Principles of Economics
Midterm Exam
Course Introduction
Principles of Economics introduces students to the fundamental concepts and theories that underpin the study of economics. Covering both microeconomics and macroeconomics, this course explores how individuals, firms, and governments make choices within the context of scarcity. Topics include supply and demand, market equilibrium, consumer behavior, production and costs, market structures, and the role of government in the economy. The course also examines economic indicators, national income, inflation, unemployment, and fiscal and monetary policy. By understanding these principles, students gain insight into real-world economic issues and learn to analyze decisions from both a personal and societal perspective.
Recommended Textbook
Economics for Today 5th Edition by Allan Layton
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Chapter 1: Thinking Like an Economist
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Q1) Which one of the following is the most accurate definition of economics?
A) Economics is the study of stocks and bonds.
B) Economics is the study of how people allocate unlimited resources.
C) Economics is the study of how consumers choose to spend their unlimited income.
D) Economics is the study of how an individual agent/entity chooses to allocate scarce Resources.
Answer: D
Q2) The statement: 'A tax hike for the rich is the fairest way to raise tax collection', is an example of positive economic analysis.
A)True
B)False
Answer: False
Q3) Ceteris paribus is a German phrase that means that everything is allowed to be changed.
A)True
B)False
Answer: False
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Chapter 2: Applying Graphs to Economics
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Q1) A direct relationship is a relationship between two variables in which they move in different directions (if one increases, the other decreases).
A)True
B)False
Answer: False
Q2) An inverse relationship is a negative causation between two variables.
A)True
B)False
Answer: False
Q3) Straight line CD in Exhibit A1.2 shows which of the following?
A) The relationship between X and Y is unknown.
B) The values of Y are independent from the values of X.
C) There is an inverse relationship between X and Y.
D) There is a negative relationship between X and Y.
Answer: D
Q4) A horizontal line indicates an independent relationship between two variables. A)True
B)False
Answer: True
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Chapter 3: Production Possibilities and Opportunity Cost
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Q1) The rate of future economic growth will be greater if:
A) the economy is focused on the production of capital goods.
B) the existing resources are employed in the production of consumer goods rather than capital goods.
C) the existing resources are employed equally in the production of consumer goods and capital goods.
D) the existing resources are saved for later use.
Answer: A
Q2) Movement along the production possibilities curve shown in Exhibit 2.7 indicates:
A) The law of increasing opportunity costs.
B) The law of declining opportunity costs.
C) all inputs are homogeneous including labour.
D) that not all resources are utilised.
Answer: A
Q3) The most efficient point on the production possibilities curve is the midpoint on the curve.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Market Demand and Supply
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Q1) If consumers are anticipating a wet summer, then:
A) the demand for hotdogs will increase.
B) the demand for raincoats will shift to the right.
C) the demand for umbrellas will not be affected.
D) the demand for umbrellas will shift to the left.
Q2) According to the law of demand:
A) as the price of a good increases, less units are demanded and everything else remains the same.
B) as the price of a good increases, the same number of units is demanded.
C) as the price of a good declines, less units are demanded.
D) the price of a good does not correspond to the quantity demanded.
Q3) A demand curve for The Steel Porcupines' concert tickets would show the:
A) number of tickets the box office is willing to sell at various prices.
B) number of people who need tickets.
C) quality of people who want to buy these concert tickets.
D) number of tickets that will be purchased at various prices.
Q4) Other things being equal, a fall in the price of Coca-Cola will increase the quantity of Coca-Cola produced.
A)True
B)False
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Chapter 5: Markets in Action
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Q1) Competition in the presence of negative externality will result in the following outcome:
A) the market price will be lower and output will be lower than socially desirable.
B) the market price will be lower and output will be higher than socially desirable.
C) the market price will be higher and output will be lower than socially desirable.
D) the market price output will be the same as socially desirable.
Q2) Which of the following is not a market failure?
A) A lack of competition in some markets.
B) Prices determined in competitive markets, where an individual consumer has no control over price.
C) The presence of externalities in some markets.
D) A lack of public goods desired by a majority of citizens.
Q3) An explanation for the existence of black markets is:
A) a price ceiling below the equilibrium price.
B) a price ceiling above the equilibrium price.
C) a price floor above the equilibrium price.
D) a price floor below the equilibrium price.
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Chapter 6: Elasticity of Demand and Supply
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Q1) If a farmer lowers the price of his product from $15 to $5 and finds that sales increase from 500 to 1000 units per week, then the demand for the farmer's product in this range is (assuming midpoint formula for price elasticity of demand):
A) price inelastic.
B) price elastic.
C) unit elastic.
D) cross elastic.
Q2) If the income elasticity of demand for a good is 1.75, then it is what type of good?
A) Price elastic.
B) Price inelastic.
C) Income inelastic.
D) Income elastic.
Q3) The price elasticity of demand for a vertical demand curve is:
A) perfectly elastic.
B) perfectly inelastic.
