Economics Principles
Test Bank
Course Introduction
Economics Principles introduces students to the foundational concepts of microeconomics and macroeconomics, exploring how individuals, businesses, and governments make choices in the face of scarcity. The course covers topics such as supply and demand, market structures, consumer behavior, production costs, national income, unemployment, inflation, fiscal and monetary policy, and international trade. Through real-world examples and case studies, students gain an understanding of the economic forces shaping society and develop analytical skills to evaluate economic issues and policy decisions.
Recommended Textbook
Macroeconomics Understanding the Global Economy 3rd Edition by David Miles
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21 Chapters
704 Verified Questions
704 Flashcards
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Page 2
Chapter 1: What Is Macroeconomics
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Sample Questions
Q1) Macroeconomics differs from microeconomics in that
A) microeconomics examines strictly short run questions; macroeconomics examines only long run questions
B) microeconomics examines the domestic economy only; macroeconomics examines the world
C) microeconomics examines production; macroeconomics examines distribution
D) microeconomics examines individual behavior; macroeconomics examines aggregate outcomes
E) microeconomics examines positive issues; macroeconomics examines normative questions
Answer: D
Q2) The fundamental problem of economics is
A) that resources are too scarce to satisfy all wants simultaneously
B) how to balance the federal budget
C) deciding how large government should be
D) how to keep the unemployment rate below 4%
E) that firms have no way to know what consumers want to buy
Answer: A
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Chapter 2: The Language of Macroeconomicsthe National
Income Accounts
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Sample Questions
Q1) The Human Development Index (HDI) compiled by the United Nations
A) is used by anthropologists to track the evolution of human beings
B) measures standards of living by taking into account output, education, and life expectancy
C) facilitates interpersonal comparisons of utility by asking citizens how satisfied they are
D) is an employment/unemployment index, or ratio, used to evaluate the progress of non-market economies in becoming market-oriented
E) is the name international agencies give to real gross domestic product
Answer: B
Q2) Suppose 1 million Germans work as consultants in Spain and repatriate their earnings back to Germany. Then the value of their services counts
A) as Spanish exports and German imports
B) as part of Germany's foreign direct investment in Spain
C) as part of Spain's GNI and Germany's GDP
D) as part of Germany's GNI and Spain's GDP
E) as a transfer of foreign aid from Germany to Spain
Answer: D
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Chapter 3: The Wealth of Nationsthe Supply Side
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Sample Questions
Q1) Consider a hypothetical economy with a population of 500 people,each of whom is employed for 2000 hours per year. The nation's GDP is $25 million. In this economy,
A) GDP per capita is $12,500 and labor productivity per hour is $4
B) GDP per capita is $25,000 and labor productivity per hour is $50
C) GDP per capita is $50,000 and labor productivity per hour is $40
D) GDP per capita is $25,000 and labor productivity per hour is $80
E) GDP per capita is $50,000 and labor productivity per hour is $25
Answer: E
Q2) If everyone in the population were employed for a fixed number of hours per year,then
A) GDP per capita would equal labor productivity multiplied by hours worked per person
B) GDP would equal labor productivity multiplied by hours worked per person
C) Labor productivity would equal GDP per capita multiplied by hours worked per person
D) GDP per capita would equal GDP divided by hours worked per person
E) Labor productivity times population would equal GDP
Answer: A
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Chapter 4: Capital Accumulation and Economic Growth
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Sample Questions
Q1) The experience of Asia from 1960 to the end of the 20<sup>th</sup> century suggests that higher investment rates
A) lead to excess capacity and long-term unemployment
B) can stimulate economic growth until the steady state is reached
C) reduce the rate of economic growth in the short run and increase it in the long run
D) are not influence by domestic saving or interest rates
E) cannot be sustained because they ultimately induce higher depreciation rates
Q2) Interest rates are most often determined by
A) government mandates called usury laws
B) the value of the U.S. dollar relative to the value of foreign currency
C) a concave production function exhibiting diminishing marginal returns
D) an equilibrium between saving and investing
E) long run shifts in the full capacity level of output
Q3) During the 20<sup>th</sup> century,convergence occurred most clearly
A) between Africa and North America
B) between China and Western Europe
C) within Western Europe
D) between Japan and South America
E) between India and North America
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Page 6
Chapter 5: Total Factor Productivity, human Capital, and Technology
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Sample Questions
Q1) Developed economies need to engage in research and development more than do developing economies because developed economies
A) have greater capital depreciation rates
B) have largely exhausted the gains from capital accumulation
C) are inherently less innovative than developing economies
D) need to exploit rent-seeking opportunities in order to continue growing
E) have smaller workforces
Q2) In which respect is human capital unlike physical capital?
