Economics I Pre-Test Questions
Course Introduction
Economics I introduces students to the fundamental principles of microeconomics, focusing on how individuals, households, and firms make decisions regarding the allocation of scarce resources. The course explores concepts such as supply and demand, market equilibrium, elasticity, consumer behavior, production and costs, and market structures. Through real-world examples and problem-solving approaches, students gain a foundational understanding of how markets function and how economic agents interact within various institutional frameworks.
Recommended Textbook
Macroeconomics 2nd Edition by Charles I. Jones
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Chapter 1: Introduction to Macroeconomics
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Q1) Which of the following questions should a successful model predict?
i.How do changes in government policies change the labor market?
ii.How does money supply influence inflation?
iii.What is the relationship between inflation and unemployment?
A)iii only
B)ii only
C)i,ii,and iii
D)i and ii
E)i and iii
Answer: C
Q2) Income per person began at __________ in 1870 and __________ by nearly a factor of 15 to end at __________ in 2004.
A)$2,500;rose;$25,000
B)$2,500;rose;$37,000
C)$2,500;rose;$100,000
D)$37,000;fell;$2,500
E)$25,000;fell;$2,500
Answer: B
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3
Chapter 2: Measuring the Macroeconomy
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Sample Questions
Q1) Real GDP is the __________ of all goods and services produced in a period of time using __________ prices.
A)summation;current
B)value;base year
C)value;1970
D)value;1945
E)summation;base year
Answer: B
Q2) In 2005,consumption expenditures accounted for about 70 percent of the total GDP.
A)True
B)False
Answer: True
Q3) Which of the following does not count toward changes in the current GDP?
A)A student buys another year of tuition.
B)You buy a used car from your parents.
C)The local police station buys new squad cars.
D)The Pentagon buys gasoline.
E)b and c
Answer: B
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Page 4
Chapter 3: An Overview of Long- Run Economic Growth
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Sample Questions
Q1) Between 1960 and 2000,Burundi was one of the fastest-growing countries in the world.
A)True
B)False
Answer: False
Q2) What are the "stylized facts" of Japan's growth experience over the past 150 years or so?
Answer: Japan lagged behind the other western industrialized nations,the United Kingdom,the United States,and Germany,from 1860-1945,but grew at roughly the same rate,thus was not able to catch up with these countries.However,following World War II,Japan's growth rate accelerated,averaging about 6 percent.By 1990 Japan's economy had passed both Germany and the United Kingdom but has since had lower growth rates,once again growing at a similar rate to these three countries (see Figure 3.6).
Q3) According to historical data,wages in ancient Greece and Rome were about the same as wages in fifteenthcentury Britain.
A)True
B)False
Answer: True
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Chapter 4: A Model of Production
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Sample Questions
Q1) The two main inputs we consider in our production function model are labor and land.
A)True
B)False
Q2) Which of the following explain differences in total factor productivity?
A)institutions
B)human capital
C)infrastructure
D)legal structure.
E)all of the above
Q3) The equation MPK = r* yields:
A)the amount of capital in an economy.
B)the optimal amount of capital,K*,a firm fires.
C)the optimal amount of capital,K*,a firm hires.
D)the quantity of capital a firm wants to hire at any rental rate of capital.
E)none of the above
Q4) If the marginal product of capital equals the rental rate of capital,firms should not hire any more capital.
A)True
B)False
Page 6
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Chapter 5: The Solow Growth Model
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Q1) In the Solow model,if gross investment is greater than capital depreciation,the economy accumulates new capital.
A)True
B)False
Q2) In the steady state,capital accumulation is positive.
A)True
B)False
Q3) The analysis of how an economy approaches the steady state is called:
A)investment.
B)economic growth.
C)transition dynamics.
D)saving.
E)depreciation.
Q4) In Figure 5.1,at K1,net investment is __________ and the economy __________.
A)negative;will grow
B)positive;is in its steady state
C)zero;is in its steady state
D)positive;will grow
E)negative;will contract
Q5) What are the key assumptions of the Solow growth model?
