Foundations of Economics Question Bank
Course Introduction
Foundations of Economics introduces students to the basic principles and concepts of economics, including the study of how individuals, businesses, and governments make decisions about scarce resources. The course covers key topics such as supply and demand, market structures, consumer behavior, production and costs, and the role of government in the economy. Students will explore both microeconomic and macroeconomic perspectives, gaining an understanding of economic systems, national income, inflation, unemployment, and international trade. This foundational course equips students with analytical tools and critical thinking skills necessary to understand and evaluate economic issues in the real world.
Recommended Textbook
Economics 4th Edition by R. Glenn Hubbard
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30 Chapters
4273 Verified Questions
4273 Flashcards
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Page 2
Chapter 1: Economics: Foundations and Models
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142 Verified Questions
142 Flashcards
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Sample Questions
Q1) You explain to your roommate Surya,who makes beaded headbands,about an economic theory which asserts that consumers will purchase more of a product at lower prices than they will at higher prices.She contends that the theory is incorrect because over the past two years she has lowered the price of her headbands and yet has seen a decrease in sales.How would you respond to Surya?
A) Surya is right; she has evidence to back her claim. The theory must be erroneous.
B) Surya is making the mistake of assuming that correlation implies causation.
C) I will explain to her that she is making the error of reverse causality: it is the decrease in demand that has caused her to lower her prices.
D) I will explain to her that there are some omitted variables that have contributed to a decrease in her sales such as changes in income.
Answer: D
Q2) List the five main factors of production.
Answer: The five main factors of production are labor,capital,human capital,natural resources,and entrepreneurial ability.
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Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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152 Flashcards
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Sample Questions
Q1) Without an increase in the supplies of factors of production,how can a nation achieve economic growth?
A) by producing more high-value goods and less of low-value goods
B) through technological advancement which enables more output with the same quantity of resources
C) by lowering the prices of factors of production
D) by increasing the prices of factors of production
Answer: B
Q2) If opportunity costs are constant,the production possibilities frontier would be graphed as
A) a ray from the origin.
B) a positively sloped straight line.
C) a negatively sloped curve bowed in toward the origin.
D) a negatively sloped straight line.
Answer: D
Q3) How do firms and households interact in markets?
Answer: Firms supply goods and services to households,and buy factors of production from households.Households supply factors of production to firms,and buy goods and services from firms.
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Scarcity is defined as the situation that exists when the quantity demanded for a good is greater than the quantity supplied.
A)True
B)False
Answer: False
Q2) If an increase in income leads to in an increase in the demand for peanut butter,then peanut butter is
A) a neutral good.
B) a normal good.
C) a necessity.
D) a complement.
Answer: B
Q3) Ranchers can raise either cattle or sheep on their land.Which of the following would cause the supply of sheep to increase?
A) an increase in the price of sheep
B) a decrease in the price of cattle
C) an increase in the demand for cattle
D) an increase in the price of sheep feed
Answer: B
Page 5
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) If there is a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and consumer surplus plus producer surplus is maximized,then
A) maximum deadweight loss occurs.
B) economic efficiency is achieved.
C) profits are maximized.
D) costs are minimized.
Q2) Refer to Figure 4-4.The figure above represents the market for pecans.Assume that this is a competitive market.If the price of pecans is $3
A) economic surplus is maximized.
B) not enough consumers want to buy pecans.
C) the quantity supplied is less than the economically efficient quantity.
D) the quantity supplied is economically efficient but the quantity demanded is economically inefficient.
Q3) Marginal cost is the additional cost to a firm of producing one more unit of a good or service.
A)True
B)False
Q4) What is "tax incidence"? What determines tax incidence in a competitive market?
Page 6
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) Refer to Figure 5-2.The efficient output level is
A) Q<sub>d</sub>.
B) Q<sub>b</sub>.
C) Q<sub>a</sub>.
D) Q<sub>b</sub> - Q<sub>d</sub>.
