Fundamentals of Economics
Exam Answer Key
Course Introduction
Fundamentals of Economics introduces students to the basic principles and concepts that underpin economic theory and practice. The course covers the essentials of both microeconomics and macroeconomics, including supply and demand, market structures, consumer behavior, production, national income, inflation, unemployment, and government intervention. Through real-world examples and analytical tools, students will develop an understanding of how economic agents make decisions, how markets function, and the impact of economic policies on individuals and society as a whole. This foundational knowledge provides a basis for further study in the field of economics and its applications in business, policy, and everyday life.
Recommended Textbook
Principles of Economics 7th Edition by Robert H. Frank
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Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) Pat can either drive to work, which takes half an hour and uses $1.50 worth of gas, or take the bus, which takes an hour and costs $1.00. How should Pat get to work?
A)Pat should take the bus because it costs $0.50 less than driving.
B)Pat should drive because it saves half an hour relative to taking the bus.
C)Pat should drive if saving half an hour is worth $0.50 or more.
D)Pat should take the bus if saving half an hour is worth $0.50 or more.
Answer: C
Q2) According to the Cost-Benefit Principle, you should go see the latest Star Wars movie with your friends this weekend if:
A)the extra benefits of seeing the movie are greater than the extra costs of seeing the movie.
B)you really like Star Wars.
C)you can afford to go to the movies.
D)the average benefit you get from going to the movies is greater than the average cost of a ticket.
Answer: A
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Chapter 2: Comparative Advantage
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Sample Questions
Q1) Suppose it takes Dan 5 minutes to make a sandwich and 15 minutes to make a smoothie, and it takes Tracy 6 minutes to make a sandwich and 12 minutes to make a smoothie. Which of the following statements is correct?
A)Tracy should specialize in sandwiches and smoothies.
B)Dan should specialize in smoothies, and Tracy should specialize in sandwiches.
C)Dan should specialize in sandwiches, and Tracy should specialize in smoothies.
D)Dan should specialize in both sandwiches and smoothies.
Answer: C
Q2) Working efficiently, Jordan can write 3 essays and outline 4 chapters each week. It must be true that:
A)6 essays and 0 chapter outlines would be unattainable.
B)2 essays and 3 chapter outlines would be efficient.
C)3 essays and 5 chapter outlines would be unattainable.
D)4 essays and 3 chapter outlines would be both attainable and efficient.
Answer: C
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4
Chapter 3: Supply and Demand
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Sample Questions
Q1) Refer to the given table. Suppose the columns in this table reflect demand and supply. At a price of $50: \[\begin{array} { | r | r | r | }
\hline \text { Price Per Unit } & \text { Columu A Units Per Year } & \text { Colum B Units Per Year } \\
\hline \$ 20 & 100 & 40 \\
\hline \$ 30 & 95 & 50 \\
\hline \$ 40 & 80 & 60 \\
\hline \$ 50 & 65 & 70 \\
\hline \$ 60 & 50 & \mathbf { 8 0 } \\
\hline
\end{array}\]
A)the market will be in equilibrium.
B)there will be an excess demand of 5 units.
C)there will be an excess supply of 70 units.
D)there will be an excess supply of 5 units.
Answer: D
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Chapter 4: Elasticity
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Sample Questions
Q1) The price elasticity of supply at a point is the:
A)percentage change in quantity supplied divided by the percentage change in price.
B)percentage change in price divided by the percentage change in quantity supplied.
C)change in quantity supplied divided by the change in price.
D)change in price divided by the change in quantity supplied.
Q2) If the absolute value of the price elasticity of demand for tickets to a football game is 2, then if the price increases by 1 percent, quantity demanded decreases by:
A)0.5 percent.
B)1 percent.
C)2 percent.
D)4 percent.
Q3) If the price elasticity of demand for pineapples is 0.75, then a 4 percent increase in the price of pineapples will lead to a:
A)3 percent decrease in the quantity of pineapples demanded.
B)3 percent increase in the quantity of pineapples demanded.
C)0.75 percent decrease in the quantity of pineapples demanded.
D)0.75 percent increase in the quantity of pineapples demanded.
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Page 6
Chapter 5: Demand
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Q1) If a consumer reallocates his or her spending away from Good A and towards Good B, then the consumer's total utility will increase if:
A)MUA/PA > MUB/PB.
B)MUA/PA < MUB/PB.
