Course Introduction
Economic Literacy Review
Questions
Economic Literacy is designed to equip students with a foundational understanding of key economic principles and concepts that influence daily life, business decisions, and public policy. The course covers fundamental topics such as supply and demand, market structures, money and banking, personal finance, and the role of government in the economy. Through real-world examples, interactive discussions, and practical applications, students develop the analytical skills needed to interpret economic data, recognize economic trends, and make informed decisions as consumers, workers, and citizens in a global economy.
Recommended Textbook
Essentials of Economics 3rd Edition by Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) What is marginal benefit?
Answer: Marginal benefit is the additional benefit received from continuing with an activity.
Q2) A university must decide if it wants to offer more internet-based classes.This decision involves answering the economic question of 'what to produce.'
A)True
B)False
Answer: True
Q3) Explain why economics is considered a social science.
Answer: Economics is a social science because it studies the actions of individuals.As a social science,economics considers human behaviour,particularly decision-making behaviour,in every context.
Q4) Refer to Figure 1-3.Calculate the area of the trapezoid X.
A) $270
B) $720
C) $810
D) $2520
Answer: C
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Sample Questions
Q1) Refer to Table 2-1.Assume Tomaso's Trattoria only produces pizzas and calzones.A combination of 36 pizzas and 30 calzones would appear
A) along Tomaso's production possibility frontier.
B) inside Tomaso's production possibility frontier.
C) outside Tomaso's production possibility frontier.
D) at the horizontal intercept of Tomaso's production possibility frontier.
Answer: C
Q2) Refer to Table 2-7.What is Horace's opportunity cost of bathing a cat?
A) Half a groomed dog
B) Two groomed dogs
C) Two-thirds of a groomed dog
D) One and a half groomed dogs
Answer: D
Q3) On a diagram of a production possibility frontier,opportunity cost is represented by the production possibility frontier shifting outward.
A)True
B)False
Answer: False
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Explain the differences between a change in supply and a change in quantity supplied.
Answer: A change in supply refers to a shift of the supply curve,which occurs when one of the variables other than the price of the product changes.A change in quantity supplied refers to a movement along the supply curve,which occurs when the price of the product changes.
Q2) Refer to Figure 3-2.A decrease in productivity would be represented by a movement from
A) A to B.
B) B to A.
C) S<sub>1</sub> to S<sub>2</sub>.
D) S<sub>2</sub> to S<sub>1</sub>.
Answer: D
Q3) If the price of peaches,a substitute for plums,decreases,the demand for plums will increase.
A)True
B)False
Answer: False
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Chapter 4: Market Efficiency and Market Failure
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Sample Questions
Q1) A study of the effects of the minimum wage on employment of low-skilled workers estimated the price elasticity of demand for low-skilled workers to be -0.75.Suppose that the government is considering raising the minimum wage from $7.25 per hour to $7.75 per hour.Based on this information,calculate the percentage change in the employment of low-skilled workers.Use the midpoint formula.
Q2) Refer to Figure 4-7.What is the value of the price elasticity of supply between g and h?
A) 20
B) 0.5
C) 2
D) 0.02
Q3) There is a limited number of original Picasso paintings.This means that the supply of original Picasso paintings is perfectly inelastic.
A)True
B)False
Q4) When is demand perfectly elastic? When is demand perfectly inelastic? What are the values of the price elasticity of demand when demand is perfectly elastic or perfectly inelastic? What do perfectly elastic and perfectly inelastic demand curves look like?
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Chapter 5: The Economics of Healthcare
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Sample Questions
Q1) 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.
Q2) The area ________ the market supply curve and ________ the market price is equal to the total amount of producer surplus in a market.
A) above; above
B) above; below
C) below; above
D) below; below
Q3) Economic efficiency in a competitive market is achieved when
A) economic surplus is equal to consumer surplus.
B) consumers and producers are satisfied.
C) the marginal benefit equals the marginal cost from the last unit sold.
D) producer surplus equals the total amount firms receive from consumers minus the cost of production.
Q4) What is 'tax incidence'? What determines tax incidence in a competitive market?
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Chapter 6: Firms,the Stock Market,and Corporate Governance
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Sample Questions
Q1) Refer to Table 6-8.Elegant Settings experiences
A) economies of scale up to an output level of 400.
B) diminishing returns up to an output level of 400.
C) increasing returns beyond an output level of 400.
D) economies of scale at an output of 300 or less and diseconomies of scale at an output level above 400.
Q2) Refer to Figure 6-2.The curve labelled 'F' is
A) the total product curve.
B) the average product curve.
C) the marginal product curve.
D) the output supply curve.
Q3) Which of the following is typically considered a fixed cost by academic book publishers but a variable cost by companies that print books?
A) Postage and supplies
B) Travel
C) Rent
D) Wages and salaries
Q4) Describe the difference between technology and positive technological change.
Q5) Is it possible for technological change to be negative? If so,give an example.
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) To maximise profit,a firm will produce the level of output where MR = MC.If a firm actually makes a profit depends on the relationship of price to average total cost.What are the three possible relationships between price and average total cost that determine if a firm will make a profit,experience a loss,or break even?
