Economic Principles
Practice Exam
Course Introduction
Economic Principles is an introductory course designed to familiarize students with the fundamental concepts and analytical tools of economics. The course explores the basic principles governing the allocation of scarce resources, focusing on the behavior of consumers, firms, and governments within various market structures. Students will examine concepts such as supply and demand, opportunity cost, elasticity, efficiency, market failures, and the role of government intervention in the economy. Through real-world examples and case studies, the course provides a foundation for understanding how economic forces shape daily life and inform policy decisions.
Recommended Textbook
Economics 4th Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) A college 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
Q2) One example of human capital is the amount of skills that you have.
A)True
B)False
Answer: True
Q3) At a recent faculty meeting,Lorraine Waverly,president of Skywalker College,announced that enrollment is up by 12 percent over the previous semester.If enrollment the previous semester was 3,250 students,what is the student enrollment this semester?
A) 390
B) 2,860
C) 3,640
D) 4,030
Answer: C
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Chapter
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Sample Questions
Q1) Refer to Table 2-4.Does either China or South Korea have an absolute advantage and if so,in what product?
A) South Korea has an absolute advantage in wheat.
B) China has an absolute advantage in wheat.
C) South Korea has an absolute advantage in both products.
D) China has an absolute advantage in digital cameras.
Answer: C
Q2) Refer to Table 2-3.What is Serena's opportunity cost of making a necklace?
A) 2 necklaces
B) 1/2 of a bracelet
C) 1/2 of a necklace
D) 3/4 of a bracelet
Answer: B
Q3) Refer to Figure 2-1.Point A is
A) technically efficient.
B) unattainable with current resources.
C) inefficient in that not all resources are being used.
D) the equilibrium output combination.
Answer: C
4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Nearly a quarter of China's 1.3 billion people are under the age of 15.How will this affect high school enrollment over the next fifteen years? The labor market over the next fifteen years?
Answer: The demand for high school education will increase.The supply of labor over the next 15 years will increase.
Q2) Which of the following is the correct way to describe equilibrium in a market?
A) At equilibrium, demand equals supply.
B) At equilibrium, quantity demanded equals quantity supplied.
C) At equilibrium, market forces no longer apply.
D) At equilibrium, scarcity is eliminated.
Answer: B
Q3) A movement along the demand curve for toothpaste would be caused by
A) a change in the price of toothbrushes.
B) a change in consumer income.
C) a change in the price of toothpaste.
D) a change in population.
Answer: C
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Page 5
Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) Economists refer a to a market where buying and selling take place at prices that violate government price regulations as
A) a black market.
B) an outlaw market.
C) a noncompetitive market.
D) a restricted market.
Q2) Refer to Figure 4-8.How much of the tax is paid by buyers?
A) $2
B) $5
C) $7
D) $12
Q3) If the quantity of donuts supplied is represented by the equation QS = -15 + 5P then the corresponding price of donuts is represented by the equation
A) P = 0.2QS + 3.
B) P = 5QS + 75.
C) P = QS - 7.5.
D) P = 15 - 0.5QS.
Q4) What is "tax incidence"? What determines tax incidence in a competitive market?
Q5) What is producer surplus? What does producer surplus measure?
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) Refer to Figure 5-3.The deadweight loss due to the externality is represented by the area
A) mso.
B) msn.
C) nso.
D) mtn.
Q2) According to ________,in a market with an externality,private parties would voluntarily negotiate an efficient outcome without government intervention.
A) A. C. Pigou
B) Adam Smith
C) Ronald Coase
D) John Maynard Keynes
Q3) Refer to Figure 5-2.The marginal benefit of the last unit produced is represented by the price
A) P<sub>a</sub>.
B) P<sub>b</sub>.
C) P<sub>c</sub>.
D) P<sub>f</sub>.
Q4) How does a negative externality in production reduce economic efficiency?
Page 7
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Chapter 6: Elasticity: The Responsiveness of Demand and Supply
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Q1) If at a price of $24,Octavia sells 36 home-grown orchids and at $30 she sells 24 home-grown orchids,the demand for her orchids is
A) elastic.