Q2) According to ________,in a market with an externality,private parties would voluntarily negotiate an efficient outcome without government intervention.
A) A. C. Pigou
B) Adam Smith
C) Ronald Coase
D) John Maynard Keynes
Q3) If the EPA does implement its plan to enact tougher limits on smog-forming ozone,________ would bear more of the external cost of pollution and the gap between the marginal private cost of pollution and the marginal social cost of pollution would ________.
A) consumers; widen B) producers; widen C) producers; narrow D) consumers; narrow
Page 7
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Chapter 6: Elasticity: The Responsiveness of Demand and Supply
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Sample Questions
Q1) A demand curve that is horizontal indicates that the commodity
A) has few substitutes.
B) must be very cheap.
C) is a necessity.
D) has a large number of substitutes.
Q2) Refer to Figure 6-5.Identify the two goods which are complements.
A) Good X and Good Y
B) Good Y and Good Z
C) Good X and Good Z
D) It is not possible to distinguish any relationship among the goods.
Q3) The demand for most farm products is relatively inelastic.A drought that reduces the supply of farm products will also cause farm revenues to fall.
A)True
B)False
Q4) If demand is perfectly inelastic,the absolute value of the price elasticity of demand is A) zero.
B) less than one.
C) more than one.
D) equal to the absolute value of the slope of the demand curve.
Page 8
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) A goal of market-based reforms of the health care system is to give patients an incentive to pay more attention to the prices of medical services.This would tend to ________ economic efficiency by ________ the costs of medical services
A) increase; increasing
B) increase; decreasing
C) decrease; increasing
D) decrease; decreasing
Q2) If a state requires all drivers to buy health insurance,the problem of adverse selection is eliminated.
A)True
B)False
Q3) If a state requires all drivers to purchase auto insurance,insurance companies still face the problem of
A) correctly pricing their insurance.
B) sunk costs.
C) adverse selection.
D) excess demand for their insurance.
Q4) What is moral hazard?
Q5) What is adverse selection?
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) Generally with bond ratings,the higher the rating,the ________ the interest rate an investor will receive and the ________ the the risk that the issuer of the bond will default.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Q2) What is a primary market?
A) a market where primary inputs like steel are sold
B) a market where you can sell any bonds you own as a private investor
C) a market where a newly issued claims are sold to initial buyers by the borrowing firm
D) a market where you can sell any stocks you own as a private investor
Q3) Net worth and stockholders' equity are both equal to the difference between assets and liabilities.
A)True
B)False
Q4) What is a corporate bond and what does it specify?
Q5) In a corporation,what are "inside directors" and "outside directors"?
Q6) Briefly describe the Sarbanes-Oxley Act and explain why it was passed.
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Refer to Table 9-1.Select the statement that accurately interprets the data in the table.
A) Linda has an absolute advantage in dog bathing and Sandy has an absolute advantage in dog grooming.
B) Sandy has an absolute advantage in dog bathing and Linda has an absolute advantage in dog grooming.
C) Sandy has an absolute advantage in dog bathing and dog grooming.
D) Linda has an absolute advantage in dog bathing and dog grooming.
Q2) Refer to Figure 9-2.With the tariff in place,the United States
A) imports 16 million pounds of rice.
B) imports 9 million pounds of rice.
C) imports 15 million pounds of rice.
D) exports 31 million pounds of rice.
Q3) Today,the United States charged an average tariff rate
A) that is more than its average tariff rate in 1930.
B) which is greater than any other high-income country.
C) of less than 2 percent.
D) that exceeds 50 percent.
Q4) How have U.S.imports and exports,as a fraction of GDP,changed from 1950 to the present?
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) If total utility increases at a decreasing rate as a consumer consumes more coffee,then marginal utility must
A) remains constant.
B) increase also.
C) decrease.
D) be negative.
Q2) Refer to Figure 10-6.Suppose the price of Pilates sessions rise to $30 while income and the price of Yoga sessions remain unchanged.The income effect of this price change is represented by the movement from
A) A to B.
