Economics I Midterm Exam
Course Introduction
Economics I is an introductory course that explores the fundamental principles of microeconomics, focusing on how individuals, households, and firms make choices under conditions of scarcity. The course covers topics such as supply and demand, market equilibrium, elasticity, consumer behavior, production and costs, and the different structures of markets like perfect competition and monopoly. Through real-world applications and analytical models, students will develop a strong foundational understanding of how economic agents interact within markets and how these interactions shape the allocation of resources in society.
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 2010 Patient Protection and Affordable Care Act (Obamacare)contains a provision that may require individuals to either purchase private health insurance or pay a tax. This is an example of
A) a mixed economy.
B) market capitalism.
C) centrally planned socialism.
D) the invisible hand.
Answer: A
Q2) Scarcity affects only those who are in need.
A)True
B)False
Answer: False
Q3) The slope of a positive relationship is
A) positive.
B) undefined.
C) positive to the right of the maximum point and negative to the left.
D) constant as long as the relationship is nonlinear.
Answer: A
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Chapter 2: The Economic Problem
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Q1) Economic growth is shown on the production possibilities frontier as
A) a movement from one point on the PPF to another.
B) an outward shift in the PPF.
C) an inward shift in the PPF.
D) the curvature of the PPF.
Answer: B
Q2) Homer and Teddy are stranded on a desert island. To feed themselves each day they can either catch fish or pick fruit. In a day, Teddy could pick 60 pieces of fruit or catch 20 fish. Homer could pick 100 pieces of fruit or catch 150 fish. Which of the following statements is CORRECT?
A) Homer has an absolute advantage in catching fish and Teddy has an absolute advantage in picking fruit.
B) Homer has an absolute advantage in picking fruit and Teddy has an absolute advantage in catching fish.
C) Homer has an absolute advantage in both catching fish and picking fruit.
D) Teddy has an absolute advantage in both catching fish and picking fruit.
Answer: C
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Chapter 3: Demand and Supply
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Q1) If the price of a good changes but everything else influencing suppliers' planned sales remains constant, there is a
A) new supply curve that is to the right of the initial supply curve.
B) new supply curve that is to the left of the initial supply curve.
C) movement along the supply curve.
D) rotation of the initial supply curve around the initial price.
Answer: C
Q2) The above figures show the market for hamburger meat. Which figure shows the effect of a decrease in the price of a substitute like hot dogs?
A) Figure A
B) Figure B
C) Figure C
D) Figure D
Answer: B
Q3) Soft drinks are a normal good. Draw a graph showing the effect of an increase in income on the demand for soft drinks.
Answer: 11ea1607_da38_f7fc_ba9d_4f996a3f04fe_TB3035_00 The increase in the income increases the demand for soft drinks, as illustrated in the figure above.
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Chapter 4: Measuring GDP and Economic Growth
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Q1) If we compare the four sources of spending in the economy we see that
A) household consumption is the smallest.
B) government expenditure is the largest.
C) business investment is the largest.
D) household consumption is the largest.
Q2) In the circular flow diagram, aggregate expenditure includes
A) consumption expenditure, saving, investment and government expenditure.
B) consumption expenditure, saving, investment and net exports.
C) consumption expenditure, investment, government expenditure and net exports.
D) consumption expenditure, saving, government expenditure and net exports.
Q3) Transfer payments are not included in GDP because
A) their market value cannot be accurately determined.
B) they do not generate additional income.
C) they are not purchases of goods or services.
D) their value is included in government expenditure.
Q4) When IBM, an American firm, produces computer chips in another country, this production is not included in U.S. GDP because the production did not take place in the United States.
A)True
B)False
Page 6
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Chapter 5: Monitoring Jobs and Inflation
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Q1) "The new goods bias puts a downward bias into the CPI and its measure of the inflation rate." Is the previous sentence correct or not? Explain your answer.
Q2) The CPI is the average price of all goods and services produced within the economy.
A)True
B)False
Q3) Give an example of a structurally unemployed person.
Q4) Using the definition of unemployment, which of the following individuals would be unemployed?
A) A full-time student quits school, enters the labor market for the first time, and searches for employment.
B) Because of the increased level of automobile imports, an employee of General Motors is laid off but expects to be called back to work soon.