B) inelastic.
C) unit-elastic.
D) perfectly elastic.
Q2) The price of wheat has fallen since 1950.Which of the following explains this price decline?
A) The price elasticity of demand is less than 1 (in absolute value) and the income elasticity of demand for wheat is low.
B) The price elasticity of demand is greater than 1 (in absolute value) and the income elasticity of demand for wheat is low.
C) The price elasticity of demand is less than 1 (in absolute value) and wheat is an inferior good.
D) The price elasticity of demand is greater than 1 (in absolute value) and the income elasticity of demand for wheat is greater than 1.
Q3) Explain the relationship between price elasticity of demand and total revenue.
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Page 8
Chapter 7: The Economics of Health Care
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Sample Questions
Q1) What is the principal-agent problem?
A) It is a problem caused by a person (principal) who hires an agent to act on his behalf but is unwilling to delegate authority to the agent to carry out the task in the best possible way.
B) It is a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them.
C) It is a problem of the power system of boss and subordinate where the boss (principal) exerts influence over his subordinates (agents) using punishment or threat.
D) It is a problem that exists when a person (principal) has more information about the task than the agent he hires to perform the task.
Q2) Under the Patient Protection and Affordable Care Act (PPACA),insurance companies will be required to participate in a high-risk pool that will cover individuals with pre-existing medical conditions.
A)True
B)False
Q3) How can improvements in health increase a country's total income?
Q4) What is moral hazard?
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) Total dividend payments plus retained earnings divided by outstanding stock shares equals
A) the price-earnings ratio.
B) earnings per share.
C) the dividend yield.
D) the year-to-date percentage change.
Q2) What are liabilities?
A) anything of value owned by a person or a business
B) anything a person or a business owes to entities outside the business
C) the total cost of labor for a firm
D) only those unpaid expenses for which a business or person is making interest payments
Q3) Stockholders
A) select the board of directors of a corporation.
B) select the employees of a corporation.
C) select the managers of a corporation.
D) all of the above
Q4) How do firms raise external funds through indirect finance?
Q5) What is the difference between explicit and implicit costs?
Q6) What is the difference between retained earnings and dividends? Page 10
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Refer to Figure 9-3.What is the area that represents the deadweight loss as a result of the quota?
A) G + H
B) G + H + I + J
C) E + I + J + M
D) E + M
Q2) In the 1930s,the United States charged an average tariff rate ________.Today,the rate is ________.
A) of 100 percent; 20 percent
B) above 50 percent; less than 2 percent
C) of less than 10 percent; over 40 percent
D) of 17 percent; 33 percent
Q3) Refer to Table 9-1.Select the statement that accurately interprets the data in the table.
A) Sandy has a comparative advantage in dog grooming.
B) Linda has a comparative advantage in dog grooming.
C) Linda has a comparative advantage in dog grooming and dog bathing.
D) Sandy has a comparative advantage in dog bathing.
Q4) Anti-globalization and protectionism are both arguments against free trade.How do these two arguments differ?
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) The demand curve for corn is downward sloping.If the price of corn,an inferior good,falls,
A) the income effect which causes you to reduce your corn purchases is smaller than the substitution effect which causes you to increase your corn purchases, resulting in a net increase in quantity demanded.
B) the income effect which causes you to increase your corn purchases is larger than the substitution effect which causes you to reduce your corn purchases, resulting in a net increase in quantity demanded.
C) both the income and substitution effects reinforce each other to increase the quantity demanded.
D) the income and substitution effects offset each other but the price effect of an inferior good leads you to buy less corn.
Q2) Suppose your marginal utility from consuming the 3rd slice of cake is zero,then your total utility from consuming cake is
A) maximized.
B) decreasing.
C) negative.
D) increasing.
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Chapter 11: Technology, production, and Costs
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Sample Questions
Q1) Which of the following is an example of market "production",as used by economist?
A) Garvey takes out a low-cost government loan to start his pet-sitting business.
B) Heidi makes a pizza for her family's dinner.
C) Katrina works as a cashier at the local produce stand.