B) B to C.
C) D to B
D) D to C.
Q3) What is marginal utility and what is the law of diminishing marginal utility?
Q4) Economists assume that the goal of consumers is to A) do as little work as possible to survive. B) make themselves as well off as possible. C) expend all their income.
D) consume as much as possible.
Q5) What is a Giffen good?
12
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Chapter 11: Technology, production, and Costs
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Sample Questions
Q1) If a firm experiences positive technological change,it is able to produce more output using the same inputs.
A)True
B)False
Q2) If average total cost is $50 and average fixed cost is $15 when output is 20 units,then the firm's total variable cost at that level of output is
A) $1,000.
B) $700.
C) $300.
D) impossible to determine without additional information.
Q3) The slope of an isoquant measures
A) the price ratio of the two inputs.
B) the average product of labor.
C) the ratio of the marginal utility of the two inputs.
D) the rate at which inputs can be substituted for each other keeping total output constant.
Q4) In the long run the relevant cost is total cost.
A)True
B)False
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Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Firms in perfect competition produce the productively efficient output level in the short run and in the long run.
A)True
B)False
Q2) Refer to Figure 12-7.If this is a constant-cost industry,what is the market price in the long-run equilibrium?
A) $5
B) $14
C) $15
D) $20
Q3) Refer to Figure 12-4.If the market price is $30 and the firm is producing output,what is the amount of the firm's profit or loss?
A) loss of $1,080
B) profit of $1,440
C) loss of $2,520
D) profit of $1,300
Q4) If in the long run a firm makes zero profit,it should exit the industry.
A)True
B)False
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Chapter 13: Monopolistic Competition: The Competitive
Model in a More Realistic Setting
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Sample Questions
Q1) In the long-run equilibrium,a monopolistically competitive firm earning normal profit produces the allocatively efficient output level.
A)True
B)False
Q2) If a monopolistically competitive firm breaks even,the firm is earning as much in this industry as it could in any other comparable industry.
A)True
B)False
Q3) One way by which firms differentiate their products is to find a market niche.
A)True
B)False
Q4) A monopolistically competitive firm will
A) charge the same price as its competitors do.
B) always produce at the minimum efficient scale of production.
C) have some control over its price because its product is differentiated.
D) produce an output level that is productively and allocatively efficient.
Q5) For a monopolistically competitive firm,price equals average revenue.
A)True
B)False
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) Which of the following is not among Porter's competitive forces?
A) power of buyers
B) power of suppliers
C) threat of new entrants
D) changing consumer tastes
Q2) Refer to Table 14-2.Suppose Wal-Mart and Target both advertise that they will match the lowest price offered by any competitor.What is the purpose of such a strategy?
A) to signal to each other not to charge below the current low price
B) to signal to each other that they will not hesitate to initiate a price war
C) to signal to each other that they intend to charge the high price
D) to signal to each other to share the market equally
Q3) A member of a cartel earns more profits by producing more than its quota and selling at a price higher than the cartel's price.
A)True
B)False
Q4) What happens to the profit a car company makes on each car sold if it offers cash rebates to customers? What happens to the company's profit per car if it offers zero percent financing? How might a car company decide which of these strategies to use?
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Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) Refer to Figure 15-1.If the firm's average total cost curve is ATC<sub>3</sub>,the firm will
A) suffer a loss.
B) break even.
C) make a profit.
D) face competition.
Q2) Which of the following statements applies to a monopolist but not to a perfectly competitive firm at their profit maximizing outputs?
A) Marginal revenue is less than price.
B) Marginal revenue equals marginal cost.
C) Price equals marginal cost.
D) Average revenue equals average cost.
Q3) Long-run economic profits would most likely exist in which market structure?
A) monopoly, monopolistic competition and oligopoly
B) monopoly and oligopoly
C) monopoly and monopolistic competition
D) monopoly only
Q4) What gives rise to a natural monopoly? How do consumers benefit from a natural monopoly?
