Economic Theory
Exam Bank
Course Introduction
Economic Theory explores the foundational principles that govern the behavior of individuals, firms, and markets within an economy. This course examines key concepts such as supply and demand, market equilibrium, consumer choice, production and costs, and different market structures. Students will analyze how economic agents make decisions, interact in various types of markets, and respond to changes in policies and external conditions. By integrating both microeconomic and macroeconomic perspectives, the course equips students with a theoretical framework to understand resource allocation, price formation, and the impact of government intervention.
Recommended Textbook
Principles of Economics 7th Edition by Robert H. Frank
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4171 Verified Questions
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Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) Your classmates from the University of Chicago are planning to go to Miami for spring break, and you are undecided about whether you should go with them. The round-trip airfare is $600, but you have a frequent-flyer coupon worth $500 that you could use to pay part of the airfare. All other costs for the vacation are exactly $900. The most you would be willing to pay for the trip is $1,400. Your only alternative use for your frequent-flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation, which your parents are forcing you to attend. The Chicago-Atlanta round-trip airfare is $450. If you do not use the frequent-flyer coupon to fly to Miami, should you go to Miami?
A)Yes, your benefit is more than your cost.
B)No, your benefit is less than your cost.
C)Yes, your benefit is equal to your cost.
D)No, because there are no benefits in the trip.
Answer: B
Q2) Dividing the total cost of undertaking n units of an activity by n reveals the:
A)average benefit.
B)marginal cost.
C)units per cost.
D)average cost.
Answer: D
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Chapter 2: Comparative Advantage
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Sample Questions
Q1) An increase in an economy's productive resources will lead the production possibilities curve to:
A)shift inward.
B)shift outward.
C)become flatter.
D)stay the same.
Answer: B
Q2) A graph that illustrates the maximum amount of one good that can be produced for every possible level of production of the other good is called a:
A)production possibilities curve.
B)consumption possibilities curve.
C)production function.
D)supply curve.
Answer: A
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Chapter 3: Supply and Demand
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Sample Questions
Q1) If a country's economic decisions are made by an individual or small number of individuals, then it has a:
A)centralized economy.
B)free-market economy.
C)capitalist economy.
D)open economy.
Answer: A
Q2) The buyer's reservation price for a particular good or service is the:
A)smallest price the buyer would be willing to pay for it.
B)same as the market price.
C)largest price the buyer would be willing to pay for it.
D)price the buyer must pay to ensure he or she gets it.
Answer: C
Q3) A movement along a demand curve from one price-quantity combination to another is called a:
A)change in quantity demanded.
B)shift in the demand curve.
C)change in demand.
D)change in quantity supplied.
Answer: A
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Chapter 4: Elasticity
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Sample Questions
Q1) A demand curve that is drawn as a vertical line has a price elasticity of demand equal to:
A)0.
B)1.
C)infinity.
D)the quantity.
Q2) If a 10 percent decrease in the price of a good leads to a 20 percent increase in the quantity demanded, then what is the price elasticity of demand?
A)0.5
B)2
C)10
D)20
Q3) If the demand for electricity is inelastic, and the local utility wants to increase its total revenue, it should ________ its price.
A)lower
B)raise
C)not change
D)frequently change
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Chapter 5: Demand
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Sample Questions
Q1) Assume that Dusty has $30 in income, the price of a loaf of bread is $1.50, and the price of a jar of peanut butter is $3. Suppose that at the original income of $30, the price of a loaf of bread increased to $3 and the price of a jar of peanut butter decreased to $2. Dusty can buy a maximum of ________ loaves of bread or a maximum of ________ jars of peanut butter.
A)10; 15
B)15; 10
C)20; 15
D)15; 20
Q2) Suppose the price of an apple is $0.75, and the price of a banana is $0.50. If Hugh is maximizing his utility, and his marginal utility from consuming an apple is 24 utils, then his marginal utility from consuming a banana must be:
A)12 utils.
B)16 utils.
C)32 utils.
D)36 utils.
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Chapter 6: Perfectly Competitive Supply
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Sample Questions
Q1) If a perfectly competitive firm produces an output level at which price is less than marginal costs, then the firm should:
A)raise its price.
B)reduce output to earn greater profits or smaller losses.
C)expand output to earn greater profits or smaller losses.
D)leave its output level unchanged provided it is covering its variable cost.
Q2) Individual supply curves generally slope ________ because ________.
A)downward; sellers become more efficient with practice.
