Foundations of Economics Exam Bank
Course Introduction
Foundations of Economics introduces students to the fundamental principles and concepts that underpin the study of economics. The course explores how individuals, businesses, and governments make choices in the face of scarcity, and examines key topics such as supply and demand, market equilibrium, opportunity cost, and the role of incentives. Additionally, students learn about the functioning of different economic systems, the importance of economic modeling, and the impact of government intervention in markets. This course provides a basis for further study in economics by equipping students with critical analytical tools for understanding both microeconomic and macroeconomic issues.
Recommended Textbook
Economics USA 8th Edition Edition by
Nariman Behravesh
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Page 2
Chapter 1: What is Economics
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Q1) There would be no economic problems in a world in which all resources were
A) free.
B) natural.
C) bought and sold for a price.
D) owned by the government.
E) scarce.
Answer: A
Q2) For this economy to produce 5 million units of consumer goods and 3 million units of defense goods
A) resources must be used inefficiently.
B) the production possibilities curve must be pushed outward.
C) unemployment must grow.
D) income inequality must increase.
E) society's resources must shrink.
Answer: B
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Chapter 2: Markets and Prices
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Q1) Which of the following activities is most likely to generate an external economy?
A) playing a stereo full blast in a dorm room during reading days
B) eating a pizza in a restaurant
C) driving while intoxicated
D) keeping a neatly mown, weedless lawn in a suburban neighborhood
E) quietly napping during an Economics class
Answer: D
Q2) A firm is able to purchase 1 unit of raw material for $2 and convert that unit into a finished product that sells for $25.Four production techniques are available,as shown in the table.If labor costs $1 per hour and machine time costs $3 per hour,the firm should A) use technique A.
B) use technique B.
C) use technique C.
D) use technique D.
E) not produce at all.
Answer: C
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4
Chapter 3: The Business Firm: Organization,motivation,and
Optimal Input Decisions
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Q1) Person-hours of labor would be considered a(n)________ input.
A) fixed
B) variable
C) average
D) break-even
E) diminishing
Answer: B
Q2) A business firm owned by a single individual is called a
A) monopoly.
B) closed shop.
C) proprietorship.
D) plant.
E) trust.
Answer: C
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Chapter 4: Getting Behind the Demand and Supply Curves
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Q1) If burgers cost $1.75,fries cost $0.75,and shakes cost $1,a utility-maximizing teenager with $6 to spend on lunch will buy
A) 0 burgers, 0 fries, and 6 shakes.
B) 0 burgers, 4 fries, and 3 shakes.
C) 1 burger, 3 fries, and 2 shakes.
D) 2 burgers, 2 fries, and 1 shake.
E) 3 burgers, 1 fries, and 0 shakes.
Q2) Which best expresses the relationship between the market and individual demand curves?
A) The market demand curve is an average of all individual demand curves.
B) The market demand curve is constructed by multiplying the price times the quantity demanded by each consumer and summing the results.
C) The market demand curve is found by adding the quantities demanded by each consumer at each possible price.
D) The market demand curve sums the prices each individual is willing to pay for a given quantity.
E) Individual demand curves can be found by dividing the market demand by the number of buyers.
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6
Chapter 5: Market Demand and Price Elasticity
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Q1) The major reason why the Iowa Dairy Farmers strike (and other similar protests)against Sioux City Milk dealers failed was that
A) the market demand for milk is highly price elastic so that consumers substitute other beverages when its price rises.
B) the strike raised costs of production because milk was destroyed, forcing dairy farmers into bankruptcy.
C) there were so many dairy farmers that milk dealers could find enough milk elsewhere to offset their losses from the striking farmers.
D) the U.S. government stepped in and forced the dairy farmers to go back to work.
E) Congress passed the Benson Brannan law, which raised farm prices and eliminated the need for the dairy farmers' protest.
Q2) If price elasticity of demand is 1.0,demand for the commodity is
A) of unitary elasticity.
B) price postelastic.
C) price elastic.
D) price inelastic.
E) price preelastic.
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Page 7
Chapter 6: Economic Efficiency,market Supply,and Perfect Competition
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Q1) In the long run,in a perfectly competitive industry,________ are zero.
A) economic profits
B) costs of production
C) average total costs
D) prices
E) variable costs
Q2) Which of the following characteristics would be inappropriate when describing a perfectly competitive market?
