Foundations of Economics Question Bank
Course Introduction
Foundations of Economics introduces students to the basic principles and concepts underlying the study of economics, including scarcity, choice, opportunity cost, and the functioning of markets. The course explores both microeconomics focusing on individual decision-making, consumer behavior, and the operation of businesses and macroeconomics, examining broader topics such as national income, inflation, unemployment, and economic growth. Students will analyze how supply and demand interact to determine prices, investigate government intervention in markets, and gain a foundational understanding of global economic systems. Emphasis is placed on real-world applications and the development of critical thinking skills to analyze current economic issues.
Recommended Textbook
Economics for Today 4th Asia Pacific Edition by Allan Layton
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Chapter 1: Thinking like an economist
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Sample Questions
Q1) Which of the following is capital?
A)Fresh air.
B)Money.
C)Photocopier.
D)Pastoral land.
E)Lake.
Answer: C
Q2) Which of the following would eliminate scarcity as an economic problem?
A)Moderation of people's competitive instincts.
B)Discovery of sufficiently large new energy reserves.
C)Resumption of steady productivity growth.
D)Economic scarcity cannot be eliminated.
Answer: D
Q3) Macroeconomics is concerned with the issue of how monetary policy can slow down inflation.
A)True
B)False
Answer: True
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Chapter 2: Production possibilities and opportunity cost
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Sample Questions
Q1) When the opportunity cost of producing laptops increases as more laptops are produced,then:
A)no more laptops will be produced.
B)resources are equally suited to the production of laptops and to other goods.
C)the production possibilities frontier is a straight line.
D)the production possibilities frontier becomes positively sloped.
E)the law of increasing costs is present.
Answer: E
Q2) In Exhibit 2-1,according to the information,the opportunity cost of producing 3 units of capital goods is:
A)3 units of consumption goods.
B)4 units of consumption goods.
C)6 units of consumption goods.
D)7 units of consumption goods.
Answer: A
Q3) A country has a comparative advantage in producing a good when it has the lowest opportunity cost of producing that good.
A)True
B)False
Answer: True
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Chapter 3: Market demand and supply
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Q1) Assume that croutons and soup are complementary goods.The effect on the soup market of a decrease in the price of croutons (other things being equal)would best be described as a/an:
A)decrease in the quantity of soup demanded.
B)decrease in the demand for soup.
C)increase in the quantity of soup demanded.
D)increase in the demand for soup.
Answer: D
Q2) Which of the following will increase the supply of a good?
A)An increase in the price of another good producers could produce.
B)A lower price paid for resources used in the production of the good.
C)A decrease in the number of sellers.
D)An increase in taxes paid to the government by producers.
Answer: B
Q3) If the quantity demanded is less than the quantity supplied,then:
A)the price will have to increase to establish equilibrium.
B)there will be a surplus.
C)the quantity supplied will be less than the quantity demanded.
D)the demand will shift to the right.
Answer: B
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Chapter 4: Markets in action
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Sample Questions
Q1) A minimum wage results in:
A)market equilibrium.
B)increased demand for workers.
C)unemployment.
D)a shortage of workers.
Q2) In Exhibit 4-4,a movement from A to B in which price has decreased and quantity has increased is best explained by a/an:
A)increase in supply and demand.
B)decrease in supply and demand.
C)increase in supply that dominates a decrease in demand.
D)increase in demand that dominates a decrease in supply.
E)decrease in demand that dominates an increase in supply.
Q3) Which of the following would be a social cost?
A)Price of a pack of cigarettes.
B)Cost of the hospitalisation due to smoking related illnesses.
C)Costs of new more efficient equipment to produce cigarettes.
D)Cost of electricity to produce cigarettes.
Q4) Assume a price floor is set above the equilibrium price.The result is a surplus.
A)True
B)False
Page 6
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Chapter 5: Elasticity of demand and supply
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Sample Questions
Q1) When the price of bread increases by 5 per cent,the quantity demanded of crackers increases by 2 per cent.The cross elasticity of demand between crackers and bread is:
A)0.67.
B)1.5.
C)2.5.
D)3.2.
E)0.4.
Q2) If the managers of a bus system find that revenues increase when fares are raised,they would conclude that price elasticity demand for a subway service is inelastic.
A)True
B)False
Q3) The cross-elasticity of demand:
A)reveals whether the good is income elastic.
B)reveals whether the good is a necessity.
C)reveals whether the good is important.
D)reveals whether the good is a substitute.
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Chapter 6: Production costs
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Sample Questions
Q1) Which of the following statements is possible?
A)AVC can be falling when ATC is rising.
B)ATC can be falling when AVC is rising.
C)ATC cuts AVC at its minimum.
D)AVC falls when ATC falls, and rises when ATC rises.
E)When MC is falling, ATC is rising.
Q2) Which firm in Exhibit 6-11 displays a long-run average cost curve with economies of scale throughout the range of output shown?
A) Firm A.
B) Firm B.
C) Firm C.
D) Firms A and B.
Q3) Implicit costs are:
A)labour costs to the firm.
B)the opportunity costs of using someone else's resources.
