Economic Principles
Practice Questions
Course Introduction
Economic Principles introduces students to the foundational concepts and analytical tools of economics. The course explores the basics of microeconomics and macroeconomics, including topics such as supply and demand, market equilibrium, consumer and producer behavior, the role of government in the economy, and the decision-making processes of households and firms. Students will examine how economic agents interact within various market structures and how these interactions affect resource allocation, efficiency, and welfare. The course also covers key macroeconomic issues such as inflation, unemployment, and economic growth, providing students with a comprehensive understanding of economic theory and its application to real-world problems.
Recommended Textbook
Principles of Macroeconomics 5th Canadian Edition by N. Mankiw
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Page 2
Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) What is the term for what you give up to obtain an item?
A)opportunity cost
B)explicit cost
C)true cost
D)direct cost
Answer: A
Q2) A typical worker in Italy can produce 24 units of product in an 8 hour day, where a typical worker in Poland produces 25 units of product in a 10 hour day. What can we conclude?
A)Worker productivity in Poland is higher than in Italy.
B)The standard of living will be higher in Italy than in Poland.
C)Productivity for the Polish worker is 3 units per hour and 2 1/2 units per hour for the Italian worker.
D)There will be no difference between the standard of living in Italy and Poland.
Answer: B
Q3) The cost of an action is measured in terms of foregone opportunities.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) Refer to Figure 2-1. Which arrow shows the flow of goods and services?
A)arrow A
B)arrow B
C)arrow C
D)arrow D
Answer: B
Q2) What does it mean if an economy is producing efficiently?
A)there is no way to produce more of one good without producing less of the other.
B)it is possible to produce more of both goods.
C)it is possible to produce more of one good without producing less of the other.
D)it is not possible to produce more of one good at any cost.
Answer: A
Q3) In a simple circular-flow diagram, the two types of markets in which households and firms interact are the markets for goods and services and the markets for factors of production.
A)True
B)False
Answer: True
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4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Refer to Table 3-4. Which of the following is correct?
A)Alberta has an absolute advantage in birdhouses and Manitoba has an absolute advantage in baskets.
B)Alberta has an absolute advantage in baskets and Manitoba has an absolute advantage in birdhouses.
C)Alberta has an absolute advantage in neither good and Manitoba has an absolute advantage in both goods.
D)Alberta has an absolute advantage in both goods and Manitoba has an absolute advantage in neither good.
Answer: A
Q2) It takes Russell 6 hours to produce a bushel of corn and 2 hours to wash and polish a car. It takes Wilma 6 hours to produce a bushel of corn and 1 hour to wash and polish a car. Wilma and Russell cannot gain from specialization and trade, since it takes each of them 6 hours to produce 1 bushel of corn.
A)True
B)False
Answer: False
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Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) In a free market, who determines how much of a good will be sold and the price at which it is sold?
A)suppliers
B)demanders
C)the government
D)suppliers and demanders together
Q2) What is the unique point at which the supply and demand curves intersect?
A)market unity
B)an agreement
C)cohesion
D)equilibrium
Q3) Refer to Figure 4-5. Which of the four graphs represents the market for peanut butter after a major hurricane hits the peanut-growing area?
A)graph A
B)graph B
C)graph C
D)graph D
Q4) It is not possible for demand and supply to shift at the same time.
A)True
B)False
Page 6
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Chapter 5: Measuring a Nations Income
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Sample Questions
Q1) If a small country has current nominal GDP of $25 billion and the GDP deflator is 125, what is its real GDP?
A)$312.5 billion
B)$207.5 billion
C)$31.25 billion
D)$20 billion
Q2) In the country of Mainia, GDP consists of cranberries and maple syrup. In 2010, 50 units of cranberries are sold at $20 per unit, and 100 units of maple syrup are sold at $10 per unit. If the price of cranberries was $10 per unit and the price of maple syrup was $15.00 per unit in the base year, what can we conclude?
A)Nominal GDP is $2500, real GDP is $2000, and the GDP deflator is 83.3.
B)Nominal GDP is $2000, real GDP is $2500, and the GDP deflator is 125.
C)Nominal GDP is $2000, real GDP is $2000, and the GDP deflator is 100.
D)Nominal GDP is 2500, real GDP is 2500, and the GDP deflator is 100.
Q3) Which of the following is included in the investment component of GDP?
A)purchases of previously owned homes
B)purchases of government bonds
C)purchases of new cars
D)changes in inventory
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Page 7
Chapter 6: Measuring the Cost of Living
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Sample Questions
Q1) The price index is 270 in one year and 300 in the next. What is the inflation rate?
A)1 percent
B)9.3 percent
C)10 percent
D)11.1 percent
Q2) When the quality of a good deteriorates, what happens to the purchasing power of the dollar?
A)It increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B)It increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C)It decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D)It decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
Q3) Why does the GDP deflator give a different rate of inflation than does the CPI?
