic over that range of prices.
A)True
B)False
Q4) If a price floor is not binding, then it will have no effect on the market.
A)True
B)False
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Chapter 5: Market Failure and Public Choice
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Sample Questions
Q1) A similarity between the market and the public sector is that:
A)both are guided by the invisible hand.
B)both are controlled by the government.
C)scarcity is present in both the sectors.
D)public goods are not produced by either of the two.
E)government intervention leads to allocative efficiency in both the sectors.
Q2) A special-interest group is likely to:
A)represent the general opinion of the public on important social issues.
B)represent the view of the median voter.
C)have a greater impact on a political decision than individual voters.
D)be formed during a special session of the legislature.
E)take a decision that imposes a large cost on others.
Q3) What distinguishes public goods from private goods?
Q4) Which of the following would not be considered a special-interest group?
A)The National Rifle Association
B)Greenpeace
C)The U.S. sugar industry
D)The potato growers in the United States
E)Congress
Q5) Why might voters tend to be relatively uninformed about political issues?
Page 7
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Chapter 6: Production and Costs
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Sample Questions
Q1) Explain why some costs are considered to be variable and some fixed. How is time related to variable and fixed cost?
Q2) Lintell Inc. earned a total revenue of $10 million for the financial year 2013-14. The company incurred a total cost of $6.9 million. Lintell Inc. earned a profit of:
A)$3.1 million
B)$3.9 million.
C)$4.5 million.
D)$6 million.
E)$5.3 million.
Q3) The per-unit cost of total output is known as _____.
A)average total cost
B)external cost
C)social marginal cost
D)total fixed cost
E)private marginal cost
Q4) An economic profit of zero indicates a satisfactory situation for a firm.
A)True
B)False
Q5) How short is the short-run production period?
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Chapter 7: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Typically, extractive industries such as farming, mining, or lumbering:
A)are considered to be decreasing cost industries.
B)are considered to be constant cost industries.
C)use only small portions of the total supply of specialized resources.
D)are considered to be increasing-cost industries.
E)allow the firms to earn economic profits in the long run.
Q2) A firm that is earning zero economic profits has a strong incentive to exit the industry.
A)True
B)False
Q3) Productive efficiency requires production at a quantity such that:
A)MC = MR.
B)MC = ATC.
C)MC = D.
D)ATC = D.
E)MR = ATC.
Q4) In a perfectly competitive market, marginal revenue is the same as the market price.
A)True
B)False
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Chapter 8: Monopoly
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Sample Questions
Q1) Which of the following is true of a monopolist?
A)A monopolist has to reduce price on all units when it wants to expand output.
B)As a monopolist expands output, the average total cost of production declines.
C)A monopolist charges each consumer the highest possible price.
D)When a firm has a monopoly, consumers have no choice other than to pay the price set by the monopolist.
E)A monopolist always sells as many units as demanded in the market at a competitive price.
Q2) In order to implement average cost pricing regulation, it is necessary to provide a natural monopolist with a subsidy equal to the economic loss.
A)True
B)False
Q3) Monopolies tend to produce a greater quantity and charge higher prices than perfectly competitive industries.
A)True
B)False
Q4) Will all monopolistic firms always generate economic profits? Why or why not?
Q5) Does the monopolist have an incentive to reduce cost under average cost pricing?
Q6) How can economies of scale lead to monopoly?
Page 10
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Chapter 9: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) One reason collusive oligopolies are usually short lived is that firms participating in the collusion:
A)are unable to earn economic profits in the long run.
B)do not set prices where marginal cost equals marginal revenue.
C)set prices below long-run average total costs.
D)cheat on one another.
E)are unable to attain economies of large-scale production.
Q2) For a time, either R. J. Reynolds or Phillip Morris raised the prices of cigarettes twice a year by about 50 cents per carton. The other firms in the industry raised their prices by the same amount. Such behavior results in:
A)predatory pricing.
B)a price war.
C)price leadership.
D)producer sovereignty.
E)productive efficiency.
