Introduction to Economics
Exam Answer Key
Course Introduction
Introduction to Economics offers students a foundational understanding of how economies function at both the individual and societal levels. The course covers fundamental economic concepts such as scarcity, opportunity cost, supply and demand, market structures, and the roles of consumers, firms, and governments. Students explore the principles of microeconomics and macroeconomics, examining how markets allocate resources, the impact of government intervention, and factors influencing economic growth and stability. Through real-world examples and analytical tools, the course provides essential insights into decision-making processes and the broader economic forces shaping our world.
Recommended Textbook
Economics USA 8th Edition Edition by
Nariman Behravesh
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Page 2
Chapter 1: What is Economics
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Q1) Proposed causes of the Great Recession include all of the following EXCEPT
A) irresponsible lending practices.
B) the bubble mentality.
C) high interest rates implemented by the Federal Reserve.
D) legislation promoting home ownership.
E) unencumbered access to global capital markets.
Answer: C
Q2) Answers to economic issues that depend on an individual's values or preferences are called ________ economics.
A) positive
B) passive
C) normative
D) mechanical
E) comparative
Answer: C
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Page 3
Chapter 2: Markets and Prices
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Q1) When supply increases in a competitive market
A) equilibrium price falls.
B) demand falls.
C) shortages emerge.
D) actual price rises.
E) quantities sold decrease.
Answer: A
Q2) A firm dumping pollutants into a stream,rendering the water unfit for use by those downstream,is an example of a(n)
A) unfair distribution of income.
B) external economy.
C) external diseconomy.
D) public good.
E) transfer payment.
Answer: C
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Chapter 3: The Business Firm: Organization,motivation,and
Optimal Input Decisions
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Q1) An important element of the Sarbanes-Oxley Act of 2002 is that it
A) sets limits on the market shares of large corporations.
B) enables the Fed to actively intervene in the stock market by buying corporate securities during times of falling stock prices.
C) tightens the standards of accountability for the top corporate officers.
D) requires corporate boards of directors to have at least one elected public official as a member.
E) prevents corporations from declaring profits that are higher than they originally estimated.
Answer: C
Q2) A firm's total output divided by the amount of input used to produce it is the ________ of the input.
A) cost
B) supply
C) average product
D) marginal product
E) combined product
Answer: C
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Chapter 4: Getting Behind the Demand and Supply Curves
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Q1) In a market economy,consumer purchases depend on their A) costs and what they can charge.
B) production decisions.
C) income, tastes, and market prices.
D) expenses, supply, and levels of activity.
E) past outlook and state of technology.
Q2) Which of the following factors was probably most significant in putting an end to the designer jeans fad?
A) Prices got so high that people stopped buying designer jeans.
B) Producers failed to advertise enough to promote this new product effectively.
C) So many consumers bought designer jeans that they lost their uniqueness.
D) The quality of the product declined as more firms entered the market.
E) Supply decreased because of the energy crisis.
Q3) If the total cost of 100 units is $560 and the marginal cost of the 101st unit is $6
A) total cost will fall.
B) total fixed cost will rise.
C) total variable cost will fall.
D) average total cost will rise.
E) average variable cost will fall.
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Page 6
Chapter 5: Market Demand and Price Elasticity
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Q1) A negative cross elasticity of demand indicates that two commodities are A) luxuries.
B) necessities.
C) unrelated.
D) substitutes.
E) complements.
Q2) From the event depicted in the graph,one can conclude that,over the period in question,farm
A) prices and output fell.
B) prices and output rose.
C) prices and income rose.
D) output and income fell.
E) prices fell and output rose.
Q3) If a $1 price increase causes the quantity demanded to fall by 7 units,the demand is A) price elastic.
B) price inelastic.
C) unit price elastic.
D) arc price elastic.
E) undetermined; not enough information is given.
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Chapter 6: Economic Efficiency,market Supply,and Perfect Competition
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Q1) Perfectly competitive firms have zero economic profits in the long run because
A) they all produce slightly different products.
B) of nonprice competition.
C) of freedom of entry and exit.
D) of the outgrowth of advertising expenditures.
E) of the law of diminishing marginal utility.
Q2) Under perfect competition,the existence of economic profits and losses
A) produces economic inefficiencies leading to the misallocation of resources in the long run.
