Principles of Macroeconomics Practice
Questions
Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and analytical tools used to understand the behavior of economies as a whole. The course covers topics such as gross domestic product (GDP), inflation, unemployment, economic growth, monetary and fiscal policy, international trade, and exchange rates. Students learn how economic policies affect overall economic performance and explore the roles of governments and central banks in stabilizing the economy. Through real-world examples and data analysis, the course fosters an understanding of the broader economic environment and equips students with tools to critically analyze economic issues on a national and global scale.
Recommended Textbook
Microeconomics Today The Macro View 17th Edition by Roger LeRoy Miller
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Chapter 1: The Nature of Economics
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Q1) Under a pure price system,the decision of resource allocation is made by
A)the head of the government.
B)a queen or king.
C)individuals who own the resources.
D)no one.
Answer: C
Q2) The rationality assumption says that
A)people do not intentionally make decisions that would leave them worse off.
B)people never make decisions that would leave them worse off.
C)people do not respond to incentives since incentives require scarce resources.
D)all economic analysis must be normative.
Answer: A
Q3) What is the type of economic system that relies on one central authority to make economic decisions?
A)Free market
B)Price system
C)Command and control
D)Mixed economic system
Answer: C
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Chapter 2: Scarcity and the World of Trade-Offs
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Q1) Which of the following is a true statement?
A)All goods are economic goods.
B)All economic goods are goods,but not all goods are economic goods.
C)Economic goods and goods mean the same thing.
D)Economic goods do not include services while goods do include services.
Answer: B
Q2) In the above figure,the farmer faces a trade-off between beans and wheat equal to A)one-to-one.
B)three-to-one.
C)one-to-two.
D)one-to-four.
Answer: C
Q3) In economic terminology,the accumulated training and education that workers receive to increase their productivity is referred to as A)entrepreneurship.
B)human capital.
C)labor.
D)physical capital.
Answer: B
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Chapter 3: Demand and Supply
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Sample Questions
Q1) Refer to the above figure.Which diagram shows the effect on the market of Corn Flakes when the demand for Corn Flakes has increased?
A)graph C
B)graph D
C)neither graph
D)both graphs
Answer: C
Q2) Which of the following occurs when a market is in equilibrium?
A)quantity supplied is equal to quantity demanded
B)supply is equal to demand.
C)the price of the good will tend to rise,all else held constant.
D)the price of the good will tend to fall,all else held constant.
Answer: A
Q3) Mary increases her consumption of Good X after the price of Good Y decreased.For Mary
A)Good X and Good Y are substitutes.
B)Good X and Good Y are complements.
C)Good X is an inferior good.
D)Good Y is an inferior good.
Answer: B
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Chapter 3: Extensions of Demand and Supply Analysis
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Q1) Consider the above table.If the government imposes a price ceiling on garbanzo beans of $8,what would be the likely result?
A)a surplus of 2,000 garbanzo beans on the market
B)a shortage of 2,000 garbanzo beans on the market
C)Market equilibrium will be reached.
D)The quantity demanded of garbanzo beans would fall to zero.
Q2) The signals in markets are determined
A)by supply and demand.
B)for all goods by the government through the use of price controls.
C)in an unfair manner that ends up hurting the poor.
D)by nonprice rationing devices.
Q3) Which of the following is one of the functions of rental prices?
A)To redistribute income from landlords to renters
B)To redistribute income from renters to landlords
C)To signal to the local government when taxes on rental units should be increased
D)To ration the use of existing housing for current consumers
Q4) What are the effects of an increase in the minimum wage? Who would be most affected?
Q5) What are the terms of exchange and how are these terms related to the price?
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Chapter 4: Public Spending and Public Choice
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Q1) Examples of transfers-in-kind include
A)tax rebates on both the federal and state levels.
B)taxes on alcohol and tobacco.
C)food stamps and public housing.
D)political advertising.
Q2) When comparing market and public sector decision making,which statement is NOT true?
A)Self-interest is the motivating force in each decision making arena.
B)In both decision making sectors,majority rule is how things are done.
C)In both decision making sectors,there are scarcity constraints.
D)Collective (political)outcomes and economic outcomes may differ.
Q3) The funds that polluters pay that gives them the right to discharge into the air or water a certain amount of pollution are
A)special subsidies.
B)regulation fees.
C)external costs.
D)effluent fees.
Q4) Explain why ensuring economic stability is an economics function of government?
Q5) Briefly explain the similarities and differences of decision making by the market sector and the public sector.
