Economic Principles and Tools
Exam Materials
Course Introduction
Economic Principles and Tools provides a comprehensive introduction to the fundamental concepts and analytical methods used in economics. Students will explore the basic principles that govern how individuals, businesses, and governments make decisions about allocating scarce resources. The course covers core topics such as supply and demand, opportunity cost, market equilibrium, elasticity, and the role of government intervention. It also introduces essential tools of economic analysis, including graphical and mathematical models, to interpret and predict economic outcomes. By the end of the course, students will develop a solid foundation for understanding economic issues and applying economic reasoning to real-world situations.
Recommended Textbook
Survey of Economics Principles Applications and Tools 7th Edition by Arthur OSullivan
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Page 2
Chapter 1: Introduction: What Is Economics
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Sample Questions
Q1) The 3 key economic questions include all of the following EXCEPT
A) "what products do we produce?"
B) "how do we produce these products?"
C) "where should these products be produced?"
D) "who consumes the products?"
Answer: C
Q2) Normative economics
A) is the focus of most modern economic reasoning.
B) answers the question "What ought to be?"
C) predicts the consequences of alternative actions.
D) answers the question "What is?"
Answer: B
Q3) When computing percentage changes, using the simple approach results in increases and decreases which are
A) identical.
B) symmetric.
C) not symmetric.
D) more accurate than using the midpoint method.
Answer: C
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Page 3
Chapter 2: The Key Principles of Economics
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Sample Questions
Q1) What is the real value of money?
A) its face value
B) its compounded earnings in banks
C) the quantity of goods it can buy
D) the ability of shop at market prices
Answer: C
Q2) Explain the concept of diminishing returns.
Answer: The principle of diminishing returns shows that in the short run, beyond some point, output will increase at a decreasing rate. For example, producing more output in an existing production facility by increasing the number of workers sharing the facility will bring into effect the principle of diminishing returns, as output will eventually increase but at a decreasing rate.
Q3) The opportunity cost of something is
A) the cost of the labor used to produce it.
B) what you sacrifice to get it.
C) the price charged for it.
D) the search cost required to find it.
Answer: B
Q4) What is an opportunity cost?
Answer: An opportunity cost is what you sacrifice to get something.
Page 4
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Chapter 3: Demand, Supply, and Market Equilibrium
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Sample Questions
Q1) If the number of wine producers decreases
A) the demand for wine increases.
B) the demand for wine decreases.
C) the supply of wine increases.
D) the supply of wine decreases.
Answer: D
Q2) If the demand for jelly increases, and the price of grapes (used to make jelly) rises
A) the equilibrium price of jelly rises and the equilibrium quantity of jelly might rise or fall.
B) the equilibrium price of jelly falls and the equilibrium quantity of jelly might rise or fall.
C) the equilibrium price of jelly falls and the equilibrium quantity of jelly rises.
D) the equilibrium quantity of jelly falls and the equilibrium price of jelly might rise or fall.
Answer: A
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5
Chapter 4: Elasticity: A Measure of Responsiveness
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Sample Questions
Q1) If the demand curve facing a firm had a price elasticity of demand equal to zero and the firm raised its price, its total revenue would
A) decrease slightly.
B) fall to zero.
C) not change.
D) increase.
Q2) If the percentage change in price is 2 and the percentage change in quantity supplied is 10, supply is
A) unaffected by price changes.
B) inelastic.
C) unit elastic.
D) elastic.
Q3) When the price of pens went from $1 to $1.50, the quantity demanded of pencils changed from 50 to 75 a day. The cross-price elasticity of demand for pens (using the initial value formula) is
A) 0.8.
B) 0.4.
C) 0.2.
D) It cannot be determined from the information provided.
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Page 6
Chapter 5: Production Technology and Cost
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Sample Questions
Q1) Diminishing marginal returns implies that firms
A) require fewer and fewer workers to produce each additional unit of output.
B) require more and more workers to produce each additional unit of output.
C) get decreasing amounts of revenue for each unit of output they produce.
D) get increasing amounts of revenue for each unit of output they produce.
Q2) An example of an implicit cost is
A) the wages paid to workers.
B) the interest on business loans.
C) the imputed rent on a store owned by the firm.
D) the materials used to produce the product.
Q3) The short-run average total cost curve is U-shaped because average fixed costs ________ and average variable costs ________ eventually as quantity produced increases.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q4) Economic cost is always less than accounting cost.
A)True
B)False
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Chapter 6: Perfect Competition
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Sample Questions
Q1) If a firm is a price taker, the demand curve faced by the firm is
A) horizontal.
B) vertical.
C) downward sloping.
D) upward sloping.
Q2) An increase in demand will induce entry by firms in the long run.
A)True
B)False
Q3) For a perfectly competitive firm, price always equals marginal cost.
A)True
B)False
Q4) Firms earning negative profits in the short run should always shut down.
A)True
B)False
Q5) Which of the following is NOT a characteristic of a perfectly competitive market?
