Principles of Economics Study
Guide Questions
Principles of Economics introduces students to the foundational concepts and analytical tools used to understand economic behavior and decision-making at both individual and societal levels. The course covers essential topics such as supply and demand, market structures, consumer choice, production and costs, and the role of government in the economy. Students will also examine macroeconomic indicators like GDP, inflation, and unemployment, as well as the principles guiding fiscal and monetary policy.
Through real-world examples and economic models, this course equips students with the skills necessary to analyze economic issues and evaluate the impact of various policy decisions.
Recommended Textbook
ECON MACRO4 4th Edition by William A. McEachern
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21 Chapters
3789 Verified Questions
3789 Flashcards
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Chapter 1: The Art and Science of Economic Analysis
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147 Verified Questions
147 Flashcards
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Sample Questions
Q1) Rational choice by an individual implies
A)the use of some mathematical model when solving a problem
B)making decisions aimed at achieving some predetermined goal
C)that only monetary costs and benefits are weighed
D)that an individual will never regret any action taken
E)that scarcity can be eliminated for that individual
Answer: B
Q2) Considering both product markets and resource markets, most economic decision makers participate in the economy as both buyers and sellers.
A)True
B)False
Answer: True
Q3) The association-causation fallacy is the error of assuming that what is true for one member of a group must be true for the group.
A)True
B)False
Answer: False
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Chapter 2: Understanding Graphs-Appendix
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Sample Questions
Q1) A U-shaped curve has a positive slope everywhere.
A)True
B)False
Answer: False
Q2) In Exhibit 1-2, at x = 8, the
A)value of y is larger on curve A than on curve B
B)value of y is smaller on curve A than on curve B
C)value of y is the same on curve A as on curve B
D)slope of line A is negative
E)slope of line B is positive
Answer: B
Q3) 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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195 Flashcards
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Sample Questions
Q1) The term opportunity cost suggests that
A)in any exchange situation where one person gains, someone else must lose
B)not all individuals make the most of life's opportunities
C)executives do not always recognize opportunities for profit as quickly as they should
D)the only factor that is important in decision making is cost
E)because goods are scarce, in order to get some good you must give up some other good in return
Answer: E
Q2) If Evan has an absolute advantage in cleaning and bookkeeping when compared to Gloria, then
A)Evan must also have a comparative advantage in cleaning and bookkeeping
B)Evan must have a comparative advantage in cleaning
C)Evan must have a comparative advantage in bookkeeping
D)Gloria has a comparative advantage in neither activity
E)we can conclude nothing about comparative advantage
Answer: E
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Chapter 4: Economic Decision Makers
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Sample Questions
Q1) During recent elections, consumer groups in various states attempted to get the sales tax on all medicines and drugs removed. They argued that such a tax is "severely regressive." What is the economic interpretation of their statement?
A)The poor get ill more often than do the rich.
B)The poor pay higher prices for medicine and drugs than do the rich.
C)The poor pay a higher percentage of their income for medicine and drugs than do the rich.
D)All consumers pay too much money for medicine and drugs.
E)The sales tax discourages the poor from seeking medical treatment.
Q2) Households act as demanders when they demand
A)that corporate executives and government officials be held accountable for their actions
B)dividends from the stocks they hold
C)interest and capital gains from the bonds they hold
D)goods and services from firms and the government
E)payment for the goods and services they sell to firms and governments
Q3) A major disadvantage of the corporate form of business is limited liability.
A)True
B)False
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Page 6
Chapter 5: Demand, Supply, and Markets
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Sample Questions
Q1) Suppose the current equilibrium price of pizza is $5. If the government decides the price of pizza cannot rise above $4, the result of this policy would be
A)a shortage
B)a surplus
C)that the market would remain in equilibrium but with a larger quantity bought and sold than at $5
D)at the $4 price, the quantity sold would be greater than the quantity bought
E)a shift of demand to the right
Q2) Refer to exhibit 4-14. The market demand curve is given by D<sub>1</sub> and the supply by S<sub>1</sub>. Equilibrium price is P<sub>2</sub> and equilibrium quantity is Q<sub>1</sub>. What will the new equilibrium price and quantity be if there is an increase in the birth rate?
