Economics I Exam Practice Tests
Course Introduction
Economics I introduces students to the fundamental principles of microeconomics, focusing on the behavior of individuals and firms in making decisions regarding the allocation of scarce resources. The course covers key topics such as supply and demand, market equilibrium, elasticity, consumer choice, production and costs, and various market structures including perfect competition, monopoly, and oligopoly. Students will learn to analyze real-world economic issues using graphical and mathematical tools, gaining a foundational understanding of how markets function and the role of government in economic outcomes.
Recommended Textbook macroeconomics principles and policy 12th edition by william j. baumol
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Page 2
Chapter 1: What Is Economics?
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Sample Questions
Q1) Graphs are valuable because they facilitate interpretation of data.
A)True
B)False
Answer: True
Q2) The tangent at point A on a curve has a positive slope.Therefore,the curve has a
A) positive slope at all points.
B) positive slope at point A.
C) negative slope at all points.
D) negative slope at point A.
Answer: B
Q3) Which of the following is an example of a fiscal policy initiative?
A) Lowering of interest rates.
B) Increase in reserve requirements.
C) Reduction in taxes.
D) Decrease in money supply.
Answer: C
Q4) A ray through the origin always has a slope of one.
A)True
B)False
Answer: False
Page 3
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Chapter 2: The Economy: Myth and Reality
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Sample Questions
Q1) When government defines and enforces property rights,this is an example of government as
A) referee.
B) regulator of business.
C) buyer of goods and services.
D) tax collector.
E) redistributor.
Answer: A
Q2) The total market value of capital assets in the United States is over $30 trillion dollars.
A)True
B)False
Answer: True
Q3) The role of government in a market economy includes all of the following except A) providing services such as national defense.
B) collecting taxes.
C) extensive ownership of productive resources.
D) making and enforcing laws.
Answer: C
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Page 4
Chapter 3: The Fundamental Economic Problem: Scarcity and Choice
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Sample Questions
Q1) The production possibilities frontier can be used to show a manufacturer's possible combinations of output of two goods.
A)True
B)False Answer: True
Q2) Opportunity cost always arises when a trade-off decision is made.
A)True
B)False Answer: True
Q3) The opportunity cost of any decision is the forgone value of the next best alternative that is not chosen.
A)True
B)False Answer: True
Q4) The principle of comparative advantage helps explain trade between nations.
A)True
B)False Answer: True
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Chapter 4: Supply and Demand: An Initial Look
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Sample Questions
Q1) Firms often seek to borrow money to expand their capital stock,and the price they pay for that money is the interest rate.What happens to quantity of money demanded if the interest rate increases?
A) It increases.
B) It decreases.
C) It does not change.
D) Uncertain-the law of demand does not apply to money.
Q2) The demand for computers has risen dramatically at the same time that the unit cost of production has decreased.As a result,we can expect
A) a decrease in price and no predictable impact on output.
B) a definite decrease in price and increase in output.
C) an increase in output with no predictable change in price.
D) no predictable changes in either price or output.
Q3) Which of the following would cause an increase in demand for Toyota automobiles?
A) an increase in the price of Toyota automobiles
B) a decrease in the price of Toyota automobiles
C) a decrease in the price of Honda automobiles
D) an increase in the price of Honda automobiles
Q4) List some of the problems that may arise when prices are controlled.
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Chapter 5: An Introduction to Macroeconomics
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Sample Questions
Q1) In terms of macroeconomic conditions,the 1930s were the "good old days."
A)True
B)False
Q2) Is GDP an accurate measure of a country's well being?
A) Yes, it is the best measure of national well being.
B) Yes, provided we use real GDP and not nominal GDP.
C) The answer is uncertain, depending on whether GDP is rising or falling.
D) No, it is not.
Q3) The successes of the 1960s were ascribed to the effects of
A) classical policies from the 1800s.
B) classical policies from the 1930s.
C) classical policies from the 1950s.
D) Keynesian policies from the 1930s.
E) Keynesian policies from the 1950s.
Q4) In Figure 5-2,if the aggregate demand curve shifts outward over time,the economy will
A) experience inflation.
B) see a sustained decrease in the price level.
