Economic Theory
Exam Bank
Course Introduction
Economic Theory explores the foundational principles that govern the production, distribution, and consumption of goods and services within different economies. This course covers core concepts such as supply and demand, market equilibrium, consumer behavior, production costs, market structures, and the role of government intervention. Through analytical models and real-world applications, students will develop a solid understanding of how economic agents make decisions, how markets function, and how various policies can impact economic outcomes at both the micro and macro levels.
Recommended Textbook
Principles of Economics 5th Edition by Robert Frank
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26 Chapters
3218 Verified Questions
3218 Flashcards
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Chapter 1: Thinking Like an Economist
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134 Verified Questions
134 Flashcards
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Sample Questions
Q1) The extra benefit that comes from an extra unit of activity is called the _________ of the activity.
A)marginal benefit.
B)marginal cost.
C)average benefit.
D)reservation benefit.
Answer: A
Q2) Forest is a mountain man living in complete isolation in Montana.He is completely self-sufficient through hunting,fishing,and farming.He has not been in the city to buy anything in five years.One can infer:
A)the scarcity principle does not apply to Forest.
B)Forest is not required to make choices.
C)the scarcity principle still applies because more hunting means less fishing and farming.
D)Forest is very satisfied.
Answer: C
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Chapter 2: Comparative Advantage
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Sample Questions
Q1) Dent 'n' Scratch Used Cars and Trucks employs 3 salesmen.Data for their sales last month are shown in this table: \[\begin{array} { | l | l | l | }
\hline & \text { Cars Sold } & \text { Trucks Sold } \\
\hline \text { Larry } & 10 & 5 \\
\hline \text { Joe } & 9 & 9 \\
\hline \text { Ralph } & 3 & 12 \\
\hline
\end{array}\]
For Ralph,the opportunity cost of selling a truck is:
A)9 fewer cars sold.
B)1/3 car not sold.
C)3 fewer cars sold.
D)1/4 car not sold.
Answer: D
Q2) Having a comparative advantage in a particular task means that:
A)you are better at it than other people.
B)you give up more to accomplish that task than do others.
C)you give up less to accomplish that task than do others.
D)you have specialized in that task,while others have not.
Answer: C
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) In the market for coffee,for many consumers:
A)tea is a substitute.
B)non-dairy creamer is a substitute.
C)cola beverages are complements.
D)coffee mugs are substitutes.
Answer: A
Q2) Suppose that the price of doughnuts decreases and that doughnut-holes are a by-product of producing doughnuts.One would expect:
A)the supply of doughnut holes to decrease.
B)the supply of doughnuts to decrease.
C)the supply of doughnut holes to increase.
D)the supply of doughnuts to increase.
Answer: A
Q3) An increase in the quantity demanded of tea occurs whenever:
A)the population of tea drinkers grows.
B)the price of coffee rises.
C)tea drinkers receive an increase in their incomes.
D)the price of the tea falls.
Answer: D
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Page 5
Chapter 4: Elasticity
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Sample Questions
Q1) When the price of lettuce rises,the demand for salad dressing _______ because these two goods are complements.
A)increases
B)decreases
C)remains the same
D)becomes more inelastic
Q2) Demand tends to be _______ in the short run than in the long run.
A)more elastic
B)more inelastic
C)more volatile
D)less important
Q3) A demand curve that is drawn as a vertical line illustrates price elasticity equal to: A)0.
B)1.
C)infinity.
D)the quantity.
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Chapter 5: Demand
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Sample Questions
Q1) Sven likes to water ski,but can only water ski during the one week that he is on vacation.Therefore,he plans to ski every day,for eight hours a day.The first day,Sven skied for eight hours and enjoyed every hour.The second day,Sven slept in and then skied for seven hours,which was fun but not as much fun as the first day.The third day,Sven skied for six hours,but was starting to get a bit bored by the end.The fourth day,Sven skied for four hours and then took a nap.On the fifth day of Sven's vacation,Sven went blueberry picking all day.
Sven's vacation convinced him that
A)even for activities he really enjoys,diminishing marginal utility eventually sets in.
B)blueberry picking yields higher total utility than does water skiing.
