Introduction to Economics Exam Questions
Course Introduction
Introduction to Economics provides students with a comprehensive overview of fundamental economic principles and concepts, including the basics of supply and demand, market structures, consumer and producer behavior, and the roles of government in the economy. The course explores both microeconomic and macroeconomic perspectives, offering insights into how individuals, businesses, and societies allocate scarce resources to meet various needs and wants. Through real-world examples and analytical tools, students develop critical thinking skills to understand and evaluate economic issues, preparing them for further study in the field and for informed decision-making in their personal and professional lives.
Recommended Textbook
Economics Private and Public Choice 14th Edition by
David A. Macpherson
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Chapter 1: The Economic Approach
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Sample Questions
Q1) Which of the following actions is consistent with the basic economic postulate (the guidepost) that incentives matter?
A) Consumers buy fewer potatoes when the price of potatoes increases.
B) A politician votes against a pay raise for himself because most of his constituents are strongly opposed to it and would vote against him in the next election.
C) Farmers produce less corn because corn prices have declined.
D) All of the above.
Answer: D
Q2) Economic choice and competitive behavior are the result of A) scarcity.
B) poverty.
C) public ownership of resources.
D) private ownership of resources.
Answer: A
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Chapter 2: A : Some Tools of the Economist
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Sample Questions
Q1) Refer to Figure 2-10. What is the opportunity cost of the movement from point A to point C?
A) 50 baseballs
B) 100 baseballs
C) 100 bananas
D) 300 bananas
Answer: B
Q2) A point outside the production possibilities curve represents a combination of goods that is
A) inefficient.
B) efficient.
C) unattainable.
D) attainable.
Answer: C
Q3) Creative destruction refers to the process where
A) new products and methods of production are continuously replacing old ones
B) producing more of one good causes you to produce less of another
C) everybody involved is made worse off
D) new ways to destroy buildings are employed
Answer: A
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Chapter 2: B : Some Tools of the Economist
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Q1) An airline ticket from Baltimore to Miami costs $525. A bus ticket is $325. Traveling by plane will take 5 hours, compared with 25 hours by bus. Thus, the plane costs $200 more but saves 20 hours of time (Hint: Note how we are "thinking at the margin" here by looking at the changes). Other things constant, an individual will gain by choosing air travel if, and only if, each hour of her time is valued at more than
A) $10 per hour.
B) $13 per hour.
C) $20 per hour.
D) $105 per hour.
Answer: A
Q2) In a market economy,
A) a larger income for one person means a smaller one for another.
B) the government answers all the basic economic questions.
C) a larger income for one person means it is possible for others to earn more too.
D) economic output shrinks as we discover better ways of doing things.
Answer: C
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Chapter 3: A : Supply, Demand, and the Market Process
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Q1) Other things constant, a decrease in consumer income will
A) decrease the demand for large-screen television sets.
B) increase the demand for large-screen television sets.
C) cause a movement along the demand curve for large-screen television sets, but it will not shift the demand curve.
D) have no impact on the quantity demanded or the demand curve for large-screen television sets.
Q2) A decrease in demand will cause
A) an increase in supply.
B) a decrease in supply.
C) an increase in quantity supplied.
D) a decrease in quantity supplied.
E) an increase in equilibrium price.
Q3) Ceteris paribus, an increase in the price of a good will cause the
A) quantity demanded of the good to increase.
B) quantity supplied of the good to decrease.
C) producer surplus derived from the good to increase.
D) supply of the good to decrease.
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Chapter 3: B : Supply, Demand, and the Market Process
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Q1) Refer to Figure 3-21. At the quantity Q ,
A) the market is in equilibrium.
B) consumer surplus is maximized.
C) the sum of consumer surplus and producer surplus is maximized.
D) the value to buyers is less than the cost to sellers.
Q2) Which of the following is most likely to lead to an increase in the rental price of apartments near your campus?
A) lower property taxes on apartment buildings
B) an unexpected increase in enrollment at your college
C) lower prices for the bricks used in the construction of apartments
D) the building of a new large dormitory on the college campus
Q3) Market prices are
A) conveyors of information.
B) determined by the interactions of supply and demand in voluntary exchange.
C) indicators of the relative scarcity of resources and products.
D) all of the above.
Q4) Economists maintain that the price of a product has no effect on demand. How can this be true?
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Chapter 4: A : Supply and Demand: Applications and Extensions
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Q1) Which of the following generalizations about the benefit of a subsidy is correct?
A) The more inelastic the supply of a product, the larger the portion of the benefit will be to buyers.
B) The more inelastic the demand for a product, the larger the portion of the benefit will be to buyers.
C) The more elastic the supply of a product, the smaller the portion of the benefit will be to buyers.
D) The distribution of the benefit of a subsidy is not affected by the elasticity of the supply and demand for the product for which the subsidy is granted.
Q2) The Laffer curve indicates that
A) when tax rates are low, a decrease in tax rates is likely to increase tax revenues.
