Foundations of Economics Exam Questions
Course Introduction
Foundations of Economics introduces students to the core concepts, principles, and analytical tools used in the study of economics. The course explores both microeconomic and macroeconomic frameworks, covering topics such as supply and demand, market structures, consumer behavior, production costs, economic efficiency, and the role of government in the economy. It also provides an overview of broader economic indicators, inflation, unemployment, fiscal and monetary policy, and international trade. Emphasis is placed on developing critical thinking and problem-solving skills through real-world applications and current events, preparing students for more advanced studies in economics and related fields.
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Essentials of Economics 6th Edition by N. Gregory Mankiw
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Chapter 1: Ten Principles of Economics
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Q1) You have driven 500 miles on a vacation and then you notice that you are only 25 miles from an attraction you hadn't known about,but would really like to see.In computing the opportunity cost of visiting this attraction you had not planned to visit,you should include
A) both the cost of driving the first 500 and the next 25 miles.
B) the cost of driving the first 500 miles,but not the cost of driving the next 25.
C) the cost of driving the next 25 miles,but not the cost of driving the first 500.
D) neither the cost of driving the first 500 miles nor the cost of driving the next 25 miles.
Answer: C
Q2) One advantage market economies have over centrally-planned economies is that market economies
A) provide an equal distribution of goods and services to households.
B) establish a significant role for government in the allocation of resources.
C) solve the problem of scarcity.
D) are more efficient.
Answer: D
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Chapter 2: Thinking Like an Economist
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Q1) Points inside the production possibilities frontier represent feasible levels of production.
A)True
B)False
Answer: True
Q2) The production possibilities frontier is a graph that shows the various combinations of output that an economy A) should produce. B) wants to produce. C) can produce. D) demands.
Answer: C
Q3) The scientific method is the dispassionate development and testing of theories about how the world works.
A)True
B)False
Answer: True
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Chapter 3: Interdependence and the Gains From Trade
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Q1) Refer to Figure 3-6.Daisy has an absolute advantage in the production of
A) both goods and a comparative advantage in the production of pies.
B) both goods and a comparative advantage in the production of tarts.
C) neither good and a comparative advantage in the production of pies.
D) neither good and a comparative advantage in the production of tarts.
Answer: B
Q2) Refer to Figure 3-5.Hosne's opportunity cost of one wallet is
A) 4/5 purse and Merve's opportunity cost of one wallet is 2/3 purse.
B) 4/5 purse and Merve's opportunity cost of one wallet is 3/2 purses.
C) 5/4 purses and Merve's opportunity cost of one wallet is 2/3 purse.
D) 5/4 purses and Merve's opportunity cost of one wallet is 3/2 purses.
Answer: C
Q3) Refer to Figure 3-3.Arturo's opportunity cost of one burrito is
A) 3/4 taco and Dina's opportunity cost of one burrito is 1/2 taco.
B) 3/4 taco and Dina's opportunity cost of one burrito is 2 tacos.
C) 4/3 tacos and Dina's opportunity cost of one burrito is 1/2 taco.
D) 4/3 tacos and Dina's opportunity cost of one burrito is 2 tacos.
Answer: D
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Chapter 4: The Market Forces of Supply and Demand
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Q1) Public service announcements,mandatory health warnings on cigarette packages,and the prohibition of cigarette advertising on television are all policies aimed at shifting the demand curve for cigarettes to the right.
A)True
B)False
Q2) Refer to Figure 4-18.What is the equilibrium quantity in this market?
A) 5 units
B) 7.5 units
C) 10 units
D) The equilibrium quantity cannot be determined from this graph.
Q3) Refer to Figure 4-1.It is apparent from the figure that the A) good is inferior.
B) demand for the good decreases as income increases.
C) demand for the good conforms to the law of demand.
D) All of the above are correct.
Q4) The law of demand states that,other things equal,when the price of a good rises,the quantity demanded of the good falls,and when the price falls,the quantity demanded rises.
A)True
B)False
Page 6
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Chapter 5: Elasticity and Its Application
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Q1) If we observe that when consumers' incomes rise by 10%,the quantity demanded of ice cream increases by 5%,then ice cream is an inferior good.
