Foundations of Economic Analysis Exam Preparation Guide
Course Introduction
Foundations of Economic Analysis introduces students to the core concepts and analytical tools essential for understanding economic theory and its applications. Covering both microeconomics and macroeconomics, the course explores principles such as market equilibrium, consumer and producer behavior, efficiency, and the role of government. It emphasizes the use of mathematical techniques and graphical analysis to model economic phenomena, enabling students to rigorously analyze resource allocation, decision-making, and the functioning of markets. This foundational course prepares students for advanced study in economics by developing skills in logical reasoning, problem-solving, and critical evaluation of economic policy and outcomes.
Recommended Textbook Principles of Economics 7th Edition by Robert H. Frank
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28 Chapters
4171 Verified Questions
4171 Flashcards
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Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) Suppose a retail store was offering 10 percent off list prices on all goods. The benefit of the 10 percent savings is:
A)unrelated to the list price of the good.
B)negatively related to the list price of the good.
C)positively related to the list price of the good.
D)zero since costs and benefits shouldn't be measured proportionally.
Answer: C
Q2) The Incentive Principle is an example of:
A)an economic decision-making pitfall.
B)over-estimating the benefits of an action.
C)a positive economic principle.
D)a normative economic principle.
Answer: C
Q3) The field of economics that would be most concerned with a recent fall in interest rates is:
A)microeconomics.
B)macroeconomics.
C)economic naturalism.
D)marginal economics.
Answer: B
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Chapter 2: Comparative Advantage
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Sample Questions
Q1) Working efficiently, Jordan can write 3 essays and outline 4 chapters each week. It must be true that:
A)6 essays and 0 chapter outlines would be unattainable.
B)2 essays and 3 chapter outlines would be efficient.
C)3 essays and 5 chapter outlines would be unattainable.
D)4 essays and 3 chapter outlines would be both attainable and efficient.
Answer: C
Q2) Which of the following jobs is least likely to be outsourced?
A)Flipping hamburgers
B)Technical assistance over the phone for your computer
C)Transcription of physicians' records
D)Software design
Answer: A
Q3) The benefits of specialization can be used to explain why:
A)workers prefer to work on a variety of tasks during the day.
B)machines are more productive than human workers.
C)individuals and nations benefit from trade.
D)big companies take advantage of smaller ones.
Answer: C
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) Jessica's marginal cost for producing a pitcher of lemonade is $0.25. Therefore, $0.25 is her:
A)marginal revenue.
B)equilibrium price.
C)reservation price.
D)producers surplus.
Answer: C
Q2) Which of the following would cause an increase in quantity of wheat supplied?
A)The price farmers receive for their wheat rises
B)The price of fertilizer farmers use in their fields falls
C)The price firms pay for liability insurance falls
D)New, better technology for farming is introduced
Answer: A
Q3) Buyers and sellers of a particular good make up the:
A)market for the good.
B)demand for the good.
C)supply for the good.
D)production possibilities curve for the good.
Answer: A
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Page 5
Chapter 4: Elasticity
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Sample Questions
Q1) If the price elasticity of demand for a good equals one, then the demand for that good is:
A)elastic.
B)inelastic.
C)unit elastic.
D)perfectly elastic.
Q2) You have found data that indicates that the income elasticity of demand for generic (unbranded)shampoo is -0.7. You should conclude that generic shampoo:
A)is a normal good.
B)has inelastic demand.
C)is below its equilibrium price.
D)is an inferior good.
Q3) If the absolute value of slope of the demand curve is 2.5, price is $6 per unit, and the quantity demanded is 8 units, then the price elasticity of demand is:
A)0.3.
B)0.533.
C)1.6.
D)1.875.
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6
Chapter 5: Demand
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Q1) Let MUc denote the marginal utility that Pablo receives from a cup of coffee, and let Pc denote the price of a cup of coffee. We typically expect that as Pablo buys more coffee:
A)MUc/Pc will rise.
B)MUc/Pc will fall.
C)MUc/Pc will not change.
D)MUc and Pc will both fall.
Q2) As the price of computers falls, the quantity of computers demanded increases. This is an application of:
A)the law of supply.
B)the production possibilities curve.
C)the law of demand.
D)needs versus wants.
Q3) For two goods, A and B, the rational spending rule is expressed as:
A)MUA = MUB.
B)MUA × MUB = PA × PB.
