Principles of Economics
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Course Introduction
Principles of Economics introduces students to the fundamental concepts and analytical tools of microeconomics and macroeconomics. The course explores how individuals, businesses, and governments make choices about allocating limited resources, how markets operate, and the role of supply and demand in determining prices. Students learn about consumer and producer behavior, market structures, and the impact of government policies. The macroeconomic portion covers topics such as national income, unemployment, inflation, fiscal and monetary policy, and international trade, providing a comprehensive foundation for understanding economic phenomena in everyday life and public policy.
Recommended Textbook
The Macro Economy Today 13th Edition by
Bradley Schiller Cynthia Hill
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Chapter 1: Economics: The Core Issues
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Q1) Scarcity results when available resources cannot satisfy all desired uses of those resources.
Wants exceed resources.
A)True
B)False
Answer: True
Q2) The role of the entrepreneur in an economy is to
A)Bring the factors of production together and assume the risk of production.
B)Work with government planners to determine what goods are produced.
C)Arrange bank financing for the owners of new businesses.
D)Ensure full employment of labor.
Answer: A
Q3) When the invisible hand does not produce optimal outcomes for the economy,there is evidence of
A)Market failure.
B)Government failure.
C)Macroeconomic failure.
D)Scarcity.
Answer: A
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Chapter 2: The Us Economy: A Global View
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Q1) Income inequalities are often greatest in the poorest countries. Richer nations tend to be better at reducing income inequality than are poorer nations.
A)True
B)False
Answer: True
Q2) Which of the following has been a century-long trend in the United States?
A)Decline of total value of world trade.
B)Relative increase in farming to manufacturing.
C)Relative decline in manufacturing to the service sector.
D)Relative decline in service sector to manufacturing.
Answer: C
Q3) In the United States today,nearly _________ of the population has attained a college degree.
A)30 percent
B)15 percent
C)50 percent
D)40 percent
Answer: A
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Chapter 3: Supply and Demand
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Sample Questions
Q1) Which of the following is not held constant along a given supply curve for a good?
A)The cost of factors of production.
B)Price.
C)Technology.
D)Taxes.
Answer: B
Q2) Ceteris paribus,if buyers expect the price of airline tickets to fall in the future,then right now there should be
A)An increase in the demand for airline tickets.
B)A decrease in the supply of airline tickets.
C)A decrease in the demand for airline tickets.
D)No change in the supply of or demand for airline tickets because the price is not changing right now.
Answer: C
Q3) The supply curve shifts to the right when a seller sells a good.
The market supply curve is a summary of the supply intentions of all producers.
A)True
B)False
Answer: False
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Chapter 4: The Role of Government
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Q1) Which of the following is the best description of the U.S.tax system?
A)The federal income tax is regressive,but sales,property,and other taxes tend to be progressive.
B)The U.S.tax system is consistently progressive.
C)The federal income tax is progressive,but sales,property,and other taxes tend to be regressive.
D)The U.S.tax system is consistently regressive.
Q2) Which of the following properly ranks the size of tax revenues received by the federal government from highest to lowest?
A)Excise taxes,Social Security payroll taxes,income taxes,and corporate taxes.
B)Corporate taxes,Social Security payroll taxes,income taxes,and excise taxes.
C)Income taxes,Social Security payroll taxes,corporate taxes,and excise taxes.
D)Social Security payroll taxes,excise taxes,corporate taxes,and income taxes.
Q3) The largest source of federal revenue is the corporate income tax. The largest source of federal revenue is the individual income tax.
A)True
B)False
Q4) Why is it safe to assume that national defense will always be provided by the government instead of the market?
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Chapter 5: National Income Accounting
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Q1) Without foreign trade,the dollars used to buy goods and services are included in the circular flow as consumption,investment,and government spending.
As income is used to buy goods and services,the money spent is counted as consumption,investment,and government spending in the circular flow.
A)True
B)False
Q2) Savings equal the difference between personal income and consumption. Savings equal the difference between disposable income and consumption.
A)True
B)False
Q3) GDP can be calculated by summing up the "value added" at every stage of production.
The value added is the amount by which the price goes up from the sale of an intermediate or final good.
A)True
B)False
Q4) What are transfer payments,and how do they make their way into the GDP calculation?
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Chapter 6: Unemployment
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Questions
Q1) How have the unemployment components of the natural rate of unemployment changed over the past 20 years?
A)Frictional unemployment has increased and structural unemployment has increased.
B)Frictional unemployment has decreased and structural unemployment has decreased.
