Principles of Economics Exam Bank
Course Introduction
Principles of Economics introduces students to the fundamental concepts, theories, and analytical tools of both microeconomics and macroeconomics. The course explores how individuals, firms, and governments make choices about allocating scarce resources, examining the forces of supply and demand, market equilibrium, consumer behavior, and production decisions. Students also learn about broader economic issues such as national income, inflation, unemployment, fiscal and monetary policy, and global trade. Throughout, the course emphasizes critical thinking and real-world applications, providing a foundation for further study in economics and related disciplines.
Recommended Textbook
Economics 5th Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Q1) The number of people who have gray hair is very high among residents living in Florida. A student concludes that living in Florida causes hair to turn gray. What is the flaw in this student's reasoning?
A) The student is drawing a false conclusion by making the mistake of omitting critical variables such as the age and gender of the residents.
B) The student is using an inadequate sample size.
C) The student is drawing a false conclusion; he is confusing cause and effect.
D) The student has failed to take into account other causes of gray hair.
Answer: C
Q2) Which of the following is not an example of an economic trade-off that a firm has to make?
A) whether it is cheaper to produce with more machines or with more workers
B) whether it is to outsource the production of a good or service
C) whether or not consumers will buy its products
D) whether it should produce more of its product
Answer: C
Q3) What is a marginal cost?
Answer: Marginal cost is the additional cost associated with continuing with an activity.
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Q1) Refer to Table 2-18. What is Minnie's opportunity cost of making a hat?
A) 1/5 of an umbrella
B) 1/4 of an umbrella
C) 4 umbrellas
D) 10 umbrellas
Answer: B
Q2) The production possibilities frontier model assumes which of the following?
A) Labor, capital, land and natural resources are unlimited in quantity.
B) The economy produces only two products.
C) Any level of the two products that the economy produces is currently possible.
D) The level of technology is variable.
Answer: B
Q3) Refer to Table 2-4. Assume Dina's Diner only produces sliders and hot wings. A combination of 50 sliders and 50 hot wings would appear
A) along Dina's production possibilities frontier.
B) inside Dina's production possibilities frontier.
C) outside Dina's production possibilities frontier.
D) at the vertical intercept of Dina's production possibilities frontier.
Answer: C
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Q1) Explain the difference between substitutes and complements. Answer: Substitutes are goods and services that can be used for the same purpose. Complements are goods and services that are used together.
Q2) An increase in the quantity of a product supplied is caused by an increase in the price of the product.
A)True
B)False
Answer: True
Q3) Refer to Figure 3-8. The graph in this figure illustrates an initial competitive equilibrium in the market for motorcycles at the intersection of D1 and S1 (point
A) The equilibrium point will move from A to E.
A). If the price of motorcycle engines increases, and the wages of motorcycle workers increase, how will the equilibrium point change?
B) The equilibrium point will move from A to B.
C) The equilibrium point will move from A to C.
D) The equilibrium will first move from A to B, then return to A.
Answer: B
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Chapter 4: Economic Efficiency, Government Price Setting, and Taxes
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Q1) All renters benefit from rent control and all landlords lose.
A)True
B)False
Q2) Refer to Figure 4-3. What is the total amount that Kendra is willing to pay for 1 ice cream cone?
A) $0.50
B) $3.50
C) $9.00
D) $13.50
Q3) Refer to Figure 4-11. What is the value of producer surplus after the imposition of the price floor?
A) $3,000
B) $3,600
C) $4,200
D) $4,500
Q4) Refer to Figure 4-18. How much of the tax is paid by buyers?
A) $8
B) $5
C) $4
D) $3
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Chapter 5: Externalities, Environmental Policy, and Public Goods
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Q1) Refer to Figure 5-9. An efficient way to get the firm to produce the socially optimal output level is
A) for government to set a quota on the quantity of toilet paper that the toilet paper industry can produce.
B) to impose a tax to make the industry bear the external costs it creates.
C) to grant a subsidy to enable the industry to internalize the external costs of production.