D) The theatre and film studies department in Fine Art's College stages a play at the local theatre.
Q2) Refer to Figure 11-2.The curve labeled "F" is A) the total product curve.
B) the average product curve.
C) the marginal product curve.
D) the output supply curve.
Q3) Due to a downturn in business and increased competition,Dave Amundson,owner of Dave's Delicious Donuts,decides to close half of his 36 donut shops.Use a graph to illustrate average total cost curves for Dave's Delicious Donuts before and after closing the 18 stores.Assume that after closing the stores,Dave's Delicious Donuts will be producing at minimum average total cost.
Q4) Describe the relationship between marginal cost and average total cost.
Q5) In economics,what is the difference between the short run and the long run?
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Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Assume that after a banner year in U.S.farm exports in 2011,farmers are expected to break even in 2012.This means that at the quantity being produced in 2012,
A) MC =AVC.
B) MR =MC.
C) MR =ATC.
D) AVC =ATC.
Q2) Refer to Figure 12-5.What is the minimum price the firm requires to produce output?
A) $20
B) $14
C) $5
D) It cannot be determined
Q3) Refer to Figure 12-2.Suppose the firm is currently producing Q<sub>2</sub> units.What happens if it expands output to Q<sub>3</sub> units?
A) Its profit increases by the size of the vertical distance df.
B) It makes less profit.
C) It incurs a loss.
D) It will be moving toward its profit maximizing output.
Q4) What is meant by the term "long-run competitive equilibrium?
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Chapter 13: Monopolistic Competition: The Competitive
Model in a More Realistic Setting
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Sample Questions
Q1) Refer to Table 13-1.What portion of the marginal revenue of the 5th unit is due to the output effect and what portion is due to the price effect?
A) output effect = $3.00; price effect = $0.50
B) output effect = $1.50; price effect = $2.00
C) output effect = $5.50; price effect = -$2.00
D) output effect = $4.00; price effect = -$0.50
Q2) In theory,in the long run,monopolistically competitive firms earns zero profits.However,in reality there are some ways by which a firm can avoid losing profits.Which of the following is one such way?
A) gradually increase the mark up on the goods produced
B) lower the price of its products to expand its market share
C) identify new markets and develop products precisely for those markets
D) find a market niche and keep it as narrow as possible so as to prevent other producers from entering this market segment
Q3) Refer to Table 13-1.What is the marginal revenue of the 3rd unit?
A) $6.50
B) $5.50
C) $1.83
D) $0.50
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) Refer to Table 14-3.What is the Nash equilibrium in this game?
A) In the Nash equilibrium both Saudi Arabia and Nigeria produce a low output and earn a profit of $100 million and $20 million respectively.
B) In the Nash equilibrium both Saudi Arabia and Nigeria produce a high output and earn a profit of $60 million and $20 million respectively.
C) In the Nash equilibrium Saudi Arabia produces a low output and earns a profit of $80 million and Nigeria produces a high output and $30 million respectively.
D) There is no Nash equilibrium.
Q2) What is the incentive for a firm to join a cartel?
A) to be able to earn profits in the long run but not in the short run
B) to be able to earn larger profits than if it was not part of the cartel
C) to completely insulate itself from competition
D) to produce a larger amount of output than if it was not part of the cartel
Q3) All of the following are characteristics of game theory except
A) rules that determine what actions are allowable.
B) payoffs that are the results of the interaction among players' strategies.
C) strategies that players employ to attain their objectives.
D) independence among players
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Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) Refer to Figure 15-5.What is the difference between the monopoly's price and perfectly competitive industry's price?
A) The monopoly's price is higher by $9.50.
B) The monopoly's price is higher by $13.
C) The monopoly's price is higher by $3.50.
D) The monopoly's price is higher by $21.
Q2) Research has shown that most economic profits from selling a prescription drug are eliminated 20 years after the drug is first offered for sale.The main reason for the elimination of profits is
A) after 20 years most people who have taken the drug have passed away or are cured of the illness the drug was intended to treat.