C)Frictional unemployment has decreased and structural unemployment has increased.
D)Frictional unemployment has increased and structural unemployment has decreaseD.Frictional unemployment has decreased due to better communication,and structural unemployment has increased due to rapid technology changes and increased trade and outsourcing.
Q2) Why has structural unemployment in the United States increased over the last 20 years?
A)Rapid technology changes have eliminated the needs for certain skill sets.
B)Companies are increasingly outsourcing certain task to cheaper foreign markets.
C)Increased trade with other countries has shut down U.S.factories competing with import industries.
D)All of the choices are correct.
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Chapter 7: Inflation
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Q1) The Consumer Price Index is
A)A measure of changes in the average price of all goods and services.
B)A measure of changes in the average price of consumer goods and services.
C)Used to measure the impact of business speculation on consumers.
D)The impact felt by consumers who move into a higher tax bracket because of inflation.
Q2) If the price of iPods rises 10 percent during a year when the level of average prices rises 3 percent,the relative price of iPods compared with other goods
A)Remains constant.
B)Increases.
C)Decreases.
D)More information is required to answer this question.
Q3) A friend tells you that his income has risen every year by 5 percent.At the same time,prices,on average,have risen by 5 percent.Your friend claims he is better off.Your friend
A)Is experiencing money illusion.
B)Really is better off as he suggests.
C)Has experienced an increase in nominal and real income.
D)Has experienced an increase in real income only.
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Chapter 8: The Business Cycle
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Q1) A recession can be represented by a point
A)Inside the production possibilities curve.
B)Outside the production possibilities curve.
C)On the production possibilities curve.
D)At either end of the production possibilities curve.
Q2) What are the differences between classical theory and what Keynes believed?
Q3) Keynesian levers include
A)Deregulation.
B)Fiscal policy.
C)Monetary policy.
D)Aggregate supply.
Q4) Which of the following is not associated with the aggregate supply curve?
A)Factors of production.
B)The interest rate effect.
C)The profit effect.
D)The cost effect.
Q5) Is equilibrium always at an optimal level of output? Explain your answer.
Q6) Why does the slope of the aggregate supply curve change from the short run to the long run?
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Chapter 9: Aggregate Demand
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Q1) Which of the following most likely occurs when an inflationary gap exists?
A)A bidding war for available goods and services.
B)More layoffs.
C)Rising inventories.
D)Excessive saving.
Q2) According to Keynes,cyclical unemployment is caused by too
A)Much aggregate demand.
B)Little aggregate demand.
C)Much aggregate supply.
D)Little aggregate supply.
Q3) The economy will not reach and maintain its goals of full employment and price stability unless the economy is
A)At full employment and the price level is stable.
B)Above full employment and the price level is stable.
C)Below full employment and the price level is stable.
D)None of the choices are correct.
Q4) What are the two types of consumer spending as identified by Keynes,and what are the determinants of each?
Q5) How can autonomous consumption be greater than zero when income is zero?
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Chapter 10: Self-Adjustment or Instability
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Q1) How can an event such as the terrorist attacks of September 2001 affect consumer and business confidence and the economy?
Q2) If the marginal propensity to save is 0.10 and the initial decline in investment is $100,by how much will aggregate demand eventually decrease?
A)$100.
B)$900.
C)$1,000.
D)$10,000.
Q3) Given C = 200 + 0.75Y<sub>D</sub>,the multiplier is A)0.25.
B)0.75.
C)4.
D)1.33.
Q4) Which of the following situations results in the lowest level of cyclical unemployment?
A)Undesired inventory accumulation.
B)Total value of goods supplied exceeds total value of goods demanded.
C)A period of significant inflation.
D)Desired saving exceeds desired investment.
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Chapter 11: Fiscal Policy
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Sample Questions
Q1) Nearly half of the federal government's tax revenues come from
A)Social Security payroll taxes.
B)Customs,whiskey,and tobacco taxes.
C)Individual income taxes.
D)Corporate income taxes.
Q2) If the multiplier equals 2 and the AD shortfall is $6 million,the desired fiscal stimulus is
A)$6 million.
B)$12 million.
C)$333,333.
D)$3 million.
Q3) The World View article in the text titled "China Sets Big Stimulus Plan in Bid to Jump-Start Growth" states that China's plan includes spending in housing,infrastructure,and agriculture,as well as a tax deduction for capital spending by companies.This is an example of
A)Fiscal stimulus.
B)Aggregate demand shortfall.
C)Fiscal restraint.
D)Expansionary classical policy.