D) to assign property rights to the firms in the industry.
Q2) Refer to Figure 5-2. The private profit maximizing quantity for the firm is
A) Qa.
B) Qb.
C) Qb - Qd.
D) Qd.
Q3) If there is pollution in producing a product, then the market equilibrium price
A) is too high and equilibrium quantity is too low.
B) and equilibrium quantity are too low.
C) and equilibrium quantity are too high.
D) is too low and equilibrium quantity is too high.
Q4) What is an externality?
Page 7
Q5) How does a positive externality in consumption reduce economic efficiency?
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Chapter 6: Elasticity: the Responsiveness of Demand and Supply
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Q1) For each pair of items below determine which product would have the higher price elasticity of demand (in absolute value).
a. Insulin for a diabetic or aspirin for someone suffering a headache.
b. A new Whirlpool 27 cu. ft. side-by-side refrigerator or electricity to power your all-electric home.
c. A can of Red Bull or soft drinks in general.
Q2) Suppose the demand curve for a product is represented by a typical downward-sloping curve. Now suppose the demand for this product decreases. Which of the following statements accurately predicts the resulting decrease in price?
A) The more elastic the supply curve, the greater the price increase.
B) The more elastic the supply curve, the smaller the price decrease.
C) The increase in price is not affected by the elasticity of the supply curve.
D) The decrease in price will always be proportional to the magnitude of the demand shift.
Q3) Briefly explain the economic concept of elasticity.
Q4) Explain the concepts of cross-price elasticity of demand and income elasticity of demand. What do positive and negative values indicate for each of these demand elasticities?
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Q5) Explain the relationship between price elasticity of demand and total revenue.
Chapter 7: The Economics of Health Care
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Q1) In most circumstances, employees pay taxes on the value of health insurance their employers provide them.
A)True
B)False
Q2) A typical consumer of health care in the United States
A) pays the full price of his or her health care.
B) pays more than the full price of his or her health care.
C) does not pay any of the price of his or her health care.
D) does not pay the full price of his or her health care.
Q3) By the year 2019, health care's share of gross domestic product in the United States is projected to
A) return to its 1995 level.
B) have declined to only 6.5 percent.
C) be more than three times as high as it was in 1965.
D) reach a level of 75 percent.
Q4) In most circumstances, employees do not pay taxes on the value of health insurance their employers provide them.
A)True
B)False
Q5) How do adverse selection and moral hazard affect the market for insurance?
Page 9
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Q1) The Sarbanes-Oxley Act of 2002 was passed in response to what event?
A) a series of accounting scandals
B) unexpected increases in dividend payments to stockholders at various corporations
C) volatility in NASDAQ indexes
D) historically low bond prices
Q2) Jake sells Star Wars memorabilia on eBay. His annual revenue is $42,000 per year, and the explicit costs of his business are $10,000. What is his accounting profit?
A) $10,000
B) $22,000
C) $32,000
D) $42,000
Q3) Anything owed by a person or a firm is
A) an asset.
B) a liability.
C) a bond.
D) equity.
Q4) How is accounting profit found?
Q5) Define a partnership.
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Q1) Autarky is a situation where one country does not trade with other countries.
A)True
B)False
Q2) Refer to Table 9-11. If the actual terms of trade are 1 hat for 1.8 clocks and 150 hats are traded, how many clocks will Belize gain compared to the "without trade" numbers?
A) -100
B) 100
C) 120
D) 250
Q3) Many people assume that if child workers in developing countries weren't working in factories, they would be in school. In fact, children in developing countries
A) split their time evenly between work and school.
B) usually have few good alternatives to work.
C) are only allowed to work if they have attended school up to age 15.
D) who work are relatively rare, as most do attend school full time.
Q4) What does it mean for a country to have a comparative advantage in producing a product?
Q5) What is a tariff?
Page 11
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Chapter 10: Consumer Choice and Behavioral Economics
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Q1) Which of the following is held constant along an indifference curve?
