Economics I Exam Materials
Course Introduction
Economics I introduces students to the fundamental principles of microeconomics, focusing on how individuals and firms make choices in the face of scarcity. The course covers topics such as supply and demand, elasticity, consumer and producer behavior, market efficiency, and various forms of market structures. Students will explore the mechanisms that drive decision-making in households and businesses, as well as the outcomes of interactions within different types of markets. By applying theoretical concepts to real-world scenarios, students will develop critical analytical skills necessary for understanding basic economic issues and policy debates.
Recommended Textbook
Principles of Macroeconomics 6th Edition by N.
Gregory Mankiw
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Page 2
Chapter 1: Ten Principles of Economics
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Q1) The fact that people are willing to pay much more for a diamond, which is not needed for survival, than they are willing to pay for a cup of water, which is needed for survival, is an example of irrational behavior.
A)True
B)False Answer: False
Q2) To say people respond to incentives means that people may alter their decisions when the costs and benefits of an action change.
A)True
B)False Answer: True
Q3) Productivity is defined as the quantity of goods and services produced from each unit of labor input.
A)True
B)False Answer: True
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Chapter 2: Thinking Like an Economist
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Q1) When constructing a production possibilities frontier, which of the following assumptions is not made?
A)The economy produces only two goods or two types of goods.
B)Firms produce goods using factors of production.
C)The technology available to firms is given.
D)The quantities of the factors of production that are available are increasing over the relevant time period.
Answer: D
Q2) Refer to Figure 2-4. If this economy devotes all of its resources to the production of notepads, then it will produce
A)0 notepads and 40 lamps.
B)35 notepads and 20 lamps.
C)70 notepads and 0 lamps.
D)70 notepads and 40 lamps.
Answer: C
Q3) Evaluating normative statements involves values as well as facts.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Interdependence and the Gains From Trade
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Q1) Refer to Table 3-7. We could use the information in the table to draw a production possibilities frontier for Japan and a second production possibilities frontier for Korea. If we were to do this, measuring cars along the horizontal axis, then
A)the slope of Japan's production possibilities frontier would be -5 and the slope of Korea's production possibilities frontier would be -3.
B)the slope of Japan's production possibilities frontier would be -0.2 and the slope of Korea's production possibilities frontier would be -0.33.
C)the slope of Japan's production possibilities frontier would be 0.2 and the slope of Korea's production possibilities frontier would be 0.33.
D)the slope of Japan's production possibilities frontier would be 5 and the slope of Korea's production possibilities frontier would be 3.
Answer: B
Q2) Differences in opportunity cost allow for gains from trade.
A)True
B)False
Answer: True
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Chapter 4: The Market Forces of Supply and Demand
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Q1) Ford Motor Company announces that next month it will offer $3,000 rebates on new Mustangs. As a result of this information, today's demand curve for Mustangs
A)shifts to the right.
B)shifts to the left.
C)shifts either to the right or to the left, but we cannot determine the direction of the shift from the given information.
D)will not shift; rather, the demand curve for Mustangs will shift to the right next month.
Q2) Suppose an increase in the price of rubber coincides with an advance in the technology of tire production. As a result of these two events, the demand for tires
A)decreases, and the supply of tires increases.
B)is unaffected, and the supply of tires decreases.
C)is unaffected, and the supply of tires increases.
D)None of the above is necessarily correct.
Q3) An increase in supply will cause a decrease in price, which will cause an increase in demand.
A)True
B)False
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Chapter 5: Elasticity and Its Application
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Q1) Demand is inelastic if the price elasticity of demand is greater than 1.
A)True
B)False
Q2) The case of perfectly elastic demand is illustrated by a demand curve that is A)vertical.
B)horizontal.
C)downward-sloping but relatively steep.
D)downward-sloping but relatively flat.
Q3) If the price of gasoline rises, when is the price elasticity of demand likely to be the highest?