B) generally causes output in the short run to fall in markets where economic profits are being made and to rise in markets where economic losses are being made.
C) creates hardships for producers, leading to industry concentration in the hands of relatively few producers.
D) ensures that output will not be produced at minimum unit cost in the long run.
E) causes firms to enter or leave markets and otherwise reallocate resources in the long run.
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8
Chapter 7: Monopoly and Its Regulation
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Q1) Schumpeter argues that the rate of technological change is likely to be greater in imperfectly competitive industries because imperfectly competitive firms
A) earn profits that support expenditures on research and development.
B) lack the power necessary to keep rivals from imitating their innovations.
C) have a vested interest in maintaining demand for existing products.
D) use their power to keep out rivals who would be more inclined to use new techniques.
E) are composed of a large number of independent decision-making units that are less inclined to be conservative.
Q2) Which of the following conditions would most likely permit a monopolist to continue earning economic profits even in the long run?
A) a price below average variable cost for all levels of output
B) loss of patent protection
C) a total revenue that is lower than fixed cost for all levels of output
D) significant barriers to entry
E) loss of control over a basic input
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Chapter 8: Monopolistic Competition,oligopoly,and Antitrust Policy
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Q1) Game theory can most effectively be used to postulate behavior in ________ markets.
A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic
E) regulated
Q2) The ________ Act was designed to prevent undesirable and unfair competitive practices and was later used to outlaw deceptive advertising.
A) Sherman
B) Federal Trade Commission
C) Clayton
D) Webb-Pomerene
E) Celler-Kefauver
Q3) The presence of a price leader in an oligopolistic industry
A) implies that one firm can consistently charge the highest price.
B) allows firms to coordinate their behavior short of outright collusion.
C) decreases the profits of all other firms.
D) is illegal according to the Sherman Antitrust Act.
Page 10
E) leads naturally to cost-plus pricing by other firms in the industry.
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Chapter 9: Pollution and the Environment
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Q1) The most efficient way of reducing greenhouse gases is
A) discouraging attempts to develop alternative energy sources.
B) subsidizing "green" fuels.
C) implementing carbon taxes.
D) outlawing smog-producing industries.
E) giving away cap-and-trade permits instead of auctioning them.
Q2) When individuals do not pay the true social costs of their actions
A) these costs disappear.
B) they refrain from undertaking these actions.
C) there must be no divergence between the private and social costs of these actions.
D) social benefits exceed social costs.
E) others in society pay the costs of these actions.
Q3) Point C represents the
A) highest cost of pollution.
B) average cost of pollution.
C) optimal level of pollution
D) absence of pollution.
E) point where the costs of pollution equal the costs of pollution control.
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11
Chapter 10: The Supply and Demand for Labor
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Q1) Wage differentials that persist in labor markets because of the inability of individuals to gain the training necessary to enter highly paid occupations are an example of A) noncompeting groups.
B) a derived demand.
C) perfectly competitive homogeneous labor markets.
D) a bilateral involvement.
E) a marginal attachment.
Q2) In general,a firm should employ additional units of labor as long as A) they are willing to work.
B) their wages exceed the value of their marginal product.
C) their wage rates do not change.
D) they add at least as much to revenues as they do to costs. E) production is functioning.
Q3) This firm would hire no labor if the price per day rose above A) $6.
B) $30.
C) $40.
D) $60.
E) $80.
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Page 12
Chapter 11: Interest,rent,and Profit
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Q1) If the supply of an input is fixed,its supply curve is a(n)
A) upward-sloping line.
B) vertical line.
C) downward-sloping line.
D) horizontal line.
E) single point.
Q2) To Marx,profits were
A) a reward for risk bearing.
B) a measure of capital's productive activity.
C) a social dividend arising from the capitalist's efficiency.
D) a measure of the surplus value created by capital.
E) that part of labor's productivity the capitalist retains.
Q3) As the degree of risk connected with a loan increases,the difference between the actual rate of interest on the loan and the pure rate of interest
A) increases.
B) decreases.
C) remains unchanged.
D) becomes zero.
E) is negative.
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Page 13
Chapter 12: Poverty,income Inequality,and Discrimination
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Q1) A controversial element of the Social Security program is that A) participation is mandatory.
