Foundations of Economics Exam Preparation Guide
Course Introduction
Foundations of Economics introduces students to the core principles and concepts that underpin modern economic theory and practice. The course covers fundamental topics such as supply and demand, market equilibrium, opportunity cost, and comparative advantage, along with an exploration of different market structures, the role of government in the economy, and basic macroeconomic indicators. Through real-world applications and analytical frameworks, students develop a comprehensive understanding of how economies function at both the micro and macro levels, preparing them for further study in economics and related fields.
Recommended Textbook
Economics Today 17th Edition by Roger LeRoy Miller
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Page 2
Chapter 1: The Nature of Economics
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Sample Questions
Q1) Which of the following best describes how economists test the empirical predictions of economic models?
A) Economists survey individuals to learn about how people think through decisions about how much to purchase or to produce.
B) Economists collect and analyze real-world observations of people's actions to discern if those actions accord with theories' predictions.
C) Based on theories about thought processes, economists seek to determine which thought processes predominate in determining how a person decides what actions to take.
D) Recognizing that people always do what they say they will do, economists rely exclusively on information gleaned from polls and surveys conducted by poll takers and market researchers.
Answer: B
Q2) Is inflation a macroeconomic or a microeconomic question? Why?
Answer: Inflation is a macroeconomic question because it deals with an economy-wide phenomenon. The price increase of a specific product, such as gasoline, would be a microeconomic matter. Since inflation deals with prices in the economy as a whole, it is a macroeconomic concern.
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Chapter 2: Scarcity and the World of Trade-Offs
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Q1) All of the following are assumptions of the production possibilities curve EXCEPT
A) resources are fully employed.
B) there is a fixed time period.
C) there is a fixed level of technology.
D) there is a fixed demand for the products.
Answer: D
Q2) Which of the following statements indicates the idea of trade-offs?
A) "I chose the road less traveled."
B) "The devil made me do it."
C) "You've got me under your spell."
D) "Always give it the best that you can."
Answer: A
Q3) Division of labor means that
A) the labor market in the United States is geographically segmented.
B) some employees join labor unions and others do not.
C) management and labor are always in conflict.
D) the production process is divided into smaller tasks.
Answer: D
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4
Chapter 3: Demand and Supply
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Q1) A given supply curve illustrates
A) the relationship between price and quantity supplied.
B) the effect of a change in resource costs on quantity supplied.
C) the effect of a change in technology on quantity supplied.
D) the relationship between expected future prices and quantity supplied.
Answer: A
Q2) A supply schedule
A) can be used to generate a supply curve.
B) is a table reflecting the inverse relationship between price and quantity supplied.
C) shows what happens to quantity supplied when price is held constant.
D) all of the above.
Answer: A
Q3) Which of the following statements is consistent with a decrease in supply?
A) Prices of raw material inputs have increased.
B) There has been an advance in technology.
C) Consumers' incomes have increased.
D) The market price has decreased.
Answer: A
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5
Chapter 4: Extensions of Demand and Supply Analysis
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Q1) If both buyers and sellers expect the price of a commodity to fall in the future, it is likely that the market clearing price ________ and the equilibrium quantity
A) will fall, cannot be predicted B) will rise, cannot be predicted C) cannot be predicted, will fall D) cannot be predicted, will rise
Q2) Refer to the above figure. Suppose that the supply curve shifts from S<sub>A</sub> to S<sub>B</sub> while the demand curve shifts from D<sub>A </sub>to D<sub>B</sub>.
Which of the following is true about the results of the shifts in the supply and demand curves?
A) The equilibrium price increases while the equilibrium quantity remains unchanged.
B) Both the equilibrium price and equilibrium quantity increase.
C) The equilibrium price remains unchanged while the equilibrium quantity increases.
D) Both the equilibrium price and equilibrium quantity remain unchanged.
Q3) Suppose local educators argue that teachers' salaries are too low. At the same time it is said that the school district received 750 applications for 5 new openings. Are salaries too low? Explain.
