Principles of Economics Practice
Questions
Course Introduction
Principles of Economics introduces students to the fundamental concepts and analytical tools used to understand how individuals, businesses, and governments make decisions regarding the allocation of limited resources. The course covers the basics of microeconomics including supply and demand, market equilibrium, consumer and producer behavior as well as core macroeconomic topics such as national income, inflation, unemployment, and fiscal and monetary policy. By exploring these principles, students develop an appreciation for the economic forces that shape society and learn how economic theory applies to real-world issues and policy debates.
Recommended Textbook
Economics for Today 5th Edition by Allan Layton
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Page 2
Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) Scarcity is a problem:
A) that only poor people face.
B) because human wants are limited while resources are unlimited.
C) because human wants are unlimited while resources are limited.
D) only in third world countries.
Answer: C
Q2) Someone notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. This person has:
A) confused association and causation.
B) understood the economy very well.
C) used normative economics to answer a positive question.
D) built an untestable model.
Answer: A
Q3) Macroeconomics is concerned with the issue of how monetary policy can slow down inflation.
A)True
B)False
Answer: True
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3
Chapter 2: Applying Graphs to Economics
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Sample Questions
Q1) In Exhibit A1.5, the slope of the straight line A-D is:
A) zero.
B)1.
C) 1/2.
D) -1.
Answer: A
Q2) As shown in Exhibit A1.3, the slope of straight line AB:
A) decreases with increases in X.
B) increases with increases in X.
C) increases with decreases in X.
D) remains constant with changes in X.
Answer: D
Q3) An upward-sloping line or curve is used to illustrate:
A) the ceteris paribus assumption.
B) an inverse relationship.
C) two unrelated variables.
D) a positive relationship.
Answer: D
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Chapter 3: Production Possibilities and Opportunity Cost
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Sample Questions
Q1) Suppose that Spain has a comparative advantage in hats and Portugal has a comparative advantage in doormats. Under a system of free trade, each country specialises and then trades with the other. If the price starts at four hats per doormat, and then increases to five hats per doormat, then:
A) people in Portugal will not want to buy as many hats.
B) Spain no longer has a comparative advantage in hats.
C) Portugal is flooding the market with too many doormats.
D) some of the gains from trade shift to Portugal.
Answer: D
Q2) Suppose an economy is faced with the production possibilities table shown in Exhibit 2.8. As additional units of capital goods are being produced, the number of consumption goods produced must _____, because _____.
A) increase; the production possibility table shows only the maximum efficiency points
B) increase; of the law of increasing costs
C) decrease; of the law of decreasing costs
D) decrease; of the limited resource base
Answer: D
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Page 5
Chapter 4: Market Demand and Supply
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Sample Questions
Q1) The effect of a decrease in the price of coffee, other things being equal, causes a:
A) leftward shift in the demand curve for coffee.
B) downward movement along the demand curve for coffee.
C) rightward shift in the demand curve for coffee.
D) upward movement along the demand curve for coffee.
Q2) In a market, competitive forces guarantee that any price other than the equilibrium price is:
A) market-clearing.
B) stable.
C) temporary.
D) unaffordable.
Q3) Which of the following will not cause a shift in the demand curve for good X?
A) A change in the price of a complementary good.
B) A change in the price of good X.
C) A change in consumer tastes and preferences for good X.
D) An increase in consumer income.
Q4) An increase in income increases the supply of all goods.
A)True
B)False
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Chapter 5: Markets in Action
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Sample Questions
Q1) Assume a ceiling price is set above the equilibrium price. The final result is the equilibrium price.
A)True
B)False
Q2) A way to reduce income inequality is:
A) for governments to impose a progressive income tax.
B) for governments to reduce welfare payments.
C) for governments to pay welfare benefits to higher income earners.
D) for governments to stop intervening in the market.
Q3) The shortage because of the price ceiling might result in:
A) less waiting times.
B) more goods on offer.
C) lower quality of the good.
D) higher quality of the good.
Q4) If the equilibrium price of good X is $15 and a price ceiling is imposed at $14, the result will be:
A) an accumulation of inventories of unsold X.
B) difficult to determine.
C) a surplus.
D) a shortage.
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Chapter 6: Elasticity of Demand and Supply
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Sample Questions
Q1) When the price of bread increases by 5 per cent, the quantity demanded of crackers increases by 2 per cent. The cross elasticity of demand between crackers and bread is:
A) 0.67.
B) 1.5.
C) 2.5.
D) 0.4.
Q2) Price elasticity remains constant along a straight-line demand curve.
A)True
B)False
Q3) The cross-elasticity of demand:
A) reveals whether the good is income elastic.
B) reveals whether the good is a necessity.
C) reveals whether the good is important.
D) reveals whether the good is a substitute.
Q4) Inelastic demand is a change of less than 10% in quantity demanded in response to a 1% change in price.