Q4) List the three major problems in using the CPI as a measure of the cost of living.
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8
Chapter 7: Production and Growth
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Sample Questions
Q1) In how many years will real GDP per person in Canada double, given its average growth rate during the past century?
A)100 years on average
B)70 years
C)35 years
D)25 years
Q2) In addition to investment in physical and human capital, what other public policies might a country adopt to increase productivity?
Q3) In Canada, approximately how much higher is GDP per person today than it was a century ago?
A)3 times higher
B)9 times higher
C)50 times higher
D)1518 times higher
Q4) Which of the following is human capital?
A)breakfasts served in a company's cafeteria
B)understanding how to use a company's accounting software
C)computers that show training videos for new corporate employees
D)the average number of holiday days per year
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Chapter 8: Saving, Investment, and the Financial System
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Sample Questions
Q1) Suppose that in a closed economy GDP is equal to 10,000, taxes are equal to 2500, consumption equals 6500, and government expenditures equal 2000. What is private saving?
A)1500
B)1000
C)500
D)0
Q2) Suppose that Parliament were to repeal an investment tax credit. Which of the following would most likely happen in the market for loanable funds?
A)The demand and supply of loanable funds would shift right.
B)The demand and supply of loanable funds would shift left.
C)The supply of loanable funds would shift right.
D)The demand for loanable funds would shift left.
Q3) Which of the following is a characteristic of the bond market?
A)Some bonds have terms as short as a few months.
B)Because they are risky, bonds pay a low rate of interest.
C)Corporations buy bonds to raise funds.
D)Bonds are rarely used as financial instruments.
Q4) What are the basic differences between bonds and stocks?
Q5) Draw and label a graph showing equilibrium in the market for loanable funds.
Page 10
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Chapter 9: Unemployment and Its Natural Rate
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Sample Questions
Q1) Between 2006 and 2007, the country of Aquilonia reported an increase in the number of people who were employed. It also reported an increase in the unemployment rate. Which of the following would best explain the two reports?
A)There was an increase in the size of the labour force between 2006 and 2007.
B)There was a decrease in the size of the labour force between 2006 and 2007.
C)There was an increase in the size of the adult population between 2006 and 2007.
D)The two reports are contradictory and cannot be reconciled.
Q2) How do sectoral shifts in the economy affect unemployment?
A)They create structural unemployment.
B)They reduce unemployment.
C)They increase unemployment due to job search.
D)Overall, they leave unemployment unchanged.
Q3) Which of the following constitutes the labour force?
A)the number of people who are employed
B)the number of people who are unemployed
C)the number of people employed plus the number of people unemployed
D)the adult population
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Chapter 10: The Monetary System
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Sample Questions
Q1) Which of the following characterizes fiat money?
A)It has no intrinsic value.
B)It is backed by gold.
C)It has intrinsic value equal to its value in exchange.
D)It is an illiquid asset.
Q2) If the reserve ratio increased from 10 percent to 20 percent, which of the following would happen to the money multiplier?
A)It would rise from10 to 20.
B)It would rise from 5 to 10.
C)It would fall from 10 to 5.
D)It would not change.
Q3) M1 includes savings deposits.
A)True
B)False
Q4) Which of the following does the Bank of Canada NOT do?
A)control the supply of money
B)control the value of money
C)make loans to individuals
D)regulate the banking system
Q5) What is the difference between money and wealth?
Page 12
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Chapter 11: Money Growth and Inflation
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Sample Questions
Q1) When the money market is represented in a diagram with the value of money on the vertical axis, which of the following best describes the effects of an increase in money supply?
A)It increases the price level and the value of money.
B)It increases the price level and decreases the value of money.
C)It decreases the price level and increases the value of money.
D)It decreases the price level and the value of money.
Q2) Inflation distorts relative prices. What does this mean and why does it impose a cost on society?
Q3) When the money market is drawn with the value of money on the vertical axis, in which of the following situations does the price level increase?
A)if either money demand or money supply shifts right
B)if either money demand or money supply shifts left
C)if money demand shifts right or money supply shifts left
D)if money demand shifts left or money supply shifts right
Q4) According to the classical dichotomy, what changes nominal variables? What changes real variables?
Q5) "The introduction of the automated teller machines was equivalent to an increase in money supply." Discuss this assertion.
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Chapter 12: Open-Economy Macroeconomics: Basic Concepts
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Sample Questions
Q1) If the exchange rate is 175 yen = $1, what is the cost of a bottle of rice wine that costs 5250 yen?
A)$28
B)$30
C)$32
D)$34
Q2) If the exchange rate changes from 0.35 Kuwaiti dinar per dollar to 0.30 Kuwaiti dinar per dollar, what has happened to the dollar?
A)It has appreciated and so buys more Kuwaiti goods.