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Chapter 5: Public Spending and Public Choice
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Q1) Federal antitrust laws in the United States are enforced
A) solely by the Federal Trade Commission.
B) solely by the Department of Justice.
C) by the Department of Justice and by the Federal Trade Commission.
D) by the Department of Commerce.
Q2) The theory of public choice
A) is the theory of how government decides on what military hardware to purchase.
B) considers government decision-making efficient.
C) is the study of collective decision making.
D) is the study of how negative externalities can be reduced.
Q3) If public subsidies for education were eliminated, what would you expect as an outcome in the market for educational services?
A) More students would enroll in school.
B) The price students pay to attend school would equal the value of an additional unit of education consumed.
C) There would be no correlation between the price students pay and the cost of providing the educational services.
D) The quality of education would deteriorate.
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Chapter 6: Funding the Public Sector
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Q1) What happens when the government imposes a unit excise tax on a good?
A) The amount of the tax is added to the current equilibrium price.
B) The demand for the newly taxed good decreases.
C) That good's supply curve shifts down by the amount of the tax.
D) The newly taxed good's supply curve shifts vertically upward by the amount of the per-unit tax being levied.
Q2) Ad valorem taxes
A) are not used in the United States.
B) are assessed as a percentage of a good's price.
C) are based on income levels.
D) are applied only to imports.
Q3) The responsibility of paying for the Social Security benefits for currently retired individuals falls on
A) current and future workers.
B) the retired people themselves.
C) no one, since the government prints the money.
D) only working people over 50 years of age.
Q4) Explain why an increase in the tax rate can result in lower tax revenues.
Q5) In what way is corporate income subject to double taxation?
Q6) Explain how corporate profits are taxed twice.
Page 8
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Chapter 7: The Macroeconomy: Unemployment, Inflation, and Deflation
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Q1) Suppose that unemployment increases because the government requires employers to provide more funds for their employees' retirement programs. The increase in unemployment is most likely a result of an increase in
A) frictional unemployment.
B) structural unemployment.
C) the natural rate of unemployment.
D) cyclical unemployment.
Q2) An increase in inflation will cause a reduction in which of the following?
A) the nominal value of money
B) the Producer Price Index
C) the GDP deflator
D) the real value of money
Q3) In the United States, most often the ________ changes first, and the ________ follows.
A) CPI; PPI
B) GDP deflator; CPI
C) PPI; CPI
D) PCE; CPI
Q4) How are inflation and the purchasing power of money related?
Q5) In what ways is the consumer price index flawed?
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Chapter 8: Measuring the Economys Performance
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Q1) Refer to the above table. The production of this good goes through 4 different stages of production. What is the value added at Stage 2?
A) $0.02
B) $0.08
C) $0.10
D) $0.75
Q2) If Net Domestic Product (NDP) is $50 less than Gross Domestic Product (GDP), we know that
A) inventories increased over the year.
B) inventories decreased over the year.
C) net investment equals $50.
D) depreciation equals $50.
Q3) The two principle methods of measuring Gross Domestic Product are the A) flow approach and the stock approach.
B) expenditures approach and the income approach.
C) intermediate approach and the value-added approach.
D) domestic approach and the international approach.
Q4) Define and explain gross domestic product.
Q5) What constitutes investment when measuring gross private domestic investment?
Page 10
Q6) Where does profit enter in the circular flow? Why?
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Chapter 9: Global Economic Growth and Development
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Q1) According to Romer and other new growth theorists, what could poor countries do to stimulate greater economic growth?
Q2) According to many economists, as nations become wealthier, what happens to family sizes?
A) They increase.
B) They decline.
C) There is no effect.
D) They increase, but later in life.
Q3) The study of factors that contribute to the economic growth of a country is known as
A) natural resource economics.
B) entrepreneurial economics.
C) development economics.
D) savings economics.
Q4) Economic growth can be defined as a percentage increase in A) per capita real GDP.
B) real GDP.
C) nominal GDP.
D) consumption by households.
Q5) Why might population growth and immigration stimulate economic growth?
