Economics I Final Test Solutions
Course Introduction
Economics I introduces students to the foundational principles of microeconomics, focusing on the behavior of individuals and firms in making decisions about allocating limited resources. The course covers topics such as supply and demand, market structures, consumer behavior, production and costs, and the role of government in markets. Through analytical tools and real-world examples, students learn how economic theory applies to everyday situations, equipping them with the skills to critically assess economic issues and policies. This course lays the groundwork for more advanced study in economics and related disciplines.
Recommended Textbook
Macroeconomics 12th Edition by Michael Parkin
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Page 2
Chapter 1: What Is Economics?
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Q1) The term "opportunity cost" points out that
A) there may be such a thing as a free lunch.
B) not all individuals will make the most of life's opportunities because some will fail to achieve their goals.
C) executives do not always recognize opportunities for profit as quickly as they should.
D) any decision regarding the use of a resource involves a costly choice.
Answer: D
Q2) Suppose you produce 10 bikes a day for a total cost of $1000. Total costs increase to $1100 when you produce 15 bikes. Finally, total costs increase to $1300 if you make 20 bikes. A graph showing the relationship between total costs and the number of bikes produced would be
A) a negatively-sloped line that becomes steeper.
B) a positively-sloped line that becomes steeper.
C) a negatively-sloped line that becomes flatter.
D) a positively-sloped line that becomes flatter.
Answer: B
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3
Chapter 2: The Economic Problem
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Q1) In the above figure, in order for this country to move from production possibilities frontier PPF? to PPF?, it might
A) increase the skills and productivity of its work force.
B) put all unemployed resources to work producing desired output.
C) engage in exchange with other nations.
D) increase the average level of prices for all goods produced and consumed.
Answer: A
Q2) Opportunity cost is best defined as
A) the amount of money that an individual is willing to pay to purchase a good that means a great deal to that person.
B) the amount of money lost by one individual in an exchange process so that another individual might gain.
C) the highest-valued alternative that is forgone when choosing among various alternatives.
D) a situation in which one individual cannot have an absolute advantage over another individual in the production of all goods.
Answer: C
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Chapter 3: Demand and Supply
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Q1) The relative price of a good is
A) an opportunity cost.
B) equal to the money price of a good.
C) equal to the price of that good divided by the quantity demanded of the good.
D) what you get paid for babysitting your cousin.
Answer: A
Q2) When does a shortage occur?
Answer: A shortage occurs when the price is below the equilibrium price. When the price is less than the equilibrium price, the quantity demanded is greater than the quantity supplied.
Q3) If the supply of bottled water decreases and at the same time the demand for bottled water increases, the equilibrium price ________ and the equilibrium quantity ________.
A) might rise, fall, or stay the same; decreases
B) might rise, fall, or stay the same; increases
C) falls; increases
D) rises; might increase, decrease, or stay the same
Answer: D
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5
Chapter 4: Measuring GDP and Economic Growth
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Q1) The difference between gross investment and net investment is
A) inflation.
B) depreciation.
C) initial capital.
D) consumption.
Q2) List the components of the expenditure approach to measuring GDP.
Q3) If a measure of real GDP could include the value of leisure time, measured real GDP would increase.
A)True
B)False
Q4) Depreciation is defined as the
A) decrease in the stock of capital due to wear and tear.
B) increase in the stock of capital due to investment by firms.
C) increase in the stock of capital due to wear and tear.
D) decrease in the stock of capital due to investment by firms.
Q5) Investment, as included in GDP, consists of what?
Q6) Define and discuss GDP.
Q7) What are the categories of total expenditure?
Page 6
Q8) Is it possible for nominal GDP to increase while real GDP does not change?
Q9) Can nominal GDP ever be less than real GDP?
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Page 7
Chapter 5: Monitoring Jobs and Inflation
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Q1) An example of the new goods bias in the CPI is the
A) introduction of higher quality brakes as standard equipment on new cars.
B) introduction of hybrid automobiles, vehicles that were not made until recently.
C) decreasing popularity of SUVs as the price of gasoline has risen.
D) switch from traditional car dealerships to low-cost Internet car buying services.
Q2) The cost of inflation to society includes
A) unpredictable changes in the value of money.
B) higher interest rates paid by borrowers.
C) higher interest rates paid by the government on its debt.