A)True
B)False
Q2) Refer to Figure 5-8.For prices below $5,demand is price
A) elastic,and raising price will increase total revenue.
B) inelastic,and raising price will increase total revenue.
C) elastic,and lowering price will increase total revenue.
D) inelastic,and lowering price will increase total revenue.
Q3) The price elasticity of supply measures how responsive
A) sellers are to a change in price.
B) sellers are to a change in buyers' income.
C) buyers are to a change in production costs.
D) equilibrium price is to a change in supply.
Q4) Suppose that when the price rises by 10% for a particular good,the quantity demanded of that good falls by 20%.The price elasticity of demand for this good is equal to 2.0.
A)True B)False
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Chapter 6: Supply,demand,and Government Policies
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Q1) Which of the following is not a function of prices in a market system?
A) Prices have the crucial job of balancing supply and demand.
B) Prices send signals to buyers and sellers to help them make rational economic decisions.
C) Prices coordinate economic activity.
D) Prices ensure an equal distribution of goods and services among consumers.
Q2) When a binding price floor is imposed on a market,
A) price no longer serves as a rationing device.
B) the quantity demanded at the price floor exceeds the quantity that would have been demanded without the price floor.
C) all sellers benefit.
D) All of the above are correct.
Q3) A binding price ceiling causes quantity demanded to be less than quantity supplied. A)True
B)False
Q4) A tax on buyers decreases demand.
A)True
B)False
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Chapter 7: Consumers, producers, and the Efficiency of Markets
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Q1) We can say that the allocation of resources is efficient if
A) producer surplus is maximized.
B) consumer surplus is maximized.
C) total surplus is maximized.
D) sellers' costs are minimized.
Q2) When the demand for a good increases and the supply of the good remains unchanged,consumer surplus
A) decreases.
B) is unchanged.
C) increases.
D) may increase,decrease,or remain unchanged.
Q3) Refer to Table 7-2.If the market price is $5.50,the consumer surplus in the market will be
A) $3.00.
B) $4.50.
C) $15.50.
D) $21.00.
Q4) The lower the price,the lower the producer surplus,all else equal.
A)True
B)False
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Chapter 8: Application: the Costs of Taxation
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Q1) Refer to Figure 8-4.The price that sellers effectively receive after the tax is imposed is
A) $12.
B) between $8 and $12.
C) between $5 and $8.
D) $5.
Q2) When a tax is imposed on a good,consumer surplus decreases and producer surplus remains unchanged.
A)True
B)False
Q3) Which of the following would likely have the smallest deadweight loss relative to the tax revenue?
A) a head tax (that is,a tax everyone must pay regardless of what one does or buys)
B) an income tax
C) a tax on compact discs
D) a tax on caviar
Q4) Using demand and supply diagrams,show the difference in deadweight loss between (a)a market with inelastic demand and supply and (b)a market with elastic demand and supply.
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Chapter 9: Application: International Trade
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Q1) If the world price of a good is greater than the domestic price in a country that can engage in international trade,then that country becomes an importer of that good.
A)True
B)False
Q2) Refer to Figure 9-20.With trade,Vietnam will
A) export 1,000 units of rice.
B) export 1,500 units of rice.
C) import 1,000 units of rice.
D) import 1,500 units of rice.
Q3) The nation of Cranolia used to prohibit international trade,but now trade is allowed,and Cranolia is exporting furniture.Relative to the previous no-trade situation,buyers of furniture in Cranolia are now better off.
A)True
B)False
Q4) A quota is
A) a tax placed on imports.
B) a limit on the quantity of imports.
C) a tax on exports to other countries.
D) an excess of exports over imports.
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Chapter 10: Externalities
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Q1) Assume that your roommate is very messy.According to campus policy,you have a right to live in an uncluttered apartment.Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you.The Coase theorem would suggest that an efficient solution would be for your roommate to
A) stop her messy habits or else move out.
B) pay you at least $100 but less than $200 to live with the clutter.