C)MUA/PA > 0 and MUB/PB > 0.
D)MUA/PA < 0 and MUB/PB < 0.
Q2) Pat's total utility after eating 99 Reese's Peanut Butter Cups was greater than his total utility after eating 100 Reese's Peanut Butter Cups. Therefore, Pat's marginal utility from the 100 peanut butter cup was:
A)positive, but less than one.
B)positive, but less than his marginal utility for the 99 peanut butter cup. C)zero.
D)negative.
Q3) According to the law of demand, when the price of shoes ________, people will consume ________ shoes.
A)rises; more B)falls; more C)rises; the same amount D)falls; the same amount
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Chapter 6: Perfectly Competitive Supply
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Sample Questions
Q1) Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly competitive, and Jenny is charging the equilibrium price, then Jenny can increase her revenue if she:
A)decreases the price of her lemonade and doesn't change her output.
B)increases the price of her lemonade and decreases her output.
C)increases the price of her lemonade and doesn't change her output.
D)keeps the price of her lemonade the same and increases the output.
Q2) Suppose a perfectly competitive firm is producing 37 units output, and the marginal cost of the 37 unit is $3. If the firm can sell each unit of output for $5 and the firm's revenue is sufficient to cover its variable cost, the firm should:
A)lower its price.
B)decrease production.
C)increase production.
D)raise its price.
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Chapter 7: Efficiency, Exchange, and the Invisible Hand in Action
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Sample Questions
Q1) Free entry and exit of firms is a characteristic of:
A)all industries in the U. S. economy.
B)perfectly competitive industries.
C)centralized economies.
D)industries in which firms are earning positive economic profit.
Q2) A cost-saving innovation in a perfectly competitive industry will lead to:
A)entry by new firms.
B)economic profits for new firms.
C)economic profits for a few firms for a short time.
D)a leftward shift of the industry supply curve.
Q3) Adam Smith's theory of the invisible hand posits the actions of independent, self-interested buyers and sellers will ________ lead to the most efficient allocation of resources.
A)always
B)often
C)rarely
D)never
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Page 9
Chapter 8: Monopoly, Oligopoly, and Monopolistic Competition
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Sample Questions
Q1) Given the demand curve it faces, if an imperfectly competitive firm wants to sell another unit of output, it must:
A)increase its advertising.
B)increase the value of its product.
C)lower its price.
D)lower its quality.
Q2) Natural monopolies are most likely to arise when firms have:
A)low start-up costs and low marginal costs.
B)high start-up costs and low marginal costs.
C)low start-up costs and high marginal costs.
D)high start-up costs and high marginal costs.
Q3) Because monopolists charge a price in excess of marginal cost, it must be the case that monopolists:
A)earn a positive economic profit.
B)earn a negative economic profit.
C)produce more than the socially optimal level of output.
D)produce less than the socially optimal level of output.
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Page 10
Chapter 9: Games and Strategic Behavior
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Sample Questions
Q1) The last time you went on a road trip, you noticed that there were several fast food outlets clustered near some freeway exits, but none at the others. Now that you are familiar with Hotelling's model, you know that the reason for this is:
A)zoning laws.
B)firms vying for a favorable location.
C)failure by the firms to correctly distribute themselves.
D)the existence of fast food cartels.
Q2) Suppose that you have noticed that almost all of the car dealers in your city are located along a three-block stretch of the same street. A likely reason for this clustering of car dealers is that:
A)the dealers are better able to form a cartel.
B)each dealer is attempting to locate closest to the customers.
C)there is a social norm in that city that dealers follow in choosing location.
D)each dealer sells a different brand of car, so they are not competitors and do not have to be concerned about the other dealers' locations.
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11
Chapter 10: An Introduction to Behavioral Economics
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Sample Questions
Q1) In traditional economic models, homo economicus refers to a decision maker who:
A)is narrowly self-interested, well-informed, highly disciplined, and cognitively capable enough to solve optimization problems.
B)searches for relevant facts in a potentially haphazard way and who quits once his or her understanding has reached a certain threshold.
C)makes frequent departures from rational choice and instead relies upon judgmental heuristics, or rules of thumb, to guide decisions.
D)lacks impulse control and, as a result, may experience regret.
Q2) If a Proposer and a Responder are asked to split $100 in the ultimatum bargaining game, standard economic theory would predict that the Responder should:
A)reject any amount over $50.
