Economic Theory
Exam Solutions
Course Introduction
Economic Theory explores the foundational principles and models that explain how individuals, firms, and governments make choices regarding resource allocation, production, and consumption in various market structures. The course delves into core concepts such as supply and demand, market equilibrium, consumer behavior, production costs, and the dynamics of competitive and non-competitive markets. Students will analyze how economic agents interact and how their decisions impact overall economic efficiency and welfare. Through mathematical models and real-world applications, the course equips learners with analytical tools to understand and predict economic outcomes, preparing them for advanced studies or professional applications in economics and related fields.
Recommended Textbook
Macroeconomics 10th Edition by William Boyes
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Page 2
Chapter 1: The Wealth of Nations: Ownership and Economic
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Sample Questions
Q1) The major economic problem is to:
A) provide for full employment.
B) eliminate scarcity.
C) increase the standard of living.
D) allocate limited resources among unlimited uses.
E) increase leisure.
Answer: D
Q2) The concept of scarcity as used by economists refers to:
A) a situation of excess supply.
B) a situation in which the available resources are not enough to satisfy the wants of the people at a zero price.
C) a situation in which an item is available only in very small quantities.
D) a situation in which an item is very expensive.
E) a situation in which a resource is nonrenewable.
Answer: B
Q3) If you have a choice between consuming bundle X or bundle Y, the opportunity cost of consuming bundle X is bundle Y.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Scarcity and Opportunity Costs
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Sample Questions
Q1) Assume that the United States uses 20 worker-hours to produce 1 computer and 5 worker-hours to produce 1 unit of food; assume also that Japan uses 10 worker-hours to produce 1 computer and 30 worker-hours to produce 1 unit of food. Which of the following statements is true?
A) Japan has the comparative advantage in food production.
B) The United States has the comparative advantage in food production.
C) The United States has the absolute advantage in food production.
D) The United States has a lower opportunity cost for making computers.
E) Japan has a lower opportunity cost for making food.
Answer: B
Q2) Economic growth can be illustrated by an outward shift of the PPC. A)True
B)False
Answer: True
Q3) Gains from trade can be realized if each country specializes in the production of a good in which it has a comparative advantage.
A)True
B)False
Answer: True
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Page 4
Chapter 3: The Market and Price System
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Sample Questions
Q1) Margaret can use her quarterly savings to buy a teakwood study table for her room or spend it on a small Christmas party with her family. The _____ cost of her enjoyment at the Christmas party would then equal the forgone utility of the study table.
A) transaction
B) exchange
C) opportunity
D) direct
E) sunk
Answer: C
Q2) A price floor does not benefit producers.
A)True
B)False
Answer: False
Q3) When the price ceiling on eggs is lifted, there is a shortage of eggs in the market.
A)True
B)False
Answer: False
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Chapter 4: The Aggregate Economy
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Sample Questions
Q1) According to Scenario 4-1, country C has net exports of:
A) zero.
B) $13 million.
C) $6 million.
D) $13 million.
E) $6 million.
Q2) Financial intermediaries are best described as:
A) informal institutions that provide funds to the government to manage budget deficits.
B) institutions that accept deposits and make loans.
C) institutions that control the money supply in the economy.
D) institutions that provide financial aid to foreign countries.
E) individuals who manage other's investment portfolios.
Q3) Which of the following observations is true of the federal budget between 1960 and 2010?
A) The federal budget was in deficit in the early 1960s.
B) Between 1960 and 1970 the federal budget deficit reflected a sharp increase.
C) The federal budget was in surplus between 1970 and 1980.
D) The federal budget deficit was the highest in the late 1990s.
E) The federal budget deficit was lower than 600 billion dollars in 2010.
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Page 6
Chapter 5: National Income Accounting
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Sample Questions
Q1) Productive activity in the underground economy:
A) results in an overstatement of actual income and production in the national accounting system.
B) consists of unrecorded cash transactions.
C) is estimated and included in the national income accounting system.
D) poses no problem for the measurement of gross domestic product.
E) does not affect GDP but is included in the value-added computations.
Q2) Refer to Scenario 5.1. Gross national product of this nation will be:
A) $177 billion.
B) $259 billion.
C) $291 billion.
D) $343 billion.
