Economic Theory
Pre-Test Questions
Course Introduction
Economic Theory explores the foundational principles and models that underpin the study of economics, focusing on how individuals, firms, and governments make decisions regarding the allocation of limited resources. The course covers both microeconomic and macroeconomic theories, examining concepts such as supply and demand, market equilibrium, consumer and producer behavior, cost structures, market structures, and the role of government intervention. Through theoretical analysis and real-world examples, students develop an understanding of how economic agents interact in various markets and how these interactions influence overall economic outcomes. This course provides a rigorous framework for critical thinking and problem-solving relevant to further studies and careers in economics and related fields.
Recommended Textbook
Macroeconomics 5th Edition by Stephen D. Williamson
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966 Verified Questions
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Chapter 1: Introduction
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Sample Questions
Q1) Considering the future
A) is irrelevant to macroeconomics.
B) is key to macroeconomic modelling.
C) has a limited impact on macroeconomic analysis.
D) matters only under special circumstances.
Answer: B
Q2) Macroeconomic models are
A) never wrong.
B) accurate descriptions of the economy.
C) simple abstractions of reality.
D) consistent with all economic data.
Answer: C
Q3) Which period was not a recession in the United States?
A) 1974-1975
B) 1990-1991
C) 1984-1985
D) 2001
Answer: C
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3
Chapter 2: Measurement
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Sample Questions
Q1) A price index can be computed by
A) dividing a nominal variable by its real counterpart.
B) dividing a real variable by its real counterpart.
C) subtracting the nominal variable from its real counterpart.
D) subtracting the real variable from its nominal counterpart.
Answer: A
Q2) Value added is equal to the value of a firm's production minus A) all of its costs of production.
B) labor costs.
C) investment expenditures.
D) intermediate goods used in production.
Answer: D
Q3) The components of investment expenditures include all of the following except A) financial investment.
B) residential investment.
C) non-residential investment.
D) inventory investment.
Answer: A
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4
Chapter 3: Business Cycle Measurement
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Sample Questions
Q1) Business cycle persistence refers to the property that
A) real GDP is rarely exactly at trend.
B) booms and recessions last a long time.
C) when real GDP is above trend, it tends to stay above trend, and when it is below trend, it tends to stay below trend.
D) business cycles are persistently hard to predict.
Answer: C
Q2) Macroeconomic forecasting is made easier due to the fact that
A) real GDP is variable about trend.
B) the business cycle has a regular frequency.
C) deviations from trend in real GDP are persistent.
D) turning points are easy to predict.
Answer: C
Q3) Positive correlation between x and y implies that
A) when x is high, y is high.
B) when x is high, y is low.
C) when x is zero, y is positive.
D) x and y are positively unrelated.
Answer: A
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Chapter 4: Consumer and Firm Behavior: The Work-Leisure
Decision and Profit Maximization
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Sample Questions
Q1) The construct of a representative firm is most helpful in describing the behavior of all of the firms in the economy when
A) there are constant returns to scale.
B) there are increasing returns to scale.
C) there are decreasing returns to scale.
D) the marginal product of labor is increasing in the amount of labor input.
Q2) We use indifference curves because
A) households on average do not care.
B) they help represent preferences.
C) households sometimes make mistakes.
D) they formalize the production process.
Q3) A consumer is said to be indifferent between two consumption bundles
A) when the consumer doesn't care about his or her consumption bundle.
B) when the two bundles provide equal amounts of utility.
C) when the consumer chooses the bundles equally often.
D) when the consumer is indecisive.
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6
Chapter 5: A Closed-Economy One-Period Macroeconomic
Model
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Sample Questions
Q1) In response to an increase in total factor productivity
A) both the substitution effect and the income effect suggest that hours worked should increase.
B) the substitution effect suggests that hours worked should increase, while the income effect suggests that hours worked should decrease.
C) the substitution effect suggests that hours worked should decrease, while the income effect suggests that hours worked should increase.
D) both the substitution effect and the income effect suggest that hours worked should decrease.
Q2) Which of the following is not a property of a competitive equilibrium?
A) markets clear.
B) consumers and firms optimize given market prices.
C) the government budget constraint is satisfied.
D) increasing total factor productivity.
Q3) In an economic model,an endogenous variable is
A) a stand-in for more complicated variables.
B) determined by the model itself.
C) determined outside the model.
D) a variable that has no effect on the workings of the model.
Page 7
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Chapter 6: Search and Unemployment
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Sample Questions
Q1) The participation rate was higher in 2012 than in 1948 because
A) the labor force was larger in 2012 than in 1948.
B) the unemployment rate became less variable over time.
C) of the Great Moderation
D) the participation rate of women rose between 1948 to 2012.