Q5) What happens to a monopoly's revenue when it sells more units of its product?
Page 17
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) If the selling price of a firm's product is $200 and the estimated average cost of producing this product is $150,what is the firm's markup?
A) 75 percent
B) 33.33 percent
C) 25 percent
D) impossible to determine with the information given
Q2) If,at the firm's projected sales level,the marginal cost is $40,the average cost is $50 and the markup is 30 percent,then its selling price is
A) $40.
B) $50.
C) $52.
D) $65.
Q3) If marginal cost is zero,with an optimal two-part tariff, A) total revenue is maximized.
B) consumers maximize their surplus
C) the firm does not have to charge a fixed-fee portion.
D) firms may not maximize profit.
Q4) Are sellers who practice arbitrage taking advantage of buyers?
Q5) What is odd pricing? Why do some merchants use odd pricing?
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Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) A firm's labor demand curve is also its marginal revenue product curve.For both the perfectly competitive firm and the output price maker,the labor demand curve slopes downwards.However,there is a difference in the reasons why the labor demand curve slopes downwards.What is this difference?
Q2) What is a compensating differential?
Q3) Which of the following explains why talented major league baseball players command much higher salaries than neurosurgeons?
A) because the total value of baseball games is much higher than the total value of neurosurgery
B) because it takes far more skill and training to be a major league baseball player than to be a neurosurgeon
C) because the supply of talented major league baseball players is relatively low compared to the supply of neurosurgeons. Therefore, major league baseball players exert far more market power than neurosurgeon.
D) because the supply of talented major league baseball players is low relative to its demand compared to the supply of neurosurgeons. Therefore, adding another player yields far greater marginal benefit than adding another neurosurgeon.
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Page 19
Chapter 18: Public Choice, taxes, and the Distribution of Income
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Sample Questions
Q1) Explain the effect of price elasticities of supply and demand on tax incidence.
Q2) A government-imposed tax on soft drinks would shift the ________ curve for soft drinks to the ________,increasing the equilibrium price and decreasing the equilibrium quantity.
A) demand; right
B) demand; left
C) supply; right
D) supply; left
Q3) One argument advanced in favor of raising the tax on dividends is that
A) dividends increase the wealth of shareholder's which could lead to inflation.
B) the tax revenue gained will be used to help pay for the federal stimulus package.
C) dividends accrue mostly to low income individuals, thus increasing income inequality.
D) it increases the incentive for corporations to maximize shareholder value.
Q4) Refer to Figure 18-1.The excess burden of the tax is represented by the area
A) B+C.
B) F+G.
C) E+H.
D) B+C+F+G.
Page 20
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Chapter 19: GDP: Measuring Total Production and Income
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Sample Questions
Q1) In calculating gross domestic product,the Bureau of Economic Analysis uses the sum of the market value of final goods and services produced.This means that the BEA
A) simply counts the total number of goods produced in the market place and then adds them up.
B) values goods at their market prices, multiplies them by the quantity produced, and then adds them up.
C) simply counts the total number of goods and services produced in the marketplace and then adds them up.
D) values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up.
Q2) If the GDP deflator is less than 100,which will be higher: nominal GDP or real GDP? Why?
Q3) Which of the following is not a durable good?
A) furniture
B) automobile
C) clothing
D) refrigerator
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Chapter 20: Unemployment and Inflation
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Sample Questions
Q1) Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to overstate the true extent of joblessness?
A) inflation
B) discouraged workers
C) counting people as employed who are working part time, although they would prefer to be working full time
D) unemployed persons falsely report themselves to be actively looking for a job
Q2) To reduce the bias in the consumer price index,the Bureau of Labor Statistics
A) updates the market basket every two years, rather than every 10 years.
B) updates the market basket every 10 years, rather than every two years.
C) incorporates substitutions by consumers when prices of specific products rise rapidly.
D) incorporates substitutions by consumers when prices of specific products fall rapidly.
