Introduction to Economics Test
Preparation
Course Introduction
Introduction to Economics provides students with a foundational understanding of how economies function at both the individual and societal levels. This course explores the basic principles of microeconomics and macroeconomics, including supply and demand, market structures, consumer and producer behavior, national income, inflation, unemployment, and government intervention. Through real-world examples and analytical tools, students learn to analyze economic issues, make informed decisions, and understand the impact of economic policies on individuals, businesses, and nations.
Recommended Textbook
Essential Foundations of Economics 6th Edition by Robin Bade
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Page 2
Chapter 1: Getting Started
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Sample Questions
Q1) A linear relationship
A)when graphed is a straight line.
B)when graphed is a line whose slope changes.
C)can be a positive or a negative relationship.
D)Both answers A and C are correct.
E)Both answers A and B are correct.
Answer: D
Q2) In the diagram above, which figure(s)show(s)an inverse relationship between the variables?
A)both B and C
B)only B
C)both A and C
D)only D
E)only C
Answer: B
Q3) Define marginal cost and marginal benefit.
Answer: Marginal cost is the opportunity cost of a one-unit increase in an activity. Marginal benefit is the benefit of a one-unit increase in an activity.
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Chapter 2: The Us and Global Economies
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Sample Questions
Q1) In the goods market, firms ________ and households ________.
A)purchase goods and services; supply goods and services
B)supply land, labor, capital, and entrepreneurship services; hire land, labor, capital, and entrepreneurship services
C)pay rent, wages, interest, and profit; earn rent, wages, interest, and profit
D)supply goods and services; purchase goods and services
E)hire land, labor, capital, and entrepreneurship services; supply goods and services
Answer: D
Q2) Which of the following correctly describes how the "global pie is baked"?
A)Advanced economies account for about 50 percent of the value of the world's production.
B)The U.S.'s share of economic pie is increasing while China's share is decreasing.
C)The increase in manufacturing has taken place in mainly the advanced economies.
D)Asia accounts for about 40 percent of the global pie.
E)Emerging economies account for about 25 percent of the global pie.
Answer: A
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Chapter 3: The Economic Problem
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Sample Questions
Q1) If Country A can produce an extra plane by giving up two boats, and Country B can produce an extra plane by giving up three boats, then
A)Country A has a comparative advantage over Country B in the production of planes.
B)Country B has a comparative advantage over Country A in the production of planes.
C)the two countries have no incentive to trade with one another.
D)Country A would like to trade with B, but B cannot gain by trading with A.
E)Country A has an absolute advantage in producing planes and a comparative advantage in producing boats.
Answer: A
Q2) The idea of increasing opportunity cost is reflected in the
A)bowed out shape of the production possibilities frontier.
B)bowed in shape of the production possibilities frontier.
C)linear shape of the production possibilities frontier.
D)positive slope of the production possibilities frontier.
E)fact that the PPF shows there are unattainable production points.
Answer: A
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Chapter 4: Demand and Supply
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Sample
Questions
Q1) The demand for cat food decreases while the supply increases. The equilibrium price of cat food ________, and the equilibrium quantity ________. A)does not change; increases B)rises; decreases C)falls; perhaps changes but we can't say if it increases, decreases, or stays the same D)rises; perhaps changes but we can't say if it increases, decreases, or stays the same E)falls; increases
Q2) Pizza is a normal good. Which figure above shows the effect of a decrease in consumers' incomes?
A)Figure A
B)Figure B
C)Figure C
D)Figure D
E)Both Figure B and Figure C
Q3) What are substitutes in production?
Q4) Explain the difference between a change in demand and a change in quantity demanded. What leads to each of these changes?
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Chapter 5: Elasticities of Demand and Supply
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Sample Questions
Q1) The table above gives the demand schedule for a good. Using the midpoint method, find the price elasticity of demand between points A and B, between B and C, between C and D, and between D and E.
Q2) What factors determine the size of the price elasticity of demand?
Q3) The data in the table above give two points on the demand curve for pizza. Using the midpoint method, when the price of a pizza falls from $10 to $9, what is the price elasticity of demand?
A)0.5
B)0.6
C)0.9
D)2.1
E)8.6
Q4) If substitutes for a good are readily available, the demand for that good
A)does not change substantially if the price rises.
B)does not change substantially if the price falls.
C)is inelastic.
D)is elastic.
E)Both answers A and B are correct.
Q5) Explain the total revenue test.
Q6) List factors that increase the price elasticity of supply.