B) when tax rates are high, an increase in tax rates is likely to a decrease in tax revenues.
C) tax revenue will always increase when tax rates are increased.
D) tax revenue will always decrease when tax rates are lowered.
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Chapter 4: B : Supply and Demand: Applications and Extensions
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Sample Questions
Q1) If there was an increase in the excise tax on beer, what would be the effect on the equilibrium price and quantity of beer?
A) price increases, quantity decreases
B) price decreases, quantity decreases
C) price increases, quantity increases
D) price decreases, quantity increases
Q2) Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls
A) are effective in helping the poor find housing.
B) improve the quality of housing available to consumers.
C) create a surplus of rental housing.
D) reduce the future supply of rental housing.
Q3) Suppose the U.S. government banned the sale and production of cigarettes. Which of the following would be most likely to occur?
A) No one would smoke anymore.
B) The amount of violence involved in the buying and selling of cigarettes would increase.
C) The price of cigarettes would decrease.
D) The supply for cigarettes would become elastic.
Page 9
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Chapter 5: Difficult Cases for the Market and the Role of Government
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Q1) When a nuclear-powered electrical plant is permitted to dump radioactive waste at no cost into a recreational waterway lowering the value boaters receive from the waterway, the
A) firm's cost of producing electricity will be higher than the community's true opportunity cost.
B) firm will tend to produce too little electricity from the viewpoint of economic efficiency. C) community generally receives an external benefit from the production of electricity.
D) firm's cost of producing electricity will be lower than the community's true opportunity cost.
Q2) Which of the following is the best example of a public good?
A) long distance telephone service
B) national defense
C) an amusement park
D) the electric service of a public utility
Q3) How does the text define economic efficiency? Is this an absolute or a relative definition? Would another type of definition be preferable? Why or why not?
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Chapter 6: The Economics of Collective Decision-Making
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Q1) Assume that you are a member of the U.S. House of Representatives from your home state and district. Which of the following best explains why you have a strong incentive to get the federal government to finance pork-barrel projects in your district?
A) Most of the benefits of pork-barrel projects within your district will accrue to your constituents, while most of the costs will be imposed on voters from other districts.
B) Most of the costs of pork-barrel projects within your district will be imposed on your constituents, while most of the benefits will accrue to voters from other districts.
C) Pork producers are a powerful political lobby that will influence the actions of legislators in all districts.
D) This is a trick question; in a representative democracy, there is little incentive for legislators to support pork-barrel projects.
Q2) Congressman Localstuff always votes for a balanced budget amendment to the U.S. Constitution. He also always votes for spending bills supported by the leadership of his political party. Is this rational?
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Chapter 7: A : Taking the Nations Economic Pulse
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Q1) If inventory investment during a year was minus $6 billion, producers must have
A) produced only $6 billion of new capital assets during the year.
B) sold $6 billion more goods and services during the year than they produced.
C) added goods valued at $6 billion to their stock of unsold goods and raw materials.
D) produced new capital assets that exceeded the depreciation allowance by $6 billion.
Q2) From the producer's viewpoint, GDP is best thought of as an indicator of the A) good things consumed during the period.
B) wealth of a nation.
C) costs incurred producing goods and services during the period.
D) social welfare of the nation.
Q3) In an economy with persistent inflation,
A) real GDP will grow faster than nominal GDP.
B) nominal GDP will grow faster than real GDP.
C) nominal and real GDP will grow at the same rate.
D) nominal and real GDP will both fall.
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Chapter 7: B : Taking the Nations Economic Pulse
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Sample Questions
Q1) Refer to Table 7-14. What is this country's net exports?
A) 35
B) -35
C) 115
D) -115
Q2) Determine whether each of the following transactions will be counted in the 2005 GDP of the United States. If the transaction is counted, identify which expenditure component (personal consumption, gross investment, government consumption and gross investment, or net exports) will be affected.
a.Norm, a frequent visitor to a local bar, purchases a Budweiser beer. (Budweiser beer is domestically produced.)
b.The owner of the local bar purchases a new domestically made cooler unit in which to store his beer.
c.Carla, a U.S. foreign exchange student, works her way through college in Germany as a waitress in a bar.
d.On her night off, Carla purchases a Budweiser beer for her friend in the German bar.
Q3) Discuss the problems with GDP as a measure of a country's current production and income.
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Chapter 8: Economic Fluctuations, Unemployment, and Inflation
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Sample Questions
Q1) John begins looking for work after two years of not working because he believes his prospects of finding a job have greatly improved. The Bureau of Labor Statistics would classify John as
A) not in the labor force.
B) on layoff.
C) unemployed.
D) not in the labor force because he is on vacation.
Q2) The distinguishing characteristics of business cycles are
A) periods of inflation followed by periods of deflation.
B) high rates of economic growth coupled with high rates of unemployment.
C) a constant rate of economic growth coupled with ups and downs in the general level of prices.
