Fundamentals of Economics
Exam Answer Key
Course Introduction
Fundamentals of Economics introduces students to the core principles and concepts that form the basis of economic theory and practice. Topics include the laws of supply and demand, market equilibrium, the role of government in the economy, types of markets, and the distinction between microeconomics and macroeconomics. Students will explore concepts such as scarcity, opportunity cost, production possibilities, and economic efficiency, providing a foundation for understanding household and firm behavior, price determination, and the broader economic environment. The course also touches on real-world applications, enabling students to analyze current economic issues and policies.
Recommended Textbook
Principles of Macroeconomics 1st Edition by N.
Gregory Mankiw
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3530 Verified Questions
3530 Flashcards
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Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) Stan buys a 1966 Mustang, which he plans to restore and sell. He anticipates that the cost of the car and the repairs will be $15,000 and that he can sell it for $19,000. When he has spent $15,000, he discovers he needs to replace the engine, which will cost $4000. He can sell the car without the new engine for $9000. What should Stan do?
A) He should complete the repairs and sell the car for $13,000.
B) He should sell the car now for $9000.
C) He should never try such an expensive project again.
D) He should be totally indifferent between finishing the project and selling the car now.
Answer: D
Q2) Which statement best describes the concept represented by the adage "There is no such thing as a free lunch"?
A) Melissa can only attend the concert if she takes her sister with her.
B) Greg is hungry and homeless.
C) Brian must repair the tire on his bike before he can ride it to class.
D) Olivia must decide between skiing at Whistler or Lake Louise for spring break.
Answer: D
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Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) Because it is difficult for economists to use experiments to generate data, what must they generally do?
A) do without data
B) use whatever data the world gives them
C) select a committee of economists to make up data for all economists to use
D) use hypothetical, computer-generated data
Answer: B
Q2) Refer to Figure 2-9. What is this type of graph known as?
A) a time-series graph
B) a bar graph
C) a scatterplot graph
D) a pie chart
Answer: C
Q3) What two broad subfields is the field of economics traditionally divided into?
A) national economics and international economics
B) consumer economics and producer economics
C) private sector economics and public sector economics
D) microeconomics and macroeconomics
Answer: D
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Page 4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) It takes Russell 6 hours to produce a bushel of corn and 2 hours to wash and polish a car. It takes Wilma 6 hours to produce a bushel of corn and 1 hour to wash and polish a car. Wilma and Russell cannot gain from specialization and trade, since it takes each of them 6 hours to produce 1 bushel of corn.
A)True
B)False
Answer: False
Q2) Both Canada and the U.S. can produce equally tasty maple syrup. What determines which country will export maple syrup?
A) how the opportunity cost in Canada compares to the opportunity cost in the U.S.
B) how the costs of production in Canada compare to the costs of production in the U.S. C) how the costs of labour in Canada compare to the costs of labour in the U.S.
D) how the costs of maple syrup in Canada compares to the cost of maple syrup in the U.S.
Answer: A
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Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) Refer to the Figure 4-6. What is the shift from D To D called?
A) an increase in demand
B) a decrease in demand
C) a decrease in quantity demanded
D) an increase in quantity demanded
Q2) Market demand is given as Qd =150 - 3P. Market supply is given as Qs = 2P. What would result if the market price were $25?
A) a shortage of 25
B) a surplus of 25
C) a surplus of 70
D) a shortage of 70
Q3) Refer to the Table 4-2. What is the space that would represent an increase in equilibrium quantity and an indeterminate change in equilibrium price?
A) space A
B) space B
C) space C
D) space D
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Chapter 5: Measuring a Nations Income
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Sample Questions
Q1) Which statement supports the idea of using GDP as a measure of well-being?
A) Countries with higher GDP tend to have more luxury cars.
B) Countries with higher GDP tend to have more schools.
C) Countries with higher GDP tend to have more fast food restaurants.
D) Countries with higher GDP tend to have more food.
Q2) If nominal GDP is $1 trillion and real GDP is $0.9 trillion, what is the GDP deflator?
A) 0.9
B) 1.43
C) 90
D) 143
Q3) When economists talk about growth in the economy, how do they measure that growth?
A) with the absolute change in nominal GDP
B) with the percentage change in real GDP
C) with the absolute change in real GDP
D) with the percentage change in nominal GDP
Q4) Income exceeds production.
A)True
B)False
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Chapter 6: Measuring the Cost of Living
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Sample Questions
Q1) If the nominal interest rate is 5 percent and the rate of inflation is 10 percent, what is the real interest rate?
A) -5 percent
B) -2 percent
C) 2 percent
D) 5 percent
Q2) Suppose that the CPI is currently 300 and was 50 in 1950. Then, according to the CPI, $1 in 1950 purchased the same amount of goods and services as what amount today?
