Principles of Economics Exam Review
Course Introduction
Principles of Economics is an introductory course that explores the fundamental concepts, theories, and models used to understand how individuals, businesses, and governments make decisions regarding the allocation of limited resources. The course covers both microeconomics, focusing on the behavior of consumers and firms in various market structures, and macroeconomics, examining broad economic indicators such as inflation, unemployment, and economic growth. Students will learn about supply and demand, market equilibrium, the role of government in the economy, and the impact of monetary and fiscal policy, providing a solid foundation for further study in economics and related fields.
Recommended Textbook
Essentials of Economics 4th Edition by R.
Glenn Hubbard
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19 Chapters
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Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) ________ is a situation in which a good or service is produced at the lowest possible cost.
A)Allocative efficiency
B)Productive efficiency
C)Equity
D)Optimal marginalism
Answer: B
Q2) At a recent company meeting,Ravi Batra,sales manager of Life's a Beach,a surfboard producer announced,"We have increased our sales by 13 percent in just 9 months." Suppose 9 months ago,its sales amounted to $245,000,what is the value of its sales today?
A)$31,850
B)$207,638
C)$276,850
D)$359,905
Answer: C
Q3) One example of human capital is the amount of savings that you have.
A)True
B)False
Answer: False
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Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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Sample Questions
Q1) The payment received by suppliers of entrepreneurial skills is called profit.
A)True
B)False
Answer: True
Q2) What causes a production possibilities frontier to shift inward?
Answer: A production possibilities curve shifts inward with economic decline,or negative growth.This occurs with a decrease in resources or a negative technology change.
Q3) The circular flow model demonstrates
A)the role of the government in overseeing the market system.
B)the roles played by households and firms in the market system.
C)how shortages and surpluses are eliminated in a market.
D)how demand and supply for goods and services are brought into equilibrium.
Answer: B
Q4) All of the following countries come close to the free market benchmark except A)Canada.
B)North Korea.
C)Germany.
D)Singapore.
Answer: B
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Figure 3-1.If the product represented is a normal good,a decrease in income would be represented by a movement from A)A to B.
B)B to A.
C)D to D .
D)D to D .
Answer: D
Q2) Hurricane Katrina damaged a large portion of refining and pipeline capacity when it swept through the Gulf coast states in August 2005.As a result of this,many gasoline distributors were not able to maintain normal deliveries.At the pre-hurricane equilibrium price (i.e.,at the initial equilibrium price),we would expect to see
A)a surplus of gasoline.
B)the quantity demanded equal to the quantity supplied.
C)a shortage of gasoline.
D)an increase in the demand for gasoline.
Answer: C
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Chapter 4: Market Efficiency and Market Failure
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Sample Questions
Q1) The difference between the lowest price a firm would have been willing to accept and the price it actually receives from the sale of a product is called A)producer surplus.
B)profit.
C)marginal revenue.
D)price differential.
Q2) Refer to Table 4-8.If a minimum wage of $10.50 is mandated there will be a
A)shortage of 30,000 units of labor.
B)surplus of 30,000 units of labor.
C)shortage of 60,000 units of labor.
D)surplus of 60,000 units of labor.
Q3) Refer to Figure 4-1.If the market price is $2.00,what is the consumer surplus on the second burrito?
A)$0
B)$1.00
C)$2.00
D)$4.50
Q4) What is a Pigovian tax? What happens to deadweight loss when a Pigovian tax is implemented?
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Chapter 5: The Economics of Health Care
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Sample Questions
Q1) Most doctors and hospitals operate as private businesses in all of the following countries except
A)Canada.
B)Japan.
C)the United Kingdom.
D)the United States.
Q2) In the United States,out-of-pocket spending on health care per person
A)has been rising since 1965.
B)has been falling since 1965.
C)has remained fairly steady since 1965.
D)fell from 1965 through 1995, then began to rise from 1995 to the present.
Q3) Because consumers who have insurance provided by their employers usually only pay a deductible for a visit to the doctor's office,they ________ of health care services than they would if they paid a price that better represented the true cost of providing the service.
A)demand a larger quantity
B)demand a smaller quantity
C)supply a larger quantity
D)supply a smaller quantity
Q4) What are the main sources of health insurance in the United States?
Page 7
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Chapter 6: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) Explain what potential conflict exists between shareholders in a corporation and the corporation's managers.
Q2) Jake sells Star Wars memorabilia on eBay.His annual revenue is $42,000 per year,the explicit costs of his business are $10,000,and the opportunity costs of his business are $18,000 per year.What are the implicit costs of his business?
A)$8,000
B)$18,000
C)$24,000
D)$32,000
Q3) Who controls a sole proprietorship?
A)stockholders
B)bondholders
C)the owner
D)all of these
Q4) In which types of business do owners have unlimited personal liability and in which do owners have limited personal liability?
Q5) How is accounting profit found?
Q6) What role do well functioning financial markets play in a market economy?
Q7) What is a firm's balance sheet?