Q4) How does the slope of the AS curve affect the closure of the GDP gap?
Page 13
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Chapter 12: Deficits and Debt
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Q1) If full-employment income and equilibrium income are equal for a country,then a tax cut will result in
A)Excess AD.
B)Output exceeding desired expenditure.
C)Leakages exceeding injections.
D)Undesired inventory accumulation.
Q2) In order to reduce the U.S.debt,
A)The government must use deficit spending.
B)The government should spend less than it collects in tax revenues.
C)There will be a transfer of revenue from bondholders to taxpayers.
D)Foreign governments must lend more money to the U.S.government.
Q3) Which of the following is not true when the economy is fully employed and government bonds are sold to finance greater government spending?
A)This pushes the economy along its production possibilities curve toward more public sector goods.
B)This action results in crowding out.
C)The government is running a structural deficit.
D)The government is running a cyclical deficit.
Q4) How do rising interest rates cause crowding out?
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Chapter 13: Money and Banks
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Q1) If bank customers decide as a group to pay off their loans and to not take out any new loans,ceteris paribus,
A)Excess reserves will decrease.
B)The money multiplier will decrease.
C)The money supply will increase.
D)The money supply will decrease.
Q2) A reduction in the minimum required reserve ratio will reduce the money multiplier. A reduction in the minimum required reserve ratio will actually increase the money multiplier.
A)True
B)False
Q3) Trusted money does all of the following except
A)Reduce the efficiency with which market exchanges take place.
B)Serve as a mechanism for transforming current income into future purchases.
C)Promote efficient division of labor.
D)Facilitate the continuous series of exchanges that characterizes a market economy.
Q4) What are the constraints on deposit creation for the banking system?
Q5) How does the banking system create money?
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Chapter 14: The Federal Reserve System
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Q1) The Fed is most likely to pursue
A)Frequent adjustment of the reserve requirement.
B)Use of open market operations as the primary mechanism to change reserves.
C)Numerous increases in the discount rate to tighten the money supply quickly.
D)Frequent changes in marginal tax rates.
Q2) The Federal Open Market Committee includes
A)All 7 governors and 5 of the regional Reserve bank presidents.
B)5 of the governors and all of the regional Reserve bank presidents.
C)12 of the regional Reserve bank presidents plus the chairman of the Fed.
D)All 12 of the governors and all 7 of the regional Reserve bank presidents.
Q3) The reserve requirements and discount rates affect M2 but do not have much impact on M1.
The Fed tools have an impact on both M1 and M2 because M2 includes all of M1 plus a few other items.
A)True
B)False
Q4) How does the reserve requirement impact the banking system as a monetary policy tool,and is it used frequently?
Q5) Why do banks typically maintain a low level of excess reserves?
Q6) Is the Federal Reserve insulated from political pressures in any way? Explain.
Page 16
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Chapter 15: Monetary Policy
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Q1) The federal funds rate reflects the cost for banks to borrow from other banks. The federal funds rate is an overnight,interbank loan rate paid to cover reserve requirements.
A)True
B)False
Q2) Holding the velocity of money constant,according to the equation of exchange,a 10 percent increase in the money supply could possibly cause which of the following?
A)A 5 percent increase in the quantity of output.
B)A 5 percent decrease in the price level.
C)A 10 percent decrease in the quantity of output.
D)A 10 percent increase in the price level.
Q3) If the Fed wants to increase AD,it should do which of the following?
A)Conduct open market purchases.
B)Raise the discount rate.
C)Raise the required reserve ratio.
D)Lower capital gains tax rates.
Q4) Name and explain the three reasons for holding money balances.
Q5) How can the Fed increase the level of output for the economy through open market operations?
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Chapter 16: Supply-Side Policy: Short-Run Options
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Q1) The Phillips curve implies a trade-off between interest rates and unemployment. The Phillips curve implies a trade-off between the inflation rate and unemployment.
A)True
B)False
Q2) Which of the following is the best indication that stagflation is occurring?
A)Rising unemployment rate and falling inflation rate.
B)Rising unemployment rate and rising inflation rate.
C)Falling unemployment rate and falling inflation rate.
D)Falling unemployment rate and rising inflation rate.
Q3) The idea that a shift in aggregate demand affects both inflation and unemployment is consistent with
A)The Keynesian view of the economy.
B)The consensus view of the economy.
C)The monetarist view of the economy.
D)A vertical aggregate demand curve.
Q4) What is the misery index? What are the economic conditions when it is low versus when it is high?
Q5) What does the Phillips curve illustrate,and what changes in the AS-AD model support this relationship?