C)(MUA/PB)= (MUB/PA).
D)(MUA/PA)= (MUB/PB).
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Chapter 6: Perfectly Competitive Supply
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Q1) Suppose 30 employees per day can produce 50 units of output. Assuming the law of diminishing marginal returns is present, to produce 100 units of output would require:
A)an additional 30 employees per day.
B)more than 30 additional employees per day.
C)a total of 60 or fewer employees per day.
D)fewer than 30 additional employees per day.
Q2) Fred runs a fishing lodge and has a very profitable business during the summer. In the fall, the number of guests at the lodge starts to decline. Fred should keep the lodge open:
A)all year because his summer profits offset any losses he might have in the winter.
B)only during those months in which his total revenue exceeds his total cost.
C)only during those months in which his total revenue exceeds his fixed cost.
D)only during those months in which his total revenue exceeds his variable cost.
Q3) Average variable cost is defined as:
A)total cost divided by total output.
B)total cost divided by number of workers.
C)variable cost divided by total output.
D)variable cost divided by price.
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Page 8
Chapter 7: Efficiency, Exchange, and the Invisible Hand in Action
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Sample Questions
Q1) The phrase "smart for one, but dumb for all" refers to the idea that the individual pursuit of self-interest:
A)only leads to an efficient outcome when everyone is well-informed.
B)always leads to an efficient outcome.
C)never leads to an efficient outcome.
D)doesn't always lead to an efficient outcome.
Q2) Suppose a market is in equilibrium. The area below the market price and above the supply curve is:
A)the loss in total economic surplus.
B)producer surplus.
C)consumer surplus.
D)total economic surplus.
Q3) Some people have argued that the government should provide free medical care to everyone. Under this system:
A)the price of medical care will allocate resources efficiently.
B)the price of medical care will ration resources efficiently.
C)prices will not ration medical care so there will be no scarcity.
D)prices will not ration medical care so some other rationing method will be used.
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Chapter 8: Monopoly, Oligopoly, and Monopolistic Competition
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Sample Questions
Q1) Economies of scale arise from:
A)constant returns to scale.
B)increasing returns to scale.
C)decreasing returns to scale.
D)constant marginal returns to scale.
Q2) Start-up costs:
A)have no impact on the number of firms in an industry because they are sunk costs.
B)are inversely related to variable costs.
C)are the one-time costs incurred when beginning the production of a new product.
D)are always greater than marginal costs.
Q3) Which of the following is NOT an example of the hurdle method of price discrimination?
A)A coupon for $10 off any purchase of $50 or higher.
B)A mail-in rebate on a printer.
C)An early-bird discount for people who order dinner before 5pm.
D)A lower price on strawberries when they are in season.
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Chapter 9: Games and Strategic Behavior
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Sample Questions
Q1) Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. Which of the following statements is correct?
A)OPEC does not have dominant strategy.
B)OPEC's dominant strategy is to abide by the agreement.
C)OPEC's dominated strategy is to cheat on the agreement.
D)OPEC's dominant strategy is to cheat on the agreement.
Q2) Most cartels cease to be effective because:
A)of strict enforcement of antitrust legislation.
B)of the incentive to cheat on the cartel agreement.
C)the dominant firm buys out the other firms.
D)consumers discover the cartel and buy from other firms instead.
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Chapter 10: An Introduction to Behavioral Economics
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Sample Questions
Q1) If an entity is fungible, then its individual units are:
A)of value for a short period of time.
B)nearly impossible to purchase.
C)useless without the other units.
D)interchangeable.
Q2) Last week, Gina's bakery sold fewer cupcakes than ever before. Regression to the mean implies that the bakery:
A)has probably had other bad weeks, but Gina can't remember them.
B)will sell more cupcakes this week.
C)is likely to go out of business.
D)should stop selling cupcakes.
Q3) In traditional economic models, homo economicus is assumed to be all of the following EXCEPT:
A)highly disciplined.
B)altruistic.
C)well-informed.
D)cognitively sophisticated.
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Chapter 11: Externalities, Property Rights, and the Environment
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Sample Questions
Q1) If either the production or consumption of a good generates an external cost, then the:
A)social demand curve will lie to the right of the private demand curve.
B)social marginal cost curve will lie to the right of the private marginal cost curve.
C)social marginal cost curve will lie to the left of the private marginal cost curve.
D)social demand for the good will equal zero.