A) many firms
B) homogeneous product
C) some power over price
D) low barriers to entry
E) no form of nonprice competition practices
Q3) If the price is $1.00 per unit,the quantity supplied will be
A) 4.
B) 5.
C) 6.
D) 7.
E) 8.
Page 8
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Chapter 7: Monopoly and Its Regulation
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Q1) The total revenue curve is best represented by line
A) RS.
B) PR.
C) URT.
D) 0ST.
E) 0WPQ.
Q2) The calculation of marginal revenue is best described by which of the following equations if R(q)equals total revenue for a given level of output (q)?
A) marginal revenue = R(q) × R(q - 1)
B) marginal revenue = R(q) + R(q - 1)
C) marginal revenue = R(q)/R(q - 1)
D) marginal revenue = R(q) - R(q - 1)
E) marginal revenue = [R(q) + R(q - 1)]/R(q)
Q3) Which of the following would help to establish a monopoly?
A) possession of patent or copyright privileges
B) sharply increasing average cost at low rates of output
C) minimal industry barriers to entry for new products
D) a perfectly elastic demand curve for the product
E) the need to buy basic inputs in the world market
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Page 9
Chapter 8: Monopolistic Competition,oligopoly,and Antitrust Policy
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Q1) The Federal Trade Commission Act declared that
A) tying contracts substantially lessen competition.
B) contracts and combinations in restraint of trade are illegal.
C) the rule of reason is reasonable.
D) perfect competition results in optimal efficiency and an optimal distribution of income.
E) unfair methods of competition in commerce are unlawful.
Q2) Antitrust action against the American Telephone and Telegraph Company,begun by the Justice Department in 1974
A) led to the 1982 Supreme Court decision to break up AT&T.
B) was an unsuccessful effort by the Justice Department to reestablish the rule of reason doctrine.
C) resulted in an out-of-court settlement in which AT&T divested itself of its 22 local telephone companies.
D) ensured that AT&T would continue to have a monopoly position in local but not long-distance telephone service.
E) resulted in a denial of the proposed conglomerate merger of AT&T and IBM.
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Page 10
Chapter 9: Pollution and the Environment
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Q1) Which of the following policies would be LEAST desirable in helping to control pollution?
A) tax credits for pollution control equipment
B) federal grants-in-aid to municipal and regional agencies for waste cleanup
C) zero economic growth
D) direct regulation
E) effluent fees
Q2) Pollution-generating companies tend to overproduce because
A) consumers want something as compensation for the pollution.
B) the supply curve of the firm incorporates only the private costs of production.
C) the private costs exceed the social costs.
D) consumers pay for waste disposal in the price of the product.
E) they have extra profits to spend on advertising.
Q3) Curve 2 represents the
A) cost of pollution to society.
B) cost of pollution control to society.
C) difference between the cost of pollution and the cost of pollution control.
D) sum of the costs of pollution and of pollution control.
E) cost of pollution divided by the cost of pollution control.
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Page 11
Chapter 10: The Supply and Demand for Labor
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Q1) If the actual wage is $5,there will be
A) downward pressure on the wage because of the excess supply of labor.
B) no tendency toward change because $5 is the equilibrium wage.
C) upward pressure on the wage because the labor supply function is horizontal.
D) upward pressure on the wage because of the excess demand for labor.
E) a reduction in the supply of labor.
Q2) A major union weapon to force a favorable settlement is the threat of
A) a lockout.
B) an open shop.
C) featherbedding.
D) a strike.
E) collective bargaining.
Q3) Under which condition is the checkoff legal?
A) the worker must agree in writing
B) there must be a closed shop
C) there must be a yellow dog contract
D) the union must have sufficient funds to cover the check
E) the union must mandate it as a condition of membership
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12
Chapter 11: Interest,rent,and Profit
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Q1) Profits as a reward to innovation is a concept most associated with A) Karl Marx.
B) Henry George.
C) Frank Knight.
D) Thomas Malthus.
E) Joseph Schumpeter.
Q2) The basic difference between rent and other payments for productive inputs is that A) a reduction in rent will not influence the availability of the input; reductions in other input payments will reduce their availability.
B) rent is earned income to the input owner; other input payments are unearned.
