Economic Literacy
Mock Exam
Course Introduction
Economic Literacy provides students with the foundational knowledge and skills to understand basic economic concepts, principles, and real-world applications. This course explores fundamental topics such as supply and demand, market structures, the role of government in the economy, personal finance, and global economic issues. By developing economic reasoning and analytical skills, students will be better equipped to make informed financial decisions as individuals and citizens, interpret economic news, and understand the impact of economic policies on society.
Recommended Textbook
Survey of ECON 3rd Edition by Robert L. Sexton
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18 Chapters
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2
Chapter 1: The Role and Method of Economics
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Sample Questions
Q1) Which of the following represents a normative statement?
A)A decrease in price leads to an increase in quantity demanded.
B)The study of economics is more important than the study of history.
C)People will buy less butter at $1.50 per pound than they will at $1.00 per pound
D)As an economy develops, the nation's birth rate tends to decrease.
E)As an economy develops, the employment rate in the service sector tends to increase.
Answer: B
Q2) Tractors, shovels, copy machines, and computer programming expertise are all examples of scarce resources.
A)True
B)False
Answer: True
Q3) As resources are abundant, we do not have to make choices about their use. A)True
B)False
Answer: False
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3
Chapter 2: The Economic Way of Thinking
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Sample Questions
Q1) Marginal thinking is best demonstrated by:
A)choosing to spend one more hour studying economics because you think the improvement in your score on the next quiz will be worth the time sacrificed.
B)deciding to never purchase a coat made of animal skin or fur.
C)acquiring all information relevant to a choice before making that choice.
D)measuring all the costs of a meal against all its benefits when deciding on whether to order a second milkshake.
E)deciding to never buy an airline ticket during the holiday period.
Answer: A
Q2) Country A has a comparative advantage over Country B in the production of a particular good if Country A:
A)can produce the good at a higher opportunity cost than Country B.
B)is more self-sufficient than Country B.
C)can produce the good at a lower opportunity cost than Country B.
D)has a GDP higher than Country B.
E)has a GDP lower than Country B.
Answer: C
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Chapter 3: Supply and Demand
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Sample Questions
Q1) Two goods are complements if an increase in the price of one causes an increase in the demand for the other good.
A)True
B)False
Answer: False
Q2) How does the equilibrium quantity change when there is an increase in supply and a decrease in demand?
Answer: Answers will vary. The impact on equilibrium quantity is indeterminate because the increase in supply increases the equilibrium quantity, while the decrease in demand decreases it. The change in the equilibrium quantity will vary depending on the relative changes in supply and demand. If the decrease in demand is greater than the increase in supply, the equilibrium quantity will decrease. If the increase in supply is greater than the decrease in demand, the equilibrium quantity will increase. REJ: Please see the section ''Market Equilibrium Price and Quantity'' for more information.
Q3) If the price of pizza falls, the demand for pizza will rise.
A)True
B)False
Answer: False
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Chapter 4: Using Supply and Demand
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Sample Questions
Q1) Producer surplus for a particular unit of a good is the:
A)difference between the market price and the seller's cost of producing that unit.
B)sum of the market price and the seller's cost of producing that unit.
C)ratio of the market price to the seller's cost of producing that unit.
D)product of the market price and the seller's cost of producing that unit.
E)ratio of the market price to the seller's cost of producing that unit multiplied by 100.
Q2) Consumer surplus is positive as long as the:
A)money value of the marginal benefit derived from one additional unit of a good exceeds the market price.
B)market price of a good exceeds the money value of the marginal benefit derived from one additional unit of the good.
C)marginal propensity to consume is less than one.
D)marginal propensity to consume is more than one.
E)marginal propensity to consume equals one.
Q3) Explain the impact of:
a. A rent ceiling set below the equilibrium price.
b. A price floor set above the equilibrium price.