C) unitary elastic.
D) elastic.
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Chapter 7: Production Costs
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Q1) As shown in Exhibit 6.3, the marginal product of labour when five additional workers are employed per day is (points from B to C):
A) 50.
B) 100.
C) 150.
D) 175.
Q2) As shown in Exhibit 6.6, the average fixed cost of producing the fifth unit is:
A) $0.
B) $20.
C) $25.
D) $100.
Q3) Marginal cost is:
A) change in total cost divided by change in quantity.
B) change in total fixed cost divided by change in quantity.
C) change in average variable cost divided by change in quantity.
D) change in average fixed cost divided by change in quantity.
Q4) The shape of the MC curve is inversely related to the shape of the marginal product curve.
A)True
B)False
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Chapter 8: Perfect Competition
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Sample Questions
Q1) A perfectly competitive firm's supply curve follows the upward-sloping segment of its marginal cost curve above the:
A) average total cost curve.
B) average variable cost curve.
C) average fixed curve.
D) average price curve.
Q2) What are the possible long-run equilibrium situations for a firm in a perfectly competitive market?
A) Normal profit.
B) Economic profit.
C) Loss.
D) Product diversification.
Q3) Assume the short-run average total cost for a perfectly competitive industry remains constant as the output of the industry expands. In the long run, the industry supply curve will:
A) have a positive slope.
B) have a negative slope.
C) be perfectly horizontal.
D) be perfectly vertical.
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Page 10
Chapter 9: Monopoly
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Sample Questions
Q1) Economists:
A) mostly do not support price discrimination.
B) wholeheartedly support price discrimination.
C) are indifferent to the topic of price discrimination.
D) do not understand why price discrimination occurs.
E) are unsure whether to support price discrimination or not.
Q2) Price discrimination can benefit some consumers because:
A) a uniform price may be above their willingness to pay.
B) they can resell that good at a higher price and earn some extra money.
C) it forces monopolists to earn lower profits.
D) it forces monopolists to operate on the elastic section of their demand curve.
Q3) Both a perfectly competitive firm and a monopolist:
A) always earn an economic profit.
B) maximise profit by setting marginal cost equal to marginal revenue.
C) maximise profit by setting marginal cost equal to average total cost.
D) are price takers.
Q4) A monopolist maximises total revenue.
A)True
B)False
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Chapter 10: Monopolistic Competition and Oligopoly
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Q1) In a price leadership oligopoly model:
A) a cartel of leading firms determines price and industry output.
B) the industry, in consortium with the government, determines price and output.
C) one firm is the price leader and all other firms are followers.
D) the firms abandon a profit-maximising goal.
Q2) Which of the following market structures describes an industry in which a group of firms formally agree to control prices and output of a product?
A) Perfect competition.
B) Monopoly.
C) Oligopoly.
D) Cartel.
Q3) Firms enter the monopolistically competitive industry if:
A) other firms exit the industry.
B) there are profits.
C) they have enough fixed inputs.
D) there are scarce resources.
Q4) A cartel is a legal agreement among firms to innovate and advertise.
A)True
B)False
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Chapter 11: Policy Issues: Housing Affordability and Climate Change
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Q1) Australian governments have argued that:
A) Australia should not focus on climate change issues as it is a minor issue for Australia.
B) Australia should address the climate change issues even if other countries are unwilling to do so.
C) Australia should address the poverty issues first.
D) Australia should address the climate change issues only when other countries are willing to do the same.
Q2) Regulation is the best solution to climate change issues.
A)True
B)False
Q3) If the external costs of carbon emissions were included in the industry supply curve:
A) carbon emitters would use more resources but emit less.
B) carbon emitters would use fewer resources and emit less.
C) carbon emitters would use fewer resources but emit more.
D) carbon emitters would use the same resources but emit less.
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Chapter 12: Measuring the Size of the Economy
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Sample Questions
Q1) Economic values that are measured in units per period of time are referred to as: A) stocks.
B) insignificant.
C) unit values.
D) flows.
Q2) GDP data provides _____ information as to whether a small fraction of the population consumes most of a country's GDP or whether consumption is evenly divided. A) no
B) a little
C) a lot of
D) interesting
Q3) Use the information in Exhibit 11.3 to compute GDP. Which of the following is correct?
A) $8500 billion.
B) $8400 billion.
C) $7400 billion.
D) $8350 billion.
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Chapter 13: Business Cycles and Economic Growth
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Q1) A trough represents the highest point in a recession phase.
A)True
B)False
Q2) A business cycle is the period of time in which:
A) a business is established and ceases operations.
B) there are three phases, which are: peak, depression and recovery.
C) real GDP declines.
D) expansion and contraction of economic activities are alternated.
Q3) The Solow growth model was the first economic model to show that long-term increases in living standards depended crucially on:
A) increases in capital.
B) increases in labour.
C) increases in saving rates.
D) technological progress.
Q4) Endogenous growth theory tries to highlight the importance of capital and labour at the expense of technological progress.