A) human capital does not depreciate
B) the stock of human capital cannot be increased
C) human capital cannot be measured
D) human capital does not affect output
E) none of the above
Q3) In this economy,approximately how fast would the capital stock need to grow to produce growth of 1% per annum?
A) 1% per annum
B) 2.5% per annum
C) 3.3% per annum
D) 4.8% per annum
E) 5.2% per annum
Page 7
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Chapter 6: Endogenous Growth and Convergence
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Q1) One reason to believe that the marginal product of capital may be constant is that
A) capital and labor are substitutes in production
B) physical capital and human capital may be complementary inputs
C) firms treat unsold output as inventory investments
D) beyond the optimal level, the extra output produced by another machine is always zero
E) technology rarely changes
Q2) If the marginal product of capital were increasing in all nations
A) nations would experience a rapid convergence to a steady state in which GDP per capita would be the same across countries
B) poverty traps would be avoided
C) nations with large capital stocks would in vest more than nations with small capital stocks
D) technology would spill over rapidly from rich nations into poor nations
E) the marginal product of labor would also be increasing in all nations
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Chapter 7: Unemployment and the Labor Market
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Sample Questions
Q1) Which of the following is the least likely to influence the natural rate of unemployment?
A) monopolies in the goods market
B) labor unions
C) payroll taxes
D) unemployment insurance benefits
E) monetary policy
Q2) The most accurate measurement of unemployment
A) is an extrapolation based on a random survey of households
B) counts the number of workers collecting unemployment insurance benefits
C) uses payroll data by subtracting the number of workers employed at firms from the number of citizens of working age
D) uses the number of layoffs reported to the government by employers
E) none of the above
Q3) Unemployment insurance benefits increase productivity most by
A) shortening the duration of unemployment
B) providing replacement rates that are lower than real wages
C) shifting government funds away from less productive ventures
D) helping to improve the match-up between jobs and workers
E) weakening monopoly power
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Chapter 8: International Trade
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Sample Questions
Q1) The idea that efficient producers can benefit from trading with inefficient producers is known as
A) the theory of competitive advantage
B) the Hecksher-Ohlin theorem
C) the Stolper-Samuelson theorem
D) New Trade Theory
E) comparative advantage
Q2) The price of a country's exports relative to the price of its imports is called
A) the export price ratio
B) the comparative advantage
C) the tariff barrier
D) the terms of trade
E) the mercantile factor
Q3) Then in terms of production,
A) Mexico has an absolute advantage in producing goods
B) Canada should produce both goods and services, but mostly goods
C) neither country should produce services
D) the opportunity cost of producing goods is higher in Canada than in Mexico
E) Mexico is relatively more efficient at producing services than goods
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Page 10
Chapter 9: Globalization
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Sample Questions
Q1) Which of the following is not among the primary operations of the IMF?
A) monitoring governments to determine which are in danger of experiencing a balance of payments crisis
B) establishing conditions on a country's economic policies as prerequisites for loans
C) lending funds on a short-term basis to countries in crisis
D) providing technical assistance to governments, to help implement economic reforms
E)arbitrating balance-of-payments disputes among member nations
Q2) The competition between nations to cut corporate taxes so as to attract MNEs has been called
A) the gravity model approach to trade
B) the simultaneity problem
C) strategic trade policy
D) comparative advantage in the terms of trade
E) the race to the bottom
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11
Chapter 10: Consumption Investment
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Sample Questions
Q1) The expenditure multiplier
A) is defined as the inverse of the savings rate
B) is greater than zero but less than one
C) does not depend on consumption behavior
D) is larger in a country with a large MPC than in a country with a small MPC
E) determines the effect on consumption from an increase in disposable income
Q2) If borrowing is precluded,then beginning at age 18,the individual will consume
A) $10,000 each year until age 23, then about $32,000 per year afterwards
B) $10,000 every year
C) all of his income as he receives it each year
D) $10,000 per year until age 23, then $25,000 per year afterwards
E) $25,000 every year
Q3) The marginal propensity to consume was conceived which famous economist?