Q3) The real wage equals the nominal wage ________ the CPI,all times 100.
A) divided by B) times
C) minus D) plus
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Chapter 21: Economic Growth, the Financial System, and Business Cycles
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Sample Questions
Q1) Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle.
A) increase; decrease B) decrease; increase C) decrease; decrease further
D) increase; increase further
Q2) In an open economy,there is interaction with other economies in terms of both trading of goods and services and borrowing and lending.
A)True
B)False
Q3) The total amount of physical capital available in a country is know as the country's A) labor productivity.
B) savings.
C) investment.
D) capital stock.
Q4) Briefly explain how the miserliness of Ebenezer Scrooge might actually be beneficial for economic growth.
Q5) How are unemployment,inflation,and the business cycle related?
Page 23
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Chapter 22: Long-Run Economic Growth: Sources and Policies
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Q1) If real GDP per capita in Ireland is estimated to be $7,400 in 2012,what will real GDP per capita be in 2017 if real GDP per capita grows at an annual rate of 2.8%?
A) $7,607
B) $8,496
C) $9,472
D) $20,720
Q2) An economy that grows too slowly fails to raise living standards.
A)True
B)False
Q3) One drawback of the patent system is that firms must disclose to the public information about the product or process.
A)True
B)False
Q4) All of the following policies are ways for a country to promote long-run economic growth except
A) increasing vaccinations against infectious diseases.
B) undergoing political reform to decrease corruption.
C) enacting stronger laws to protect property rights.
D) imposing stricter regulations to limit foreign direct investment.
24
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Chapter 23: Aggregate Expenditure and Output in the Short Run
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Q1) If the consumption function is defined as C = 7,250 + 0.8Y,what is the marginal propensity to save?
A) 0.2
B) 0.8
C) 5.8
D) 9.1
Q2) Investment spending ________ during a recession,and ________ during an expansion.
A) declines; increases
B) increases; declines
C) increases; increases
D) declines; declines
Q3) The passage of the Smoot-Hawley Tariff in 1930 sparked a trade war that caused net exports to ________ and real GDP to ________.
A) increase; increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease
Q4) Explain how a stock market crash has the potential to lead to a recession in an economy.
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Chapter 24: Aggregate Demand and Aggregate Supply Analysis
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Q1) The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation.What did this technological change do the short-run supply curve?
A) It shifted the short-run aggregate supply curve to the left.
B) It shifted the short-run aggregate supply curve to the right.
C) It moved the economy up along a stationary short-run aggregate supply curve.
D) It moved the economy down along a stationary short-run aggregate supply curve.
Q2) Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise?
A) SRAS shifted to the right by more than LRAS.
B) AD shifted to the right by more than SRAS.
C) AD shifted to the right by less than SRAS.
D) SRAS and AD do not shift.
Q3) Which of the following is considered a negative supply shock?
A) increasing immigration in the economy causes the labor supply to rise
B) an improvement in technology
C) an increase in unemployment
D) an unexpected decrease in the refining capacity for oil
Q4) Briefly describe monetarism and the monetary growth rule.
Page 26
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Chapter 25: Money, banks, and the Federal Reserve System
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Sample Questions
Q1) The German Hyperinflation of the early 1920s was caused by A) the German government raising funds for expenditures by selling bonds to the central bank.
B) an overly aggressive monetary policy implemented to combat a severe recession. C) rising oil prices after World War I caused a severe stagflation and hyperinflation. D) large deficits resulting from the high levels of war spending and falling taxes.
Q2) Banks keep ________ of checking deposits as reserves because on a typical day withdrawals ________ deposits.
A) more than 100%; are much greater than B) exactly 100%; are about the same as C) less than 100%; are about the same as D) exactly 100%; are much greater than E) less than 100%; are much greater than
Q3) The real-world money multiplier is greater than the simple money multiplier (1/RR). A)True B)False
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Chapter 26: Monetary Policy
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Q1) In response to already low interest rates doing little to stimulate the economy,the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low.This policy is known as
A) inflation targeting.