Q2) In the DMP model,a decrease in the unemployment insurance benefit
A) increases the unemployment rate.
B) reduces labor market tightness.
C) reduces the unemployment rate.
D) reduces the vacancy rate.
Q3) In the Keynesian DMP model
A) There is a fiscal multiplier.
B) The government post vacancies in the labor market.
C) There is no unemployment.
D) There can be more than one wage consistent with equilibrium.
Q4) In the Keynesian DMP model,if the wage is high then
A) the vacancy rate is low.
B) the unemployment rate is low.
C) labor market tightness is high.
D) the labor force must be low.
Page 8
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Chapter 7: Economic Growth: Malthus and Solow
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Sample Questions
Q1) The per-worker production function relates output per worker
A) to capital per worker.
B) to the participation rate.
C) to production per worker.
D) in different countries.
Q2) The Solow model emphasizes the role of which of the following factors of production?
A) land
B) labor
C) capital
D) natural resources
Q3) If an epidemic hits a Malthusian economy,the long-term consequence is A) an increase in the standard of living.
B) a reduction in the standard of living.
C) no change in the standard of living.
D) dependent on the population growth rate.
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Chapter 8: Income Disparity Among Countries and Endogenous Growth
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Sample Questions
Q1) In the endogenous growth model presented in the text,an increase in the efficiency of human capital accumulation
A) increases the growth rate of human capital and increases the growth rate of output.
B) increases the growth rate of human capital and decreases the growth rate of output.
C) decreases the growth rate of human capital and increases the growth rate of output.
D) decreases the growth rate of human capital and decreases the growth rate of output.
Q2) Paul Romer argues that a key feature of knowledge is
A) divisibility.
B) private ownership.
C) nonrivalry.
D) durability.
Q3) In the endogenous growth model presented in the text,
A) consumption grows faster than human capital.
B) human capital grows faster than consumption.
C) both consumption and human capital grow at the same rate.
D) neither consumption nor human capital grows in the steady state.
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Chapter 9: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
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Sample Questions
Q1) Why don't consumers work in the two-period model?
A) It's a convenient simplification.
B) It would make no difference to the model if consumers could work.
C) People who participate in real-world credit markets do not work.
D) We don't know how to include workers in the model.
Q2) The government's present value budget constraint states that A) taxes must equal government spending in each period.
B) the present value of government spending must be equal to the present value of consumers' disposable incomes.
C) the present value of government spending must be equal to the present value of taxes.
D) the government may run deficits each and every year, as long as the deficits are sufficiently small.
Q3) The property of diminishing marginal rate of substitution follows from the property that the indifference curves are
A) downward sloping.
B) upward sloping.
C) bowed in toward the origin.
D) bowed out from the origin.
Page 11
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Q1) Why do consumers benefit from pay-as-you-go social security?
A) It keeps inflation in check as money is redistributed.
B) It is a better way than taxes to finance the government.
C) It forces people to save more than they would otherwise.
D) With sufficiently high population growth, many young contribute to the benefits of the old.
Q2) If the proportion of bad borrowers increases,
A) the lending interest rate increases.
B) the lending interest rate decreases.
C) the borrowing interest rate increases.
D) the borrowing interest rate decreases.
Q3) In the two-period model with asymmetric information,a one-unit increase in the real rate of interest on bank deposits
A) causes the real loan interest rate to increase by more than one unit.
B) causes the real loan interest rate to increase by less than one unit.
C) cause the real loan interest rate to decrease by less than one unit.
D) causes the real loan interest rate to decrease by more than one unit.
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Page 12
Chapter 11: A Real Intertemporal Model with Investment
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Sample Questions
Q1) If firm-level asymmetric information becomes more severe,then
A) investment demand increases.
B) investment demand decreases.
C) investment demand does not change.
D) it is impossible to tell.
Q2) Labor demand depends on the interest rate because
A) household savings depend on the interest rate.
B) firms discount future profits.
C) of Ricardian equivalence.
D) Labor demand actually does not depend on the interest rate.
Q3) A temporary increase in government spending that leads to only a small decline in lifetime wealth likely shifts the output demand curve to the
A) right by more than the rightward shift in output supply.
B) right by less than the rightward shift in output supply.
C) left by more than the leftward shift in output supply.
D) left by less than the leftward shift in output supply.
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13
Chapter 12: Money, Banking, Prices, and Monetary Policy
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Q1) In a model with money neutrality,a 10% increase in the money supply leads to an increase of output by
A) more than 10%.
B) 10%.
C) less than 10%, but more than zero.
D) zero.
Q2) The nominal interest rate cannot fall below A) the real interest rate.