A)immediately after the price increases
B)one month after the price increase
C)three months after the price increase
D)one year after the price increase
Q4) Pierre says that he will spend exactly 75 cents a day on candy bars, regardless of the price of candy bars. Pierre's demand for candy bars is
A)perfectly elastic.
B)unit elastic.
C)perfectly inelastic.
D)None of the above answers is correct.
Page 7
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Chapter 6: Supply, Demand, and Government Policies
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Q1) Which of the following is correct? Price controls
A)always help those they are designed to help.
B)never help those they are designed to help.
C)often hurt those they are designed to help.
D)always hurt those they are designed to help.
Q2) Refer to Figure 6-7. For a price floor to be binding in this market, it would have to be set at
A)any price below $6.
B)a price between $3 and $6.
C)a price between $6 and $9.
D)any price above $6.
Q3) If a binding price ceiling is imposed on the baby formula market, then
A)the quantity of baby formula demanded will increase.
B)the quantity of baby formula supplied will decrease.
C)a shortage of baby formula will develop.
D)All of the above are correct.
Q4) When a tax of $1.00 per gallon is imposed on sellers of gasoline, the supply curve for gasoline shifts upward, but by less than $1.00.
A)True
B)False
Page 8
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Chapter 7: Consumers, Producers, and the Efficiency of Markets
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Q1) If Gina sells a shirt for $40, and her producer surplus from the sale is $32, her cost must have been
A)$72.
B)$32.
C)$8.
D)We would have to know the consumer surplus in order to make this determination.
Q2) A consumer's willingness to pay directly measures
A)the extent to which advertising and other external forces have influenced the consumer's preferences.
B)the cost of a good to the buyer.
C)how much a buyer values a good.
D)consumer surplus.
Q3) Refer to Table 7-5. If the market price of an orange is $1.20, then the market quantity of oranges demanded per day is
A) 1.
B) 2.
C) 3.
D) 4.
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Chapter 8: Application: The Costs of Taxation
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Q1) When a tax is placed on a product, the price paid by buyers
A)rises, and the price received by sellers rises.
B)rises, and the price received by sellers falls.
C)falls, and the price received by sellers rises.
D)falls, and the price received by sellers falls.
Q2) Suppose a tax of $5 per unit is imposed on a good. The supply curve is a typical upward-sloping straight line, and the demand curve is a typical downward-sloping straight line. The tax decreases consumer surplus by $10,000 and decreases producer surplus by $15,000. The deadweight loss of the tax is $2,500. The tax decreased the equilibrium quantity of the good from
A)6,500 to 5,500.
B)5,500 to 4,500.
C)5,000 to 3,000.
D)6,000 to 4,000.
Q3) The benefit that government receives from a tax is measured by
A)deadweight loss.
B)consumer surplus.
C)tax incidence.
D)tax revenue.
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Page 10
Chapter 9: Application: International Trade
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Q1) In principle, trade can make a nation better off, because the gains to the winners exceed the losses to the losers.
A)True
B)False
Q2) Refer to Figure 9-12. With trade, the domestic price and domestic quantity demanded are
A)$27 and 400.
B)$27 and 800.
C)$21 and 400.
D)$21 and 600.
Q3) Refer to Figure 9-7. The equilibrium price and the equilibrium quantity of cheese in Wales before trade are
A)P<sub>1</sub> and Q<sub>2.</sub>
B)P<sub>1</sub> and Q<sub>1</sub>.
C)P<sub>0</sub> and Q<sub>0</sub>.
D)P<sub>0</sub> and Q<sub>1</sub>.
Q4) Deadweight loss measures the decrease in total surplus that results from a tariff or quota.
A)True
B)False
Page 11
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Chapter 10: Measuring a Nations Income
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Q1) If nominal GDP is $10 trillion and real GDP is $12 trillion, then the GDP deflator is
A)83.33, and this indicates that the price level has decreased by 16.67 percent since the base year.