B)upward; profits increase with quantity.
C)downward; inputs are cheaper when purchased in high volume.
D)upward; of increasing opportunity costs.
Q3) Which of the following is the most likely to be a variable factor of production at a university?
A)The number of librarians
B)The size of the football stadium
C)The size of the student union
D)The location of the university
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Chapter 7: Efficiency, Exchange, and the Invisible Hand in Action
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Sample Questions
Q1) Suppose the production of cotton causes substantial environmental damage because the pesticides used by cotton farmers often make their way into nearby rivers and streams, and are very harmful to fish and other wildlife. If cotton farmers do not have to pay for the environmental damage caused by the pesticides used to grow cotton, then the market equilibrium price will be ________ and the market equilibrium quantity will be ________.
A)inefficiently high; inefficiently low
B)inefficiently high; inefficiently high
C)inefficiently low; inefficiently high
D)inefficiently low; inefficiently low
Q2) The role that prices play in distributing scarce goods and services to those consumers who value them the most highly is known as the ________ function of price.
A)allocative
B)multiplicative
C)equilibrium
D)rationing
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Chapter 8: Monopoly, Oligopoly, and Monopolistic Competition
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Sample Questions
Q1) If a firm's total revenue is $112 when it sells 16 units, $119 when it sells 17 units and $126 when it sells 18 units, then the firm is:
A)only an imperfectly competitive firm if it sets MR=MC.
B)either a perfectly or imperfectly competitive firm.
C)an imperfectly competitive firm.
D)a perfectly competitive firm.
Q2) Which of the following is NOT an example of the hurdle method of price discrimination?
A)Offering a mail-in rebate.
B)Permanently reducing all prices by 10 percent.
C)Charging less for airline tickets if the trip includes a Saturday night stayover.
D)Giving a discount on movie tickets to people with a student ID.
Q3) The reason economists consider monopoly to be socially undesirable is that monopolists:
A)earn too much economic profit.
B)can charge any price they want.
C)exploit the inelastic nature of demand.
D)produce less than the socially optimal level of output.
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Chapter 9: Games and Strategic Behavior
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Sample Questions
Q1) In tit-for-tat, if your partner ________ in your first interaction, then you will ________ in your next interaction.
A)defects; cooperate
B)defects; defect
C)cooperates; defect
D)defects; refuse to play
Q2) In sequential games, the player who moves first:
A)always has a first-mover advantage.
B)has a first-mover advantage only when he or she is able to make a credible threat or promise to choose a dominated strategy.
C)has a first-mover advantage only when the second mover fails to choose the dominant strategy.
D)sometimes has an advantage and sometimes has a disadvantage.
Q3) A ________ describes the possible moves in a game in sequence and lists the payoffs to each possible combination of moves.
A)decision tree
B)payoff matrix
C)game graph
D)multi-period game
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Page 11
Chapter 10: An Introduction to Behavioral Economics
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Sample Questions
Q1) Suppose Whitney is willing to pay $200 to buy a new phone. Loss aversion implies that if Whitney already had just bought the phone, you would:
A)have to pay her less than $200 to part with it.
B)have to pay her more than $200 to part with it.
C)have to pay her exactly $200 to part with it.
D)not be able to get her to part with it for any amount of money.
Q2) The ________ is a game in which the first player has the power to confront the second player with a take-it-or-leave-it offer.
A)Nash bargaining game
B)matching pennies game
C)ultimatum bargaining game
D)repeated prisoner's dilemma
Q3) ________ is the relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus.
A)The adaptive rationality standard
B)The Weber-Fechner law
C)The representative heuristic
D)Regression to the mean
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Page 12
Chapter 11: Externalities, Property Rights, and the Environment
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Sample Questions
Q1) The most efficient distribution of pollution abatement is such that the:
A)extent of pollution abatement is the same across all geographic regions.
B)extent of pollution abatement is the same across all polluters.
C)largest reductions in pollution are made by the largest polluters.
D)marginal cost of abatement is the same across all polluters.
Q2) If the production of oranges generates an external benefit, then we would expect the market equilibrium quantity of oranges to be:
A)equal to the socially optimal quantity.
B)less than the socially optimal quantity.
C)greater than the socially optimal quantity.
D)equal to the socially optimal quantity plus the external benefit.
Q3) Which of the following is an example of a positional arms control agreement?
