Principles of Economics
Final Exam
Course Introduction
Principles of Economics introduces students to the fundamental concepts and analytical tools used in economic reasoning. Covering both microeconomics and macroeconomics, the course explores how individuals, firms, and governments make decisions regarding the allocation of scarce resources. Topics include supply and demand, market structures, consumer behavior, production costs, national income, inflation, unemployment, fiscal and monetary policy, and the impact of government intervention. By gaining an understanding of these principles, students will be better equipped to analyze economic issues, evaluate public policy, and understand the forces shaping the global economy.
Recommended Textbook
Principles of Macroeconomics 6th Edition by
N. Gregory Mankiw
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Chapter 1: Ten Principles of Economics
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Q1) You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a rational consumer you should make your choice by comparing
A)the benefits from eating all three bowls of ice cream to how much three bowls of ice cream costs.
B)the benefits from eating all three bowls of ice cream to how much one more bowl of ice cream costs.
C)the benefits from eating one more bowl of ice cream to how much three bowls of ice cream costs.
D)the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream costs.
Answer: D
Q2) Which of these activities will most likely impose an external cost?
A)An athlete works out at a gym.
B)A secretary smokes a cigarette in a crowded break room.
C)A young mother pushes her baby in a stroller.
D)A construction worker eats a hotdog during his lunch break.
Answer: B
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Chapter 2: Thinking Like an Economist
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Q1) When economists make
A)positive statements, they are speaking not as scientists but as policy advisers.
B)positive statements, they are speaking not as scientists but as forecasters.
C)normative statements, they are speaking not as scientists but as policy advisers.
D)normative statements, they are speaking not as policy advisers but as model-builders.
Answer: C
Q2) Which of the following would likely be studied by a microeconomist rather than a macroeconomist?
A)the effect of foreign direct investment on economic growth
B)the effect of a sales tax on the cigarette industry
C)the effect of an investment tax credit on the economy's capital stock
D)the effect of a war on government spending
Answer: B
Q3) Economic growth causes a production possibilities frontier to shift outward.
A)True
B)False
Answer: True
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Chapter 3: Interdependence and the Gains From Trade
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Q1) Refer to Table 3-8. The opportunity cost of 1 plate for Huang is
A)1/3 parasol.
B)1/2 parasol.
C)3 parasols.
D)4 parasols.
Answer: C
Q2) Assume for Namibia that the opportunity cost of each hut is 200 bowls. Which of these pairs of points could be on Namibia's production possibilities frontier?
A)(200 huts, 30,000 bowls) and (150 huts, 35,000 bowls)
B)(200 huts, 40,000 bowls) and (150 huts, 30,000 bowls)
C)(300 huts, 50,000 bowl) and (200 huts, 60,000 bowls)
D)(300 huts, 60,000 bowls) and (200 huts, 80,000 bowls)
Answer: D
Q3) It is possible for the U.S. to gain from trade with Germany even if it takes U.S. workers fewer hours to produce every good than it takes German workers.
A)True
B)False
Answer: True
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Chapter 4: The Market Forces of Supply and Demand
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Q1) Each of the following is a determinant of demand except A)tastes.
B)production technology.
C)expectations.
D)the prices of related goods.
Q2) A movement downward and to the right along a demand curve is called a(n)
A)increase in demand.
B)decrease in demand.
C)decrease in quantity demanded.
D)increase in quantity demanded.
Q3) Refer to Figure 4-2. If Consumer A and Consumer B are the only consumers in the market, then the market quantity demanded when the price is $6 is
A)4 units.
B)6 units.
C)8 units.
D)12 units.
Q4) A yard sale is an example of a market.
A)True
B)False
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Chapter 5: Elasticity and Its Application
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Q1) If the price elasticity of supply is 1.5, and a price increase led to a 3% increase in quantity supplied, then the price increase is about
A)0.2%.
B)0.5%.
C)2.0%.
D)4.5%.
Q2) There are fewer farmers in the United States today than 200 years ago because of A)improvements in farm technology.
B)increased government regulations in farming.
C)an elastic demand for food.
D)environmental programs designed to reduce soil erosion.
Q3) Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units to 25 units. Using the midpoint method, the cross-price elasticity of demand is
A)-1.0, and X and Y are complements.
B)-1.0, and X and Y are substitutes.
C)1.0, and X and Y are complements.
D)1.0, and X and Y are substitutes.
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Chapter 6: Supply, Demand, and Government Policies
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Q1) Most labor economists believe that the supply of labor is
A)less elastic than the demand, and, therefore, firms bear most of the burden of the payroll tax.
B)less elastic than the demand, and, therefore, workers bear most of the burden of the payroll tax.
C)more elastic than the demand, and, therefore, workers bear most of the burden of the payroll tax.