B) the Social Security payments are withheld dollar for dollar.
C) to collect any Social Security benefits, workers must retire at 65.
D) it is run strictly like an ordinary insurance system that ties the level of benefits directly to the amount of an individual's contributions.
E) the Social Security tax is progressive.
Q2) In the diagram
A) the tax rate is regressive over all incomes.
B) the dollar amount of tax liability falls as income rises.
C) all family incomes of less than $5,000 before taxes are raised to $5,000 with the negative tax payment.
D) families with incomes of $3,000 receive a $1,000 payment.
E) the amounts of negative and positive taxes balance out so the government will just break even.
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14
Chapter 13: Economic Growth
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Q1) Joseph Schumpeter's view of innovation and the diffusion process can be represented as
A) a continuous movement along the average product of capital curve.
B) a series of outward shifts of the marginal product curves of capital and labor.
C) a steady increase in the stock of human capital.
D) an increase over time in entrepreneurial ambitions.
E) the independent effects of workers and technology on production.
Q2) Which of the following is the best example of an innovation?
A) Boeing introduces computer-assisted design and manufacturing to the aircraft industry.
B) GM brings out its version of a minivan to compete with Chrysler's.
C) Exxon introduces a higher-octane grade of unleaded gas.
D) McDonald's increases the size of its hamburger.
E) Microsoft updates its Windows operating system.
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Chapter 14: Public Goods and the Role of the Government
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Q1) Income redistribution programs reflect a belief that
A) the poor are entitled to an income that accurately reflects their productivity.
B) economic resources should be owned and managed by the government.
C) tax structures that are regressive benefit the poor.
D) the more affluent should be taxed to allow others to take more from the nation's output than they produce.
E) poverty is necessary for the rich to practice altruism.
Q2) An external economy occurs when
A) library facilities of a university are open to the general public without charge.
B) wealthy individuals are taxed more heavily to support programs to help poor people.
C) a consumer buys a hamburger and a milkshake.
D) someone attends a regular Academy of Music performance of the Philadelphia Orchestra.
E) people smoke in public facilities.
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Chapter 15: National Income and Product
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Q1) Gross domestic product is
A) a measure of the value of all goods and services produced in a given year.
B) a measure of the value of all goods and services produced by the private sector in a given year.
C) measured, when possible, using the prices of goods and services as a measure of value.
D) equal to the total wage bill.
E) a measure of the total value of all market transactions in a given year.
Q2) The components of gross private domestic investment include
A) net exports.
B) consumer durable goods.
C) the net change in total inventories.
D) government purchases of goods and services.
E) corporate income taxes.
Q3) The greatest amount of consumer spending in the economy is on
A) durable goods.
B) nondurable goods.
C) services.
D) plants and equipment.
E) residential structures.
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Chapter 16: Business Fluctuations and Unemployment
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Q1) People temporarily out of work because they are changing jobs or looking for their first jobs are examples of ________ unemployment.
A) frictional
B) structural
C) cyclical
D) inflationary
E) residual
Q2) If full employment is defined by an unemployment rate of 5 percent,potential GDP can be estimated by multiplying
A) last year's GDP times 1.05.
B) the average output of the workforce times 95 percent.
C) the normal hours of work times last year's GDP times 100.
D) 95 percent of the labor force times the normal hours of work per year times the average output per hour of work.
E) the normal hours of work per year times the average output of the white-collar worker at the relevant time times 95.
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18
Chapter 17: The Determination of National Output and the Keynesian Multiplier
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Q1) The determinants of investment are
A) the marginal propensity to invest and the savings rate.
B) the level of gross domestic product and the marginal propensity to spend.
C) the profit rate and the equilibrium rate.
D) business expectations and the Dow Jones Industrial Average.
E) the interest rate and the expected rate of return from capital.
Q2) If total intended spending precisely equals GDP
A) inflation soars.
B) consumer spending begins to decline.
C) expected rates of return exceed interest rates.
D) unemployment rises.
E) GDP tends to remain unchanged.
Q3) If disposable income increases from $1,900 to $2,000 billion,the marginal propensity to consume is
A) 0.8.
B) 0.84.
C) 0.92.
D) 1.0.
E) 1.08.