D) the lost spending when people do not have enough money.
Q3) Unpredictable changes in the value of money, which brings about gains and losses, are a consequence of unpredictable changes in A) real GDP.
B) unemployment rate.
C) inflation.
D) productivity.
Q4) How does the unemployment rate change in a recession and in an expansion?
Q5) Define and give an example of how a spell of structural unemployment can begin.
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Chapter 6: Economic Growth
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Sample Questions
Q1) In 2011, Armenia had a real GDP of $4.21 billion and a population of 2.98 million. In 2012, real GDP was $4.59 billion and population was 2.97 million. What was Armenia's economic growth rate from 2011 to 2012?
A) 0.38 percent
B) 9.0 percent
C) 3.8 percent
D) 8.3 percent
Q2) In addition to saving and investment in capital, making an even larger contribution to long-term economic growth in real GDP per person
A) are technological advances.
B) is lower current consumption.
C) is higher current consumption.
D) is a larger work force.
Q3) Over the last 100 years, the average U.S. growth rate in real GDP per person was about
A) 2 percent per year.
B) 6 percent per year.
C) 12.5 percent per year.
D) 1 percent per year.
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Page 9
Chapter 7: Finance, Saving, and Investment
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Q1) In January 2015, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2015, Tim spent $200,000 on new machines. During 2015, Tim's net investment totaled A) $1 million.
B) -$300,000.
C) $200,000.
D) -$100,000.
Q2) There is a positive relationship between the demand for loanable funds and the real interest rate.
A)True
B)False
Q3) If disposable income increases, people will decide to ________ saving, the supply of loanable funds will ________ and the real interest rate will ________.
A) increase; decrease; rise
B) decrease; decrease; rise
C) increase; increase; fall
D) decrease; increase; fall
Q4) How does expected future income affect saving supply?
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Chapter 8: Money, the Price Level, and Inflation
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Q1) If the price level doubles, the
A) nominal demand for money doubles.
B) nominal demand for money drops by half.
C) real demand for money drops by half.
D) real demand for money doubles.
Q2) "Even though we can convert them into money, deposits at banks are not money." Is the previous statement correct or not?
Q3) The above table presents the balance sheet of the TBK commercial bank. If the desired reserve ratio is 25 percent, what is this bank's desired reserves?
A) $120
B) $150
C) $175
D) $30
Q4) Discuss the quantity theory of money. Be sure to mention the velocity of circulation and the equation of exchange.
Q5) The Federal Reserve is divided into 7 districts.
A)True
B)False
Q6) What is the opportunity cost of holding money?
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Chapter 9: The Exchange Rate and the Balance of Payments
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Q1) Other things remaining the same, the U.S. interest rate differential increases if the U.S. interest rate
A) rises and foreign interest rates remain constant.
B) falls and foreign interest rates remain constant.
C) falls and foreign interest rates rise.
D) remains constant and foreign interest rates rise.
Q2) The supply curve of U.S. dollars shifts leftward. This could have been influenced by
A) a rise in the U.S. interest rate differential
B) a fall in the expected future exchange rate
C) an increase in the U.S. exchange rate
D) a decrease in the U.S. exchange rate
Q3) The data in the table above are the U.S. balance of payments. The sum of the current account plus capital and financial account plus official settlements account is equal to
A) $0.
B) -$335 billion.
C) $140 billion.
D) -$60 billion.
Q4) What is purchasing power parity?
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Chapter 10: Aggregate Supply and Aggregate Demand
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Q1) People expect that the El Niño effect will cause drought in Australia in coming years. If most Australian firms expect their profits will fall during the next five years, Australia's ________ this year.
A) aggregate demand will increase
B) long-run aggregate supply will increase
C) aggregate demand will decrease
D) short-run aggregate supply will increase
Q2) Moving upward along the short-run aggregate supply curve results in a ________ in the price level and ________ in real GDP.
A) rise; an increase
B) rise; a decrease
C) fall; an increase
D) fall; a decrease
Q3) Full-employment equilibrium occurs when
A) real GDP exceeds potential GDP.
B) real GDP equals potential GDP.
C) potential GDP exceeds real GDP.
D) None of the above answers are correct.
Q4) How does the aggregate demand curve reflect an increase in aggregate demand?
