Economics for Business
Pre-Test Questions
Course Introduction
Economics for Business introduces students to the fundamental concepts and analytical tools of microeconomics and macroeconomics, emphasizing their application to real-world business decision-making. The course explores topics such as market structures, supply and demand analysis, pricing strategies, cost behaviors, and the impact of government policies on business environments. Students will learn how economic principles guide strategies for production, resource allocation, competition, and the handling of global and ethical challenges in diverse business contexts. By integrating case studies and practical examples, the course equips students with the economic insight necessary to make informed managerial decisions and understand the broader economic forces shaping modern businesses.
Recommended Textbook
Macroeconomics 5th Edition by Stephen D. Williamson
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Chapter 1: Introduction
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Q1) The real interest rate is
A) always equal to the pure rate of time preference.
B) equal to the rate of inflation minus the nominal rate of interest.
C) equal to the nominal rate of interest minus the rate of inflation.
D) less important for decision making than the nominal rate of interest.
Answer: C
Q2) The development most responsible for the wide-spread introduction of macroeconomic models built upon solid microeconomic foundations was the
A) work of John Maynard Keynes.
B) rational expectations revolution.
C) popularization of supply-side economics.
D) development of the Keynesian coordination failure model.
Answer: B
Q3) According to Keynesian coordination failure theory,the primary causes of business cycles are
A) shocks to aggregate demand.
B) monetary factors.
C) technology shocks.
D) waves of self-fulfilling optimism and pessimism.
Answer: D
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Chapter 2: Measurement
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Sample Questions
Q1) If Year 2 is the base year,the real GDP of Year 1 is
A) $800.
B) $1050.
C) $1900.
D) $2400.
Answer: B
Q2) In recent U.S. history
A) GDP has been much higher than GNP.
B) GNP has been much higher than GDP.
C) the difference between GNP and GDP has been very volatile.
D) there has been little practical difference between GNP and GDP.
Answer: D
Q3) To calculate value added,we need to subtract
A) only the cost of domestically-produced intermediate inputs.
B) only the cost of foreign-produced intermediate inputs.
C) the cost of domestic- and foreign-produced intermediate inputs.
D) total imports.
Answer: C
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Chapter 3: Business Cycle Measurement
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Sample Questions
Q1) For the period 1947-2012 in the United States,the money supply was
A) procyclical and leading.
B) procyclical and lagging.
C) countercyclical and leading.
D) countercyclical and lagging.
Answer: A
Q2) Negative correlation between x and y implies that
A) when x is high, y is high.
B) when x is high, y is low.
C) xy < 0.
D) x/y < 0.
Answer: B
Q3) Macroeconomic forecasting is made more difficult due to the fact that A) deviations from trend in real GDP are persistent.
B) turning points are hard to predict.
C) there is no regularity in comovements.
D) consumption is smooth.
Answer: B
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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 goal of the representative firm is to
A) hire as much labor as possible.
B) maximize revenue.
C) minimize labor costs.
D) maximize profits.
Q2) A lump-sum tax is a tax that
A) can be avoided by strategic behavior.
B) does not depend on the actions of the economic agent being taxed.
C) does not depend on the actions of the government.
D) distorts economic decisions.
Q3) 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.
Q4) In a one-period economy,real consumption
A) is always less than disposable income.
B) is typically greater than disposable income.
C) is exactly equal to disposable income.
D) can be greater than, less than, or equal to disposable income.
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Chapter 5: A Closed-Economy One-Period Macroeconomic
Model
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Sample Questions
Q1) Suppose total factor productivity increases. Which of the following is incorrect?
A) Households are better off.
B) Consumption goes up.
C) The real wage goes down.
D) Output goes up.
Q2) A competitive equilibrium has all of the following properties except
A) MPN = slope of PFF.
B) MRS?,C = MRT?,C.
C) MRT?,C = MPN.
D) MPN = w.
Q3) The PPF determines
A) all possible outcomes for a given wage.
B) the set of feasible outcomes.
C) given leisure, how much consumption a household wants.
D) the share of consumption in output.
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Chapter 6: Search and Unemployment
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Q1) In the DMP model,an increase in productivity does not
A) reduce the unemployment rate.
B) increase the vacancy rate.
C) increase labor market tightness.
D) increase the size of the labor force.
Q2) The matching function captures the idea that
A) consumers have to be paid to work.