C) continue to be messy and force you to move out.
D) demand payment of at least $100 but no more than $200 to clean up after herself.
Q2) Refer to Figure 10-9.The installation of a scrubber in a smokestack reduces the emission of harmful chemicals from the smokestack.Therefore,the market for smokestack scrubbers is shown in
A) Panel (a).
B) Panel (b).
C) Panel (c).
D) Both (b)and (c)are correct.
Q3) Use a graph to illustrate the quantity of pollution that would be emitted (a)after a corrective tax has been imposed and (b)after tradable pollution permits have been imposed.Could these two quantities ever be equivalent?
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Chapter 11: Public Goods and Common Resources
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Q1) Goods that are rival in consumption and excludable would be considered
A) club goods.
B) common resources.
C) public goods.
D) private goods.
Q2) The ocean remains one of the largest unregulated resources for each of the following reasons except
A) many countries have access to the ocean.
B) it is difficult to get international cooperation among countries that hold different values.
C) the oceans are so vast that enforcing any agreements would be difficult.
D) All of the above are reasons the ocean remains one of the largest unregulated resources.
Q3) The greatest difficulty with cost-benefit analysis of a public project is determining A) whether government revenue is sufficient to cover the cost of the project.
B) which contractor should be awarded the project.
C) the cost of the project.
D) the value or benefit of the project.
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Chapter 12: The Costs of Production
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Q1) Refer to Figure 12-10.The firm experiences diseconomies of scale if it changes its level of output from
A) Q<sub>1</sub> to Q<sub>2</sub>.
B) Q<sub>2</sub> to Q<sub>3</sub>.
C) Q<sub>3</sub> to Q<sub>4</sub>.
D) Q<sub>4</sub> to Q<sub>5</sub>.
Q2) Refer to Figure 12-1.Suppose the production function shifts from TP2 to TP1.Such a shift in the total product curve is most likely due to a decrease in the firm's A) costs of production.
B) product price.
C) market share.
D) productivity.
Q3) Economists and accountants usually disagree on the inclusion of implicit costs into the cost analysis of a firm.
A)True
B)False
Q4) Several related measures of cost can be derived from a firm's total cost.
A)True
B)False
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Chapter 13: Firms in Competitive Markets
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Q1) For a competitive firm,
A) total revenue equals average revenue.
B) total revenue equals marginal revenue.
C) total cost equals marginal revenue.
D) average revenue equals marginal revenue.
Q2) Which of the following represents the firm's long-run condition for exiting a market?
A) exit if P < MC
B) exit if P < FC
C) exit if P < ATC
D) exit if MR < MC
Q3) In calculating accounting profit,accountants typically don't include A) long-run costs.
B) sunk costs.
C) explicit costs of production.
D) opportunity costs that do not involve an outflow of money.
Q4) A miniature golf course is a good example of where fixed costs become relevant to the decision of when to open and when to close for the season.
A)True
B)False
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Chapter 14: Monopoly
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Q1) Which of the following is a characteristic of a natural monopoly?
A) Average cost exceeds marginal cost over large regions of output.
B) Increasing the number of firms increases each firm's average total cost.
C) One firm can supply output at a lower cost than two firms.
D) All of the above are correct.
Q2) Perfect price discrimination
A) eliminates deadweight loss.
B) reduces profits to the monopolist.
C) decreases the total quantity sold by the monopolist.
D) requires arbitrage in order for the monopolist to maximize profits.
Q3) The fundamental source of monopoly power is
A) barriers to entry.
B) profit.
C) decreasing average total cost.
D) a product without close substitutes.
Q4) The fundamental cause of monopolies is barriers to entry.
A)True
B)False
Q5) Graphically depict the deadweight loss caused by a monopoly.How is this similar to the deadweight loss from taxation?
Page 16
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Chapter 15: Measuring a Nations Income
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Q1) In a simple circular-flow diagram,total income and total expenditure are
A) never equal because total income always exceeds total expenditure.
B) seldom equal because of the ongoing changes in an economy's unemployment rate.
C) equal only when the government purchases no goods or services.