A)True
B)False
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8
Chapter 7: Production Costs
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Sample Questions
Q1) By filling in the blanks in Exhibit 6.8, the ATC of three pizzas is shown to be equal to:
A) $9.00.
B) $10.00.
C) $13.33.
D) $22.33.
Q2) As a firm expands its output from zero:
A) marginal wage of labour increases.
B) it suffers from the diseconomies of scale.
C) it has to pay wages, rent and electricity to cover the variable costs.
D) no change in the cost is occurring.
Q3) Which of the following statements is possible?
A) AVC can be falling when ATC is rising.
B) ATC can be falling when AVC is rising.
C) ATC cuts AVC at its minimum.
D) AVC falls when ATC falls, and rises when ATC rises.
Q4) The law of diminishing marginal returns causes a firm's short-run marginal cost curve to be U-shaped.
A)True
B)False
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Chapter 8: Perfect Competition
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Sample Questions
Q1) If there is no level of output at which the firm earns a profit, the firm should:
A) shut down.
B) perform an analysis regarding whether to operate or not.
C) diversify.
D) try to push the price up.
Q2) A perfectly competitive firm has control over:
A) the number of firms in the market.
B) market conditions.
C) the price at which to sell.
D) the quantity of output to produce.
Q3) According to Exhibit 7.7, the firm's short-run economic profit will be:
A) zero.
B) $260.
C) $520.
D) indeterminate from the information given.
Q4) If a competitive firm cannot cover all of its costs, then it should shut down in the short run.
A)True
B)False
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Chapter 9: Monopoly
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Sample Questions
Q1) Mobile phone companies offer alternative pricing plans to consumers, who can then choose the one that suits them best. This is an example of:
A) predatory pricing.
B) perfect competition.
C) price discrimination.
D) arbitrage.
Q2) By calculating the data provided in Exhibit 8.5, how much is the profit if the firm decides to produce 7 units?
A) zero.
B) 6.
C) 12.
D) 16.
Q3) In a natural monopoly, the long-run average cost curve declines and therefore average cost is lower when there is only one seller.
A)True
B)False
Q4) A monopoly earns the most profit by charging a price where demand is inelastic.
A)True
B)False
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Chapter 10: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) The oligopoly market structure does not have which of the following characteristics?
A) Few sellers.
B) Homogeneous product.
C) Differentiated product.
D) Many small sellers.
Q2) An oligopoly is characterised by having:
A) a low-concentration ratio and a few large independent firms.
B) a high-concentration ratio and a few large independent firms.
C) many small firms that cannot dominate the market.
D) a few large independent firms.
Q3) 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.
Q4) The strategic analysis firms undertake is often seen in perfect competition.
A)True
B)False
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Chapter 11: Policy Issues: Housing Affordability and Climate
Change
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Sample
Questions
Q1) Assume that the private supply is 'Supply 1' and the supply including tax is 'Supply 2' (Exhibit 10.2). What is the reduction in the output after the carbon tax was imposed?
A) zero units.
B) 30 units.
C) 20 units.
D) 10 units.
Q2) In Exhibit 10.3, if the 'cap' is set at 80 permits, and the demand for the permits decreased by 10 units at each price level, the resulting price of permits is equal to:
A) $50.
B) $30.
C) $10.
D) $40
Q3) In Exhibit 10.2, the market demand curve 'Demand' and market supply curve 'Supply 1' establish a:
A) socially desirable level of emissions.
B) market equilibrium.
C) regulated output.
D) price and quantity of external costs.
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Chapter 12: Measuring the Size of the Economy
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Q1) Which of the following is a shortcoming of GDP?
A) It measures non-market transactions.
B) It includes an estimate of illegal transactions.
C) It includes an estimate of the value of household services.
D) It does not include the value of the black market.
Q2) Which of the following is a shortcoming of GDP?
A) It measures used goods and services.
B) It includes changes in inventories.
C) It includes the value of net exports.
D) It does not make an allowance for leisure time.
Q3) The underground economy:
A) produces final goods and services that can be counted in GDP.
B) is illegal because it is not included in GDP.
C) is about 60 to 65 per cent of GDP.
D) is a good indicator of the size of GDP.
Q4) If the underground economy were included in GDP, GDP would:
A) grow.
B) decline.
C) stay the same.
D) Not possible to determine.
Page 14
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Chapter 13: Business Cycles and Economic Growth
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Sample Questions
Q1) Suppose the index of leading economic indicators begins to decline for several months. Which of the following economic events will likely follow?
A) A recession.
B) Severe inflation.
C) Greater employment.
D) Higher investment.
Q2) A recession is a decline in real GDP lasting at least:
A) one year.
B) six months.
C) three months.
D) one month.
Q3) Which of the following statements is correct regarding the Solow growth model?
A) Increases in living standards will be achieved automatically in the long run.
B) An increase in the saving rate will always result in a higher level of output per person.