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Chapter 10: Real GDP and the Price Level in the Long Run
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Q1) What is the real-balance effect of an increase in the price level?
Q2) In the above figure, if the price level is 150,
A) total planned production exceeds total expenditures.
B) total expenditures exceed total planned expenditures.
C) total planned production equals total expenditures.
D) total planned production is less than total expenditures.
Q3) Refer to the above figure. A movement from B to D would be a result of
A) an increase in the quantity of money in circulation.
B) an increase in labor productivity.
C) an increase in government expenditures.
D) an increase in the marginal income tax rate.
Q4) At each price level, the aggregate demand curve indicates
A) the nominal value of total production of goods and services domestic income that will be produced.
B) the total amount of real planned expenditures.
C) the nominal Gross Domestic Product (GDP) that will be produced.
D) the total amount of real Gross Domestic Product (GDP) that will be produced.
Q5) What are the three forces that cause the aggregate demand curve to slope down? Explain.
Page 12
Q6) What are three causes of supply-side inflation?
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Chapter 11: Classical and Keynesian Macro Analyses
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Q1) A consumer who buys more coffee when the price of coffee falls 5 percent, while all other prices fell 5 percent too, is
A) suffering from money illusion.
B) worrying too much about a coming recession.
C) behaving in accordance with classical economic theory.
D) paying too much attention to changes in relative prices.
Q2) Consider the above figure. If the aggregate demand went from AD<sub>2 </sub>to AD<sub>3</sub>,<sub> </sub>our nation would have gone from
A) a recessionary gap to an inflationary gap.
B) a recessionary gap to full-employment real GDP.
C) an inflationary gap to full-employment GDP.
D) full-employment real GDP to an inflationary gap.
Q3) The Keynesian contention that the short-run aggregate supply curve is horizontal is based on the assumption that there are
A) sticky prices.
B) flexible prices.
C) real prices.
D) upward sloping prices.
Q4) What is the shape of the modern short-run aggregate supply (SRAS) curve? Why?
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Chapter 12: Consumption, Real GDP, and the Multiplier
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Q1) A permanent reduction in net exports leads to
A) a more than proportional decrease in real Gross Domestic Product (GDP).
B) a less than proportional decrease in real Gross Domestic Product (GDP).
C) a proportional increase in real Gross Domestic Product (GDP).
D) a reduction in taxes, autonomous government spending, and a fall in real Gross Domestic Product (GDP).
Q2) If businesses expect the economic activity to expand,
A) the planned investment function relating investment to the interest rate will shift to the left.
B) the planned investment function relating investment to the interest rate will remain unchanged, but will move downward along the curve.
C) the planned investment function relating investment to the interest rate will steepen.
D) the planned investment function relating investment to the interest rate will shift to the right.
Q3) Suppose autonomous consumption is $1 trillion, investment spending is $1.5 trillion, and the marginal propensity to consume is 0.75. Show the graph for the C + I curve.
What is the equilibrium level of real GDP? Explain its meaning.
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Page 14
Chapter 13: Fiscal Policy
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Sample Questions
Q1) What do automatic stabilizers attempt to stabilize?
A) long-run aggregate supply
B) aggregate demand
C) exports
D) imports
Q2) One characteristic of built-in or automatic stabilizers is that
A) they require no new legislative action by Congress to have an effect.
B) they automatically produce surpluses during recessions and deficits during inflation.
C) they have no effect on the distribution of income.
D) they reduce the size of the public debt during times of recession.
Q3) Suppose the economy has a high level of unemployment. This would imply
A) that the government should engage in expansionary fiscal policy and increase the tax rate.
B) that the economy is operating to the left of the LRAS curve and that government spending could be increased to reduce unemployment.
C) that fiscal policy has been ineffective and should be abandoned.
D) that the economy is operating on the SRAS curve and that government spending could be decreased to reduce unemployment.
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Chapter 14: Deficit Spending and the Public Debt
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Q1) In the long run, what effect does a government's deficit spending have on equilibrium real Gross Domestic Product (GDP)?