C)even for activities he really enjoys,total utility declines each time he engages in it.
D)economic theory applies only to things you buy,not recreation.
Q2) The rational spending rule is derived from the consumer's efforts to A)maximize utility.
B)minimize expenditures.
C)obtain the lowest possible price.
D)maximize the number of units purchased.
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Chapter 6: Perfectly Competitive Supply
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Sample Questions
Q1) One reason that variable factors of production tend to show diminishing returns in the short run is that:
A)too much capital equipment is idle.
B)there are more and more workers using a fixed amount of productive resources.
C)the firm has become too large to effectively manage workers.
D)the cost of hiring additional workers increases as firms seek to hire more.
Q2) When some factors of production are fixed,in order to increase production by equal amounts,a firm would need to add successively:
A)smaller and smaller quantities of the variable factor.
B)constant quantities of the variable factor.
C)larger and larger quantities of the variable factor.
D)larger and larger quantities of the fixed factors.
Q3) Which of the following is a condition that is necessary for a market to be perfectly competitive?
A)The firms face inelastic demand for their product.
B)Market demand for the product is perfectly elastic.
C)Firms can easily buy and sell the productive resources necessary to compete in the market.
D)Consumers display strong brand loyalty.
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Page 8
Chapter 7: Efficiency, Exchange, and the Invisible Hand in Action
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Sample Questions
Q1) If a single firm,belonging to a perfectly competitive industry in long run equilibrium,discovers a significant cost saving methodology,then:
A)all firms will enjoy economic profits for a short period of time.
B)the rest of the industry will quickly adopt the new methodology.
C)the firm will enjoy economic profits forever.
D)the firm will lower its price to drive the rest of the industry out of business.
Q2) Unlike economic profits,economic rents:
A)can be less than zero.
B)can't be easily driven to zero by entry.
C)don't involve the idea of opportunity costs.
D)only apply to land.
Q3) Barriers to entry are _____,and one effect of barriers to entry is to _____ the ability of the invisible hand to allocate resources efficiently.
A)uncommon today due to antitrust enforcement;improve B)forces that limit new firms from joining an industry;reduce C)forces that limit new firms from joining an industry;irrelevant to D)uncommon today due to antitrust enforcement;reduce
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Page 9
Chapter 8: Monopoly, Oligopoly, and Monopolistic Competition
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Sample Questions
Q1) A consumer has a reservation price of $90 for a blender.If the local store is offering the blender for $100 with a $10 rebate and he does not make the purchase,one can surmise that:
A)his reservation price was too high.
B)his reservation price was too low.
C)the hurdle was too high.
D)the hurdle was too low.
Q2) The profit maximizing rule P = MC applies to:
A)all firms.
B)monopolists only.
C)monopolists and perfect competitors.
D)perfect competitors only.
Q3) De Beers accounts for approximately 80% of diamond sales worldwide.The source of their market power is:
A)its exclusive ownership of South African diamond mines.
B)its patent on diamond production.
C)the perfectly inelastic demand for diamonds.
D)Western engagement customs.
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Chapter 9: Games and Strategic Behavior
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Sample Questions
Q1) The three elements of a game are:
A)the firm,the consumers,and the profit.
B)the players,the strategies,and the payoffs.
C)the model,the graph,and the costs.
D)the costs,the revenue,and the profit.
Q2) A monopolistically competitive firm:
A)sells products that are perfect substitutes for its competitors' products,so must compete on the basis of location.
B)sells products that are close substitutes for its competitors' products,so will locate as far away from its competitors as possible.
C)sometimes distinguishes its output from that of its competitors by locating in a more convenient place.
D)will be more successful the more similar its output is to its competitors' output.
Q3) A strategy that limits defection in a repeated prisoner's dilemma game is:
A)a Nash equilibrium.
B)tit-for-tat.
C)a cartel.
D)an ultimatum bargaining game.
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11
Chapter 10: Externalities and Property Rights
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Sample Questions
Q1) Since the cost of obtaining more of any resource is __________,viewing any resource's price as zero leads to __________.