B) the rate of growth in the money stock.
C) 2%.
D) zero.
Q3) Money is each of the following except A) a medium of exchange.
B) a store of value.
C) a means by which the central bank can always, and permanently, affect production. D) a unit of account.
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Chapter 13: Business Cycle Models with Flexible Prices and Wages
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Sample Questions
Q1) In the coordination failure model,we mention sunspots because
A) they influence business cycles.
B) apparently irrelevant events may influence business cycles.
C) in central banker speak, they are synonymous with open market operations.
D) seasonal sunshine has an impact on the business cycle.
Q2) Strategic complementarities may help explain business cycles because such complementarities may lead to
A) decreasing returns to scale.
B) constant returns to scale.
C) increasing returns to scale.
D) a downward-sloping labor supply curve.
Q3) In the real business cycle model,a persistent increase in total factor productivity
A) increases the real wage and increases the price level.
B) increases the real wage and decreases the price level.
C) decreases the real wage and increases the price level.
D) decreases the real wage and decreases the price level.
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15
Chapter 14: New Keynesian Economics: Sticky Prices
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Sample Questions
Q1) A price may be sticky because
A) of monetary policy.
B) of menu costs.
C) of total factor productivity shocks.
D) of the monetary illusion.
Q2) Under a liquidity trap in the New Keynesian model,
A) prices cannot be sticky.
B) monetary policy is ineffective.
C) the economy is always efficient.
D) fiscal policy is ineffective.
Q3) The output gap is
A) the difference between target output and realized output.
B) the difference between initial output and final output.
C) the difference between market-clearing output and actual output.
D) the difference between forecasted output and past output.
Q4) The New Keynesian transmission mechanism for monetary policy is characterized by
A) helicopter drops of money.
B) money having an impact on the real interest rate.
C) banks using money injections for business loans.
D) the government buying goods with fresh money.
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Chapter 15: International Trade in Goods and Assets
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Sample Questions
Q1) In a two-period model,as long as wealth effects are small,an increase in the world real interest rate
A) increases consumption and increases the current account surplus.
B) increases consumption and decreases the current account surplus.
C) decreases consumption and increases the current account surplus.
D) decreases consumption and decreases the current account surplus.
Q2) In a two-period model with production,an anticipated future increase in domestic total factor productivity
A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) has no effect on domestic output and increases the current account surplus.
D) has no effect on domestic output and decreases the current account surplus.
Q3) In a two-period model with production,a permanent increase in domestic government spending
A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) decreases domestic output and increases the current account surplus.
D) decreases domestic output and decreases the current account surplus.
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17
Chapter 16: Money in the Open Economy
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Q1) In the monetary small open-economy model with a fixed exchange rate,an increase in the exchange rate has which impact on domestic money demand?
A) It increases it.
B) It decreases it.
C) It has no impact.
D) It depends.
Q2) In the monetary small open-economy model with a fixed exchange rate,the domestic
A) government loses control over the level of domestic government spending.
B) government loses control over the level of domestic taxes.
C) government loses control over the level of domestic government spending and domestic taxes.
D) central bank loses control over the domestic stock of money.
Q3) In the monetary small open-economy model with a flexible exchange rate,an increase in the foreign price level has which impact on domestic money demand?
A) It increases it.
B) It decreases it.
C) It has no impact.
D) It depends.
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Chapter 17: Money, Inflation, and Banking
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Q1) The opportunity cost of money is
A) zero.
B) the inflation rate.
C) the real interest rate.
D) the nominal interest rate.
Q2) In the monetary intertemporal model,the long-run effects of an increase in the level of money include
A) an increase in employment.
B) lower output.
C) higher real wages.
D) higher nominal wages.
Q3) If the Friedman rule for long-term monetary policy were implemented,the result would be
A) inflation.
B) neither inflation nor deflation.
C) deflation.
D) hyperinflation.
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Chapter 18: Inflation, the Phillips Curve, and Central Bank Commitment
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Q1) A)W. Phillips' study of unemployment and inflation in the United Kingdom specifically looked at the empirical relationship between the unemployment rate and the
A) rate of change in prices.
B) rate of change in nominal wages.
C) rate of change in real wages.
D) level of nominal wages.
Q2) A Phillips curve is
A) the correlation between money growth and the inflation rate.
B) the negative correlation between the unemployment rate and the vacancy rate.
C) the positive observed correlation between the inflation rate and the nominal interest rate.
D) an observed positive correlation between the inflation rate and some measure of aggregate economic activity.
Q3) The time consistency problem implies that
A) the central bank should not commit.
B) central bank commitment is useful.
C) discretion is better than tying your hands.
D) there are problems we cannot solve.
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