A) Government deficit spending will increase equilibrium real Gross Domestic Product (GDP).
B) Deficit spending will decrease the nation's equilibrium real Gross Domestic Product (GDP).
C) Higher government deficits will not raise equilibrium Gross Domestic Product (GDP) above the full-employment level.
D) Higher government deficits will raise equilibrium Gross Domestic Product (GDP) above the full-employment level and also have an inflationary effect.
Q2) The largest expenditure component of the federal budget is spending on A) the military.
B) entitlement programs.
C) environmental protection programs. D) foreign aid.
Q3) What are the macroeconomic consequences of a budget deficit when the economy is operating at full employment? Be sure to discuss the effects in the short-run and in the long-run.
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Chapter 15: Money, Banking, and Central Banking
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Q1) The most important function of the Fed is to
A) provide a system for collecting and clearing checks.
B) collect taxes.
C) support the federal government's deficit spending by buying government securities.
D) regulate the money supply.
Q2) Liquidity refers to
A) the ease with which an asset can be acquired or disposed of without incurring high transaction costs.
B) the expected return from an asset.
C) the amount of indebtedness held against an asset.
D) the net worth of the individual in question.
Q3) If knowledge possessed by one party in a financial transaction is not known to the other party, ________ exists.
A) disintermediation
B) asymmetric information
C) fraud
D) no financial intermediation
Q4) Explain the forces that caused the savings and loan debacle in the latter half of the 1980s.
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Chapter 16: Domestic and International Dimensions of Monetary Policy
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Q1) During a period of contractionary monetary policy,
A) the price level is increased, which leads to an increase in the money supply.
B) the price level is decreased ,which leads to a decrease in the money supply.
C) the rate of growth of the money supply is increased, leading to an increase in the price level.
D) the rate of growth of the money supply is reduced, leading to a decrease in the price level.
Q2) Both the precautionary and asset demand for money are influenced by A) the U.S. Treasury.
B) the interest rate.
C) gold prices.
D) none of the above.
Q3) In the long run, the effect of a reduction in the money supply is to
A) decrease the price level only.
B) decrease real Gross Domestic Product (GDP) only.
C) decrease both the price level and real Gross Domestic Product (GDP).
D) decrease the price level and increase real Gross Domestic Product (GDP).
Q4) Briefly describe the effects of an open market sale by the Federal Reserve, according to the interest-rate-based approach to the monetary policy transmission mechanism.
Page 18
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Chapter 17: Stabilization in an Integrated World Economy
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Q1) According to the new Keynesian sticky-price theory, a rise in aggregate demand results in ________ price level in the near term and in ________ price level in the longer term.
A) a higher; an unchanged B) an unchanged; a higher C) a lower; an unchanged D) a lower; a higher
Q2) Expansionary fiscal policy can be used to reduce unemployment by
A) increasing long-run aggregate supply so as to raise real GDP.
B) increasing aggregate demand so as to raise real GDP.
C) reducing nominal wages so as to encourage firms to hire more workers.
D) eliminating inefficiencies from labor markets.
Q3) Explain the rational expectations hypothesis.
Q4) Which of the following is NOT a possible cause of structural unemployment?
A) individuals take the time to search for the best job opportunities
B) a mismatch of worker training and skills with requirements of employers
C) government-imposed minimum wage laws
D) union activity that sets wages above the equilibrium level
Q5) What is the modern view of the Phillips curve?
Q6) What is meant by the natural rate of unemployment?
Page 19
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Chapter 18: Policies and Prospects for Global Economic Growth
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Q1) The International Monetary Fund (IMF) was created to achieve each of the following goals EXCEPT
A) to supervise exchange-rate practices of member countries.
B) to help finance economic development in poor countries.
C) to encourage convertibility of member countries' currencies.
D) to lend funds to countries having difficulties meeting their international payment obligations.
Q2) The acquisition of more than 10 percent of the shares of ownership in a company in another country is known as
A) net exports.
B) net national investment.