D) always equal because every transaction has a buyer and a seller.
Q2) Retained earnings is income that
A) households retain after paying taxes.
B) businesses retain after paying taxes.
C) corporations have earned but have not used to invest in plant,equipment,and inventories.
D) corporations have earned but have not paid out to their owners.
Q3) The Patersons bought a home that was newly constructed in 2007 for $275,000.They sold the home in 2009 for $205,000.Which of the following statements is correct regarding the sale of the house?
A) The 2009 sale increased 2009 GDP by $205,000 and had no effect on 2007 GDP.
B) The 2009 sale reduced 2009 GDP by $70,000 and had no effect on 2007 GDP.
C) The 2009 sale increased 2009 GDP by $205,000; and caused 2007 GDP to be revised downward by $70,000.
D) The 2009 sale affected neither 2007 GDP nor 2009 GDP.
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Chapter 16: Measuring the Cost of Living
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Q1) If the price of Italian shoes imported into the United States increases,then
A) both the GDP deflator and the consumer price index will increase.
B) neither the GDP deflator nor the consumer price index will increase.
C) the GDP deflator will increase,but the consumer price index will not increase.
D) the consumer price index will increase,but the GDP deflator will not increase.
Q2) Suppose that over the past year,the real interest rate was 3 percent and the inflation rate was -1 percent.It follows that
A) the dollar value of savings increased at 2 percent,and the purchasing power of savings increased at 3 percent.
B) the dollar value of savings increased at 2 percent,and the purchasing power of savings increased at 4 percent.
C) the dollar value of savings increased at 4 percent,and the purchasing power of savings increased at 2 percent.
D) the dollar value of savings increased at 4 percent,and the purchasing power of savings increased at 3 percent.
Q3) Why does the GDP deflator give a different rate of inflation than the CPI?
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Chapter 17: Production and Growth
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Q1) "When workers already have a large quantity of capital to use in producing goods and services,giving them an additional unit of capital increases their productivity only slightly." This statement
A) represents the traditional view of the production process.
B) is an assertion that capital is subject to diminishing returns.
C) is made under the assumption that the quantities of human capital,natural resources,and technology are being held constant.
D) All of the above are correct.
Q2) Which of the following is a good gauge of economic progress?
A) the level of real GDP per person,but not the growth rate of real GDP per person
B) the level of real GDP per person and the growth rate of real GDP per person
C) the growth rate of real GDP per person,but not the level of real GDP per person
D) neither the level nor the growth rate of real GDP per person
Q3) Why does a nation's standard of living depend on property rights?
Q4) A forest is an example of a nonrenewable resource.
A)True
B)False
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Chapter 18: Saving,investment,and the Financial System
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Q1) If people become less optimistic about the future earnings of Hyde Park Jazz Studio,then the price of the company's stock will fall.
A)True
B)False
Q2) Which of the following is a certificate of indebtedness?
A) stocks and bonds
B) stocks but not bonds
C) bonds but not stocks
D) neither stocks nor bonds
Q3) The slope of the supply of loanable funds curve represents the
A) positive relation between the real interest rate and investment.
B) positive relation between the real interest rate and saving.
C) negative relation between the real interest rate and investment.
D) negative relation between the real interest rate and saving.
Q4) Compared to bondholders,stockholders
A) face higher risk and have the potential for higher returns.
B) face higher risk but receive a fixed payment.
C) face lower risk and have the potential for higher returns.
D) face lower risk but receive a fixed payment.
Q5) What are the basic differences between bonds and stocks?
Page 20
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Chapter 19: The Basic Tools of Finance
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Q1) Give two conditions that are important to the efficient market theory.List one implication of the efficient market theory.
Q2) The present value of a future payment to be received in three years is $1,000.If the interest rate is 5%,what is the amount that will be paid in three years?
A) $1,150.00
B) $1,157.63
C) $1,215.51
D) $1,250.00
Q3) Nancy would like to double the money in her retirement account in five years.According to the rule of 70,what rate of interest would she need to earn to attain her objective?