D) periods of growth in real output followed by periods of decline.
Q3) When information about potential jobs is costly to acquire and individuals must spend time searching for jobs, which type of unemployment will result?
A) frictional
B) seasonal
C) structural
D) cyclical
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Chapter 9: A : an Introduction to Basic Macroeconomic Markets
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Q1) A decrease in the dollar price of the English pound will make
A) U.S. exports to England increase.
B) U.S. exports less expensive for the English.
C) imports from England more expensive for Americans.
D) U.S. exports to England decrease.
Q2) If the quantity supplied of euro were greater than the quantity demanded, then the price of the
A) euro would rise.
B) euro would fall.
C) dollar would fall.
D) euro would be in equilibrium.
Q3) If the price level in the current period is lower than what buyers and sellers anticipated,
A) profit margins will be unattractive, and firms will expand output.
B) profit margins will be unattractive, and firms will reduce output.
C) profit margins will be attractive, and firms will expand output.
D) profit margins will be attractive, and firms will reduce output.
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Chapter 9: B : an Introduction to Basic Macroeconomic Markets
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Sample Questions
Q1) Answer the following questions:
a.What is a bond?
b.If bonds make fixed payments every year, explain how a reduction in market interest rates will increase the price of the bond in the market.
Q2) How does the aggregate goods and services market differ from the regular supply and demand graph in Chapter 3? Address the measures of price, quantity, and the demand and supply curve(s).
Q3) Within the framework of the AS/AD model, which of the following is a true statement regarding short-run aggregate supply?
A) An increase in prices temporarily improves profit margins because important components of costs are fixed in the short run.
B) An increase in prices leads to higher interest rates, which temporarily improves profit margins.
C) An increase in prices leads to an expansion in the money supply, which stimulates additional output.
D) An increase in prices increases real wage rates and thereby expands the size of the economy's resource base.
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Chapter 10: Dynamic Change, Economic Fluctuations, and the Ad-As Model
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Sample Questions
Q1) Figure 10-5 indicates that the output of the economy is
A) greater than the economy's long-run capacity.
B) equal to the economy's long-run capacity.
C) less than the economy's long-run capacity.
D) consistent with long-run equilibrium.
Q2) The economy's short-run (SRAS ) and long-run (LRAS) aggregate supply curves are shown in Figure 10-15, along with three alternative aggregate demand curves and the accompanying equilibrium points. At which point will resource prices naturally tend to increase?
A) A
B) B
C) C
D) D
Q3) When output is less than the economy's long-run capacity, which of the following is most likely to occur?
A) an abnormally low rate of unemployment
B) reductions in real interest rates and real resource prices
C) a sharp increase in imports
D) a government budget surplus
Page 17
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Chapter 11: Fiscal Policy: the Keynesian View and Historical Perspective
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Q1) Within the framework of the Keynesian model,
A) changes in output rather than changes in prices direct the economy to equilibrium.
B) changes in prices rather than changes in output direct the economy to equilibrium.
C) changes in interest rates and resource prices will direct the economy to equilibrium.
D) the economy will continually be in equilibrium.
Q2) According to the Keynesian model, which of the following policies would be most appropriate during a period of rapid inflation?
A) a tax cut
B) a budget deficit
C) a budget surplus
D) an increase in the money supply
Q3) Within the Keynesian model, the multiplier effect tends to
A) smooth out the up- and down- swings of the business cycle.
B) promote price stability.
C) magnify small changes in spending into much larger changes in output and employment.
D) reduce the impact of an increase in investment on output and employment.
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Chapter 13: A : Money and the Banking System
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Q1) Which of the following items are counted in M2?
A) stock mutual funds
B) money-market mutual funds
C) bond mutual funds
D) all of the above
Q2) If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments?
A) Banks are legally required to expand loans when the Fed creates excess reserves.
B) Maintaining reserves in excess of demand deposits is against the law.
C) Banks fear the Fed will remove the excess reserves.
D) Loans and investments generally earn more interest income for the banks than excess reserves.
Q3) In the United States, the control of the money supply is the responsibility of the A) Federal Reserve System (the Fed).
B) the president.
C) the U.S. Treasury.
D) the U.S. Congress.
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Chapter 14: Modern Macroeconomics and Monetary Policy
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Q1) A shift to a more expansionary monetary policy will have its greatest effect on A) the interest rate on a 30-year fixed-rate mortgage.
B) the interest rate on 10-year government bonds.
C) short-term interest rates.
D) the 15-year corporate bond interest rate.
Q2) If the amount of money in circulation is $400 billion and the nominal GDP is $800 billion, the velocity of money is A) 0.5.
B) 2.
C) 4.
D) 8.
Q3) Which of the following policies would be most likely to reduce the rate of inflation?
A) sale of government bonds by the Federal Reserve
B) a reduction in the discount rate
C) an increase in the size of the federal budget deficit
D) a reduction in the required reserves imposed on the banking system
Q4) Write out the equation of exchange. What assumptions did the classical economists make about the variables that compose the equation, and what did this lead them to conclude about money and prices?
