Principles of Microeconomics
Exam Materials
Course Introduction
Principles of Microeconomics introduces students to the fundamental concepts and analytical tools necessary for understanding how individuals and firms make decisions about the allocation of scarce resources. The course examines topics such as supply and demand, market equilibrium, elasticity, consumer behavior, production and costs, and the various market structures including perfect competition, monopoly, monopolistic competition, and oligopoly. Additionally, it explores the impact of government interventions, such as taxes and subsidies, on markets, and discusses real-world applications of microeconomic theory in areas like labor markets and externalities. This foundational course provides the basis for further study in economics and helps students develop critical thinking skills for analyzing economic issues.
Recommended Textbook
Economics Private and Public Choice 14th Edition by David A. Macpherson
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6847 Verified Questions
6847 Flashcards
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Page 2
Chapter 1: The Economic Approach
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Sample Questions
Q1) Joe observes that a car in 1925 sold for an average of $500 versus $20,000 for a 2005 model.He concludes that 2005 cars must be 40 times better than 1925 cars.What's wrong with this way of thinking?
Answer: Poor Joe has made several errors.First,a 1925 car differs substantially from a 2005 car.As the saying goes,Joe is comparing apples and oranges.Second,the value of the dollar has declined;Joe,therefore,is using as his measure a unit that has changed sizes.This is like measuring one room with a 50-inch stick and another room with a 20-inch stick.We can give both measures in terms of sticks,but they are not very comparable.
Q2) All but one of the following are elements of the economic way of thinking.Which one is not part of the economic way of thinking?
A)Incentives matter.
B)The value of goods can be determined objectively.
C)Economic thinking is marginal thinking.
D)Information is scarce.
Answer: B
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Chapter 2: Asome Tools of the Economist
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Sample Questions
Q1) The process by which new products and methods of production are continuously replacing old ones is known as
A)the invisible hand principle.
B)the production possibilities frontier.
C)creative destruction.
D)the fallacy of composition.
Answer: C
Q2) Refer to Table 2-3.The farmer and the rancher both could benefit if the farmer were to specialize in
A)meat and the rancher were to specialize in potatoes.
B)potatoes and the rancher were to specialize in meat.
C)neither good and the rancher were to specialize in both goods.
D)none of the above;they cannot both benefit by specialization and trade.
Answer: B
Q3) Which of the following sayings best reflects the concept of opportunity cost?
A)"You can't teach an old dog new tricks."
B)"Time is money."
C)"I have a baker's dozen."
D)"There's no business like show business."
Answer: B
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Chapter 3: Asupply,demand,and the Market Process
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Sample Questions
Q1) Velcro is becoming more and more popular for a variety of uses,including as fasteners for shoes.What should happen to the equilibrium price and quantity for shoelaces as a result?
A)Both price and quantity will increase.
B)Both price and quantity will decrease.
C)Price will increase and quantity decrease.
D)Price will decrease and quantity increase.
E)Nothing.
Answer: B
Q2) If the demand for a good is relatively elastic,this means that consumer purchases of the good are
A)not very sensitive to the price of the good.
B)highly sensitive to the price of the good.
C)unrelated to the price of the good.
D)unaffected by changes in the income level of consumers.
Answer: B
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Chapter 4: Asupply and Demand: Applications and Extensions
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Sample Questions
Q1) If Heather's tax liability increases from $10,000 to $13,500 when her income increases from $30,000 to $40,000,her marginal tax rate is
A)33 percent.
B)35 percent.
C)50 percent.
D)60 percent.
Q2) The Laffer curve indicates that
A)when tax rates are low,a decrease in tax rates is likely to increase tax revenues. B)when tax rates are high,an increase in tax rates is likely to a decrease in tax revenues.
C)tax revenue will always increase when tax rates are increased. D)tax revenue will always decrease when tax rates are lowered.
Q3) Refer to Figure 4-20.The amount of the tax per unit is
A)$1.
B)$2.
C)$3.
D)$5.
