Principles of Economics
Midterm Exam
Course Introduction
Principles of Economics introduces students to the fundamental concepts and tools used in economic analysis. The course explores how individuals, businesses, and governments make choices regarding the allocation of scarce resources to satisfy unlimited wants. Major topics include supply and demand, market equilibrium, elasticity, consumer behavior, production and costs, market structures, and the basics of macroeconomics such as national income, unemployment, inflation, and fiscal and monetary policy. Through these concepts, students develop a foundational understanding of how economies operate and the impact of economic decision-making on society.
Recommended Textbook
Principles of Macroeconomics 1st Edition by
N. Gregory Mankiw
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17 Chapters
3530 Verified Questions
3530 Flashcards
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Page 2
Chapter 1: Ten Principles of Economics
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218 Verified Questions
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Sample Questions
Q1) To increase living standards, what should public policy do?
A) ensure that workers are well educated and have the necessary tools and technology
B) make unemployment benefits easier to obtain
C) move workers into jobs directly from high school
D) ensure that workers have access to union membership and benefits
Answer: A
Q2) From which of the following is the word "economy" derived?
A) environment
B) one who manages a household
C) one who participates in a market
D) allocation
Answer: B
Q3) How do people make decisions at the margin?
A) by following the business cycle
B) by experience
C) by calculating dollar costs
D) by comparing costs and benefits
Answer: D
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3
Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) Refer to Figure 2-3. Which point or points are inefficient?
A) points A and C
B) points B and C
C) point C
D) point D
Answer: D
Q2) Refer to Figure 2-10. How are the price of roses and the quantity of roses related?
A) directly related, and therefore moving in the same direction
B) directly related, and therefore moving in opposite directions
C) inversely related, and therefore moving in opposite directions
D) independent of each other
Answer: C
Q3) Refer to Figure 2-2. In which market are firms sellers?
A) Box A
B) Box B
C) Box C
D) Box D
Answer: C
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Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Suppose that a worker in Boatland can produce either 5 units of wheat or 25 units of fish per year, and a worker in Farmland can produce either 25 units of wheat or 5 units of fish per year. There are 10 workers in each country. No trade occurs between the two countries. Boatland produces and consumes 25 units of wheat and 125 units of fish per year, while Farmland produces and consumes 125 units of wheat and 25 units of fish per year. If trade were to occur, Boatland would trade 100 units of fish to Farmland in exchange for 100 units of wheat. If Boatland no longer grew any of its own wheat, how many units of fish could it now consume along with the 100 units of imported wheat?
A) 25 units
B) 75 units
C) 150 units
D) 250 units
Answer: C
Q2) What is David Ricardo's contribution?
A) He wrote books opposing the ideas of Adam Smith.
B) He was the founder of modern economics.
C) He argued in favour of Britain following a free-trade policy.
D) He wrote An Inquiry into the Nature and Causes of the Wealth of Nations.
Answer: C
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Page 5
Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) Suppose you wish to analyze the change in the equilibrium price of lumber as a result of pine beetle infestations that are destroying trees in the West. What would your first step be?
A) to identify the new equilibrium point
B) to decide whether the fires affect the quantity demanded
C) to decide whether the fires affect the price
D) to decide whether the fires shift demand or supply
Q2) If a surplus exists in a market, what do we know?
A) The actual price is above equilibrium price, and quantity supplied is greater than quantity demanded.
B) The actual price is above equilibrium price, and quantity demanded is greater than quantity supplied.
C) The actual price is below equilibrium price, and quantity demanded is greater than quantity supplied.
D) The actual price is below equilibrium price, and quantity supplied is greater than quantity demanded.
Q3) A market is a group of buyers and sellers of a particular product.
A)True
B)False
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Page 6
Chapter 5: Measuring a Nations Income
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Sample Questions
Q1) Alcestis and her family are the only inhabitants of Elafonisos, a small island off the coast of Greece. She only produces fresh fish, which she can sell to clients from nearby islands for 2 euros per kilo. Last year, Alcestis caught 800 kg of fish; she consumed 50 kg and sold the remaining 750 kg for 1500. She used 1000 to buy food and clothing, and she used the remaining 500 for a new fishing boat that she bought from another island. Calculate the following for Elafonisos:
a) GDP, as the value of production
b) Consumption
c) Investment
d) Exports
e) Imports
f) Net Exports
g) GDP, as total expenditure
Q2) David is a Canadian resident who works in Canada, where he owns a pizza business. Robert is also Canadian, but he works in the United States. On a typical day, David makes $275 in sales. Robert makes $150 in wages. There are no other costs. Based on this information, compute David and Robert's contributions to the following:a. Canadian GDPb. Canadian GNP
c. U.S. GDPd. U.S. GNP
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Chapter 6: Measuring the Cost of Living
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Sample Questions
Q1) In 1969, Don bought a Dodge Dart for $2500. In 2015, he bought a Honda Civic for $22,000. If the price index in 1969 was 39.2 and the price index in 2015 was 190, what is the price of the Dodge Dart in 2015 prices?