C) portfolio investment
D) none of the above
Q3) The International Monetary Fund was created to achieve each of the following goals EXCEPT
A) lend funds to countries with international payment problems.
B) lend funds to large government infrastructure projects.
C) monitor and offer advice on the exchange rate policies of member nations.
D) encourage free convertibility of the currencies of member nations.
Q4) What is the mission of the World Bank?
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Chapter 19: Demand and Supply Elasticity
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Q1) The value of the absolute price elasticity of demand for good X is 4. The absolute price elasticity for good Y is 1. Which good's quantity demanded is more responsive to a change in price?
A) Good X.
B) Good Y.
C) They are equally responsive.
D) Not enough information is given.
Q2) The longer any price change lasts over time, the
A) more difficult it is to alter quantity demanded.
B) the more quickly quantity demanded will return to its original level.
C) the longer the short-run equilibrium will continue to be the short-run equilibrium.
D) more quantity demanded will change.
Q3) Wheat is sold in world markets, usually priced in terms of bushels. In the market for wheat, the price elasticity of demand for wheat would be expressed as
A) the number of bushels of wheat sold.
B) the number of whatever currency is used in purchasing the wheat.
C) the number of dollars spent on wheat.
D) a unitless number.
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Chapter 20: Consumer Choice
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Q1) The budget constraint shows that
A) the consumer faces a trade-off in the consumption of goods.
B) the consumer can have as many goods as he wants.
C) as consumers spend more on one good, they spend more on others.
D) total income equals total spending on one good.
Q2) The real-income and the substitution effects reinforce each other by
A) increasing the consumption of good y when the price of x falls.
B) increasing the consumption of both goods x and y when income increases.
C) decreasing the consumption of good x when the price of good y falls.
D) decreasing the consumption of good x when the price of good x increases.
Q3) Use the above figure. When the budget line rotates from "c" to "b"
A) fewer units of J and fewer units of K will be purchased.
B) more units of J and more units of K will be purchased.
C) fewer units of J and more units of K will be purchased.
D) more units of J and fewer units of K will be purchased.
Q4) In the above figure, the budget line will change from line DE to line DF when
A) income rises.
B) the price of bagels increases.
C) the price of coffee increases.
D) the price of coffee decreases.
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Chapter 21: Rents, Profits, and the Financial Environment of Business
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Q1) It is likely that the owners have little to do with the day-to-day management of a firm in the case of
A) partnerships only.
B) proprietorships only.
C) corporations only.
D) partnerships and corporations.
Q2) Which of the following is not an advantage of a partnership?
A) Limited liability
B)
Q3) When Patricia sells her General Motors common stock at the same time that Brian purchases the same amount of General Motors stock from another party, General Motors receives
A) the dollar value of the transaction.
B) only the par value of the common stock.
C) nothing.
D) the dollar amount of the transaction, less brokerage fees.
Q4) Do people make decisions on the basis of the nominal interest rate or the real interest rate? What is the relationship between the two interest rates?
Q5) What would happen if a corporation goes out of business?
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Chapter 22: The Firm: Cost and Output Determination
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Q1) In the above figure, if this firm produces output level Q<sub>2</sub>, it has average total costs of
A) OF.
B) OE.
C) OC.
D) OD.
Q2) Refer to the above table. When the quantity of labor equals 3, what does the average product equal?
A) 21
B) 17
C) 63
D) 189
Q3) In the above figure, if this firm produces output level Q<sub>2</sub>, it has average variable costs of A) OF.
B) OE.
C) OC.
D) OD.
Q4) "All average costs have a U-shaped curve." Do you agree or disagree? Explain why?
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Chapter 23: Perfect Competition
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Q1) The demand curve for a perfectly competitive industry is
A) perfectly elastic.
B) downward sloping.
C) perfectly inelastic.
D) unit elastic.
Q2) A perfectly competitive firm is maximizing profits in the short run. This implies that the firm is earning the most economic profits possible, which
A) must be positive.
B) must be either zero or positive.
C) can be positive, negative, or zero.
D) exist at the point at which price equals total cost.