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Chapter 18: Fiscal Policy and National Output
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Q1) Which of the following events would correct the condition shown?
A) a decrease in private sector spending
B) an increase in the money supply by the government
C) an increase in government spending accompanied by a tax cut
D) a decrease in potential output because of a natural disaster
E) a decrease in the price level through the imposition of wage and price controls
Q2) Which of the following events would correct the condition shown?
A) an increase in the money supply by the government
B) a cut in government spending accompanied by a tax increase
C) a decrease in the price level through imposing wage and price controls
D) an increase in spending by the private sector
E) a decrease in potential output because of a natural disaster
Q3) In a simple Keynesian model,an increase in government spending,other things being equal
A) increases the equilibrium GDP by a multiplier effect.
B) alters the composition of, but not the total amount of, intended spending.
C) shifts the C + I + G line downward.
D) pushes the aggregate demand curve to the left, causing price levels to fall.
E) changes the angle of the 45-degree line.
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Page 20
Chapter 19: Inflation
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Q1) Which of the following conditions imposes the largest disincentive to speculate in precious metals and collectibles?
A) runaway inflation
B) negative real interest rates
C) price stability
D) significant increases in the general price level
E) a breakdown in the monetary system
Q2) Supply-side inflation is best illustrated by a
A) rightward shift in the aggregate supply curve.
B) rightward shift in the aggregate demand curve.
C) leftward shift in the aggregate supply curve.
D) leftward shift in the aggregate demand curve.
E) simultaneous rightward shift in the aggregate supply curve and a leftward shift in the aggregate demand curve.
Q3) Unanticipated inflation clearly imposes a cost on
A) everyone, because it reduces money incomes.
B) employees working under contracts with cost-of-living increase clauses.
C) borrowers.
D) lenders.
E) foreigners, because our exports cost more.
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Chapter 20: Money and the Banking System
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Q1) In general,commercial banks receive their higher interest rates from A) service charges on demand deposits.
B) loans that have a greater degree of risk.
C) the federal funds market.
D) foreclosures.
E) capital gains in the stock market.
Q2) Bank B may now safely increase its loans by a maximum of A) $1,094.
B) $7,656.
C) $8,750.
D) $10,000.
E) $15,312.
Q3) After this process has worked its way through the banking system,the initial excess reserves in bank A will have led to an additional increase in the money supply of A) $8,750.
B) $10,000.
C) $17,500.
D) $70,000.
E) $80,000.
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Page 22
Chapter 21: The Federal Reserve and Monetary Policy
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Q1) If this same bank has its legal reserve requirement raised to 18 percent,it
A) need not do anything since it still has sufficient legal reserves to meet this new requirement.
B) must take steps to increase its demand deposits by making new loans from its reserves.
C) should discourage new demand deposit accounts until its legal reserves are increased.
D) must either sell securities or not renew loans as they come due.
E) should buy government securities to increase the money supply.
Q2) An important characteristic of the discount rate is that it
A) has a powerful effect on the money supply.
B) has a direct impact on bank reserves without changing the money supply.
C) can be changed frequently and substantially.
D) structurally alters bank credit creation.
E) has no effect on financial markets.
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Chapter 22: Supply Shocks and Inflation
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Q1) As a result of the monetary policy just undertaken,the price level
A) declines to P .
B) declines to P .
C) declines to P .
D) rises to P .
E) remains at P .
Q2) Monetary authorities might attempt to minimize the impact of the strategic input price increases on unemployment by
A) doing nothing because unemployment is unchanged.
B) increasing the money supply to shift aggregate demand to AD .
C) increasing the money supply to shift aggregate supply to AS .
D) decreasing the money supply to shift aggregate supply to AS .
E) decreasing the money supply to shift aggregate demand back to AD .
Q3) The Phillips curve illustrates the relationship between
A) the interest rate and the money supply.
B) the interest rate and the level of investment.
C) aggregate demand and aggregate supply.
D) output and income.
E) inflation and unemployment.
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Page 24
Chapter 23: Productivity,growth,and Technology Policy
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Q1) Which of the following would be conducive to developing and commercializing a new technology?
