Introduction to Economic Theory
Midterm Exam
Course Introduction
Introduction to Economic Theory explores the fundamental principles that underlie economic decision-making at both individual and collective levels. The course examines key concepts such as scarcity, opportunity cost, supply and demand, market structures, and the role of government in the economy. Students will gain an understanding of how markets function, how prices are determined, and what factors influence economic outcomes. Through a combination of theoretical models and real-world examples, this course provides a solid foundation for further study in economics and equips students with tools to analyze various economic issues in everyday life.
Recommended Textbook
ECON for Macroeconomics 1st Edition by William A.
McEachern
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Chapter 1: The Art and Science of Economic Analysis
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Sample Questions
Q1) An economic model
A) always has a mathematical foundation
B) can never be proven wrong
C) can be constructed for an individual economic unit but not for the economy as a whole
D) is a simplification of the real world
E) can be constructed for the economy as a whole but not for an individual economic unit
Answer: D
Q2) A rational individual would make charitable contributions only if such contributions receive favorable tax treatment.
A)True
B)False
Answer: False
Q3) Ceteris paribus means "other things constant."
A)True
B)False
Answer: True
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Chapter 2: Economic Tools and Economics Systems
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Sample Questions
Q1) A test was scheduled for Monday morning,but you went to a party on Saturday night.If you hadn't attended the party,you could have studied for the test or gone to a movie.Which of the following is true?
A) The opportunity cost of going to the movie is studying for the test.
B) The opportunity cost of going to the party is the movie.
C) The opportunity cost of going to the party is both the movie and the study time.
D) Because you could go to the party only that night but could go to a movie any time,the opportunity cost of the party is the study time.
E) From the above information,it's not possible to determine the opportunity cost of attending the party.
Answer: E
Q2) The division of labor
A) allows more people to be employed
B) allows tasks to be performed more efficiently
C) makes people happier on the job
D) means that less management is required
E) means that less equipment will be used
Answer: B
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Page 4
Chapter 3: Economic Decision Makers
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Sample Questions
Q1) Which of the following accounts for the largest percentage of spending by households in the United States?
A) durable goods
B) nondurable goods
C) services
D) insurance payments
E) underground activities (e.g.,illegal activities)
Answer: C
Q2) Which of the following is an example of a durable good?
A) a cowboy
B) a cherry pie
C) a newspaper
D) a hand-held calculator
E) a pencil
Answer: D
Q3) Household production still exists because it often requires fewer specialized resources than market production does.
A)True
B)False
Answer: True
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Chapter 4: Demand, Supply, and Markets
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Sample Questions
Q1) If income rises and a good is inferior,then demand for that good will decrease.
A)True
B)False
Q2) The basic reason that supply curves slope upward is that
A) demand curves slope downward
B) production is characterized by increasing costs
C) profits decline as product prices rise
D) greater output can only result from improved technology
E) price and quantity supplied are inversely related
Q3) Which of the following is most likely to be an inferior good?
A) airline travel
B) restaurant meals
C) a subscription to the Wall Street Journal
D) soft drinks
E) used clothing
Q4) If supply increases and demand decreases,then equilibrium price will fall.
A)True
B)False
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Page 6
Chapter 5: Introduction to Macroeconomics
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Sample
Questions
Q1) If business leaders become optimistic about future sales and profits,they will __________ spending on plant and equipment,which __________ employment and income and,therefore,their expectations are __________.
A) increase; increases; fulfilled B) increase; increases; not met
C) increase; decreases; fulfilled D) decrease; decreases; fulfilled E) decrease; increases; not met
Q2) Capital is a stock variable.
A)True
B)False
Q3) Stagflation is a situation with high unemployment rates,high inflation rates,and little or no growth in the economy.
A)True
B)False
Q4) For a given aggregate supply curve,the price level and output both rise when aggregate demand decreases.
A)True
B)False
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Chapter 6: Productivity and Growth
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Sample Questions
Q1) Over the long run,technological change increases both labor productivity and unemployment rates.