A) the prices of the goods in question
B) the marginal rate of substitution between the two goods in question
C) the marginal utility derived from consuming any bundle of goods on the indifference curve
D) the total utility derived from consuming any bundle of goods on the indifference curve
Q2) Suppose Joe is maximizing total utility within his budget constraint. If the price of the last pair of jeans purchased is $25 and it yields 100 units of extra satisfaction and the price of the last shirt purchased is $20, then, using the rule of equal marginal utility per dollar spent, the extra satisfaction received from the last shirt must be
A) 2,000 units of utility.
B) 500 units of utility.
C) 100 units of utility.
D) 80 units of utility.
Q3) Economists assume people's tastes are identical.
A)True
B)False
Q4) What is a Giffen good?
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Chapter 11: Technology, Production, and Costs
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Q1) Which of the following are examples of a firm experiencing a positive technological change?
a. A firm is able to reduce its inputs by 15 percent and still produce the same level of output.
b. A seminar attended by the firm's workers makes them more productive.
c. A firm adds 5 percent to its workforce and is able to maintain its initial level of output.
d. A firm restructures its distribution system and is able to save on its shipping times.
e. A firm rearranges its warehouse and finds that it can use fewer workers to maintain its productivity level.
Q2) Marginal cost is calculated for a particular increase in output by
A) multiplying the total cost by the change in output.
B) multiplying the change in total cost by the change in output.
C) dividing the total cost by the change in output.
D) dividing the change in total cost by the change in output.
Q3) As the level of output increases, what happens to the value of average fixed cost, and what happens to the difference between the value of average total cost and average variable cost?
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Chapter 12: Firms in Perfectly Competitive Markets
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Q1) Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health. How will this affect a typical firm that remains in the industry?
A) The firm's supply curve shifts right and its marginal revenue curve shifts upward as the market price rises and ultimately the firm starts making profits.
B) The firm's marginal revenue curve and average cost curve shift upward in response to the increase in market price and advertising expenditure. The firm increases output until it starts breaking even.
C) The marginal revenue curve shifts upward, the firm's output increases along its marginal cost curve, it expands production and eventually starts making profits.
D) The marginal revenue curve shifts upward, the firm's output increases along its marginal cost curve, it expands production until it breaks even.
Q2) Why are individual buyers and sellers in perfect competition called price takers?
Q3) Under what conditions should a competitive firm shut down in the short run?
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Chapter 13: Monopolistic Competition: the Competitive
Model in a More Realistic Setting
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Q1) Refer to Table 13-5. At the profit-maximizing or loss-minimizing output level,
A) the firm makes a profit of $12.
B) the firm incurs a loss equal to its fixed cost.
C) the firm makes a profit of $16.
D) the firm incurs a loss of $14.
Q2) If price exceeds average variable cost but is less than average total cost, a firm
A) should further differentiate its product.
B) should stay in business for a while longer until its fixed costs expire.
C) is making some profit but less than maximum profit.
D) should shut down.
Q3) A monopolistically competitive firm is producing an output level where marginal revenue is greater than marginal cost. What should this firm do to increase its profit or reduce its losses?
A) The firm should raise its price.
B) The firm should decrease its fixed costs.
C) The firm should increase its implicit costs.
D) The firm should lower its price.
Q4) What is the difference between the terms "marketing" and "advertising"?
Q5) Why are many companies concerned about brand management?
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Q1) Collusion makes firms better off because if they act as a single entity (a cartel) they can reduce output and increase their prices and profits. But some cartels have failed and others are unstable. Which of the following is a reason why cartels often break down?
A) Most cartels do not have a dominant strategy.
B) When a cartel is profitable, the amount of competition it faces increases.
C) Members of a cartel may resent having to share their profits equally.
D) Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.
Q2) A member of a cartel like OPEC has an incentive to
A) argue for larger production quotas for each member of the cartel.
B) agree to a low cartel production level and then produce more than its quota.
C) abide by its individual production quota.
D) support equal production quotas for each member.
Q3) Which of the following is not an example of a government-imposed entry barrier?
