Economic Literacy
Question Bank
Course Introduction
Economic Literacy introduces students to fundamental concepts and principles underlying the field of economics, emphasizing the practical application of economic reasoning in everyday life. The course covers foundational topics such as supply and demand, market structures, the role of government in the economy, personal finance, and basic macroeconomic indicators. Through real-world examples, discussions, and activities, students develop the analytical skills necessary to interpret economic news, make informed personal and civic decisions, and better understand the dynamic forces shaping global and local economies.
Recommended Textbook Essentials of Economics 6th Edition by R. Glenn Hubbard
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19 Chapters
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) In economics,tangible merchandise is referred to as A) invention.
B) human capital.
C) services.
D) goods.
Answer: D
Q2) Refer to Table 1-5.What is Julius's marginal cost if he decides to stay open for three hours instead of two hours?
A) $0
B) $18
C) $54
D) $65
Answer: B
Q3) "A decrease in the price of tablet computers will decrease the demand for desktop computers." This statement is an example of a normative economic statement.
A)True
B)False
Answer: False
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Sample Questions
Q1) Refer to Table 2-1.Assume that Tomaso's Trattoria only produces pizzas and calzones.A combination of 36 pizzas and 30 calzones would appear
A) along Tomaso's production possibilities frontier.
B) inside Tomaso's production possibilities frontier.
C) outside Tomaso's production possibilities frontier.
D) at the horizontal intercept of Tomaso's production possibilities frontier.
Answer: C
Q2) Which of the following statements is true?
A) Individuals who have never been the best at doing anything cannot have a comparative advantage in producing any product.
B) Individuals who have never been the best at doing anything can still have a comparative advantage in producing some product.
C) Individuals who have never been the best at doing anything perform all tasks at a higher opportunity cost than others.
D) Individuals who have never been the best at doing anything must have an absolute advantage in at least ones task.
Answer: B
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Chapter 3: Where Prices Come From: The Interaction of
Demand and Supply
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Sample Questions
Q1) Shrimp is an increasingly popular part of the American diet.Louisiana shrimpers who represent the bulk of the U.S.industry were almost all put out of business by Hurricane Katrina.How did the hurricane affect the equilibrium price and quantity of shrimp?
Answer: The supply curve for shrimp shifted to the left resulting in a higher equilibrium price and lower equilibrium quantity.
Q2) Tom Searchinger,a senior attorney at the Environmental Defense Fund,observed that generous farm subsidies have encouraged farmers to produce more corn and more wheat.How does this affect the market for fertilizer?
A) The supply of fertilizer increases.
B) The supply of fertilizer decreases.
C) The demand for fertilizer increases.
D) The demand for fertilizer decreases.
Answer: C
Q3) In 2004,hurricanes destroyed a large portion of Florida's grapefruit crop.How did this affect the market price and market quantity of grapefruit?
Answer: The supply curve for grapefruit shifted to the left resulting in a higher equilibrium price and lower equilibrium quantity.
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Page 5
Chapter 4: Market Efficiency and Market Failure
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Sample Questions
Q1) The social cost of cutting trees for firewood in a government forest is
A) the increased likelihood of flooding as more trees are cut.
B) the increased likelihood of flooding as more trees are cut plus the private cost of cutting the trees.
C) opportunity cost to the individual of cutting the wood.
D) the marginal costs of cutting the last tree.
Q2) Refer to Figure 4-15.If,because of an externality,the economically efficient output is Q and not the current equilibrium output of Q ,what does S represent?
A) the market supply curve reflecting marginal private cost
B) the market supply curve reflecting marginal social cost
C) the market supply curve reflecting external cost
D) the market supply curve reflecting implicit cost
Q3) Economic efficiency is a market outcome in which the marginal benefit to consumers is equal to the marginal cost of production and the sum of consumer surplus and producer surplus is maximized.
A)True
B)False
Q4) What area on a supply and demand graph represents producer surplus?
Q5) What is the difference between scarcity and a shortage?
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Chapter 5: The Economics of Health Care
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Sample Questions
Q1) Explain why the death rates due to kidney disease and diabetes have slightly increased in the United States since 1981.