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Chapter 17: Growth and Productivity: Long-Run Possibilities
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Q1) Which of the following would increase labor productivity,ceteris paribus?
A)An increase in the number of participants in the labor force.
B)An increase in the quality of capital.
C)Crowding out.
D)A decrease in the quantity of capital.
Q2) Whose work resulted in a doomsday forecast?
A)Thomas Malthus.
B)Robert Solow.
C)Edward Denison.
D)Karl Marx.
Q3) The rule of 72
A)Refers to the base year from which growth rates are measured.
B)Shows the number of years it takes for productivity to triple.
C)Is the procedure for calculating percentage increases in the growth rate.
D)Can be used to determine how long it will take for GDP to double.
Q4) Ceteris paribus,rising employment rates imply
A)Falling per capita GDP.
B)Rising per capita GDP.
C)Higher labor force participation rates.
D)Lower labor force participation rates.
Page 19
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Chapter 18: Theory Versus Reality
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Q1) The correction of any and all macroeconomic problems that arise
A)Is compatible with our design capabilities.
B)Has been easy to accomplish over the last decade.
C)Is the concept of fine-tuning.
D)Is the policy approach favored by most economists.
Q2) Since the Second World War,the severity of the business cycle has moderated. The ups and downs of the economy have been less pronounced since World War II.
A)True
B)False
Q3) Which of the following groups believes that the private sector takes actions based on rational expectations to offset policy actions?
A)Keynesians.
B)New classical economists.
C)Supply-siders.
D)Marxists.
Q4) A supply-side policy to cure a recession might include
A)A decrease in government spending.
B)Elimination of the minimum wage.
C)A tax increase.
D)A decrease in the reserve requirement.
Page 20
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Chapter 19: International Trade
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Q1) An embargo is
A)A prohibition on exports or imports.
B)A tax imposed on imported goods.
C)A limit to the quantity of a good that may be imported in a given time period.
D)An orderly marketing agreement.
Q2) Protectionism achieves which of the following goals?
A)Greater consumption possibilities through greater specialization.
B)Protection of infant industries.
C)Protection of comparative advantage.
D)Protection of absolute advantage.
Q3) International trade
A)Causes prices of products to rise because of the transportation costs.
B)Benefits the domestic industries that compete with the imported products.
C)Redistributes income from import-competing industries to export industries.
D)Reduces the level of income for export industries.
Q4) Which of the following groups has an interest in encouraging free trade?
A)Workers in import-competing industries.
B)Producers in import-competing industries.
C)Neither workers nor producers in any industry are in favor of trade.
D)Workers in export industries.
Page 21
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Chapter 20: International Finance
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Q1) One cartoon in the text shows a tourist on a far-off island saying,"How can I relax,knowing that out there,somewhere,somehow,someone's attacking the dollar?"
Which of the following shifts in the foreign exchange market is the tourist concerned about?
A)Leftward shift of supply and leftward shift of demand for the dollar.
B)Leftward shift of supply and rightward shift of demand for the dollar.
C)Rightward shift of supply and leftward shift of demand for the dollar.
D)Rightward shift of supply and rightward shift of demand for the dollar.
Q2) Which of the following does not involve exports and imports?
A)Net exports.
B)Current account.
C)Balance of trade.
D)Capital account.
Q3) Foreign exchange reserves are
A)Held illegally by many countries.
B)Holdings of foreign exchange by official government agencies.
C)Holdings of foreign exchange by individual citizens.
D)Used by the Federal Reserve in open market operations.
Q4) State the case for and the case against currency bailouts.
Q5) Explain the forces that can cause an exchange rate to change.
Page 22
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Chapter 21: Global Poverty
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Q1) Which of the following will not increase the opportunity for internal financing of capital?
A)Improved banking facilities.
B)Saving incentives.
C)Seizing of private banks by the government.
D)Transparent capital markets.
Q2) De Soto's The Other Path encourages poor countries to use their development policies to do all of the following except
A)Encourage population growth.
B)Reduce regulations.
C)Enforce laws to safeguard property.
D)Encourage entrepreneurship.
Q3) Which of the following statements is true?
A)U.S.GDP per capita is five times larger than the world average.
B)According to world standards,12 percent of Americans are poor.
C)The poorest nations of the world have average incomes of $5,000.
D)"Extreme poverty" refers to an income of less than $2 per day.
Q4) Explain the difference between poverty in the United States and poverty in the rest of the world.
Q5) What is human capital,and what factors contribute to human capital development?
Page 23
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