Q2) Suppose that the EPA has proposed strict controls on the amount of sulfur that diesel fuel contains. These controls were designed to fully offset the cost of pollution generated by diesel fuel vehicles. The effect of the regulation is estimated to increase the equilibrium price of a gallon of diesel fuel by 10 cents. Suppose that demand for diesel fuel is perfectly inelastic and supply has a positive slope. The effect of the regulation will ________ than if demand were not perfectly inelastic.
A)increase price and quantity by more
B)increase price by less and reduce quantity by more
C)decrease price and quantity by more
D)increase price by more and reduce quantity by less
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Page 13
Chapter 12: The Economics of Information
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Sample Questions
Q1) One way sellers can credibly signal that they have a high-quality product is to:
A)sell very little of their product in order to create scarcity.
B)spend a lot of money on advertising.
C)lower their marginal cost of production.
D)simply tell buyers more about their product.
Q2) Alex, who is risk-neutral, is looking for a one-bedroom apartment to rent for the month of August while he's on vacation in Seattle. All of the one-bedroom apartments in the neighborhood where he wants to stay are of equal quality, but 70 percent rent for $700 per month, 20 percent rent for $600 per month, and 10 percent rent for $500 per month. The first apartment Alex finds rents for $700 per month. If the cost to Alex of searching for an apartment is $30, then searching for another apartment is a gamble with an expected value of:
A)$0.
B)$10.
C)$20.
D)$40.
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Chapter 13: Labor Markets, Poverty, and Income Distribution
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Sample Questions
Q1) Jen is offered a job answering the phone in the State U economics department during lunchtime, from noon to 1 p.m., Tuesdays and Thursdays. Her reservation wage for this job is $15 per hour. If the department chair offers Jen $150 per week, how much economic surplus will she enjoy as a result of accepting the job?
A)$15 per week
B)$120 per week
C)$135 per week
D)$150 per week
Q2) An arbitrary preference by an employer for one group of workers over another is termed:
A)customer discrimination.
B)statistical discrimination.
C)employer discrimination.
D)employee discrimination.
Q3) Food stamps and Medicaid are examples of:
A)cash transfer programs.
B)in-kind transfer programs.
C)welfare programs that have been eliminated.
D)programs created by the Personal Responsibility Act.
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Page 15
Chapter 14: Public Goods and Tax Policy
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Q1) The marginal cost of providing another viewer with access to HBO is zero. Since only people who pay for HBO can watch it:
A)fewer than the socially optimal number of people will have access to HBO.
B)more than the socially optimal number of people will have access HBO.
C)HBO will not be profitable in the long run.
D)access to HBO is nonexcludable.
Q2) Josh pays $6,000 in taxes and earns $60,000. Maggie pays $4,000 in taxes. If the tax system is progressive, then Maggie earns:
A)$40,000.
B)more than $40,000 but less than $60,000.
C)less than $40,000.
D)more than $60,000.
Q3) According to the textbook, the private provision of television programming may not be socially optimal because:
A)consumers don't pay for broadcast television.
B)the government strictly regulates the market.
C)most consumers don't like watching television commercials.
D)programs are chosen on the basis of audience size rather than the value to the audience.
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Page 16
Chapter 15: International Trade and Trade Policy
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Sample Questions
Q1) If a country is net exporter, free trade will hurt the ________.
A)domestic producers
B)rich citizens of the country
C)poor citizens of the country
D)domestic consumers
Q2) An economy that does NOT trade with the rest of the world is a(n)
A)open economy.
B)command economy.
C)trade economy.
D)closed economy.
Q3) An economy that trades with the rest of the world is a(n)________.
A)open economy
B)command economy
C)trade economy
D)closed economy
Q4) If the United States is a net importer of bananas, free trade will benefit the
A)domestic banana producers.
B)rich citizens of the Unite States.
C)poor citizens of the United States.
D)domestic banana consumers.
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Chapter 16: Macroeconomics: The Birds Eye View of the Economy
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Q1) Which of the following would be considered an example of monetary policy?
A)A broad government initiative to reduce the country's reliance on agriculture and promote high-technology industries.
B)A reduction in income tax rates.
C)Provision of additional cash to the banking system.
D)A decision by a developing country to reduce government control of the economy and to become more market-oriented.
Q2) In the United States decisions to increase interest rates are made by ________ and decisions to increase taxes are made by ________.