Q2) Refer to Figure 7-5.The firm's manager suggests that the firm's goal should be to maximise average profit.In that case,what is the output level and what is the average profit that will achieve the manager's goal?
A) Q = 1350 units; average profit = $5
B) Q = 1100 units; average profit = $6
C) Q = 1350 units; average profit = $9
D) Q = 1800 units; average profit = $20
Q3) Allocative efficiency is achieved in an industry when firms supply those goods and services that provide consumers with a marginal benefit equal to the marginal cost of producing those goods and services.
A)True
B)False
Q4) What is a long-run supply curve? What does a long-run supply curve look like on a perfectly competitive market graph?
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Chapter 8: Technology, production, and Costs
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Sample Questions
Q1) Refer to Figure 8-15.With perfect price discrimination,the firm will produce and sell
A) Q<sub>1</sub> units.
B) Q<sub>2</sub> units.
C) Q<sub>3</sub> units.
D) Q<sub>4</sub> units.
Q2) Publishers practice price discrimination when they sell books at high prices to A) early adopters.
B) local bookstores.
C) large chain bookstores.
D) online book sellers.
Q3) Identify four reasons for high entry barriers.Briefly explain each reason.
Q4) Early adopters are consumers who will pay a high price to be among the first to own new products.
A)True
B)False
Q5) Producers in perfect competition receive a smaller producer surplus than a monopoly producer.
A)True
B)False
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Chapter 9: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) In the long run,if price is less than average cost
A) there is an incentive for firms to exit the market.
B) there is profit incentive for firms to enter the market.
C) the market must be in long-run equilibrium.
D) there is no incentive for the number of firms in the market to change.
Q2) Economies of scale can lead to an oligopolistic market structure because
A) if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms.
B) if economies of scale are insignificant, only a few firms are able to produce at the low costs achieved by the big established firms.
C) a few firms can force rivals to produce at low levels of output.
D) a few firms can use high profits to keep out new entrants.
Q3) Which of the following is not a characteristic of monopolistic competition?
A) There are many buyers and sellers.
B) There are low barriers to entry.
C) Average revenue is equal to price.
D) The products sold by all firms are identical.
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) Suppose a competitive firm is paying a wage of $12 an hour.Assume that labour is the only input.If hiring another worker would increase output by four units per hour,then to maximise profits the firm should
A) not change the number of workers it currently hires.
B) hire the extra worker.
C) lay off some workers.
D) There is not enough information to answer the question.
Q2) If the labour supply is unchanged,an increase in the demand for labour will
A) increase the equilibrium wage and decrease the number of workers employed.
B) increase the equilibrium wage and increase the quantity of jobs demanded.
C) decrease the equilibrium wage and increase the number of workers employed.
D) increase the equilibrium wage and increase the number of workers employed.
Q3) Refer to Table 10-4.What are the quantity of labour and marginal revenue product of labour that will maximise the profit Apple would earn from selling iPods?
A) 2; $160
B) 3; $340
C) 2; $680
D) 3; $140
Q4) What is a monopsony?
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Chapter 11: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) If you burn your trash in the back yard despite regulations against it,then you are
A) acting economically irrationally and creating a social cost.
B) avoiding the private costs associated with disposing your garbage some other way and creating a social cost.
C) acting rationally and creating a positive externality.
D) saving landfill space and creating a social benefit.
Q2) Define the tragedy of the commons.Give three examples of common resources.Briefly explain why common property resources are subject to overuse.
Q3) What are property rights?
A) The title to ownership of any physical asset.
B) A legal document verifying ownership of intangible assets.
C) The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
D) The right of the government to appropriate private assets for the good of society.
Q4) How does a negative externality in production reduce economic efficiency?
Q5) How does a positive externality in consumption reduce economic efficiency?
Q6) State the Coase theorem.
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Chapter 12: GDP: Measuring Total Production and Income
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Sample Questions
Q1) Give reasons why measured GDP does not reflect total production in an economy.
Q2) GDP is not a perfect measure of wellbeing because
A) the value of leisure is included in GDP.
B) GDP is not adjusted for the effects of pollution.
C) GDP is adjusted for changes in crime.
D) GDP is adjusted for increases in drug addiction.
Q3) Which factors explain labour productivity?
A) Technological change and the quantity of labour per hour.
B) Diminishing returns and the quantity of labour per hour.
C) Diminishing returns and the quantity of capital per hour.
D) Technological change and the quantity of capital per hour.
Q4) What is 'potential GDP'?
Q5) An increase in the price level of 5 per cent between 2008 and 2009 would be implied by a change in the GDP deflator from ________ in 2008 to ________ in 2009.
A) 105; 115
B) 200; 205
C) 400; 420
D) 375; 390
Q6) What is the gross domestic product of a country?
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Q7) Outline the various actions the government sector should take to promote growth.
Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) The unemployment rate is calculated by
A) dividing the number of unemployed people by the sum of the number of working people plus the number of unemployed people, and multiplying by 100.