Q3) What are the characteristics of oligopoly?
Q4) Explain how economic profits are reduced to zero as new firms enter a monopolistically competitive industry.
Q5) Define monopolistic competition.
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Chapter 10: Labor Markets, Income Distribution, and Poverty
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Sample Questions
Q1) Through collective bargaining, a labor union can:
A)increase wages and employment in the union sector.
B)increase wages and decrease employment in the union sector.
C)increase wages and employment in the nonunion sector.
D)increase wages and decrease employment in the nonunion sector.
E)decrease wages and increase employment in the union sector.
Q2) From 1935 to 2010, the proportion of income received by the poorest 20 percent of Americans has:
A)increased substantially due to the government's efforts
B)decreased sharply due to the impact of the Second World War.
C)slightly decreased due to the impact of the Great Depression.
D)increased from 12 percent to 14 percent.
E)remained virtually unchanged.
Q3) Which of the following state-subsidized programs have benefited the middle- and upper-income quintiles more than the poor?
A)Food stamps
B)Housing subsidies
C)Higher education
D)Medicaid
E)School lunch
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Chapter 11: Introduction to Macroeconomics:
Unemployment, Inflation, and Economic Fluctuations
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Q1) Economists believe that the Consumer Price Index tends to understate the actual rate of inflation.
A)True
B)False
Q2) If the number of officially employed and officially unemployed people do not change but the size of the population increases by 10%, there will be _____.
A)an increase in the unemployment rate and an increase in the labor force participation rate
B)an increase in the unemployment rate and no change in the labor force participation rate
C)a decrease in the unemployment rate and a decrease in the labor force participation rate
D)a decrease in the labor force participation rate with an increase in the unemployment rate
E)a decrease in the labor force participation rate but no change in the unemployment rate
Q3) The economy reaches full employment when the unemployment rate equals zero. A)True
B)False
13
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Chapter 12: Economic Growth
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Sample Questions
Q1) What are the four major factors responsible for long-run economic growth? On what does Romer's new growth theory focus?
Q2) How does opportunity cost to education contribute to low school enrollments in developing countries?
Q3) Which of the following is a measure of the income earned by owners of resources used in making final goods and services?
A)Personal income
B)National income
C)Net national product
D)Gross domestic product
E)Gross national product
Q4) Which of the following is subtracted from gross domestic product to get national income?
A)Proprietors' income
B)Corporate profit
C)Indirect business tax
D)Personal income tax
E)Statistical discrepancy
Q5) What is the relationship between savings, capital formation, and consumption?
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Chapter 13: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) A recession with the price level falling is generally caused by:
A)an increase in aggregate demand.
B)a decrease in aggregate demand.
C)an increase in aggregate supply.
D)a decrease in aggregate supply.
E)an increase in the government expenditure.
Q2) Sam prefers holding his savings as cash in his house. Currently, the economy is experiencing an increasing price level. He can conclude that:
A)the real purchasing power of his money has remained constant.
B)the real value of his savings has increased.
C)the real value of his savings has decreased.
D)he should not retain his savings any longer.
E)the nominal value of his savings has decreased.
Q3) The short-run aggregate supply curve is drawn with:
A)the price level on the vertical axis and real GDP on the horizontal axis.
B)the price level on the vertical axis and nominal GDP on the horizontal axis.
C)nominal GDP on the vertical axis and real GDP on the horizontal axis.
D)real GDP on the horizontal axis and the rate of unemployment on the vertical axis.
E)real GDP on the vertical axis and nominal GDP on the horizontal axis.
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Page 15
Chapter 14: Fiscal Policy
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Sample Questions
Q1) A flat tax:
A)is designed so that everybody would pay the same number of dollars in taxes.
B)is designed in such a way that the tax rate decreases as a person's income rises.
C)is designed so that everybody would be charged the same percentage of their income in tax.
D)is designed to take a smaller percentage of higher incomes than of lower incomes
E)is designed in such a way that the tax rate increases as a person's income rises
Q2) Automatic stabilizers lead to:
A)a decrease in the taxes collected by the government during an economic expansion.