A) $0.6
B) $3
C) $4
D) $6
Q3) The price index is 320 in one year and 380 in the next. What was the inflation rate?
A) 6.7 percent
B) 8.8 percent
C) 12.5 percent
D) 18.8 percent
Q4) Why does the GDP deflator give a different rate of inflation than the CPI does?
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Chapter 7: Production and Growth
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Sample Questions
Q1) According to the traditional view of the production process, how does output per worker change when capital per worker increases?
A) It increases. This increase is larger at larger values of capital per worker.
B) It increases. This increase is smaller at larger values of capital per worker.
C) It increases. This increase is the same at all values of capital per worker.
D) It decreases. This decrease is larger at larger values of capital per worker.
Q2) What is the source of most technological progress?
A) private research by firms and individual inventors
B) private research by firms and government
C) government research
D) government-sponsored research by universities
Q3) In a market economy, what is scarcity of resources most clearly reflected in?
A) supply
B) demand
C) market prices
D) the stock of the resource
Q4) Productivity can be found as number of hours worked divided by output.
A)True
B)False
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Chapter 8: Saving, Investment, and the Financial System
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Sample Questions
Q1) What has the typical price/earnings ratio been historically?
A) about 5
B) about 10
C) about 15
D) about 20
Q2) Suppose that Parliament were to institute an investment tax credit. What would most likely happen in the market for loanable funds?
A) The demand for and supply for loanable funds would shift left.
B) The demand for and supply of loanable funds would shift left.
C) The demand for loanable funds would shift right.
D) The supply of loanable funds would shift right.
Q3) What is public saving equal to?
A) national saving
B) the total amount that consumers save
C) government spending plus transfers minus government revenue
D) government revenue minus government spending minus transfers
Q4) Using a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if a government goes from a deficit to a surplus.
Q5) What are the basic differences between bonds and stocks
Page 10
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Chapter 9: Unemployment and Its Natural Rate
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Sample
Questions
Q1) In 2009, Canada was in a serious recession. By 2013, Canada was experiencing a strong economic recovery. How did employment growth and gross job creation compare between 2009 and 2013?
A) Both employment growth and job creation were smaller in 2009.
B) Employment growth was the same in both years but job creation was smaller in 2009.
C) Employment growth was smaller in 2009 but job creation was larger in 2009.
D) Employment growth was smaller in 2009 but job creation was the same in both years.
Q2) What is a rough estimate of the natural rate of unemployment in Canada?
A) 1 to 2.5 percent
B) 3 to 5.5 percent
C) 6 to 8 percent
D) 8.5 to 11 percent
Q3) Approximately what percentage of all Canadian workers are union members?
A) 5 percent
B) 30 percent
C) 50 percent
D) 95 percent
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Chapter 10: The Monetary System
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Sample Questions
Q1) Which statement best describes the outcomes of open-market purchases conducted by the Bank of Canada?
A) Bank reserves increase, and the money supply increases.
B) Bank reserves increase, and the money supply decreases.
C) The Bank of Canada borrows from member banks, which increases the money supply.
D) The Bank of Canada lends money to member banks, which decreases the money supply.
Q2) Marc puts prices on surfboards and skateboards at his sporting goods store. He is using money as a unit of account.
A)True
B)False
Q3) During recessions, banks typically choose to hold more excess reserves relative to their deposits. Which statement best describes the effects of the increase in reserves?
A) The money multiplier increases, and the money supply increases.
B) The money multiplier decreases, and the money supply decreases.
C) The money multiplier does not change, but the money supply increases.
D) The money multiplier does not change, but the money supply decreases.
Q4) What is the difference between money and wealth?
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Chapter 11: Money Growth and Inflation
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Sample Questions
Q1) According to the classical dichotomy, what increases when the money supply increases?
A) the real interest rate
B) the real GDP
C) the value of money
D) the price level
Q2) A rising price level eliminates an excess supply of money.
A)True
B)False
Q3) You put money in an account and earn a real interest rate of 10 percent. Inflation is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real interest rate?
A) 1.6 percent
B) 2.6 percent
C) 5.6 percent
D) 7.6 percent
Q4) Inflation distorts savings because people pay taxes on their nominal rather than their real interest income.
A)True
B)False
Page 13
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Chapter 12: Open-Economy Macroeconomics: Basic Concepts
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Sample Questions
Q1) If the Canadian real exchange rate appreciates, what will most likely happen?
A) Exports increase and imports decrease.
B) Exports decrease and imports increase.
C) Exports and imports both increase.
D) Exports and imports both decrease.
Q2) If the Canadian real interest rate exceeds the world real interest rate, what would Canadian savers most likely do?
A) Canadian savers would prefer to buy foreign assets.
B) Canadian savers would prefer to wait until the real interest rate falls to equal the world interest rate.
