Introduction to Economics Exam Review
Course Introduction
Introduction to Economics provides students with a foundational understanding of economic principles and concepts, exploring how individuals, businesses, and governments make choices about allocating scarce resources. The course covers key topics such as supply and demand, market equilibrium, elasticity, consumer behavior, production costs, and the role of government in the economy. Students also examine broader macroeconomic issues, including inflation, unemployment, and economic growth. Through real-world examples and practical applications, this course equips students with the analytical tools necessary to interpret economic trends and make informed decisions in both personal and professional contexts.
Recommended Textbook
Macroeconomics 12th Edition by Michael Parkin
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Chapter 1: What Is Economics?
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Q1) Suppose we are considering the relationship between two variables y and x. y is measured on the y-axis and x is measured on the x-axis, and the relationship between then is a straight line. Suppose that the slope of the line is positive and is less than 1. This slope means that a change in x is associated with
A) a bigger change in y.
B) a smaller change in y.
C) no change in y.
D) an equal change in y.
Answer: B
Q2) In the above, which figure shows a linear relationship?
A) Figure A
B) Figure B
C) both Figure A and Figure B
D) neither Figure A nor Figure B
Answer: C
Q3) What does the slope of the line shown in the above figure equal?
Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or (18 - 27)/(10 - 20) = 0.90.
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Chapter 2: The Economic Problem
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Q1) A country produces only pencils and erasers. Pencil production is allocatively efficient if the marginal ________ of a pencil equals the marginal ________ of
A) cost; benefit; an eraser
B) cost; cost; an eraser
C) benefit; benefit; an eraser
D) benefit; cost; a pencil
Answer: D
Q2) Tom takes 20 minutes to cook an egg and 5 minutes to make a sandwich. Jerry takes 15 minutes to cook an egg and 3 minutes to make a sandwich. Both individuals will be better off if
A) Tom trades sandwiches in exchange for eggs.
B) Jerry trades sandwiches in exchange for eggs.
C) they trade, no matter who trades sandwiches and who eggs.
D) they don't trade.
Answer: B
Q3) Households are buyers in factor markets and sellers in goods markets.
A)True
B)False
Answer: False
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Chapter 3: Demand and Supply
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Q1) When both the demand for a good increases and the supply of the good increases, the equilibrium quantity definitely increases.
A)True
B)False
Answer: True
Q2) If both demand and supply increase, what will be the effect on the equilibrium price and quantity?
A) Both the price and the quantity will increase.
B) The quantity will increase but the price could either rise, fall, or remain the same.
C) The price will fall but the quantity will increase.
D) The price will rise but the quantity could either increase, decrease, or remain the same.
Answer: B
Q3) Soft drinks and milk are substitutes for consumers. Draw a graph showing the effect of an increase in the price of milk on the demand for soft drinks.
Answer: 11ea1607_da38_f7fb_ba9d_2f3b09620816_TB3035_00 The increase in the price of milk increases the demand for soft drinks, as illustrated in the figure above.
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Chapter 4: Measuring GDP and Economic Growth
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Q1) The figure above shows a time-series graph. The horizontal axis measures ________ and the vertical axis measures ________.
A) time; x-values
B) time; the variable of interest
C) the variable of interest; time
D) y-values; the variable of interest
Q2) If Frito Lay, an American snack company, opens a new manufacturing facility in Mexico and produces snacks which are distributed in South America, then Mexico's GDP ________ and U.S. GDP ________.
A) increases; does not change
B) does not change; increases
C) increases; decreases
D) increases; increases
Q3) Real GDP measures the
A) total profits earned by all businesses valued using prices from a single year.
B) changes in the prices of output measured in dollars.
C) general upward drift in prices.
D) value of total production linked to prices of a single year.
Q4) What is the relationship between actual and potential real GDP?
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Chapter 5: Monitoring Jobs and Inflation
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Q1) If last year's price level was 100 and this year's price level is 114, over the year the inflation rate has been
A) 14 percent.
B) 114 percent.
C) 12 percent
D) 100 percent.
Q2) In September 2012 the U.S. unemployment rate was 7.8 percent while the natural unemployment rate was 6 percent. The U.S. economy
A) had a negative output gap.
B) had a positive output gap.
C) had an output gap of zero.