B)accept any amount offered by the Proposer.
C)reject any amount less than $50.
D)only accept an offer for exactly $50.
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Chapter 11: Externalities, Property Rights, and the Environment
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Sample Questions
Q1) Lunch in Jamie's dorm is an all-you-can-eat buffet, served from 11 a.m. until 1 p.m. By noon, the buffet is picked over, and by 12:30, there are very few popular items left. The garbage bins, though, are full of food. Over time, you would expect that students would:
A)stop eating so much at lunch because they would notice that it generates waste. B)start distributing themselves more evenly over the lunch hours to avoid long lines.
C)come earlier and earlier for lunch in order to have a better selection from which to choose.
D)be pickier in their selections from the buffet.
Q2) Which one of the following government actions is intended to generate positive externalities?
A)Taxing polluting industries
B)Speed limits on the highways
C)Requiring autos to meet minimum emissions regulations
D)Subsidies for planting trees on hillsides
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Chapter 12: The Economics of Information
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Sample Questions
Q1) Suppose that the salary range for recent college graduates with a bachelor's degree in economics is $30,000 to $50,000, with 25 percent of jobs offering $30,000 per year, 50 percent offering $40,000 per year and 25 percent offering $50,000 per year and that in all other respects, the jobs are equally satisfying. Assume that in this market, a job offer remains open for only a short time so that continuing to search requires an applicant to reject any current job offer. If this scenario describes job searches in general, the segment of the population that is most risk-averse will tend to earn:
A)average salaries.
B)below-average salaries.
C)above-average salaries.
D)stable salaries.
Q2) According to the textbook, middlemen:
A)add no value to economic activity.
B)only add value if the consumer gets a good deal.
C)only add value to themselves.
D)provide value through information and coordination.
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Chapter 13: Labor Markets, Poverty, and Income Distribution
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Sample Questions
Q1) Jen is offered a job answering the phone in the State U economics department during lunchtime, from noon to 1 p.m., Tuesdays and Thursdays. Her reservation wage for this job is $15 per hour. Now suppose the department chair announces that the $150 per week earnings from the job will be divided equally among Jen and 299 other students in the department. How much economic surplus will Jen enjoy each week if she accepts the job?
A)$0.50
B)-$14.00
C)-$29.00
D)-$29.50
Q2) In terms of improving the standard of living of the poor, one drawback on the earned income tax credit (EITC)is that:
A)it provides workers with in-kind transfers.
B)it's only available to individuals whose incomes are above a certain threshold.
C)it provides no benefits to people who are unemployed.
D)it gives firms a strong incentive to lay off low-wage workers.
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Chapter 14: Public Goods and Tax Policy
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Sample Questions
Q1) Which of the following is NOT an example of a public good?
A)National defense
B)Police protection
C)The ocean
D)Government-subsidized public housing
Q2) If one state is suffering from acid rain as a result of sulfur dioxide emissions from the industries in a neighboring state, then:
A)the individual states can easily reach a solution to the problem.
B)the problem is best addressed through federal regulation.
C)state courts can provide adequate remedies.
D)the acid rain ceases to be an externality.
Q3) A pure public good is one that is:
A)highly nonrival and highly nonexcludable.
B)neither nonrival nor nonexcludable.
C)nonexcludable but rival.
D)nonrival but excludable.
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Chapter 15: International Trade and Trade Policy
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Sample Questions
Q1) An economy has two workers, Paula and Ricardo. Every day they work, Paula can produce 4 computers or 16 shirts, and Ricardo can produce 6 computers or 12 shirts. ________ has the comparative advantage in computers and ________ has the comparative advantage in shirts.
A)Paula; Paula
B)Paula; Ricardo
C)Ricardo; Paula
D)Ricardo; Ricardo
Q2) Amy can produce either 5,000 pounds of cheese or 20 cars per year. Mike can produce either 5,000 pounds of cheese or 10 cars per year. Amy has a comparative advantage in producing ________, and Mike has a comparative advantage in producing ________.
A)cars; cars
B)cars; cheese
C)cheese; cars
D)cheese; cheese
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Chapter 16: Macroeconomics: The Birds Eye View of the Economy
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Sample Questions
Q1) The field of macroeconomics developed when economists looked for causes of:
A)the wealth of nations.
B)the Great Depression.
C)World War I.
D)poverty and inflation.