C)payments from owners of a firm for labour.
D)the opportunity costs of using resources owned by the firm.
E)payments to non-owners of a firm for their resources.
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Chapter 7: Perfect competition
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Sample Questions
Q1) In the short run,the supply curve for a perfectly competitive firm is its marginal cost curve for all levels of output.
A)True
B)False
Q2) In Exhibit 7-1,if output is between 100 and 200 units per week,economic profit for the firm is:
A)zero.
B)negative or zero.
C)at its maximum.
D)positive or zero.
Q3) According to Exhibit 7-6,if MR = $20,the result for a perfectly competitive firm will be:
A)making a short-run profit.
B)making a short-run loss of $10 per unit.
C)making a short-run loss.
D)making a short-run loss of $5
E)unclear as there is not enough information.
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Chapter 8: Monopoly
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Sample Questions
Q1) In the long run,a monopoly:
A)will always earn economic profit.
B)is always free from competition, either real or potential.
C)will always be protected by the government to prevent competition.
D)can change its plant size.
Q2) Under both perfect competition and monopoly,a firm:
A)is a price taker.
B)is a price maker.
C)will shut down in the short run if price falls short of average total cost.
D)always earns a pure economic profit.
E)sets marginal cost equal to marginal revenue.
Q3) Compared to a perfectly competitive firm with the same cost structure,a monopoly firm will charge a:
A)higher price and sell more.
B)lower price and sell more.
C)higher price and sell less.
D)lower price and sell less.
E)similar price and sell the same.
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Chapter 9: Monopolistic competition and oligopoly
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Sample Questions
Q1) It is difficult to talk conclusively about the allocation of resources in an oligopoly because:
A)entry is impossible in oligopolies.
B)both price and output can be higher in oligopolies than in perfect competition.
C)the level of competition varies greatly in oligopolistic markets.
D)non-price competition is rare in an oligopoly.
Q2) A characteristic of monopolistic competition is that:
A)there are many large firms in the industry.
B)firms produce a homogeneous product.
C)there are few firms in the industry.
D)firms are price makers.
Q3) In Exhibit 9-3,the exhibit represents a kinked-demand oligopoly model.Suppose the current price is $50.If one firm in the oligopoly now attempts to raise its price,all firms will:
A)follow along demand curve D1.
B)follow along demand curve D2.
C)ignore this price increase and cause the price-raising firm to move along D1.
D)ignore this price increase and cause the price-raising firm to move along D2.
E)lower their prices.
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Chapter 10: Policy issues: resource taxes and climate change
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Sample Questions
Q1) A reduction in royalties can be expected to:
A)decrease the output of the nation.
B)increase employment.
C)decrease employment.
D)have no impact on market.
Q2) Which of the following statements is true?
A)The super profits tax is the same as a royalty.
B)The super profits tax charges a different rate depending on the elasticity of the good or service.
C)The super profits tax is imposed only on imported goods.
D)The super profits tax allows government to compensate mineral producers if they make losses.
Q3) Suppose that firms are required to purchase equipment to reduce carbon emissions.How is this illustrated in Exhibit 10-2?
A)A shift from 'Supply 2' to 'Supply 1'.
B)A movement along the 'Supply 1' curve.
C)A shift in demand.
D)A shift from 'Supply 1' to 'Supply 2'.
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Chapter 11: Measuring the size of the economy
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Sample Questions
Q1) The output measure that adjusts for depreciation in plant and equipment is:
A)net national product.
B)gross domestic product.
C)not possible to estimate.
D)net domestic product.
Q2) Gross domestic product is officially measured by adding together:
A)the quantity of each good and service produced by Australian residents.
B)gross national product and depreciation of resources.
C)incomes received by all of a nation's households.
D)the market value of all final goods and services produced within the borders of a nation.
Q3) A country's current account balance is equal to:
A)current account balance minus the capital account balance.
B)net exports plus imports.
C)net exports minus net income paid overseas.
D)net exports plus government spending.
E)net exports plus investment.
Q4) Capital goods,like factories and machinery,are classified as intermediate goods.
A)True
B)False
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Chapter 12: Business cycles and economic growth
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Sample Questions
Q1) What saving rate is optimal?
A)The rate of spending that produces the minimum level of consumption per capita in the long-run steady state.
B)The rate of saving at which the community will be made no better off by additional saving.
C)The rate of saving that produces the steady level of consumption per capita in the long- run steady state.
D)The rate of saving that produces the maximum level of consumption per capita during the recession.
Q2) A country can increase its real GDP per person by:
A)reducing the quantity of production factors.
B)increasing the number of holidays.
C)reducing its spending.
D)using more productive technology.
Q3) The term 'trough' refers to the maximum point of the business cycle.
A)True
B)False
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Chapter 13: Inflation and unemployment
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Sample Questions
Q1) Sharon was being treated unfairly by her boss,so she stormed off the job and two days later found another position.For two days,Sharon experienced:
A)cyclical unemployment.
B)structural unemployment.
C)seasonal unemployment.
D)frictional unemployment.
E)being out of the labour force.
