Principles of Economics
Final Test Solutions
Course Introduction
Principles of Economics introduces students to the fundamental concepts and analytical tools used to understand how individuals, firms, and societies make choices about allocating scarce resources. The course covers both microeconomics, which examines decision-making by households and firms, and macroeconomics, which explores aggregated economic indicators such as GDP, inflation, and unemployment. Key topics include supply and demand, market equilibrium, elasticity, comparative advantage, fiscal and monetary policies, market structures, and the role of government intervention. By the end of the course, students will be equipped with a foundational understanding of economic principles and their real-world applications.
Recommended Textbook
ECON MACRO4 4th Edition by William A. McEachern
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3789 Verified Questions
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Chapter 1: The Art and Science of Economic Analysis
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Sample Questions
Q1) An example of a positive economic statement is, "An increase in the price of a product causes consumers to purchase more of that product."
A)True
B)False
Answer: True
Q2) The basic purpose of economic models is to
A)construct simplifying assumptions about the real world
B)explain reality in all its complexity
C)collect empirical data to support the facts
D)construct situations where controlled experiments can be carried out
E)provide explanations for, and predictions of, economic events
Answer: E
Q3) Which of the following is an example of capital?
A)pizza ovens
B)bulldozers
C)a college education
D)carpentry skills
E)all of the above
Answer: E
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Page 3
Chapter 2: Understanding Graphs-Appendix
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Sample Questions
Q1) Refer to Exhibit 1-13. The reason that Line (a) would shift to the position of Line (b) is
A)a change in quantity
B)a change in price
C)a change in an assumption about the relationship between the two variables observed
D)a change from a positive relation to a negative relation
E)a change from a negative relation to a positive relation
Answer: C
Q2) In Exhibit 1-2, curve B has a __________ slope that is __________ at every point.
A)positive; constant
B)positive; changing
C)negative; constant
D)negative; changing
E)changing; constant
Answer: C
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4
Chapter 3: Economic Tools and Economics Systems
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Sample Questions
Q1) The opportunity cost of an activity is best measured
A)only by the monetary costs
B)by the number of alternative activities that were forgone
C)by the cost difference between the chosen activity and the next best alternative
D)by the value expected from the best alternative that is forgone
E)as the time wasted choosing among various activities
Answer: D
Q2) According to Exhibit 2-1, Hans and Maria would be better off if
A)Hans specialized in typing and Maria in doing laundry
B)Hans specialized in doing laundry and Maria in typing
C)each did their own laundry and typing
D)Maria did all of the typing and all of the laundry
E)Hans did all of the typing and all of the laundry
Answer: A
Q3) It is possible for one person to have an absolute advantage in something even if she has no comparative advantage in anything.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Economic Decision Makers
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Sample Questions
Q1) To serve the public interest, government sometimes promotes competition by breaking up natural monopolies.
A)True
B)False
Q2) Which of the following is one of the chief reasons for the increased number of married women in the U.S. work force?
A)The marginal cost of working in the labor force has increased.
B)Jobs provide greater independence and self-worth.
C)The opportunity cost of household work has increased.
D)The sunk cost of household appliances has risen to the point that women must work to make payments on them.
E)Women spend more time in the market as a result of the increasing division of labor in household production.
Q3) Personal income in the United States is primarily determined by selling labor services.
A)True B)False
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Chapter 5: Demand, Supply, and Markets
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Sample Questions
Q1) Refer to exhibit 4-12. The discovery that breast milk provides more protection against disease than baby formula will cause which of the following to happen?
A)a movement from a to b on demand curve D<sub>1</sub>
B)a demand shift from D<sub>1</sub> to D<sub>2</sub>
C)movement from c to d on demand curve D<sub>2</sub>
D)demand shift from D<sub>2</sub> to D<sub>1</sub>
E)either a or b
Q2) Tax preparation services and IRS tax publications can be considered substitutes.
