Economic Principles
Textbook Exam Questions
Course Introduction
Economic Principles provides a comprehensive introduction to the fundamental concepts and analytical tools used in microeconomics and macroeconomics. The course explores how individuals, firms, and governments make choices regarding the allocation of scarce resources, and examines topics such as supply and demand, market structures, consumer behavior, production and costs, and the role of public policy. Additionally, students will learn how economies function at an aggregate level by investigating issues like inflation, unemployment, economic growth, and the impact of fiscal and monetary policy. By understanding these core principles, students gain the foundational knowledge necessary to analyze economic issues and make informed decisions in both personal and professional contexts.
Recommended Textbook
CoreMacroeconomics 3rd Edition by Eric
Chiang
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Chapter 1: Exploring Economics
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Sample Questions
Q1) A society that is able to produce goods and services at the lowest cost possible is experiencing:
A) allocative efficiency.
B) production efficiency.
C) opportunity costs.
D) scarcity.
Answer: B
Q2) Markets provide an incentive structure to:
A) maximize equity.
B) eliminate scarcity.
C) maximize market information.
D) maximize efficiency.
Answer: D
Q3) (Figure: Graph Examples)Which graph is an example of a scatter plot?
A) graph A
B) graph B
C) graph C
D) graph D
Answer: B
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Page 3
Chapter 2: Production, Economic Growth, and Trade
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Sample Questions
Q1) If a firm produces its mix of output at the lowest possible cost,it is said to achieve production efficiency.
A)True
B)False
Answer: True
Q2) _______________ occurs when goods and services are produced at their lowest resource cost,while _________________ occurs when the mix of goods and services produced is the most desired by society.
A) Allocative efficiency;production efficiency
B) Production efficiency;social efficiency
C) Allocative efficiency;social efficiency
D) Production efficiency;allocative efficiency
Answer: D
Q3) Explain how a free market economy decides what to produce.
Answer: A free market economy is both consumer-driven and profit-driven.In other words,producers see what goods and services buyers wish to purchase.If there is a strong demand for a particular product,then sellers will see an opportunity and try to fill the demand.
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4
Chapter 3: Supply and Demand
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Sample Questions
Q1) In the market economy,the primary channel through which buyers and sellers communicate with each other is:
A) advertising.
B) price.
C) involuntary signaling.
D) subliminal signaling.
Answer: B
Q2) The supply is the maximum amount that producers are willing to offer for sale at specific prices.
A)True
B)False
Answer: True
Q3) A change in the quantity demanded of hamburgers occurs when the price of hot dogs changes.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Markets and Government
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Sample Questions
Q1) Suppose that a customer's willingness to pay for a product is $1,480,and the seller's willingness to sell is $1,210.If the negotiated price is $1,300,how much is consumer surplus?
A) $90
B) $180
C) $220
D) $270
Q2) (Figure: Understanding Price Ceilings and Floors)In the graph,a price of $75 would allow for an effective price ceiling.
A)True
B)False
Q3) The government often provides goods that are nonrivalrous and nonexclusive to overcome which market failure?
A) asymmetric information
B) negative externality (external costs)
C) positive externality (external benefits)
D) public goods
Q4) Describe why governments might get involved between willing participants on either side of a transaction.
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Chapter 5: Introduction to Macroeconomics
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Sample Questions
Q1) The main reason the national income and product accounts were devised was to:
A) provide businesses with data on the economy.
B) help government manage the business cycle.
C) provide employment for statisticians during the Great Depression.
D) test out accounting theory developed during the early 20th century.
Q2) The Leading Economic Index has successfully predicted the past seven recessions.
A)True
B)False
Q3) Suppose the yield on a three-month Treasury bill is 0.04% and the 10-year Treasury note yields 2.74%.This yield curve suggests the economy is headed for recession.
A)True
B)False
Q4) The total of disposable income must be either spent or saved. A)True
B)False
Q5) Most frozen foods are considered durable goods.
A)True
B)False
Q6) Describe the major components of national income.
Page 7
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Chapter 6: Measuring Inflation and Unemployment
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Q1) People often resort to bartering for goods and services during periods of hyperinflation because money is virtually worthless.
A)True
B)False
Q2) The numeric level of the natural rate of unemployment is independent of the levels of the frictional and structural unemployment rates.