B) supply and demand for labor determine the market wage.
C) it is costly and time-consuming to get firms and workers together to produce output.
D) firms are profit-maximizing.
Q3) In the DMP model,a decrease in productivity
A) decreases the unemployment rate.
B) reduces the vacancy rate.
C) increases the unemployment rate.
D) increases the size of the labor force.
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Chapter 7: Economic Growth: Malthus and Solow
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Sample Questions
Q1) In a Malthusian world,what would improve the standard of living permanently?
A) a war
B) a new medical drug
C) birth control
D) democracy
Q2) In the Golden Rule steady state,the marginal product of capital is equal to the
A) savings rate plus the population growth rate.
B) population growth rate plus the depreciation rate.
C) depreciation rate plus the savings rate.
D) savings rate divided by the marginal product of labor.
Q3) Before the Industrial Revolution,standards of living differed
A) greatly over time and across countries.
B) little over time, but differed greatly across countries.
C) greatly over time, but differed little across countries.
D) little over time and across countries.
Q4) The Solow residual attempts to measure the amount of output not explained by A) technological progress.
B) the direct contribution of labor and capital.
C) economic projections.
D) the amount of a nation's human capital.
Page 9
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Chapter 8: Income Disparity Among Countries and Endogenous Growth
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Q1) Income per worker has been
A) converging in both the rich countries and the poor countries.
B) converging in the rich countries, but not converging in the poor countries.
C) converging in the poor countries, but not converging in the rich countries.
D) converging in neither the poor nor the rich countries.
Q2) In the endogenous growth model,workers divide their time between market work and
A) accumulating physical capital.
B) accumulating human capital.
C) trying to invent new production processes.
D) work at home.
Q3) An improvement in school quality translates into an increase in which model parameter?
A) H
B) z
C) b
D) 1-u
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Chapter 9: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
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Sample Questions
Q1) Distorting taxes can invalidate Ricardian equivalence because
A) they confuse consumers about the need for government to repay its debt.
B) alternative ways of collecting the same tax revenue produce different amounts of lost welfare.
C) they are inferior to lump-sum taxes.
D) they are more popular, politically, than lump-sum taxes.
Q2) We use a two-period model because
A) the business cycle has two phases: contraction and recovery.
B) it is the simplest dynamic model.
C) we want to make a distinction between young and old households.
D) this is the horizon of the politicians that formulate policy.
Q3) A permanent decrease in taxes leads to
A) a small increase in current consumption.
B) a large increase in current consumption.
C) a small decrease in future consumption.
D) a large decrease in future consumption.
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11
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Q1) In a fully-funded social security program
A) the young pay for the benefits of the old.
B) the young are forced to save for their own retirement.
C) the young have to buy bonds for the old.
D) the young are forced to save for the retirement of the old.
Q2) An interest rate spread is
A) the difference between long-term and short-term interest rates.
B) the difference between nominal and real interest rates.
C) the difference between lending and borrowing interest rates.
D) the difference between public and commercial interest rates.
Q3) Asymmetric information means
A) some market participants have more information than others.
B) some news are more important than others.
C) some market participants interpret news differently.
D) the impact of news on economic outcomes depends on the context.
Q4) Limited commitment means
A) one cannot credibly promise something.
B) one saves only part of what is optimal.
C) only some households are allowed to save.
D) there is rationing on the credit market.
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Chapter 11: A Real Intertemporal Model with Investment
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Q1) The equilibrium effects of a temporary increase in government spending include
A) an increase in the real wage and an increase in the real interest rate.
B) an increase in the real wage and a decrease in the real interest rate.
C) a decrease in the real wage and an increase in the real interest rate.
D) a decrease in the real wage and a decrease in the real interest rate.
Q2) In determining the benefit of additional investment to the representative firm,we consider the marginal product of A) current capital.
B) future capital
C) current labor.
D) future labor.
Q3) The demand for current consumption,as plotted against the interest rate,shifts to the right due to all of the following except
A) a decrease in current taxes.
B) a increase in future taxes.
C) an increase in current income.
D) an increase in future income.
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Chapter 12: Money, Banking, Prices, and Monetary Policy
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Q1) Government printing of money to finance government spending is called A) irresponsible.
B) an open-market purchase.
C) sterilization.
D) seigniorage.
Q2) An increase in the nominal interest rate increases the quantity of credit card services because
A) bank profits go up.
B) of intertemporal substitution.