E) $323 billion.
Q3) According to the expenditures approach, gross domestic product represents the sum of consumption spending, government spending, net exports, and net investment.
A)True B)False
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Chapter 6: An Introduction to the Foreign Exchapterange
Market and the Balance of Payments
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Q1) If the U.S. dollar price of one Japanese yen was $0.009 in 1997 and $0.011 in 2001, then the reciprocal exchange rate adjusted from $1 = ¥111.1 in 1997 to $1 = ¥90.9 in 2001. This implies that over this time period, the U.S. dollar experienced a depreciation relative to the Japanese yen.
A)True
B)False
Q2) The euro began trading in January 1999.
A)True
B)False
Q3) Double-entry bookkeeping requires that the debit and credit entries for any transaction must balance.
A)True
B)False
Q4) The purchase of French wine by U.S. consumers will be accounted as:
A) a deficit in the services account.
B) a credit in the merchandise account.
C) a debit in the services account.
D) a surplus in the services account.
E) a debit in the merchandise account.
Page 8
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Chapter 7: Unemployment and Inflation
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Sample Questions
Q1) In a business cycle, a peak marks the end of an expansion and the beginning of a recession.
A)True
B)False
Q2) When there is an upward rise in the volume of economic activity, the economy is said to be in a recession.
A)True
B)False
Q3) Suppose statistical surveys indicate that new orders for manufactured goods and new building permits for single-family homes are declining and that business inventories are rising. This implies economic activity is slowing down and the economy is potentially entering a recessionary period.
A)True
B)False
Q4) In the 1990s, the unemployment rates in the U.S. were higher than that in the European nations.
A)True
B)False
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Chapter 8: Macroeconomic Equilibrium: Aggregate
Demand and Supply
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Sample Questions
Q1) If the exchange rate is defined as the price of the foreign currency in terms of the domestic currency, an increase in the exchange rate:
A) increases domestic demand for foreign goods.
B) makes domestic goods cheaper in the foreign markets.
C) lowers net exports.
D) lowers aggregate expenditure on domestic goods.
E) increases the domestic country's external debt burden.
Q2) Which of the following is an incorrect statement?
A) Macroeconomic equilibrium occurs at the intersection of the aggregate demand and aggregate supply curves.
B) The aggregate supply curve indicates a positive relationship between the price level and GDP.
C) Other things equal, a downward shift of the aggregate demand curve implies that the economy is entering a contractionary phase.
D) Aggregate demand and aggregate supply determine the equilibrium price and quantity of any given good.
E) The aggregate demand curve indicates a negative relationship between the price level and GDP.
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Chapter 9: Aggregate Expenditures
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Sample Questions
Q1) Refer to Table 9.1. At an income level of $10,000, the APS equals -0.20. Therefore, the APC has to be equal to:
A) 0.20.
B) 0.80.
C) -1.20.
D) 1.20.
E) 1.80.
Q2) The average propensity to save (APS) is the proportion of disposable income that is saved.
A)True
B)False
Q3) Once macroeconomic equilibrium has been established in an economy, there is no tendency for real GDP to change, even if there is a change in autonomous expenditure. A)True
B)False
Q4) Consumption, saving, and wealth all represent stock concepts because they are measured over a period of time.
A)True
B)False
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Chapter 10: Income and Expenditures Equilibrium
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Sample Questions
Q1) At each round of the multiplier process, increases in income:
A) leak out of the expenditures stream in the form of investment and taxes.
B) leak out of the expenditures stream in the form of saving and imports.
C) are matched by a smaller increase in expenditures.
D) result in even greater increases in expenditures due to investment and exports.
E) result in no change in total expenditures.
Q2) Wealth is considered to be a nonincome determinant of consumption.
A)True
B)False
Q3) Other things equal, a reduction in personal income taxes will decrease consumption and will have an expansionary effect on real GDP.
A)True
B)False
Q4) Refer to Table 10.1. What is the equilibrium level of real GDP in year 1?
A) $940
B) $1,040
C) $1,100
D) $1,050
E) $920
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Chapter 11: Fiscal Policy
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Sample Questions
Q1) A drop in consumption or investment spending caused by increased government spending is referred to as:
A) the multiplier effect.
B) an expansionary gap.