A)True
B)False
Q3) Which of the following assumptions is NOT a problem in using the consumer price index (CPI)to accurately state the rate of inflation?
A) The CPI assumes that people do not substitute goods.
B) The CPI does not account for quality changes.
C) The CPI does not include new products.
D) The CPI does not deal with producer prices.
Q4) The nonaccelerating inflation rate of unemployment does not change over time. A)True
B)False
Q5) What is the GDP deflator,and how is it measured?
Q6) Who is hurt by inflation? Who benefits?
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Chapter 7: Economic Growth
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Sample Questions
Q1) The natural gas deposits found in the United States over the past decade are an example of an increase in:
A) land and natural resources.
B) labor.
C) physical capital.
D) entrepreneurial ability,technology,and ideas.
Q2) The classical form of the production function states that:
A) Output = f(L / K)
B) Output = f(N,K)
C) Output = f(L,K)
D) Output = f(N / K)
Q3) Some countries block access to social media because of fears that opposition to the government will be coordinated through social media.What effect would blocking social media have on economic growth in these countries,all other things being equal?
Q4) The Rule of 70 is fairly accurate for high growth rates.
A)True
B)False
Q5) How can an effective legal system facilitate economic growth?
Q6) What does the Index of Economic Freedom measure?
Page 9
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Chapter 8: Aggregate Expenditures
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Sample Questions
Q1) Equilibrium in the full Keynesian model requires that:
A) all injections (I + G + X)must equal all withdrawals (S + T + M).
B) income exceed expenditures.
C) expenditures exceed income.
D) the government budget be in balance.
Q2) A horizontal investment schedule assumes that investment spending is not related to current income.
A)True
B)False
Q3) If your income is $35,000 and the average propensity to save is 0.46,what is consumption?
A) $16,100
B) $18,900
C) $15,500
D) $19,500
Q4) If the marginal propensity to save is 0.2,how much is the spending multiplier?
A) 0.8
B) 1.25
C) 5
D) 8
Page 10
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Chapter 9: Aggregate Demand and Supply
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Sample Questions
Q1) Falling interest rates mean increased business investment and a resulting increase in quantity demand for real GDP in the aggregate economy.
A)True B)False
Q2) The idea behind the spending multiplier is that new spending causes more spending,income,and output than just an amount equal to the new spending itself.
A)True B)False
Q3) If the pound sterling appreciates against the U.S.dollar,England buys ______ U.S.goods,causing the U.S.aggregate demand curve to shift to the ______.
A) more;right
B) more;left
C) fewer;left
D) fewer;right
Q4) Describe the determinants of short-run aggregate supply and their effects on the short-run aggregate supply curve.Support your response with a graph.
Q5) Describe why the aggregate demand curve has a negative slope.
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Chapter 10: Fiscal Policy and Debt
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Sample Questions
Q1) The solution to the simultaneous presence of inflation and unemployment is to implement policies that shift the:
A) aggregate demand curve to the right.
B) aggregate demand curve to the left.
C) short run aggregate supply curve to the right.
D) short run aggregate supply curve to the left.
Q2) Automatic stabilizers are designed so that as income falls:
A) government spending falls so that budget is always balanced.
B) spending rises to a degree that the recession automatically ends.
C) the rate of spending decrease accelerates.
D) spending does not fall as much as income.
Q3) What approach to federal finance would you agree with if you were most concerned with the federal government's pursuit of fostering economic growth,stable prices,and full employment?
A) annually balanced budget
B) cyclically balanced budget
C) functional finance
D) trade-balanced budget
Q4) Define the concept of fiscal sustainability.How does it differ from the concept of the balanced budget?
Page 12
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Chapter 11: Saving, Investment, and the Financial System
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Sample Questions
Q1) What is money,and what are its functions? Support your response with examples.
Q2) Which of the following assets is MOST liquid?
A) a house
B) a Picasso painting
C) a corporate bond
D) money
Q3) The supply of loanable funds includes only private saving.
A)True
B)False
Q4) A deferment on a college loan means that _________ will pay it off.
A) the federal government
B) the student's parents or relatives
C) the student,beginning at a later time,
D) It will not have to be paid off at all.
Q5) List the factors that shift the demand curve for loanable funds.
Q6) Which one of the following items is NOT a function of money?