C) experience a significant decrease in unemployment.
D) experience economic recession.
Page 7
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Chapter 6: The Goals of Macroeconomic Policy
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Sample Questions
Q1) When comparing the costs of inflation to society,it is important to distinguish between
A) low versus high rates of inflation.
B) expected versus unexpected inflation.
C) high price levels and low price levels.
D) real versus nominal inflation.
Q2) The relationship between industrial capacity percentage and
A) the unemployment rate is indirect.
B) the unemployment rate is direct.
C) real GDP is indirect.
D) nominal GDP is indirect.
Q3) The main cost that low inflation imposes on an economy is that low inflation
A) inevitably leads to high inflation.
B) distorts some economic decisions.
C) reduces real wages.
D) benefits lenders at the expense of borrowers.
Q4) Inflation tends to redistribute real income from lenders to borrowers.
A)True
B)False
Q5) High unemployment is socially wasteful.Why?
Page 8
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Chapter 7: Economic Growth: Theory and Policy
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Sample Questions
Q1) The shrinking gap between the income levels of poor and rich countries is known as the
A) conservative hypothesis.
B) divergence hypothesis.
C) convergence hypothesis.
D) confluent hypothesis.
Q2) The productivity growth rates of richer countries tend to be ____ than those of poorer countries.
A) higher
B) lower
C) increasing faster
D) decreasing faster
Q3) In the United States,the wage rates for high school graduates are growing faster than the wage rates for college graduates.
A)True
B)False
Q4) Draw a production function and illustrate the effects of capital investment and technological improvement on labor productivity.
Q5) Describe the three pillars of productivity growth.
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Chapter 8: Aggregate Demand and the Powerful Consumer
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Sample Questions
Q1) Why is it t that domestic product and national income must be equal?
A) The IRS national accounting system assures that taxes equal total income.
B) The total amount of spending must equal total national sales.
C) The value of final product must equal the sum of resource income that produced it.
D) The total amount of income earned is eventually spent.
Q2) Disposable income can be defined as national product
A) minus federal and state taxes.
B) minus taxes plus transfers.
C) minus indirect taxes.
D) plus taxes plus transfers.
Q3) The relationship between consumption and disposable income is such that as
A) consumption rises, disposable income falls.
B) disposable income rises, consumption rises.
C) disposable income rises, consumption falls.
D) disposable income rises, saving falls.
Q4) Scatter diagrams are a useful way to depict the relationship between two variables.
A)True
B)False
Page 10
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Chapter 9: Demand-Side Equilibrium: Unemployment or
Inflation?
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Sample Questions
Q1) The expenditure schedule includes the consumption function.
A)True
B)False
Q2) In a market economy,the decisions about what to produce and how much of each good or service to produce are made by
A) government officials.
B) economic planners.
C) central bankers.
D) consumers and producers.
Q3) Businesses in the United States cut their investment projects by $30 billion.If the MPC is 2,what will be the impact on the national income (Y)?
A) Y will fall by $15 billion.
B) Y will fall by $30 billion.
C) Y will fall by $60 billion.
D) Y will fall by $120 billion.
Q4) The multiplier can be expressed as the ratio of the change in Y over the change in I.
A)True
B)False
11
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Chapter 10: Bringing in the Supply Side: Unemployment and Inflation?
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Q1) Stabilization policy may be necessary to modify or counteract volatile changes in aggregate demand.
A)True
B)False
Q2) When equilibrium GDP is below potential GDP,jobs are
A) plentiful and unemployment is low.
B) plentiful and unemployment is high.
C) scarce and unemployment is high.
D) scarce and unemployment is low.
Q3) If the price level falls,what will happen to the aggregate supply curve?
A) It will shift outward.
B) It will shift inward.
C) Nothing.
D) It will get steeper.
E) It will get flatter.
Q4) One complication that tends to prolong recessionary gaps is that wages
A) are fixed by unions, which represent nearly all workers in the United States.
B) tend to rise rapidly.
C) rarely fall.
D) tend to move in the opposite direction from prices.
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Chapter 11: Managing Aggregate Demand: Fiscal Policy
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Sample Questions
Q1) When you compare the effects of government spending on aggregate demand with the effects of taxes on aggregate demand,the effects of government spending are
A) smaller.