C) Because of a reduction in the military budget, your next door neighbor loses her job in a plant where nuclear warheads are made and must look for a new job.
D) All of these individuals are unemployed.
Q5) Can frictional unemployment ever be totally eliminated? Explain your answer.
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Chapter 6: Economic Growth
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Q1) Which of the following ideas apply to the neoclassical growth theory?
I.The rate of technological change influences the rate of economic growth.
II.Technological change promotes saving and investment.
III.Convergence of economic growth rates across countries
A) I only
B) III only
C) I and II
D) I, II and III
Q2) Suppose a country is producing $20 million of real GDP. If the economy grows at 10 percent per year, approximately how many years will to take for real GDP to grow to $80 million?
A) 14
B) 7
C) 4
D) 30
Q3) If a nation's population grows, then
A) growth in real GDP per person will be less than the growth of real GDP.
B) there can be no economic growth.
C) growth in real GDP per person will be greater than the growth of real GDP.
D) there must be an increase in real GDP per person.
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Chapter 7: Finance, Saving, and Investment
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Q1) If U.S. exports are $2.2 billion and our imports are $2.7 billion
A) the United States is lending to the rest of the world.
B) U.S. national saving is too high.
C) the United States is borrowing from the rest of the world.
D) U.S. investment must decrease.
Q2) Suppose the market for loanable funds is in equilibrium. If disposable income increases, the equilibrium real interest rate ________ and the quantity of loanable funds ________.
A) falls; increases
B) falls; decreases
C) rises; decreases
D) rises; increases
Q3) People know that the inflation rate will increase from 3 percent to 5 percent. As a result
A) the nominal interest rate falls by 2 percentage points.
B) the nominal interest rate is constant.
C) the nominal interest rate rises by 2 percentage points.
D) the real interest rate rises by 2 percentage points.
Q4) What are the factors that change investment demand and shift the demand for loanable funds curve?
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Chapter 8: Money, the Price Level, and Inflation
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Q1) A change in the price level changes the amount of nominal money people demand.
A)True
B)False
Q2) A $25,000 price tag on a new car is an example of money as
A) a medium of exchange.
B) a unit of account.
C) a store of value.
D) a time deposit.
Q3) Excess reserves are
A) desired reserves minus actual reserves.
B) required reserves minus actual reserves.
C) liquidity funds minus actual reserves.
D) actual reserves minus desired reserves.
Q4) A decrease in the quantity of reserves held by commercial banks could be the result of
A) a decision by U.S. households to hold less currency.
B) the sale of government securities by the Federal Reserve.
C) a decrease in the government's budget deficit.
D) an increase in the exchange rate.
Q5) Are checks and credit cards money? Explain why or why not.
Page 10
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Chapter 9: The Exchange Rate and the Balance of Payments
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Q1) Suppose X - M = net exports; T - G = government sector balance; and S - I = private sector balance. What relationship exists among these variables?
A) (X - M ) + (T - G ) + (S - I ) = 0
B) (X - M ) = (T - G ) + (S - I )
C) (T - G ) + (X - M ) = (S - I )
D) (T - G ) = (X - M ) + (S - I )
Q2) The table above shows the exchange rates between various currencies and the U.S. dollar. Between 2015 and 2016, the U.S. dollar ________ against the Canadian dollar and the Euro ________ against the U.S. dollar
A) appreciated, depreciated
B) appreciated, appreciated
C) depreciated, appreciated
D) depreciated, depreciated
Q3) If a country's central bank does not intervene in the foreign exchange market, the country has
A) a crawling peg exchange rate policy.
B) a fixed exchange rate policy.
C) a flexible exchange rate policy.
D) no exchange rate policy.
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Chapter 10: Aggregate Supply and Aggregate Demand
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Q1) Which of the following shifts both the LAS and SAS curves?
A) a change in the price level
B) a change in the money wage rate
C) a simultaneous change in both the price level and the money wage rate
D) an advance in technology
Q2) A decrease in short-run aggregate supply ________ the equilibrium price level and ________ the equilibrium quantity of real GDP.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Q3) Stagflation is the combination of
A) inflation and increasing real GDP.
B) deflation and recession.
C) inflation and recession.
D) deflation with increasing real GDP.
Q4) A change in the price level does not shift the aggregate demand curve.
A)True
B)False
Q5) What is the difference between a recessionary gap and an inflationary gap?