C) Canadian savers would sell their Canadian assets and buy foreign assets instead.
D) Canadian savers would sell their foreign assets and buy Canadian assets instead.
Q3) If the real exchange rate of the Canadian dollar falls, Canadian net exports will fall.
A)True
B)False
Q4) Why are net exports and net capital outflow always equal?
Q5) How do we find the real exchange rate from the nominal exchange rate?
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Chapter 13: A Macroeconomic Theory of the Small Open Economy
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Sample Questions
Q1) Suppose a prime ministerial candidate promises to increase the government budget surplus and claims that doing so will stop Canadian citizens from investing in foreign companies and increase the value of the dollar. Evaluate this promise.
Q2) In the open-economy macroeconomic model, at the equilibrium real interest rate, the amount that people (including government) want to save exactly balances desired domestic investment.
A)True
B)False
Q3) Why do higher real interest rates lead to lower net capital outflow?
Q4) In the market for foreign-currency exchange in the open-economy macroeconomic model, what does the amount of net capital outflow represent?
A) the quantity of dollars supplied for the purpose of selling assets domestically
B) the quantity of dollars supplied for the purpose of buying assets abroad
C) the quantity of dollars demanded for the purpose of buying Canadian exports of goods and services
D) the quantity of dollars demanded for the purpose of importing foreign goods and services
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Chapter 14: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) Refer to the Scenario 14-2. In the short-run, which statement is consistent with the aggregate demand and aggregate supply theory?
A) The price level and real GDP both increase.
B) The price level and real GDP both decrease.
C) The price level rises, and real GDP falls
D) The price level falls, and real GDP rises.
Q2) How do changes in the price of oil affect economies?
A) They lead to increased nominal GDP.
B) They do not contribute much to output fluctuations.
C) They change the economy principally by changing aggregate demand.
D) They may create both inflation and recession.
Q3) Compare the effects of an aggregate-demand-induced recession with an aggregate-supply-induced recession. How would you recognize that a recession is induced by demand or supply? What policies would be appropriate in the first case and what in the second?
Q4) Pessimism about the future leads to falling prices and rising unemployment.
A)True
B)False
Q5) Make a list of expenditures whose sum equals GDP.
Q6) Make a list of things that would shift the aggregate-demand curve to the right.
Page 16
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Chapter 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Sample Questions
Q1) When the government reduces taxes, all other things being equal, what will decrease?
A) consumption
B) take-home pay
C) household saving
D) government surplus
Q2) What do supply-side economists believe a reduction in the tax rate will cause?
A) a large shift of the aggregate-supply curve to the left
B) a large shift of the aggregate-supply curve to the right
C) a small shift of the aggregate-supply curve to the right
D) a small shift of the aggregate-supply curve to the left
Q3) Refer to the Figure 15-1. What will happen if the current interest rate is 2 percent?
A) There will be excess money supply.
B) People will sell more bonds, which drives interest rates up.
C) People will buy more bonds, which drives interest rates up...
D) People will sell more bonds, which drives the interest rates down.
Q4) If inflation is zero, then the nominal and real interest rates are the same.
A)True
B)False
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Chapter 16: The Short-Run Tradeoff Between Inflation and Unemployment
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Sample Questions
Q1) Which theory proposes that people optimally use all available information when forecasting the future?
A) rational expectations
B) perfect expectations
C) momentum expectations
D) policy expectations
Q2) Refer to the Figure 16-4. What is the natural rate of unemployment?
A) 0 percent
B) 2 percent
C) 5 percent
D) 8 percent
Q3) According to Phillips, which set of two items have a negative relation?
A) output and unemployment
B) output and employment
C) wage inflation and output
D) wage inflation and unemployment
Q4) Suppose the natural rate of unemployment is 6 percent, the expected inflation is 2 percent, and the constant "a" in the short-run Phillips curve equation is 0.8. Change the expected inflation to 3 percent and draw the new Phillips curve. How did it change?
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Chapter 17: Five Debates Over Macroeconomic Policy
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Sample Questions
Q1) Suppose that at the start of fiscal year 2013 the government had a debt of $6300 billion. Suppose that during fiscal year 2015, real GDP grew by about 4 percent and inflation was about 3 percent. What is the largest deficit the government could have run without raising the debt-to-GDP ratio?
A) about $184 billion
B) about $375 billion
C) about $441 billion
D) about $632 billion
Q2) There are ways that policymakers could reduce the costs of inflation without reducing inflation.
A)True
B)False
Q3) Why should monetary policy be made by rule rather than discretion?
A) The economy is subject to a variety of random shocks.
B) Monetary policymakers are now allowed undisciplined discretion.
C) It is not clear how important political business cycles have been in the past.
D) Central banks can achieve credibility over time by backing up their words with deeds.
Q4) Explain how it is possible for the government debt to grow forever.
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