Page 7
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Chapter 6: Growth and Ideas
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Sample Questions
Q1) Which of the following can be used to give firms incentive to innovate?
A)patents
B)copyrights
C)prizes
D)subsidies
E)all of the above
Q2) A balanced growth path is defined as a situation in which:
A)the output growth rate is constant.
B)the growth rates of all endogenous variables are variable.
C)the growth rates of some of the endogenous variables are constant.
D)the growth rates of all endogenous variables are constant.
E)All of the above are correct.
Q3) The "idea" of the assembly line leads to increasing returns.
A)True
B)False
Q4) Suppose Chile and Côte Ivoire have the same fraction of researchers,the same knowledge efficiency parameter,but Chile's population is larger.Chile has a higher per capita output growth rate.
A)True
B)False
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Chapter 7: The Labor Market,wages,and Unemployment
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Sample Questions
Q1) Wage rigidity decreases labor market volatility.
A)True
B)False
Q2) Consider Figure 7.6,which shows the unemployment rate from 1948-2010.
(a)What does the smooth line represent? How can it be represented?
(b)Based solely on this data,was the period from approximately 1963-1971 an expansion or recession? Explain.What about the period 1981-1986?
(c)Based on the data presented,what is your prediction for future rates of unemployment?
Q3) The supply of labor curve slopes upward because,with a higher wage,the opportunity cost of leisure rises.
A)True
B)False
Q4) An institutional fixed wage set above the equilibrium wage is called:
A)the market wage.
B)the minimum wage.
C)a wage rigidity.
D)a real rigidity.
E)none of the above
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Chapter 8: Inflation
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Sample Questions
Q1) According to the government's budget constraint,if the government spends more than it generates in taxes,it can raise revenues by:
A)printing money.
B)increasing its debt.
C)lowering interest rates.
D)privatization.
E)a and b
Q2) In 2004,the movie Spiderman 2 generated about $40 million on its opening day.In 1992,Batman Returns generated $35 million on its opening day.If the CPI in 2006 is 100;in 2004,it is 93.7;and in 1992,69.5,__________ is the larger single-day grossing movie,with __________ in revenues in 2006 dollars.
A)Spiderman 2;$57.5
B)Batman Returns;$47.1
C)Batman Returns;$50.3
D)Spiderman 2;$40.0
E)Not enough information is given.
Q3) Briefly discuss what makes up the monetary base,M1,and M2.
Q4) Briefly explain the cause of the Great Inflation in the 1970s.
Q5) Explain how increases in government expenditures can lead to inflation.
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Chapter 9: An Introduction to the Short Run
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Q1) Which of the following is not an example of a short term macroeconomic "shock"?
A)political unrest
B)a change in the tax code
C)a drought
D)increased military spending
E)none of the above
Q2) Which of the following is not an example of a short term macroeconomic "shock"?
A)planned investment expenditures
B)a hurricane
C)increased military spending
D)a change in the tax code
E)new technology
Q3) Taxes,oil price changes,government spending,interest rate changes,new technologies,and disasters are examples of __________.
A)long-term economic shocks
B)short-term economic shocks
C)political unrest
D)monetary policy
E)fiscal policy
Q4) What does the Phillips curve represent?
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Chapter 10: The Great Recession: a First Look
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Sample Questions
Q1) Which investment bank collapsed in September 2008?
A)Merrill Lynch
B)Goldman Sachs
C)Lehman Brothers
D)Wells Fargo
E)Barclays
Q2) In mid-2008 oil prices:
A)stayed constant.
B)rose by 40 percent.
C)fell to $30 per barrel.
D)rose to $140 per barrel.
E)rose to $70 per barrel.
Q3) What is an indicator of the extent of risk in financial systems?
A)the difference between the unemployment rate and the natural rate of unemployment
B)falling commodity prices
C)the spread between the monthly LIBOR rate and U.S.T-bill yield
D)the spread between inflation-indexed and nonindexed U.S.bonds
E)the number of banks applying for federal assistance
Q4) How does "securitization" reduce overall risk?