D) was at full employment.
Q3) What is a discouraged worker? How do they affect the unemployment rate?
Q4) Frictional unemployment is
A) unemployment associated with business cycle recessions.
B) unemployment associated with the changing of jobs in a changing economy.
C) long-term unemployment.
D) unemployment associated with declining industries.
Q5) How does the unemployment rate change in a recession and in an expansion?
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Chapter 6: Economic Growth
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Q1) Saving and investment that increase a nation's capital lead to
A) slower growth because there is a lack of consumption.
B) a decrease in labor productivity as capital is used to replace labor.
C) a decrease in the amount of capital per worker.
D) an increase in labor productivity.
Q2) Which of the following statements are CORRECT?
I.The average economic growth rate in real GDP per person in the United States over the last century was 5 percent per year.
II.The United States has the highest economic growth rate of any nation.
A) I only
B) II only
C) both I and II
D) neither I nor II
Q3) What are the basic arguments of the neoclassical growth theory?
Q4) The gaps between the United States and the Asian countries of Honk Kong, Singapore, Korea and China have been
A) decreasing
B) increasing
C) remaining fairly constant
D) there are no gaps between these Asian countries and the United States
Page 8
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Chapter 7: Finance, Saving, and Investment
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Q1) In 2010, the United States and foreign economies start to recover from the recession. U.S. firms increase their profit expectations. As a result, the demand for loanable funds curve shifts ________ and the real interest rate ________.
A) leftward; decreases
B) rightward; decreases
C) leftward; increases
D) rightward; increases
Q2) The Ricardo-Barro effect says that
A) government budget deficits have no crowding out effect because taxpayers increase their savings to match the quantity of loanable funds demanded by the government. B) government budget deficits crowd out private investment and thereby lower the real interest rate.
C) government budget deficits resulting from an increase in government expenditure have no effect on investment but government deficits resulting from a decrease in taxes crowd out investment.
D) government budget deficits cause households to save more in anticipation of higher taxes, which causes higher real interest rates.
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Chapter 8: Money, the Price Level, and Inflation
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Q1) Which of the following best describes the chain of events in the money creation process?
A) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves.
B) Currency is drained from the quantity of money into the banking system, where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money.
C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases.
D) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money.
Q2) Money ________.
A) is always composed of coins and paper
B) loses its value as it becomes older
C) requires a double coincidence of wants
D) is any commodity that is generally acceptable as a means of payment
Q3) Give an example of how money functions as a unit of account.
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Chapter 9: The Exchange Rate and the Balance of Payments
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Q1) Purchasing power parity means equal rates of return.
A)True
B)False
Q2) Using the data in the above table, if the government sector runs a deficit of $250 billion and net exports equal -$500 billion, then saving must equal
A) $450 billion.
B) $250 billion.
C) $1,350 billion.
D) $400 billion.
Q3) In the above table, the government sector balance is a
A) surplus of $200 billion.
B) deficit of $200 billion.
C) surplus of $100 billion.
D) deficit of $100 billion.
Q4) The current account records all transactions below EXCEPT for
A) net exports of goods and services.
B) net interest income.
C) net foreign investment.
D) net transfers.
Q5) How do the capital account and the current account differ?
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Chapter 10: Aggregate Supply and Aggregate Demand
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Q1) A classical economist believes that
A) if the economy was left alone, it would rarely operate at full employment.
B) the economy is self-regulating and always at full employment.
C) the economy is self-regulating and will normally, though not always, operate at full employment if monetary policy is not erratic.
D) the economy is self-regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic.
Q2) An individual holds $10,000 in a checking account and the price level rises significantly. Hence
A) the individual's real wealth and consumption expenditure decrease.
B) the individual's real wealth decreases but real national wealth increases.
C) there is no change in the individual's real wealth.
D) the individual's real wealth increases.
Q3) The aggregate demand curve shows
A) total expenditures at different levels of national income.
B) the quantity of real GDP demanded at different price levels.
C) that real income is directly (positively) related to the price level.
D) All of the above answers are correct.
Q4) What is the difference between a recessionary gap and an inflationary gap?
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Chapter 11: Expenditure Multipliers
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Q1) The slope of the saving function is equal to A) the MPS.