Page 7
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Chapter 5: Funding the Public Sector
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Sample Questions
Q1) Refer to the above figures.A unit tax of $2 has been levied on a good.Which of the panels depict the effect of the taxes?
A)Panel 1.
B)Panel 2.
C)Panel 3.
D)None of the diagrams reflect the effect of the tax.
Q2) Ad valorem taxation means
A)that only the value added by a service provider is taxed.
B)that the tax rate is a percentage of the price paid for a product.
C)a negative income tax.
D)a progressive property tax imposed in some states.
Q3) The earnings that a corporation saves for investment in other productive activities are
A)capital gains.
B)tax incidence.
C)transfers in kind.
D)retained earnings.
Q4) Explain why it is that how much consumers pay for an excise tax depends on how responsive they are to a given change in market price.
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Chapter 6: Demand and Supply Elasticity
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Q1) No matter what the price of coffee is in the cafeteria,Jack spends $20 a week on coffee.We can conclude that the absolute value of the price elasticity of demand for coffee for Jack is
A)greater than 1.
B)equal to 1.
C)less than 1.
D)equal to 0.
Q2) Which of the following goods is likely to have the highest income elasticity?
A)A designer blouse
B)Tomato soup
C)Hamburger
D)Can of tuna
Q3) If demand is inelastic and the price of a product decreases by 10 percent,then
A)the change in quantity demanded is less than 10 percent.
B)the change in quantity demanded is equal to 10 percent.
C)the change in quantity demanded is greater than 10 percent.
D)the decrease in quantity demanded is greater than 0 percent.
Q4) Why is elasticity of demand greater for goods that are a large share of a consumer's budget?
Q5) "Higher prices always yield higher revenues." Do you agree or disagree? Why?
Page 9
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Chapter 7: Consumer Choice
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Sample Questions
Q1) The principle of diminishing marginal utility suggests that A)total utility falls with additional consumption.
B)total utility is usually negative.
C)the consumer will never tire of additional units of a good.
D)the rate at which utility increases diminishes as more of a good is consumed.
Q2) The substitution effect refers to A)the law of diminishing marginal utility.
B)the want-satisfying power of a good or service.
C)substitution of less expensive commodities for more expensive commodities. D)the change in purchasing power when the price of a good changes.
Q3) Suppose that a consumer is at an optimum consuming X and Y.If the price of X falls,then to get to a new equilibrium the consumer must
A)purchase less X and more Y.
B)purchase less Y and less X.
C)purchase more X.
D)purchase more Y.
Q4) Suppose a family purchases 10,000 gallons of water a year at 20 cents a gallon and one diamond ring at a price of $1000.Can we conclude that the diamond ring provides more utility to the family than water? Explain.
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Chapter 8: Rents, profits, and the Financial Environment of Business
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Sample Questions
Q1) Out-of-pocket expenses such as wages and raw materials are A)direct costs.
B)an owner-provided capital cost.
C)implicit costs.
D)explicit costs.
Q2) The three basic legal forms of business enterprise in the United States are A)monopolies,enterprises,and competitors.
B)vertical,horizontal,and conglomerate corporations.
C)national,global,and multinational corporations.
D)proprietorships,partnerships,and corporations.
Q3) The British economist most often associated with the issue of economic rent for land was
A)John Maynard Keynes.
B)Jeremy Bentham.
C)A.W.Phillips.
D)David Ricardo.
Q4) Which method of corporate finance is used the most? Why?
Q5) How is inflation related to interest rates?
Q7) What is the random walk theory? Page 11
Q6) What are the two meanings of interest in economics?
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Chapter 9: The Firm: Cost and Output Determination
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Q1) When El Torito Restaurant is deciding how many waiters to hire for a holiday weekend,it is making a ________ decision.
A)plant-size
B)long-run
C)short-run
D)fixed-input
Q2) Refer to the above table.At an output of 4 units,average variable costs are
A)$16.
B)$22.
C)$38.50.
D)$44.
Q3) What happens to the marginal cost curve when the marginal physical product of labor is rising?
A)It becomes upward sloping.
B)It becomes vertical.
C)It becomes downward sloping.
D)It becomes horizontal.
Q4) Why might firms experience diseconomies of scale?
Q5) What is a production function?
Q6) What is the most important determinant of the firm's short-run cost curves?
Page 13
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Chapter 10: Perfect Competition
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Q1) If a firm shuts down in the short run,
A)it will lose its operating costs.
B)its losses will be equal to zero.
C)it will incur its fixed costs.
D)it will incur only its explicit costs.
Q2) The difference between price and average total cost is
A)total costs.
B)marginal costs.
C)average profit.
D)an irrelevant quantity.
