Foundations of Economics Chapter Exam Questions
Course Introduction
Foundations of Economics introduces students to the fundamental principles and concepts that underpin economic theory and practice. The course covers basic topics such as scarcity, opportunity cost, supply and demand, market equilibrium, and the roles of consumers, firms, and governments in the economy. Students will explore both microeconomic and macroeconomic frameworks, learning how markets function, what causes market failures, and how economic policies impact society. Emphasis is placed on applying economic reasoning to real-world issues, enhancing problem-solving and critical thinking skills essential for further study in economics and related fields.
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Economics for Today 5th Edition by Allan Layton
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Chapter 1: Thinking Like an Economist
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Q1) Which of the following goods is not a capital good?
A) An arrow.
B) A computer.
C) Money.
D) A car.
Answer: C
Q2) Which of the following is a microeconomics topic?
A) The unemployment rate.
B) The inflation rate.
C) The economy's growth rate.
D) The price of apples.
E) Forecasts of a recession next year.
Answer: D
Q3) Scarcity is a situation:
A) where people's needs exceed their resources.
B) where people's wants exceed their resources.
C) where the quantity of resources is sufficient to meet all wants.
D) where people's needs exceed other people's resources.
E) where the quantity of resources is sufficient to meet all needs.
Answer: B
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Chapter 2: Applying Graphs to Economics
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Sample Questions
Q1) As shown in Exhibit A1.3, the intercept of straight line AB is:
A)1.
B)10.
C)20.
D)30.
E) not determinable from the information provided.
Answer: B
Q2) A positive relationship exists when:
A) there is no association between two variables.
B) one variable increases and there is no change in the other variable.
C) one variable increases and the other variable increases too.
D) one variable increases and the other variable decreases.
Answer: C
Q3) What is the slope of the line shown in Exhibit A1.6?
A) 1/20.
B) 1/10.
C) 1/5.
D) 1/2.
Answer: A
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Chapter 3: Production Possibilities and Opportunity Cost
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Sample Questions
Q1) The opportunity cost of watching a movie is the:
A) dollar cost of a movie ticket plus enjoyment from watching a movie.
B) dollar cost of a movie ticket.
C) alternatives foregone such as studying and fishing.
D) the next best alternative option foregone.
Answer: D
Q2) In Exhibit 2.11, the production possibilities curves for a country are shown for the years 2002 and 2003. Suppose this country was located at point A in 2002 and point B in 2003. This economy:
A) is worse off in 2003 than in 2002.
B) has stagnated production in this two-year period.
C) is more efficient in 2003 than in 2002.
D) has shown growth between these two years.
E) has higher unemployment in 2003 than in 2002.
Answer: D
Q3) An increase in current consumption is necessary for economic growth.
A)True
B)False
Answer: False
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Chapter 4: Market Demand and Supply
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Sample Questions
Q1) If the price of hot dogs increases, what will happen in the market for potato chips, a complementary good?
A) Demand will increase.
B) Quantity demanded will increase.
C) Demand will decrease.
D) Quantity demanded will decrease.
Q2) Which of the following must be true if good X is a normal good and income increases?
A) The demand for X will increase, and thus the price and quantity sold and bought will Decrease.
B) The demand for X will decrease, and thus the price and quantity sold and bought will decrease.
C) The demand for X will increase, and thus the price and quantity sold and bought may increase.
D) The demand for X will decrease, and thus the price and quantity sold and bought will increase.
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Chapter 5: Markets in Action
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Sample Questions
Q1) Which of the following is an example of a positive externality?
A) Planting flowers in your front yard.
B) Talking loudly when others are trying to study economics.
C) Accidentally pushing someone as you try to cross the street.
D) Littering on the street.
Q2) If the government imposes a price ceiling below the market equilibrium price, then:
A) there will be no changes to the market equilibrium.
B) there will be excess supply.
C) there will be more goods to meet the additional demand.
D) there will be less goods to meet the demand.
Q3) If the free market is called upon to provide public goods, then:
A) there will more goods provided than is optimal.
B) there will be fewer goods provided than is optimal.
C) the market will provide the optimal number of goods.
D) the market price will be correct, but the optimal amount of output will not be produced.
Q4) More information on the benefits of honey will result in more honey bought.
A)True
B)False
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Chapter 6: Elasticity of Demand and Supply
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Sample Questions
Q1) Price elasticity of demand measures:
A) the responsiveness of the quantity demanded of a good to a change in income.
B) the responsiveness of the quantity demanded of a good to a change in consumers' Preferences.
C) the responsiveness of the quantity demanded of a good to a one percent change in price.
D) the reduction in the quantity demanded of a good when the price is reduced.
Q2) The price elasticity of demand for a vertical demand curve is:
A) perfectly elastic.
B) perfectly inelastic.
C) unitary elastic.
D) elastic.
Q3) If an excise tax is placed on a product that has a perfectly inelastic demand, then:
A) the entire tax will be paid by the consumer.
B) the entire tax will be paid by the producer.
C) the consumer and producer will each pay a share of the tax.
D) the incidence of the tax cannot be determined unless we know the coefficient of price elasticity of supply.