A)True
B)False
Q3) A decrease in the demand for peanut butter could be caused by a(n)
A)increase in the supply of peanut butter
B)increase in the price of peanut butter
C)doubling of the price of bread
D)drought in Georgia that destroyed 30 percent of the peanut crop
E)increase in consumer income
Q4) A price ceiling set below the equilibrium price will result in a shortage.
A)True
B)False
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Chapter 6: Introduction to Macroeconomics
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Sample Questions
Q1) According to Keynes, in order to get the economy out of a recession, the government should
A)plan for a budget deficit
B)encourage firms to export to other nations, thereby jump-starting the economy
C)follow an expansionary monetary policy
D)follow a contractionary monetary policy
E)do nothing and rely on the market system to heal itself
Q2) Long-term growth in production can be partially explained by
A)trade surpluses that lead to accumulations of precious metals
B)a gradual but consistent increase in the price level
C)general optimism about the future and the pioneering spirit of America
D)improvements in technology
E)federal government budget deficits
Q3) In Exhibit 5-1, which of the following might cause a shift in the aggregate demand curve from AD to AD'?
A)an increase in household wealth
B)a fall in domestic interest rates
C)an increase in government spending
D)an appreciation of the dollar relative to other currencies
E)a decrease in the nation's money supply
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Chapter 7: Tracking the Us Economy
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Sample Questions
Q1) Using the information in Exhibit 6-2, how much did the price index change from the base to the curtrent year?.
A)100%
B)50%
C)0%
D)-50%
E)-100%
Q2) GDP is a good measure of social welfare since it includes the value of leisure time.
A)True
B)False
Q3) Which is true of leakages and injections in the circular flow?
A)Leakages minus injections equal GDP.
B)Injections minus leakages equal GDP.
C)Leakages minus injections equal zero in equilibrium.
D)Domestic leakages must equal domestic injections.
E)Leakages must be greater than injections for the economy to be growing.
Q4) If the CPI rises in one year from 220 to 230, the inflation rate is 10 percent.
A)True
B)False
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Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) Cost-push inflation is typically caused by an
A)inward shift of the demand curve
B)inward shift of the aggregate supply and demand curves
C)outward shift of the demand curve
D)outward shift of the supply curve
E)inward shift of the supply curve
Q2) Which of the following is not considered a cost of unemployment?
A)loss of self-respect by those who are unemployed
B)waste of the economy's resources
C)negative psychological effects on those who have lost their jobs
D)higher inflation rates
E)loss of income by those who are unemployed
Q3) The official unemployment rate would be higher if it included the existence of hidden unemployment or individuals who are
A)on unemployment compensation
B)not working
C)working part-time but prefer full-time work
D)voluntarily retired
E)unemployed and looking for work
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Page 10
Chapter 9: Productivity and Growth
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Sample Questions
Q1) In contrast to government research and development, private sector R&D has
A)more impact on productivity, since much government R&D focuses narrowly on military applications
B)more impact on productivity, since much government R&D focuses narrowly on the service sector
C)more impact on productivity, since much government R&D focuses narrowly on not-for-profit activities
D)less impact on productivity, since the government is more motivated and able to hire better people and facilities
E)less impact on productivity, since firms tend to hold back on research when results are easily copied
Q2) Since 1990, the major industrial country with the lowest growth rate in per capita GDP has been
A)West Germany
B)Italy
C)the United States
D)Great Britain
E)Canada
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Page 11
Chapter 10: Aaggregate Expenditure and Agregate Demand
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Sample Questions
Q1) Changes in the price level will not shift the consumption function.
A)True
B)False
Q2) If the market interest rate equals 8 percent, the opportunity cost of the last new investment project undertaken would be approximately equal to A)zero percent
B)4 percent
C)infinity
D)8 percent
E)16 percent
Q3) Suppose that when disposable income rises from $3 trillion to $3.2 trillion, consumption rises from $2.5 trillion to $2.6 trillion. What is the marginal propensity to consume? A)0.1
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Chapter 11: Aggregate Expenditure and Aggregate Demand
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Sample Questions
Q1) The MPS in the economy represented in Exhibit 10-4 is
A)0
B)0.1
C)0.2
D)0.8
E)20
Q2) If output exceeds planned aggregate spending, the result is unintended inventory increases.