A)Congress; the Federal Reserve
B)Congress; Congress
C)the Federal Reserve; the Federal Reserve
D)the Federal Reserve; Congress
Q3) Which of the following is the most aggregated value?
A)Total output of a firm
B)Total output of a country
C)Total output of a city
D)Total output of an industry
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Chapter 17: Measuring Economic Activity: GDP and Unemployment
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Sample Questions
Q1) An economy produces 500,000 tables valued at $100 each. Households purchase 100,000 tables, of which 50,000 are imported. Businesses purchase 200,000 domestically produced tables, the government purchases 100,000 domestically produced tables, and 50,000 domestically produced tables are sold abroad. At the end of the year, the table manufacturers hold the unsold tables in inventory. What is value of the investment component of GDP?
A)$10 billion
B)$20 million
C)$25 million
D)$30 million
Q2) In a small town of 100 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs, but wanted them.
What is the participation rate in this town?
A)63.0 percent
B)72.0 percent
C)81.1 percent
D)87.5 percent
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Chapter 18: Measuring the Price Level and Inflation
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Q1) Assume one investor bought a 10-year inflation-protected bond with a fixed annual real rate of 1.5 percent and another investor bought a 10-year bond without inflation protection with a nominal annual return of 4.2 percent. If inflation over the 10-year period averaged 2 percent, which investor earned a higher real return?
A)The investor who purchased the inflation protected bond.
B)The investor who purchased the bond without inflation protection.
C)Both investors earned the same real return.
D)Neither investor earned a positive real return.
Q2) If the CPI equaled 1.00 in 2005 and 1.65 in 2015 and a typical household's income equaled $35,000 in 1995 and $40,000 in 2005, then between 2005 and 2015, real household income:
A)increased.
B)decreased.
C)was constant.
D)may have either increased or decreased.
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Chapter 19: Economic Growth, Productivity, and Living Standards
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Sample Questions
Q1) The costs of economic growth include all of the following except consumption sacrificed for:
A)physical capital formation.
B)acquiring new human capital.
C)research and development into new technologies.
D)additional hours of leisure.
Q2) The biggest problem thwarting economic growth in the poorest countries, compared to the richest countries, is:
A)insufficient human capital.
B)outdated physical capital.
C)no access to technology.
D)a legal and/or political environment unfavorable to economic growth.
Q3) Compound interest is:
A)the payment of interest on the original deposit.
B)the interest rate adjusted for the rate of inflation.
C)the real rate of interest compounded by the rate of inflation.
D)the payment of interest on both the original deposit and all accumulated interest.
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Page 21
Chapter 20: The Labor Market: Workers, Wages, and Unemployment
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Q1) Short-term unemployment that is associated with the process of matching workers with jobs is called ________ unemployment.
A)cyclical
B)structural
C)technological
D)frictional
Q2) Structural unemployment is increased when workers can afford to be unemployed for longer periods of time as a result of:
A)unemployment insurance.
B)worker mobility.
C)minimum wage laws.
D)skill-biased technological change.
Q3) The extra production gained by employing one more worker is called the:
A)real wage.
B)nominal wage.
C)marginal product.
D)surplus product.
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Page 22
Chapter 21: Saving and Capital Formation
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Q1) If total government tax collections equal $200 billion, transfer payments equal $75 billion, and government interest payments equal $10 billion, then net taxes equal:
A)$115 billion.
B)$125 billion.
C)$190 billion.
D)$275 billion.
Q2) At the household level, higher saving rates lead to ________ and greater economic security.
A)greater current consumption
B)greater wealth
C)less wealth
D)less current income
Q3) To the extent that households are target savers who save to reach a specific goal, an increase in the interest rate ________ household saving and a decrease in the interest rate ________ household saving.
A)increases; decreases
B)decreases; increases
C)does not affect; increases
D)increases; does not affect
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Page 23
Chapter 22: Money Prices and the Federal Reserve
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Q1) The M2 measure of money consists of the sum of:
A)savings deposits, small time deposits, and money market mutual funds.
B)currency, checking and savings deposits, and small time deposits.
C)currency, checking and savings deposits.
D)M1, savings deposits, small time deposits, and money market mutual funds.
Q2) A banking panic is an episode in which:
A)depositors, spurred by news or rumors of possible bankruptcy of one bank, rush to withdraw deposits from the banking system.
B)commercial banks, fearing Federal Reserve sanctions, unwillingly participate in open-market operations.