A) Adam Smith
B) David Ricardo
C) Thomas Robert Malthus
D) John Maynard Keynes
E) Robert Solow
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Chapter 11: Business Cycles
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Sample Questions
Q1) In the long run,
A) nominal wages rise more slowly than prices
B) output is independent of the price level
C) real wages are higher than money wages
D) a higher price level elicits a sustained increase in production
E) the aggregate demand curve is perfectly horizontal
Q2) The shape of the short run aggregate supply curve is generally believed to be
A) a decreasing function of the price level
B) an increasing function of the interest rate
C) an increasing function of the price level
D) vertical
E) backward-bending
Q3) Assuming aggregate supply is upward-sloping and aggregate demand is downward-sloping,a sudden reduction in a nation's exports will
A) cause inflation
B) cause recession
C) cause stagflation
D) increase GDP and reduce prices
E) increase GDP and raise equilibrium prices
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Page 13
Chapter 12: Money and Prices
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Sample Questions
Q1) The inflation rates in the 7 major industrialized countries
A) have fallen steadily since 1970
B) reached a peak in the mid-1990s
C) have been historically high in all countries except the U.S. during the 1990s
D) have been nearly zero since 1970, because prices have been stable
E) were higher in the mid- and late 1970s than at any time since
Q2) Seignorage is an especially important source of government revenue in countries
A) with weak credit industries
B) with low inflation rates
C) with high tariffs on imports
D) with a currency tied to the dollar
E) that still use commodity money
Q3) The widespread historical use of gold or silver in transactions is an example of A) barter
B) commodity money
C) fiat money
D) credit
E) paper money
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Chapter 13: Monetary Policy
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Sample Questions
Q1) The real interest rate will be approximately
A) -.01
B) .02
C) .025
D) .05
E) .07
Q2) When the central bank undertakes an open market purchase,
A) the national debt increases
B) bank reserves decrease
C) interest rates rise
D) the money supply increases
E) the monetary base declines
Q3) Targeting interest rates and targeting the money supply are equivalent if
A) money demand is stable
B) banks hold no excess reserves
C) exchange rates are fixed
D) central banks practice inflation targeting
E) consumers exhibit rational expectations
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Chapter 14: Fiscal Policy and the Role of Government
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Sample Questions
Q1) Which of the following government functions could most easily be handled by the private sector?
A) education
B) national defense
C) the legal system
D) the police force
E) foreign policy
Q2) Which of the following is a justification for transfer payments?
A) transfers can create a more ethically acceptable income distribution
B) income redistribution provides insurance against misfortune
C) poverty creates negative externalities such as crime and disease
D) myopic individuals make time-inconsistent saving decisions
E) all of the above
Q3) Balancing the government's budget each year would
A) allow tax rates to remain constant from year to year
B) reduce uncertainty over future tax rates and net income
C) exacerbate recessions
D) stabilize short run GDP
E) generate smaller economic distortions than a policy of countercyclical deficits and surpluses
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Chapter 15: Stabilization Policy
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Sample Questions
Q1) US data fit the pattern of a short run Phillips Curve better in the 1960s than in the 1970s primarily because
A) government used more demand management in the 1970s than in the 1960s
B) wages were more flexible in the 1960s than in the 1970s
C) oil price shocks in the 1970s shifted the Phillips Curve
D) the concepts of inflationary expectations and the natural rate of unemployment had not been introduced in the 1960s
E) the end of the Vietnam War in the 1970s fundamentally altered the natural rate of unemployment
Q2) In response to an adverse supply shock,
A) demand management could be used to restore the initial equilibrium
B) stabilizing prices would exacerbate the recession
C) interest rate hikes could be used to fend off inflation and prevent recession
D) fiscal policy can be used to push aggregate supply outward
E) a tax cut could stabilize GDP and the price level
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17
Chapter 16: Financial Markets: Equities and Bonds
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Sample Questions
Q1) Higher short term interest rates
A) benefit bondholders
B) benefit those who issue bonds
C) benefit depositors at banks
D) benefit borrowers at banks
E) benefit governments with large national debts
Q2) Suppose there is a 20% chance of mean reversion. Then if the bubble persists during the current period,the price will
A) rise 3.025%
B) rise 5.63%
C) rise 7.00%
D) rise 27.00%
E) remain constant
Q3) Which of the following could cause a retail chain's stock price to fall?