Q2) "The Federal Reserve should raise interest rates in order to keep inflation at an acceptably low level" is a ________ statement about ________ policy.
A)positive; fiscal
B)normative; fiscal
C)positive; monetary
D)normative; monetary
Q3) Macroeconomists are concerned with each of the following issues EXCEPT:
A)Why does inflation vary over time?
B)Why does inflation vary across countries?
C)Why do the prices of computers increase more slowly than the price of gasoline?
D)What are the costs of inflation?
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18
Chapter 17: Measuring Economic Activity: GDP and Unemployment
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Sample Questions
Q1) Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store is produced by the following production process:
\[\begin{array} { | l | c | r | }
\hline { \text { Name of Campany } } & \text { Revenues } & \text { Cast af Pur chased Inguts } \\
\hline \text { Citrus Growers Inc. } & \$ 0.75 & \mathbf { 0 } \\
\hline \text { Florida Jarn Cormpany } & \$ 2.00 & \$ 0.75 \\
\hline \text { The Corner Store } & \$ 2.50 & \$ 2.00 \\
\hline
\end{array}\] What is the value added of Citrus Growers Inc.?
A)$0.00
B)$0.50
C)$0.75
D)$1.75
Q2) The participation rate is the number of people:
A)employed divided by the labor force.
B)employed divided by the population aged 16 years and older.
C)employed and unemployed divided by the labor force.
D)employed and unemployed divided by the population aged 16 years and older.
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Chapter 18: Measuring the Price Level and Inflation
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Q1) A measurement in terms of current dollar value is called a(n)________ quantity.
A)nominal
B)real
C)deflated
D)indexed
Q2) Inflation ________ the signals sent by price changes to demanders and suppliers of goods and services.
A)amplifies
B)obscures
C)enhances
D)has no impact on
Q3) The process of converting current dollar values into real terms is called ________, while the process of adjusting nominal quantities to maintain their purchasing power is called ________.
A)deflation; inflation
B)inflation; hyperinflation
C)deflating; indexing
D)indexing; deflating
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20
Chapter 19: Economic Growth, Productivity, and Living Standards
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Sample Questions
Q1) Providing workers with on-the-job training will increase:
A)average labor productivity.
B)the share of the population employed.
C)the unemployment rate.
D)the labor force participation rate.
Q2) The biggest barrier to growth for many of the poorest countries in the world is the need for:
A)larger populations.
B)more human capital.
C)more physical capital.
D)improved legal and political frameworks.
Q3) Average labor productivity times the proportion of the population employed equals:
A)real GDP.
B)real GDP per person.
C)real GDP per worker.
D)output per worker.
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Chapter 20: The Labor Market: Workers, Wages, and Unemployment
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Q1) All of the following describe trends in U.S. labor markets except:
A)growing wage inequality in the United States in recent decades.
B)a slowdown in real wage growth since the 1970s.
C)substantial growth in the level of employment in the United States since 2000.
D)substantial growth in real wages during the last century.
Q2) When unemployment insurance benefits exceed the wages a worker could earn when employed, the worker will have an incentive to:
A)remain unemployed longer than otherwise.
B)have his/her unemployment insurance benefits cancelled.
C)accept the first job offered.
D)decrease his/her reservation price.
Q3) In the twentieth century, average real wages have risen substantially:
A)only in the United States.
B)in industrial countries excluding the United States.
C)in industrial countries including the United States.
D)in neither the United States nor other industrial countries.
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Page 22
Chapter 21: Saving and Capital Formation
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Q1) Which of the following is a stock?
A)Saving
B)Income
C)Consumption
D)Wealth
Q2) The supply and demand for saving are brought into equilibrium by adjustments of the ________ rate.
A)discount
B)nominal interest
C)real interest
D)dividend
Q3) The Cub Scouts have so far sold 100 tickets for their upcoming raffle, but they sell a constant additional 12 tickets every day. After three more days of selling tickets, the stock of tickets sold will be ________, and the flow of tickets sold will be ________.
A)136; 12
B)36; 12
C)100; 36
D)136; 36
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Chapter 22: Money Prices and the Federal Reserve
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Q1) Two countries, Alpha and Beta, have the same levels of nominal and real GDP. Each dollar in Alpha is used more frequently than each dollar in Beta. Therefore, it must be the case that ________ in Alpha than in Beta.