C) rent is payment for use of an input; other input payments are made to obtain input services.
D) rent is payment for an input that has alternative uses; other input payments are for unique inputs.
E) There are no basic differences among these payments.
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Chapter 12: Poverty,income Inequality,and Discrimination
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Q1) Which of the following best states John Rawls's argument for income equality?
A) A dollar taken from a rich man and given to a poor man provides the poor man with more satisfaction than the rich man loses.
B) Income equality encourages people to take risks and to become more productive.
C) If people were framing a constitution for society without knowing what their class position would be, they would opt for equality.
D) Greater income equality leads to significantly higher rates of capital formation.
E) Political freedom and economic equality can only be achieved with a perfectly equal distribution of income.
Q2) Which of the following government programs provides goods or services rather than cash payments to the poor?
A) Aid to Families with Dependent Children
B) unemployment insurance
C) Social Security
D) Medicaid
E) old-age insurance
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14
Chapter 13: Economic Growth
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Q1) The purpose of the British Corn Laws was to
A) maintain the high profits of the British landlords.
B) prevent British farmers from exporting corn to other nations.
C) prevent British farmers from growing grain.
D) encourage grain imports from France and Germany.
E) encourage the British to substitute corn for meat.
Q2) Significant government involvement in stimulating economic growth became more common
A) before the Civil War.
B) between the Civil War and World War I.
C) during the 1920s.
D) during the 1930s.
E) after World War II.
Q3) ________ stressed the importance of innovation in the process of economic growth.
A) Joseph Schumpeter
B) Karl Marx
C) Thomas Malthus
D) David Ricardo
E) Adam Smith
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Chapter 14: Public Goods and the Role of the Government
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Q1) For a society operating at full employment,an increase in the amount of publicly provided goods
A) can be achieved without the sacrifice of privately provided goods.
B) means a reduction in the scope of government services.
C) means that the rate of unemployment falls.
D) means that society must reduce its consumption of privately provided goods.
E) means that the production possibilities curve has shifted to the left.
Q2) Suppose a sales tax on the commodity is imposed where S and D are the market supply and demand curves before the tax was levied.The equilibrium price with the tax is
A) $6.
B) $6.40.
C) $7.
D) $7.40.
E) somewhere between $6.40 and $7.
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Chapter 15: National Income and Product
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Q1) When computing GDP via the income approach,we must include
A) exports minus imports.
B) gross investment.
C) depreciation and indirect business taxes.
D) household savings and consumption.
E) government purchases of goods and services.
Q2) To measure the value of all final goods produced in a given year,we must include the value of
A) used goods that are resold.
B) intermediate goods.
C) government and private transfer payments.
D) all financial transactions.
E) changes in total inventories.
Q3) Which of the following would be explicitly counted when computing the gross domestic product by the expenditures approach?
A) the purchase of a used car by a college student
B) the salary of the CEO of Gillette Corporation
C) the purchase of fuel injectors by Ford
D) Social Security payments to retired persons
E) the purchase of a microwave oven by newlyweds
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Chapter 16: Business Fluctuations and Unemployment
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Q1) High levels of resource unemployment and excess capacity would imply a price level of
A) 100.
B) 200.
C) 300.
D) 400.
E) 500.
Q2) An equilibrium level of output and an equilibrium price level occur
A) only when the aggregate supply curve is horizontal.
B) when the price level equals the level of national output.
C) as long as the aggregate demand curve slopes upward.
D) where the aggregate supply and demand curves intersect.
E) in the short run only with specific government intervention.
Q3) A leftward shift in the short-run aggregate supply curve causes
A) price levels to fall.
B) real output to rise.
C) demand-pull inflation.
D) simultaneous inflation and a decrease in total real output.
E) unemployment to fall.
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Page 18
Chapter 17: The Determination of National Output and the Keynesian Multiplier
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Q1) If disposable income rises by $100 billion and personal consumption expenditure rises by $60 billion,what is the marginal propensity to save?
A) 0.60
B) 0.40
C) -0.40
D) -1.50
E) impossible to calculate from these figures
Q2) GDP is at the equilibrium level when
A) total intended household spending equals business spending.
B) it is at full-employment level.
C) the rate of inflation equals the rate of unemployment.
D) any further increases in intended spending increase the price level.