A)Campaign spending limits
B)Highly selective admissions standards at colleges
C)Prohibiting speech that causes more harm than good
D)Public education
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Page 13
Chapter 12: The Economics of Information
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Sample Questions
Q1) Lou and Toby both live in a little town and are trying to sell their cars. Both of their cars have a blue book value of $10,000. Lou has an American car like most of the people in town own. Toby owns the only Bulgarian car in town. If people in their town are risk averse, then who will get closest to the blue book value for his car?
A)Lou will because American cars are better than Bulgarian cars.
B)Toby will because there is less uncertainty about the quality of Lou's car.
C)Lou will because there is less uncertainty about the quality of Lou's car.
D)Both should get the same price for their cars because both cars have the same blue book value.
Q2) When the expected value of search increases:
A)fewer searches occur.
B)the number of searches does not change.
C)more searches occur.
D)the cost of searching falls.
Q3) Rationally, search should continue until:
A)all search options have been explored.
B)the marginal benefit of search equals the marginal cost of search.
C)the marginal benefit of search is zero.
D)the marginal cost of search is zero.
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Page 14
Chapter 13: Labor Markets, Poverty, and Income Distribution
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Sample Questions
Q1) Leo is a welfare recipient who qualifies for two means-tested cash benefit programs. If he does not earn any income, he receives $225 from each program. For each dollar he earns (which his employer is required to report to the welfare agency), his benefit from each program is reduced by 75 cents until the benefit equals zero. When Leo's earnings are less than $300, each extra dollar he earns causes his total income (earnings plus benefits)to:
A)fall by 25 cents.
B)rise by 50 cents.
C)fall by 50 cents.
D)rise by 75 cents.
Q2) Kyle works for a perfectly competitive firm where he receives a wage rate of $15. From this, one can infer that:
A)Kyle's marginal product is at least $15.
B)the price of the firm's output is at least $15.
C)Kyle's reservation wage is $15.
D)Kyle's value of marginal product is at least $15.
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Chapter 14: Public Goods and Tax Policy
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Sample Questions
Q1) Joe earns $10,000 in income and pays $1,000 in taxes while Jack earns $30,000 and pays $4,000 in taxes. The structure of this tax is:
A)progressive.
B)proportional.
C)regressive.
D)a head tax.
Q2) Goods like Wi-Fi networks that are nonrival but excludable are known as:
A)pure public goods.
B)private goods.
C)commons goods.
D)collective goods.
Q3) The demand curve for a public good is constructed by:
A)summing voters' desired quantity of the public good at each price.
B)surveying voters on how much of a particular public good they would use at each price.
C)summing voters' reservation prices at each quantity.
D)dividing the total cost of providing the public good by the number of potential users.
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Page 16
Chapter 15: International Trade and Trade Policy
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Sample Questions
Q1) The United States imports garments from third world countries. This means that if the U.S. economy were closed, the domestic price of goods would be ________ the world price of garments.
A)less than
B)greater than C)equal to
D)close to
Q2) If the domestic quantity supplied of a good is greater than the domestic quantity demanded, the country is likely to be a(n)
A)consumer of the good.
B)importer of the good.
C)importer and exporter.
D)exporter of the good.
Q3) Protectionism is the view that:
A)a country's free trade agreements should be enforced.
B)free trade is harmful and should be restricted.
C)a country can best defend itself against foreign attack if it opens itself to trade.
D)free trade agreements best protect a nation's economic interests.
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17
Chapter 16: Macroeconomics: The Birds Eye View of the Economy
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Sample Questions
Q1) In the 1950's and 1960's the European unemployment rate tended to be ________ the U.S. unemployment rate, while in the 1990's the European unemployment rate tended to be ________ the U.S. unemployment rate.
A)higher than; higher than B)lower than; higher than C)higher than; lower than D)lower than; lower than
Q2) After increasing at more than 2 percent per year between 1950 and 1973, the growth rate of average labor productivity ________ between 1973 and 1995, and ________ between 1996 to 2007.
A)slowed; decreased even more
B)speeded up; accelerated even more
C)slowed; picked up
D)speeded up; slowed
Q3) Positive analysis:
A)recommends whether a policy should be implemented.
B)aims at determining only the economic consequences of a particular policy.
C)depends on the analyst's values.
D)determines whether the consequences of a policy are desirable.
Page 18
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Chapter 17: Measuring Economic Activity: GDP and Unemployment
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Sample Questions
Q1) Bob's Barber Shop cut 3,000 heads of hair in 2016 and 3,100 in 2017. The price of a haircut was $7 in 2016 and $8 in 2017. If 2016 is the base year, what was Bob's contribution to real GDP in 2016?