Page 12
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Chapter 11: The Is Curve
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Sample Questions
Q1) Recently,Toyota took over the position of the world's largest automobile manufacturer from GM.This is an example of __________ in the United States.
A)a positive aggregate demand shock
B)a negative aggregate demand shock
C)a rightward movement along the IS curve
D)a positive aggregate supply shock
E)Not enough information is given.
Q2) You are given the data in Table 11.1,which covers the period 1947-2006."Mean" is the average growth over the period and "St Dev" is the standard deviation of the growth (a measure of volatility)of real output,consumption,investment,government expenditure,and net exports.From this information,you conclude that
A)households smooth their consumption more than other sectors.
B)firms base their decisions on more than the potential GDP.
C)foreigners are fickle consumers.
D)government expenditures are zero.
E)a and b are correct.
Q3) What is the relationship between the real interest rate and the output gap in the IS curve? Explain.
Q4) Derive Hicks' IS relationship beginning with the national income identity.
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Chapter 12: Monetary Policy and the Phillips Curve
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Q1) If the price of oil unexpectedly rises,the Phillips curve shifts down and to the right.
A)True
B)False
Q2) Which of the following contributed to high levels of inflation in the 1970s?
i.oil price shocks
ii.lower taxes
iii.a productivity slowdown
A)i only
B)ii only
C)iii only
D)i and iii
E)ii and iii
Q3) Starting at any equilibrium in Figure 12.11,if the Fed tightens money,the money market would move from:
A)point C to A.
B)point B to D.
C)point B to C.
D)point A to D.
E)Not enough information is given.
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Page 14
Chapter 13: Stabilization Policy and the Asad Framework
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Sample Questions
Q1) The reputations of __________,__________,and __________ have convinced observers that the Fed is committed to low and stable inflation.
A)John Taylor,Milton Friedman,Karl Marx
B)George H.W.Bush,Bill Clinton,George W.Bush
C)Ronald Reagan,Alan Greenspan,Ben Bernanke
D)Paul Volcker,Alan Greenspan,Ben Bernanke
E)David Ricardo,John Stuart Mill,Alfred Marshall
Q2) The adjustment process back to the steady state in the short-run model hinges on the:
A)rate of unemployment.
B)immediate reaction to a change in the inflation rate.
C)consumer's response to inflation shocks.
D)government's response to inflation shocks.
E)slow adjustment of inflation reflected in the aggregate supply curve.
Q3) According to the Taylor rule,the federal funds rate should rise in positive proportion to the inflation rise.
A)True
B)False
Q4) Define the steady state in the AS/AD framework.
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Chapter 14: The Great Recession and the Short-Run Model
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Sample Questions
Q1) Briefly discuss the Fed's balance sheet before and after the financial crisis of 2008.
Q2) In the IS-MP framework,when the Fed __________ the federal funds rate in the aftermath of the decline in housing prices,the risk premium gave rise to a(n)__________ in the real interest rate which caused a(n)__________.
A)lowered;increase;deeper recession
B)raised;decline;commodity bubble
C)lowered;decline;expansion
D)held constant;economic "settling"
E)lowered;decrease;deeper recession
Q3) In the AS/AD framework,the risk premium appears as a(n):
A)negative demand shock.
B)negative supply shock.
C)the risk premium is only present in the IS-MP model.
D)positive supply shock.
E)a change in the long-run real interest rate.
Q4) The price-to-earnings ratio is useful in identifying asset bubbles.
A)True
B)False
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Page 16
Chapter 15: Consumption
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Sample Questions
Q1) When applied to the first President Bush's temporary tax cuts,which were repealed six months after they were implemented,Ricardian equivalence predicts that households did not boost their spending.
A)True
B)False
Q2) Because people can't perfectly foresee income changes over their lifetime,consumption should be predictable.
A)True
B)False
Q3) Are all households homogeneous and rational,at least as defined by economists?
Q4) In the utility functions in Figure 15.1,curve b exhibits:
A)diminishing marginal utility.
B)economies of scale.
C)risk seeking.
D)satiation.
E)unrealistic behavior.