B) larger.
C) the same.
D) impossible to predict.
Q2) Taxes reduce total spending
A) directly by increasing government purchases by an equal amount.
B) directly by substituting investment spending.
C) indirectly by reducing government spending.
D) indirectly by reducing disposable income.
Q3) In Figure 11-1,to reach the level of potential GDP,the administration of President Obama would most likely advocate
A) increasing Social Security payments.
B) decreasing defense spending.
C) decreasing personal income taxes.
D) All of the above are correct.
Q4) Discuss some of the general conclusions arrived at about supply-side tax initiatives.
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Chapter 12: Money and the Banking System
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Sample Questions
Q1) During the 2007-2009 financial crisis,the U.S.government decided that Lehman Brothers was not too big to fail and that AIG was too big to fail.
A)True
B)False
Q2) The narrowest definition of the money supply,including cash and checking deposits,is known as
A) M0.
B) M1.
C) M payments.
D) currency.
E) real-value money.
Q3) The increase in bank supervision in the U.S.in the 1980s and early 1990s was due to an increase in bank
A) profits.
B) ownership of common stocks.
C) failures.
D) deposits and loans.
Q4) What is fiat money? Why is fiat money important in the United States today?
Q5) Why are credit cards not considered part of the money supply?
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Chapter 13: Monetary Policy: Conventional and
Unconventional
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Sample Questions
Q1) Technically,the Federal Reserve district banks are corporations whose stockholders are the
A) state governments in each district.
B) citizens of the United States.
C) Departments of Treasury and Commerce.
D) member banks.
Q2) In Latin America,countries like Brazil and Mexico have found it necessary to grant their central banks more independence in order to
A) maintain higher levels of political stability.
B) promote economic growth and employment.
C) counteract high rates of inflation.
D) deal with the consequences of globalization.
Q3) Does the Fed have good control over the money supply?
A) Yes, open market operations generate exact changes in bank lending.
B) Yes, reserve requirements create new loans.
C) No, because of difficulties estimating the reserve ratio.
D) No, because of difficulties estimating the size of the excess reserves and cash holdings by the public.
Q4) Explain the concept of 'lender of last resort'.What is discount rate?
Page 15
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Chapter 14: The Financial Crisis and the Great Recession
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Sample Questions
Q1) When the housing bubble burst,prices fell particularly severely in A) Georgia.
B) Nevada.
C) Pennsylvania.
D) West Virginia.
Q2) In computing GDP,new home construction adds to A) consumption.
B) investment.
C) government spending.
D) net exports.
Q3) The Federal Reserve helped J.P.Morgan purchased Bear Stearns by agreeing to purchase some unwanted Bear Stearns assets.
A)True
B)False
Q4) The intended use of TARP funds was to A) support the FDIC.
B) increase consumers' disposable income.
C) fund "shovel-ready" projects.
D) purchase unwanted securities.
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Chapter 15: The Debate over Monetary and Fiscal Policy
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Q1) The objective of the Fed and the government is to
A) prevent asset bubbles by recognizing them in real time.
B) mitigate the consequences of asset bubbles by recognizing them in real time.
C) prevent asset bubbles by recognizing bad lending practices.
D) mitigate the consequences of asset bubbles by recognizing bad lending practices.
Q2) Critics of macroeconomic stabilization policies argue that A) economists are unable to influence policy.
B) stabilization policies often do more harm than good.
C) stabilization theory has no practical effect.
D) policy makers need practical advice, not theory.
Q3) The quantity theory of money assumes that
A) velocity varies inversely with interest rates.
B) if velocity equals six, the Fed can increase nominal GDP by 30 percent if it increases the money supply by 5 percent.
C) changes in the money supply affect output but not prices.
D) changes in velocity are so small that velocity can be considered constant.
Q4) Over long periods of time,M2 velocity has been relatively constant.
A)True
B)False
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Chapter 16: Budget Deficits in the Short and Long Run
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Q1) If the economy is near full employment and Congress cuts taxes,the proper monetary policy should be
A) expansionary to keep the economy fully employed.
B) expansionary to counteract the increased deficit.