A)True
B)False
Q2) Which is the resource whose quality is most often enhanced by technological change
A) capital
B) land
C) labor
D) entrepreneurship
E) credit
Q3) Labor productivity measures
A) input per unit of labor
B) output per unit of labor
C) average input per unit of labor
D) units of capital per unit of labor
E) output per unit of capital
Q4) If labor productivity growth slows,the standard of living must decrease.
A)True
B)False
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Chapter 7: Tracking the US Economy
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Sample Questions
Q1) Which of the following is a leakage from the circular flow?
A) government purchases of goods and services
B) saving
C) transfer payments
D) exports
E) consumption expenditures
Q2) If real GDP is $5 trillion for a particular year and the GDP price index is 140,then nominal GDP is $7 trillion.
A)True
B)False
Q3) Suppose that 1986 is our base year (price index equals 100)and that the 2000 price index was 200.If nominal GDP was $6.2 trillion in 2000,what was real GDP that year (measured in 1986 dollars)?
A) $3.1 trillion
B) $6.2 trillion
C) $12.4 trillion
D) $18.6 trillion
E) $24.3 trillion
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Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) If the inflation rate is 5 percent and you receive a wage increase of 5 percent,
A) your nominal income declines but your real income increases
B) both your nominal income and your real income increase by 5 percent
C) your nominal income increases but your real income declines
D) both your nominal income and your real income decrease by 5 percent
E) your nominal income increases by 5 percent but your real income is unchanged
Q2) Which is true of cost-push inflation?
A) It occurs when the aggregate demand curve shifts rightward.
B) It occurs when the aggregate supply curve shifts rightward.
C) It results in a decrease in the unemployment rate.
D) It results in a movement along the aggregate demand curve.
E) It is caused by the same factors that lead to demand-pull inflation.
Q3) The view that union wage demands may be a source of inflation would be best associated with the
A) supply shock view of inflation
B) demand pull view of inflation
C) cost push view of inflation
D) demand push view of inflation
E) monetary view of inflation
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Page 10
Chapter 9: Aggregate Expenditure
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Sample Questions
Q1) If autonomous net taxes increase by $10 trillion and the marginal propensity to consume is 0.8,consumption initially will
A) increase by $50 trillion
B) decrease by $10 trillion
C) decrease by $8 trillion
D) increase by $10 trillion
E) decrease by $50 trillion
Q2) A firm's level of investment is tied to the interest rate
A) only when the firm has to borrow funds to buy capital
B) only when the firm has to borrow funds to buy stocks
C) only when the firm already has the funds and could lend them
D) because the interest rate represents the opportunity cost of investing in capital
E) because investments are always made with borrowed funds
Q3) An increase in real disposable income will
A) shift the autonomous net export function upward
B) shift the autonomous net export function downward
C) cause a rightward movement along the autonomous net export function
D) cause a leftward movement along the autonomous net export function
E) show no movement along or shift of the autonomous net export function
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Page 11
Chapter 10: Aggregate Expenditure and Aggregate Demand
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Sample Questions
Q1) An increase in planned investment would shift the
A) aggregate demand curve outward
B) aggregate demand curve inward
C) aggregate supply curve outward
D) aggregate supply curve inward
E) consumption function upward
Q2) That fraction of a change in disposable income that is consumed is called
A) autonomous consumption
B) induced consumption
C) the multiplier
D) the marginal propensity to consume
E) the marginal propensity to save
Q3) The marginal propensity to consume (MPC)in Exhibit 10-2 equals
A) 0.20 or 1/5
B) 0.40 or 2/5
C) 0.80 or 4/5
D) 0.90 or 9/10
E) 0.60 or 3/5
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Chapter 11: Aggregate Supply
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Sample Questions
Q1) The expected price level is significant because
A) it is the equilibrium price level in the short run
B) it determines the actual price level in the short run
C) it determines the actual price level in the long run
D) firms and resource owners make long-term agreements based on the expected price level
E) the difference between the expected and actual price levels is equal to the actual inflation rate
Q2) If the actual price level in Exhibit 11-2 exceeds the expected price level,then
A) equilibrium output is Y<sub>2</sub> in the short run
B) equilibrium output is Y<sub>1</sub> in the short run
C) the actual unemployment rate is below the natural rate
D) potential output is greater than actual output
E) the actual price level is less than the equilibrium price level
Q3) The graph in Exhibit 11-4 shows a(n)
A) increase in short-run aggregate supply
B) increase in long-run aggregate supply
C) decrease in short-run aggregate supply
D) decrease in long-run aggregate supply
E) decrease in aggregate quantity demanded
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Chapter 12: Fiscal Policy
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Sample Questions
Q1) A $100 increase in government purchases will have exactly the same effect on equilibrium real GDP as a $125 decrease in autonomous net taxes regardless of the value of the MPC.