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6
Chapter 5: Difficult Cases for the Market and the Role of Government
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Sample Questions
Q1) How does the text define economic efficiency? Is this an absolute or a relative definition? Would another type of definition be preferable? Why or why not?
Q2) Which of the following best explains why making automobiles completely safe is not efficient?
A)After some level of safety is reached,making cars even safer will not be worth the additional cost.
B)Because human life is priceless,automobile safety generally doesn't matter.
C)The benefit from additional automobile safety will generally rise as automobiles are made safer,more than offsetting the opportunity cost involved.
D)Economic efficiency suggests that automobiles should be made as safe as humanly possible.
Q3) When the free-rider problem exists,
A)the market will devote too few resources to the production of the good.
B)the cost of the good will always be more than the benefit of the good.
C)the good will not be produced.
D)entrepreneurs will eventually find a way to make free-riders pay their share.
Q4) Is education a public good? Focus on whether it meets the two criteria for being a public good.
Page 7
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Chapter 6: The Economics of Collective Decision-Making
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Sample Questions
Q1) When analyzing public sector decision making,economic theory assumes that voters,politicians,and government officials will
A)respond to changes in personal benefits and costs when making public sector choices.
B)pursue the public interest even when it conflicts with their private interests.
C)pursue primarily public interests because competition is less intense in the public sector.
D)do none of the above.
Q2) Which of the following factors weakens the case for private-sector provision of goods and services relative to public-sector provision?
A)constitutional rules
B)the shortsightedness effect
C)the special-interest effect
D)public goods
Q3) Congressman Localstuff always votes for a balanced budget amendment to the U.S.Constitution.He also always votes for spending bills supported by the leadership of his political party.Is this rational?
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Chapter 7: Ataking the Nations Economic Pulse
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Sample Questions
Q1) The consumer price index is designed to measure the extent to which
A)the cost of a typical bundle (market basket)of consumer goods has changed over time.
B)consumers have increased their spending over time.
C)GDP is allocated to consumers,rather than to business or government,over time.
D)prices paid by employers to resource owners have changed over time.
Q2) If national income accountants fail to make an adequate adjustment for increases in the quality of goods and services over time,
A)increases in real GDP will understate the growth rate of real output.
B)increases in real GDP will overstate the growth rate of real output.
C)the GDP deflator will overstate the rate of inflation.
D)the GDP deflator will understate the rate of inflation.
E)both a and c are correct.
Q3) Which of the following would increase GDP?
A)buying a used car
B)buying a newly constructed house
C)buying an imported rug
D)giving a domestically produced rug to charity
Q4) Explain the two approaches to calculating GDP.
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Chapter 8: Economic Fluctuations, unemployment, and Inflation
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Sample Questions
Q1) Which of the following will most likely reduce the natural rate of unemployment?
A)an increase in the minimum wage
B)an increase in unemployment benefits
C)an increase in the proportion of prime-age workers (35-54)as a share of the labor force
D)an increase in the labor force participation rate of teenagers
Q2) Economists use the phrase "business cycle" when referring to fluctuations in
A)the rate of real output and employment.
B)interest rates.
C)the consumer price index.
D)the general level of prices.
Q3) Which one of the following persons would be considered employed?
A)a retired construction worker
B)a part-time worker looking for a full-time job
C)a construction worker laid off due to cold weather
D)a full-time college student who is not a member of the labor force
Q4) Describe two ways that public policy could reduce the natural rate of unemployment.
Q5) Discuss the dangers of inflation;that is,why may it hurt an economy?
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Chapter 9: Aan Introduction to Basic Macroeconomic Markets
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Sample Questions
Q1) Other things constant,a decrease in aggregate demand will lead to
A)a decrease in the demand for resources.
B)an increase in the demand for resources.
C)an increase in the general level of prices.
D)a reduction in the natural rate of unemployment.
Q2) If the dollar price of the English pound goes from $1.80 to $1.40,the dollar has
A)appreciated,and the English will find U.S.goods cheaper.