A)$21,000
B)$21,700
C)$24,000
D)$24,800
Q2) Who from among the following is counted as employed?
A)Ray wants to work forty hours per week, but can only find work for twenty hours per week.
B)Anna Marie spends all of her time taking care of her children at home.
C)Frank would like to work, but has not looked for work because he believes no jobs are available.
D)Martin has been offered several jobs in the past four weeks, but has chosen not to accept any of the offers.
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Chapter 18: Measuring the Price Level and Inflation
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Sample Questions
Q1) The nominal interest rate is the:
A)annual percentage increase in the dollar value of a financial asset.
B)annual percentage increase in the purchasing power of a financial asset.
C)real rate of return on an asset.
D)the real interest rate minus the inflation rate.
Q2) A year's tuition at a state university cost $250 in 1972 when the CPI equaled 0.418. The cost of a year's tuition at the same state university cost $8,000 in 2016 when the CPI equaled 2.40. The real cost of tuition between 1972 and 2016:
A)increased.
B)decreased.
C)remained constant.
D)may have either increased or decreased.
Q3) One family earned an income of $28,000 in 1995. Over the next five years, their income increased by 15 percent, while the CPI increased by 12 percent. After five years, this family's nominal income ________, and their real income ________.
A)decreased; decreased
B)decreased; increased
C)increased; did not change
D)increased; increased
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Page 20
Chapter 19: Economic Growth, Productivity, and Living Standards
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Sample Questions
Q1) Real GDP per person in Northland is $30,000, while real GDP in Southland is $10,000, However, Northland's real GDP per person is growing at 1 percent per year, and Southland's real GDP per person is growing at 3 percent per year. If these growth rates persist indefinitely, then:
A)Northland's real GDP per person will decline until it equals Southland's.
B)Northland's real GDP per person will always be between 1 and 2 percent greater than Southland's.
C)Southland's real GDP per person will always be exactly 2 percent less than Northland's.
D)Southland's real GDP per person will eventually be greater than Northland's.
Q2) Real GDP per person equals average labor productivity:
A)times one minus the unemployment rate.
B)minus the share of population employed.
C)times the labor force participation rate.
D)times the share of population employed.
Q3) Human capital is:
A)the factories and machinery used by humans in the production process.
B)the talents, training, and education of workers.
C)the financial resources available to humans for investment.
D)the factories and machinery made by workers.
Page 21
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Chapter 20: The Labor Market: Workers, Wages, and Unemployment
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Sample Questions
Q1) An increase in unemployment insurance benefits will:
A)increase the demand for labor.
B)decrease the demand for labor.
C)increase job search efforts of unemployed workers.
D)decrease job search efforts of unemployed workers.
Q2) According to the principle of diminishing returns to labor, if the amount of capital and other inputs are held constant, employing additional workers:
A)increases output at an increasing rate.
B)increases output at a constant rate.
C)increases output at a decreasing rate.
D)decreases output at an increasing rate
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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Page 22
Chapter 21: Saving and Capital Formation
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Sample Questions
Q1) In the market for saving, the price is the:
A)relative price.
B)real interest rate.
C)nominal interest rate.
D)inflation rate.
Q2) Steve takes $500 from his paycheck and uses it to purchase U.S. Savings Bonds.
Based on this information:
A)Steve's saving has increased by $500.
B)Steve's saving has decreased by $500.
C)Steve has a capital gain of $500.
D)Steve's wealth is unchanged.
Q3) An explanation for the low saving rate in the United States consistent with the precautionary reason for saving includes:
A)relatively generous government assistance for the elderly and large down payments required for home purchases.
B)households spending beyond their means to keep up with community standards.
C)highly-developed financial systems making it easy to buy homes with down payments under 15 percent.
D)confidence in future economic prosperity.
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Page 23
Chapter 22: Money Prices and the Federal Reserve
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Q1) In the past, some governments' budget deficits became so large that they could not raise sufficient taxes to finance the spending, so they ________, which led to
A)reduced the amount of currency held by the public; a smaller money supply
B)increased bank reserves; a larger reserve/deposit ratio
C)printed large quantities of paper money; hyperinflation
D)ordered the central bank to sell government bonds; an increase in the money supply
Q2) When money is used as a means to hold wealth, it serves as a:
A)double coincidence of wants.
B)store of value.