D)more elastic than the demand, and, therefore, firms bear most of the burden of the payroll tax.
Q2) Rent control may lead to lower rents for those who find housing, but the quality of the housing may also be lower.
A)True
B)False
Q3) Which of the following is not a function of prices in a market system?
A)Prices have the crucial job of balancing supply and demand.
B)Prices send signals to buyers and sellers to help them make rational economic decisions.
C)Prices coordinate economic activity.
D)Prices ensure an equal distribution of goods and services among consumers.
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Chapter 7: Consumers, Producers, and the Efficiency of Markets
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Q1) Suppose Larry, Moe, and Curly are bidding in an auction for a mint-condition video of Charlie Chaplin's first movie. Each has in mind a maximum amount that he will bid. This maximum is called
A)a resistance price.
B)willingness to pay.
C)consumer surplus.
D)producer surplus.
Q2) Refer to Figure 7-9. If the supply curve is S and the demand curve shifts from D to D', what is the change in producer surplus?
A)Producer surplus increases by $3,125.
B)Producer surplus increases by $5,625.
C)Producer surplus decreases by $3,125.
D)Producer surplus decreases by $5,625.
Q3) Total surplus in a market will increase when the government
A)imposes a binding price floor or a binding price ceiling on that market.
B)imposes a tax on that market.
C)Both a and b are correct.
D)Neither a nor b is correct.
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Chapter 8: Application: The Costs of Taxation
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Q1) Refer to Figure 8-11. The price labeled as P<sub>2</sub> on the vertical axis represents the
A)difference between the price paid by buyers after the tax is imposed and the price paid by buyers before the tax is imposed.
B)difference between the price received by sellers before the tax is imposed and the price received by sellers after the tax is imposed.
C)price of the good before the tax is imposed.
D)price of the good after the tax is imposed.
Q2) A tax on insulin is likely to cause a very large deadweight loss to society.
A)True
B)False
Q3) The most important tax in the U.S. economy is the tax on corporations' profits.
A)True B)False
Q4) Refer to Figure 8-2. Producer surplus without the tax is
A)$4, and producer surplus with the tax is $1.
B)$4, and producer surplus with the tax is $3.
C)$10, and producer surplus with the tax is $1.
D)$10, and producer surplus with the tax is $3.
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Chapter 9: Application: International Trade
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Q1) If a small country imposes a tariff on an imported good, domestic sellers will gain producer surplus, the government will gain tariff revenue, and domestic consumers will gain consumer surplus.
A)True
B)False
Q2) The General Agreement on Tariffs and Trade (GATT) was initiated in response to A)in increase in exports of low-priced goods from developing countries to developed countries.
B)the replacement of manufacturing jobs with service jobs in developed countries.
C)economic dislocations caused by the North American Free Trade Agreement (NAFTA) in the 1990s.
D)high tariffs imposed during the Great Depression of the 1930s.
Q3) Refer to Figure 9-17. The amount of revenue collected by the government from the tariff is
A)$32.
B)$288.
C)$368.
D)$720.
Q4) How does an import quota differ from an equivalent tariff?
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Chapter 10: Measuring a Nations Income
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Q1) In the economy of Ukzten in 2010, consumption was $1000, GDP was $1950, government purchases were $500, and investment was $700. What were Ukzten's net exports in 2010?
A)-$250
B)$250
C)$2200
D)Net exports cannot be calculated from the information given.
Q2) The residents of country A earn $500 million of income from abroad. Residents of other countries earn $200 million in country A. These earnings are accounted for in country A's
A)country A's net factor payments from abroad are positive, and its GDP is larger than its GNP.
B)country A's net factor payments from abroad are positive, and its GNP is larger than its GDP.
C)country A's net factor payments from abroad are negative, and its GDP is larger than its GNP.
D)country A's net factor payments from abroad are negative, and its GNP is larger than its GDP.
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Chapter 11: Measuring the Cost of Living
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Q1) Refer to Table 11-4. If the base year is 2004, then the inflation rate in 2006 was
A)44.4%.
B)50%.
C)62.5%.
D)80%.
Q2) A 2009 Chevrolet model has more horsepower than the 2008 version and is included in the BLS basket of goods. BLS attempts to account for this change in the market basket by
A)dropping the good from the basket.
B)substituting in a different vehicle with the same horsepower as the 2008 model.
C)adjusting the share of the market basket allocated to transportation.
D)adjusting the price of the good to account for the quality change.
Q3) If the cost of food & beverages increases by 10 percent, then, other things the same, the CPI is likely to increase by about
A)1.5 percent.
B)7.5 percent.
C)10 percent.
D)20 percent.
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Chapter 12: Production and Growth
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Q1) Which of the following is not correct?