B)appreciated,and the English will find U.S.goods more expensive.
C)depreciated,and the English will find U.S.goods cheaper.
D)depreciated,and the English will find U.S.goods more expensive.
Q3) When persistent inflation is present,we would expect
A)borrowers to systematically gain at the expense of lenders.
B)lenders to systematically gain at the expense of borrowers.
C)nominal interest rates to be higher than would be true if prices were stable.
D)nominal interest rates to be lower than real interest rates.
Q4) If a reform of the tax laws encourages greater saving,the result would be
A)higher interest rates and greater investment.
B)higher interest rates and less investment.
C)lower interest rates and greater investment.
D)lower interest rate and less investment.
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Chapter 10: Dynamic Change, economic Fluctuations, and the Ad-As Model
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Sample Questions
Q1) During an economic expansion,housing and stock prices generally
A)fall,leading to a reduction in aggregate demand.
B)fall,leading to an increase in aggregate demand.
C)rise,leading to a reduction in aggregate demand.
D)rise,leading to an increase in aggregate demand.
Q2) Suppose the economy is initially in long-run equilibrium and then it experiences a supply shock in the form of sharply higher energy prices.Which of the following is true?
A)The short-run aggregate supply curve shifts leftward and the long-run supply curve shifts rightward.
B)The short-run aggregate supply curve shifts rightward and there is a movement along the aggregate demand curve.
C)The short-run aggregate supply curve does not shift and the long-run aggregate supply curve shifts rightward.
D)The short-run aggregate supply curve shifts rightward but the long-run aggregate supply curve does not shift.
E)The short-run aggregate supply curve shifts leftward and there is a movement along the aggregate demand curve.
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Page 12
Chapter 11: Fiscal Policy: the Keynesian View and Historical Perspective
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Sample Questions
Q1) In the Keynesian model,the primary determinant of consumer spending is A)the interest rate.
B)disposable income.
C)expectations of inflation.
D)the stage of the business cycle.
Q2) Within the Keynesian model,the multiplier effect tends to
A)smooth out the up- and down- swings of the business cycle.
B)promote price stability.
C)magnify small changes in spending into much larger changes in output and employment.
D)reduce the impact of an increase in investment on output and employment.
Q3) A major advantage of built-in or automatic stabilizers is that they
A)guarantee the federal budget will be balanced over the course of the business cycle.
B)require no Congressional action to be effective.
C)automatically produce surpluses during recessions and deficits during inflation.
D)require discretionary actions on the part of Congress before they exert an impact on output and employment.
Q4) How does Keynesian economic theory recommend that fiscal policy be conducted?
Page 13
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Chapter 12: Fiscal Policy, incentives, and Secondary Effects
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Sample Questions
Q1) In 2007,the debt-to-income ratio of American households was
A)approximately double the level of the mid-1980s.
B)only about half the level of the mid-1980s.
C)virtually unchanged from the mid-1980s.
D)substantially lower than during the 1960s and 1970s.
Q2) The crowding-out effect stresses that
A)an increase in government expenditures will stimulate aggregate demand and,thereby,help to prevent recessions.
B)an increase in taxes will restrain aggregate demand and,thereby,help to control inflation.
C)additional government borrowing to finance a larger deficit will increase the demand for loanable funds,causing real interest rates to rise.
D)a budget deficit is a highly effective tool with which to combat recessions.
E)both a and d are correct.
Q3) Higher standards of living are the result of
A)an increase in the general level of prices.
B)trade restrictions that favor domestic industries over foreign competition.
C)an increase in the availability of goods and services that people value.
D)government subsidies that expand employment.
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Page 14
Chapter 13: Amoney and the Banking System
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Sample Questions
Q1) When using the money supply figures to measure the direction of monetary policy during the last several decades,it is better to look at changes in the M2 money supply rather than M1 because
A)the increase in popularity of interest-earning checking accounts in the 1980s distorted the M2 money supply but not the M1 money supply.