Page 7
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Chapter 6: Efficiency and Fairness of Markets
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Sample Questions
Q1) In the figure above, when 4,000 pizzas are produced, the marginal benefit of a pizza ________ its marginal cost, which means ________ pizza is being produced.
A)exceeds its marginal cost; too little
B)exceeds its marginal cost; too much
C)is below its marginal cost; too much
D)is below its marginal cost; too little
E)equals its marginal cost; the efficient quantity of
Q2) Efficiency in a market occurs when the production of the good is such that
A)marginal benefit exceeds marginal cost.
B)marginal benefit equals marginal cost.
C)marginal benefit is lower than marginal cost.
D)the marginal cost stops increasing.
E)marginal benefit exceeds marginal cost by the maximum amount possible.
Q3) Marginal cost equals
A)the profitability derived from producing another unit of output.
B)all the opportunity cost of producing the amount of output.
C)or exceeds the marginal benefit.
D)productive efficiency.
E)the opportunity cost of producing one more unit of output.
Q4) Compare and contrast production efficiency and allocative efficiency.
Page 8
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Chapter 7: Government Actions in Markets
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Sample Questions
Q1) In the labor market, as wages rise, households
A)decrease the quantity of labor supplied.
B)increase the quantity of labor supplied.
C)decrease the quantity of labor demanded.
D)increase the quantity of labor demanded.
E)increase the supply of labor.
Q2) The demand for gasoline is inelastic and the supply of gasoline is elastic. Therefore,
A)sellers bear most of the incidence of a tax on gasoline.
B)buyers bear most of the incidence of a tax on gasoline.
C)the government bears most of the incidence of a tax on gasoline.
D)the incidence of a tax on gasoline depends if the tax is imposed on sellers or on buyers.
E)None of the above answers is correct.
Q3) Discuss the inefficiencies created by a price floor.
Q4) Who gains from a price support? Who loses?
Explain how the size of the gain compares to the size of the loss.
Q5) In the housing market, if a rent ceiling of $600.00 is imposed when the equilibrium rent is $500.00, why will nothing change?
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Chapter 8: Global Markets in Action
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Sample Questions
Q1) Economists argue for free trade in export markets because
A)all consumers and producers benefit from exporting goods.
B)the gains to the U.S. producers outweigh the losses to the U.S. consumers.
C)the gains to the U.S. consumers outweigh the losses to the U.S. producers.
D)no one is made worse off by exporting goods.
E)exporting goods decreases total surplus.
Q2) Which of the following is an argument that is used for protection from free trade?
I. the national security argument
Ii. the infant-industry argument
Iii. the dumping argument
A)i only
B)ii only
C)iii only
D)i and iii
E)i, ii, and iii
Q3) What is "rent seeking"?
How does it apply to restricting imports?
Q4) How does a quota affect the domestic price of the import, the domestic consumption, the domestic production, and the quantity imported?
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Chapter 9: Externalities: Pollution, Education, and Health Care
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Sample Questions
Q1) The figure above shows the costs and benefits associated with producing paper. What is the efficient level of output?
A)0
B)4 tons
C)6 tons
D)More than 6 tons
E)None of the above answers is correct.
Q2) The figure above shows the costs and benefits associated with producing paper. What is the unregulated competitive market level of output?
A)0
B)4 tons
C)6 tons
D)More than 6 tons
E)None of the above answers is correct.
Q3) Explain the difference between a negative production externality and a negative consumption externality.
Q4) If the production of a good causes pollution (an external cost)is the unregulated competitive market equilibrium of that product efficient?
Page 11
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Chapter 10: Production and Cost
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Sample Questions
Q1) The law of decreasing returns states that as a firm uses more of a
A)fixed input, with a given quantity of variable inputs, the marginal product of the fixed input eventually decreases.
B)variable input, total output will increase indefinitely.
C)variable input, with a given quantity of fixed inputs, the marginal product of the variable input eventually decreases.
D)variable input, output will begin to fall immediately.
E)fixed input and a variable input, the marginal product of the fixed input and the marginal product of the variable input both decrease.
Q2) Based on the figure above, curve B is the firm's A)marginal cost curve.
B)total cost curve.
C)average total cost curve.
D)average variable cost curve.
E)average fixed cost curve.
Q3) Which curve shows the lowest average total cost at which it is possible to produce each output when the firm has time to change both its labor force and plant size?
Q4) What do economists mean when they say that a firm's plant is fixed?
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Page 12
Chapter 11: Perfect Competition
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Sample Questions
Q1) What is the shape of the demand curve faced by the perfectly competitive firm, and why?