Page 12
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Chapter 11: Expenditure Multipliers
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Q1) The above table gives information for the nation of North Hampton. There are no imports to or exports from North Hampton.
a)Find aggregate planned expenditure for each level of real GDP.
b)What is the equilibrium level of real GDP?
Q2) List the components of aggregate expenditure and describe how each of them change as real GDP increases.
Q3) According to the data in the above table, what is the marginal propensity to save?
A) 25.
B) 0.75.
C) 0.25.
D) 1.
Q4) The presence of income taxes and imports make the slope of the aggregate expenditure curve
A) the same as it would be without income taxes and exports.
B) steeper than it would be without income taxes and exports.
C) flatter than it would be without income taxes and exports.
D) probably different than it would be without income taxes and exports but income taxes make it steeper while imports make it flatter.
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Chapter 12: The Business Cycle, Inflation, and Deflation
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Q1) In a real business cycle model, labor supply
A) increases if the nominal interest rate rises.
B) is independent of the real interest rate.
C) decreases if the real interest rate rises.
D) decreases if the real interest rate falls.
Q2) Cost-push inflation can start with A) lower taxes.
B) an increase in government expenditure.
C) higher money wage rates.
D) an increase in transfer payments.
Q3) The long-run Phillips curve shows that in the long run, policymakers can
A) lower unemployment if they are willing to accept more inflation forever.
B) lower inflation if they are willing to accept higher unemployment forever.
C) choose the unemployment rate but not the inflation rate.
D) lower inflation without increasing unemployment.
Q4) Explain how the expected inflation rate affects the short-run Phillips curve. Be sure to mention the role played by the money wage rate.
Q5) What is demand-pull inflation?
Q6) What is the impulse that leads to business cycle in the real business cycle, RBC, theory?
Page 14
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Chapter 13: Fiscal Policy
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Q1) Corporate income taxes are the largest source of revenue for the federal government.
A)True
B)False
Q2) If the budget deficit is $50 billion and the structural deficit is $10 billion, the cyclical deficit is
A) $10 billion.
B) $40 billion.
C) $60 billion.
D) $50 billion
Q3) A reason the government expenditure multiplier is larger than 1 is because
A) investment increases when government expenditure increases.
B) government expenditure always increases.
C) government expenditure changes generate changes in consumption expenditure.
D) taxes are left unchanged.
Q4) The sum of past budget deficits minus the sum of past budget surpluses refers to A) the national debt.
B) the cyclically unbalanced budget.
C) the structural national debt.
D) the federal government net worth.
Page 15
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Chapter 14: Monetary Policy
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Q1) When the Fed raises the federal funds rate, other
A) interest rates fall, consumption, investment and net exports increase, and the aggregate demand curve shifts rightward.
B) interest rates fall, consumption, investment and net exports decrease, and the aggregate demand curve shifts leftward.
C) interest rates rise, consumption, investment and net exports decrease, and the aggregate demand curve shifts leftward.
D) interest rates rise, consumption, investment and net exports increase, and the aggregate demand curve shifts rightward.
Q2) If the Federal Reserve lowers the federal funds rate
A) other short-term interest rates fall.
B) other short-term interest rates rise.
C) the exchange rate falls.
D) Both answers A and C are correct.
Q3) Does an open market operation in which the Fed buys securities from the general public decrease or increase the banking system's reserves?
Q4) What is the effect of lowering the interest rate on net exports? Explain your answer.
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Chapter 15: International Trade Policy
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Q1) In poorer countries, free trade ________ the demand for labor in these countries and ________ the wages paid in these countries.
A) decreases; lowers B) decreases; raises C) increases; lowers D) increases; raises
Q2) A key difference between a quota and a tariff is that
A) a quota has a larger effect on quantity than on price.
B) a tariff has a larger effect on quantity than on price.
C) the government of the importing country gains revenue from a tariff, but the price gap caused by a quota benefits domestic importers.
D) All of the above answers are correct.
Q3) Which of the following are valid reasons advanced by almost all economists? Protectionism
A) saves jobs.
B) prevents rich countries from exploiting poorer countries.
C) is a good way for governments in developed nations to raise revenue.
D) Economists would not support any of the above reasons.
Q4) What is "rent seeking?" How does it apply to restricting imports?
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