B) contractionary monetary policy.
C) securities-bubble deflating.
D) quantitative easing.
Q2) When housing prices fall,as they did beginning in 2006 following the housing market bubble,consumption spending on furniture,appliances,and home improvements ________ as many households found it ________ to borrow against the value of their homes.
A) declined; easier
B) declined; harder
C) increased; easier
D) increased; harder
Q3) Beginning in 2008,The Federal Reserve and the U.S.Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways.Briefly summarize the actions of the Fed and Treasury.
Q4) List the Fed's four main monetary goals.
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Chapter 27: Fiscal Policy
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Sample Questions
Q1) The budget deficit increases during wars and recessions.
A)True
B)False
Q2) An economic expansion tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments
A) increase; rise; falls
B) increase; fall; rises
C) decrease; rise; falls
D) decrease; fall; rises
Q3) Increasing the federal budget deficit will contribute to increasing the federal government debt.
A)True
B)False
Q4) A decrease in which of the following would decrease the tax wedge?
A) marginal tax rate
B) money supply
C) national debt
D) federal budget deficit
Q5) List the five categories of federal government expenditures.
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Chapter 28: Inflation, unemployment, and Federal Reserve Policy
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135 Verified Questions
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Sample Questions
Q1) How would you expect the Fed to respond to a negative supply shock in the economy?
Q2) If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy,which of the following would you expect to see?
A) The Fed will follow deflationary monetary policies.
B) The Fed will follow inflationary monetary policies.
C) The rate of inflation will fall as Fed tries to reduce the unemployment rate.
D) The Fed will reduce the natural rate of unemployment.
Q3) If the long-run aggregate supply curve is vertical,
A) the economy stays at the natural rate of inflation in the long run.
B) the short-run Phillips curve must be vertical.
C) unemployment and inflation are positively related in the long run.
D) the trade-off between unemployment and inflation cannot be permanent.
Q4) An increase in the expected inflation rate will
A) shift the short-run Phillips curve to the right.
B) shift the short-run Phillips curve to the left.
C) reduce the inflation rate.
D) reduce the unemployment rate.
Page 30
Q5) Can the Federal Reserve achieve both low inflation and low levels of unemployment? Explain.
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Chapter 29: Macroeconomics in an Open Economy
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145 Verified Questions
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Sample Questions
Q1) The large budget deficits of the early 1990s resulted in large current account deficits.
A)True
B)False
Q2) If we take into account transfer payments (TR)when we derive the saving and investment relationship,the saving and investment equation becomes
A) S = I + NFI.
B) S + TR = I + NFI.
C) S = I + NFI + TR.
D) S = I + NX - TR.
Q3) Suppose China decides to sell a vast majority of their large holdings of U.S.Treasury bonds.If you are thinking of refinancing your house,how would China's action affect your decision to refinance?
A) You would want to refinance as soon as possible as interest rates should rise.
B) You would want to wait to refinance as interest rates should rise.
C) You would want to wait to refinance as interest rates should fall.
D) China's actions should not affect your decision to refinance in any way.
Q4) Explain the relationship between net exports and net foreign investment.
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Chapter 30: The International Financial System
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Sample Questions
Q1) Why might a developing country choose to peg the value of its currency to the dollar?
Q2) Which of the following did not help Thailand maintain its peg against the dollar in the 1990s?
A) borrowing dollars from the International Monetary Fund in exchange for baht
B) buying baht on the foreign exchange market to support higher demand for the baht
C) increasing domestic interest rates to attract more foreign investors
D) foreigners selling off of new investments in Thailand
Q3) In the United States today,how much gold will the Federal Reserve give you in exchange for $1?
A) none
B) $1 worth of gold (based on the market price of an ounce of gold at the time you redeem the gold)
C) 1 ounce of gold
D) 1/35th of an ounce of gold
Q4) A depreciation of a country's currency always lowers the domestic firm's profits.
A)True
B)False
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