B) firms sell their patent rights to other firms so that they can concentrate on finding drugs to treat new illnesses.
C) the quantity demanded of the drug has increased enough that the demand becomes inelastic and revenue falls.
D) after 20 years patent protection is ended and other firms can produce less expensive generic versions of the drug.
Q3) Provide two examples of a government barrier to entry?
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Page 18
Chapter 16: Pricing Strategy
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Sample Questions
Q1) Because each customer pays according to her willingness to pay,a consumer maximizes her consumer surplus under first-degree price discrimination.
A)True
B)False
Q2) Differentiating products to suit customers' tastes is a form of price discrimination.
A)True
B)False
Q3) If marginal cost is zero,with an optimal two-part tariff,
A) total revenue is maximized.
B) consumers maximize their surplus
C) the firm does not have to charge a fixed-fee portion.
D) firms may not maximize profit.
Q4) Which of the following undermines a firm's ability to engage in price discrimination?
A) the seller's market power
B) the inability to prevent resale of the product from one market segment to another
C) buyers having different elasticities of demand for the product
D) the seller's ability to segment the total market
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Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) If Alan Shaw reduces his work hours when his salary increases,then
A) the income effect of his salary increase dominates the substitution effect.
B) the substitution effect of his salary increase dominates the income effect.
C) the income effect of his salary increase is completely offset by the substitution effect.
D) leisure is an inferior good to Alan.
Q2) The market price of a factor of production that is in fixed is determined only by demand.
A)True B)False
Q3) A successful compensation scheme
A) must pay workers with comparable skills a comparable wage.
B) must induce effort from workers and ensure that both employer and employees benefit.
C) must enable workers to enjoy a certain standard of living and must enable employers to earn a normal rate of return.
D) must allow employees to participate in a firm's profits.
Q4) A monopsony is a firm which is the sole producer of a product.
A)True
B)False
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Chapter 18: Public Choice, taxes, and the Distribution of Income
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Sample Questions
Q1) All of the following occur whenever a government taxes a product except
A) the quantity consumed of that product falls.
B) the price of that product rises.
C) the marginal benefit of the last unit sold exceeds the marginal cost of producing it.
D) there will be no excess burden if the government's tax revenue is sufficiently large to offset the deadweight loss.
Q2) Logrolling may result in
A) legislation that yields economy-wide benefits, the funding for which is borne primarily by a few of the smallest states.
B) a majority of Congress supporting legislation that benefits the economic interests of a few, while harming the economic interests of a much larger group.
C) members of Congress selling their votes on proposed legislation to the highest bidder.
D) creating limited incentives for policymakers to consider the immediate consequences of their proposed legislation.
Q3) Explain the effect of price elasticities of supply and demand on tax incidence.
Q4) Describe the main factors economists believe cause inequality of income.
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Chapter 19: GDP: Measuring Total Production and Income
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Sample Questions
Q1) The size of the underground economy would tend to increase if the government of a country
A) decreased government regulations on businesses.
B) increased income tax rates.
C) legalized prostitution.
D) legalized marijuana.
Q2) The best measure of the income households actually have available to spend is A) personal income.
B) disposable personal income.
C) national income.
D) net national income.
Q3) Since real GDP is adjusted for inflation and nominal GDP is not,nominal GDP must always be higher than real GDP.Do you agree or disagree? Why?
Q4) If the GDP deflator is less than 100,which will be higher: nominal GDP or real GDP? Why?
Q5) The purchase of a new automobile is included in A) consumption expenditures on services.
B) consumption expenditures on nondurable goods.
C) consumption expenditures on durable goods.
D) investment expenditures.
22
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Chapter 20: Unemployment and Inflation
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Q1) Full employment is not considered to be zero unemployment,because
A) some cyclical unemployment always exists.
B) some people do not want a job.
C) there are not enough jobs for everyone who wants one.
D) people do not find jobs instantaneously.
Q2) A student who just graduated from college but has not found a job would most likely be
A) frictionally unemployed.
B) structurally unemployed.
C) cyclically unemployed.
D) seasonally unemployed.