A)positive;underutilization
B)negative;overutilization
C)positive;a surplus
D)positive;overutilization
Q2) Curly and Moe are considering living alone or being roommates and splitting the rent for the next twelve months.If they live alone,they each rent a one bedroom,one bath apartment for $500 per month,while if they are roommates,they can split a two bedroom,one bath apartment for $800 per month.The one difficulty they have is that Moe snores very loudly.Curly estimates the cost of poor sleep due to Moe's snoring at $150 per month.Moe could obtain a snore-eliminating device for $50 per month.
Refer to the information given above.The least costly solution to the externality present in this situation is for:
A)Curly to endure Moe's snoring.
B)both to live alone.
C)Moe to eliminate his snoring.
D)Moe to pay Curly for his discomfort.
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Chapter 11: The Economics of Information
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Sample Questions
Q1) Alison decides to play the lottery.She has a 5% probability of winning $100 and a 95% probability of winning zero.The expected value of her decision to play is A)$100.
B)$5.
C)$10.
D)$50.
Q2) Max is considering the following offer: a 50% chance of winning $10 and a 50% chance of losing $9.The expected value of this gamble is A)$10.
B)$5.
C)50 cents.
D)$1.
Q3) In general,the presence of insurance against the negative outcome of an event (e.g. ,fire insurance)tends to
A)lessen the likelihood of the event.
B)have no effect on the likelihood of the event.
C)increase the incentive to prevent the event.
D)decrease the incentive to prevent the event.
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13
Chapter 12: Labor Markets, Poverty, and Income Distribution
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Sample Questions
Q1) The level of income the federal government uses to define being poor is called the A)relative measure of poverty.
B)absolute measure of poverty.
C)poverty threshold.
D)median income threshold.
Q2) To completely eliminate the concern about public assistance reducing the poor's incentive to work,the government could
A)provide training assistance rather than cash or in-kind transfers.
B)give churches and nonprofit organization the responsibility for administering the programs.
C)give everyone a fixed cash transfer.
D)give the assistance as wages in exchange for public sector employment.
Q3) The labor market model that predicts an equilibrium wage equal to VMP applies
A)only to markets for unskilled labor.
B)only to competitive labor markets.
C)to all labor markets.
D)to labor markets that are exempt from minimum wage laws.
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14
Chapter 13: The Environment, Health, and Safety
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Sample Questions
Q1) Suppose that all workers value a safe job $2,000/year more than a risky job.The cost of safety is $700 per worker.Firms currently pay $35,000 per year to workers,without any effort to improve safety.
Suppose new firms began to offer workers $34,000 per year and safe jobs.The total cost of hiring a worker to the existing firms is __________ and to the new firms it is
A)$35,700;$33,700
B)$35,000;$34,700
C)$34,700;$35,000
D)$33,700;$35,700
Q2) Using the economist's definition,to say that the amount of crime control is efficient means that
A)the crime rate is approximately zero.
B)few false arrests occur.
C)the marginal benefit of the last dollar spent on crime control equals the marginal cost. D)the conviction rate is nearly 100%.
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Chapter 14: Public Goods and Tax Policy
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Sample Questions
Q1) Curly pays $12,000 in taxes and earns $150,000.Moe pays $7,000 in taxes.If the tax system is proportional,then Moe's income is
A)$56,000.
B)$125,000.
C)$87,500.
D)$98,000.
Q2) The presence of an unregulated negative externality means that the unregulated market equilibrium output is
A)efficient.
B)too small.
C)too large.
D)greater than demand.
Q3) Your state department of transportation is considering installing toll booths and gates on one of the freeways that runs through an unpopulated part of the state.If this is adopted,a good that is currently a(n)
A)public good will become a private good.
B)nonrival good will become a rival good.
C)nonexcludable good will become an excludable good.
D)rival good will become an excludable good.
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Page 16
Chapter 15: Spending, Income, and GDP
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Sample Questions
Q1) Summing the value added of all firms yields the value of final goods and services produced because both measures:
A)exclude the value of capital goods.
B)exclude the value of intermediate goods and services.
C)use constant prices.
D)are adjusted for population growth.
Q2) The market value of all domestically produced final goods and services is also equal to the total amount spent by ______________ less spending on imported goods and services.