A)P<sub>2</sub> and Q<sub>1</sub>
B)P<sub>1</sub> and Q<sub>2</sub>
C)P<sub>3</sub> and Q<sub>4</sub>
D)P<sub>2</sub> and Q<sub>2</sub>
E)P<sub>4</sub> and Q<sub>3</sub>
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Page 7
Chapter 6: Introduction to Macroeconomics
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162 Flashcards
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Sample Questions
Q1) In the United States before 1970,
A)most macroeconomic instability was caused by simultaneous shifts of aggregate demand and aggregate supply
B)most macroeconomic instability was caused by shifts of aggregate supply
C)most macroeconomic instability was caused by shifts of aggregate demand
D)the government assumed no direct responsibility for the level of employment
E)the government itself was a much less important player in the macroeconomy than it is today
Q2) Which of the following statements about leading economic indicators is true?
A)Most people refer to them before making any important spending decision.
B)They are the only economic indicators available to economists.
C)They indicate when the economy is in a recession or an expansion.
D)They foreshadow turning points in the business cycle.
E)They can predict precisely when turning points in the economy will occur.
Q3) Given the aggregate demand curve, an increase in aggregate supply lowers the price level and decreases output.
A)True
B)False
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Chapter 7: Tracking the Us Economy
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213 Flashcards
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Sample Questions
Q1) A fixed-weight price index recognizes the fact that the composition of output changes over time.
A)True
B)False
Q2) If the GDP price index rises from 100 to 110 to 115 over three consecutive year, the inflation rate is decreasing.
A)True
B)False
Q3) The statement that "GDP values all output equally" means that A)household production is treated the same as production by firms B)depreciation of manufactured capital is treated the same as depletion of natural resources
C)the purchase of pollution control equipment is valued the same as the pollution itself D)leisure time is valued the same as time spent working at a job
E)the market price of output is the measure of that output's value
Q4) It is not possible for the government to spend more than it collects in taxes.
A)True
B)False
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Chapter 8: Unemployment and Inflation
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202 Flashcards
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Sample Questions
Q1) Unemployment arising from mismatch of skills is called
A)frictional unemployment
B)structural unemployment
C)seasonal unemployment
D)cyclical unemployment
E)underemployment
Q2) If the official unemployment rate increases in August from its July level, we can conclude that __________ unemployment is responsible for the increase.
A)seasonal
B)cyclical
C)structural
D)frictional
E)any of the causes of
Q3) Hyperinflation refers to a situation in which
A)prices are rising extremely rapidly
B)prices are falling extremely rapidly
C)the price level is extremely high
D)the price level is extremely low
E)the price level is negative
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Page 10
Chapter 9: Productivity and Growth
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119 Verified Questions
119 Flashcards
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Sample Questions
Q1) Which of the following is most likely to increase productivity growth, as measured using GDP statistics?
A)reduced capital formation
B)decreased human capital
C)increased research and development
D)increased government regulation
E)higher prices for raw materials
Q2) Over the last 100 years, the U.S. labor productivity growth rate experienced its largest declines
A)during the Great Depression
B)in the 1940s
C)during the 1950s
D)during the 1980s
E)a and c
Q3) Between 1982 and 2002, U.S. GDP per capita grew at an average rate of 2.2 percent per year.
A)True
B)False
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11
Chapter 10: Aaggregate Expenditure and Agregate
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179 Verified Questions
179 Flashcards
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Sample Questions
Q1) Consumption
A)makes up about two-thirds of GDP in a typical year
B)exceeds GDP in years when net exports are negative
C)is much more volatile than investment, especially during recession years
D)is much more volatile than investment, especially during expansion years
E)has declined as a fraction of GDP over time
Q2) Which of the following would tend to shift the investment function upward?