A) a profit report which exceeds expectations
B) announcement of a merger with a more profitable firm
C) an unexpected increase in the money supply by the central bank, which reduces interest rates
D) the opening of a new, national, competing retail chain
E) the announcement that the firm will retire 10% of its outstanding shares
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Chapter 17: The Banking Sector
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Sample Questions
Q1) Real Estate is important to banks because
A) real estate lending is a large part of total bank lending
B) real estate is often used as collateral for loans
C) banks tend to own a lot of property
D) of both a and b
E) of a,b and c
Q2) Shareholders in a bank may encourage excessive risk taking by the bank because
A) shareholders are generally risk neutral
B) shareholders are generally risk averse
C) shareholders are generally risk loving
D) limited liability means that shareholder losses are limited
E) limited liability means that shareholder gains are limited
Q3) The Bank above suffers a 15% fall in the value of its loans.It is now
A) in a position where none of its creditors will get any of their money back
B) effectively bankrupt and depositors stand to lose money
C) effectively bankrupt but depositors can be paid off
D) effectively bankrupt but depositors and subordinated debt holders can be paid off
E) still a viable enterprise but with dramatically reduced capital
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Chapter 18: Sovereign Debt and Default
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Sample Questions
Q1) If annual GDP growth is .10,the interest rate is .05,the annual primary deficit is .04,and there is no price inflation,then the sustainable debt/GDP ratio is
A) .80
B) .90
C) 1.11
D) 2.80
E) 10
Q2) If annual GDP growth is .10,the interest rate is .05,there is no price inflation,and the government wants to keep national debt at 60% of GDP,then each year the government must run a
A) primary deficit equal to 3% of national income
B) primary deficit equal to 2% of national income
C) primary deficit equal to 1% of national income
D) primary surplus equal to 2% of national income
E) primary surplus equal to 3% of national income
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Chapter 19: Exchange Rate Determination I the Real
Exchange Rate
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Sample Questions
Q1) Price inflation in non-tradable output due to productivity enhancements in tradable output is explained by
A) Stolper-Samuelson theory
B) Balassa-Samuelson theory
C) Ricardian equivalence
D) Hecksher-Ohlin theory
E) The Harrod-Domar model
Q2) Then on a trade-weighted basis,North's currency has effectively
A) appreciated by 23%
B) appreciated by 33%
C) appreciated by 110%
D) depreciated by 5%
E) depreciated by 13%
Q3) Which of the following conditions would inhibit the Balassa-Samuelson effect?
A) Slower productivity growth in services than manufacturing
B) A relatively large service sector compared to the manufacturing sector
C) The inability to import or export services
D) The immobility of labor between manufacturing and service sectors
E) Technological improvements in manufacturing
Page 21
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Chapter 20: Exchange Rate Determination Iinominal
Exchange Rates and Asset Markets
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Sample Questions
Q1) On the spot market,UIP predicts that the exchange rate should be
A) £1.08 = $1.04
B) £2.16 = $0.96
C) £2.04 = $1.00
D) £1.50 = $2.00
E) £1 = $2.08
Q2) Order flows and exchange rates
A) are correlated in the long run but not in the short run
B) are correlated because foreign exchange markets have essentially perfect information and assimilate it quickly
C) are correlated because traders interpret others' purchase orders as a signal to buy D) are both determined in the short run by macroeconomic forces
E) are uncorrelated
Q3) In the long run,PPP theory predicts that the exchange rate should be
A) $1.04 = £2.16
B) $1 = £2
C) £1 = $2
D) £1.08 = $2.08
E) £1.04 = $2.08
Page 22
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Chapter 21: Currency Crises and Exchange Rate Systems
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Q1) Advocates of capital account liberalization emphasize each of the following except the idea that capital flows
A) enable poor countries to borrow for investment
B) smooth consumption in the face of idiosyncratic risk
C) impose discipline on policy makers
D) increase the depth and sophistication of financial markets
E) lead to factor price equalization across countries
Q2) Which of the following has not been raised as a criticism of IMF lending?
A) It creates moral hazard among investors by protecting them from losses
B) The conditions imposed on recipient governments often go unfulfilled
C) The default rates are quite high
D) Recipient countries recover somewhat more slowly than non-recipients
E) The loans have become so large that the IMF may need to increase its own capital reserves
Q3) A resource-based Sovereign Wealth Funds can benefit a nation by
A) Converting a temporary resource windfall into a longer term income stream
B) Mitigating the 'Dutch disease'
C) Investing the proceeds of persistent FX buying by the Central Bank
D) Both a) and b)
E) Stabilizing the price of the natural resource
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