A) keeping personal tax rates low to encourage consumption
B) using monetary policy to keep interest rates high
C) policies to encourage investment in plant and equipment
D) eliminating tax provisions that allow firms to depreciate their plant and equipment
E) providing more funds for low-income families
Q2) A major U.S.tax bill that contained a provision for an incremental tax credit for research and development was passed in
A) 1981.
B) 1979.
C) 1974.
D) 1967.
E) 1963.
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Chapter 24: Surpluses,deficits,public Debt,and the Federal Budget
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Q1) The Senate committee that considers major tax legislation before it goes to the entire Senate is the ________ Committee.
A) Ways and Means
B) Finance
C) Tax Analysis
D) Tax Legislation
E) Senate Budget
Q2) The national debt differs from consumer debt in that
A) no interest is paid on the national debt.
B) the national debt is of no economic consequence.
C) most of the national debt is held by foreigners.
D) the national debt influences the amount of aggregate spending.
E) the national debt need never be paid off if it is held internally.
Q3) The 1990 budget agreement between President Bush and Congress incorporated
A) an increase in both the income tax and some excise tax rates.
B) substantial reductions in defense spending with no change in taxes.
C) a significant increase in the money supply to cover the revenue shortfall.
D) a line-item veto option the president can use to ensure a balanced budget.
E) a supply-side tax cut designed to improve worker incentives.
Page 26
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Chapter 25: Monetary Policy,interest Rates,and Economic Activity
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Q1) The transactions demand for money
A) reflects the need for money in the event of unpredictable occurrences.
B) is of major importance in a barter economy.
C) decreases as household income increases.
D) reflects expectations of lower stock and bond prices.
E) increases as real GDP rises.
Q2) If a firm borrows money at the rate of 11 percent per year and the rate of inflation is 4 percent,the real rate of interest on the loan is ________ percent.
A) 4
B) 7
C) 11
D) 15
E) 18
Q3) The money supply multiplied by its velocity of circulation equals
A) the rate of inflation.
B) the amount of unemployment.
C) nominal GDP.
D) the Consumer Price Index.
E) government spending.
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Chapter 26: Controversies Over Stabilization Policy
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Q1) In labor-management relationships,what are implicit contracts?
A) contracts imposed by outside arbitration panels
B) informal unwritten understandings between labor and management
C) agreements between management and union leaders that are kept secret from the rank and file members
D) contracts that do not specify a wage rate but ensure that workers get the current going rate
E) documents that spell out in detail the intent and meaning of the provisions in the formal contract
Q2) The notion that the appropriate monetary policy at all times is one that requires the Federal Reserve to expand the money supply at a steady rate of 4 to 5 percent per year is an example of
A) the rules of the game.
B) the rule of reason.
C) a rule of thumb.
D) a rigid policy rule.
E) a feedback policy rule.
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Chapter 27: International Trade
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Q1) If a country is absolutely more efficient than any other country in producing everything,then it would
A) simply export goods and services and import money.
B) not trade with others because there would be no benefit in doing so.
C) still benefit that nation to specialize and trade those goods in which it possesses a comparative advantage.
D) make it unnecessary for other nations to produce anything for themselves.
E) represent a refutation of the concept of comparative advantage.
Q2) A country that is able to produce many goods should specialize in those products
A) in which it has a comparative advantage.
B) in which it has an absolute advantage.
C) it needs most.
D) its citizens are most willing to pay for.
E) that command the highest price on the world market.
Q3) The advantage of trade,both for individuals and countries
A) always nets out to zero.
B) disappears when one has an absolute advantage over the other.
C) is that trade permits specialization and specialization increases output.
D) is increased when tariffs are imposed.
E) can benefit only one party in the transaction.
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Chapter 28: Exchange Rates and the Balance of Payments
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Q1) The main criticism most contemporary economists would make of the Bretton Woods agreement is that it
A) was inherently inflexible and thus not adaptable to changing economic conditions.
B) was based on the false assumption that the ability of one country to compete with another changes over time.
C) depended too heavily on adherence to the gold standard.
D) demanded a fundamental realignment of currencies for which most countries were unprepared.
E) meant that the only way to balance imports and exports was through the use of tariffs and quotas.
Q2) In the diagram above,under fixed exchange rates,a foreign currency shortage for Americans is best illustrated by distance
A) AB.
B) BE.
C) CD.
D) BE + CD.
E) BE - CD.
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Page 30