Q5) In the intertemporal budget constraint wealth is equal to lifetime income. A)True B)False
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Chapter 16: Investment
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Sample Questions
Q1) Tobin's q is the ratio of stock market value of a stock to the value of its capital.
A)True
B)False
Q2) When __________ said "An investment in knowledge always pays the best interest," he was referring to investing in __________.
A)John Maynard Keynes;government spending
B)Karl Marx;health
C)Benjamin Franklin;new ideas
D)Sir John Templeton;technology
E)Winston Churchill;human capital
Q3) When discussing arbitrage in the stock market,a financial investor can choose between __________.
A)putting money into a savings account or buying a stock
B)buying a bond or buying a stock
C)buying a new machine or buying a stock
D)earning the real interest rate or the marginal product of capital
E)the price of a bond at maturity or the price of a stock when it is sold
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18
Chapter 17: The Government and the Macroeconomy
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Q1) Assume the government does not "print money." Can the government run persistent budget deficits?
Q2) The idea that present generations benefit from borrowing what future generations must pay is called:
A)the budget deficit.
B)intertemporal substitution.
C)the intertemporal budget constraint.
D)generational accounting.
E)discretionary spending.
Q3) The difference between the gross federal debt and the debt by the public is debt held by:
A)other government entities.
B)the Social Security administration.
C)foreign central banks.
D)all of the above
E)a and b only
Q4) When we discuss government expenditure,we are talking about only federal government expenditures.
A)True
B)False
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Chapter 18: International Trade
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Q1) Over time,international trade enables an economy to smooth consumption.
A)True
B)False
Q2) Economists have done a good job of explaining the benefits of free trade.
A)True
B)False
Q3) From the national income identity,
A)the trade balance is equal to the net capital outflow.
B)the trade balance is always greater than the net capital inflow.
C)if there is a trade surplus,there is a net capital inflow.
D)the trade balance equals the federal government's budget balance.
E)None of the above is correct.
Q4) In a two-period example of intertemporal trade,if NX > 0 in period 1,then for trade to balance in period 2,
A)C + I + G < Y.
B)NX < 0.
C)C + I + G > Y.
D)a and b are correct.
E)Not enough information is given.
Q5) Explain how trade can be used for international risk sharing.
Page 20
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Chapter 19: Exchange Rates and International Finance
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Q1) In the years prior to the Argentinean financial crisis,the Argentineans adopted a flexible exchange rate policy.
A)True
B)False
Q2) In 200X the United States entered a recession.As seen in the figure below,the U.S.dollar depreciated about 100 percent vis-á-vis the euro between 2001 and 2007.Explain the relationship between the recession and the depreciation of the dollar.What does the short-run model suggest should happen to net exports and the output gap?
Q3) The real exchange rate can be decomposed into two parts,the __________ and the __________.
A)nominal exchange rate;ratio of the domestic price level to the world price level
B)nominal exchange rate;the difference between the domestic and foreign interest rate
C)interest rate differential;the difference between the domestic and foreign inflation rate
D)nominal exchange rate;ratio of the price of exported goods to imported goods
E)interest rate differential;ratio of the domestic price level to the world price level
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Chapter 20: Parting Thoughts
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Q1) In the late 1990s,it was likely that:
A)the GDP gap was almost zero.
B)actual GDP grew more slowly than it had in the previous 20 years.
C)the GDP gap was larger than it had been in the previous 20 years.
D)potential GDP grew faster than it had in the previous 20 years.
E)None of the above is correct.
Q2) The Asian and Argentinean crises led China to maintain strict capital controls.
A)True
B)False
Q3) In the long run,real GDP is determined by very low rates of unemployment.
A)True
B)False
Q4) If we cannot accurately measure potential GDP,
A)we might overestimate the severity of a recession.
B)we may adopt the wrong fiscal or monetary policy.
C)we will never know the true state of the economy.
D)All of the above are correct.
E)None of the above is correct.
Q5) Name three contributing factors to standards of living in the long run.
Q6) What problems is economics still trying to answer?
Page 22
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