Q3) A firm in a perfectly competitive industry faces the following cost and revenue conditions: ATC = $6; AVC = $3; MR = MC = $5.The firm is
A)earning economic profits.
B)experiencing economic losses.
C)experiencing zero profits.
D)in a position in which it should shut down.
Q4) Using a graph,show a short-run equilibrium for the industry and the firm.Explain the graph.
Q5) How do we determine whether a firm has maximized profits?
Q6) When should a firm shut down? When should a firm go out of business?
Page 14
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Chapter 11: Monopoly
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Q1) In equilibrium,which of the following conditions is common to both unregulated monopoly and pure competition?
A)P = MR
B)AR = ATC
C)MR = MC
D)MC = P
Q2) Suppose a monopolist's costs and revenues are as follows: ATC = $50.00; MC = $35.00; MR = $45.00; P = $55.00.The firm should
A)increase output and decrease price.
B)decrease output and increase price.
C)not change output or price.
D)shut down.
Q3) Refer to the above figure.The firm is currently producing at \(\mathrm { Q } _ { 1 }\) .The firm should
A)reduce production.
B)leave production as it is.
C)increase production.
D)shut down.
Q4) What is deadweight loss? Whose loss is it? Explain.
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Chapter 12: Monopolistic Competition
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Q1) The model of perfect competition and the model of monopolistic competition differ in that
A)perfect competition assumes many buyers and sellers while monopolistic competition assumes many buyers but few sellers.
B)perfect competition assumes easy entry of new firms while there are more significant barriers to entry in monopolistic competition.
C)perfect competition assumes firms make zero profits in the long run and monopolistic competition assumes firms make positive profits.
D)perfect competition assumes the product is homogeneous and monopolistic competition assumes the product is differentiated.
Q2) Use the above figure.The total cost of producing at the optimal level for the monopolistically competitive firm is
A)$285.
B)$255.
C)$180.
D)$300.
Q3) Explain how information products are "special."
Q4) Why do firms in a monopolistically competitive industry advertise?
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Chapter 13: Oligopoly and Strategic Behavior
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Q1) For years,your parents claimed they had no desire to join a social web site.Recently,however,they joined one and said they did so because all their relatives have joined the same site with them.Your parents' behavior is an example of A)a switching cost.
B)a network effect.
C)the impact of positive market feedback.
D)the impact of negative market feedback.
Q2) A network effect arises whenever
A)firms in an oligopolistic industry engage in limit pricing.
B)firms in an oligopolistic industry engage in a zero-sum game.
C)a consumer's willingness to purchase a good or service is influenced by how many others also buy or have bought the item.
D)a producer's willingness to produce a good or service is influenced by how many other firms also produce or have produced the item.
Q3) Firms faced with prisoners' dilemma can always make more profits by engaging in opportunistic behavior.Why is this type of behavior NOT commonly found even in oligopolistic markets?
Q4) How can network effects lead an industry to become an oligopoly?
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Chapter 14: Regulation and Antitrust Policy in a Globalized Economy
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Q1) This agency is responsible for investigating complaints of discrimination based on race,religion,sex or age in hiring,promotion,firing,wages,testing,and all other conditions of employment.
A)Environmental Protection Agency
B)Food and Drug Administration
C)Equal Employment Opportunity Commission
D)Federal Trade Commission
Q2) Which of the following is most subject to the lemons problem?
A)credence goods
B)homogeneous goods
C)search goods
D)inferior goods
Q3) The first step in enforcing any antitrust policy is to
A)win the support of the public.
B)win congressional approval.
C)win the approval of the state senators from the state where the company is headquartered.
D)define the market.
Q4) "As compared to the benefits of economic and social regulation,the costs are minimal." Do you agree or disagree? Why?
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Chapter 15: The Labor Market: Demand, supply and Outsourcing
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Q1) Which of the following statements is true about the market and individual firm's supply curve for labor?
A)The market supply curve is perfectly elastic and the individual firm's supply curve is perfectly inelastic.
B)The market supply curve is perfectly inelastic and the individual firm's supply curve is perfectly elastic.
C)The market supply curve is more elastic than the firm's supply curve.
D)The market supply curve is more inelastic than the firm's supply curve.
Q2) The monopolist's input demand curve is the
A)marginal revenue curve.
B)marginal revenue product curve.
C)marginal physical product curve.
D)marginal factor cost.
Q3) Coal is required to make steel.Hence,the price elasticity of demand for coal by steel manufacturers will be
A)unit elastic.
B)inelastic.
C)elastic.
D)perfectly elastic.