A) 5 percent
B) 7 percent
C) 10 percent
D) 14 percent
Q4) Adverse selection is illustrated by people who take greater risks after they purchase insurance.
A)True
B)False
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Chapter 20: Unemployment
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Q1) Refer to Labor Force Statistics by Age.In the proper order,which age group has the highest unemployment rate and which has the highest participation rate?
A) under 55,under 55
B) under 55,55 and older
C) 55 and older,under 55
D) 55 and older,55 and older
Q2) The Bureau of Labor Statistics produces data on unemployment and other aspects of the labor market from a regular survey of about
A) 600 households.
B) 6,000 households.
C) 60,000 households.
D) 6,000,000 households.
Q3) A firm might offer efficiency wages so its workers will eat a more nutritious diet and therefore be healthier and more productive.
A)True
B)False
Q4) What is the theory of efficiency wages? Provide four reasons that employers might pay efficiency wages.
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Chapter 21: The Monetary System
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Q1) The president of each regional Federal Reserve Bank is appointed by
A) the U.S.president with the approval of the Senate.
B) the Board of Governors.
C) the voting members of the Federal Open Market Committee.
D) the board of directors of that regional Federal Reserve Bank.
Q2) If the reserve ratio is 8 percent,then an additional $1,000 of reserves can increase the money supply by as much as
A) $6,400.
B) $8,000.
C) $12,500.
D) $20,000.
Q3) Which of the following best illustrates the unit of account function of money?
A) You list prices for candy sold on your Web site,www.sweettooth.com,in dollars.
B) You pay for your theater tickets with dollars.
C) You hold currency even though you don't intend to spend it right away.
D) None of the above is correct.
Q4) M2 is both larger and less liquid than M1.
A)True
B)False
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Chapter 22: Money Growth and Inflation
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Q1) In 2010 the U.S.government was running a large deficit.Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit.If the Fed were to buy government bonds to help the government finance its expenditures,then
A) the price level would fall,so the value of money would fall.
B) the price level would fall,so the value of money would rise.
C) the price level would rise,so the value of money would fall.
D) the price level would rise,so the value of money would rise.
Q2) When inflation rises,people
A) make less frequent trips to the bank and firms make less frequent price changes.
B) make less frequent trips to the bank while firms make more frequent price changes. C) make more frequent trips to the bank while firms make less frequent price changes.
D) make more frequent trips to the bank and firms make more frequent price changes.
Q3) The source of all four classic hyperinflations was high rates of money growth.
A)True
B)False
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Chapter 23: Aggregate Demand and Aggregate Supply
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Q1) Refer to Optimism.In the short run what happens to the price level and real GDP?
A) both the price level and real GDP rise.
B) both the price level and real GDP fall.
C) the price level rises and real GDP falls.
D) the price level falls and real GDP rises.
Q2) The aggregate demand and aggregate supply model implies monetary neutrality
A) only in the short run.
B) only in the long run.
C) in both the short run and the long run.
D) in neither the short run nor long run.
Q3) An increase in the expected price level shifts the
A) short-run and long-run aggregate supply curves left.
B) the short-run but not the long-run aggregate supply curve left.
C) the long-run but not the short-run aggregate supply curve left.
D) neither the long-run nor the short-run aggregate supply curve left.
Q4) Refer to Figure 23-2.Point B represents
A) a short-run equilibrium and a long-run equilibrium.
B) a short-run equilibrium but not a long-run equilibrium.
C) a long-run equilibrium but not a short-run equilibrium.
D) neither a short-run equilibrium nor a long-run equilibrium.
Page 25
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Chapter 24: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) Automatic stabilizers
A) increase the problems that lags cause in using fiscal policy as a stabilization tool.
B) are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
C) are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession.
D) All of the above are correct.
Q2) In a certain economy,when income is $200,consumer spending is $145.The value of the multiplier for this economy is 6.25.It follows that,when income is $230,consumer spending is
A) $151.25.
B) $166.75.
C) $170.20.
D) $175.00.
Q3) During recessions,the government tends to run a budget deficit.
A)True
B)False
Q4) What is the difference between monetary policy and fiscal policy?
Page 26
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