C) Ricardian equivalence.
D) the paradox of thrift.
E) crowding out.
Q2) The higher the level of inflation, the stronger the impact of reductions in the personal income tax on real GDP .
A)True
B)False
Q3) In the presence of the crowding out effect, the purchase of Treasury bonds by the government will result in:
A) an increase in the interest rates.
B) a decrease in the price of bonds.
C) a decline in the private sector spending.
D) an increase in the private sector spending.
E) a decrease in the rate of inflation.
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Chapter 12: Money and Banking
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Sample Questions
Q1) If a bank's required reserves equal $270,000. Suppose the bank holds no excess reserves, and the reserve requirement is equal to 18 percent, what is the value of the bank's total deposits?
A) $900,000
B) $1,500,000
C) $48,000
D) $486,000
E) $150,000
Q2) The use of money as a unit of account:
A) discourages specialization and division of labor.
B) inhibits the exchange of goods and services.
C) makes it difficult to compare the relative values of goods and services.
D) lowers information costs relative to barter.
E) relies on the existence of a double coincidence of wants.
Q3) An asset is said to be illiquid when:
A) it lacks purchasing power.
B) it cannot act as a store of value.
C) it is an illegal tender.
D) it cannot be readily exchanged for goods.
E) it cannot be used to settle debts.
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Chapter 13: Monetary Policy
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Sample Questions
Q1) All the following affect short-run operating targets of the FOMC, except:
A) the federal funds rate.
B) the rate of inflation.
C) the budget deficit.
D) the foreign exchange rate.
E) the growth of real GDP.
Q2) Refer to Table 13.1. Assume a reserve requirement of 8 percent. What is the maximum potential increase in the money supply from the Fed's purchase of $400 worth of government securities?
A) $62,500
B) $2,800
C) $3,200
D) $4,600
E) $400
Q3) The Fed can enhance liquidity in the U.S. economy by increasing the federal funds rate.
A)True
B)False
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Chapter 14: Macroeconomic Policy: Tradeoffs, Expectations,
Credibility, and Sources of Business Cycles
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Sample Questions
Q1) Since the growth in the money supply is unrelated to government spending, fiscal policy and monetary policy can be conducted independently.
A)True
B)False
Q2) Critics of the Federal Reserve maintain that, to correct the credibility problem of monetary policy, the Fed should:
A) tighten monetary policy.
B) be required to maintain a growth rate of the money supply that is fixed by law.
C) give more power to the Federal Open Market Committee.
D) ignore public opinion and establish more discretionary power over monetary policy.
E) merge with the U.S. Treasury and be dissolved as an independent agency.
Q3) Government spending can be financed by all of the following, except:
A) personal income taxes.
B) investment spending.
C) government borrowing.
D) money creation.
E) excise taxes.
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Chapter 15: Macroeconomic Viewpoints: New Keynesian,
Monetarist, and New Classical
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Q1) Refer to Figure 15.2. Assume that the economy is now at point B. If government officials announce and carry out a policy that will maintain the inflation rate at 15 percent, we would expect:
A) the economy to move to point A.
B) the economy to remain at point B.
C) the economy to move to point C.
D) the economy to move to point D.
E) the economy to move to point E.
Q2) According to new classical school of economics, the aggregate supply curve is:
A) horizontal in both the short run and the long run.
B) vertical in the short run and upward-sloping in the long run.
C) upward-sloping in both the short run and the long run.
D) vertical in both the short run and the long run.
E) upward-sloping in the short run and vertical in the long run.
Q3) Milton Friedman is widely considered to be the father of monetarism.
A)True
B)False
Q4) New classical economists believe that wages are inflexible.
A)True
B)False
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Chapter 16: Economic Growth
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Sample Questions
Q1) The labor force typically grows faster in developing countries than in industrial ones because mortality rates are higher in low-income countries.
A)True
B)False
Q2) If an investment of $400 increases to $800 in 16 years, the annual interest rate of the investment must be _____.
A) 18%
B) 10%
C) 9%
D) 4.5% E) 1.8%
Q3) In developing countries, the labor force typically grows _____.
