Foundations of Economics Question Bank
Course Introduction
Foundations of Economics introduces students to the core principles and analytical tools of economic theory, covering both microeconomics and macroeconomics. The course explores how individuals, businesses, and governments make decisions about allocating limited resources, examines the functioning of markets, and analyzes key concepts such as supply and demand, opportunity cost, and market equilibrium. Students also gain an understanding of broader economic issues including inflation, unemployment, and economic growth, laying the groundwork for further study in economics and related social sciences.
Recommended Textbook
Essentials of Economics 4th Edition by R. Glenn Hubbard
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6487 Verified Questions
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) If the price of milk was $1.25 a gallon and it is now $2.25 a gallon,what is the percentage change in price?
A)4.4 percent
B)8 percent
C)44 percent
D)80 percent
Answer: D
Q2) Explain the term "economics."
Answer: Economics is the study of the choices people make to attain their goals,given their scarce resources.
Q3) Marginal benefit is the benefit that your activity provides to someone else.
A)True
B)False
Answer: False
Q4) What is an economic market?
Answer: An economic ic market refers to a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
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Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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Sample Questions
Q1) Refer to Figure 2-17.One segment of the circular flow diagram in the figure shows the flow of goods and services from market C to economic agents A.What is market C and who are economic agents A?
A)C = factor markets; A = households
B)C = product markets; A = households
C)C = factor markets; A = firms
D)C= product markets; A = firms
Answer: B
Q2) If a commercial dairy farm wants to raise funds to purchase feeding troughs,it does so in the
A)output market.
B)product market.
C)factor market.
D)dairy products market.
Answer: C
Q3) What is an entrepreneur?
Answer: An entrepreneur is someone who operates a business,bringing together the factors of production to produce goods and services.
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Which of the following statements is true?
A)An increase in demand causes a change in equilibrium price; the change in price does not cause a further change in demand or supply.
B)A decrease in supply causes equilibrium price to rise; the increase in price then results in a decrease in demand.
C)If both demand and supply increase there must be an increase in equilibrium price; equilibrium quantity may either increase or decrease.
D)If demand decreases and supply increases one cannot determine if equilibrium price will increase or decrease without knowing which change is greater.
Answer: A
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
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Chapter 4: Market Efficiency and Market Failure
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Sample Questions
Q1) Refer to Figure 4-25.The efficient equilibrium price of gasoline is ________ per gallon.
A)$3.00
B)$3.75
C)$4.25
D)$5.00
Q2) Which of the following is an example of a Pigovian tax?
A)payments by utilities to obtain tradable emissions allowances
B)a payroll tax
C)payments for licenses to pollute
D)a tax imposed on a utility that internalizes the cost of externalities caused by the utility
Q3) Congress passed the ________ in 1996,the purpose of which was to phase out price floors and return to a free market in agriculture
A)Rice and Beans Act
B)Smoot-Hawley Act
C)Agribusiness Act
D)Freedom to Farm Act
Q4) What is marginal cost? Which curve is also referred to as the marginal cost curve?
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Chapter 5: The Economics of Health Care
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Sample Questions
Q1) The aging of the U.S.population has tended to ________ spending on health care,and the development of new drugs and medical equipment has tended to ________ spending on health care.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease
Q2) In 2012,employees covered by company-provided health insurance paid ________ percent of the cost of their own health insurance.
A)3
B)18
C)37
D)65
Q3) in the United States since 1900,life expectancy at birth has ________ and the death rate has ________.
A)increased; increased
B)increased; decreased
C)decreased; increased
D)decreased; decreased
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Page 7
Chapter 6: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) In a typical year,________ of new jobs are created by small firms.
A)less than 5 percent
B)10 percent
C)40 percent
D)75 percent
Q2) A corporation is
A)the easiest type of business to set up.
B)the least expensive type of business to set up.
C)the most difficult type of business to set up.
D)the least profitable type of business to set up.
Q3) The only type of business that faces unlimited liability is a sole proprietorship.
A)True
B)False
Q4) Which of the following statements is false?
A)Corporations can issue stocks and bonds, while proprietorships cannot.
B)Corporations have one owner, while proprietorships have many owners.
C)Corporations face more taxes than do proprietorships.
D)Proprietorships have unlimited liability while corporations have limited liability.
Page 8
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) An economist observes two consumers in a supermarket.One of the consumers buys a case of Coca-Cola and the other buys a case of Pepsi-Cola.Both colas sell for the same price and the ages and incomes of the consumers are also the same.Based on this information,how would the economist explain the consumers' choices?
A)One of the consumers made the wrong choice, but it is impossible to say which one.
B)Both consumers should have considered buying other colas that had lower prices.
C)Both consumers should have purchased less than a case because they would be able to buy more later.