Q2) The cost of group health insurance is lower than if an individual buys a policy on his own because
A) the problem of adverse selection is reduced.
B) moral hazard costs of a group tend to move to a low average.
C) it is easier for the company to deny claims from a large group.
D) insuring a group eliminates the problem of buyers having more information than the seller.
Q3) Changes in the health of the average person are an important indicator of changes in the standard of living.
A)True
B)False
Q4) Vaccinations tend to result in a positive externality.
A)True
B)False
Q5) Briefly explain what you would expect to see happen to spending on health care over time,with health care being considered as a normal good.
Q6) What is asymmetric information?
Page 7
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Chapter 6: Firms, The Stock Market, and Corporate Governance
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Sample Questions
Q1) Raising funds through ________ is called indirect finance.
A) issuing stock
B) issuing bonds
C) financial intermediaries
D) retaining earnings
Q2) The only type of business that faces limited liability is a partnership.
A)True
B)False
Q3) Mortgage-backed securities are similar to bonds in that the investor who buys one receives
A) federal insurance to cover the value of the security.
B) partial ownership of the company that issued the security.
C) dividend payments.
D) regular interest payments.
Q4) From the highest to the lowest,the percentage of firms by business type in the United States is represented by which of the following?
A) sole proprietorships, corporations, partnerships
B) sole proprietorships, partnerships, corporations
C) corporations, partnerships, sole proprietorships
D) corporations, sole proprietorships, partnerships
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) After getting an A on your economics exam,you decide to go to your favorite Mexican restaurant to celebrate.You are having trouble deciding whether to order the chipotle chicken chimichanga or the cilantro seafood enchiladas.Use the rule of equal marginal utility per dollar to determine which one to purchase: (a)the chimichanga for $8 which gives you 120 units of utility,or (b)the enchiladas for $15 which gives you 195 units of utility? Assume your budget is large enough to purchase either item.
Q2) For a demand curve to be upward sloping,the good would have to be an inferior good,and
A) the income effect would have to be larger than the substitution effect.
B) the income effect would have to be smaller than the substitution effect.
C) the income effect would have to be equal to the substitution effect.
D) the income effect and the substitution effect would have to be nonexistent.
Q3) Some online penny auctions charge a fee,such as $1,for every bid placed.Why should these costs of $1 per bid be considered sunk costs? Would it be smart for someone who has "already invested $5 in bidding costs" to keep bidding to "protect his or her sunk investments"? Why or why not?
Q4) What is a Giffen good?
Q5) Define the economic concept of elasticity.
Q6) What is marginal utility and what is the law of diminishing marginal utility?
Page 9
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Chapter 8: Technology,Production,and Costs
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Sample Questions
Q1) When firms analyze the relationship between their level of production and their costs,they separate the time period involved into
A) morning and evening.
B) 6 months or less; 6 months to 1 year; more than 1 year.
C) a fixed period and a variable period.
D) the short run and the long run.
Q2) Economic costs of production differ from accounting costs in that A) economic costs include expenditures for hired resources while accounting costs do not.
B) economic costs add the opportunity costs of a firm using its own resources while accounting costs do not.
C) accounting costs include expenditures for hired resources while economic costs do not.
D) accounting costs are always larger than economic cost.
Q3) Refer to Figure 8-7.When the output level is 100 units average fixed cost is A) $12.
B) $8.
C) $4.
D) This cannot be determined from the diagram.
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Page 10
Chapter 9: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) The marginal revenue curve for a perfectly competitive firm
A) is downward-sloping.
B) is the same as its demand curve.
C) is perfectly inelastic.
D) is the same as its marginal cost curve.
Q2) Refer to Figure 9-5.What is the minimum price the firm requires to produce output?
A) $20
B) $14
C) $5
D) It cannot be determined
Q3) A perfectly competitive firm's marginal revenue
A) is greater than its price.
B) is less than price because a firm must lower its price to sell more. C) is equal to its price.
D) may be either greater or less than its price, depending on the quantity sold.
Q4) What is meant by allocative efficiency? How does a perfectly competitive firm achieve allocative efficiency?
Q5) What is the difference between "shutting down temporarily" and "exiting the industry"?