A)True
B)False
Q2) Which of the following assumptions is usually made about government purchases?
A) They vary directly with the interest rate.
B) They are autonomous.
C) They vary directly with the level of income.
D) They equal the level of net taxes in equilibrium.
E) They vary inversely with the level of income.
Q3) Government transfer payments are a good example of an automatic stabilizer.
A)True
B)False
Q4) If fiscal policy is used to close an expansionary gap,the
A) SRAS curve shifts leftward and the price level falls
B) SRAS curve shifts rightward and the price level increases
C) SRAS curve shifts rightward and the price level falls
D) AD curve shifts leftward and the price level decreases
E) AD curve shifts rightward and the price level decreases
Page 14
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Chapter 13: Federal Budgets and Public Policy
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Sample Questions
Q1) Government purchases of goods and services are not included in the government budget deficit but are included in the government purchases component of GDP.
A)True
B)False
Q2) Almost one-half of federal spending consists of cash and "in kind" payments to individuals.
A)True
B)False
Q3) Approximately __________ of the budget falls into expenditure categories that are determined by existing law.
A) one-fourth
B) one-third
C) half
D) two-thirds
E) three-quarters
Q4) U.S.debt has never exceeded 100 percent of GDP because if it did so,the federal government would be bankrupt.
A)True
B)False
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Chapter 14: Money and the Financial System
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Sample Questions
Q1) The FDIC insures deposits in
A) all banks
B) Federal Reserve member banks only
C) state banks only
D) any banking institution that purchases FDIC insurance
E) any bank approved by the Fed
Q2) Falling interest rates usually increase bank profits because
A) banks can make more loans at low rates
B) bank deposit costs fall faster than the average return on bank lending
C) short-term rates fall faster than long-term rates
D) long-term rates fall faster than short-term rates
E) none of the above is correct; banks increase profitability with rising interest rates,not falling rates
Q3) A lender of last resort is a financial institution that is willing and able to lend to
A) individuals who have other debts outstanding
B) individuals who do not have a positive net worth
C) banks that are not members of the Federal Reserve System
D) fractional reserve system banks experiencing runs on their deposits
E) Federal Reserve System member banks experiencing runs on their deposits
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Page 16
Chapter 15: Banking and the Money Supply
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Sample Questions
Q1) M2 is defined as
A) M1 plus savings accounts,small time deposits,and money market mutual funds
B) coins,currency,and checkable deposits
C) all near moneys
D) M1 plus time deposits
E) M1 plus money market mutual funds
Q2) In the federal funds market,
A) banks make loans to the Fed
B) banks make short-term loans to other banks
C) banks make long-term loans to other banks
D) the Fed makes short-term loans to commercial banks
E) the Fed makes long-term loans to commercial banks
Q3) The immediate effect of a member bank's sale of U.S.government securities to the Fed is a(n)
A) increase in that bank's required reserves
B) decrease in that bank's required reserves
C) increase in that bank's excess reserves
D) decrease in that bank's excess reserves
E) decrease in the Fed's assets
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Page 17
Chapter 16: Monetary Theory and Policy
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Sample Questions
Q1) If the Fed wants to close a contractionary gap,it might
A) increase government spending
B) increase taxes
C) decrease taxes
D) sell U.S.government bonds to banks
E) lower the discount rate
Q2) If the money supply decreases,the opportunity cost of holding money __________ and people will want to hold __________ quantity of money.