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Chapter 17: Institutions, Policies, and Cross-Country
Differences in Income and Growth
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Q1) Which of the following economies was most economically free during 1980-2009?
A) Singapore
B) Russia
C) Iran
D) Myanmar
Q2) During 1980 through 2009,
A) the per capita income of high-income industrial countries declined.
B) the fastest growing economies in the world were LDCs.
C) almost all LDCs grew more rapidly than the high-income industrial economies.
D) most of the countries with rapid growth rates during the last two decades were located in South America.
Q3) Countries with more economic freedom have levels of economic growth that
A) are generally higher than those of nations with less economic freedom.
B) are similar to those of nations with less economic freedom since the level of investment, not economic freedom, determines the growth rate.
C) cannot continue at high levels because too little government planning is being done.
D) are generally lower than the growth rates of countries with less economic freedom.
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Chapter 18: Gaining From International Trade
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Q1) Nevada is the low opportunity cost producer of computer software, and California is low opportunity cost producer of wine. Which of the following is true?
A) Nevada has no comparative advantage over California in the production of wine or computer software.
B) Nevada has a comparative advantage in producing wine
C) Nevada has a comparative advantage in producing software.
D) Nevada has a comparative advantage in producing both wine and software.
Q2) If the U.S. put an import quota on vacuum cleaners, it would
A) raise U.S. net exports of vacuum cleaners and raise net exports of other U.S. goods.
B) raise U.S. net exports of vacuum cleaners and lower net exports of other U.S. goods.
C) lower U.S. net exports of vacuum cleaners and raise net exports of other U.S. goods.
D) lower U.S. net exports of vacuum cleaners and lower net exports of other U.S. goods.
Q3) What is the law of comparative advantage, and why is it important in international trade?
Q4) What is the difference between a tariff and a quota?
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Chapter 19: International Finance and the Foreign Exchange Market
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Q1) A currency board is an entity that
A) issues a currency with a floating value relative to a widely accepted currency.
B) promises to continue to redeem the issued currency at the prevailing market rate.
C) controls the domestic supply of money by buying and selling bonds and other liquid assets.
D) provides 100% backing for all currency issued.
Q2) If the United States experiences an economic boom, how will this affect the foreign exchange value of the U.S. dollar?
A) It will fall because other nations would be forced to raise their interest rates.
B) It will fall because the United States will import more goods and services, leading to an increased demand for foreign currencies.
C) It will rise because U.S. GDP would be rising faster than other countries.
D) It will rise because the Fed will have to lower U.S. interest rates.
E) It will rise because the United States will import more goods and services, leading to an increased demand for foreign currencies.
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Chapter 20: Consumer Choice and Elasticity
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Q1) For a price increase from $10 to $11, the price elasticity of the demand curve depicted in Figure 7-8 is
A) highly inelastic.
B) relatively inelastic.
C) approximately equal to -1.
D) approximately equal to -2.
Q2) The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
A) ice cream must be eaten quickly.
B) this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers. C) the market is broadly defined.
D) other flavors of ice cream are good substitutes for this particular flavor.
Q3) If the quantity of oranges purchased decreases by 30 percent as the result of a 15 percent increase in the price of oranges, the price elasticity of demand for oranges is A) -0.25.
B) -0.50.
C) -1.25.
D) -2.
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Chapter 21: A : Costs and the Supply of Goods
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Q1) When would sunk costs be irrelevant for current decision making?
A) when the sunk costs are computed using accounting methods
B) when the sunk costs are greater than variable costs
C) when the sunk costs have been incurred only a short time ago
D) Sunk cost are always irrelevant when making current decisions.
Q2) In 1632, the Virginia Legislature decreed that all love apples must be sold for $1 per bushel (no more, no less). At the time, Mr. McKintoch had 1,000 bushels of love apples ready for harvesting. His sunk costs were $1,100, and his total costs (including sunk costs) would have been $1,800 if he harvested. If McKintoch decided not to harvest because he did not think he could cover his total costs, he
A) made the wrong decision, but for the right reason.
B) made the wrong decision; the sunk cost component of total cost should not have affected his decision to harvest.
C) made the correct decision and considered the correct decision-making criteria; a firm should never sell for less than its costs.
D) One cannot determine from the data whether he should have harvested the love apples.
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Chapter 21: B : Costs and the Supply of Goods
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Q1) James opened a baseball manufacturing operation, and initially the more balls he made, the lower the per-unit cost. Now, as output expands, his per-unit costs are rising. He concludes that diseconomies of scale have set in. Is he correct? Why?
Q2) The AB Manufacturing Company has hired an economist to evaluate its financial situation. She explains to the board of directors that the company is making zero economic profit. Should the company go out of business?