A)Countries that have had higher output growth per person have typically done so without higher productivity growth.
B)A country's standard of living and its productivity are closely related.
C)Productivity refers to output produced per hour of work.
D)Increases in productivity can be used to increase output or leisure.
Q2) An increase in the saving rate permanently increases the growth rate of real GDP per person.
A)True
B)False
Q3) Over the period 1870-2008, the United States experienced an average annual growth rate of real GDP per person of about 4 percent per year.
A)True
B)False
Q4) Petroleum is an example of a nonrenewable resource.
A)True
B)False
Q5) Why does a nation's standard of living depend on property rights?
Q6) What is the difference between human capital and technology?
14
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Chapter 13: Saving, Investment, and the Financial System
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Q1) As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is
A)borrowing directly.
B)borrowing indirectly.
C)lending directly.
D)lending indirectly.
Q2) The Eye of Horus incense company has $10 million in cash which it has accumulated from retained earnings. It was planning to use the money to build a new factory. Recently, the rate of interest has increased. The increase in the rate of interest should A)not influence the decision to build the factory because The Eye of Horus doesn't have to borrow any money.
B)not influence the decision to build the factory because its stockholders are expecting a new factory.
C)make it more likely that The Eye of Horus will build the factory because a higher interest rate will make the factory more valuable.
D)make it less likely that The Eye of Horus will build the factory because the opportunity cost of the $10 million is now higher.
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Chapter 14: The Basic Tools of Finance
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Q1) Historically the return on stocks has been higher than the return on bonds. In part this reflects the higher risk from holding stock.
A)True
B)False
Q2) Historically, stocks have offered higher rates of return than bonds.
A)True
B)False
Q3) Toni put $500 into an account and one year later she had $534. What interest rate was paid on Toni's deposit?
A)7.1 percent
B)5.9 percent
C)6.8 percent
D)None of the above is correct.
Q4) According to the efficient markets hypothesis, at any moment in time, the market price is the best estimate of the company's value based on publicly available information.
A)True
B)False
Q5) Discuss the statistical evidence concerning the efficient markets hypothesis.
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Chapter 15: Unemployment
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Q1) Refer to Table 15-1. The labor-force participation rate of Aridia in 2012 was A)50%.
B)53.3%.
C)56.25%.
D)88.9%.
Q2) The Bureau of Labor Statistics produces data on unemployment and other aspects of the labor market from a regular survey of about A)600 households.
B)6,000 households.
C)60,000 households.
D)6,000,000 households.
Q3) Unemployment generated by the existence of labor unions is structural unemployment and so contributes to the natural rate of unemployment.
A)True
B)False
Q4) The Bureau of Labor Statistics' U-4 measure of joblessness includes discouraged workers.
A)True B)False
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Chapter 16: The Monetary System
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Q1) Credit cards are
A)a medium of exchange.
B)counted as part of M2 but not as part of M1.
C)important for analyzing the monetary system.
D)All of the above are correct.
Q2) The primary difference between commodity money and fiat money is that
A)commodity money is a medium of exchange but fiat money is not.
B)fiat money is a medium of exchange but commodity money is not.
C)commodity money has intrinsic value but fiat money does not.
D)fiat money has intrinsic value but commodity money does not.
Q3) Which of the following does the Federal Reserve not do?
A)It controls the supply of money.
B)It acts as a lender of last resort to banks.
C)It makes loans to any qualified business that requests one.
D)It tries to ensure the health of the banking system.
Q4) Banks cannot influence the money supply if they are required to hold all deposits in reserve.
A)True
B)False
Q5) What makes the New York Federal Reserve regional bank so important?
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Chapter 17: Money Growth and Inflation
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Q1) When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in
A)nominal interest rates.
B)real interest rates.
C)the price level.
D)the money supply.
Q2) In United States history there were long periods when most prices fell.
A)True
B)False
Q3) Open-market purchases by the Fed make the money supply
A)increase, which makes the value of money increase.
B)increase, which makes the value of money decrease.
C)decrease, which makes the value of money decrease.
D)decrease, which makes the value of money increase.
Q4) When inflation rises, firms make
A)more frequent price changes. This raises their menu costs.
B)more frequent price changes. This reduces their menu costs.
C)less frequent price changes. This raises their menu costs.
D)less frequent price changes. This reduces their menu costs.
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Chapter 18: Open-Economy Macroeconomic Models
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Q1) Paul, a U.S. citizen, builds a telescope factory in Israel. His expenditures
A)increase U.S. and Israeli net capital outflow.
B)increase U.S. net capital outflow, but decrease Israeli net capital outflow.
C)decrease U.S. net capital outflow, but increase Israeli net capital outflow.
D)None of the above is correct.