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) If the market for a product is narrowly defined,then there are likely to be many substitutes for the product and the demand for the product is relatively elastic.
A)True
B)False
Q2) If at a price of $24,Octavia sells 36 home-grown orchids and at $30 she sells 24 home-grown orchids,the demand for her orchids is
A)elastic.
B)inelastic.
C)unit-elastic.
D)perfectly elastic.
Q3) Refer to Table 7-6.Suppose Antonio has $10 to spend and the price of beer = $2 per glass and the price of pizza = $2 per slice.How many of each good will he consume when he maximizes his utility?
A)2 glasses of beer, 1 slice of pizza
B)2 glasses of beer, 3 slices of pizza
C)3 glasses of beer, 2 slices of pizza
D)4 glasses of beer, 5 slices of pizza
Q4) Briefly explain the economic concept of elasticity.
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Page 9
Chapter 8: Technology, production, and Costs
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Sample Questions
Q1) If the total cost of producing 20 units of output is $1,000 and the average variable cost is $35,what is the firm's average fixed cost at that level of output?
A)$65
B)$50
C)$15
D)It is impossible to determine without additional information.
Q2) Average total cost is
A)total cost divided by the quantity of output produced.
B)total explicit costs divided by the quantity of output produced.
C)variable cost divided by the quantity of output produced.
D)the change in fixed plus variable cost divided by the quantity of output produced.
Q3) The total output produced by a firm divided by the quantity of workers employed by the firm is the definition of
A)the marginal product of labor.
B)the division of labor.
C)the average product of labor.
D)the average cost of production.
Q4) In economics,what is the difference between the short run and the long run?
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Page 10
Chapter 9: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Why are individual buyers and sellers in perfect competition called price takers?
Q2) Which of the following offers the best reason why restaurants are not considered to be perfectly competitive firms?
A)Restaurants do not sell identical products.
B)Restaurants compete in small market areas-neighborhoods and cities-rather than in regional or national markets.Therefore, restaurants are not small relative to their market size.
C)Restaurants usually have entry barriers in the form of zoning restrictions and health regulations.
D)Restaurants have significant liability costs that perfectly competitive firms do not have; for example, customers may sue if they suffer from food poisoning.
Q3) What is meant by productive efficiency? How does a perfectly competitive firm achieve productive efficiency?
Q4) In a decreasing-cost industry,the entry of new firms lowers average cost at each level of output.
A)True
B)False
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Chapter 10: Monopoly and Antitrust Policy
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Sample Questions
Q1) Microsoft hires marketing and sales specialists to decide what prices it should set for its products,whereas a wealthy corn farmer in Iowa,who sells his output in the world commodity market,does not.Why is this so?
A)because Microsoft is large enough to hire the best people in the field
B)because Microsoft could potentially lose sales if it sets prices indiscriminately C)because the wealthy corn farmer is a price taker who chooses his optimal output independently of market price but Microsoft's optimal output depends on the price it selects
D)because unlike Microsoft, the wealthy corn farmer is probably a monopolist
Q2) Refer to Figure 10-15.The profit-maximizing price is
A)P .
B)P .
C)P .
D)P .
Q3) If a monopolist's marginal revenue is $15 per unit and its marginal cost is $25,then to maximize profit the firm should decrease output.
A)True
B)False
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Chapter 11: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) The DeBeers Company of South Africa was able to block competition through A)economies of scale.
B)ownership of an essential input.
C)government-imposed barriers.
D)differentiating its product.
Q2) Refer to Figure 11-14.It is possible to lower the average cost of production by expanding output beyond Q to Q .Why wouldn't a firm expand its output to Q ?
A)The firm wants to maximize accounting profit rather than economic profit.
B)The firm would suffer an economic loss at Q while it would break even at Q .
C)The firm's marginal revenue would be negative at Q .
D)Demand is not sufficient for consumers to buy Q .
Q3) Why do most firms in monopolistic competition typically make zero profit in the long run?
A)because firms produce differentiated products
B)because the lack of entry barriers would compete away profits
C)because firms do not produce at their minimum efficient scale
D)because the total market is not large enough to accommodate so many firms
Q4) Explain the differences between total revenue,average revenue,and marginal revenue.
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Chapter 12: Gdp: Measuring Total Production and Income
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Sample Questions
Q1) Real GDP per capita is calculated by dividing the value of real GDP for a country by the country's adult population.
A)True
B)False
Q2) The measure of production that values output using base-year prices is called A)real GDP.
B)nominal GDP.
C)value-added GDP.
D)underground GDP.
Q3) In 2013,the U.S.auto industry experienced rising sales.The automobile industry was experiencing the effects of A)inflation.
B)the underground economy.
C)the business cycle.
D)depreciation.
Q4) The size of the underground economy as a percent of GDP is larger in the United States as compared to poorer countries such as Zimbabwe.
A)True
B)False
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) To understand why someone cannot get a job,it helps to know the three types of unemployment.List the three types of unemployment and explain what causes each type.What advice for finding a job would be appropriate for someone in each type of unemployment?