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Chapter 11: Expenditure Multipliers
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Q1) The marginal propensity to import reflects the relationship between changes in imports and changes in
A) consumption expenditure.
B) investment spending.
C) exports.
D) real GDP.
Q2) Mauritius, an island off the coast of Africa, competes with other countries producing goods with low-skilled labor. In 2006, it was reported that ..."its clothing factories have been exposed to frontal competition from China, India and other Asian mass producers."
As a result, "the main export industry has seen a 30 per cent reduction in volume ..." Www)ft.com, 3/13/2006
Suppose real GDP is $14 billion, exports total $2 billion and the multiplier is 4. If exports decline by $600,000,000, real GDP in Mauritius will
A) increase by $2.4 billion
B) decrease by $2.4 billion.
C) decrease by $8 billion.
D) increase by $4 billion.
Q3) What effect does an increase in the MPC have on the slope of the AE curve?
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Chapter 12: The Business Cycle, Inflation, and Deflation
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Q1) Suppose the natural unemployment rate is 4 percent and the expected inflation rate is 6 percent. In the above figure, illustrate the long-run Phillips curve. What does the long-run Phillips curve reveal about the long-run tradeoff between inflation and unemployment?
Q2) In the above figure, the economy is at point A. An increase in money wage rates that sets off a cost-push inflation will initially move the economy from point A to point A) A, that is, the economy does not change.
B) B.
C) C.
D) D.
Q3) The initial factors that can create a cost-push inflation do NOT include A) increases in money wage rates. B) increases in the money prices of raw materials. C) increases in the quantity of money.
D) None of the above answers is correct because all of the above could be the initial cause of a cost-push inflation.
Q4) Describe how a demand-pull inflation can occur.
Q5) Define and describe the short-run Phillips curve.
Q6) Compare and contrast the Keynesian and Monetarist business cycle theories.
Page 15
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Chapter 13: Fiscal Policy
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Q1) The structural surplus measures whether a budget surplus is cyclical or structural.
A)True
B)False
Q2) The table above has data for a country's government budget. The country has government revenues of ________ billion.
A) $900
B) $1125
C) $725
D) $2100
Q3) The largest source of revenue for the federal government is ________ and the largest outlay is for ________.
A) corporate taxes; Social Security
B) personal income taxes; Medicare
C) personal income taxes; interest on national debt
D) personal income taxes; transfer payments
Q4) What is the Laffer curve? Where on their Laffer curves are the United States, the United Kingdom and France located?
Q5) What is the government expenditure multiplier?
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Chapter 14: Monetary Policy
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Q1) When would the Fed want to carry out a monetary policy that decreases aggregate demand?
Q2) In November 2008, the Reserve Bank of India (RBI)lowered its "repo" rate, the rate at which it lends to banks, from 8 percent to 7.5 percent. Only two weeks earlier, it had lowered the rate from 9 percent to 8 percent.
The Economist, 11/6/2008
The Reserve Bank of India is lowering its rates to fight A) inflation.
B) recession.
C) rising net exports.
D) a decrease in money demand.
Q3) The Taylor Rule states that the
A) Fed should target the monetary base and not the federal funds rate. B) use of an exchange rate target, although costly, is economically efficient.
C) Fed should adjust the federal funds rate to take account of the deviations of the inflation rate from its target and real GDP from potential GDP.
D) None of the above is correct.
Q4) What is the effect of lowering the interest rate on net exports? Explain your answer.
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Page 17
Chapter 15: International Trade Policy
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Q1) When the principle of comparative advantage is used to guide trade, then a country will specialize by producing only
A) goods with the highest opportunity cost.
B) goods with the lowest opportunity costs.
C) goods for which production takes fewer worker-hour than another country.
D) goods for which production costs are more than average total costs.
Q2) In the figure above, with international trade Americans buy ________ million shirts per year.
A) 48
B) 32
C) 16
D) 24
Q3) Between August 2007 and July 2008, Brazil exported more than 3.5 billion pounds of coffee to the rest of the world. Because of this, we know definitively that
A) Brazil has comparative advantage in coffee production.
B) the rest of the world has comparative advantage in coffee production.
C) the rest of the world has absolute advantage in coffee production.
D) Brazil has absolute advantage in coffee production.
Q4) What are the effects of a tariff?
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