A) patents
B) occupational licensing
C) barriers to international trade
D) antitrust legislation
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Chapter 15: Monopoly and Antitrust Policy
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Q1) If a monopolist's price is $50 at the output where marginal revenue equals marginal cost and average total cost is $43, then the average profit is $7.
A)True
B)False
Q2) Refer to Figure 15-12. What is the amount of consumer surplus if, instead of monopoly, the industry was organized as a perfectly competitive industry?
A) $21
B) $124
C) $186
D) $332
Q3) How do the price and quantity of a monopoly compare to that of a perfectly competitive industry?
Q4) A monopoly is a firm that is the only seller of a good or service that does not have a close substitute.
A)True
B)False
Q5) Identify four reasons for high entry barriers. Briefly explain each reason.
Q6) Provide two examples of a government barrier to entry?
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Chapter 16: Pricing Strategy
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Q1) When colleges use yield management techniques, they
A) rank students on the basis of academic merit and award higher financial aid offers to those at the top of the ranking.
B) increase financial aid offers to students whose demand for college education is likely to be more price elastic and reduce financial aid offers to students whose demand for college education is likely to be less price elastic.
C) rank students on the basis of academic merit and award higher financial aid offers to those at the bottom of the ranking.
D) increase financial aid offers to students whose demand for college education is likely to be more price inelastic and reduce financial aid offers to students whose demand for college education is likely to be less price inelastic.
Q2) Which of the following will prevent firms from engaging in price discrimination?
A) yield management
B) arbitrage
C) transactions costs
D) odd pricing
Q3) What is odd pricing? Why do some merchants use odd pricing?
Q4) Are sellers who practice arbitrage taking advantage of buyers?
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Chapter 17: The Markets for Labor and Other Factors of Production
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Q1) Increases in population shift the market supply curve for labor to the right.
A)True
B)False
Q2) In a study conducted by Marianne Bertrand and Sendhil Mullianthan, identical resumes were sent in response to help wanted ads in newspapers, with half of the resumes assigned an African-American-sounding name and half assigned a white-sounding name. The study found that
A) employers were equally likely to interview workers with white-sounding names and with African-American-sounding names.
B) employers were 50 percent less likely to interview workers with African-American-sounding names.
C) employers were 50 percent less likely to interview workers with white-sounding names.
D) no employers chose to interview workers with African-American-sounding names.
Q3) Marginal revenue product for a perfectly competitive seller is equal to
A) the output price multiplied by the total product of labor.
B) the output price multiplied by the number workers hired.
C) the change in total revenue that results from hiring another worker.
D) the marginal cost of production.
Page 19
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Chapter 19: GDP: Measuring Total Production and Income
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Q1) Refer to Table 19-7. Suppose that a simple economy produces only four goods and services: iPods, t-shirts, bottled water, and oranges. Calculate nominal GDP for this simple economy.
Q2) The purchase of a new house is included in A) consumption expenditures.
B) investment expenditures.
C) government purchases.
D) net exports.
Q3) Between 2013 and 2014, if an economy's exports rise by $8 billion and its imports fall by $8 billion, by how much will GDP change between the two years, all else equal?
A) Net exports will increase GDP by $8 billion.
B) The increase in exports is offset by the decrease in imports, so there is no change in net exports and no effect on GDP.
C) Net exports will increase GDP by $16 billion.
D) Net exports will decrease GDP by $8 billion.
Q4) The Bureau of Economic Analysis divides its statistics on GDP into four major categories. List the categories of expenditures and define each.
Q5) Give two reasons why GDP does not reflect total production in an economy.
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Chapter 20: Unemployment and Inflation
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Q1) The nominal interest rate equals the real interest rate ________ the inflation rate. A) times B) divided by C) plus D) minus
Q2) The Bureau of Labor Statistics counts as employed people who work part-time, but would prefer to work full-time. Suppose the people who had part-time jobs, but wanted full-time jobs, were counted as unemployed. Explain how the unemployment rate and the labor force participation rate would change.
