Foundations of Economics Exam Answer
Key
Course Introduction
Foundations of Economics provides an introduction to the basic principles that underpin economic theory and decision-making. The course explores fundamental concepts such as scarcity, opportunity cost, supply and demand, market equilibrium, and efficiency. It examines the roles of households, firms, and governments in various market structures, and introduces students to key macroeconomic indicators including GDP, inflation, and unemployment. Through real-world examples and critical analysis, students develop a foundational understanding of how resources are allocated and how economic policies impact individuals and society.
Recommended Textbook
CoreMacroeconomics 3rd Edition by Eric Chiang
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16 Chapters
4462 Verified Questions
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Page 2
Chapter 1: Exploring Economics
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286 Verified Questions
286 Flashcards
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Sample Questions
Q1) If you plot temperature on the y axis and time on the x axis,then you have created a:
A) time series.
B) scatter plot.
C) pie chart.
D) bar chart.
Answer: A
Q2) The broad scope of economics analysis allows us to reflect on everyday choices in addition to more global issues.
A)True
B)False
Answer: True
Q3) Which of the following is NOT true of economic model building?
A) There may be exceptions to economic models.
B) Adding more complexity to models does not always provide greater insights.
C) Economic models always reach verifiable results.
D) Economic models provide generalizations about economic behavior.
Answer: C
Q4) Is understanding recessions a microeconomic or a macroeconomic issue? Explain.
Answer: Macroeconomic;it is a national issue.
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Chapter 2: Production, Economic Growth, and Trade
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Sample Questions
Q1) The "what" question of the three basic questions is "What price should be charged for a good?"
A)True
B)False
Answer: False
Q2) Opportunity cost applies only to personal purchasing decisions.
A)True
B)False
Answer: False
Q3) A country has to be able to produce both goods at a faster rate in order to have an absolute advantage.
A)True
B)False
Answer: False
Q4) Isabel can bake six cakes or 240 muffins in an eight-hour day.Pawel can bake 12 cakes or 360 muffins in an eight-hour day.Who has comparative advantage in cakes,and what is his or her opportunity cost of producing one additional cake?
Answer: Pawel has comparative advantage-a single cake costs him 30 muffins.In contrast,one cake costs Isabel 40 muffins.
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Chapter 3: Supply and Demand
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Sample Questions
Q1) The market-clearing price:
A) refers to a demand curve.
B) refers to a surplus.
C) is the price at which quantity demanded equals quantity supplied.
D) refers to a shortage.
Answer: C
Q2) The law of demand states that as the price of a good increases,the quantity demanded decreases.
A)True
B)False
Answer: True
Q3) When the supply curve shifts out (to the right)and the demand curve shifts in (to the left),the equilibrium price will:
A) increase.
B) decrease.
C) be indeterminate.
D) There is not enough information to tell.
Answer: B
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Chapter 4: Markets and Government
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Sample Questions
Q1) (Figure: Determining Surplus and Loss)In the graph,$12 would allow for an effective price ceiling.
A)True
B)False
Q2) According to economic theory,good information is not necessary for a market to work efficiently.
A)True
B)False
Q3) Explain how a price control such as a minimum wage can adversely affect low-skilled workers.
Q4) Deadweight loss reduces:
A) consumer surplus and not producer surplus.
B) producer surplus and not consumer surplus.
C) consumer surplus and producer surplus.
D) neither consumer surplus nor producer surplus.
Q5) Laws used to keep market prices from falling are called:
A) price ceilings.
B) rationing and subsidies.
C) allocations and redemptions.
D) price floors.
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Chapter 5: Introduction to Macroeconomics
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Sample Questions
Q1) One important reason economists track business investment is that:
A) it helps them decide which stocks to purchase.
B) it is a leading indicator of the business cycle.
C) business investment is an excellent proxy for government investment.
D) it shows them where the economy has been.
Q2) A jobless recovery occurs when an economic recovery produces too few jobs to significantly reduce the unemployment rate.
A)True
B)False
Q3) Corporate profits are slightly less than 10% of GDP.
A)True
B)False
Q4) In the simple circular flow model:
A) income is equal to spending.
B) saving is equal to consumer spending.
C) factor payments are equal to goods and services.
D) goods and services are equal to consumer spending.
Q5) During a recession,firms hire more workers to take advantage of lower wages.