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Chapter 7: Production Costs
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Sample Questions
Q1) ATC can be calculated as follows:
A) AFC*AVC or TC*Q
B) AFC-AVC or TC/Q
C) AFC+AVC or TC*Q
D) AFC+AVC or TC/Q
Q2) By filling in the blanks in Exhibit 6.8, the AVC of four pizzas is shown to be equal to:
A) $9.50.
B) $10.00.
C) $19.50.
D) $40.00.
Q3) When marginal product is rising, marginal cost will be:
A) falling.
B) rising.
C) rising or falling.
D) constant.
Q4) Costs that do not vary as output varies and that must be paid even if output is zero are called total fixed costs.
A)True
B)False
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Chapter 8: Perfect Competition
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Sample Questions
Q1) A perfectly competitive industry's short-run market supply curve is derived from:
A) horizontal summation of the short-run supply curves of major firms in the industry.
B) horizontal summation of the long-run supply curves of all firms in the industry.
C) vertical summation of the short-run supply curves of all firms in the industry.
D) horizontal summation of the short-run supply curves of all firms in the industry.
Q2) Refer to Exhibit 7.9 and assume the perfectly competitive firm is in long-run equilibrium and there is an increase in demand. Along which cost curve, in the short run, will the firm increase output?
A) Short-run average total cost curve B.
B) Short-run marginal cost curve B.
C) Long-run average cost curve.
D) The firm shuts down.
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Chapter 9: Monopoly
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Sample Questions
Q1) Price discrimination occurs when:
A) for the same product, a seller charges different customers different prices justified by cost differences.
B) for a different product, a seller charges different customers different prices not justified by cost differences.
C) for a different product, a seller charges the same customers different prices not justified by cost differences.
D) for the same product, a seller charges different customers different prices not justified by cost differences.
Q2) Price discrimination often permits some consumers, who otherwise would be excluded from a market, to buy a good or service.
A)True
B)False
Q3) Predatory pricing in monopolies is the practice of:
A) increasing prices to prey on consumers.
B) increasing prices to raise revenue.
C) decreasing prices to deter potential competitors.
D) decreasing prices to deter potential consumers.
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Chapter 10: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) The strategic analysis firms undertake is often seen in perfect competition.
A)True
B)False
Q2) Product differentiation makes the demand for a monopolistically competitive firm's product:
A) perfectly elastic.
B) more elastic than for a monopoly.
C) more inelastic than for a monopoly.
D) perfectly inelastic.
Q3) In general, oligopolies are considered to misallocate resources because:
A) competition is often fierce in oligopolies.
B) an oligopolist often earns economic profits.
C) P < MC in oligopoly.
D) P = MC in oligopoly.
Q4) In a monopolistically competitive market, sellers sell a differentiated product because:
A) there is a very low cross-price elasticity of demand between the products.
B) there is a valuable difference between sellers' products.
C) sellers' products are not close substitutes.
D) sellers cannot influence the market price.
Page 12
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Chapter 11: Policy Issues: Housing Affordability and Climate
Change
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Sample Questions
Q1) The absence of the external costs of carbon emissions in the price of electricity means that:
A) firms produce electricity accounting for the global warming.
B) firms produce electricity equal to what is socially desirable.
C) firms produce more electricity than is socially desirable.
D) firms produce less electricity than is socially desirable.
Q2) In Exhibit 10.2, the market demand curve 'Demand' and market supply curve 'Supply 1' establish a:
A) socially desirable level of emissions.
B) market equilibrium.
C) regulated output.
D) price and quantity of external costs.
Q3) Economists prefer an emissions trading scheme to other carbon reduction measures because:
A) an ETS requires continuous government intervention.
B) such a scheme achieves the highest emissions reduction price per tonne of carbon.
C) such a scheme gives all parties involved more flexibility and more control over their own decisions.
D) they don't trust government to make the right decisions.
Page 13
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Chapter 12: Measuring the Size of the Economy
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Q1) Net national product is:
A) NDP minus depreciation.
B) GDP minus depreciation.
C) NDP minus net income paid overseas.
D) GNP minus net income paid overseas.
Q2) Gross national product is also known as:
A) gross international income.
B) net domestic goods and services.
C) gross national expenditure.
D) gross national income of a country.
Q3) A country's current account balance is equal to:
A) current account balance minus the capital account balance.
B) net exports plus imports.
C) net exports minus net income paid overseas.
D) net exports plus government spending.
Q4) Net domestic product (NDP) is equal to gross domestic product (GDP) plus indirect business taxes.
A)True
B)False
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Chapter 13: Business Cycles and Economic Growth
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Q1) Exogenous technological progress is the progress that:
A) depends on the economic growth process.
B) is independent of the economic growth process.
C) is undefinable.
D) is growing slowly according to spending in the economy.
Q2) Which of the following is not a lagging indicator?
A) Outstanding commercial loans.
B) Duration of unemployment.
C) Prime rate.
D) Stock prices.
Q3) The trough is good news because:
A) it is the middle of the expansion phase of the business cycle.
B) production is at the highest level.