A)the rate of inflation is greater
B)the money stock is smaller
C)the price level is greater
D)the velocity is lower
Q2) The U.S. Congress instituted a system of deposit insurance for banks in: A)1789.
B)1865.
C)1913.
D)1934.
Q3) According to the quantity equation, if velocity and real GDP are constant, and the Federal Reserve increases the money supply by 5 percent, then the price level:
A)decreases by 5 percent.
B)decreases by more than 5 percent.
C)increases by more than 5 percent.
D)increases by 5 percent.
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24
Chapter 23: Financial Markets and International Capital Flows
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Q1) Which of the following equations is equivalent to the equation S - NX = I?
A)S + KI = I
B)S I = KI
C)S KI = NX
D)S + I = NX - KI
Q2) An increase in the perceived riskiness of Company A stock ________ the risk premium investors require to purchase Company A stock and ________ the price of Company A stock.
A)increases; increases
B)increases; decreases
C)decreases; increases D)decreases; decreases
Q3) You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $62.73 for one share of the stock today, and you expect a dividend payment of $4, what rate of return do you require?
A)3.6 percent
B)6.2 percent
C)6.4 percent
D)10 percent
Page 25
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Chapter 24: Short-Term Economic Fluctuations: An Introduction
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Q1) The end of a recession is called the: A)trough.
B)expansion.
C)peak. D)boom.
Q2) In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 5 percent, then real GDP must be:
A)$98 trillion.
B)$96 trillion.
C)$102 trillion.
D)$104 trillion.
Q3) Suppose the natural rate of unemployment is 4 percent. What is the actual rate of unemployment if actual output is 2 percent below potential output?
A)3 percent
B)5 percent
C)6 percent
D)8 percent
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Chapter 25: Spending and Output in the Short Run
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Q1) For an economy starting at potential output, a decrease in autonomous expenditure in the short run results in a(n):
A)expansionary output gap.
B)recessionary output gap.
C)increase in potential output.
D)decrease in potential output.
Q2) House prices in the U.S. increased dramatically ________, and decreased dramatically ________.
A)from 2001 to 2006; from 2007 to 2009
B)from 2007 to 2009; from 2001 to 2006
C)from 2001 to 2009; from 2006 to 2007
D)from 2006 to 2009; from 2001 to 2006
Q3) The consumption function is the relationship between consumption and:
A)planned aggregate expenditure.
B)total spending.
C)investment.
D)disposable income.
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Chapter
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Q1) The money demand curve will shift to the left if:
A)the nominal interest rate increases.
B)the nominal interest rate decreases.
C)ATM machines are introduced.
D)the price level increases.
Q2) A bank is able to make new loans equal to:
A)legal reserves of the bank.
B)excess reserves of the bank.
C)total reserves of the bank.
D)required reserves of the bank.
Q3) According to the Taylor rule, the Federal Reserve ________ the real interest rate as the output gap increases and ________ the real interest rate as the inflation rate increases.
A)lowers; lowers
B)raises; lowers
C)lowers; raises
D)raises; raises
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Chapter 27: Aggregate Demand, Aggregate Supply, and Inflation
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Q1) A substantial reduction in the rate of inflation is called:
A)inflation inertia.
B)inflation shock.
C)disinflation.
D)hyperinflation.
Q2) Compared to an initial long-run equilibrium, an aggregate supply shock that reduces potential output results in a(n)________ gap in the short run and ________ output and ________ inflation in the long run.
A)recessionary; lower; higher
B)expansionary; lower; higher
C)expansionary; higher; higher
D)recessionary; potential; higher
Q3) For a given level of inflation, if there is a greater willingness by foreigners to purchase domestic goods, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward
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Chapter 28: Exchange Rates and the Open Economy
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Q1) In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the ________ and affects net exports by changing the ________.
A)inflation rate; unemployment rate
B)exchange rate; real interest rate
C)growth of domestic real GDP; growth of foreign real GDP
D)real interest rate; exchange rate
Q2) A decrease in the value of a currency relative to other currencies is called a(n): A)revaluation.
B)devaluation.
C)appreciation.
D)depreciation.
Q3) Each of the following would decrease the supply of U.S. dollars, shifting the supply curve for dollars to the left, EXCEPT:
A)a decreased preference for foreign-made goods.
B)a decrease in U.S. real GDP.
C)a decrease in the real interest rate on foreign assets.
D)a depreciation of the U.S. dollar relative to other currencies.
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