A) a large number of firms in a market
B) selling a standardized product
C) substantial barriers to entry
D) an individual firm having no control over price
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Chapter 7: Monopoly and Price Discrimination
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Sample Questions
Q1) Table 7.2 contains price, demand, and cost data for the Capri Theater, the only first-run movie theater in a small town. What is its revenue from non-students under the single price policy?
A) $300
B) $360
C) $450
D) $540
Q2) What is the most likely reason that snack foods sold in vending machines are so much more expensive than snack foods sold in grocery stores?
A) Snack foods sold in vending machines come in smaller packages, so the per-package costs are higher.
B) Grocery stores buy in bulk, while vending machine companies tend to buy in smaller quantities.
C) People who purchase snack foods from vending machines tend to have less elastic demand for snack foods.
D) Owners of vending machine companies are greedier than owners of grocery stores.
Q3) Why do barriers to entry create market power?
Q4) What is a patent?
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Chapter 8: Market Entry, Monopolistic Competition, and Oligopoly
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Sample Questions
Q1) When a second firm enters a monopolist's market, the initial demand curve facing the monopolist will
A) shift to the left.
B) shift to the right.
C) remain the same.
D) none of the above
Q2) Consider two people involved in a marriage or relationship. If, when one person is caught cheating on their agreement, the other divorces or leaves them, then they are using a
A) tit-for-tat strategy.
B) grim trigger strategy.
C) dominant strategy.
D) predatory strategy.
Q3) A firm that faces the duopolists' dilemma can avoid the dilemma by
A) telling customers that it will match any competitor's price.
B) undercutting its competitor's price.
C) agreeing to join a cartel.
D) always choosing its dominant strategy regardless of the other firm's action.
Q4) What is a contestable market?
Q5) What is "monopolistic" about monopolistic competition?
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Chapter 9: Imperfect Information, External Benefits, and
External Costs
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Sample Questions
Q1) Consumers can reduce their information disadvantage by investigating consumer satisfaction surveys.
A)True
B)False
Q2) Recall the Application. Which of the following factors is used in determining the demand for CO allowances in the EU?
A) the level of economic activity
B) fuel prices
C) weather
D) all of the above
Q3) Why is it easier to raise $1 million in voluntary contributions for medical research into a deadly disease like cancer than it is to raise the same amount for space exploration?
Q4) Fireworks on the night on July 4th are neither rival nor excludable.
A)True
B)False
Q5) The free-rider problem is larger for private goods than it is for public goods.
A)True
B)False
Q6) Why does it usually NOT make sense to reduce pollution to zero?
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Chapter 10: The Labor Market and the Distribution of Income
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Sample Questions
Q1) Applied to perfectly competitive labor markets, the marginal principle tells firms to hire workers until
A) the marginal revenue product of the last worker hired equals the wage.
B) marginal productivity begins to diminish.
C) average total costs are minimized.
D) the price of the product equals the wage of the worker.
Q2) The poverty rate in the United States is lowest for whites.
A)True
B)False
Q3) Figure 10.3 describes the labor market for a manufacturing industry. In the short run an increase in the price of the good made by the workers will
A) cause the equilibrium wage and the hours of labor used to increase.
B) not have an effect on this market.
C) cause the equilibrium wage to increase but will not change the hours of labor used.
D) cause the equilibrium wage and the hours of labor used to decrease.
Q4) Evaluate the statement: All minimum wage workers will be better off if the minimum wage rises.
Q5) What is the output effect?
Page 12
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Chapter 11: Measuring a Nations Production and Income
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Sample Questions
Q1) When the GDP is measured using "adjustments for price changes" it is known as the A) real GDP.
B) nominal GDP.
C) real GNP.
D) nominal GNP.
Q2) If GDP included the value of leisure time, the value of U.S. GDP would most likely increase.
A)True
B)False
Q3) A depression is
A) a severe recession.
B) a sustained economic upturn.
C) another word for a bull market.
D) the period of time following a peak in the business cycle.
Q4) Which of the following is a macroeconomic statement?
A) Motorcycle manufacturer productivity decreased by three percent in 2016.
B) The price of cell phones decreased by 18 percent last year.
C) Real domestic output of seafood increased 12 percent from 2015 to 2016.
D) The U.S. inflation rate was two percent in 2016.
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Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) One cost of unanticipated inflation is
A) both lenders and borrowers lose.
B) arbitrary redistributions of income.
C) nominal income falls below real income.
D) people cannot repay their debts.
Q2) Which one of the following statements is TRUE of the Consumer Price Index?
A) It does not take account of the price of imported goods and services.
B) It measures changes in prices of a fixed basket of goods.
C) It does not take into account the price of used goods.
D) It understates the true rate of inflation.
Q3) Economic expansions might lead to inflation because an expansion leads to
A) a decrease in the unemployment rate, which increases wages.
B) an increase in the unemployment rate, which increases wages.
C) a decrease in the unemployment rate, which decreases wages.