Page 19
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Chapter 16: Unions and Labor Market Monopoly Power
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Q1) Suppose a union successfully negotiates a wage rate for its members that is above the competitive wage rate,then
A)there will be downward pressure on the wage rate until equilibrium is established.
B)right-to-work laws become effective.
C)there is a shortage of jobs.
D)there is excess demand for labor.
Q2) In the above figure,what is the wage rate for the perfectly competitive market?
A) \(\mathrm { W } _ { 1 }\)
B) \(\mathrm { W } _ { 2 }\)
C) \(\mathrm { W } _ { 3 }\)
D) \(\mathrm { W } _ { 4 }\)
Q3) If the goal of the union is to maximize member income,then
A)a wage rate will be set in the inelastic portion of the demand curve.
B)a wage rate will be set at the point at which the elasticity of demand equals 1 and marginal revenue is positive.
C)a wage rate will be set at the point at which marginal revenue equal zero.
D)the supply of labor must be inelastic.
Q4) What can a union do in order to raise the wages of its members ?
Q5) Can unions increase productivity? Explain.
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Chapter 17: Income, poverty, and Health Care
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Q1) Which of the distributive standards does NOT involve a value judgment?
A)Productivity standard
B)Egalitarian standard
C)Merit standard
D)All of the standards involve value judgments.
Q2) All of the following are criticisms of the Lorenz curve analysis EXCEPT
A)income-in-kind is not figured in.
B)the inequality gap is not an issue that economists study.
C)different sizes of households are ignored.
D)it does not take into consideration lifetime earnings.
Q3) In the United States,the distribution of wealth
A)is the same as the distribution of income.
B)is more unequal than the distribution of income.
C)is more equal than the distribution of income.
D)is equal for all families.
Q4) Income is considered to be a
A)nontaxable stream of funds.
B)flow.
C)stock.
D)resource.
21
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Chapter 18: Environmental Economics
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Q1) The marginal benefit from pollution abatement
A)increases as pollution abatement increases because people learn to want an even cleaner environment as the environment gets cleaner.
B)decreases as pollution abatement increases because of the law of diminishing marginal product.
C)is constant as pollution abatement increases because pollution abatement is valued for its own sake and not for the utility it provides.
D)decreases as pollution abatement increases because of the law of diminishing marginal utility.
Q2) The idea that it takes 90 percent of your time to clean up the last 10 percent of your house illustrates that
A)the marginal cost of cleaning up slopes downward.
B)the marginal cost of cleaning up slopes upward.
C)the marginal benefit of cleaning up is constant.
D)the marginal benefit of cleaning up slopes upward.
Q3) Suppose people value clean air more as their incomes increase.What would happen to the optimal amount of clean air as a country develops economically? Is there an economic prediction we can make from this?
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Chapter 19: Comparative Advantage and the Open Economy
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Q1) Country X subsidizes industry A.A worldwide recession has hit and Country X has decided to export Good A worldwide,selling the product for less than it costs to produce it.This is
A)the infant industry argument.
B)comparative advantage argument.
C)dumping.
D)a regional trade bloc.
Q2) A tariff is a
A)legal limit on sales of a foreign product in the domestic market.
B)regulation of the quality of a foreign product sold in the domestic market.
C)tax on sales of a foreign product in the domestic market.
D)voluntary limit on sales of a foreign product in the domestic market.
Q3) Restricting imports usually leads to
A)a country producing beyond its production possibilities frontier.
B)a country consuming even further beyond its production possibilities frontier.
C)a reduction in exports and employment.
D)a higher per capita level of real consumption.
Q4) What are the effects of a tariff on a good?
Page 23
Q5) What must a government know for the infant industry argument to be a valid reason for imposing tariffs?
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Chapter 20: Exchange Rates and the Balance of Payments
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Q1) Changes in which of the following will cause a change in exchange rates?
A)real interest rates
B)consumer preferences
C)perceptions of economic and political stability
D)All of the above
Q2) An accounting identity
A)ensures that all balances will be in equilibrium.
B)is useless in analyzing balance of payments since one cannot tell from the identity whether an equilibrium exists or not.
C)ensures a balance but does not ensure an equilibrium.
D)applies only to plans of economic agents and not to their actual actions.
Q3) Which of the following would NOT increase German exports to the United States?
A)An appreciation of the U.S.dollar
B)A depreciation of the euro
C)An appreciation of the euro
D)An increase in German demand for U.S.exports
Q4) Suppose there was a substantial increase in political instability in the rest of the world.What would be the effects on the U.S.current account? Explain.
Q5) How are deficit and surplus items determined in the balance of payments?
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