A)households and firms
B)households,firms,and governments
C)households,firms,and the foreign sector
D)households,firms,governments,and the foreign sector
Q3) In the base year,real GDP ______ nominal GDP.
A)is greater than
B)is less than
C)is equal to
D)could be greater than or less than
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17
Chapter 16: Inflation and the Price Level
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Sample Questions
Q1) A labor contract provides for a first-year wage of $10 per hour,and specifies that the real wage will rise by 3 percent in the second year of the contract and by another 3 percent in the third year.The CPI is 1.00 in the first year,1.07 in the second year,and 1.15 in the third year.What dollar wage must be paid in the third year?
A)$10.61
B)$11.15
C)$12.20
D)$12.31
Q2) Suppose the value of the CPI is 1.100 in year one,1.210 in year two,and 1.331 in year three.Assume also that the price of computers increases by 3% between year one and year two,and by another 3% between year two and year three.The price level is increasing,the inflation rate is _______,and the relative price of computers is
A)increasing;increasing B)constant;increasing
C)constant;decreasing D)increasing;decreasing
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Page 18
Chapter 17: Wages and Unemployment
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Sample Questions
Q1) A long-term mismatch between the skills of some workers and the jobs available is a principal cause of ______ unemployment.
A)cyclical
B)structural
C)global
D)frictional
Q2) A person 16 years or older who does not work,but is actively looking for work,is officially classified as:
A)employed.
B)unemployed.
C)chronically unemployed.
D)out of the labor force.
Q3) The two most important factors contributing to increased productivity in industrialized countries in the twentieth century were:
A)higher relative prices and a larger labor supply.
B)higher relative prices and technological progress.
C)technological progress and increases in the capital stock.
D)technological progress and increases in the labor supply.
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Chapter 18: Economic Growth
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Sample Questions
Q1) Organizing production,obtaining financing,assigning workers to jobs,and dealing with suppliers are among the ways that ______ increases average labor productivity.
A)human capital
B)physical capital
C)an entrepreneur
D)a manager
Q2) A nation's standard of living,as measured by real GDP per person,increases:
A)only if average labor productivity increases.
B)only if the share of population employed increases.
C)only if both average labor productivity and the share of population employed increase.
D)if either average labor productivity and/or the share of population employed increase.
Q3) If real GDP per person in a country equals $20,000 and 40 percent of the population is employed,then average labor productivity equals:
A)$8,000.
B)$20,000.
C)$40,000.
D)$50,000.
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20
Chapter 19: Saving, Capital Formation, and Financial Markets
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Sample Questions
Q1) If net taxes paid by households increase:
A)private saving will decrease.
B)private saving will increase.
C)public saving will decrease.
D)transfer payments to households will decrease.
Q2) Saving is a(n)______ and wealth is a(n)______.
A)stock;flow
B)flow;stock
C)asset;liability
D)liability;asset
Q3) The saving rate equals saving divided by:
A)wealth.
B)assets.
C)liabilities.
D)income.
Q4) The expected benefit of investment equals:
A)private saving.
B)the value of the marginal product of capital.
C)the real interest rate.
D)the price of the capital good.
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Chapter 20: Money, Prices, and the Financial System
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Sample Questions
Q1) Regular interest payments made to bondholders are called ______ payments.
A)diversification
B)reserve
C)coupon
D)dividend
Q2) Banks help savers find productive uses for their funds because banks have specialized in:
A)gathering information about and evaluating potential borrowers.
B)obtaining preferential tax treatment for savers.
C)securing government guarantees for loans.
D)evaluating the riskiness of stocks.
Q3) You expect a share of EconNews.Com to sell for $65 a year from now.If you are willing to pay $62.73 for one share of the stock today,and you expect a dividend payment of $4,what rate of return do you require?
A)3.6%
B)6.2%
C)6.4%
D)10%
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22
Chapter 21: Short-Term Economic Fluctuations
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Sample Questions
Q1) In an expansion,the cyclical rate of unemployment is most often:
A)positive.
B)zero.
C)negative.
D)equal to the natural rate of unemployment.