Q2) The four market types are
A)perfect competition, imperfect competition, monopoly, and oligopoly.
B)oligopoly, monopsony, monopoly, and imperfect competition.
C)perfect competition, monopoly, monopolistic competition, and oligopoly.
D)oligopoly, oligopolistic competition, monopoly, and perfect competition.
E)perfect competition, imperfect competition, monopoly, and duopoly.
Q3) The firm in the figure above has a total cost equal to ________.
A)$5.14 × 7
B)$3.00 × 7
C)($5.14 - $3.00)× 7
D)($3.00 - $5.14)× 7
E)None of the above answers are correct because more information is needed.
Q4) The characteristics that describe a perfectly competitive industry include
A)many firms selling an identical product.
B)one firm selling to many buyers.
C)many firms selling a slightly differentiated product.
D)a few firms selling to many buyers.
E)None of the above answers is correct.
Page 13
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Chapter 12: Monopoly
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Sample Questions
Q1) Christy's Haircuts, the sole supplier of haircuts in a small town, faces the demand schedule shown in the table above. What is Christy's marginal revenue from the 35th haircut?
A)zero
B)-$5.00
C)$5.00
D)$12.50
Q2) Suppose a single-price monopoly sells 3 units of a good at $20 per unit. If the monopoly sells 4 units, the total revenue increases to $72. What is the marginal revenue of the fourth unit?
A)$52
B)$18
C)$60
D)$12
E)$20
Q3) What potential problem is there with rate of return pricing?
Q4) How does marginal revenue compare to price for a single-price monopoly?
Q5) Compare and contrast the marginal cost and average cost pricing rules for regulating natural monopolies.
Page 14
Q6) What are the conditions that define a monopoly?
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Chapter 13: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) Firms decide how much to spend on product development and marketing by
A)spending the same amount as they did in previous years.
B)spending the historical average of 1/4 of total production cost.
C)determining what it will take to eliminate excess capacity.
D)balancing the cost and the benefit of product development and marketing.
E)ensuring that the marginal cost of product development and marketing is less than or equal to the marginal cost of producing the good or service.
Q2) If a firm in monopolistic competition is earning an economic profit,
A)it is in the long run.
B)other firms can enter the market.
C)it can do so because it is "monopolistic" and other firms will have a hard time competing with it.
D)its average cost must exceed its marginal cost.
E)The question errs because firms in monopolistic competition cannot earn an economic profit.
Q3) How do product development and marketing affect a firm in monopolistic competition?
Q4) In a cartel, how does the number of firms affect the likelihood that the cartel will be able to successfully maintain a high price?
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Chapter 14: Gdp: a Measure of Total Production and Income
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Sample Questions
Q1) The following are all final goods EXCEPT
A)flour used by the baker to make cupcakes.
B)bread eaten by a family for lunch.
C)pencils used by a 6th grader in class.
D)Nike shoes used by a basketball player.
E)a computer used by Intel to design new computer chips.
Q2) Are stocks and bonds considered part of the investment component of GDP?
Q3) Which of the following would be included in Germany's GNP?
A)the production of BMWs (made by a German-based company)in South Carolina
B)the production of Michelin tires made in Germany by a French company and then sold directly to French consumers
C)the production of BMWs in Germany
D)the production of Michelin tires made in France by a French company and then sold to BMW in Germany for use in BMW cars
E)Answers A and C are correct.
Q4) "To calculate GDP, economists begin with total income earned and then subtract total expenditure by the four sectors of the economy." Is the previous sentence true or false?
Explain your answer.
Page 16
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Chapter 15: Jobs and Unemployment
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Sample Questions
Q1) Full employment occurs when
A)the unemployment rate is zero.
B)the cyclical unemployment rate is zero.
C)the frictional unemployment rate is zero.
D)the sum of frictional and structural unemployment is zero.
E)the structural unemployment rate is zero.
Q2) For the past decade, the unemployment rate in Western Europe has been higher than the unemployment rate in the United States. Based on this fact, is the natural unemployment rate larger in Western Europe or in the United States? Why might the natural rates differ between the two areas?
Q3) During a recession,
A)real GDP is equal to potential GDP.
B)real GDP is less than potential GDP.
C)real GDP is greater than potential GDP.
D)the relationship between real GDP and potential GDP no longer exists.
E)the actual unemployment rate is less than the natural unemployment rate.
Q4) Suppose the population is 220 million people, the labor force is 150 million people, the number of people employed is 130 million and the working-age population is 175 million people. What is the unemployment rate?