C)medium of exchange.
D)unit of account.
Q3) The quantity equation is always true because it:
A)is the definition of velocity rewritten.
B)is a law of economics.
C)has been empirically tested.
D)has been historically verified.
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Chapter 23: Financial Markets and International Capital Flows
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Sample Questions
Q1) The practice of spreading one's wealth over a variety of different financial investments in order to reduce overall risk is called:
A)allocation.
B)following the risk premium.
C)diversification.
D)risk reservation.
Q2) The principal amount of a bond is the amount:
A)originally lent.
B)of interest agreed upon when the bond was originally issued.
C)paid to the bondholders on a regular basis.
D)of interest the bondholder is entitled to when the bond matures.
Q3) Purchases of foreign assets by domestic firms or households is called a:
A)trade surplus.
B)trade deficit.
C)capital outflow.
D)capital inflow.
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25
Chapter 24: Short-Term Economic Fluctuations: An Introduction
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Q1) Workers in durable-goods industries are ________ workers in service industries to lose their jobs during a recession.
A)much less likely than B)more likely than C)less likely than
D)equally likely as
Q2) The increasing availability of temporary job placement agencies and online job services has ________ the efficiency of matching workers and jobs, and has therefore ________ the natural rate of unemployment in the United States.
A)increased; increased
B)increased; decreased
C)decreased; decreased
D)decreased; increased
Q3) During recessions, the change in real GDP is:
A)always positive.
B)always negative.
C)most often positive, but occasionally negative.
D)most often negative, but occasionally positive.
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Chapter 25: Spending and Output in the Short Run
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Sample Questions
Q1) In the basic Keynesian model, a tax cut:
A)reduces short-run equilibrium output.
B)increases short-run equilibrium output.
C)reduces potential output.
D)increases potential output.
Q2) If firms sell less output than expected, planned investment:
A)is greater than actual investment.
B)is less than actual investment.
C)equals actual investment.
D)equals zero.
Q3) In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm changes:
A)prices to meet the demand.
B)production levels to meet the demand.
C)prices and production levels to meet demand.
D)prices, but holds production levels constant, to meet the demand.
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Chapter
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Q1) If the Federal Reserve wants to increase the money supply, it should:
A)increase reserve requirements.
B)increase the discount rate.
C)conduct open-market purchases.
D)increase the interest that it pays on reserves.
Q2) To close an expansionary gap, the Fed ________ interest rates which ________ aggregate spending and ________ short-run equilibrium output.
A)raises; increases; increases B)raises; decreases; increases C)raises; decreases; decreases D)reduces; increases; decreases
Q3) If the Fed's policy reaction function equals r = .02 + , where r is the real interest rate and is the inflation rate. When the inflation rate is zero, then the real interest rate will be:
A)set to equal 2 percent.
B) below the target value for the real interest rate.
C)set to equal zero.
D)set to equal 4 percent.
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Chapter 27: Aggregate Demand, Aggregate Supply, and Inflation
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Q1) For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward
Q2) All else equal, an increase in the rate of inflation ________ planned spending and ________ short-run equilibrium output.
A)increases; increases
B)decreases; increases
C)increases; decreases
D)decreases; decreases
Q3) Which of the following will shift the aggregate demand curve to the left?
A)Income taxes are lowered.
B)The government increases spending on education.
C)Consumers become optimistic about the future.
D)Foreign economies fall into recession, reducing their demand for domestic exports.
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Chapter 28: Exchange Rates and the Open Economy
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Sample Questions
Q1) If the fundamental value of the nominal exchange rate equals 0.20 U.S. dollars per franc, but the franc is officially fixed at 0.15 U.S. dollars per franc, then the franc exchange rate is ________ and to maintain this exchange rate there will be ________ in the government's stock of international reserves.
A)undervalued; a net decline
B)undervalued; a net increase
C)overvalued; a net increase
D)overvalued; a net decline
Q2) A currency depreciation is a(n):
A)increase in the value of a currency relative to other currencies.
B)decrease in the value of a currency relative to other currencies.
C)reduction in the official value of a currency in a fixed-exchange-rate system.
D)increase in the official value of a currency in a fixed-exchange-rate system.
Q3) A currency revaluation is a(n):
A)increase in the value of a currency relative to other currencies.
B)decrease in the value of a currency relative to other currencies.
C)reduction in the official value of a currency in a fixed-exchange-rate system.
D)increase in the official value of a currency in a fixed-exchange-rate system.
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