Q2) If the purchasing power of the dollar is always the same at home and abroad, then the nominal exchange rate defined as units of foreign currency per dollar decreases if the U.S. price level rises more than the price level in foreign countries.
A)True
B)False
Q3) If prices in Thailand rise less than prices in the United States, then according to the doctrine of purchasing-power parity the U.S. nominal exchange rate should rise.
A)True
B)False
Q4) Suppose a lobster supper in Maine costs fewer dollars than a Lobster supper in Paris, France. Explain why this is inconsistent with purchasing-power parity and explain why the inconsistency may exist.
Q5) Why are net exports and net capital outflow always equal?
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Chapter 19: A Macroeconomic Theory of the Open Economy
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Q1) In the open-economy macroeconomic model, the supply of loanable funds comes from
A)the sum of domestic investment and net capital outflow.
B)the sum of national saving and net capital outflow.
C)national saving.
D)net exports
Q2) A rise in the budget deficit
A)shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars in the market for foreign-currency exchange right.
B)shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars in the market for foreign-currency exchange left.
C)shifts both the demand for loanable funds in the market for loanable funds and the demand for dollars in the market for foreign-currency exchange right.
D)shifts both the demand for loanable funds in the market for loanable funds and the demand for dollars in the market for foreign-currency exchange left.
Q3) Suppose that the Turkish government budget deficit increases. What curves in the open-economy macroeconomic model shift? Explain why each curve shifts the direction it does.
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Chapter 20: Aggregate Demand and Aggregate Supply
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Q1) Other things the same, if the price level rises, people
A)increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange increases.
B)increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases.
C)decrease foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange increases.
D)decrease foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases.
Q2) Other things the same, if the U.S. price level falls, then
A)U.S. residents want to buy more foreign bonds. The real exchange rate rises.
B)U.S. residents want to buy more foreign bonds. The real exchange rate falls.
C)U.S. residents want to buy fewer foreign bonds. The real exchange rate rises.
D)U.S. residents want to buy fewer foreign bonds. The real exchange rate falls.
Q3) Other things the same, when the price level falls, interest rates
A)rise, which means consumers will want to spend more on homebuilding.
B)rise, which means consumers will want to spend less on homebuilding.
C)fall, which means consumers will want to spend more on homebuilding.
D)fall, which means consumers will want to spend less on homebuilding.
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Chapter 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) If the inflation rate is zero, then the nominal and real interest rate are the same.
A)True
B)False
Q2) Changes in the interest rate help explain
A)only the slope of, not shifts of aggregate demand.
B)only shifts of, not the slope of aggregate demand.
C)both the slope of and shifts of aggregate demand.
D)neither the slope nor shifts of aggregate demand.
Q3) Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is you answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?
Q4) An essential piece of the liquidity preference theory is the demand for money.
A)True
B)False
Q5) The logic of the multiplier effect applies
A)only to changes in government spending.
B)to any change in spending on any component of GDP.
C)only to changes in the money supply.
D)only when the crowding-out effect is sufficiently strong.
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Chapter 22: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) According to the Phillips curve, unemployment and inflation are positively related in
A)the short run and in the long run.
B)the short run, but not in the long run.
C)the long run, but not in the short run.
D)neither the long run nor the short run.
Q2) A basis for the slope of the short-run Phillips curve is that when unemployment is high there are
A)downward pressures on prices and wages.
B)downward pressures on prices and upward pressures on wages.
C)upward pressures on prices and downward pressures on wages.
D)upward pressures on prices and wages.
Q3) The idea that the long-run Phillips curve is
A)vertical stems from the analysis of Samuelson and Solow.
B)vertical stems from the analysis of Friedman and Phelps.
C)vertical was disproved by the experiment that monetary and fiscal policymakers inadvertently created in the 1970s.
D)downward-sloping can be correct if unemployment responds very quickly to unexpected inflation.
Q4) Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?
Page 24
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Chapter 23: Six Debates Over Macroeconomic Policy
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Q1) Which of the following is correct?
A)Deficits always require people to consume at the expense of their children.
B)If the government uses funds to pay for investment programs, on net the debt need not burden future generations.
C)If the government is in debt it must be running a deficit currently.
D)The current government debt is a large share of lifetime income.
Q2) What is the political business cycle and how does it relate to whether the central bank should have discretion or use a rule?
Q3) Policymakers following a "lean against the wind" policy would
A)increase government expenditures when output is low and decrease them when output is high.
B)increase government expenditures when output is low and do nothing when output is high.
C)decrease government expenditures when output is low and increase them when output is high.
D)decrease government expenditures when output is high and do nothing when output is low.
Q4) Why do many economists advocate a consumption tax rather than an income tax?
Q5) Identify three government policies that discourage saving.
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