B)83.33, and this indicates that the price level has increased by 83.33 percent since the base year.
C)120, and this indicates that the price level has increased by 20 percent since the base year.
D)120, and this indicates that the price level has increased by 120 percent since the base year.
Q2) In the economy of Ukzten in 2010, consumption was $5000, exports were $100, government purchases were $900, imports were $200, and investment was $1000. What was Ukzten's GDP in 2010?
A)$6700
B)$6800
C)$7000
D)$7200
Q3) Since it is counted as investment, why doesn't the purchase of earthmoving equipment from China by a U.S. corporation increase U.S. GDP?
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Page 12
Chapter 11: Measuring the Cost of Living
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Q1) The CPI is more commonly used as a gauge of inflation than the GDP deflator is because
A)the CPI is easier to measure.
B)the CPI is calculated more often than the GDP deflator is.
C)the CPI better reflects the goods and services bought by consumers.
D)the GDP deflator cannot be used to gauge inflation.
Q2) To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant?
A)substitution bias
B)introduction of new goods
C)unmeasured quality change
D)income bias
Q3) Refer to Scenario 11-3. In real terms, Sue Holloway's income amounts to about what percentage of Josh Holloway's income?
A)5.71 percent
B)9.6 percent
C)59.7 percent
D)67.4 percent
Q4) Why does the GDP deflator give a different rate of inflation than the CPI?
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Chapter 12: Production and Growth
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Q1) Technological knowledge
A)is the same thing as human capital.
B)can be discovered but it can never be kept secret.
C)is a determinant of productivity.
D)does not play a role in the relationship that economists call the production function.
Q2) Countries that have lower levels of real GDP per person than the United States
A)tend to have growth rates that are higher than that of the United States.
B)tend to have growth rates that are about the same as that of the United States.
C)tend to have growth rates that are lower than that of the United States.
D)in some cases have growth rates that are higher than that of the United States and in other cases lower than that of the United States.
Q3) In some countries such as Chad, Gabon, and Senegal real GDP per person has been stagnant for many years.
A)True
B)False
Q4) What is a production function? Write an equation for a typical production function, and explain what each of the terms represents.
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Chapter 13: Saving, Investment, and the Financial System
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Q1) If in the past Congress had taken additional actions to make saving more rewarding, then today it is likely that the equilibrium interest rate
A)and the equilibrium quantity of loanable funds both would be lower.
B)and the equilibrium quantity of loanable funds both would be higher.
C)would be higher and the equilibrium quantity of loanable funds would be lower.
D)would be lower and the equilibrium quantity of loanable funds would be higher.
Q2) If an economy is closed and if it has no government, then
A)national saving = private saving.
B)total income = consumption + investment.
C)saving = total income - consumption.
D)All of the above are correct.
Q3) A checking deposit functions as
A)a medium of exchange and as a store of value.
B)a medium of exchange, but not as a store of value.
C)a store of value, but not as a medium of exchange.
D)neither a medium of exchange nor as a store of value.
Q4) In the national income accounting identity showing the equality between national saving and investment, what are the algebraic expressions for private saving and public saving?
Q5) What are the basic differences between bonds and stocks?
Page 15
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Chapter 14: The Basic Tools of Finance
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Q1) Tami knows that people in her family die young, and so she buys life insurance. Preston knows he is a reckless driver and so he applies for automobile insurance.
A)These are both examples of adverse selection.
B)These are both examples of moral hazard.
C)The first example illustrates adverse selection, and the second illustrates moral hazard.
D)The first example illustrates moral hazard, and the second illustrates adverse selection.
Q2) If unexpected news raised people's expectations of a corporation's future dividends and price, then before the price changes this corporation's stock would be
A)overvalued, so its price would rise.
B)overvalued, so its price would fall.
C)undervalued, so its price would rise.
D)undervalued, so its price would fall.
Q3) Give an example of adverse selection and an example of moral hazard using homeowners insurance.