A)True
B)False
7
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Chapter 6: Measuring Inflation and Unemployment
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Sample Questions
Q1) Unemployed workers who voluntarily quit their job to search for a better position are categorized as _____________ unemployed.
A) structurally
B) cyclically
C) frictionally
D) seasonally
Q2) Other things equal,if a recession gets worse,the number of discouraged workers __________,and the number of those in the labor force _____________.
A) increases;decreases
B) decreases;decreases
C) increases;increases
D) decreases;increases
Q3) The misery index is the sum of the unemployment and inflation rates.
A)True
B)False
Q4) Excessive government spending and printing new money are signs that the economy is in danger of hyperinflation.
A)True
B)False
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Chapter 7: Economic Growth
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Sample Questions
Q1) Between 1990 and 2010,the number of people in the world living in poverty has: A) stayed roughly the same.
B) been cut in half. C) doubled.
D) increased by 50%.
Q2) Economic growth typically results in longer life expectancies.
A)True
B)False
Q3) Long-run economic growth is shown by moving from a point below the production possibility frontier (PPF)to a point on the PPF.
A)True
B)False
Q4) Total factor productivity is influenced in part by a country's institutions. A)True
B)False
Q5) Year-over-year growth data exclude seasonal variations in growth rates. A)True B)False
Q6) If Macronomica has a growth rate of 2.6% per year,how long will it take for its output to double?
Page 9
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Chapter 8: Aggregate Expenditures
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Sample Questions
Q1) In the simple Keynesian model with no government and foreign sectors,assume that full employment occurs at an output of $10,000.With a marginal propensity to consume of 0.5 and equilibrium output at $9,600,by how much will investment spending have to increase to move the economy to full employment?
A) $100
B) $400
C) $200
D) $50
Q2) If the marginal propensity to consume is 0.6,the marginal propensity to save is 0.4,and government spending increases by $2 billion at the same time taxes rise by $2 billion,equilibrium income will:
A) rise by $2 billion.
B) not change.
C) fall by $2 billion.
D) rise by $5 billion.
Q3) Suppose the economy has more saving than investment.In the simple Keynesian model,how would the economy achieve equilibrium,assuming that desired investment is fixed?
Q4) Where does equilibrium occur in the simple Keynesian model?
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Chapter 9: Aggregate Demand and Supply
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Sample Questions
Q1) Cost-push inflation occurs when aggregate supply shifts to the right,causing the price level to increase along with rising unemployment.
A)True
B)False
Q2) An increase in investment will cause the aggregate demand curve to shift to the right.
A)True
B)False
Q3) The drop in aggregate demand that occurred during the Great Depression caused a drop in real GDP:
A) and deflation.
B) but an increase in the price level.
C) but no change in the price level.
D) but a modest rise in inflation.
Q4) Which of the following factors is NOT a component of aggregate demand?
A) consumption
B) investment
C) income
D) net exports
Q5) Why does the wealth effect not apply to assets such as houses or artwork?
Page 11
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Chapter 10: Fiscal Policy and Debt
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Sample Questions
Q1) If an advance in technology shifts the long-run aggregate supply curve out:
A) prices drop and output increases.
B) prices increase and output decreases.
C) prices remain stable and output decreases.
D) None of the answers is correct.
Q2) Supply-side fiscal policies have the disadvantage of setting up a tradeoff between low inflation and low unemployment rates.
A)True
B)False
Q3) Which of the following statements is TRUE?
A) Tax revenues are maximized when the tax rate is 100%.
B) Not knowing the economy's position on the Laffer curve means the effects of lowering tax rates are uncertain.
C) Low marginal tax rates have disincentive effects on work effort.
D) High marginal tax rates increase incentives to work.
Q4) When the economy is at equilibrium:
A) GDP = C + I.
B) GDP = C + I + G + (X - M).
C) Y + C = I.
D) Y = C / I.
Page 12
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Chapter 11: Saving, Investment, and the Financial System
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Sample Questions
Q1) Savings deposits are included in M1 but not M2.
A)True
B)False
Q2) Credit card companies sometimes offer teaser rates that will rise considerably after the offer period ends.
A)True
B)False
Q3) If the government issues receipts for goods and services and declares the receipts to be money,then those receipts are fiat money.
A)True
B)False
Q4) If the government offers firms investment tax credits for building new factories,the after-tax rate of return _______,causing the loanable funds __________ curve to shift ______,leading to __________ interest rates.