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Chapter 10: Monopoly and Antitrust Policy
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Sample Questions
Q1) The only firms that do not have market power are
A) firms in industries with low barriers to entry.
B) firms that do not advertise their products.
C) firms in perfectly competitive markets.
D) firms that sell identical products.
Q2) Baxter International,a manufacturer of hospital supplies,acquired American Hospital Supply,a distributor of hospital supplies.This is an example of
A) a conglomerate merger.
B) a horizontal merger.
C) a vertical merger.
D) a two-dimensional merger.
Q3) A patent or copyright is a barrier to entry based on
A) ownership of a key necessary raw material.
B) large economies of scale as output increases.
C) government action to protect a producer.
D) widespread network externalities.
Q4) How does a network externality serve as a barrier to entry? Is this barrier surmountable? Explain.
Q5) If you own the only bookstore in a small town,do you have a monopoly?
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Chapter 11: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) What is the most important difference between perfectly competitive markets and monopolistically competitive markets?
Q2) All of the following are examples of oligopolistic markets except A) the broadcasting industry.
B) aircraft manufacture.
C) college bookstores.
D) seafood restaurant chains.
Q3) All of the following characteristics are common to both monopolistic competition and perfect competition except A) firms act to maximize profit.
B) entry barriers into the industries are low.
C) the market demand curves are downward-sloping.
D) firms take market prices as given.
Q4) Refer to Figure 11-13.What is the area that represents the firm's total cost?
A) P aQ 0
B) P cQ 0
C) P eQ 0
D) P dQ 0
Q5) What is the difference between explicit collusion and implicit collusion?
Q6) What are the formulas for total revenue,average revenue,and marginal revenue.
Page 13
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Chapter 12: GDP: Measuring Total Production and Income
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Sample Questions
Q1) Real GDP per capita is calculated by dividing the value of real GDP for a country by the country's adult population.
A)True
B)False
Q2) Which of the following is not an example of a transfer payment?
A) unemployment insurance payments
B) health insurance payments to an army private
C) social security payments to retirees
D) social security payments to disabled persons
Q3) A sharp increase in the number of medical errors increases the number of lawyers hired to determine medical malpractice settlements.This will
A) increase GDP and increase well-being in the economy.
B) increase GDP and decrease well-being in the economy.
C) decrease GDP and increase well-being in the economy.
D) decrease GDP and decrease well-being in the economy.
Q4) Refer to Table 12-21.Consider the data above for a simple economy: Using 2013 as the base year,calculate nominal GDP,real GDP,and the GDP deflator for 2018.Show your work.
Q5) Give two reasons why GDP does not reflect total production in an economy.
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) If inflation is unanticipated,no redistribution of income can occur.
A)True
B)False
Q2) Structural unemployment is the result of
A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs.
B) the search process of matching workers with jobs.
C) the ups and downs in inflation.
D) a slowdown in the economy.
Q3) An unemployment insurance program has which of the following effects?
A) It decreases the amount of personal income of the unemployed.
B) It increases the severity of a recession because it makes it more difficult for the unemployed to find jobs.
C) It increases the amount of time spent searching for a job.
D) It lowers the overall unemployment rate.
Q4) Describe the three types of unemployment.
Q5) Refer to Table 13-12.Consider a simple economy that produces only three products: burritos,flashlights,and golf balls.Use the information in the table to calculate the inflation rate for 2018,as measured by the consumer price index.
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Chapter 14: Economic Growth, The Financial System, and Business Cycles
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Sample Questions
Q1) Purchases of which of the following goods would be dramatically reduced during a recession?
A) tomatoes
B) ink pens
C) gasoline
D) refrigerators
Q2) How will an increase in the government budget surplus as a result of lower government spending (with no change in net taxes)affect private saving in the economy?
A) Private saving will increase by the amount of increase in the budget surplus.
B) Private saving will decrease by the amount of increase in the budget surplus.
C) Private saving will decrease by less than the amount of increase in the budget surplus.
D) Private saving will be unaffected by the increase in the budget surplus.
Q3) If real GDP in a closed economy is $40 billion,consumption is $20 billion,and government purchases are $10 billion,what is investment?