Q3) The boss observes that her 10 workers produce 1,000 widgets a day. She concludes that she can employ 20 workers and make 2,000 widgets, 30 to make 3,000, or 40 to make 4,000. Explain why this observation is either correct or incorrect.
Q4) Mr. Jones pays his employees by the hour. He believes they purposely work slowly to maximize their personal satisfaction. What can he do to provide them with a stronger incentive to work efficiently?
Q5) If the ABC Company decides to take over the XYZ Corporation by purchasing all of the stock of XYZ, what does this tell us about the view ABC holds of XYZ?
Q6) Suppose you are planning to open a lemonade stand. List separately all the explicit and implicit costs that might be involved.
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Chapter 22: A : Price Takers and the Competitive Process
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Q1) When the market price is $60 in Figure 9-9, the firm's maximum daily profit will be approximately
A) zero.
B) $100.
C) $900.
D) $1,200.
Q2) Profit-maximizing firms enter a competitive market when, for existing firms in that market,
A) total revenue exceeds fixed costs.
B) total revenue exceeds total variable costs.
C) average total cost exceeds average revenue.
D) price exceeds average total cost.
Q3) If a firm is losing money, this implies that
A) consumers do not understand the value of the product.
B) the value of the resources used to make the product is being reduced.
C) the firm must go out of business immediately.
D) this product cannot be produced profitably in the long run.
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Chapter 22: B : Price Takers and the Competitive Process
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Q1) Which of the following products would most closely fit the competitive price-taker model?
A) stereo systems-there are many reputable brands.
B) beer-it has many consumers.
C) eggs-there are many producers of this relatively homogeneous product.
D) automobiles-there are substantial economies of scale in production.
Q2) Regarding costs of production, can a firm ever be at a point that is not on the marginal cost curve? Explain.
Q3) When a firm is operating in a price-taker market, marginal revenue is
A) equal to price.
B) always less than price.
C) equal to zero when the market is in long-run equilibrium.
D) equal to the change in output divided by the change in total revenue.
Q4) In some industries, like insurance, both small and very large firms coexist and compete quite effectively in the market. This indicates that the long-run average total cost curve in these industries
A) is "U" shaped.
B) is downward sloping over all levels of output.
C) exhibits constant returns to scale over a wide range of output.
D) exhibits diseconomies of scale beginning at a low rate of output.
Page 32
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Chapter 23: Price-Searcher Markets With Low Entry Barriers
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Sample Questions
Q1) Which of the following is the major reason why most economists are reluctant to charge price searcher markets with allocative inefficiency?
A) Consumers value the wider variety of quality and styles in competitive price-searcher markets.
B) Advertising costs are typically so small that they are irrelevant.
C) Competitive price searchers always operate that the lowest point on their average total cost curve.
D) Competitive price searchers charge a price equal to marginal cost.
Q2) If a profit-maximizing restaurant is going to increase its revenues by charging senior citizens (persons age 65 and over) lower prices than other customers,
A) the demand of senior citizens for the services of the restaurant must be inelastic.
B) senior citizens must have lower incomes than other potential customers.
C) the demand of senior citizens for the services of the restaurant must be elastic.
D) senior citizens must have higher incomes than other potential customers.
E) other customers must enjoy food more than senior citizens.
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Chapter 24: A : Price-Searcher Markets With High Entry
Barriers
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Sample Questions
Q1) Cartels are difficult to maintain because
A) antitrust laws are difficult to enforce.
B) cartel agreements are conducive to monopoly outcomes.
C) there is always tension between cooperation and self-interest in a cartel.
D) firms pay little attention to the decision made by other firms.
Q2) When economists talk about a barrier to entry, they are referring to A) a factor that makes it difficult for potential competitors to enter a market.
B) the opportunity cost of equity capital that is incurred by a firm producing at minimum total cost.
C) the downward-sloping portion of the long-run average total cost curve.
D) the declining output experienced as additional units of a variable input are used with a given amount of a fixed input.
Q3) From Figure 11-9, indicate the maximum profit a pure monopolist with the cost and demand conditions above would be able to achieve.
A) BFEC
B) AGEC
C) BHEC
D) EFH
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Chapter 24: B : Price-Searcher Markets With High Entry
Barriers
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Q1) Why does the U.S. government maintain a monopoly in the delivery of first-class mail? Does the Postal Service nevertheless face other forms of competition?
Q2) For which of the following reasons do regulatory agencies sometimes fail to bring the price and output of a natural monopoly to the ideal level?
A) The regulatory agency does not have all the information concerning a firm's true costs.
B) Monopolists may conceal profits by inflating the costs of production by spending money to achieve personal objectives (a very nice office building, for example).
C) Regulatory agencies often come to reflect the views of the industries they are supposed to regulate.
D) All of the above are reasons.
Q3) Suppose all automobile manufacturers have collusively agreed to sell their cars at a uniform price. If a firm wanted to break this agreement and not be detected, what would be one way to do this?
Q4) One answer to the problem of natural monopoly is provision of the good by a government-owned and operated firm. Why is that option not used very often?