Q3) What is the natural rate of unemployment, and what types of unemployment constitute the natural rate of unemployment?
Q4) The average period of unemployment was ________ following the 2007-2009 recession as following any other recession since the end of World War II. A) three times as low B) approximately the same C) twice as high D) eight times as high
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Chapter 21: Economic Growth, the Financial System, and Business Cycles
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Q1) What is investment in a closed economy if you have the following economic data? Y = $10 trillion
C = $5 trillion
TR = $2 trillion
G = $2 trillion
A) $2 trillion
B) $3 trillion
C) $5 trillion
D) cannot be determined without information on taxes (T)
Q2) In 2003, Congress passed a tax cut that included a reduction in the marginal tax rate on stock dividends. This essentially increased the after-tax rate of return on stocks that offer dividends. Using the loanable funds market, describe what will happen to saving, investment, economic growth, the real interest rate, and the quantity of loanable funds exchanged.
Q3) Actual real GDP will be above potential GDP if A) firms are producing below capacity.
B) firms are producing at capacity.
C) firms are producing above capacity.
D) inflation is rising.
Q4) Explain why the demand curve for loanable funds has a negative slope.
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Chapter 22: Long-Run Economic Growth: Sources and Policies
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Q1) Between 1990 and 2012, which of these leading industrial countries of the world had the highest average annual growth rate in GDP per capita?
A) the United States
B) Germany
C) Japan
D) Canada
Q2) Most economic growth in the world occurred between 1,000,000 B.C. and 1300 A.D.
A)True
B)False
Q3) In the long run, a country will experience an increasing standard of living only if it experiences
A) a high rate of consumption.
B) continuous technological change.
C) a high rate of labor force growth.
D) a slow rate of population growth.
Q4) Your friend does not understand the benefits of globalization. Outline for your friend the positive economic aspects of globalization.
Q5) Explain the meaning of the word "convergence" in the context of economic growth and standards of living.
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Chapter 23: Aggregate Expenditure and Output in the Short Run
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Q1) If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will
A) increase consumption by $7,500.
B) increase consumption by $2,500.
C) decrease consumption by $7,500.
D) decrease consumption by $2,500.
Q2) C = 2,800 + 0.9Y
I = 750
G= 1,200
NX = 150
Given the equations for C, I, G, and NX above, what is the equilibrium level of GDP (Y)?
Q3) If the marginal propensity to save is 0.4, the multiplier is 2.5.
A)True
B)False
Q4) When aggregate expenditure = GDP, A) macroeconomic equilibrium occurs.
B) the federal budget is balanced.
C) net exports equal zero.
D) saving equals zero.
25
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Chapter 25: Money, Banks, and the Federal Reserve System
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Q1) The simple deposit multiplier is the ratio of the amount of
A) new reserves created by the banks to the amount of deposits.
B) new reserves created by the banks to the amount of loans.
C) deposits created by the banks to the amount of new reserves.
D) loans issued by the banks to deposits created by the banks.
Q2) Refer to the Article Summary. In 2013, the European Union agreed to essentially bail out the banks in the nation of Cyprus, but in doing so also included what is being called a special bank levy which was changed to bank depositors. This levy may have been needed to prevent bank runs, which are situations in which
A) a majority of the shareholders in a bank decide to sell off all their shares of stock.
B) many depositors simultaneously decide to withdraw money from a bank.
C) a majority of the bank's loans go into default all at once.
D) a bank stops paying interest on all of its interest-bearing accounts.
Q3) The quantity theory of money assumes that
A) the velocity of money is negative.
B) the velocity of money is constant.
C) the velocity of money is zero.
D) the velocity of money fluctuates unpredictably.