A) rises;demand;rightward;higher
B) rises;demand;leftward;higher
C) falls;demand;leftward;lower
D) rises;supply;rightward;lower
Q5) List some useful advice for dealing with credit card debt.
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Chapter 12: Money Creation and the Federal Reserve
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Sample Questions
Q1) If banks decide to hold more in excess reserves,then the value of the money multiplier increases.
A)True
B)False
Q2) The fractional reserve banking system:
A) makes possible the money creation process.
B) helps to prevent bank runs.
C) requires banks to hold a portion of their demand deposits in reserve.
D) All of the answers are correct.
Q3) Assume that the reserve requirement is 20%.A bank has $20 billion in demand deposits.How much money does the bank have to keep in reserves?
A) $20 billion
B) $10 billion
C) $4 billion
D) $2 billion
Q4) _______________ lags are shorter for monetary policy than for fiscal policy.
A) Information
B) Decision
C) Recognition
D) Implementation
Page 14
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Chapter 13: Monetary Policy
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Sample Questions
Q1) In May 2013,Brazilian President Dilma Rousseff said he would ensure that Brazil's central bank had the autonomy to do what was needed to tame inflation.Brazil's central bank would have to pursue a(n)_________ monetary policy.As a result,the dollar would ____________ against the real (Brazil's currency),making U.S.exports to Brazil
A) expansionary;rise;more expensive
B) expansionary;fall;cheaper
C) tight;rise;more expensive
D) tight;fall;cheaper
Q2) What are the limitations on the use of the classical theory of money?
Q3) The Federal Reserve's interest rate target is the level that will generally result in inflationary pressures.
A)True
B)False
Q4) The phenomenon of hoarding money when the interest rate falls to low levels is an outcome of:
A) the liquidity trap.
B) the transactions demand for money.
C) the precautionary demand for money.
D) deflation.
Page 15
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Chapter 14: Macroeconomic Policy: Challenges in a Global Economy
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Sample Questions
Q1) The Phillips curve will shift when:
A) the expected inflation rate changes.
B) rational expectations change.
C) the price level falls.
D) the unemployment rate falls.
Q2) The original Phillips curve showed a ________ relationship between ________ and unemployment rates.
A) negative;price inflation
B) negative;money wage rates
C) positive;price inflation
D) positive;money wage rates
Q3) Rational expectations theory suggests that the Fed and other policymakers must fool the public if their policies are to have short-term effects.
A)True
B)False
Q4) The 2007-2009 recession was brought on when the Fed used excessive tightening of the money supply to solve the stagflation of 2004 to 2007.
A)True
B)False
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Chapter 15: International Trade
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Sample Questions
Q1) Which of the following statements describes a benefit of low foreign wages?
A) Domestic jobs are destroyed.
B) Many domestic workers must be retrained.
C) Domestic consumers pay lower prices.
D) Domestic firms that compete with the imports lose profit.
Q2) International trade produces only "winners."
A)True
B)False
Q3) Anti-globalization activists are opposed to increased trade because of three of the following reasons.Which of the following is NOT one of the three?
A) Developing nations use child labor.
B) Developing nations pay low wages.
C) Developing nations employ workers with low human capital.
D) Developing nations degrade the environment.
Q4) Barriers to free trade create inefficiencies in the allocation of foreign resources. A)True B)False
Q5) What is the purpose of tariffs? Who gains and who loses from tariffs?
Q6) How can comparative advantage provide gains from trade and specialization?
Page 17
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Chapter 16: Open Economy Macroeconomic
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Sample Questions
Q1) If the dollar depreciates relative to the yuan,then American exports to China will:
A) increase.
B) decrease.
C) remain the same.
D) fall to zero.
Q2) The sum of all of the balance of payments accounts must equal zero.
A)True
B)False
Q3) Which of the following currency trades is NOT consistent with the current exchange rates of 500 Chilean pesos for US$1 and 1 pound sterling for US$1.50?
A) 1,000 Chilean pesos for US$2
B) 1,000 Chilean pesos for 2 British pounds
C) 1,000 British pounds for US$1,500
D) 1,500 Chilean pesos for 2 British pounds
Q4) Absolute purchasing power parity means:
A) real exchange rates equal the purchasing power in each country.
B) nominal exchange rates equal the purchasing power in each country.
C) real exchange rates are less than the purchasing power.
D) nominal exchange rates are less than the purchasing power.
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