Q4) What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.
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Page 16
Chapter 15: Unemployment
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Q1) Recent entrants into the labor force account for about
A)1/5 of those who are unemployed.
B)1/4 of those who are unemployed.
C)1/3 of those who are unemployed.
D)1/2 of those who are unemployed.
Q2) For the Bureau of Labor Statistics to place someone in the "unemployed" category, that person must
A)be available for work.
B)have tried to find employment during the previous week.
C)have previously been employed.
D)All of the above are correct.
Q3) The Bureau of Labor Statistics reported in 2005 that there were 28.19 million people over age 25 who had no high school degree or its equivalent, 11.73 million of whom were employed and 1.04 million of whom were unemployed. What were the labor-force participation rate and the unemployment rate for this group?
A)45.3% and 3.7%
B)45.3% and 8.1%
C)41.6% and 3.7%
D)41.6% and 8.1%
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Chapter 16: The Monetary System
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Q1) To increase the money supply, the Fed could
A)sell government bonds.
B)increase the discount rate.
C)decrease the reserve requirement.
D)None of the above is correct.
Q2) Economists use the word "money" to refer to
A)income generated by the production of goods and services.
B)those assets regularly used to buy goods and services.
C)fianncial assets such as stocks and bonds.
D)any type of wealth.
Q3) Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 10 percent, and excess reserves are $3 billion. What is the level of loans?
A)$3,603 billion
B)$3,600 billion
C)$3,573 billion
D)$3,570 billion
Q4) Federal Reserve governors are given long terms to insulate them from politics.
A)True
B)False
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Chapter 17: Money Growth and Inflation
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Q1) Which country is correctly matched with its 2009 inflation rate?
A)9 percent inflation in the United States
B)-1 percent inflation in Russia
C)25 percent inflation in Venezuela
D)2 percent inflation in Japan
Q2) In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold
A)raised both the price level and the value of gold in Cairo.
B)raised the price level, but decreased the value of gold in Cairo.
C)lowered the price level, but increased the value of gold in Cairo.
D)lowered both the price level and the value of gold in Cairo.
Q3) Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then
A)both the nominal and the real interest rate rise.
B)neither the nominal nor the real interest rate rise.
C)the nominal interest rate rises, but the real interest rate does not.
D)the real interest rate rises, but the nominal interest rate does not.
Q4) Explain how inflation affects savings.
Q5) List and define any two of the costs of high inflation.
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Chapter 18: Open-Economy Macroeconomic Models
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Q1) Why are net exports and net capital outflow always equal?
Q2) Other things the same, if U.S. net capital outflow rises, so does U.S. saving.
A)True
B)False
Q3) By itself, if a U.S. firm builds a new factroy overseas, U.S. net captial outflow rises.
A)True
B)False
Q4) Which of the following does purchasing-power parity imply?
A)The purchasing power of the dollar is the same in the U.S. as in foreign countries.
B)The price of domestic goods relative to foreign goods cannot change.
C)The nominal exchange rate is the ratio of U.S. prices to foreign prices.
D)All of the above are correct.
Q5) A Canadian manufacturing company opens a factory the produces air conditioners in the United States. This is an example of Canadian
A)foreign direct investment that increases Canadian net capital outflow.
B)foreign direct investment that decreases Canadian net capital outflow.
C)foreign portfolio investment that increases Canadian net capital outflow.
D)foreign portfolio investment that decreases Canadian net capital outflow.
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Chapter 19: A Macroeconomic Theory of the Open Economy
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Q1) An increase in a country's budget surplus shifts its
A)demand for loanable funds right and decreases investment spending.
B)supply of loanable funds right and increases investment spending.
C)supply of loanable funds left and decreases investment spending.
D)None of the above is correct.
Q2) The key determinant of net capital outflow is the real interest rate.