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Chapter 16: The Cpi and the Cost of Living
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Sample Questions
Q1) Mark has a two-year wage contract with his employer. Mark's wage contract specifies a $50,000 salary for the first year, and specifies a salary increase equal to the percentage increase in the CPI during the second year. The percentage increase in the CPI during the year was 4.0 percentage points. If the CPI overstates inflation by 1.0 percentage point, at the end of the first year Mark's salary increased by ________ more than it would have without the upward bias.
A)$50
B)$3000
C)$500
D)$1500
E)$2000
Q2) Since 1305, of the following centuries the inflation rate has been the highest during the
A)17th century.
B)16th century.
C)20th century.
D)14th century.
E)15th century.
Q3) Explain the difference between a nominal value and a real value.
Q4) What is inflation and how is it measured using the Consumer Price Index?
Page 18
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Chapter 17: Potential Gdp and Economic Growth
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Sample Questions
Q1) The level of real GDP the economy produces at full employment is
A)an unattainable level.
B)potential GDP.
C)never reached in reality.
D)called the Lucas level.
E)the maximum amount of GDP that can ever be produced.
Q2) A reason a nation faces diminishing returns along a production function is because
A)unemployment always exists.
B)potential GDP is fixed.
C)the quantity of physical capital is fixed.
D)full employment is not possible.
E)the wage rate is fixed while moving along the production function.
Q3) Which of the following is true?
A)Real GDP fluctuates around potential GDP.
B)Potential GDP fluctuates around nominal GDP.
C)Nominal GDP fluctuates around real GDP.
D)Real GDP never equals potential GDP.
E)The Okun Gaps are much larger than the Lucas Wedge.
Q4) What is economic freedom and why is it important for economic growth?
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Chapter 18: Money and the Monetary System
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Sample Questions
Q1) Money must be ________ which includes the fact that is should ________.
A)in physical form; not be transferable using electronic means
B)accepted as a means of payment across countries' borders; not be fiat money
C)generally accepted as a means of payment; be recognizable and divisible into small parts
D)whatever is used in a barter system; transferable across countries' borders
E)backed by gold; not decrease in value over time
Q2) Banks earn a profit by
A)keeping as many reserves on hand as possible.
B)making loans at a lower interest rate than the rate that they offer on their deposits.
C)charging an interest rate on their depositors' accounts.
D)making loans at a higher interest rate than the rates that they offer on their deposits.
E)not paying interest on their reserves.
Q3) Are the members of the Board of Governors of the Federal Reserve System elected officials?
Q4) If a bank receives an additional deposit of $50,000 and the desired reserve ratio is 20 percent, what is the amount of new loans the bank can make?
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Chapter 19: Aggregate Supply and Aggregate Demand
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Sample Questions
Q1) An increase in ________ increases potential GDP and ________ aggregate supply.
A)technology; increases
B)technology; decreases
C)the money wage rate; increases
D)the money price of oil; decreases
E)the money wage rate; decreases
Q2) If the money wage rate rises,
A)the AS curve shifts rightward.
B)there is a movement up along the AS curve.
C)the AS curve shifts leftward.
D)there is a movement down along the AS curve.
E)there is neither a movement along or a shift in the AS curve.
Q3) In the figure above, the shift in the aggregate demand curve from AD to AD could be result of
A)a fall in the price level.
B)a decrease in the quantity of money.
C)an increase in government expenditures on goods and services.
D)an increase in taxes.
E)a rise in the price level.
Q4) How does the aggregate demand curve reflect an increase in aggregate demand?
Page 21
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Chapter 20: Fiscal Policy and Monetary Policy
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Sample Questions
Q1) Discretionary fiscal policy is handicapped by
A)law-making time lags, induced taxes, and automatic stabilizers.
B)law-making time lags, estimation of potential GDP, and economic forecasting.
C)economic forecasting, law-making time lags, and induced taxes.
D)automatic stabilizers, law-making time lags, and potential GDP estimation.
E)automatic stabilizers, the multipliers, and potential GDP estimation.
Q2) When the Federal Reserve increases the federal funds rate, bank loans ________, the supply of loanable funds ________, and the real interest rate ________.
A)decrease; decreases; rises
B)do not change; decreases; rises
C)increase; increases; falls
D)increase; increases; rises
E)decrease; does not change; rises
Q3) What is the effect on aggregate demand and the AD curve from either an increase in government expenditure or a cut in taxes?
Q4) How does a rise in the federal funds rate affect aggregate demand, real GDP, and the price level?
Q5) When would the Fed want to carry out a monetary policy that decreases aggregate demand?
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