C) the opportunity cost of making transactions with money has risen.
D) the substitution effect is greater than the income effect.
Q3) With money supply shocks in the intertemporal model with money,the price level is A) procyclical.
B) acyclical.
C) countercyclical.
D) somewhat cyclical.
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Chapter 13: Business Cycle Models with Flexible Prices and Wages
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Q1) A reduction in financial liquidity,producing deficient liquid assets
A) shifts the output supply curve to the right.
B) shifts the output demand curve to the right.
C) shifts the output supply curve to the left.
D) shifts the output demand curve to the left.
Q2) Extraneous events that are completely unrelated to economic fundamentals are called
A) moonbeams.
B) black holes.
C) sunspots.
D) time warps.
Q3) The phenomenon of underutilization of labor during a recession is called
A) labor stockpiling.
B) investing in human capital.
C) labor force stabilization.
D) labor hoarding.
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Chapter 14: New Keynesian Economics: Sticky Prices
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Sample Questions
Q1) Total factor productivity shocks are not a good explanation of economic fluctuations in the New Keynesian model for all the following reasons except
A) they do not generate output fluctuations.
B) employment drops when TFP increases.
C) the real wage drops when TFP increases.
D) they do not generate price fluctuations.
Q2) In the New Keynesian model,the stabilization effects of fiscal and monetary policy are different because
A) the effects on the composition of output are different.
B) monetary policy does not work in a liquidity trap, but fiscal policy does.
C) monetary policy affects spending on goods indirectly; fiscal policy affects spending directly.
D) all of the above.
Q3) What do we need to assume about firms in the sticky price model?
A) They accommodate any demand at the given price.
B) They hire until the real wage equals the average labor productivity.
C) They maximize only current profits.
D) They adapt the price to current conditions.
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Chapter 15: International Trade in Goods and Assets
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Q1) In a two-period model,holding everything else constant,an increase in future taxes
A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus, as long as Ricardian equivalence holds.
Q2) The current account surplus is not
A) the trade balance.
B) the excess of national savings over investment.
C) private saving less government deficit.
D) output less taxes and trade deficit.
Q3) 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.
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Chapter 16: Money in the Open Economy
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Q1) To maintain a fixed exchange rate,authorities
A) make laws stipulating the exchange rate.
B) modify money supply.
C) modify government expenses.
D) modify taxes.
Q2) The nominal exchange rate is the
A) domestic currency price of foreign currency.
B) foreign currency price of domestic currency.
C) price of domestic goods in terms of foreign goods.
D) price of foreign goods in terms of domestic goods.
Q3) Under a flexible exchange rate,an increase in the domestic money supply leads to A) a devaluation of the domestic currency.
B) a revaluation of the domestic currency.
C) a depreciation of the domestic currency.
D) an appreciation of the domestic currency.
Q4) The International Monetary Fund plays the key role of
A) providing deposit insurance for banks in its member nations.
B) acting as lender of last resort for its member countries' central banks.
C) providing loans to member countries to help finance development projects.
D) enforcing international monetary agreements.
Page 18
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Chapter 17: Money, Inflation, and Banking
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Q1) Moral hazard is a problem in providing deposit insurance because insured banks are
A) more likely to make bookkeeping errors.
B) overly cautious due to extra regulations adopted by the FDIC.
C) more likely to provide bank managers with lavish perquisites.
D) encouraged to take on more risk.
Q2) An increase in the inflation rate shifts the labor
A) supply curve to the right.
B) supply curve to the left.
C) demand curve to the right.
D) demand curve to the left.
Q3) Which of the following properties must a good have to be used as money?
A) It should be a durable good.
B) It should be issued by a government of central bank.
C) It should have intrinsic value.
D) It should be shiny.
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Chapter 18: Inflation, the Phillips Curve, and Central Bank Commitment
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Q1) In the Friedman-Lucas money surprise model,a surprise increase in money supply growth
A) has no effect on inflation.
B) increases inflation less than in proportion to the growth rate of the money supply.
C) increases inflation in an equal proportion to the growth rate of the money supply.
D) increases inflation more than in proportion to the growth rate of the money supply.
Q2) Time inconsistency means
A) taking different decisions at different times despite facing the same situation. B) making policy choices that violate the intertemporal budget constraint.
C) deciding to do something tomorrow, and then doing something different tomorrow. D) adding a random factor to decisions.
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