A)True
B)False
Q3) If the price level decreases, other things constant, people consume
A)more because nominal income falls
B)less because nominal income rises
C)more because the real value of their wealth increases
D)more because real income increases
E)less because real income decreases
Q4) If there are no unintended changes in inventories, the economy is at its equilibrium level of real GDP demanded.
A)True
B)False
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Chapter 12: Aggregate Supply
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Sample Questions
Q1) The potential level of output can be altered by changes in
A)the actual price level
B)the expected price level
C)aggregate demand
D)real GDP
E)a nation's stock of capital
Q2) The main effect of an increase in the capital stock is a(n)
A)rightward shift of the long-run aggregate supply curve
B)rightward shift of the aggregate demand curve
C)leftward shift of the long-run aggregate supply curve
D)leftward shift of the aggregate demand curve
E)increase in price and output levels
Q3) The capital stock increases
A)whenever money in circulation is decreased
B)whenever gross investment is positive
C)whenever gross investment is negative
D)only if net investment is positive
E)whenever gross investment is zero
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14
Chapter 13: Fiscal Policy
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Sample
Questions
Q1) If autonomous net taxes decline by $40 billion and the MPC = 0.75, then equilibrium real GDP demanded
A)declines by $120 billion
B)increases by $120 billion
C)declines by $160 billion
D)increases by $160 billion
E)increases by $40 billion
Q2) "Net taxes" equals "taxes minus transfer payments."
A)True
B)False
Q3) According to Keynes,
A)fiscal policy should not be used to influence the economy
B)the economy eventually tends toward the potential output
C)to get the economy to potential output, the SRAS curve must shift to the right
D)the economy could be stuck at equilibrium below the potential output for a prolonged period
E)deviations from potential output are short-lived
Q4) Government transfer payments are a good example of an automatic stabilizer.
A)True
B)False
15
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Chapter 14: Federal Budgets and Public Policy
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Sample Questions
Q1) Other things equal, an increase in defense spending will increase the budget deficit.
A)True
B)False
Q2) China is currently the largest holder of US Treasury Securities.
A)True
B)False
Q3) Which of the following has not been proposed as a reform to the federal budget process?
A)operating on a biennial budget rather than an annual budget
B)eliminating line items
C)moving the federal government fiscal year to begin in january instead of October
D)sort the budget into a capital and an operating budget
E)all of the above have been suggested as reforms
Q4) Some economists argue that federal government capital projects, which offer benefits over a number of years, should be financed over a number of years and therefore involve deficit finance.
A)True
B)False
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Page 16
Chapter 15: Money and the Financial System
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Sample Questions
Q1) Which of the following are legal tender?
A)checks
B)Federal Reserve notes
C)bank notes issued by private banks
D)credit cards
E)traveler's checks
Q2) Eileen puts $10,000 in a federally insured checking account at the First National Bank. Norma borrows $10,000 from the First National Bank, flies to a South Pacific island, and is never heard from again. Which of the following is true?
A)Eileen will lose her $10,000.
B)Eileen will lose her $10,000 if she and Norma are related.
C)Eileen will lose her $10,000 if the First National Bank makes all of its loans to people who run off to South Pacific islands.
D)Eileen will not lose her $10,000 no matter what happens to the First National Bank.
E)Eileen will not lose her $10,000 unless there is a run on the First National Bank.
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Chapter 16: Banking and the Money Supply
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Sample Questions
Q1) Which of the following would likely increase the money supply?
A)One bank buys government securities from another bank.
B)The required reserve ratio increases.
C)The Fed increases the reserves of commercial banks and the banks hold these as excess reserves.
D)The discount rate increases.
E)A bank sells government securities to the Fed.