A)higher interest rates
B)gloomy sales expectations
C)a cut in corporate taxes that raises after-tax profits
D)a decrease in the marginal propensity to consume
E)an increase in aggregate income
Q3) An increase in the price level will
A)increase consumption because goods are more expensive
B)make the consumption function steeper
C)increase consumption because wages will increase
D)decrease consumption because falling interest rates make it cheaper to borrow
E)decrease consumption because the value of net wealth has decreased
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Chapter 11: Aggregate Expenditure and Aggregate Demand
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148 Flashcards
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Sample Questions
Q1) Suppose that planned autonomous investment increases by $200 billion and that the marginal propensity to consume equals 0.80. The equilibrium level of real GDP will increase by
A)$40 billion
B)$160 billion
C)$200 billion
D)$250 billion
E)$1,000 billion
Q2) On the aggregate expenditure graph, if autonomous saving decreases by $15 billion,
A)the aggregate expenditure line shifts upward by $15 billion
B)planned investment increases by $15 billion
C)the aggregate expenditure line shifts downward by $15 billion
D)planned investment decreases by $15 billion
E)the equilibrium level of real GDP demanded decreases by $15 billion
Q3) Movement along the aggregate demand curve may be caused by a change in autonomous investment spending.
A)True
B)False
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13
Chapter 12: Aggregate Supply
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Sample Questions
Q1) If the economy is at point M in Exhibit 11-5,
A)the actual price level is lower than expected with a $200 billion expansionary gap
B)the actual price level is lower than expected with a $200 billion contractionary gap
C)the actual price level is higher than expected with a $200 billion contractionary gap
D)the actual price level is higher than expected with a $200 billion expansionary gap
E)the economy is in equilibrium in the short run and the long run
Q2) Wage agreements may cause costs to be __________ flexible than prices so that __________ in the price level cause __________ in aggregate quantity supplied.
A)more; decreases; decreases
B)more; increases; decreases
C)less; increases; decreases
D)less; decreases; increases
E)less; decreases; decreases
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14
Chapter 13: Fiscal Policy
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240 Flashcards
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Sample Questions
Q1) Which of the following will not increase when net taxes decrease?
A)saving
B)disposable income
C)consumption
D)government expenditure
E)GDP
Q2) Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.
Disposable income will initially
A)remain unchanged
B)rise by $300
C)rise by $200
D)rise by $900
E)fall by $300
Q3) Most government transfer programs are
A)also government spending programs
B)examples of monetary policy rather than fiscal policy
C)designed mainly to offset macroeconomic instability
D)discretionary fiscal policies
E)automatic stabilizers
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Chapter 14: Federal Budgets and Public Policy
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158 Verified Questions
158 Flashcards
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Sample Questions
Q1) The federal government budget is
A)a year-end record of how much the government received in income and how much it spent
B)a plan for government expenditures and revenues for the coming year
C)always in balance: receipts must equal expenditures
D)equal to government receipts minus government expenditures
E)usually planned for the calendar year: January through December
Q2) Which institution was created under the Employment Act of 1946 to assist the President in formulating an appropriate fiscal policy?
A)the Council of Economic Advisers
B)the Board of Governors of the Fed
C)the Office of Management and Budget
D)the Fed's Open Market Committee
E)the Department of Commerce
Q3) Crowding out refers to the effect that deficits have on private investment spending.
A)True
B)False
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Chapter 15: Money and the Financial System
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Sample Questions
Q1) Which of the following is not a function of the Federal Reserve System?
A)holding deposits of member banks
B)clearing checks
C)making loans to member banks
D)serving as a bank to the Federal government
E)making loans to the public
Q2) In a barter system,
A)trade will only occur if there is a double coincidence of wants
B)an individual offers money to get a good or service
C)an individual offers a good or service to get money
D)different kinds of money are exchanged for each other
E)individuals are self-sufficient
Q3) If two kinds of money are circulating at the same time,
A)one of them must be commodity money
B)one of them must be fiat money
C)one of them must be paper money
D)the poorer quality one will be offered by purchasers of goods and the better one will be hoarded
E)the better quality one will be offered by purchasers of goods and the poorer one will be hoarded
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Chapter 16: Banking and the Money Supply
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Sample Questions
Q1) Suppose the Fed wishes to make only a small change in the money supply. Which of its policy tools is it most likely to use?
A)the prime interest rate
B)loans made to the public
C)Fed Fund Rate
D)open market operations
E)the required reserve ratio
Q2) If banks choose not to lend out their excess reserves then the money supply will not eapand.