C) An increase in the saving rate will always result in a higher level of consumption per person.
D) The optimal saving rate will be achieved as the community is no better off by additional saving.
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15
Chapter 14: Inflation and Unemployment
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Sample Questions
Q1) According to the Australian Bureau of Statistics (ABS), any person who claims on an ABS survey that she/he is performing only unpaid household duties is:
A) retired.
B) unemployed.
C) re-employable.
D) not a member of the labour force.
Q2) Cyclical unemployment can occur:
A) when the demand for certain goods and services depends on the current stage of the business cycle.
B) when the demand for certain goods and services depends on the workers' skill levels.
C) when the demand for certain goods and services has declined due to the recession.
D) when the demand for certain goods and services declines over time.
Q3) During the 1970s, inflation in Australia:
A) reached its lowest rate (0.2 per cent) since the end of the Second World War.
B) approached hyperinflation proportions.
C) declined to 0.5 per cent as a result of the first oil price shock.
D) reached a peak of 16 per cent in 1976, then subsided during the 1980s.
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Page 16
Chapter 15: A Simple Model of the Macro Economy
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Sample Questions
Q1) The aggregate supply curve shows the relationship between the price level and the level of nominal GDP produced by the nation's economy.
A)True
B)False
Q2) Which of the following will shift the aggregate demand curve to the right?
A) Consumers becoming more pessimistic about the future.
B) A decrease in government spending.
C) An increase in business optimism.
D) A decrease in business optimism.
Q3) Other factors held constant, a decrease in labour cost will shift the aggregate:
A) demand curve leftward.
B) demand curve rightward.
C) supply curve leftward.
D) supply curve rightward.
Q4) Keynes placed great primacy on the:
A) production function.
B) supply side of the economy.
C) demand side of the economy.
D) delivery of inputs to producer.
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Chapter 16: The Monetary and Financial System
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Q1) Keynes called the money that people hold to make routine day-to-day purchases the:
A) transactions demand for holding money.
B) precautionary demand for spending money.
C) speculative demand for holding money.
D) store of value demand for holding money.
Q2) Credit cards are money because they serve the three functions of money.
A)True
B)False
Q3) 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.
Q4) Other things being equal, an increase in the rate of interest causes a/an:
A) upward movement along the demand for money curve.
B) downward movement along the demand for money curve.
C) rightward shift of the demand for money curve.
D) leftward shift of the demand for money curve.
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Chapter 17: Macroeconomic Policy I: Monetary Policy
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Q1) According to Keynesians, an increase in the money supply will have its greatest impact on GDP when the aggregate demand curve intersects:
A) the vertical portion of the aggregate supply curve.
B) the upward-sloping portion of the aggregate supply curve.
C) the horizontal portion of the aggregate supply curve.
D) either the upward-sloping or the vertical portions of the aggregate supply curve.
Q2) If the RBA believes the economy is likely to fall into a recession over the next two quarters, its likely response to this will be to:
A) sell government securities to banks in order to increase interest rates.
B) sell government securities to banks in order to decrease interest rates.
C) buy government securities from banks in order to decrease interest rates.
D) buy government securities from banks in order to increase interest rates.
Q3) The primary goal of the RBA is to:
A) keep inflation low in order to generate sustainable growth.
B) maintain full employment.
C) ensure the economic prosperity of Australian people.
D) keep interest rates low.
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Chapter 18: Macroeconomic Policy II: Fiscal Policy
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Sample Questions
Q1) The Laffer curve shows that as tax rates rise, tax revenue:
A) always rises.
B) first rises, then falls and then rises again.
C) always falls.
D) first rises and then falls.
Q2) Transfer payments are an example of a/an:
A) discretionary stabiliser.
B) countercyclical stabiliser.
C) pro-cyclical stabiliser.
D) automatic stabiliser.
Q3) With low inflation and high unemployment, the most likely fiscal stance of the federal government would be:
A) neutral.
B) expansionary.
C) contractionary.
D) pro-cyclical.
Q4) The national debt is always a burden on future generations.
A)True
B)False
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Chapter 19: International Trade and Finance
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Sample Questions
Q1) In Exhibit 18.3, Australia has a comparative advantage in producing:
A) potatoes.
B) wheat.
C) both potatoes and wheat.
D) neither potatoes nor wheat.
Q2) If the current account and capital account are both in surplus, the official reserve account does not have to be in deficit.
A)True
B)False
Q3) Assume that the opportunity cost of producing wheat is lower in Australia compared with Malaysia. Further assume that the opportunity cost of producing cars is higher in Australia compared with Malaysia. Which country has a comparative advantage in producing wheat?
A) Australia and Malaysia.
B) Australia.
C) Malaysia.
D) Both countries have to specialise in producing cars.
Q4) If the yen price of dollars falls, then the dollar price of yen rises.
A)True
B)False
Page 21
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