D) an increase in the unemployment rate, which decreases wages.
Q4) Unemployment insurance tends to lead to the unemployed worker spending less time unemployed.
A)True
B)False
Q5) What is cyclical unemployment?
Page 14
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Chapter 13: Why Do Economies Grow
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Sample Questions
Q1) Nations with low levels of GDP per capita may converge to richer nations if
A) nations with high levels of income experience a continuously increasing growth rate.
B) nations with lower levels of income grow more quickly than those with higher levels of income.
C) nations with lower levels of income spend less on investment.
D) nations with lower levels of income grow more slowly than those with higher levels of income.
Q2) Capital deepening causes ________ in the demand for labor.
A) an increase
B) a decrease
C) no change
D) either an increase or decrease
Q3) An event that allows the economy to operate more efficiently by producing more outputs without using any more inputs is referred to as
A) absolute progress.
B) efficiency progress.
C) capital investment.
D) technological progress.
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15
Chapter 14: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) Aggregate demand determines output in the short run if prices are flexible.
A)True
B)False
Q2) Which of the following does NOT decrease aggregate demand in the United States?
A) a decrease in the price of oil
B) a decrease in GDP in Germany
C) a decrease in government spending
D) a decrease in the supply of money
Q3) During an economic boom
A) actual output exceeds potential output.
B) potential output exceeds quantity demanded.
C) potential output exceeds actual output.
D) aggregate demand exceeds aggregate supply.
Q4) As the price level ________, the purchasing power of money ________.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; stays the same
Q5) Identify three key factors that can cause a shift in the aggregate demand curve.
Page 16
Q6) Explain why the long-run aggregate supply curve is vertical.
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Chapter 15: Fiscal Policy
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Sample Questions
Q1) Expansionary policies are policies designed to
A) increase the level of real GDP.
B) reduce the level of real GDP.
C) decrease government spending.
D) reduce the federal deficit.
Q2) During a recession, tax revenues ________ while government transfer payments ________, thereby mitigating part of the adverse effects of a recession and stabilizing the economy.
A) fall; increase
B) fall; decrease
C) rise; increase
D) rise; decrease
Q3) What are the two components of federal spending?
Q4) Policies taken to move the economy closer to potential output
A) must necessarily be expansionary policies.
B) must necessarily be contractionary policies.
C) are called stabilization policies.
D) are lagging policies or automatic policies.
Q5) Briefly explain how a change in the personal income tax rate affects aggregate demand.
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Chapter 16: Money and the Banking System
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Sample Questions
Q1) List and explain the three subgroups of the Federal Reserve System.
Q2) Suppose that while vacationing in Switzerland, you won 9,375 Swiss francs, which is the equivalent of $8,000. When you return to the United States, you deposit the $8,000 into your checking account. If the required reserve ratio is 15 percent, this would increase your bank's
A) liabilities by $8,000.
B) excess reserves by $8,000.
C) required reserves by $8,000.
D) assets by $1,200.
Q3) Suppose a bank has $8 million in deposits and a reserve ratio of 20 percent. Its required reserves are
A) $40,000.
B) $400,000.
C) $1,600,000.
D) $16,000,000.
Q4) Which of the following is NOT included in M1 or M2?
A) checking account balances
B) currency in circulation outside of commercial banks
C) traveler's checks
D) credit card balances
Page 18
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Chapter 17: Monetary Policy and Inflation
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Sample Questions
Q1) A decrease in the reserve requirement
A) increases the money supply, which leads to increased interest rates and a fall in investment spending.
B) increases the money supply, which leads to decreased interest rates and a rise in investment spending.
C) decreases the money supply, which leads to increased interest rates and a fall in investment spending.
D) decreases the money supply, which leads to decreased interest rates and a rise in investment spending.
Q2) An increase in the level of real GDP in the economy leads to A) a leftward shift in the demand for money curve. B) a rightward shift in the demand for money curve.
C) a leftward movement along the demand for money curve. D) a rightward movement along the demand for money curve.
Q3) If the Federal Reserve raises the discount rate, banks will be inclined to borrow additional reserves and the money supply will increase.
A)True
B)False
Q4) What three factors affect the demand for money?
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Chapter 18: International Trade and Finance
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Sample Questions
Q1) Recall the Application. The European nations that adopted the euro as a common currency no longer have their own central banks and are therefore no longer able to conduct their own independent
A) fiscal policy.
B) monetary policy.
C) international investment.
D) trade policy.
Q2) Under a fixed exchange rate system, if the inflation rate of the United States exceeds the inflation rate of other nations, the A) dollar will depreciate.
B) dollar will appreciate.
C) United States will develop a trade deficit.
D) United States will develop a trade surplus.
Q3) Explain what is meant by the economic principle of voluntary exchange.
Q4) Define the term "import."
Q5) Jobs lost to outsourcing can be partially offset by jobs gained from A) higher production costs.
B) higher opportunity costs.
C) greater trade imbalances.
D) increased output from another industry.
20
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