A)True
B)False
Q3) Katie Sierra is willing to pay a higher interest rate. With no income verification, she can apply for a type of loan commonly called
A)lion loans
B)liars loans
C)phantom loans
D)vaporware loans
E)prime-rate loans
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18
Chapter 17: Monetary Theory and Policy
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Sample Questions
Q1) In the United States over the last decade, the velocity of A)M1 has been more stable than the velocity of M2, possibly because of the deregulation of the interest paid on checkable deposits
B)M1 has been more stable than the velocity of M2, leading the Fed to rely more on M1 targets
C)M2 has been more stable than the velocity of M1, but the Fed still relies on M1 targets
D)M2 has been more stable than the velocity of M1, possibly because of the deregulation of the interest paid on checkable deposits
E)both c and d are true
Q2) When the money supply increases, people get rid of their excess money by buying real assets, such as durable goods.
A)True
B)False
Q3) In the quantity theory of money, it is assumed that M and P are the only elements in the equation that are free to fluctuate.
A)True
B)False
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Chapter 18: Macro Policy Debate: Active or Passive
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Sample Questions
Q1) The economy may turn around on its own before a new policy registers its full impact primarily because of the
A)recognition lag
B)decision-making lag
C)effectiveness lag
D)implementation lag
E)time lag
Q2) Which of the following is not a potential problem with active policy for policy makers?
A)predicting what would happen with a passive approach
B)lacking the tools needed to achieve the desired result quickly
C)not predicting the effects of an active policy on the economy's key performance measures
D)fiscal and monetary policy makers not working together
E)failing to implement the appropriate policy because of political obstacles
Q3) Those who prefer a passive approach to the conduct of macroeconomic policy tend to believe that markets are self-correcting.
A)True
B)False
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Page 20
Chapter 19: International Trade
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Sample Questions
Q1) In Exhibit 19-3, if the world price of tulips is $1 and there are no trade restrictions, The Netherlands will
A)produce 7,000, consume 10,000, and export 3,000 tulips
B)produce 10,000 and consume 10,000 tulips
C)produce no tulips
D)import all of the tulips that it consumes
E)consume all of the tulips that it produces
Q2) In Exhibit 19-3, if the world price of tulips is $4 and there are no trade restrictions, The Netherlands will
A)produce 10,000, consume 4,000, and import 6,000 tulips
B)produce 10,000, consume 4,000, and export 6,000 tulips
C)produce 4,000, consume 10,000, and import 6,000 tulips
D)produce no tulips
E)import all of the tulips that it consumes
Q3) The United States is a major exporter of
A)diamonds
B)bauxite
C)coffee
D)corn
E)gold
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Chapter 20: International Finance
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231 Flashcards
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Sample Questions
Q1) The Bretton Woods agreement established the gold standard.
A)True
B)False
Q2) The Bretton Woods agreement did all of the following except
A)set up the International Monetary Fund
B)name the U.S. dollar as the key reserve currency
C)set the price of gold at $35 per ounce
D)fix exchange rates
E)return the international monetary system to the gold standard
Q3) Today's exchange rate system can be described as
A)a fixed exchange rate system
B)a freely floating exchange rate system
C)a pegged exchange rate system
D)a flexible exchange rate system
E)a managed float
Q4) If the U.S. dollar appreciates, it becomes cheaper for Australians to visit their relatives in the United States.
A)True
B)False
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Chapter 21: Economic Development
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Sample Questions
Q1) Which of the following creates an obstacle to pursuing freer international trade?
A)Consumers do not recognize their potential gains
B)Losses are widespread
C)Domestic producers do not recognize their potential losses
D)Government has plenty of political will and support to remove trade barriers
E)Consumers can easily organize to demand free trade
Q2) The first step in gradualism is
A)the privatization of larger industrial sectors
B)the phasing out of money-losing enterprises
C)large industrial enterprises quickly finding market-clearing prices
D)the thriving of small-scale capitalism
E)state-owned enterprises running more like businesses to maximize profit
Q3) There is no unified economic theory of how to construct the institutions that are central to the success of capitalism.
A)True
B)False
Q4) Successful management of resource wealth is a poverty trap
A)True
B)False
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