A)True
B)False
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Chapter 14: Inflation and Unemployment
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Sample Questions
Q1) An example of structural unemployment includes:
A) a textile worker who quits one job and waits for the new job to begin.
B) the worker of the factory that has closed and he lacks the skills to obtain a new job.
C) a computer programmer who becomes rich and leaves the labour force.
D) a construction worker who was temporarily laid off due to the end of the construction contract.
Q2) If the inflation rate rises unexpectedly, the winners will be:
A) lenders and borrowers.
B) lenders.
C) borrowers.
D) only those who invested in real estate.
Q3) Which of the following statements is true?
A) Demand-pull inflation is caused by an increase in the cost of production.
B) Cost-push inflation is caused by an increase in spending.
C) If nominal interest rates remain the same and the inflation rate falls, real interest rates decrease.
D) If real interest rates are positive, borrowers incur losses.
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Chapter 15: A Simple Model of the Macro Economy
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Q1) According to classical theory, if the aggregate demand curve decreased and the economy experienced unemployment, then:
A) the economy would remain in this condition indefinitely.
B) the government must increase spending to restore full employment.
C) prices and wages would fall quickly to restore full employment.
D) the supply of money would increase until the economy returned to full employment.
Q2) The classical economists thought that the market:
A) did not exist.
B) could self-correct.
C) would disappear.
D) was not important.
Q3) Classical economics argued that:
A) the supply curve should remain vertical in the long run.
B) the First World War was fought to free Britain from economic ruin.
C) depression was only a short-run, temporary departure from full-employment equilibrium.
D) funeral plots need to be determined by the market.
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Chapter 16: The Monetary and Financial System
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Q1) The minimum liquidity requirement means that a bank:
A) must never have a certain minimal reserve level of highly liquid assets.
B) must always maintain a certain minimal reserve level of highly liquid assets.
C) must always maintain a certain minimal reserve level of low liquid assets.
D) must always maintain a certain minimal number of highly important customers.
Q2) If the economy is inflationary, the RBA would most likely:
A) encourage banks to provide loans by buying government securities.
B) encourage banks to provide loans by raising the cash rate.
C) encourage banks to provide loans by selling government securities.
D) restrict bank lending by selling government securities.
Q3) Treasury notes issued by the government are:
A) considered to be high risk.
B) long-term financial instruments.
C) sold by the Treasury at a face value.
D) freely traded in financial markets once issued.
Q4) Keynesian economists argue that monetary policy works, through its effects on:
A) budget deficits and trade deficits.
B) price and wage flexibility.
C) interest rates and investment.
D) the spending and money multipliers.
Page 18
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Chapter 17: Macroeconomic Policy I: Monetary Policy
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Q1) When the RBA sells government securities:
A) the reserve deposits of banks rise.
B) the reserve deposits of banks fall.
C) the reserve deposits of banks remain unaffected.
D) the cash rate must fall.
Q2) If the central bank decides to keep the increase in the money supply constant and the velocity of money turns out to be lower than expected, then:
A) higher unemployment may result.
B) lower unemployment may result.
C) inflation will be higher than expected.
D) inflation will be unaffected, but unemployment will be lower.
Q3) With a floating exchange rate, intervention in the FOREX market is usually known as: A) violating.
B) fixing.
C) testing.
D) volatility.
Q4) The RBA might try to sell securities at an attractive rate of interest.
A)True
B)False
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Chapter 18: Macroeconomic Policy II: Fiscal Policy
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Q1) Equal increases in government expenditures and taxes will:
A) cancel each other out so that the equilibrium level of output will remain unchanged.
B) lead to an equal decrease in the equilibrium level of output.
C) lead to an equal increase in the equilibrium level of output.
D) lead to an increase in the equilibrium level of real GDP output that is larger than the initial change in government expenditures and taxes.
Q2) If the government issues securities in order to finance current consumption, then: A) it may be a burden to future generations if the securities were bought by foreign interests.
B) it may be a burden as current generations need to pay for the interest repayments without any improvement in the country's productive capacity.
C) it will not be a burden if the securities were bought by foreign interests.
D) it will not be a burden if the debt is held domestically.
Q3) The cyclically adjusted budget deficit is the planned deficit for future times.
A)True
B)False
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Chapter 19: International Trade and Finance
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Q1) In order for an investment to exceed domestic saving, a country:
A) usually runs capital account deficits.
B) has been able to take advantage of more investment opportunities than it would otherwise have been able to.
C) usually runs a current account surplus.
D) had to buy more foreign assests.
Q2) Which of the following is an infant-industry argument in favour of restrictions on foreign trade?
A) Foreign producers must be stopped from selling their products in this country for below the cost of production.
B) Domestic workers must be protected from the lower wages paid in foreign countries.
C) The nation's security demands we ensure an adequate domestic supply capacity of certain products.
D) Industries in the early stages of development must be protected from more mature Producers.
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