B)the increase in popularity of interest-earning checking accounts in the 1980s distorted the M1 money supply but not the M2 money supply.
C)the decrease in popularity of interest-earning checking accounts in the 1980s distorted the M1 money supply but not the M2 money supply.
D)the decrease in popularity of interest-earning checking accounts in the 1980s distorted the M2 money supply but not the M1 money supply.
Q2) What is the length of the term of the members of the Board of Governors of the Federal Reserve System?
A)four years
B)six years
C)fourteen years
D)life or until the member resigns
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Page 15
Chapter 14: Modern Macroeconomics and Monetary Policy
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Sample Questions
Q1) The short run sequence of events following an unanticipated shift to a more expansionary monetary policy would be lower interest rates followed by dollar
A)depreciation,and an increase in the current account deficit.
B)depreciation,and a decrease in the current account deficit.
C)appreciation,and an increase in the current account deficit.
D)appreciation,and a decrease in the current account deficit.
Q2) When the Fed buys bonds and injects additional reserves into the banking system,this action will
A)place downward pressure on short-term interest rates.
B)cause many decision makers to expect that the future rate of inflation will fall.
C)place upward pressure on both short-term and long-term interest rates.
D)place upward pressure on short-term interest rates and downward pressure on long-term interest rates.
Q3) The cost of holding money balances increases when
A)the purchasing power of money rises.
B)the money interest rate increases.
C)the price of goods and services falls.
D)consumer income expands.
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Chapter 15: Stabilization Policy, output, and Employment
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Sample Questions
Q1) The Phillips curve depicts the relationship between
A)the federal debt and unemployment.
B)wage rates and aggregate demand.
C)the equilibrium level of income and the employment rate.
D)inflation and unemployment.
Q2) Modern Phillips curve analysis indicates that if people
A)underestimate inflation,actual unemployment will be below the natural rate.
B)overestimate inflation,actual unemployment will be below the natural rate.
C)accurately estimate inflation,actual unemployment will be less than the natural rate.
D)accurately estimate inflation,actual unemployment will be below the natural rate.
Q3) Which of the following occurred during and following the 2008-2009 recession?
A)Unemployment benefits were extended from their normal 26 weeks to up to 99 weeks.
B)The Federal Reserve more than doubled the size of the monetary base.
C)The federal budget deficit expanded to approximately 10 percent of GDP.
D)All of the above are true.
Q4) How has macro-policy changed since the 1970s? How have the views of economists on the trade-off between inflation and unemployment changed?
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17
Chapter 16: Creating an Environment for Growth and Prosperity
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Sample Questions
Q1) How does private ownership and a competitive market affect the efficiency of economic organization?
Q2) Frequently,politicians enact restrictive trade policies to protect domestic industries.How does economic theory predict this will affect the efficiency of economic organization?
Q3) Which of the following is most likely to be a major source of growth in per capita GDP?
A)a high investment/GDP ratio
B)a high rate of inflation
C)rapid population growth
D)rapid growth in the money supply
Q4) Which of the following is true?
A)in recent decades,the rich countries of the world have consistently grown more rapidly than poor countries.
B)no LDC was able to achieve a more rapid growth rate than the United States during the 1980 through 2005 period.
C)during recent decades,most LDCs have stagnated economically.
D)during 1980 through 2005,the fastest growing countries in the world were mostly LDCs.
Page 18
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Chapter 17: Institutions,policies,and Cross-Country
Differences in Income and Growth
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Q1) How do growth rates vary across countries? Are the rich countries getting richer while the poor are getting poorer?
Q2) During the 2000-2009 decade,
A)the economic freedom rating of the United States fell,but the growth rate of real GDP was more rapid than in recent decades.
B)the economic freedom rating of the United States increased and the growth of real GDP was more rapid than that of recent decades.
C)the economic freedom rating of the United States fell and the growth of real GDP was less rapid than that of recent decades.
D)the economic freedom rating of the United States increased but the growth of real GDP was less rapid than that of recent decades.