A) $3583
B) $4500
C) $9762
D) $12,117
Q2) Refer to the Table 6-2. Suppose that the basket of goods in the CPI consisted of 3 units of pork and 4 units of corn. What is the consumer price index for 2015 if the base year is 2014?
A) 120.00
B) 129.17
C) 136.11
D) 150.00
Q3) How often is the CPI calculated?
A) weekly
B) monthly
C) quarterly
D) yearly
Q4) Why does the GDP deflator give a different rate of inflation than the CPI does?
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Chapter 7: Production and Growth
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Sample Questions
Q1) The president of a developing country proposes that his country needs to help domestic firms by imposing trade restrictions. What kind of policies are these?
A) These are outward-oriented policies and most economists believe they would have beneficial effects on growth.
B) These are outward-oriented policies and most economists believe they would have adverse effects on growth.
C) These are inward-oriented policies and most economists believe they would have beneficial effects on growth.
D) These are inward-oriented policies and most economists believe they would have adverse effects on growth.
Q2) If a country's saving rate increases, what happens in the long run?
A) Income decreases faster.
B) Productivity increases faster.
C) Productivity decreases.
D) Income increases.
Q3) Productivity can be found as number of hours worked divided by output.
A)True
B)False
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9
Chapter 8: Saving, Investment, and the Financial System
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Sample Questions
Q1) What does a low P/E for a stock indicate?
A) People may expect earnings to fall in the future perhaps because the firm will be faced with increased competition.
B) Its dividends have been low so that no one is willing to pay very much for it.
C) The corporation is possibly overvalued.
D) It is always a good time for buying the company's stock.
Q2) Suppose that in a closed economy GDP is 10,000, consumption is 6500, and taxes are 2000. What value of government expenditures would make national saving equal 1500?
A) 2000
B) 3000
C) 7000
D) 9000
Q3) What is a dividend yield?
A) It is the dividend as a percentage of the stock price.
B) It is the stock price as a percentage of the dividend.
C) It is the dividend as a percentage of the retained earnings per share.
D) It is the retained earnings per share as a percentage of the dividend.
Q4) What are the basic differences between bonds and stocks
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Page 10
Chapter 9: Unemployment and Its Natural Rate
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Sample Questions
Q1) Refer to the Figure 9-2. If the minimum wage fell from $7 to $5, what would happen to unemployment?
A) It would fall by 20.
B) It would fall by 40.
C) It would be unchanged.
D) It would rise by 20.
Q2) The government operates programs for job training and job information intended to reduce unemployment. Which statement best describes how economists feel about such programs?
A) Most economists agree that such programs are of no use.
B) Most economists agree that such programs work very well.
C) Some economists claim that the government can do these things no better than firms, and individuals could do them for themselves.
D) Some economists believe that the private sector has no role in the process of job search.
Q3) What is the theory of efficiency wages? Give a couple of explanations for how efficiency wages might work.
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Chapter 10: The Monetary System
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Sample Questions
Q1) If the reserve ratio is 15 percent, by how much will an additional $1000 of reserves increase the money supply?
A) $1176
B) $1275
C) $5667
D) $6667
Q2) If the reserve ratio is 20 percent, how much is the money multiplier?
A) 2
B) 4
C) 5
D) 8
Q3) Ralph deposits half of his inheritance in a savings account at the bank. In doing so, Ralph is using money as a medium of exchange.
A)True
B)False
Q4) An increase in reserve requirements raises the reserve ratio and decreases the money supply.
A)True
B)False
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Chapter 11: Money Growth and Inflation
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Sample Questions
Q1) According to the principle of monetary neutrality, what will an increase in the quantity of money also increase?
A) employment
B) nominal GDP
C) the incentive to save
D) labour productivity
Q2) In order to maintain stable prices, what must the central bank do?
A) maintain low interest rates
B) keep unemployment low
C) tightly control the money supply
D) sell indexed bonds
Q3) According to the classical dichotomy theory, when the money supply doubles, what also doubles?
A) the price level
B) the real interest rate
C) the inflation rate
D) the real income
Q4) Define each of the symbols and explain the meaning of M × V = P × Y.
Q5) According to the classical dichotomy, what changes nominal variables? What changes real variables?
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Chapter 12: Open-Economy Macroeconomics: Basic Concepts
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Sample Questions
Q1) Refer to Table 12-1. What currency(ies) is(are) less valuable than predicted by the purchasing-power parity theory?