A) $10 billion
B) $30 billion
C) $40 billion
D) $70 billion
Page 16
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) Refer to Figure 15-2.Ceteris paribus,a decrease in the expected price of an important natural resource would be represented by a movement from
A) SRAS to SRAS .
B) SRAS to SRAS .
C) point A to point B.
D) point B to point A.
Q2) An increase in disposable income will shift the aggregate demand curve to the right. A)True B)False
Q3) Explain how the static aggregate demand and aggregate supply model gives us misleading results about the price level,particularly with respect to decreases in aggregate demand.Describe how the aggregate demand curve is different in the dynamic model as compared to the static model.Describe how potential GDP is different in the dynamic model as compared to the static model.
Q4) Explain how the economy moves back to full employment from recession.Be sure to detail what happens to short-run aggregate supply,unemployment,equilibrium GDP and the price level.
Q5) What are sticky prices,and how can contracts make them "sticky"?
Page 17
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Chapter 16: Money,Banks,and the Federal Reserve System
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Sample Questions
Q1) The Federal Reserve's narrowest definition of the money supply is
A) M0.
B) M1.
C) M2.
D) M3.
Q2) The most liquid measure of money supply is
A) M0.
B) M1.
C) M2.
D) M3.
Q3) Refer to Scenario 16-2.As a result of Kristy's deposit,Bank A's required reserves increase by
A) $2,000.
B) $8,000.
C) $10,000.
D) $50,000.
Q4) In countries that have experienced hyperinflation,what role have large government budget deficits played in causing the very high inflation rates?
Q5) What is the principle monetary policy tool used by the Fed.Why?
Q6) How do open market operations work?
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Chapter 17: Monetary Policy
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Sample Questions
Q1) A decrease in interest rates can ________ the demand for stocks as stocks become relatively ________ attractive investments as compared to bonds.
A) increase; more
B) decrease; less
C) decrease; more
D) increase; less
E) increase; similar
Q2) The Fed can simultaneously reduce the inflation rate and stimulate growth through lowering interest rates.
A)True
B)False
Q3) Rising prices erode the value of money as a ________ and as a ________.
A) unit of barter; unit of account
B) store of value; unit of liquidity
C) medium of exchange; store of value
D) store of value; unit of barter
Q4) In 2008,the Fed began paying banks interest on their reserve holdings.
A)True
B)False
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Chapter 18: Fiscal Policy
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Sample
Questions
Q1) Why will there be less crowding out of private spending by government spending the less sensitive consumption,investment,and net exports are to changes in interest rates?
Q2) Crowding out,following an increase in government spending,results from (the exchange rate is the foreign exchange price of the domestic currency)
A) higher interest rates and a lower exchange rate.
B) higher interest rates and a higher exchange rate.
C) lower interest rates and a lower exchange rate.
D) lower interest rates and a higher exchange rate.
Q3) Data indicates that recessions following financial crises ________ recessions which do not follow financial crises.
A) are more severe than B) are less severe than C) are equally severe as
D) Data does not show any link between the severity of recessions following financial crises.
Q4) Explain how a tax reduction on capital gains and dividends might increase aggregate supply.
Q5) What is the difference between federal purchases and federal expenditures?
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Chapter 19: Comparative Advantage, International Trade, and Exchange Rates
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Sample Questions
Q1) Imports are goods and services bought domestically
A) and produced domestically.
B) but produced in other countries.
C) and resold at a profit.
D) and not subject to tariffs.
Q2) In 1930,the U.S.government attempted to help domestic firms that were harmed by the Great Depression by
A) establishing the General Agreement on Tariffs and Trade (GATT).
B) passing the Smoot-Hawley Tariff.
C) establishing the World Trade Organization (WTO).
D) passing the North American Free Trade Agreement (NAFTA).
Q3) Refer to Figure 19-3.Without the quota,the domestic price of peanuts equals the world price which is $2.00 per pound.What is the quantity of peanuts demanded by domestic consumers in the absence of a quota?
A) 10 million pounds
B) 28 million pounds
C) 30 million pounds
D) 40 million pounds
Q4) Is the value of U.S.exports typically larger or smaller than the value of U.S.imports?
Page 21
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