Q3) Which of the following countries has the highest per capita income?
A)Malawi
B)Niger
C)Ireland
D)Mexico
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19
Chapter 18: Gaining From International Trade
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Sample Questions
Q1) Refer to Figure 17-7.With trade,Jamaica
A)imports 150 calculators.
B)imports 250 calculators.
C)exports 100 calculators.
D)exports 250 calculators.
Q2) If the country illustrated in Figure 17-12 is initially trading without restrictions at a world price of $1.00,net welfare loss as a result of a tariff of $0.50 per unit is represented by area
A)c + i + e + f
B)i + f
C)i
D)f
E)b + d
Q3) The law of comparative advantage suggests that
A)neither country would gain from trade.
B)only Slavia would gain from trade;Italia would be harmed.
C)both countries could gain if Italia traded food for Slavia's clothing.
D)both countries could gain if Slavia traded food for Italia's clothing.
Q4) What is the difference between a tariff and a quota?
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Chapter 19: International Finance and the Foreign Exchange Market
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Q1) With time,an appreciation in the value of the nation's currency in the foreign exchange market would cause
A)the nation's imports to increase and exports to decline.
B)the nation's exports to increase and imports to decline.
C)both imports and exports to decline.
D)both imports and exports to rise.
Q2) In the balance of payments accounts,a net importer of capital is a nation that
A)sells more goods in foreign countries than it imports.
B)must be running a trade surplus.
C)sells more assets to individuals in other countries than the assets it buys from them.
D)buys more assets from individuals in other countries than the assets it sells to them.
Q3) The difference between the value of a country's merchandise exports and merchandise imports is known as the balance
A)of payments.
B)of merchandise trade.
C)on current account.
D)on capital account.
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Page 21
Chapter 20: Consumer Choice and Elasticity
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Sample Questions
Q1) You and your college roommate eat three packages of Ramen noodles each week.After graduation last month,both of you were hired at several times your college income.You still enjoy Ramen noodles very much and buy even more,but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more.When looking at income elasticity of demand for Ramen noodles, A)yours would be negative and your roommate's would be positive. B)yours would be positive and your roommate's would be negative. C)yours would be zero and your roommate's would approach infinity. D)yours would approach infinity and your roommate's would be zero.
Q2) Suppose the Pleasant Corporation cuts the price of its American Girl dolls by 10 percent,and as a result,the quantity of the dolls sold increases by 25 percent.This indicates that the price elasticity of demand for the dolls over this range is A)2.5.
B)0.4.
C)0.5.
D)5.
E)inelastic.
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Page 22
Chapter 21: Acosts and the Supply of Goods
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Q1) Accounting costs are often unsatisfactory from the economist's point of view because
A)they fail to allow for depreciation,the wearing out of capital assets during a period.
B)they often exclude the opportunity costs of the firm's equity capital.
C)accountants attempt to minimize costs in order to make profits look good.
D)accounting procedures are designed to overstate costs in order to minimize business tax liability.
Q2) Bart operates a lemonade stand in front of his house.His father works at the Springfield Nuclear Power Plant.Which of the following is most likely to be true?
A)The long run is the same for the power plant as it is for the lemonade stand.
B)The long run is longer for the power plant than it is for the lemonade stand.
C)The long run is shorter for the power plant than it is for the lemonade stand.
D)We cannot compare the long runs because these are different businesses.
E)It's impossible for the power plant short run to be shorter than the lemonade stand's long run.
Q3) Suppose you are planning to open a lemonade stand.List separately all the explicit and implicit costs that might be involved.
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Page 23
Chapter 22: Aprice Takers and the Competitive Process
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Q1) If a firm in a price-taker market is earning zero economic profit,it
A)will shut down in the long run but not the short run.
B)will also be earning zero accounting profit.
C)is doing as well as typical firms in other markets.
D)will shut down in the short run.
Q2) If profit-seeking entrepreneurs are going to be successful,they must
A)produce a product that the consumers value more than the resources required for its production.