A) rises; a greater B) rises; a smaller
C) does not change; the same D) falls; a greater E) falls; a smaller
Q3) In the long run,an increase in aggregate demand
A) increases the price level and real output,but the effect on the price level is larger
B) increases the price level and real output,but the effect on output is larger
C) affects only real output
D) affects only the price level
E) has no effect at all
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Page 18
Chapter 17: Macro Policy Debate: Active or Passive
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Q1) According to the active policy position,eliminating a contractionary gap
A) can only be achieved by decreasing wages
B) requires a public policy of wage and price controls
C) should be accomplished by stimulating aggregate demand
D) will increase unemployment
E) will cause a recession
Q2) According to those who favor a passive approach to policy,how will the economy shown in Exhibit 16-2 attain equilibrium at potential output?
A) The SRAS curve will shift to the left.
B) The SRAS curve will shift to the right.
C) Either the money supply or government spending should be increased.
D) Either the money supply or government spending should be decreased.
E) Aggregate demand should be decreased.
Q3) If self-correction works,a policy that continually increases aggregate demand will
A) have a strong impact on GDP
B) cause permanent inflation
C) eventually cause the SRAS curve to shift to the right
D) have relatively large impact on GDP
E) will cause inflation to continually diminish
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Page 19
Chapter 18: International Trade
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Sample Questions
Q1) If the country illustrated in Exhibit 19-3 is initially trading without restrictions at a world price of $1.00,the government revenue from a tariff of $0.50 per unit is represented by area
A) c
B) e + g
C) i + e + f
D) d + e
E) e
Q2) Ad valorem tariffs on imports are based on a percentage of an import's value; specific tariffs are based on a lump sum per physical unit imported.
A)True
B)False
Q3) In Exhibit 19-3,with a tariff of $0.50 per unit and a world price of $1.00,
A) 25 units will be exported
B) 25 units will be imported
C) 50 units will be exported
D) 50 units will be imported
E) 10 units will be exported
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Chapter 19: International Finance
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Sample Questions
Q1) Utopia would be a debtor nation
A) if consumers in other countries bought goods and services from Utopia
B) only if it had a deficit in its current account
C) only if it had a deficit in its balance of goods and services
D) if it had a deficit in its balance of trade
E) if it had a deficit after adding together the balances in both its current account and its capital account
Q2) The U.S.demand curve for foreign currency is drawn holding constant all except one of the following factors.Which is the exception?
A) income in the United States
B) the inflation rate in the United States
C) incomes in the rest of the world
D) the interest rate in the United States relative to the rest of the world
E) tastes and preferences of Americans for foreign goods
Q3) The current international financial system is a managed float system.
A)True
B)False
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Chapter 20: Developing and Transitional Economies
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Q1) If Gloria is woman in a developing country,then it is likely that
A) she is less educated than most men in her country
B) her brother has dropped out of high school,but not she has graduated
C) she has more employment opportunities and earns higher wages than her male classmates
D) she and other women will not have to work long hours in agriculture
E) she has special access to resources such as land,capital,and technology
Q2) Developing countries
A) do not benefit from foreign aid
B) do not benefit from private investment
C) generate less than half of their annual flow of foreign exchange from exports
D) must acquire foreign exchange in order to pay for imports
E) need to decrease labor productivity
Q3) Export promotion has been more successful than import substitution.
A)True
B)False
Q4) Education makes people more receptive t new ideas and methods,which leads to economic development.