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Chapter 26: Monetary Policy
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Q1) Refer to Table 26-8. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2014 if the Federal Reserve does not use monetary policy:
a. If the Fed wants to keep real GDP at its potential level in 2014, should it use an expansionary policy or a contractionary policy? Should the trading desk buy T-bills or sell them?
b. Suppose the Fed's policy is successful in keeping real GDP at its potential level in 2014. State whether each of the following will be higher or lower than if the Fed had taken no action:
(i) Real GDP
(ii) Full-employment real GDP
(iii) The inflation rate
(iv) The unemployment rate
c. Draw an aggregate demand and aggregate supply graph to illustrate your answer. Be sure that your graph contains LRAS curves for 2013 and 2014; SRAS curves 2013 and 2014; AD curve for 2013 and 2014, with and without monetary policy actions; and equilibrium real GDP and the price level in 2014 with and without policy.
Q2) List the Fed's four main monetary goals.
Q3) What problems can high inflation rates cause for the economy?
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Chapter 27: Fiscal Policy
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Q1) How could the existence of an unemployment insurance system or other transfer programs have reduced the severity of the Great Depression?
Q2) A change in tax rates
A) has a less complicated effect on GDP than does a tax cut of a fixed amount. B) has a larger multiplier effect the smaller the tax rate.
C) will not affect disposable income.
D) will not affect the size of the multiplier.
Q3) Refer to Table 27-5. The economy is in the state described by the table above. Draw the dynamic aggregate demand and aggregate supply diagram to illustrate the state of the economy in year 1 and year 2, assuming that no policy is pursued. Then illustrate and explain the appropriate fiscal policy to use in this situation. Assume that the policy results in the economy producing potential GDP.
Q4) Give an example of an automatic stabilizer. Explain how automatic stabilizers work in the case of recession.
Q5) The problem causing most recessions is too little
A) money (currency plus checking accounts).
B) spending.
C) unemployment.
D) taxes.
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Chapter 28: Inflation, Unemployment, and Federal Reserve Policy
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Q1) Refer to Figure 28-9. A follower of the new classical macroeconomics would argue that a contractionary monetary policy to lower inflation after a supply shock, like that pursued by Volcker in 1979, would result in a movement from
A) A to D to C.
B) A to B.
C) C to D to A.
D) C to A.
E) A to C.
Q2) In the short run, the Federal Reserve can affect which of the following?
A) the inflation rate
B) the unemployment rate
C) the growth rate of real GDP in the economy
D) all of the above
Q3) Which of the following could decrease unemployment and inflation simultaneously?
A) a decrease in oil prices
B) expansionary monetary policy
C) contractionary monetary policy
D) an increase in the real wage
Q4) How would you expect the Fed to respond to a negative supply shock in the economy?
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Chapter 29: Macroeconomics in an Open Economy
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Q1) What is the relationship between the balance of trade and the current account balance?
Q2) What's the difference between the nominal exchange rate and the real exchange rate?
Q3) Suppose the government cuts taxes. We would expect interest rates to ________ and the dollar to ________ in foreign exchange markets.
A) rise; appreciate B) rise; depreciate
C) fall; depreciate
D) fall; appreciate
Q4) Ceteris paribus, a rise in interest rates in the United States will cause the yen price of the dollar in international exchange markets to ________. I.e., the dollar ________ in value against the yen.
A) increase; appreciates
B) increase; depreciates C) decrease; depreciates
D) decrease; appreciates
Q5) How is the impact of contractionary monetary policy different in an open economy than in a closed economy?
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Chapter 30: The International Financial System
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Q1) China began pegging its currency, the yuan, to the dollar in 1994. Because the yuan was ________ at the pegged exchange rate, the Chinese government increased its reserves of ________ as the government purchased more ________ to maintain the pegged exchange rate.
A) undervalued; dollars; dollars
B) undervalued; yuan; yuan
C) overvalued; yuan; yuan
D) overvalued; dollars; dollars
Q2) Describe the four determinants of exchange rates in the long run.
Q3) Foreign currency prices of the U.S. dollar are currently determined by a managed float exchange rate system.
A)True
B)False
Q4) Which of the following is most important in explaining exchange rate fluctuations in the short run?
A) relative price levels across countries
B) preferences for domestic and foreign goods
C) interest rates
D) relative rates of productivity growth across countries
Q5) Which aspects of globalization help to increase growth in the world economy?
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