A)True
B)False
Q3) When Mexico suffered from capital flight in 1994, U.S. demand for loanable funds
A)and U.S. net capital outflow rose.
B)and U.S. net capital outflow fell.
C)fell and U.S. net capital outflow rose.
D)rose and U.S. net capital outflow fell.
Q4) Because a government budget deficit represents
A)negative public saving, it increases national saving.
B)negative public saving, it decreases national saving.
C)positive public saving, it increases national saving.
D)positive public saving, it decreases national saving.
Q5) What do trade policies do to the standard of living?
Q6) Why do higher real interest rates lead to lower net capital outflow?
Page 21
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Chapter 20: Aggregate Demand and Aggregate Supply
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Q1) Refer to Figure 20-1. If the economy starts at A and moves to D in the short run, the economy
A)moves to A in the long run.
B)moves to B in the long run.
C)moves to C in the long run.
D)stays at D in the long run.
Q2) Refer to Stock Market Boom 2015. Which curve shifts and in which direction?
A)aggregate demand shifts right
B)aggregate demand shifts left
C)aggregate supply shifts right
D)aggregate supply shifts left.
Q3) During World War II, the economy's production increased about
A)25 percent and prices rose about 5 percent.
B)50 percent and prices rose about 10 percent.
C)75 percent and prices rose about 15 percent.
D)100 percent and prices rose about 20 percent.
Q4) An increase in the expected price level shifts the short-run aggregate supply curve to the right.
A)True
B)False
Page 22
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Chapter 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) The theory of liquidity preference was developed by Irving Fisher.
A)True
B)False
Q2) Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always half as strong as the multiplier effect, and if the MPC equals 0.8, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?
A)by $5 billion
B)by $10 billion
C)by $20 billion
D)by $50 billion
Q3) Refer to Figure 21-2. Assume the money market is always in equilibrium. Under the assumptions of the model,
A)the real interest rate is higher at Y<sub>2</sub> than it is at Y<sub>1</sub>.
B)the quantity of money is the same at Y<sub>1</sub> as it is at Y<sub>2</sub>.
C)the price level is higher at r<sub>2</sub> than it is at r<sub>1</sub>.
D)All of the above are correct.
Q4) What is the difference between monetary policy and fiscal policy?
Page 23
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Chapter 22: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) The natural rate of unemployment
A)is constant over time.
B)varies over time, but can't be changed by the government.
C)is the unemployment rate that the economy tends to move to in the long run.
D)depends on the rate at which the Fed increases the money supply.
Q2) According to Friedman and Phelps, the unemployment rate
A)is never below its natural rate.
B)is below its natural rate when actual inflation is greater than expected inflation.
C)is below its natural rate when actual inflation is less than expected inflation.
D)is below its natural rate when actual inflation equals expected inflation.
Q3) One determinant of the natural rate of unemployment is the A)rate of growth of the money supply.
B)minimum wage rate.
C)expected inflation rate.
D)All of the above are correct.
Q4) The Phillips curve and the short-run aggregate supply curve are closely related, yet one slopes downward and the other slopes upward. Discuss.
Q5) Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?
Page 24
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Chapter 23: Six Debates Over Macroeconomic Policy
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Q1) A permanent reduction in inflation would
A)permanently reduce menu costs and permanently lower unemployment.
B)permanently reduce menu costs and temporarily raise unemployment.
C)temporarily reduce menu costs and temporarily lower unemployment.
D)temporarily reduce menu costs and temporarily raise unemployment.
Q2) The average person's share of the U.S. government debt as a percentage of lifetime income is
A)less than 2 percent.
B)about 5 percent.
C)about 10 percent.
D)over 12 percent.
Q3) A nation's saving rate is not a primary determinant of its long-run economic prosperity.
A)True
B)False
Q4) A recession has no benefit to society-it represents a sheer waste of resources.
A)True
B)False
Q5) Describe three costs of inflation.
Q6) Explain the main arguments in favor of economic stabilization.
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