B) the MPC.
C) 1- MPS.
D) None of the above answers is correct.
Q2) In the above figure, if real GDP is below $15 trillion, inventories will be A) below target levels, so firms will increase production. B) below target levels, so firms will decrease production. C) above target levels, so firms will increase production. D) above target levels, so firms will decrease production.
Q3) How is it possible for consumption expenditure to be positive even when disposable income is zero?
Q4) As disposable income increases, there is a ________ the saving function. A) leftward shift of the B) movement along C) rightward shift of D) change in the slope of
Q5) Discuss the relationship between the business cycle and changes in autonomous expenditures.
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Q6) What effect does an increase in the MPC have on the slope of the AE curve?
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Chapter 12: The Business Cycle, Inflation, and Deflation
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Q1) When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand
A) there will be no unemployment.
B) workers will overestimate the real wage rate.
C) unemployment will be at the natural rate.
D) workers will underestimate the real wage rate.
Q2) The factor leading to business cycles according to the real business cycle theory is changes in
A) the growth rate of the quantity of money.
B) technological change caused by changes in productivity.
C) productivity caused by changes in technology.
D) investment caused by changes in business confidence.
Q3) Which of the following CORRECTLY describes the new classical cycle theory of the business cycle?
A) An unexpected change in the quantity of money can trigger a business cycle.
B) An expected tax rate change can trigger a business cycle.
C) An unexpected change in the price of oil can trigger a business cycle.
D) Rational expectations keep the money wage from changing quickly.
Q4) What is the impulse that leads to business cycle in the real business cycle, RBC, theory?
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Chapter 13: Fiscal Policy
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Q1) Economic data for a mythical economy in the years 2012-2016 are summarized in the figure above. Assume that the spending formulas and tax schedules are identical for all years. When the economy is at full employment, the government has a
A) budget surplus.
B) balanced budget.
C) budget deficit.
D) procyclical policy.
Q2) Fiscal policy attempts to achieve all of the following objectives EXCEPT ________.
A) a stable money supply
B) price level stability
C) full employment
D) sustained economic growth
Q3) Needs-tested spending ________ during recessions and ________ during expansions.
A) decreases; decreases
B) decreases; increases
C) increases; decreases
D) increases; increases
Q4) How can discretionary fiscal policy be used to close a recessionary gap?
Q5) How does a tax on labor income affect potential GDP?
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Chapter 14: Monetary Policy
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Q1) If the interest rate on Treasury bills is higher than the federal funds rate, the quantity of overnight loans supplied ________ and the ________ for Treasury bills increases. A) decreases; demand B) decreases; supply C) increases; demand D) increases; supply
Q2) In December, the Bank of England reduced interest rates by another 50 basis points (a basis point is 0.01 percentage point)after it had cut them by 150 basis points in November. But the rate cut may even be larger. Economists "... expect the Monetary Policy Committee [MPC] to cut rates to 2.5 percent,"...while others "...saw a bigger 75 point cut"...or "a 100 basis point move."
Reuters, 11/27/2008
In order to ________, the Bank of England's rate cut must ________. A) decrease consumption; increase the long-run interest rate B) increase real GDP; decrease the nominal long-run interest rate C) decrease real GDP; increase the real long-run interest rate D) increase consumption; decrease the real long-run interest rate
Q3) What is the effect of lowering the interest rate on net exports? Explain your answer.
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Chapter 15: International Trade Policy
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Q1) What is "rent seeking?" How does it apply to restricting imports?
Q2) Using calculations of the cost to Americans per job saved in protected industries, it can be concluded that
A) import quotas are an efficient way to redistribute income.
B) each job saved is worth more than the cost imposed on consumers per job saved.
C) each job saved is worth less than the cost imposed on consumers per job saved.
D) tariffs are an efficient way to redistribute income to disadvantaged groups.
Q3) A country specializes in the production of goods for which it has a comparative advantage. We find that
A) some producers and consumers win, some lose, but overall the gains exceed the losses.
B) all producers win.
C) all consumers win.
D) producers win, consumers lose, but overall the gains exceed the losses.
Q4) The United States imposes a tariff on foreign limes. How does the tariff affect the U.S. price of a lime and the production of limes in the United States?
Q5) Explain the effects of a quota.
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