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Chapter 5: Market Failure and Public Choice
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Sample Questions
Q1) A free rider is someone who does not contribute toward covering the cost of a desired good but he or she cannot be excluded from receiving the benefits of the good.
A)True
B)False
Q2) Which of the following activities represents an external cost?
A)The reduction in the incidence of chicken pox after children are inoculated against the disease
B)The damage to a person's health from secondhand smoke
C)The increase in local property values after a park is built in a city
D)The price paid for the prime rib that is consumed at a local restaurant
E)The monthly rent paid by a manufacturer on a factory building
Q3) If a negative externality results from the refining of petroleum, in the eyes of the oil refinery the cost of production:
A)does not include external costs.
B)includes external costs.
C)does not include fixed costs.
D)includes external benefits.
E)does not include variable costs.
Q4) Why is television broadcasting over the air considered a public good?
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Chapter 6: Production and Costs
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Sample Questions
Q1) When there are diseconomies of scale in production, _____.
A)long-run average total cost declines as output expands
B)long-run average total cost increases as output expands
C)marginal cost decreases as output expands
D)marginal cost decreases as output expands.
E)social marginal cost declines as the level of output increases
Q2) Lintell Inc. earned a total revenue of $9.3 million and incurred an explicit cost of $3.6 million for the financial year 2013-14. The owner of the company could earn an annual salary of $0.5 million if he joined another firm. Lintell Inc.'s economic profit for 2013-14 was:
A)$5.2 million.
B)$5.7 million.
C)$8.8 million.
D)$5.5 million
E)$5.3 million.
Q3) Total cost equals total variable cost plus marginal cost.
A)True
B)False
Q4) Explain why some costs are considered to be variable and some fixed. How is time related to variable and fixed cost?
Page 8
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Chapter 7: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Why do short-run profits in a perfectly competitive industry tend to disappear over time?
Q2) In the short run, if a perfectly competitive firm produced at the quantity of productive efficiency, would it generate the highest profit level possible? Why or why not?
Q3) Graphically, the short-run supply curve of a perfectly competitive firm is:
A)identical to the portion of the average variable cost curve that lies above the minimum of the AVC curve.
B)identical to the portion of the average total cost curve that lies above the minimum of ATC curve.
C)the same as the demand curve that lies above the minimum of AVC curve.
D)is identical to the portion of the marginal cost curve that lies above the minimum of the AVC curve.
E)the same as its entire marginal cost curve.
Q4) The demand curve faced by a perfectly competitive firm is vertical.
A)True
B)False
Q5) What is productive efficiency? Does it guarantee that markets are operating efficiently?
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Chapter 8: Monopoly
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Sample Questions
Q1) In order for a firm to be able to price discriminate, it must not be a price taker, there must be different demands from different groups of consumers, and there must be an ability to restrict resale.
A)True
B)False
Q2) Which of the following is a major difference between monopolists and firms in perfectly competitive markets?
A)Monopolists maximize profit, while firms in perfectly competitive markets maximize sales.
B)Monopolists may earn long-run economic profit, while firms in perfectly competitive markets cannot.
C)Monopolists are price takers, while firms in perfectly competitive markets are price makers.
D)Monopolists can earn short-run profit, while firms in perfectly competitive markets cannot.
E)Monopolists ensure greater consumer welfare, while firms in perfectly competitive markets do not.
Q3) Does the monopolist have an incentive to reduce cost under average cost pricing?
Q4) Will all monopolistic firms always generate economic profits? Why or why not?
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Chapter 9: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) Monopolistic and perfect competition are alike in that:
A)a firm's long-run equilibrium output is located where long-run average total cost is increasing.
B)a firm's long-run equilibrium output is located where long-run average total cost is minimized.
C)firms earn a normal rate of return in the long run.
D)firms are price takers.
E)firms face a downward-sloping, linear demand curve.
Q2) The primary difference between cooperative and noncooperative games is the ability to form contracts.