Q3) The natural rate of unemployment consists of frictional unemployment plus structural unemployment.
A)True
B)False
Q4) During the 1990s,Japan experienced periods of deflation and very low nominal interest rates,approaching zero percent.Why would lenders of money agree to a nominal interest rate of almost zero?
Q5) Describe how inflation can be costly even if it is anticipated.
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Chapter 21: Economic Growth, the Financial System, and Business Cycles
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Q1) If real GDP per capita measured in 2000 dollars was $6,000 in 1950 and $48,000 in 2010,we would say that in the year 2010,the average American could buy ________ times as many goods and services as the average American in 1950.
A) 1/8
B) 4
C) 8
D) 12
Q2) If government purchases are $400 million,taxes are $700 million,and transfers are $200 million,which of the following is true?
A) Public saving is $500 million.
B) The budget deficit is $100 million.
C) The budget deficit is $500 million.
D) Public saving is $100 million.
Q3) Briefly explain how the miserliness of Ebenezer Scrooge might actually be beneficial for economic growth.
Q4) At the end of an expansion,wages of workers are usually rising faster than prices. A)True B)False
Page 24
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Chapter 22: Long-Run Economic Growth: Sources and Policies
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Q1) According to Douglass North,the Industrial Revolution occurred in England because
A) the British Parliament took control of the government and could credibly commit to upholding property rights.
B) the British monarchy took control of the government and pledged not to raise taxes arbitrarily.
C) the British courts became tied to the king and began to refuse to enforce property rights.
D) the British Parliament instituted a command economy structure and implemented a planned economy.
Q2) Which of the following explains the ability of the U.S.economy to avoid diminishing marginal returns and experience accelerating growth in the early to mid-20th century?
A) continuing technological change
B) immigration
C) additions of a greater amount of capital of the same quality
D) a decrease in the quality of labor
Q3) How does government support of health and education programs foster economic growth?
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Chapter 23: Aggregate Expenditure and Output in the Short Run
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Sample Questions
Q1) If planned aggregate expenditure is less than total production, A) actual inventories will equal planned inventories.
B) firms will experience an unplanned decrease in inventories.
C) GDP will decrease.
D) the economy is in equilibrium.
Q2) If the marginal propensity to consume is 0.75,the marginal propensity to save is A) 0.25.
B) 0.5.
C) 1.
D) 3.
Q3) An increase in the price level in the United States will reduce exports and increase imports.
A)True
B)False
Q4) Aggregate expenditure includes consumption spending,unplanned investment spending,government purchases,and net exports.
A)True
B)False
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Q5) What impact does a lower price level have on interest rates,wealth,and investment spending?
Chapter 24: Aggregate Demand and Aggregate Supply Analysis
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Q1) The international trade effect states that
A) an increase in the price level will raise net exports.
B) an increase in the price level will lower net exports.
C) an increase in the price level will raise exports.
D) an increase in the price level will lower imports.
Q2) If workers and firms have rational expectations,they form their expectations using A) all the information available to them.
B) only information from the past.
C) only information provided to them by the government.
D) only information gathered from random sources.
Q3) Refer to Figure 24-3.Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y<sub>1</sub> represents potential GDP.
A) A and B
B) A and C
C) C and D
D) B and D
Q4) In the dynamic aggregate demand and aggregate supply model,what is the result of aggregate demand increasing slower than potential real GDP?
Page 27
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Chapter 25: Money, banks, and the Federal Reserve System
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Sample Questions
Q1) A bank will consider a car loan to a customer ________ and a customer's checking account to be ________.
A) a liability; an asset
B) an asset; a liability
C) a liability; a liability
D) an asset; an asset
E) an asset; net worth
Q2) The sale of Treasury securities by the Federal Reserve will,in general,
A) not change the money supply.
B) not change the quantity of reserves held by banks.
C) increase the quantity of reserves held by banks.
D) decrease the quantity of reserves held by banks.
Q3) The main tool that the Federal Reserve uses to conduct monetary policy is
A) open market operations.
B) discount policy.
C) setting reserve requirements.
D) acting as the lender of last resort.