D)Apparently, the consumers had different tastes.
Q2) Refer to Figure 7-6.The inelastic segment of the demand curve
A)is coincident with the horizontal axis.
B)is coincident with the vertical axis.
C)lies below the midpoint of the curve.
D)lies above the midpoint of the curve.
Q3) Explain the endowment effect.
Q4) What does price elasticity of demand measure? When is demand elastic? Inelastic? Unit elastic?
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Chapter 8: Technology, production, and Costs
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Sample Questions
Q1) Refer to Figure 8-6.In the figure above which letter represents the average fixed cost curve?
A)A
B)B
C)C
D)D
Q2) Refer to Figure 8-3.For what quantity of labor does production display diminishing returns?
A)for more than 1 units of labor
B)for more than 4 unit of labor
C)for more than 5 units of labor
D)for more than 8 units of labor
Q3) The processes a firm uses to turn inputs into outputs of goods and services is called A)technology.
B)technological change.
C)marginal analysis.
D)positive economic analysis.
Q4) What are economies of scale? What are diseconomies of scale?
Q5) State the law of diminishing marginal returns.
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Chapter 9: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) If a firm shuts down in the short run
A)its loss equals zero.
B)its loss equals its fixed cost.
C)is makes zero economic profit.
D)its total revenue is not large enough to cover its fixed cost.
Q2) Refer to Table 9-3.What price (P)will Arnie charge and how much profit will he earn if the market price of basketballs is $12.50?
A)Price and profit cannot be determined from the information given.
B)P = $12.50; profit = $52.50
C)P = $12.50; profit = $22.50
D)P = $20; profit = $75.00.
Q3) For a perfectly competitive firm,at profit maximization
A)market price exceeds marginal cost.
B)total revenue is maximized.
C)marginal revenue equals marginal cost.
D)production must occur where average cost is minimized.
Q4) Firms in perfect competition produce the allocatively efficient output in the short run and in the long run.
A)True
B)False
Page 11
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Chapter 10: Monopoly and Antitrust Policy
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Sample Questions
Q1) Identify four reasons for high entry barriers? Briefly explain each reason.
Q2) Refer to Figure 10-3.Suppose the monopolist represented in the diagram above produces positive output.What is the price charged at the profit-maximizing/loss-minimizing output level?
A)$38
B)$54
C)$68
D)$75
Q3) Refer to Figure 10-4.What is the amount of the monopoly's total revenue?
A)$21,600
B)$20,400
C)$19,740
D)$7,800
Q4) There are several types of barriers to entry that can create a monopoly.Which of the following barriers is the result of government action?
A)network externalities
B)public franchise
C)economies of scale
D)control of a key resource
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Chapter 11: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) If the painting firms in a city sign a contract outlining a pricing plan,they are involved in
A)price competition.
B)a legal form of business contract in the United States.
C)collusion.
D)price regulation.
Q2) The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called
A)Nash equilibrium.
B)the prisoner's dilemma.
C)game theory.
D)dominant strategy equilibrium.
Q3) Why does a prisoner's dilemma lead to a noncooperative equilibrium?
A)because each player had agreed before the game started to minimize the harm that he can inflict on the other players
B)because each player is uncertain how other players will play the game
C)because players must choose from a limited number of non-dominant strategies
D)because each rational player has a dominant strategy to play a certain way regardless of what other players do
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Page 13
Chapter 12: Gdp: Measuring Total Production and Income
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Sample Questions
Q1) Which of the following headlines would be more closely related to what macroeconomists study than what microeconomists study?
A)Avocado prices rise due to a late frost in California.
B)The United Auto Workers sign a contract raising wages and benefits 7% over the next 3 years.
C)Real GDP grows by 2.3% in the second quarter.
D)Airlines raise ticket prices in response to rising fuel costs.
Q2) Why do we not count the value of intermediate goods and services in gross domestic product? Does the value of intermediate goods and services show up in gross domestic product? If so,how?
Q3) The best measure of the income households actually have available to spend is
A)personal income.
B)disposable personal income.
C)national income.
D)net national income.
Q4) China's current rate of GDP growth is quite rapid.Its current growth rate is probably three times that of the United States.However,the levels of pollution are much higher in China.Would you consider China to be better off than the United States given this information? Why or why not?
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) Suppose that homemakers are included as employed in the labor force statistics,rather than being counted as out of the labor force.This would
A)increase the measured unemployment rate.
B)increase the measured labor force participation rate.
C)decrease the number of persons in the labor force.
D)decrease the number of persons in the working-age population.
Q2) The full-employment rate of unemployment is zero.
A)True
B)False
Q3) The natural rate of unemployment consists of frictional unemployment plus structural unemployment.