E) it equals the amount of intended spending.
Q3) The equilibrium value of GDP is ________ billion.
A) $1,740
B) $1,800
C) $1,860
D) $1,920
E) $1,980
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Chapter 18: Fiscal Policy and National Output
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Q1) A basic objection to increased public works spending when serious unemployment appears likely to develop is that
A) such spending would lead to a budget deficit.
B) such spending would lead to a decline in GDP.
C) all public works projects are wasteful.
D) there is a long lag between authorizing a program and actually spending the money.
E) stabilization policy is more important than the long-run desirability of public works.
Q2) Over the last 50 years,federal,state,and local governments have
A) increased their expenditures faster than the growth in total output.
B) gradually but steadily declined in importance in economic matters.
C) demonstrated a movement toward significant public ownership of the means of production.
D) moved increasingly toward nationalization of the defense industry.
E) appreciably expanded public ownership in the electric power industry.
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20
Chapter 19: Inflation
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Q1) The nonaccelerating inflation rate of unemployment is another name for the ________ rate of unemployment.
A) cyclical
B) Keynesian
C) natural
D) actual
E) sedentary
Q2) The Phillips curve illustrates the relationship between
A) aggregate demand and aggregate supply.
B) the interest rate and the money supply.
C) the rate of inflation and the rate of unemployment.
D) investment and the interest rate.
E) disposable income and saving.
Q3) Increases in the price level accompanied by reductions in total real output mean that the economy is experiencing
A) leftward shifts in the aggregate demand curve.
B) full employment.
C) technological advances leading to increased productivity.
D) leftward shifts in the Phillips curve.
E) supply-side inflation.
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Chapter 20: Money and the Banking System
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Q1) The total increase in the money supply that can be achieved from a given amount of excess reserves can be found by
A) adding the excess reserve ratio to the amount of excess reserves.
B) multiplying the excess reserve ratio by the amount of excess reserves.
C) subtracting the required reserve ratio from the excess reserve ratio.
D) dividing the amount of excess reserves by the required reserve ratio.
E) adding the required reserve ratio to the excess reserve ratio and multiplying the reciprocal of the result by the amount of required reserves.
Q2) The greater the ________,the greater the extent to which the banking system can expand the money supply.
A) legal reserve requirements
B) amount of reserves the public removes from the banking system in form of cash
C) willingness of banks to hold excess reserves
D) reciprocal of the required ratio of reserves to deposits
E) number of independent banks in the system
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22
Chapter 21: The Federal Reserve and Monetary Policy
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Q1) If commercial banks have no excess reserves and the Fed sells government securities
A) the money supply will expand and interest rates will fall.
B) total demand deposits in the banking system will fall by some multiple of the bond sale.
C) the size of the money supply will not change but its composition will.
D) the required reserve ratio will increase.
E) banks will gain excess reserves equal to the amount of bonds sold.
Q2) In 1965,President Johnson opposed a tax increase recommended by his economic advisers because
A) the war in Vietnam was drawing to a close and additional tax revenue was no longer needed.
B) he feared that a tax increase would bring the issue of the Vietnam War into sharp political focus.
C) he feared a tax increase would aggravate already high interest rates.
D) the Fed saw no immediate threat from inflation and Johnson elected to trust its judgment.
E) the United States had just had a significant increase in taxes to fund the Great Society.
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Chapter 22: Supply Shocks and Inflation
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Q1) The New Economy of the 1990s was characterized by A)productivity increases and the globalization of business, which shifted the aggregate supply curve to the right
B) unemployment rates that rose rapidly because businesses outsourced production to low-wage countries
C) inflationary rates that rose steadily to more than 4.5 percent per year because of the Fed's easy-money policies.
D) large declines in aggregate demand that led to concerns by policy makers that deflation was becoming a major threat.
E) increases in budget deficits that were used to finance large government expenditures on research and development.
Q2) Phillips curve (2)could shift up to curve (1)as a result of
A) the decreased bargaining power of unions.
B) expectations of a higher rate of inflation.
C) a higher level of training of the labor force.
D) increased labor productivity.
E) decreased government spending.
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24
Chapter 23: Productivity,growth,and Technology Policy
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Q1) The commercial introduction of new products and processes for the first time is called
A) research and development.
B) capitalization.