E) check clearing.
Q4) Although gold is highly valued by most people,it is difficult to use as a medium of exchange.Explain.
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Chapter 26: Monetary Policy
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Q1) In October 2008,Congress passed the ________,under which the Treasury provided funds to banks in exchange for stock.
A) Bank Rescue Alliance Treaty (BRAT)
B) Mortgage Transfer Agency (MTA)
C) Troubled Asset Relief Program (TARP)
D) Financial Assurance Association (FAA)
Q2) In September 2011,the Fed announced a new policy in which it would invest in additional mortgage-backed securities in an attempt to further reduce mortgage rates and boost the housing market.Lower mortgage rates should lead to an increase in refinancing,which should ________ disposable income and therefore ________ aggregate demand.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q3) When the Federal Reserve System was established in 1913,its main policy goal was
A) encouraging strong economic growth.
B) promoting price stability.
C) preventing bank panics.
D) keeping employment high.
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Chapter 27: Fiscal Policy
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Sample Questions
Q1) Crowding out refers to a decrease in government purchases as a result of an increase in private expenditures.
A)True
B)False
Q2) In preparing their estimates of the stimulus package's effect on GDP,Obama administration economists estimated a government purchases multiplier of 1.57.This indicates that a $1 billion increase in government purchases would increase equilibrium real GDP by
A) $1 billion.
B) $1.57 billion.
C) $15.7 billion.
D) $157 billion.
Q3) A decrease in the tax rate will ________ the disposable income of households and ________ the size of the multiplier effect.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
E) increase; not change
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Chapter 28: Inflation, unemployment, and Federal Reserve Policy
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Q1) Ceteris paribus,in the short run following a decrease in the rate of growth in Aggregate Demand,we would expect to see an increase in the rate of unemployment and a decrease in the rate of inflation.
A)True
B)False
Q2) According to the short-run Phillips curve,if unemployment is 3.2% and inflation is 1.3%,an increase in the inflation rate might result in which of the following?
A) an increase in the unemployment rate to 3.4%
B) a decrease in the unemployment rate to 3.0%
C) a decrease in the demand for labor in the economy
D) a return to the original inflation rate of 1.3%
Q3) If actual inflation is less than expected inflation,actual real wages will be ________ expected real wages and unemployment will ________.
A) greater than; rise
B) greater than; fall
C) less than; rise
D) less than; fall
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Chapter 29: Macroeconomics in an Open Economy
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Q1) Which of the following would cause the dollar to appreciate?
A) an increase in the demand for dollars
B) a decrease in the demand for dollars
C) an increase in the supply of dollars
D) an increase in the demand for imports from foreign countries
Q2) The United States has had negative net exports since 1975.This means that the United States has ________ since 1975.
A) had a financial account surplus
B) had a net capital outflow
C) had positive net foreign investment
D) had a current account surplus
Q3) What effect does a depreciation of the dollar have on real GDP in the United States in the short run?
A) Real GDP will fall.
B) Real GDP will rise.
C) Real GDP will be unaffected by the depreciation of the dollar.
D) Real GDP will be unchanged, but nominal GDP will rise.
Q4) Explain why economies with financial account surpluses usually have current account deficits.
Q5) Explain the relationship between net exports and net foreign investment.
Page 32
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Chapter 30: The International Financial System
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Q1) Refer to Figure 30-7.Under the Bretton Woods System of exchange rates,if the par exchange rate was $2 per pound in the figure above,and equilibrium persisted at $3,then a revaluation of the currency would have
A) increased the price of British exports to the United States.
B) increased the price of imports to Britain.
C) led to a current account surplus.
D) led to a balance of trade surplus.
Q2) If purchasing power parity tells us that if the exchange rate is a pound for a dollar,then price of a haircut in London should cost the same as a haircut in New York.
A)True
B)False
Q3) One reason purchasing power parity does not exactly hold is that many goods are not traded internationally.
A)True
B)False
Q4) Will the use of the euro help increase economic growth in countries in the European Union? Will it help individual countries using the euro in times of recession? Explain.
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