A)True
B)False
Page 22
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Chapter 21: Understanding Graphs
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Sample Questions
Q1) In Exhibit 1-2,curve A has a __________ slope that is __________ at every point.
A) positive; constant
B) positive; changing
C) negative; constant
D) negative; changing
E) changing; constant
Q2) On a graph,the origin represents
A) the dependent variable
B) the variable that is the primary source of causation
C) a caption or explanatory description of the symbols,colors,and measurements used on the graph
D) the point at which the values of both variables are zero
E) ancestry
Q3) A curved line may have a positive slope or a negative slope,but it cannot have both positive and negative areas of slope.
A)True
B)False
Q4) The slope of an inverted U-shaped curve is infinity at the top of the curve.
A)True
B)False
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Chapter 22: National Income Accounts
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Sample Questions
Q1) In Exhibit 7-5,Personal Income equals
A) $410 billion
B) $385 billion
C) $365 billion
D) $390 billion
E) $420 billion
Q2) Disposable income is
A) personal income minus personal taxes
B) national income plus transfer payments
C) NDP minus personal income tax
D) personal income minus transfer payments
E) national income minus transfer payments plus taxes
Q3) Which one of the following is not included in National Income?
A) employee compensation
B) proprietors' income
C) rental incomes of persons
D) corporate profits
E) gross interest income
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Chapter 23: Variable Net Exports
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Q1) An increase in the value of the U.S.dollar relative to foreign currencies would lead to
A) an increase in U.S.exports and a decrease in U.S.imports
B) a decrease in U.S.exports and an increase in U.S.imports
C) an increase in both U.S.imports and U.S.exports
D) a decrease in both U.S.exports and U.S.imports
E) no change in exports and an increase in U.S.imports
Q2) As U.S.income rises,U.S.imports will rise.
A)True
B)False
Q3) If imports increase as disposable income increases,economic growth will __________ net exports and contribute to a trade __________.
A) increase; deficit
B) increase; surplus
C) decrease; deficit
D) decrease; surplus
E) not affect; balance
Q4) As U.S.income falls,U.S.exports will fall.
A)True
B)False
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Chapter 24: Variable Net Exports Revisited
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Q1) Refer to Exhibit 10-8.Which dotted-line segment represents an increase in autonomous spending?
A) a
B) b
C) c
D) d
E) e
Q2) Exports are an injection into the circular flow.
A)True
B)False
Q3) Imports increase as domestic income increases.
A)True
B)False
Q4) In a model which includes variable net exports,the spending multiplier equals 1/(MPS + MPM).
A)True
B)False
Q5) Imports are a leakage from the circular flow.
A)True
B)False
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Chapter 25: The Algebra of Income and Expenditure
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Q1) If Y = C + I + G + (X - M)and Y = $190,C = $100,I = $50 and G = $50 then,in equilibrium,X - M must equal
A) -$20
B) -$10
C) $10
D) $20
E) $50
Q2) If the net export function is 500 - 0.15Y,then an increase in income of $1,000 will decrease net exports by $150.
A)True
B)False
Q3) Equilibrium output equals autonomous spending multiplied by the spending multiplier.
A)True
B)False
Q4) Increases in consumption that result from increases in investment are called induced consumption.
A)True
B)False
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Chapter 26: The Algebra of Demand-Side Equilibrium
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Q1) If the government raised transfer payments by $100 million while reducing its own purchases of computers by $100 million,we would expect the net effect of these actions to be
A) an increase in aggregate demand,which is a rightward shift of the aggregate demand curve
B) an increase in aggregate demand,which is a leftward shift of the aggregate demand curve
C) a decrease in aggregate demand,which is a rightward shift of the aggregate demand curve
D) a decrease in aggregate demand,which is a leftward shift of the aggregate demand curve
E) to leave the aggregate demand curve unchanged
Q2) If the MPC equals 0.75 and the proportional income tax rate is 0.2,the spending multiplier equals
A) 3
B) 2.5
C) 16/13
D) 1
E) 4
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