Q2) The unemployment rate equals the number of unemployed divided by the ________,all times 100.
A)number of employed
B)labor force
C)working-age population
D)total population
Q3) Which of the following would increase the unemployment rate?
A)a law making it illegal to work more than 35 hours per week
B)a cut in unemployment compensation
C)an increase in unemployment insurance payments
D)a decrease in the minimum wage
Q4) Most economists believe that labor unions significantly increase the overall unemployment rate in the United States.
A)True
B)False
Q5) Why would a firm pay efficiency wages?
Page 15
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Chapter 14: Economic Growth, the Financial System, and Business Cycles
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Sample Questions
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) If Ebenezer Scrooge spends rather than saves his vast wealth he will
A)slow economic growth because he is reducing the amount of funds available for investment.
B)slow economic growth because he is increasing the amount of funds available for investment.
C)promote economic growth because he is increasing the amount of funds available for investment.
D)promote economic growth because he is decreasing the amount of funds available for investment.
Q3) Explain why increasing the government budget deficit can decrease investment spending.
Page 16
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) A supply shock causes the long-run aggregate supply curve to shift left,decreasing the price level.
A)True
B)False
Q2) A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?
A)The price level will fall, and the level of GDP will be unaffected.
B)The price level will fall, and the level of GDP will fall.
C)The price level will rise, and the level of GDP will fall.
D)The price level will rise, and the level of GDP will be unaffected.
Q3) The real business cycle model focuses on how
A)wage and price stickiness explains fluctuations in real GDP.
B)the labor theory of value is the best measure of value of a good or service.
C)the Federal Reserve should adopt a monetary growth rule.
D)productivity shocks explain fluctuations in real GDP.
Q4) Explain how the aggregate demand and aggregate supply model can be made more dynamic.
Q5) Why does the short-run aggregate supply curve slope upward?
Q7) What are sticky prices,and how can contracts make them "sticky"? Page 17
Q6) What is a supply shock,and why might a supply shock lead to stagflation?
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Page 18
Chapter 16: Money, banks, and the Federal Reserve System
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Sample Questions
Q1) One way investment banks differ from commercial banks is that investment banks
A)lend exclusively to households.
B)do not take in deposits.
C)only buy and sell mortgages.
D)trade only in foreign exchange markets.
Q2) If banks do not loan out all their excess reserves,then the real world multiplier is
A)smaller than 1/RR.
B)larger than 1/RR.
C)equal to 1/RR.
D)not related to 1/RR.
Q3) Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 5 percent.If the Federal Reserve lowers the required reserve ratio to 3 percent,then the bank will now have excess reserves of A)$0.
B)$2,000.
C)$3,000.
D)$5,000.
Q4) How do open market operations work?
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Page 19
Chapter 17: Monetary Policy
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Sample Questions
Q1) Contractionary monetary policy causes
A)aggregate demand to rise and the price level to rise.
B)aggregate demand to fall and the price level to fall.
C)aggregate demand to rise and the price level to fall.
D)aggregate demand to fall and the price level to rise.
Q2) Using the Taylor rule,if the current inflation rate equals the target inflation rate and real GDP is greater than potential GDP,then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.
A)will be greater than
B)will be less than
C)will be the same as
D)may be greater than or less than
Q3) An increase in the domestic interest rate relative to other interest rates should
A)increase investment spending.
B)decrease consumption spending.
C)increase government spending.
D)increase net exports.
Q4) List the Fed's four main monetary goals.
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Page 20
Chapter 18: Fiscal Policy
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Sample Questions
Q1) Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession.If the economy had been at potential GDP,it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower.Using these estimates,the cyclically adjusted budget
A)deficit was $210 billion.
B)deficit was $110 billion.
C)surplus was $10 billion.
D)surplus was $110 billion.
Q2) Fiscal policy refers to changes in
A)state and local taxes and purchases that are intended to achieve macroeconomic policy objectives.
B)federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
C)federal taxes and purchases that are intended to fund the war on terrorism.
D)the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
Q3) The majority of the federal government debt is held by government agencies.
A)True B)False
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Page 21
Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Sample Questions
Q1) Holding all else constant,a rise in interest rates in the United States will cause the dollar to appreciate in international exchange markets.
A)True
B)False
Q2) When Roxanne,a U.S.citizen,purchases a designer dress from Barneys of New York that was made in Milan,the purchase is
A)both a U.S.and an Italian import.
B)a U.S.import and an Italian export.
C)a U.S.export and an Italian import.
D)neither an export nor an import for either country.
Q3) Explain and show graphically the effect of a decrease in U.S.budget deficits that decrease U.S.interest rates on the demand and supply of U.S.dollars for euros.
Q4) Refer to Figure 19-3.With a quota in place,what is the quantity supplied by domestic producers?
A)8 million pounds
B)10 million pounds
C)16 million pounds
D)18 million pounds
Page 22
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