Q3) A constant-cost industry
A) is one in which an increase in demand is matched by a proportional increases in long-run supply.
B) generates increasing profits whenever demand increases because the new long-run equilibrium price is above the old price even though average costs have not changed. C) has a horizontal long-run supply curve.
D) has a downward sloping long-run supply curve.
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Chapter 24: Monopoly
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Q1) Legal or governmental restrictions that give monopolistic advantages to a firm include all of the following EXCEPT
A) franchises.
B) environmental protection.
C) exclusive ownership of an unimportant resource.
D) patents.
Q2) If the marginal cost curve of all identical firms in a perfectly competitive industry are horizontal at the same per-unit cost, then the market's consumer surplus equals the area
A) beneath the demand curve and above the marginal cost curve.
B) above the demand curve and beneath the marginal cost curve.
C) below the marginal cost curve.
D) above the demand curve.
Q3) Which of the following is issued to an investor to provide protection from having the invention copied or stolen for 20 years?
A) A license
B) A natural monopoly
C) A patent
D) A certificate of convenience
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Chapter 25: Monopolistic Competition
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Q1) Explain how advertising can act as a signal.
Q2) The production of information products is characterized by
A) relatively low fixed cost.
B) relatively low marginal cost.
C) diseconomies of operation.
D) an upward sloping marginal cost curve.
Q3) Average total cost for an information product would
A) first decrease and then increase as quantity increases.
B) increase constantly as quantity increases.
C) decrease constantly as quantity increases.
D) remain constant as quantity increases.
Q4) In a monopolistically competitive market, having a large number of firms in the market means that
A) no firm attempts to take into account the reaction of rival firms.
B) individual firms will have a large portion of the market giving them monopoly power.
C) firms will get together and collude because this will be the only way to earn monopoly profits.
D) firms will cooperate with each other to drive competitors out of the market.
Q5) Why do firms in a monopolistically competitive industry advertise?
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Chapter 26: Oligopoly and Strategic Behavior
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Q1) Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the dominant strategy for Greenco?
A) High price.
B) Low price.
C) There is no best strategy.
D) Not enough information is given to determine the best strategy.
Q2) A cartel is a form of
A) collusion.
B) vertical merger.
C) noncooperative competition.
D) negative sum game.
Q3) In industries in which strong network effects exist, which industry structure is likely to emerge?
A) Perfect competition
B) Monopoly
C) Monopolistic competition
D) Oligopoly
Q4) Why would a member of a cartel cheat?
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Chapter 27: Regulation and Antitrust Policy in a Globalized Economy
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Q1) U.S. government regulation of social and economic activity
A) only began after World War II.
B) costs less now than it did in the 1980s.
C) has increased steadily since 1970.
D) is confined to antitrust law.
Q2) Which of the following is NOT an antitrust law?
A) The Robinson-Patman Act
B) The Smoot-Hawley Act
C) The FTC Act
D) The Sherman Act
Q3) A common feature of regulated industries is cross-subsidization, which is a situation when one group of customers pays prices above costs while another group of customers pays prices below costs. The one group is subsidizing the other group. Is this practice more consistent with the capture hypothesis or the share-the-gains, share-the-pains theory? Explain.
Q4) An agency that regulates labor markets is the
A) Equal Employment Opportunity Commission.
B) Environmental Protection Agency.
C) Federal Trade Commission.
D) Consumer Product Safety Commission.
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Chapter 28: The Labor Market: Demand, Supply and Outsourcing
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Sample Questions
Q1) Suppose a new technology allows firms to substitute mechanical tomato pickers for farm laborers. As a result, the demand curve for farm laborers will
A) become less elastic.
B) become more elastic.
C) shift to the right.
D) not be affected.
Q2) In the above table, if this is a perfectly competitive firm and the market price of the product is $8, what is the marginal revenue product of worker 3?
A) $96
B) $88
C) $80
D) $240
Q3) A decrease in the supply of labor could be caused by A) wage rates falling in another industry.
B) better working conditions.
C) more job flexibility.