C) patent pending.
D) innovation.
E) derived demand.
Q2) Supply-siders typically advocate
A) tax increases to balance the federal budget.
B) tax reductions for households and tax increases for businesses to stimulate national output.
C) a steeply progressive personal income tax structure.
D) tax reductions to increase both the labor force participation and investment.
E) tax reductions for low-income workers, to stimulate consumption.
Q3) In 1840,the country with the highest per capita output was
A) the United States.
B) Canada.
C) Germany.
D) Japan.
E) England.
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Chapter 24: Surpluses,deficits,public Debt,and the Federal Budget
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Q1) The popularity of the annually balanced budget policy has increased in recent decades because of a
A) realization that the deficit has been growing at a faster rate than GDP.
B) sharp decline in U.S. overseas borrowing.
C) growing business support of higher taxes to firms.
D) gradual decline in inflation rates.
E) growing surplus in the structural deficit.
Q2) The federal budget is
A) for a fiscal year, from January 1 to December 31.
B) a statement of the government's anticipated expenditures and revenues.
C) a statement of how much the various agencies of the federal government would like to spend.
D) managed by the Federal Reserve System.
E) submitted by the president to Congress and must be either rejected or accepted without modification.
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26
Chapter 25: Monetary Policy,interest Rates,and Economic Activity
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Q1) Severe inflations often result when
A) the economy is in a serious depression.
B) governments excessively increase the money supply.
C) price levels are falling.
D) the value of money rises rapidly.
E) the public's desire to hold money balances increases.
Q2) The fact that there is NO notation on a $10 bill about what the government will give in exchange for it is an indication that
A) the note is not legal tender.
B) our paper currency no longer has much value.
C) the Fed has issued more money than the economy can handle.
D) the value of money has little to do with its intrinsic value.
E) the government does not want people to hoard money.
Q3) The monetary base is defined as
A) total demand deposits.
B) total demand deposits minus free reserves.
C) bank reserves plus currency outside member banks.
D) the interest rate on federal funds.
E) M1.
Page 27
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Chapter 26: Controversies Over Stabilization Policy
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Q1) Opponents of policy activism argue that even if intended private spending is NOT stable,economic stability nonetheless occurs because of
A) large government budget deficit spending.
B) the willingness of banks to hold excess reserves.
C) offsetting fluctuations in the velocity of circulation.
D) flexible wages and prices.
E) the acceleration effect.
Q2) The new classical macroeconomists stress that output fluctuations and unemployment
A) result from random errors and cannot be minimized by government stabilization policies.
B) require rational government actions to reduce the gap between actual and potential output.
C) will disappear if most large industries are nationalized.
D) are absent in a free market capitalist economy.
E) can be minimized if all sectors of the economy rationally expect high rates of inflation.
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28
Chapter 27: International Trade
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Q1) The windfall price increase of an imported good that results when a quota is imposed on that good accrues to
A) consumers who benefit from the lower-priced domestic substitutes.
B) no one, since only a tariff generates an explicit revenue stream.
C) firms in the industry protected by the imposition of the quota.
D) the government because it imposes the quota.
E) the importer who is successful in getting a license to import the good.
Q2) One of the first economists to understand and explain the notion that specialization and trade depend on comparative and NOT absolute advantage was
A) Adam Smith.
B) Edwin Mansfield.
C) John Maynard Keynes.
D) Thomas Malthus.
E) David Ricardo.
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Chapter 28: Exchange Rates and the Balance of Payments
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Q1) If the exchange rate is $0.75 U.S.dollar to 1 Canadian dollar,then in terms of the Canadian dollar to the U.S.dollar,it is
A) 0.75 to 1.
B) 0.33 to 1.
C) 1.33 to 1.
D) 1.75 to 1.
E) 3 to 1.
Q2) The exchange rate is the
A) number of units of one currency that exchanges for a unit of another currency.
B) volume of currency that flows internationally during a year.
C) number of ounces of gold annually used in trade.
D) ratio of exports to imports.
E) annual turnover rate of the money supply.
Q3) Globalization
A) affects primarily goods-producing industries.
B) is solely a late twentieth-century phenomenon.
C) reduces the volume of international trade.
D) faces little opposition within developed countries of the world.
E) leads to greater integration of the world economy.
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