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Chapter 25: The Supply of and Demand for Productive Resources
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Q1) Refer to Table 12-5. At which number of workers does diminishing marginal product begin?
A) 2
B) 3
C) 4
D) 5
Q2) If skilled labor costs three times as much as unskilled labor, a profit-maximizing firm will vary the quantity of each type of labor used until the A) amount of unskilled labor used is three times the quantity of skilled labor used. B) amount of unskilled labor used is one-third the quantity of skilled labor used. C) marginal product of skilled labor is one-third that of unskilled labor. D) marginal product of skilled labor is three times as great as that of unskilled labor.
Q3) Why is a college graduate more likely to get a job in management than is someone with only a high school diploma, even when the job has nothing to do with a specific type of education?
Q4) There is an Italian soccer player who makes more than $10 million a year. Why?
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Chapter 26: Earnings, Productivity, and the Job Market
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Q1) Economic theory suggests that the standard of living of American workers would fall if the
A) knowledge and skills of workers improved, reducing the need for workers.
B) United States had more natural resources.
C) United States turned to more automated methods of production.
D) productivity of American workers declined.
Q2) Economic theory suggests that the standard of living of American workers would rise if
A) technological change increased output per worker.
B) the minimum wage were doubled.
C) automation were outlawed.
D) a larger proportion of the labor force was unionized.
Q3) Suppose that Japanese and Chinese workers are equally productive, but Japanese workers receive a higher wage than Chinese workers. Then, refusing to hire Chinese workers would
A) increase the firm's costs.
B) decrease the firm's costs.
C) increase the firm's profits.
D) decrease the firm's profits.
E) do both a and d.
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Chapter 27: Investment, the Capital Market, and the Wealth of Nations
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Sample Questions
Q1) If the interest rate is 10 percent, the current value of $400 to be received two years from now is
A) $330.58.
B) $363.64.
C) $376.77.
D) $389.48.
Q2) If we want to produce more capital goods during the present time period, we must
A) increase current consumption.
B) lower future consumption.
C) reduce current consumption.
D) reduce our savings rate.
Q3) For the past several decades, the percentage of national income in the United States allocated to human capital (employees and self-employed workers) has been approximately
A) 20 percent.
B) 40 percent.
C) 60 percent.
D) 80 percent.
Q4) In a barter economy that had no form of currency, how could interest exist?
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Chapter 28: Income Inequality and Poverty
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Q1) Assume that Peter is a single parent who is in poverty. He receives food stamps and Medicaid. For every $100 that he earns, Peter loses $35 of his food stamp benefits and $20 in his Medicaid benefits. Also, Peter's income is taxed at a rate of 10 percent. Then, Peter's effective marginal tax rate is
A) 45 percent.
B) 55 percent.
C) 65 percent.
D) 70 percent.
Q2) Which of the following has contributed to the rising income inequality in the United States?
A) The proportion of single-parent families has increased.
B) The proportion of dual-earner families has increased.
C) Earnings differentials between skilled and less-skilled workers have increased.
D) all of the above
Q3) Andy observes that the income distribution between the richest and poorest people in the population has remained fixed for decades. He concludes that the rich stay rich and the poor stay poor. Is this a valid conclusion, or has Andy missed something?
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Special Topic 1 : Government Spending and Taxation
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Q1) Compared to 1980, the top marginal federal income tax rate today is
A) substantially lower and the rate structure is less progressive than in 1980.
B) substantially lower and the rate structure is more progressive than in 1980.
C) substantially higher and the rate structure is less progressive than in 1980.
D) substantially higher and the rate structure is more progressive than in 1980.
Q2) Which of the following is true?
A) Real federal spending per person was approximately 50 times higher in 1900 than 1800.
B) Real federal spending per person was approximately 80 times higher in 2010 than 1916.
C) Real federal spending per person grew slowly under the Reagan Administration during the 1980s, but it increased rapidly under the Clinton administration in the 1990s.
D) In recent years, government expenditures at the state and local levels have been greater than government spending at the federal level.
Q3) Discuss how size of government can negatively affect economic growth.
Q4) As real incomes grow, what happens to federal tax revenues as a share of the economy?
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Special Topic 2 : The Economics of Social Security
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Sample Questions
Q1) The net value to the federal government of the bonds currently held in the Social Security Trust Fund is
A) approximately $1 trillion.
B) now approaching $2 trillion.
C) greater than $2.5 trillion.
D) zero, because the federal government is both the payee and recipient of the interest and principal represented by these bonds.
Q2) Which of the following is true?
A) Labor participation tends to increase as spousal earnings increase.
B) Social Security works to the disadvantage of low-wage workers due to their shorter life expectancy.
C) Low-wage workers derive a higher rate of return from their Social Security taxes than high-wage workers.
D) High-wage workers generally begin full-time work at younger ages than low-wage workers.