B)a decrease in unemployment compensation during a recession.
C)Congressional action on changing the tax rates
D)an increase in transfer payments during a recession in an economy.
E)an increase in the price level during a recession in an economy
Q3) The issuance of debt involves some intergenerational transfer of income.
A)True
B)False
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Chapter 15: Monetary Institutions
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Sample Questions
Q1) A depositor cannot directly write checks against:
A)demand deposits.
B)currency deposits.
C)nontransaction deposits.
D)money market mutual fund accounts.
E)traveler's checks.
Q2) Paper money is fiat money because it has been declared by government as a means of exchange.
A)True
B)False
Q3) An increase in the circulation of currency would:
A)increase both M1 and M2.
B)not change M1 but increase M2.
C)decrease both M1 and M2.
D)not change M1 or M2.
E)decrease M1 and not change M2.
Q4) Explain Gresham's Law.
Q5) Why is the money multiplier considered to be a potential multiplier rather than an indication of exactly how much multiplication should be expected?
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Chapter 16: The Federal Reserve and Monetary Policy
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Q1) Which of the following actions of the Fed is likely to lead to a decrease in money supply?
A)A decrease in the discount rate
B)An increase in the interest rate it pays on reserves
C)An increase in the interest rate it pays on reserves.
D)A purchase of government securities by the Fed in the open market
E)An increase in the federal funds rate.
Q2) The velocity of money can be defined as:
A)the turnover rate of money in an economy
B)the speed at which economic activity takes place in an economy.
C)the speed at which the multiplier effect takes place in an economy.
D)the speed at which tax cuts are spent in an economy
E)the rate at which the currency of a country appreciates during an inflationary gap in an economy.
Q3) Most of the key decisions of the Federal Reserve are actually made by its Federal Open Market Committee
A)True
B)False
Q4) What can the Fed do to restore stable prices during a period of persistent, high inflation
Page 18
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Chapter 17: Issues in Macroeconomic Theory and Policy
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Q1) According to the Taylor rule, the Fed should raise the federal funds rate by 0.5% relative to the inflation rate _____.
A)if nominal GDP rises 1.0% above its target of 1.0%
B)if real GDP rises 1.0% above its target of 1.0%
C)if inflation falls 1.0% below its target of 2.0%
D)if inflation rises 1.0% above its target of 2.0%
E)if nominal GDP falls 1.0% below its target of 1.0%
Q2) A negative supply shock may lead to:
A)an increase in real aggregate output and an increase in the price level.
B)a reduction in real aggregate output and an increase in the price level.
C)a reduction in real aggregate output and a decrease in the price level.
D)an increase in real aggregate output and a decrease in price level.
E)a reduction in the price level and no change in real aggregate output.
Q3) One main argument against indexing is that:
A)it can worsen inflation.
B)it can reduce asset prices.
C)it can reduce net exports.
D)it can lead to deflation.
E)it can lead to hyperinflation.
Q4) What is quantitative easing?
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Chapter 18: International Economics
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Sample Questions
Q1) Which of the following people would most likely benefit if the U.S. dollar is stronger than other currencies?
A)A German professor on vacation in Iowa
B)An American professor on an extended vacation in Paris
C)An American farmer who relies on exports
D)A German firm which exports automobiles to the U.S. market
E)An American multinational technological company that sells computers to China
Q2) The net loss in welfare from a tariff is larger than for a quota.
A)True
B)False
Q3) Which of the following would be recorded as a credit in the U.S. balance-of-payments accounts?
A)The takeover of a German automobile industry by an American investor
B)The import of Honda trucks by an American automobile distributor
C)The travel expenditures of an American college student traveling to Europe
D)The purchase of an American Treasury bond by a French investment company
E)The import of Lenovo laptops by an American electronic goods distributor
Q4) Explain why it is not possible for a country to have a comparative advantage in the production of all goods.
Q5) What is consumer surplus? How is it different from producer surplus?
Page 20
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