Q2) When the inflation rate rises,the purchasing power of nominal income:
A)remains unchanged.
B)decreases.
C)increases.
D)changes by the inflation rate minus one.
Q3) A wage-price spiral occurs:
A)when firms need to continually meet higher wage demands because unemployment is close to zero.
B)when falling wages lead to rapidly falling prices, causing deflation.
C)when higher prices lead to rapidly falling real wages, which prompts demands for higher nominal wages.
D)when wages are indexed by law to the CPI.
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Chapter 14: A simple model of the macro economy
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Sample Questions
Q1) The aggregate supply curve is:
A)always vertical.
B)always horizontal.
C)a summation of individual supply curves and is always upward sloping.
D)horizontal, vertical and upward sloping.
Q2) Along the horizontal range of the aggregate supply curve,an increase in the aggregate demand curve will increase:
A)both the price level and real GDP.
B)only real GDP.
C)only the price level.
D)real GDP and reduce the price level.
Q3) A share market boom is often accompanied by:
A)an increase in consumption.
B)falling real GDP.
C)falling investment.
D)rising unemployment.
E)a decrease in imports.
Q4) The only determinant of investment is the interest rate.
A)True
B)False
Page 16
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Chapter 15: The monetary and financial system
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Sample Questions
Q1) Which of the following relationships with respect to banks is correct?
A)assets = liabilities - shareholders' equity.
B)shareholders' equity = assets - liabilities.
C)shareholders' equity = minimum liquidity requirements + exchange settlement account balance.
D)liabilities = assets + shareholders' equity.
E)assets = minimum liquidity requirements + exchange settlement account balance.
Q2) If the minimum liquidity requirement is a uniform 25 per cent on all deposits,the money multiplier will be:
A)4.
B)2.5.
C)0.4.
D)0.25.
Q3) The key property of money is that it is:
A)always desired.
B)fluent.
C)liquid.
D)expensive.
E)not needed.
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Chapter 16: Macroeconomic policy I: monetary policy
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Sample Questions
Q1) Financial innovation in Australia during the 1980s led to:
A)the demand for money increasing.
B)the velocity of money becoming more stable.
C)the velocity of money becoming more volatile.
D)the demand for money becoming more stable.
Q2) All economists would agree that velocity:
A)may be variable over the long term.
B)may be variable over the short term.
C)cannot be defined over the short term.
D)may be stable over the long term.
Q3) Monetarists argue that velocity is reasonably predictable.
A)True
B)False
Q4) The velocity of money is the:
A)number of times per year each dollar is used to transact an exchange.
B)rapidity of price increases during inflation.
C)number of times the price level increases during a year.
D)time it takes for cheques to clear banks.
E)number of times per year each product is purchased.
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Chapter 17: Macroeconomic policy II: fiscal policy
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Q1) The overall goal of microeconomic reform in Australia has been to:
A)shift the AS curve to the left.
B)shift the AS curve to the right.
C)shift the AD curve to the left.
D)leave the AD and AS curves unchanged.
Q2) If the government issues securities in order to finance current consumption,then:
A)it may be a burden to future generations if the securities were bought by foreign interests.
B)it may be a burden as current generations need to pay for the interest repayments without any improvement in the country's productive capacity.
C)it will not be a burden if the securities were bought by foreign interests.
D)it will not be a burden if the debt is held domestically.
Q3) A decrease in real GDP would affect the Australian economy by:
A)cutting tax revenues and raising government expenditures.
B)cutting government expenditures and raising tax revenues.
C)raising both tax revenues and government expenditures.
D)cutting both government expenditures and tax revenues.
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Chapter 18: International trade and finance
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Sample Questions
Q1) A higher value of country A currency:
A)increases the competitiveness of the country A producers.
B)increases the demand for the country A goods and services overseas.
C)reduces dependency of country A on other countries.
D)reduces an international competitiveness of the country A producers.
Q2) The theory of comparative advantage suggests:
A)that an industrialised country should not import.
B)that a country that is not competitive should import everything.
C)that a country specialises according to the opportunity cost.
D)that a country specialises according to the absolute cost.
Q3) Which of the following are problems with the employment argument for tariff protection?
A)It only protects foreign jobs, not domestic jobs.
B)It raises costs to firms, who in turn have higher output and hence higher employment.
C)Developed countries can't hope to compete with low-wage nations.
D)It reduces demand by consumers, thereby leading to higher unemployment in particular industries.
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Chapter 19: Applying graphs to economics
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Sample Questions
Q1) Straight line CD in Exhibit 1A-4 shows which of the following?
A)Increasing values for X increases the value of Y.
B)Decreasing values for X decreases the value of Y.
C)There is no association between X and Y.
D)Variables X and Y are negatively related.
Q2) When one variable increases,the other variable increases - it is called:
A)an inverse relationship.
B)causation.
C)horizontal line.
D)a direct relationship.
Q3) As shown in Exhibit 1A-3,the intercept of straight line AB is:
A)1.
B)10.
C)20.
D)30.
E)not determinable from the information provided.
Q4) A downward-sloping line has a negative slope.
A)True
B)False
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