Q3) Jane states that "Social Security is an unfair program. It discriminates against married women in the workforce and middle-income recipients." Evaluate this view.
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Special
and Potential as an Investment Opportunity
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Q1) During the 1970s, the price/earnings ratio of stocks in the S&P 500 was relatively low. This low P/E ratio was
A) surprising because the inflation rate was high during the 1970s.
B) not surprising because interest rates were low during the inflationary 1970s.
C) not surprising because interest rates were high during the inflationary 1970s.
D) surprising because the inflation rate was low during the 1970s.
Q2) Which of the following is true?
A) Investment in the stock market is a relatively foolproof method for an investor to earn a high rate of return during the next five years.
B) Current stock prices already reflect information that is known with a high degree of certainty.
C) Experts are able to predict changes in the direction of the broad stock market indexes with a high degree of accuracy.
D) While changes in the prices of specific stocks are difficult to predict, it is relatively easy to predict the future direction of the broad stock market.
E) Both c and d are true.
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Special Topic 4 : Great Debates in Economics: Keynes
Versus Hayek
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Q1) John Maynard Keynes and Friedrich Hayek
A) had similar views with regard to the cause of the Great Depression and what might be done to prevent it from happening again.
B) both believed that perverse monetary policy was the primary cause of the ups and downs of the business cycle.
C) both believed that budget deficits and surpluses could be used to smooth the ups and downs of the business cycle.
D) had polar opposite views with regard to the underlying causes of economic booms and bust, but nonetheless their scholarly work commanded widespread respect among economists.
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43
Special Topic 5 : The Crisis of 2008: Causes and Lessons for the Future
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Q1) Fannie Mae and Freddie Mac's dominance of the secondary mortgage market during 1995-2008 encouraged mortgage originators to
A) extend only 30-year, fixed-rate mortgages.
B) require higher down payments in order to obtain a home mortgage.
C) loosen lending standards as long as the mortgages were acceptable to Fannie Mae and Freddie Mac.
D) scrutinize the credit-worthiness of borrowers more carefully.
Q2) Which of the following is true of regulation?
A) Regulatory agencies often ignore the secondary effects of their actions and fail to foresee future problems.
B) Policy-makers are hesitant to call for new regulations even when it is clear they would help avert future crises.
C) Mortgage lending and banking have historically been unregulated and therefore regulation in these sectors will be unpopular.
D) Past regulations have been effective at averting crises, but they are unpopular because they reduce the profitability of the regulated industry.
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Special Topic 6 : Lessons from the Great Depression
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Q1) Which of the following is a lesson that can be learned from monetary policy during the Great Depression?
A) Monetary policy should be changed frequently in response to economic fluctuations.
B) Prolonged periods of monetary contraction will retard economic growth.
C) Low interest rates will direct an economy toward recovery.
D) Monetary policy should focus on variables such as output and employment.
Q2) Which of the following conditions during 2008-2009 most closely paralleled the economic conditions of the Great Depression?
A) record-high unemployment rates for a period of many years
B) a sharp and prolonged contraction in the money supply
C) significant increases in taxes and trade restrictions in order to counter budget deficits
D) frequent policy changes that generated an unstable and unpredictable economic climate
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Special Topic 7 : Lessons from Japan and Canada
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Q1) As the elderly population of a nation expands as a share of the total,
A) government expenditures on health care and retirement programs will generally decline.
B) economic growth is likely to slow because of a slowdown in the growth of productivity and higher taxes on current workers.
C) economic growth is likely to increase because the retirement of older workers will create high-paying jobs for younger workers.
D) government spending as a share of the economy in high-income countries like the United States will tend to fall.
Q2) As the share of a nation's population age 65 and older expands,
A) the productivity growth of the population will tend to increase.
B) the productivity growth of the population will tend to slow.
C) the nation will become more productive as more jobs become available for younger workers.
D) government expenditures on the elderly will decrease.
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Special Topic 8 : The Federal Budget and the National Debt
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Q1) Deficit spending and a large national debt can have important effects on future generations because they
A) make it possible for those living in the present to pass the opportunity costs of current government spending on to future generations.
B) can significantly impact spending on capital formation.
C) will pass interest obligations on to future generations with no corresponding benefits.
D) will cause the government to go bankrupt.
Q2) Given the underlying demographic changes in our society, we can expect
A) budget surpluses to outnumber budget deficits in the years ahead.
B) the number of budget surpluses to be approximately equal to the number of budget deficits in the years ahead.
C) budget deficits to outnumber budget surpluses in the years ahead.
D) budget deficits one year to be followed by a budget surplus the next so that the budget balances every two years.
Q3) Many people assert that the national debt is not a problem because "we owe it to ourselves." Is this true?
Q4) What is the difference between the federal budget deficit and the national debt?
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Special Topic 9 : The Economics of Healthcare
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Q1) Real expenditures on Medicare and Medicaid
A) rose during the 1970s and 1980s, but they have been declining since 1990.