A)True
B)False
Q3) Which of the following is likely to reduce the uncertainties associated with oligopoly market structure?
A)Collusion
B)Price leadership
C)Dominant strategy
D)Economies of large-scale production
E)Barriers to entry into the market
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Page 11
Chapter 10: Labor Markets, Income Distribution, and Poverty
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Sample Questions
Q1) Increases in income from sources other than employment can cause the labor supply curve to shift to the left.
A)True
B)False
Q2) As a significant number of skilled workers seek work in the nonunion sector, the supply curve of nonunion labor shifts to the:
A)right, reducing wages for nonunion workers.
B)left, reducing wages for nonunion workers.
C)right, increasing wages for nonunion workers.
D)left, increasing wages for nonunion workers.
E)left, leaving wages for nonunion workers unaffected.
Q3) Labor unions:
A)decrease employment in the nonunion sector.
B)increase employment in the union sector.
C)increase nonunion wages.
D)increase union wages.
E)decrease productivity in the union sector.
Q4) What is meant by "derived demand," and how does it relate to the factors of production?
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Chapter 11: Introduction to Macroeconomics:
Unemployment, Inflation, and Economic Fluctuations
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Q1) The trough of a business cycle refers to the point in time when _____.
A)output stops declining and business activity is at its lowest point
B)output starts increasing after a prolonged period of recession
C)business activity is continuously increasing
D)expansion comes to an end, and when output is at its highest point
E)output and employment decline continuously
Q2) Which of the following causes a surplus in the labor market?
A)A minimum wage rate
B)Price discrimination
C)Outsourcing
D)The law of diminishing marginal productivity
E)The backward-bending shape of the labor supply curve
Q3) New inventions may displace some workers, resulting in structural unemployment.
A)True
B)False
Q4) Nearly every society desires to achieve the macroeconomic goals of high employment, a stable price level, and high economic growth.
A)True
B)False
Q5) Discuss the costs associated with high inflation.
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Chapter 12: Economic Growth
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Sample Questions
Q1) A country will roughly double its gross domestic product (GDP) in five years if its annual growth rate is _____.
A)5 percent
B)7 percent
C)12 percent
D)14 percent
E)14 percent.
Q2) Household income after taxes is called:
A)national income.
B)gross domestic product
C)disposable personal income
D)gross national product.
E)net national product
Q3) Net exports are defined as:
A)exports plus imports.
B)exports minus imports
C)imports minus exports
D)exports plus imports minus tariffs.
E)exports divided by imports.
Q4) Does the political freedom existing in democracies always aid economic growth?
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Chapter 13: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) What is the natural level of output?
Q2) A change that shifted the long-run aggregate supply curve to the right would not necessarily shift the short-run aggregate supply curve to the right.
A)True
B)False
Q3) Higher interest rates will tend to reduce aggregate demand, other things being equal.
A)True
B)False
Q4) Jason has been holding his retirement savings in a safe in his house. Currently, the economy is experiencing a falling price level. He can conclude that:
A)the real purchasing power of his money is constant.
B)the real value of his savings would increase as long as the price level falls.
C)the real value of his savings would decrease as long as the price level is falls.
D)he would have been worse off if he had deposited his savings at a bank.
E)he would have been better off if he had used a major percentage of his savings for consumption earlier.
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15
Chapter 14: Fiscal Policy
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Sample Questions
Q1) Which of the following statements is not true of automatic stabilizers?
A)The most important automatic stabilizer is the tax system.
B)They act as shock absorbers in an economy
C)They require legislative action.
D)They change as business cycles conditions change
E)Payroll taxes are automatic stabilizers.
Q2) Why don't governments avoid budget deficits under all circumstances?