Q2) The majority of the Fed's liabilities are
A)discount loans
B)U.S. government securities
C)loans to member banks
D)Federal Reserve notes
E)reserves of member banks
Q3) Suppose that a bank has $100 million in checkable deposits and the required reserve ratio is 0.1. Required reserves are
A)$1 million
B)$5 million
C)$10 million
D)$50 million
E)$100 million
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Chapter 17: Monetary Theory and Policy
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Sample Questions
Q1) If the Fed decreases the money supply,
A)aggregate demand and aggregate supply both increase
B)aggregate demand increases, which leads to movement along the short-run aggregate supply curve
C)aggregate demand decreases, which leads to movement along the short-run aggregate supply curve
D)aggregate supply increases, which leads to movement along the aggregate demand curve
E)aggregate supply decreases, which leads to movement along the aggregate demand curve
Q2) A decrease in the interest rate will
A)shift the money demand curve to the right
B)shift the money demand curve to the left
C)increase the quantity of money people want to hold
D)decrease the quantity of money people want to hold
E)have no impact on the money demand curve
Q3) The opportunity cost of money is the interest foregone.
A)True
B)False
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Page 19
Chapter 18: Macro Policy Debate: Active or Passive
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Sample Questions
Q1) A policy to increase aggregate demand to cure a recessionarly gap may succeed; however, inflation is a likely result.
A)True
B)False
Q2) According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-1 attain equilibrium at potential output?
A)The SRAS curve will shift to the left.
B)The SRAS curve will shift to the right.
C)Either the money supply or government spending should be increased.
D)Either the money supply or government spending should be decreased.
E)Aggregate demand should be decreased.
Q3) In general, we would expect those who favor a passive approach to policy to believe in
A)slow rather than rapid self-correction
B)potentially incorrect rather than rational price expectations
C)short, certain rather than long, variable policy lags
D)a negatively sloped rather than vertical Phillips curve
E)the natural rate hypothesis
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Chapter 19: International Trade
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Sample Questions
Q1) Which of the following is not an argument often made for the imposition of trade restrictions?
A)trade restrictions are necessary for national defense purposes
B)trade restrictions are necessary to improve economic efficiency
C)trade restrictions are necessary to protect fledgling industries
D)trade restrictions are necessary to protect against dumping
E)trade restrictions are necessary to protect jobs
Q2) The American Tire Company has been experiencing a steady loss of market over the past 40 years due to imports of lower-priced tires. Which argument would American Tire most likely present to Congress when it lobbies for trade restrictions?
A)infant industry argument
B)declining industry argument
C)national defense argument
D)antidumping argument
E)loss of domestic jobs
Q3) Domestic producers of goods that compete with imports benefit from protectionism in the short run.
A)True
B)False
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Page 21
Chapter 20: International Finance
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Sample Questions
Q1) The Bretton Woods system
A)fixed exchange rates in terms of U.S. dollars
B)fixed exchange rates in terms of all major currencies
C)fixed exchange rates in terms of gold
D)established a system of flexible exchange rates
E)established the European monetary system
Q2) Foreign investors may wish to purchase U.S. assets for all of the following reasons except one. Which is the exception?
A)The rate of return on assets is higher in the United States than in other countries.
B)They may wish to diversify their portfolios.
C)The United States may be regarded as a relatively safer place in which to invest.
D)Governments of most other industrialized countries actively discourage foreign investment.
E)With their increased foreign debt burdens, investment in developing countries has become less attractive.
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Chapter 21: Economic Development
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Sample Questions
Q1) The yardstick most often used to compare living standards across nations is
A)average production cost per unit
B)sales revenue per month
C)utility per capita
D)output per capita
E)imports per year
Q2) Which of the following can help shape the incentive structure of the country of Gammaland?
A)resource availability
B)prices
C)income
D)incentives
E)All of the answers are correct
Q3) Output per capita is the most commonly used measure of the prosperity of a nation.
A)True
B)False
Q4) Successful management of resource wealth is a poverty trap
A)True
B)False
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