A) the yen
B) the yen and kroner
C) the baht and kroner
D) the boliviano
Q2) Suppose Connie, a Canadian citizen, buys bonds issued by an automobile manufacturer in Sweden. What would her expenditure be?
A) Canadian foreign direct investment that would increase Canadian net capital outflow
B) Canadian foreign direct investment that would decrease Canadian net capital outflow
C) Canadian foreign portfolio investment that would increase Canadian net capital outflow
D) Canadian foreign portfolio investment that would decrease Canadian net capital outflow
Q3) Suppose that Bill, a resident of Canada, buys software from a company in Japan. Explain why and in what directions this changes Canadian net exports and Canadian net capital outflow.
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Chapter 13: A Macroeconomic Theory of the Small Open Economy
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Sample Questions
Q1) In an open economy, what does the market for loanable funds equate national saving with?
A) domestic investment
B) net capital outflow
C) the sum of national consumption and net exports
D) the sum of domestic investment and net capital outflow
Q2) What does the value of net exports equal?
A) the value of national saving-net capital outflow
B) the value of public saving
C) the value of national saving minus imports
D) the value of national saving minus domestic investment
Q3) What is the real exchange rate equal to?
A) the relative price of domestic and foreign currency
B) the relative price of domestic and foreign goods
C) the ratio between the domestic and foreign interest rates
D) the nominal exchange rate minus the inflation rate
Q4) Why do higher real interest rates lead to lower net capital outflow?
Q5) A drop in the Peruvian real interest rate reduces Peruvian net capital outflow.
A)True
B)False
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Chapter 14: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) What happened during World War II?
A) Government purchases of goods and services increased.
B) The real GDP per person decreased by 60 percent.
C) The unemployment rate increased to 15 percent.
D) More resources were devoted to the production of consumer goods.
Q2) Some economists argue that at low levels of GDP (lower than the long-run level of output), a shift to the right in the aggregate-demand curve increases output without a significant increase in the price levels (without inflation), while at higher levels of output (above the long-run level), a shift in the aggregate-demand significantly increases the price level without much effect on output. How would an aggregate-supply curve look like according to this theory?
Q3) What were the changes in output in the early 1930s and early 1940s in Canada, respectively?
A) a large increase and a large increase
B) a large increase and a large decrease
C) a large decrease and a large increase
D) a large decrease and a large decrease
Q4) Use the misperceptions theory to discuss the economic forces that shift the aggregate-supply curve when the expectations about the overall price level change.
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Chapter 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Sample Questions
Q1) How does the interest rate change when the price level falls and when the money supply falls?
A) The interest rate rises both when the price level falls and when the money supply falls.
B) The interest rate rises when the price level falls and falls when the money supply falls.
C) The interest rate falls when the price level falls and rises when the money supply falls.
D) The interest rate falls both when the price level falls and when the money supply falls.
Q2) Explain how unemployment insurance acts as an automatic stabilizer.
Q3) If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?
A) $40 billion
B) $133.33 billion
C) $250 billion
D) $400 billion
Q4) What is the difference between monetary policy and fiscal policy?
Q5) Use the money market to explain why the aggregate demand curve slopes downward.
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Chapter 16: The Short-Run Tradeoff Between Inflation and Unemployment
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Sample Questions
Q1) Refer to the Figure 16-2. Suppose the economy is initially at pointc. If the money supply growth rate decreases, where does the economy move to in the short-run?
A) b
B) d
C) e
D) a
Q2) In the long run, the inflation rate depends primarily on money supply growth.
A)True
B)False
Q3) Which change will move the economy to a point on the Phillips curve where unemployment is lower?
A) lower inflation
B) increased government spending
C) a decrease the money supply
D) higher expectations about inflation
Q4) An increase in inflation expectations shifts the short-run Phillips curve right and has no effect on the long-run Phillips curve.
A)True
B)False
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Chapter 17: Five Debates Over Macroeconomic Policy
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Sample Questions
Q1) Identify three of the five costs of inflation.
Q2) Why does Canadian public policy discourage saving?
A) because, other things the same, taxes increase the return from savings
B) because means-tested programs such as Old Age Security provide greater benefits to those who saved
C) because some forms of capital income are taxed twice
D) because capital gains are not taxed
Q3) What will time inconsistency cause?
A) It will cause the short-run Phillips curve to be higher than it otherwise would.
B) It will cause the short-run Phillips curve to be lower than it otherwise would.
C) It will cause the long-run Phillips curve to be farther to the right than it otherwise would.
D) It will cause the long-run Phillips curve to be farther to the left than it otherwise would.
Q4) Suppose a country has had a high and relatively stable inflation rate for a long time. How might this affect the costs and benefits of inflation reduction?
Q5) Explain how it is possible for the government debt to grow forever.
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