A)True
B)False
Q4) The CPI in 1990 was 131,and the CPI in 2010 was 218.If you earned a salary of $40,000 in 1990,what would be a salary with equivalent purchasing power in 2010?
A)$45,977
B)$66,565
C)$87,200
D)$143,486
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Chapter 14: Economic Growth, the Financial System, and Business Cycles
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Sample Questions
Q1) Potential GDP is estimated to grow at a rate of 3.2% in the United States.Actual GDP in the U.S.
A)always grows at a slower rate than potential GDP.
B)always grows at a faster rate than potential GDP.
C)always grows at the same rate as potential GDP.
D)is the same as potential GDP if all firms in the economy were working at capacity.
Q2) One difference between stocks and bonds is that
A)stocks are financial securities, while bonds are labor market securities. B)stocks are usually issued in electronic form, while bonds are usually issued in paper form.
C)stocks represent ownership in companies, while bonds represent ownership in banks. D)stocks do not involve a promise to repay a purchaser of the stock, while bonds represent a promise to repay the purchase price of the bond.
Q3) Explain and show graphically how an increase in household saving affects the equilibrium interest rate and the equilibrium quantity of loanable funds.
Q4) Carefully define the two categories of saving in the economy.
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Page 16
Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) Most recessions in the United States since World War II have begun with
A)a decline in residential construction.
B)a rapid increase in the price level.
C)a substantial number of bank failures.
D)a stock market crash.
Q2) The recession of 2007-2009 began in ________,with the end of the economic expansion that had begun in ________.
A)January 2007; April 1984
B)December 2007; November 2001
C)July 2007; August 2006
D)March 2007; March 1995
Q3) Which of the following would cause the short-run aggregate supply curve to shift to the left?
A)an increase in the price level
B)an increase in inflation expectations
C)a technological advance
D)a decrease in interest rates
Q4) What is a supply shock,and why might a supply shock lead to stagflation?
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Q5) Using an aggregate demand graph,illustrate the impact of an increase in the price level on aggregate demand.
Chapter
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Sample Questions
Q1) According to the quantity theory of money,inflation is caused by
A)the money supply growing slower than real GDP.
B)GDP growing faster than the money supply.
C)GDP growing at the same rate as the money supply.
D)the money supply growing faster than real GDP.
Q2) Which of the following assets is most liquid?
A)money
B)bond
C)savings account
D)stock
Q3) Money is
A)an asset that people are willing to accept in exchange for goods and services.
B)a liability that people are willing to accept in exchange for goods and services.
C)the income one earns over a period of time.
D)one's assets net of one's liabilities at any point in time.
Q4) Although gold is highly valued by most people,it is difficult to use as a medium of exchange.Explain.
Q5) What is the principle monetary policy tool used by the Fed.Why?
Q6) How do open market operations work?
Page 18
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Chapter 17: Monetary Policy
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Sample Questions
Q1) The body that is responsible for dating the beginning and ending dates for a recession is
A)the Fed.
B)the Congress.
C)the National Bureau of Economic Research.
D)the Bureau of Economic Analysis.
Q2) Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in A)oil prices.
B)business taxes.
C)income tax rates.
D)investment spending.
Q3) Inflation targeting refers to conducting ________ policy so as to commit the central bank to achieving a ________.
A)fiscal; publicly announced level of inflation
B)fiscal; zero inflation rate
C)monetary; publicly announced level of inflation
D)monetary; zero inflation rate
Q4) What problems can high inflation rates cause for the economy?
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Chapter 18: Fiscal Policy
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Sample Questions
Q1) Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.
A)decreases; increases
B)increases; decreases
C)increases; increases
D)decreases; decreases
Q2) A decrease in the marginal income tax rate is a fiscal policy which will increase aggregate demand.
A)True
B)False
Q3) Of the $840 billion American Recovery and Reinvestment Act stimulus package which was enacted in 2009,the largest spending increase occurred in which category?
A)energy and the environment
B)military, veterans, and homeland security
C)health care, social services, and education
D)transportation and housing
Q4) The budget deficit increases during wars and recessions.
A)True
B)False
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Chapter 19: Comparative Advantage,
Rates
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Sample Questions
Q1) Refer to Figure 19-3.What is the area of consumer surplus after the imposition of the quota?
A)A + G + H
B)G + H + E + I+ J + M
C)G + H
D)A
Q2) Which of the following is the best example of a tariff?
A)a subsidy from the U.S.government to domestic manufacturers of residential air conditioners to enable them to compete more effectively with foreign producers
B)a limit on the quantity of residential air conditioners that can be imported from a foreign country
C)a $150 fee imposed on all imported residential air conditioners
D)a tax placed on all residential air conditioners sold in the domestic market to help offset the impact of emissions on the environment
Q3) One reason a country does not specialize completely in production is that production of most goods involves increasing opportunity costs.
A)True
B)False
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