B)It has appreciated and so buys fewer Kuwaiti goods.
C)It has depreciated and so buys more Kuwaiti goods.
D)It has depreciated and so buys fewer Kuwaiti goods.
Q3) If the Canadian real exchange rate appreciates, which of the following most likely happen?
A)Exports increase and imports decrease.
B)Exports decrease and imports increase.
C)Exports and imports both increase.
D)Exports and imports both decrease.
Q4) What is the logic behind the theory of purchasing-power parity?
Page 14
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Chapter 13: A Macroeconomic Theory of the Open Economy
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Sample Questions
Q1) Which of the following would make both the equilibrium interest rate and the equilibrium quantity of loanable funds increase?
A)The demand for loanable funds shifts right.
B)The demand for loanable funds shifts left.
C)The supply of loanable funds shifts right.
D)The supply of loanable funds shifts left.
Q2) The 1998 default by the Russian government had results that were predictable using the textbook model. Which of the following best describes what happened?
A)The event increased Russian interest rates and net exports.
B)The event reduced Russian interest rates and net exports.
C)The event increased Russian interest rates and reduced Russian net exports.
D)The event reduced Russian interest rates and increased Russian net exports.
Q3) Which of the following does the open-economy macroeconomic model take as given?
A)GDP, but not the price level
B)the price level, but not GDP
C)both the price level and GDP
D)the exchange rate
Q4) Why do higher real interest rates lead to lower net capital outflow?
Q5) Explain why saving need not equal domestic investment in an open economy.
Page 15
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Chapter 14: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) Increased uncertainty and pessimism about the future of the economy decreases investment spending shifting aggregate demand to the left.
A)True
B)False
Q2) An increase in the money supply shifts the long-run aggregate supply curve to the right.
A)True
B)False
Q3) How do prices change due to an economic contraction that is caused by a shift in aggregate demand?
A)They rise in the short run, and rise even more in the long run.
B)They rise in the short run, and fall back to their original level in the long run.
C)They fall in the short run, and fall even more in the long run.
D)They fall in the short run, and rise back to their original level in the long run.
Q4) When output rises, unemployment falls.
A)True
B)False
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16
Chapter 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Sample Questions
Q1) Which of the following do critics of stabilization policy argue?
A)There is a too short lag between the time policy is passed and policy has an impact on the economy.
B)The impact of policy may not last enough such that the problem it was designed to offset is solved.
C)Policy cannot cause economic fluctuations.
D)Policy can be a source of, instead of a cure for, recessions.
Q2) According to the theory of liquidity preference, what does an increase in the price level cause the interest rate and investment to do?
A)It causes both the interest rate and investment to rise.
B)It causes both the interest rate and investment to fall.
C)It causes the interest rate to rise and investment to fall.
D)It causes the interest rate to fall and investment to rise.
Q3) In principle, the government could increase the money supply or government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.
A)True
B)False
Q4) Explain how unemployment insurance acts as an automatic stabilizer.
Page 17
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Chapter 16: The Short-Run Tradeoff Between Inflation and Unemployment
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Sample Questions
Q1) Suppose that the economy is at an inflation rate such that unemployment is above the natural rate. How does the economy return to the natural rate of unemployment if this lower inflation rate persists?
Q2) Which of the following hypotheses is supported by the economic experience of Canada during the late 1960s and early 1970s?
A)Actual inflation and unemployment are negatively correlated.
B)Inflation and unemployment are related only in the short run.
C)Policymakers can permanently reduce unemployment below the natural level.
D)Inflation and unemployment are related both in the short run and long run.
Q3) Who releases the closely watched indicators such as the inflation rate and unemployment each month?
A)the Bureau of the Budget
B)the Ministry of Finance
C)the Department of the Treasury
D)Statistics Canada
Q4) The vertical long-run Phillips curve is an exception to monetary neutrality implied by the classical dichotomy.
A)True
B)False
Page 18
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Chapter 17: Five Debates Over Macroeconomic Policy
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Sample Questions
Q1) When the government has a deficit, it necessarily imposes a burden on future generations of taxpayers.
A)True
B)False
Q2) How is "leaning against the wind" exemplified?
A)by a tax cut when there is an expansion
B)by a decrease in the money supply when there is a recession
C)by an increase in government expenditures when there is a recession
D)by an increase in government spending when there is an expansion
Q3) Proponents of zero inflation argue that reducing inflation implies which of the following?
A)that reducing inflation eventually reduces inflation expectations
B)that reducing inflation eventually raises real interest rates
C)that reducing inflation permanently decreases output
D)that reducing inflation permanently raises unemployment
Q4) Which of the following is a part of the argument against deficits?
A)They increase interest rates and investment.
B)They increase interest rates and decrease investment.
C)They decrease interest rates and investment.
D)They decrease interest rates and increase investment.
Page 19
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