C) unemployment is low.
D) it is the starting point to improve economic conditions.
Q4) In the Solow model, technological progress is assumed to occur:
A) systematically as part of capital accumulation.
B) randomly outside the system.
C) systematically as part of increases in output.
D) systematically as part of increases in investment.
Page 15
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Chapter 14: Inflation and Unemployment
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Sample Questions
Q1) The consumer price index is also called:
A) the price of living index.
B) the cost of surviving index.
C) the cost of living index.
D) the price of underemployment.
Q2) Exclusion of which of the following tends to understate the true level of unemployment in the economy?
A) Children.
B) Retired persons.
C) Students.
D) Discouraged workers.
Q3) Cyclical unemployment:
A) causes unemployment statistics to be understated.
B) causes unemployment statistics to be overstated.
C) occurs because of recessions.
D) occurs because of technological innovations in production.
Q4) People with fixed incomes fare best in an inflationary period.
A)True
B)False
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Chapter 15: A Simple Model of the Macro Economy
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Q1) Other things being equal, an improvement in technology causes:
A) a decrease in the aggregate supply curve.
B) an increase in the aggregate demand curve.
C) a decrease in the aggregate demand curve.
D) an increase in the aggregate supply curve.
Q2) In Exhibit 14.1, there are plenty of idle resources and no upward pressure on prices in:
A) the segment labelled ab.
B) the segment labelled bc.
C) the segment labelled cd.
D) both segment bc and segment cd.
Q3) The aggregate demand is:
A) C + I + G + (X + M).
B) C + I + G - (X - M).
C) C + I + G*(X - M).
D) C + I + G + (X - M).
Q4) Much of the nation's capital stock is idle during a recession and therefore firms have incentives to invest in more.
A)True
B)False
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Chapter 16: The Monetary and Financial System
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Q1) If an exporter believes the $A is going to rise in three months when it receives payment for a shipload of its good, it may decide to:
A) enter the short-term money market to hedge against this.
B) borrow money in the interim.
C) enter the futures market to hedge against this.
D) buy Treasury notes in the interim.
Q2) The opportunity cost of holding money is properly measured by the rate of interest on financial assets such as bonds.
A)True
B)False
Q3) Expansionary monetary policy is:
A) reducing interest rates by increasing money supply.
B) increasing interest rates by increasing money supply.
C) reducing interest rates by decreasing money supply.
D) increasing interest rates by decreasing money supply.
Q4) Fiat money has no redeemability or intrinsic value.
A)True
B)False
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Chapter 17: Macroeconomic Policy I: Monetary Policy
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Q1) According to Exhibit 16.1, if the economy is currently operating at point A, the RBA is likely to:
A) increase interest rates to shift the AD" curve to AD'
B) decrease interest rates to shift the AD" curve to AD'..
C) decrease interest rates to shift the AD" curve to AD'".
D) decrease interest rates to shift the AD" curve to AD'.
Q2) With a fixed exchange rate, the RBA:
A) had to buy Australian dollars when the currency threatened to depreciate.
B) had to sell Australian dollars when the currency threatened to appreciate.
C) would alter the domestic money supply when they intervened to keep the Australian dollar at its fixed rate.
D) had strong control over domestic interest rates.
Q3) Which of the following is the equation of exchange?
A) MQ=PV.
B) PV=MQ.
C) MP=VQ.
D) MV=PQ.
Q4) Monetarists argue that velocity is reasonably predictable.
A)True
B)False
Page 19
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Chapter 18: Macroeconomic Policy II: Fiscal Policy
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Q1) The domestic deficit is the:
A) sum of domestically derived revenue and domestic government expenditure.
B) sum of domestically derived revenue and total government expenditure.
C) difference between domestically derived revenue and total government expenditure.
D) difference between domestically derived revenue and domestic government expenditure.
Q2) If the government projects that negative economic growth will occur over the next few months, the most likely outcome for the federal budget will be:
A) a surplus.
B) a balanced budget.
C) a deficit.
D) contractionary.
Q3) Along with lower tax rates, supply-siders' policy recommendations include:
A) spending cuts and increased government regulation.
B) lower resource prices and decreased government regulation.
C) spending increases and decreased government regulation.
D) spending increases and increased government regulation.
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Chapter 19: International Trade and Finance
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Sample Questions
Q1) The principal objective of the WTO is to:
A) reduce the level of all tariffs.
B) establish fair prices for all goods traded internationally.
C) act as the world's police officer to prevent dumping.
D) prevent the trading of services across nations' borders.
Q2) In Exhibit 18.3, Australia has an absolute advantage in producing:
A) potatoes.
B) wheat.
C) both potatoes and wheat.
D) neither potatoes nor wheat.
Q3) Free trade agreement between Australia and New Zealand is called:
A) Closer Economic Relations or CER.
B) Creating Economic Relations or CER.
C) Clever Economic Relations or CER.
D) Closed Economic Relations or CER.
Q4) Using tariffs to trade only with some developing countries is often called:
A) the national safety argument.
B) the cheap foreign labour argument.
C) the baby industry argument.
D) the unemployment argument.
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