B) fell during the 1970s and 1980s, but they have been increasing since 1990.
C) increased at about the same rate as real GDP during the last three decades.
D) have approximately doubled during each of the last three decades.
Q2) During the last four decades, the share of health-care expenditures paid for by third parties (either the government or insurance companies)
A) has remained relatively constant.
B) fell from approximately 60 percent in 1960 to 30 percent in 2007.
C) increased from approximately 45 percent in 1960 to over 85 percent in 2007.
D) declined during the 15 years following the passage of Medicare but has been increasing since 1980.
Q3) In 2007, health-care expenditures were approximately what percent of GDP?
A) 6 percent
B) 16 percent
C) 26 percent
D) 36 percent
Q4) How has public policy influenced the incentives of consumers to economize and suppliers to provide their services economically in the health-care industry?
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Special Topic 10 : Education: Problems and Performance
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Sample Questions
Q1) Since 1970, real spending per student in American public elementary schools has A) fallen substantially.
B) fallen modestly.
C) not changed.
D) doubled
Q2) Which of the following factors helps explain why public school administrators have little economic incentive to operate efficiently?
A) Public schools have substantial monopoly power.
B) The funding levels for public schools are determined by politicians rather than directly by consumers.
C) It is expensive for consumers to switch from a public to a private school.
D) All of the above are true.
Q3) A school voucher program targeted towards low- and middle-income families would cause
A) racial and economic segregation among schools to rise.
B) per-pupil funding in the public schools to fall.
C) salaries for outstanding teachers to rise.
D) competition between public and private schools to fall.
Q4) What does the evidence suggest regarding the effects of school choice programs?
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Special Topic 11 : Earnings Differences Between Men and Women
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Q1) Which of the following is true?
A) Due to anti-employment discrimination legislation that was passed in the early 1960s, there was a large increase in the earnings of women relative to men in the 1960s and 1970s.
B) The female/male earnings ratio for full-time workers rose substantially between 1980 and 2010.
C) The number of women preparing for careers as professionals has declined during the last two decades.
D) In 2010, only about 42 percent of those completing college degrees were women.
Q2) In 1961, ____ percent of college degrees were earned by women.
A) 19
B) 29
C) 39
D) 51
Q3) Traditionally, men have been more willing to accept jobs that A) required continuous employment in the labor force.
B) require relocation if necessary to get a higher paying job.
C) have long working hours.
D) All of the above are correct.
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Special Topic 12 : Do Labor Unions Increase the Wages of Workers?
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Sample Questions
Q1) A union representing a group of workers will tend to be stronger when
A) there are no good substitutes for the labor services of the unionized workers.
B) the domestic producers of the good produced by the unionized workers face intense competition from foreign suppliers of the good.
C) the cost of employing the unionized workers is a large part of the total cost of the product that they produce.
D) the demand for the good produced by the unionized workers is highly elastic.
Q2) Which of the following factors will make it easier for a labor union to increase the wages of its members?
A) a highly inelastic demand for the products produced by the union labor
B) a readily available supply of similar products produced by nonunion labor
C) low tariffs and strong competition from foreign firms producing the products supplied by the union labor
D) a reduction in the demand for the products produced by the union labor
Q3) In a strike, what does the union have to lose? What does management lose?
Q4) What common goals, if any, do labor and management share?
Q5) List some factors that might make the threat of a strike more effective.
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Special Topic 13 : The Question of Resource Exhaustion
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Q1) If proved reserves of a mineral amount to twelve years of use at the current rate of consumption,
A) it is likely, though not certain, that we will run out of that mineral in about twelve years.
B) we are likely to run out of the mineral in less than twelve years if our rate of use has been increasing.
C) if the good becomes more scarce relative to supply in the future, its price will rise and thereby encourage both conservation and exploration.
D) if proved reserves diminish, lower prices will extend the day of exhaustion well into the future.
Q2) Economic theory indicates that the amount consumed of a natural resource depends on
A) the price of the resource.
B) consumer income.
C) the price of substitute resources.
D) all of the above.
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Special Topic 14 : Difficult Environmental Cases and the
Role of Government
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Sample Questions
Q1) Pollution charges will be efficient if
A) the charge is just equal to the cost borne by others from the pollution.
B) the charge is greater than the cost borne by others from the pollution.
C) the charge is less than the cost borne by others from the pollution.
D) none of the above.
Q2) Economic thinking indicates that efficient adaptation strategies to reduce harms from future global warming will
A) focus on reducing overall carbon emissions.
B) emphasize changes like those imposed on prosperous nations by the Kyoto Treaty.
C) focus on reducing the effects of serious problems that we know to exist.
D) ensure that every precaution will be taken to reduce any possible risks for the future.
Q3) When is the definition and enforcement of property rights especially difficult?
A) When many polluters harm a large group of people with the same pollutant.
B) When a single polluter is harming a single person or entity.
C) When land is owned by a corporation.
D) When the benefits of prosecution are clear.
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