B)produce the product more cheaply than their rivals regardless of quality.
C)maximize the salaries of high-level management so they will be able to attract people who will work hard.
D)charge a higher price than their competitors so they can make economic profits in the long run.
Q3) As market price increases,in the short run,a profit-maximizing firm in a price-taker market will expand output along its
A)marginal cost curve.
B)average total cost curve.
C)average variable cost curve.
D)market demand curve.
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Page 24
Chapter 23: Price-Searcher Markets With Low Entry Barriers
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Q1) If a government wanted to increase the prosperity of a nation,it could best serve this goal by
A)protecting domestic industries from international trade,thus encouraging domestic growth.
B)regulating the way in which firms can operate.
C)reducing barriers that restrict the ability of potential competitors to enter markets.
D)subsidizing firms that are in danger of going out of business.
Q2) Which of the following would be most likely if firms in a competitive price-searcher market were earning economic profit?
A)Production inefficiencies would persist until the profit was eliminated.
B)Firms would decrease their rate of output in the short run,causing a decline in profitability in the market.
C)New firms would enter the market,resulting in fewer sales by existing firms.
D)All firms in the market would continue to produce at their current levels and continue to charge the same price.
Q3) What type of model would be best if we wanted to analyze the market for fast food? Why?
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Chapter 24: Aprice-Searcher Markets With High Entry
Barriers
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Q1) As Adam Smith indicated,the trouble with monopoly is that
A)firms have no incentive to produce efficiently.
B)regardless of what is produced,the firm will use too many resources.
C)a producer has no incentive to keep his costs down.
D)the monopolist "understocks" the market and charges too high a price.
Q2) If the firms in this oligopolistic industry depicted in Figure 11-12 can collude effectively and restrict the entry of potential competitors,the price of their product will tend to be
A)greater than P .
B)close to P .
C)approximately equal to P .
D)less than P .
Q3) Under what conditions can a monopolist have potentially lower costs and possibly charge a lower price than would exist if the market were competitive?
A)when the monopolist operates on the inelastic portion of the demand curve
B)when the monopolist is a profit maximizer rather than a revenue maximizer
C)when substantial diseconomies of scale are present
D)when substantial economies of scale are present
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Page 26
Chapter 25: The Supply of and Demand for Productive Resources
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Q1) If businesses found that changing economic conditions made it attractive for them to hire a larger number of economics majors,we would expect
A)economics majors to receive a greater return on their human capital investment.
B)a decrease in the employment opportunities for economics majors.
C)lower wages for economics majors.
D)fewer students to major in economics.
Q2) Generally,the supply of a resource in the short run will be
A)more elastic than in the long run.
B)less elastic than in the long run.
C)equally elastic as the supply of the resource in the long run.
D)directly related to the elasticity of demand for the product that the resource helps produce.
Q3) When the price of a resource increases,thereby causing the price of the final product to rise,consumers will purchase less of the final product.This is called the
A)substitution in production effect.
B)substitution in consumption effect.
C)elasticity effect.
D)inelasticity effect.
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Chapter 26: Earnings, productivity, and the Job Market
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Q1) The earnings of all employees in a competitive economy would be equal if
A)all individuals were homogeneous.
B)all jobs were equally attractive.
C)workers were perfectly mobile among jobs.
D)all of the above are true.
Q2) If customers are racist but employers are not,then employment discrimination will be
A)less profitable than nondiscrimination.
B)more profitable than nondiscrimination.
C)equally profitable as nondiscrimination.
D)easier to eliminate than if employers were racist but customers were not.
Q3) Given the amount of time and other costs of investing in human capital that it takes to earn a Ph.D. ,why are college professors paid less than other occupations that require similar or lesser amounts of human capital?
Q4) In the late 1800s,Bernard made buggy whips.Their quality was such that people came from hundreds of miles to buy the whips.As mechanized transportation developed,horse-drawn buggies largely disappeared and so did the demand for Bernard's whips.Would Bernard have been better off if these new modes of transportation had never been invented?