Q3) Suppose a flat tax plan allows individuals to deduct a standard allowance of $25,000 from their wages and the flat tax rate is 12 percent. An individual earning $20,000 a year would pay:
A)$2,400 in taxes
B)$1,200 in taxes
C)$3,000 in taxes
D)$0 in taxes
E)$2,000 in taxes
Q4) Supply-siders are generally critical of government intervention and regulation because they believe that regulations can be costly impediments to economic growth
A)True
B)False
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Chapter 15: Monetary Institutions
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Sample Questions
Q1) Reserve requirements exist primarily to prevent bank failures.
A)True
B)False
Q2) Money would generally be a more efficient store of value than wheat when inflation is not rapid.
A)True
B)False
Q3) Legal tender is fiat money because it is:
A)a means of exchange that has been established by custom and tradition.
B)a means of exchange that has been established by the value of the metal in a coin.
C)the balance in bank accounts that depositors can access on demand.
D)a means of exchange that has been established by government declaration.
E)the balance in bank accounts that can be easily converted into currency.
Q4) Explain Gresham's Law.
Q5) New loans decrease the money supply in an economy.
A)True
B)False
Q6) How could the rumor of a bank failure actually turn into a bank failing? Is the bank really without assets?
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Chapter 16: The Federal Reserve and Monetary Policy
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Q1) Name the six primary functions of the central bank of a country.
Q2) When the money supply decreases, other things being equal, _____.
A)real interest rates fall and investment spending rises.
B)real interest rates and investment spending fall.
C)real interest rates rise and investment spending falls
D)real interest rates and investment spending fall
E)nominal interest rates and investment spending fall
Q3) If money supply and money demand both increased by the same amount, then:
A)the nominal interest rate would increase to twice its original value
B)the nominal interest rate would increase by half of its original value
C)the nominal interest rate would decrease by half of its original value.
D)there would be no change in the nominal interest rate.
E)the nominal interest rate would decrease by one-third of its original value.
Q4) Changing reserve requirements is the most important method the Federal Reserve uses to change the supply of money
A)True
B)False
Q5) Higher rates of interest increase the opportunity cost of holding money balances
A)True
B)False
Page 18
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Chapter 17: Issues in Macroeconomic Theory and Policy
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Q1) Critics of inflation targeting argue that _____.
A)it can lead to lower aggregate supply in the long run
B)forecasting future inflation may be inaccurate, leading to inefficiency
C)governments are too flexible with inflation target rates and need to be more tight
D)targeting inflation may cause net exports to fall in the long run
E)the government can run into a deficit as a result of targeting inflation
Q2) Assuming wages are indexed to inflation, if prices rose by 1.4 percent this month and your last month's wage was $1,000, your wage this month would be $1,014.
A)True
B)False
Q3) A cut in taxes, other things being equal, will:
A)increase interest rates and consequently decrease private investment.
B)increase interest rates and consequently increase private investment.
C)decrease interest rates and consequently decrease private investment.
D)decrease interest rates and consequently increase private investment.
E)decrease interest rates and consequently increase consumer spending.
Q4) Is it possible for monetary policy to be more effective during an expansion than during a recession? If yes, why?
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Page 19
Chapter 18: International Economics
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Sample Questions
Q1) Comparative advantage exists when a person or a country can produce a good or service at a lower _____ than others.
A)fixed cost
B)variable cost
C)opportunity cost
D)total cost
E)marginal cost
Q2) The imposition of an import quota on steel by the U.S. government is likely to:
A)increase the cost of production of steel-using American firms.
B)generate tax revenue for the government.
C)decrease the production of steel in the U.S.
D)increase the production of steel-using American firms.
E)increase U.S. imports of steel.
Q3) Which of the following transactions would be recorded as a debit in the U.S. current account?
A)The purchase of a Japanese car by an American
B)The purchase of air service from a U.S. airline by a Japanese traveler
C)A short-term loan extended to a Japanese manufacturer by a U.S. bank
D)The purchase of U.S. cheese by a Japanese bakery
E)The purchase of an American Treasury bond by a French investment company
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