A) as rapidly as in industrial countries
B) less rapidly than in industrial countries
C) more rapidly than in industrial countries
D) at a diminishing rate
E) at a constant rate
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Chapter 17: Development Economics
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Sample Questions
Q1) Which of the following is not a probable consequence of food aid to developing countries?
A) Increased domestic food prices
B) Declining domestic output
C) Misallocation of food supplies
D) Increased dependency on foreign food supplies
E) Increased starvation of the needy
Q2) The primary objective of inward-oriented strategies is:
A) to raise government revenue through tariffs and other import taxes.
B) to lower the domestic price of imports.
C) to replace imported manufactured goods with domestic goods.
D) to encourage imports through reduction of tariff and non-tariff barriers.
E) to encourage the production of those goods in which the country has an absolute advantage.
Q3) In order to encourage domestic saving, it is necessary to have:
A) a laissez faire economy.
B) a balanced fiscal budget.
C) a large number of government subsidies.
D) a stable system of property rights.
E) a highly developed banking system.
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Chapter 18: Globalization
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Sample Questions
Q1) Supporters of globalization argue that increased globalization will lead to:
A) increased living standards.
B) decreased budget deficits.
C) decreased trade deficits.
D) currency appreciation.
E) monetary stability.
Q2) Suppose, before the Asian financial crisis, the Thai baht was fixed against the dollar at a rate of 26 bahts for one U.S. dollar. If the exchange rate were allowed to float freely, the market would then set the rate at 35 bahts for one dollar. Under these circumstances, we say that the baht was:
A) about to appreciate.
B) fixed below its par value.
C) overvalued.
D) undervalued.
E) revalued.
Q3) Investors may be caught by surprise when devaluation occurs, particularly if the government does not disclose its international reserve position in a timely and informative manner.
A)True
B)False
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Chapter 19: World Trade Equilibrium
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Sample Questions
Q1) Between two countries, comparative advantage is found by comparing the:
A) relative costs of production in each country.
B) absolute costs of production in each country after accounting for inflation.
C) labor hours required to produce a bundle of products in each country.
D) level of interest rates in each country.
E) shipping and transportation costs of each country.
Q2) Refer to Figure 20.1. The autarky equilibrium price of coffee in Columbia is:
A) $16.
B) $8.
C) $10.
D) $12.
E) $14.
Q3) If the world price of steel is greater than the U.S. "no-trade" domestic equilibrium price of steel, the United States:
A) will not produce steel.
B) will demand steel from the rest of the world.
C) will supply steel to the rest of the world.
D) will not trade steel.
E) will have a shortage of steel in the domestic market.
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Chapter 20: International Trade Restrictions
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Q1) Which of the following would result from a tariff?
A) An increase in government budget deficit
B) An increase in domestic production
C) A greater volume of international trade
D) Increased domestic consumption
E) Decrease in prices of the imported goods
Q2) The basic difference between a tariff and quota is that:
A) quota can be imposed both on imports and exports whereas a tariff can be imposed only on imports.
B) quota yields revenue to the government whereas tariff does not yield any revenue.
C) tariff reduces the import of the goods with greater certainty than quota as the amount of import restricted by quota depends on the price elasticity of demand for importable.
D) tariff is a quantitative restriction on imports whereas quota is an import duty.
E) a tariff raises the price of the product only in the domestic market whereas with a quota, both domestic and foreign producers receive a higher price.
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Chapter 21: Exchapterange Rates and Financial Links
Between Countries
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Q1) If prices rise within a country, then, other things equal, the value of a unit of domestic currency will:
A) rise in both the domestic and the foreign exchange markets.
B) fall in both the domestic and the foreign exchange markets.
C) rise in the domestic market and fall in the foreign exchange market.
D) fall in the domestic market and rise in the foreign exchange market.
E) fluctuate unpredictably in both domestic and foreign exchange markets.
Q2) Other things equal, the higher the deviations from purchasing power, the lesser will be the arbitrage opportunities.
A)True
B)False
Q3) When a U.S. importer needs $22,000 to settle an invoice for 25,520 Swiss francs, the exchange rate must be:
A) 1 Swiss franc = $1.16.
B) 1 Swiss franc = $0.16.
C) 1 Swiss franc = $0.84.
D) $1 = 1.16 Swiss franc.
E) $1 = 1.84 Swiss franc.
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