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Chapter 27: Investment, the Capital Market, and the Wealth of Nations
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Q1) If Microsoft stock has a constant net return each year,then the value of a share of Microsoft stock is determined by
A)subtracting Microsoft's total costs from its total revenue.
B)multiplying the annual net income by the number of shares.
C)dividing the annual net income from the asset by the interest rate.
D)both a and b above.
Q2) When investment funds are allocated by government rather than by markets,
A)profitable investments are more likely to take place.
B)political influence replaces market return as the basis for allocating funds.
C)funds will consistently be channeled into wealth-creating projects.
D)projects that are political boondoggles will be unlikely to be undertaken.
Q3) Megan must decide whether or not to go to college.She can either continue to work as a waitress and earn $22,000 per year or she can go to school and expect to earn $32,000 per year when she finishes.She should:
A)continue to work as a waitress.
B)go to school,but only if she knows she can finish in four years.
C)go to school no matter what.
D)we cannot tell since there may be important nonmonetary considerations that Megan will take into account.
Page 29
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Chapter 28: Income Inequality and Poverty
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Q1) Income mobility studies suggest that poverty
A)cannot be alleviated by privately sponsored anti-poverty programs.
B)cannot be alleviated by government sponsored anti-poverty programs.
C)is a long-term problem for a relatively large number of families.
D)is not a long-term problem for most families.
Q2) As shown in Figure 15-1,the perfect equality line is drawn between points
A)A and B.
B)B and D.
C)A and C along the straight line.
D)A and C along the curve.
Q3) Income inequality exists in the United States.Is this necessarily a bad thing? Explain how our assessment of income inequality depends crucially on the source of that inequality.
Q4) The Samaritan's dilemma describes the problem that exists when transfer programs,designed to help the poor,encourage choices that can promote or perpetuate A)poverty.
B)healthier lifestyles.
C)reduced birth rates.
D)increased life expectancy.
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Chapter 29: Government Spending and Taxation
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Q1) As government becomes larger and larger as a share of the economy,economic growth is likely to decline because
A)taxes are reduced to levels that are inconsistent with economic efficiency.
B)governments are involved in many activities for which they are ill-suited.
C)tax-transfer activities are reduced and sometimes virtually eliminated.
D)governments do not spend enough on the provision of key public goods like education.
Q2) The private sector cost of tax revenues is equal to the
A)tax revenue collected by government from individuals in the economy.
B)income that could have been earned by government employees if they had worked in the private sector.
C)difference between government expenditures and tax revenues.
D)tax revenue plus the cost of tax compliance and the excess burden of taxation.
Q3) Increased spending on which of the following items is most likely to increase the size of government during the years following 2010?
A)education
B)Social Security and Medicare
C)agricultural subsidies
D)transportation (roads and airports)
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Chapter 30: The Economics of Social Security
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Sample Questions
Q1) (I)Because married women are permitted to receive benefits based on either their own earnings or 50 percent of the benefits earned by their spouse,whichever is greater,the payroll tax takes a big chunk of the earnings of many working women without providing any significant additional benefits to them.
(II)Because blacks have a shorter life expectancy,they are economically disadvantaged by Social Security relative to whites and Hispanics.
A)I is true;II is false.
B)I is false;II is true.
C)Both I and II are false.
D)Both I and II are true.
Q2) Detailed studies indicate that,on balance,the Social Security retirement system
A)redistributes a substantial amount of income from the rich to the poor.
B)redistributes a substantial amount of income from whites to blacks.
C)is particularly advantageous to those with a shorter life expectancy.
D)is not particularly advantageous to the poor due to their shorter life expectancy.
Q3) Briefly explain why the Social Security system will face a "crisis" in the coming years.
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Chapter 31: The Stock Market: Its Function, Performance, and Potential As an Investment Opportunity
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Q1) Investment in a broad portfolio of stocks is most attractive for A)short-term investors.
B)long-term investors.
C)investors seeking a steady rate of return.