C) contractionary to shift the aggregate demand curve outward.
D) contractionary to counteract the effects of fiscal policy.
Q2) In contrast to the on-budget deficit,the off-budget deficit in 2009 was A) somewhat smaller.
B) remaining constant.
C) even larger.
D) an actual surplus.
Q3) In the early 1990s,economists became alarmed over the national debt because it A) was larger than three months' GDP.
B) was growing faster than GDP.
C) had reached twice the size of GDP.
D) was growing faster than private debt.
Q4) What is "crowding out"? Why is it important in discussions of fiscal policy? Use an appropriate diagram to illustrate your answer.
Q5) Give some arguments for and against a balanced budget requirement.
Q6) Differentiate between "off-budget" deficit and the "on-budget" deficit.
Page 18
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Chapter 17: The Trade Off between Inflation and Unemployment
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Q1) If the fluctuations in the economy's real growth rate from year to year are caused primarily by variations in the rate at which aggregate supply increases,then data would show
A) a cyclical relationship between inflation and unemployment.
B) a direct relationship between inflation and unemployment.
C) an inverse relationship between inflation and unemployment.
D) no relationship between inflation and unemployment.
Q2) If employees and employers always accurately predict inflation,what is the shape of the Phillips curve?
A) It is horizontal in the short and long run.
B) It is vertical in the short and long run.
C) It is vertical in the short run and upward sloping in the long run.
D) It is downward sloping in the short run and vertical in the long run.
Q3) Many economists think that,in the long run,the economy tends to move toward
A) the natural or full-employment rate of unemployment.
B) the natural or full-employment rate of inflation.
C) a severe slump with high unemployment.
D) an accelerating rate of inflation.
Q4) What is the effect of supply-side inflation on the short-run Phillips curve?
Page 19
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Chapter 18: International Trade and Comparative Advantage
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Sample Questions
Q1) A program of protection that results in preserving jobs in certain industries
A) maintains full employment at lower cost than any other program or policy.
B) lowers average pay in the protected industries.
C) improves living standards for the average person in that country.
D) often does so at a cost that is much higher than the average income of persons in those industries.
Q2) International trade usually benefits one trading partner while making the other trading partner worse off.
A)True
B)False
Q3) The trade philosophy of the Clinton administration is best characterized as A) protectionist.
B) mercantilist.
C) free trade.
D) strategic trade.
Q4) A tariff is a limitation on the amount of a good that can be imported. A)True
B)False
Page 20
Q5) How can tariffs lead to a situation in which all parties to a trade lose?
Q6) What is mercantilism? What are the draw backs of this doctrine?
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Page 21
Chapter 19: The International Monetary System: Order or Disorder?
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Q1) The main component of the monetary union created by the Treaty of Maastricht is a(n)
A) single currency.
B) gold standard.
C) bilateral barter system of currencies.
D) unified stock market.
Q2) There are at least three exchange rates between every pair of national currencies.
A)True
B)False
Q3) On May 12,2011,the U.S.dollar was worth 0.61 British pounds.How many dollars did it take to buy one British pound?
A)1.19
B)1.61
C)1.64
D)2.19
Q4) The gold standard prevented a nation from controlling its domestic economy through monetary policy.
A)True
B)False
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Chapter 20: Exchange Rates and the Macroeconomy
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Q1) Which of the graphs in Figure 20-8 illustrates the AD-AS shifts induced by the foreign sector following an increase in the U.S.federal deficit?
A) 1
B) 2
C) 3
D) 4
Q2) Despite the monetary expansion of the 1992-2000 period,the inflation rate
A) rose due to adverse supply shocks.
B) rose due to large increases in aggregate demand.
C) fell despite adverse supply shocks.
D) fell due to favorable supply shocks.
Q3) An increase in the price level in Japan relative to the price level in the United States would
A) increase U.S. net exports and increase aggregate demand.
B) increase U.S. net exports and increase aggregate supply.
C) reduce U.S. net exports and reduce aggregate demand.
D) reduce U.S. net exports and increase aggregate demand.
Q4) What are some of the suggested remedies for the U.S.trade deficits? What remedies have been attempted? What remedies are left to try?
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