B) dividing the number of unemployed people by the number of working individuals, and multiplying by 100.
C) dividing the number of unemployed people by the number in the working-age population, and multiplying by 100.
D) dividing the number of unemployed people by the number of people in the labour force, and dividing by 100.
Q2) Which of the following can cause demand-pull inflation if the economy is currently in equilibrium at full-employment GDP?
A) An increase in net exports.
B) A reduction in government spending.
C) An increase in the company income tax rate.
D) A decrease in real wages.
Q3) Describe the three types of unemployment.
Q4) Does inflation mean that consumers can no longer afford to buy as many goods and services due to the higher prices? Explain.
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Chapter 14: Economic Growth, the Financial System and Business Cycles
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Sample Questions
Q1) The basic (static)aggregate demand and aggregate supply model assumes that
A) potential GDP increases continuously.
B) the economy does not experience long-run growth.
C) the economy experiences continuing inflation.
D) the economy's aggregate demand curve shifts to the right in most periods.
Q2) 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.
Q3) What type of consumer good is most affected by the business cycle-durable goods or non-durable goods? Why?
Q4) Which of the following explains why the rate of unemployment continues to rise once a recession is over?
A) Discouraged workers leave the labour force.
B) Wages rise faster than productivity increases so firms are reluctant to hire workers.
C) Firms are operating below capacity for some time after the recession is finished.
D) The unemployment rate does not continue to rise after a recession is over.
Q5) Explain how the economy moves back to full employment after a recession.
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) In March 2014,the level of credit in Australia was approximately
A) $2237.9 billion.
B) $49.8 billion.
C) $141.8 billion.
D) $445.1 billion.
Q2) The reserves of a bank
A) are usually a small proportion of the bank's deposits.
B) include funds held at the Reserve Bank of Australia.
C) comprise vault cash.
D) All of these are correct.
Q3) If the Reserve Bank of Australia wants to increase interest rates,it will
A) buy financial securities.
B) sell financial securities.
C) increase the exchange rate.
D) decrease the exchange rate.
Q4) An open-market purchase of government securities by the Reserve Bank of Australia causes the reserves of banks to rise.
A)True
B)False
Q5) What is commodity money? Give an example.
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Chapter 16: Money, banks, and the Federal Reserve System
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Q1) Refer to Figure 16.3.Beginning at equilibrium,if the government budget deficit rises,which of the following would you expect to see?
A) The quantity of loanable funds demanded by firms will rise above $120 million.
B) The quantity of loanable funds demanded by firms will fall below $120 million.
C) The budget deficit will have no impact on the quantity of loanable funds demanded by firms.
D) The interest rate will fall below 4 per cent.
Q2) Accounts held with the Reserve Bank of Australia (RBA)which are used by financial institutions to settle payments between each other and with the RBA are called
A) credit accounts.
B) real-time gross settlement accounts.
C) debit accounts.
D) exchange settlement accounts.
Q3) Explain why the money demand curve is downward sloping.
Q4) Explain the consequences of expansionary monetary policy if the economy was close to,or at,potential GDP level.
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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) The cyclically adjusted budget deficit calculates the budget surplus or deficit if the economy
A) were in recession.
B) were at potential GDP.
C) was producing above potential GDP.
D) was producing below potential GDP.
Q3) According to Friedman and Phelps,if actual inflation is greater than expected inflation
A) the actual real wage is greater than the expected real wage.
B) the unemployment rate falls.
C) the actual real wage equals the expected real wage.
D) firms will hire fewer workers than they planned.
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Chapter 18: Fiscal Policy
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Sample Questions
Q1) The main purpose of most tariffs and quotas is to
A) raise revenue for the government.
B) reduce the prices consumers pay for goods and services.
C) reduce the foreign competition that domestic firms face.
D) improve the quality of goods and services imported into the country.
Q2) Refer to Table 18-6.Which country has an absolute advantage in producing hats?
A) Denmark
B) Belize
C) Both countries
D) Neither country
Q3) Refer to Table 18-6.Prior to trade,what was the opportunity cost to produce 1 hat in Denmark?
A) 1/6 of a clock
B) 2/3 of a clock
C) 1.5 clocks
D) 6 clocks
Q4) A tariff is a numerical limit on the quantity of a good that can be imported.
A)True
B)False
Q5) What is an 'open economy'?
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Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Q1) A speculative attack is the result of investors' expectations that the future value of a currency will decline.
A)True
B)False
Q2) A fixed exchange rate system is one in which
A) the currency is backed by a fixed amount of gold.
B) the government defines its currency to be worth a certain amount in terms of another currency, and ensures that the rate remains at that level.
C) foreign exchange traders accept only a fixed price for their goods, regardless of the demand and supply for the currency.
D) demand and supply adjust so that there are no shortages or surpluses of currency in the market.
Q3) Why is the net primary income component in Australia's current account always negative?
Q4) Would we expect that purchasing power parity will hold in the long run for haircut prices between Australia and Singapore? Why or why not?
Q5) What is the difference between net exports and the current account balance?
Page 21
Q6) Describe how the Bretton Woods System operated.
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