C)commercial banks, concerned about high interest rates, rush to borrow at the Federal Reserve discount rate.
D)depositors, afraid of increasing interest rates, attempt to engage in discount-window borrowing at the Federal Reserve.
Q3) When money is used as a means to hold wealth, it serves as a:
A)double coincidence of wants.
B)store of value.
C)medium of exchange.
D)unit of account.
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Page 24
Chapter 23: Financial Markets and International Capital Flows
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Q1) You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5 percent, how much is your risk premium?
A)1.5 percent
B)6.5 percent
C)8.0 percent
D)13.0 percent
Q2) The current price of a stock increases when:
A)expected future dividends decrease.
B)the expected future price of the stock decreases.
C)interest rates decrease.
D)the perceived riskiness of the stock increases.
Q3) The benefits of net capital inflows to a country include all of the following except:
A)a larger pool of total savings.
B)a higher rate of investment in new capital.
C)a potentially higher growth rate.
D)interest and dividend payments owed to foreign investors.
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Page 25
Chapter 24: Short-Term Economic Fluctuations: An Introduction
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Q1) Recessions in the United States typically are:
A)limited to a few industries.
B)limited to specific regions of the country.
C)widely felt outside the United States.
D)confined to the domestic economy.
Q2) In the short run, total spending affects ________, and in the long run total spending affects ________.
A)prices; output
B)prices; unemployment
C)output; prices
D)output; unemployment
Q3) In reference to short-term economic fluctuations, the "peak" refers to:
A)a period in which the economy is growing at a rate significantly above normal.
B)the high point of economic activity prior to a downturn.
C)the high point of economic activity prior to a recovery.
D)a particularly strong and protracted expansion.
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Chapter 25: Spending and Output in the Short Run
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Q1) C + I + G + NX equals:
A)planned aggregate expenditure.
B)potential GDP.
C)the output gap.
D)the income-expenditure multiplier.
Q2) In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Planned aggregate expenditure equals:
A)290 + 0.25Y.
B)320 + 0.25Y.
C)320 + 0.75Y.
D)290 + 0.75Y.
Q3) The effect on short-run equilibrium output of a one-unit increase in autonomous expenditure is called:
A)the marginal propensity to consume.
B)average labor productivity.
C)Okun's law.
D)the income-expenditure multiplier.
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Q1) In the short-run, if the Federal Reserve increases interest rates, then consumption and investment ________, planned aggregate expenditure ________, and short-run equilibrium output ________.
A)increase; increases; increases
B)increase; increases; decreases
C)increase; decreases; decreases
D)decrease; decreases; decreases
Q2) If the Federal Reserve is currently paying 0.75 percent interest on bank reserves, but then increases that interest rate to 1 percent, banks may decide to hold ________ reserves, and the money supply may ________.
A)more; increase
B)more; decrease
C)fewer; increase
D)fewer; decrease
Q3) The money demand curve will shift to the right if:
A)the nominal interest rate increases.
B)real income increases.
C)ATM machines are introduced.
D)the price level decreases.
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Chapter 27: Aggregate Demand, Aggregate Supply, and Inflation
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Q1) Starting from a long-run equilibrium, a reduction in potential output leads to ________ gap in the short run and to a ________ rate of inflation in the long run.
A)an expansionary; higher
B)an expansionary; lower
C)a recessionary; lower
D)a recessionary; higher
Q2) Starting from long-run equilibrium, a large tax cut will result in a(n)________ gap in the short-run and ________ inflation and ________ output in the long-run.
A)expansionary; higher; potential
B)expansionary; higher; higher
C)recessionary; lower; lower
D)recessionary; higher; potential
Q3) The aggregate demand curve shows the relationship between short-run equilibrium output and the:
A)nominal interest rate.
B)real interest rate.
C)unemployment rate.
D)inflation rate.
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Chapter 28: Exchange Rates and the Open Economy
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Sample Questions
Q1) For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ________ the real exchange rate.
A)increases
B)decreases
C)may either increase or decrease
D)offsets any change in
Q2) Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to the right, EXCEPT:
A)an increased preference for U.S.-made goods.
B)an increase in real GDP abroad.
C)an increase in the real interest rate on U.S. assets.
D)an appreciation of foreign currencies relative to the U.S. dollar.
Q3) Holding all else constant, an increase in preferences by Mexicans for U.S. goods will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.
A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase
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