D) increased wage rates in another industry.
Q4) What is the marginal revenue product of labor (MRP)? What shape does the MRP curve have? Why?
30
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Chapter 29: Unions and Labor Market Monopoly Power
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Q1) Refer to the above table. What is the marginal factor cost when the firm employs the third unit of labor?
A) $62
B) $57
C) $25
D) $21
Q2) A boycott of products sold by companies that are dealing with a company whose workers are on strike is a
A) jurisdictional dispute.
B) sympathy strike.
C) right-to-boycott law.
D) secondary boycott.
Q3) The MFC curve
A) lies below the labor supply curve, when the labor supply curve is upward sloping.
B) lies above the labor supply curve, when the labor supply curve is upward sloping.
C) is the labor supply curve.
D) is parallel to the labor supply curve, when the labor supply curve is downward sloping.
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Chapter 30: Income, Poverty, and Health Care
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Q1) The official poverty level is based on pretax income including cash. Which of the following statements is correct regarding this official specification of poverty?
A) This is a good definition of poverty since it is made up of the income from productive resources.
B) This is not a good definition of poverty because our tax structure consists of different tax brackets based on income.
C) This is not a good definition of poverty because it does not include in-kind subsidies.
D) This is a good definition of poverty because it is easy to measure.
Q2) Wealth is measured as
A) only tangible objects.
B) only buildings, machinery, land, cars, stocks and bonds.
C) only nonhuman wealth.
D) nonhuman and human wealth.
Q3) The more bowed out the Lorenz curve, the
A) less equal the income distribution.
B) more equal the income distribution.
C) greater the overall wealth in the economy.
D) less the overall wealth in the economy.
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Chapter 31: Environmental Economics
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Q1) Exclusive rights of ownership that allow the use, transfer, and exchange of property are called
A) common property rights.
B) nonexclusive property rights.
C) private property rights.
D) public property rights.
Q2) Which of the following is most likely to be private property?
A) bees
B) house flies
C) farm raised chickens
D) winds
Q3) Use the above table. What will the price be before external costs are internalized with a tax?
A) $14
B) $13
C) $12.20
D) $1.80
Q4) What is an externality?
Q5) Explain how the optimal quantity of air pollution is determined.
Q6) What are social costs? How do they differ from private costs?
Page 33
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Chapter 32: Comparative Advantage and the Open Economy
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Q1) Suppose an industry receives protection from the government in the form of tariffs. A number of years later, it is observed that the quantity supplied by domestic firms had decreased and that the domestic price was substantially greater than the world price. We could conclude that
A) the tariff had been imposed to counteract dumping and had been successful.
B) removal of the tariff would actually cause domestic output to increase and price to fall.
C) the tariff had been imposed to protect an infant industry and that the industry still needed protection.
D) removal of the tariff would cause domestic output to fall even further and the price to fall to consumers.
Q2) Using the data in the above table and assuming constant opportunity costs, it is correct to state that
A) the United States has an absolute advantage in producing cloth.
B) Mexico has a comparative advantage in producing food.
C) the United States has a comparative advantage in producing both food and cloth.
D) Mexico has an absolute advantage in producing both food and cloth.
Q3) Why is trade based on comparative advantage?
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Chapter 33: Exchange Rates and the Balance of Payments
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Q1) Under the gold standard, because all currencies had values fixed in units of gold,
A) exchange rates were essentially fixed.
B) exchange rates were essentially floating.
C) exchange rates were set to a crawling peg.
D) none of the above
Q2) In the balance of payments, any transaction that leads to a receipt by a resident of a country is a
A) minus item.
B) debit item.
C) surplus item.
D) deficit item.
Q3) Under a flexible exchange rate system, one factor that does NOT directly affect rates of exchange is
A) changes in the inflation rate in each country.
B) changes in productivity in each country.
C) changes in gold holdings in each country.
D) changes in economic stability in each country.
Q4) Distinguish between the balance of payments and the balance of trade.
Q5) How are deficit and surplus items determined in the balance of payments?
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