Q2) Since 1925,the longest recession in the United States lasted:
A)10 years.
B)24 months.
C)43 months.
D)5 years.
Q3) In a recession,the cyclical rate of unemployment:
A)is rising.
B)is constant.
C)is falling.
D)equals the natural rate of unemployment.
Q4) Potential output is:
A)the same as actual output.
B)the same as the output gap.
C)the same as the natural rate of unemployment.
D)the maximum sustainable amount of output.
Page 23
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Chapter 22: Spending, Output, and Fiscal Policy
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Sample Questions
Q1) If planned aggregate expenditure (PAE)in an economy equals 3,000 + 0.75Y and potential output (Y*)equals 12,000,then this economy has:
A)an expansionary gap.
B)a recessionary gap.
C)no output gap.
D)no autonomous expenditure.
Q2) The slope of the consumption function:
A)is vertical.
B)is horizontal.
C)equals 1.
D)equals the mpc.
Q3) If planned aggregate expenditure (PAE)in an economy equals 1,000 + 0.9Y and potential output (Y*)equals 9,000,then this economy has:
A)an expansionary gap.
B)a recessionary gap.
C)no output gap.
D)no autonomous expenditure.
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Chapter 23: Monetary Policy and the Federal Reserve
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Sample Questions
Q1) Deposit insurance is a system in which the government guarantees that:
A)depositors will not lose any money even if their bank goes bankrupt.
B)people can have deposits at commercial banks.
C)commercial banks will not go bankrupt.
D)commercial banks will not lose any deposits.
Q2) The seven Fed governors,the president of the Federal Reserve Bank of New York,and four of the presidents of the other regional Federal Reserve Banks constitute the:
A)National Monetary Commission.
B)Board of Governors.
C)Federal Open Market Committee.
D)Federal Reserve System.
Q3) If the Fed wishes to reduce nominal interest rates,it must engage in an open market ______ of bonds that ______ the money supply.
A)sale;increases
B)sale;decreases
C)purchase;decreases
D)purchase;increases
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25
Chapter 24: Aggregate Demand, Aggregate Supply, and Business Cycles
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Sample Questions
Q1) As the quality of available resources becomes worse:
A)aggregate demand falls.
B)aggregate demand rises.
C)aggregate supply falls.
D)aggregate supply rises.
Q2) Changes in planned spending not caused by changes in output or the inflation rate will shift the:
A)aggregate supply curve.
B)Keynesian cross.
C)potential output line.
D)aggregate demand curve.
Q3) Starting from potential output,if firms become less optimistic about the future and decide to decrease their investment in new capital,then this will shift the ______ curve to the left and generate ______.
A)aggregate demand;a recessionary output gap
B)aggregate supply;a recessionary output gap
C)aggregate demand;an expansionary output gap
D)aggregate supply;an expansionary output gap
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Chapter 25: Macroeconomic Policy
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Sample Questions
Q1) A central bank that attempts to achieve a zero rate of inflation:
A)cannot achieve price level stability in the long run.
B)increases the risk of deflation.
C)can consistently achieve negative real interest rates.
D)makes it easier for real wages to be reduced without cutting nominal wages.
Q2) Someone who is not strongly committed to achieving and maintaining low inflation is called a(n):
A)anchored central banker.
B)inflation dove.
C)inflationary central banker.
D)inflation hawk.
Q3) Most economists believe that the reduced variability of inflation in the U.S.is the result of:
A)globalization.
B)better management of inventories.
C)improved monetary policymaking by the Fed.
D)deregulation.
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Chapter 26: Exchange Rates, International Trade, and Capital Flows
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Sample Questions
Q1) Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico.If purchasing power parity holds then,if the price of oil is 200 pesos per barrel in Mexico,the price of oil is ______ per barrel in the United States.
A)$1,600
B)$80
C)$36
D)$25
Q2) When an American buys stock in a French company,from the perspective of the United States,this is a(n):
A)import.
B)export.
C)capital outflow.
D)capital inflow.
Q3) The sum of national saving and capital inflows from abroad must equal:
A)domestic investment in new capital goods.
B)capital outflows.
C)aggregate demand.
D)the trade deficit.
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