A) a store of value
B) a unit of account
C) a double coincidence of wants
D) a medium of exchange
Page 13
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Chapter 12: Money Creation and the Federal Reserve
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Sample Questions
Q1) Which of the following lists represents monetary policy actions that are consistent with one another?
A) buy government bonds,raise reserve requirements,raise the discount rate
B) sell government bonds,raise reserve requirements,lower the discount rate
C) sell government bonds,raise reserve requirements,raise the discount rate
D) buy government bonds,lower reserve requirements,raise the discount rate
Q2) The most important tool of monetary policy is the discount rate.
A)True
B)False
Q3) A solvency crisis means that a bank's liabilities exceed its assets.
A)True
B)False
Q4) The Federal Open Market Committee oversees the buying and selling of government securities.
A)True B)False
Q5) Monetary policy lags can last up to three years.
A)True
B)False
Q6) How do banks reduce the risk of a solvency crisis?
Page 14
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Chapter 13: Monetary Policy
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Sample Questions
Q1) When the Fed sells bonds,it is:
A) quantitative easing.
B) expansionary monetary policy.
C) tight money policy.
D) easy money policy.
Q2) The quantity theory equation of exchange states:
A) Supply = Demand.
B) GDP = Q × P.
C) M × V = P × Q.
D) M = P × Q.
Q3) When the European Central Bank made loans to member countries,it sometimes attached conditions to the loans.What were the most common requirements for getting these loans?
Q4) Keynes defined the liquidity trap as a situation in which,once interest rates sink low,individuals spend their money rather than holding onto it.
A)True
B)False
Q5) What would the Federal Reserve likely do to rein in an overheating economy?
Q6) Explain the various ways by which lower interest rates affect aggregate demand.
Q7) Describe the equation of exchange and its implications for monetary policy.
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Chapter 14: Macroeconomic Policy: Challenges in a Global Economy
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Q1) The Phillips curve shows the tradeoff between unemployment and the interest rate. A)True
B)False
Q2) The Phillips curve of the 1960s for the United States:
A) showed stagflation in the U.S.economy.
B) suggested to policymakers that they could keep unemployment low by accepting moderate inflation.
C) indicated that to keep unemployment low,policymakers had to accept double-digit rates of inflation.
D) was nearly a vertical line.
Q3) What problems will we face if world demand for U.S.Treasuries falls?
Q4) (Figure: Determining Long Run and Short Run Economic Shifts)Starting at point r,the economy will move to ____ in the long run if policymakers successfully increase aggregate demand.
A) m
B) s
C) j
D) n
Q5) What happens when the actual inflation rate is more than the expected rate?
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Chapter 15: International Trade
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Sample Questions
Q1) A country should produce a good if it has a lower opportunity cost than another country.
A)True
B)False
Q2) Tariffs are not used to generate revenues.
A)True
B)False
Q3) A quota is:
A) a set of regulations designed to ensure the quality of imports.
B) designed to stimulate exports.
C) a rule on how many citizens can travel abroad.
D) a government-set limit on the quantity of imports into a country.
Q4) Which of the following statements concerning the infant industry argument is NOT correct?
A) The management and workers in an infant industry may be too inexperienced to compete in world markets.
B) Infant industry protection tends to focus on labor-intensive industries.
C) Infant industry protection is difficult to remove after the industry has matured.
D) An infant industry is too underdeveloped to achieve comparative advantage.
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Chapter 16: Open Economy Macroeconomic
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Sample Questions
Q1) Robert Mundell discussed the problems of moving from a _____ to a _____.
A) flexible exchange rate system;fixed exchange rate system
B) fixed exchange rate system;flexible exchange rate system
C) gold standard;silver standard
D) silver standard;gold standard
Q2) If the United States increases the interest rate in order to attract foreign currency to support the value of the dollar,then the United States is operating to maintain a _____ exchange rate.
A) fixed
B) floating
C) flexible
D) fortuitous
Q3) If 1 euro will buy $1.30:
A) $1 will purchase 0.70 euro.
B) $1 will purchase 1.30 euro.
C) $1 will purchase 0.77 euro.
D) The real exchange rate equals one.
Q4) What is the mechanism,under a fixed exchange rate system,by which an expansionary monetary policy affects the current account?
Q5) List the common reasons one country would peg its currency to another.
Page 18
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