D)investors who will need the funds for other purposes in about 10 years.
Q2) Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund?
A)Indexed funds generally have better stock pickers.
B)Indexed funds engage in more detailed research.
C)Indexed funds have lower operating costs because they engage in less stock trading.
D)Indexed funds earn a significantly higher rate of return than a broad portfolio that represents the entire stock market.
Q3) Which of the following would tend to increase the value of a future stream of income?
A)an increase in the rate of inflation
B)an increase in the interest rate
C)a reduction in the interest rate
D)a reduction in the size of the expected future income
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Chapter 32: Great Debates in Economics: Keynes Versus Hayek
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Q1) John Maynard Keynes and Friedrich Hayek
A)had similar views with regard to the cause of the Great Depression and what might be done to prevent it from happening again.
B)both believed that perverse monetary policy was the primary cause of the ups and downs of the business cycle.
C)both believed that budget deficits and surpluses could be used to smooth the ups and downs of the business cycle.
D)had polar opposite views with regard to the underlying causes of economic booms and bust,but nonetheless their scholarly work commanded widespread respect among economists.
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34
Chapter 33: The Crisis of 2008: Causes and Lessons for the Future
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Sample Questions
Q1) Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused
A)housing prices to fall during that period.
B)a reduction in the use of adjustable rate mortgages to finance the purchase of housing.
C)a reduction in housing construction during 2002-2005.
D)mal-investment,that is,excessive investment in housing construction during 2002-2005.
Q2) During the 1980s and 1990s,the Federal Reserve's monetary policy focused primarily on
A)keeping short-term interest rates low in order to stimulate real output and economic growth.
B)a variety of factors,such as unemployment and real GDP,resulting in variable inflation rates throughout this period.
C)keeping inflation low and the general price level relatively stable.
D)monetary expansion in order to reduce unemployment.
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Chapter 34: Lessons From the Great Depression
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Q1) Which of the following contributed to the severity of the Great Depression in the 1930s?
A)large increases in tax rates in 1932 and again in 1936
B)large increases in the money supply during the early 1930s
C)a reduction in tariffs protecting many U.S.industries
D)a substantial tax rate reduction,which led to large deficits and high interest rates during the early 1930s
Q2) The New Deal policies of the Great Depression resulted in
A)a reduction in unemployment and an increase in real output.
B)a stable economic environment and an increase in investment.
C)economic uncertainty and prolonged unemployment.
D)a quick end to the depression once the policies had taken effect.
Q3) Prolonged periods of monetary contraction,as was the case during the Great Depression,will likely result in
A)an increase in real output and employment.
B)an increase in loanable funds and upward pressure on the rate of inflation.
C)a decrease in output and downward pressure on prices.
D)a decrease in unemployment and upward pressure on prices.
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Chapter 35: Lessons From Japan and Canada
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Q1) Which of the following led to a strong demand for commercial real estate in Japan in the mid-1980s,resulting in soaring real estate prices?
A)low interest rates set by the Bank of Japan combined with optimism of continued strong economic growth
B)high interest rates of the period along with the adoption of higher credit and borrowing standards
C)stagnant stock market prices that induced investors to shift investments from stocks to real estate
D)a historically-sluggish economy that was showing signs of recovery and future economic growth
Q2) During the mid-1990s,the Canadian economy was characterized by
A)large budget deficits as a share of the economy.
B)government expenditures in excess of 50 percent of GDP.
C)a down-grading of Canadian bonds by the bond rating agencies.
D)all of the above.
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Chapter 36: The Federal Budget and the National Debt
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Sample Questions
Q1) Why are the bonds held by the Fed and government agencies excluded from the privately held debt figures?
A)The U.S.Treasury does not have to pay off these bonds.
B)These bonds were not issued by the Treasury.
C)These bonds do not represent a net-interest obligation of the government.
D)These bonds are not interest-bearing bonds.
Q2) If the federal government runs a budget deficit,and the budget deficit as a percent of GDP is equal to the growth rate of real output,the
A)national debt will decrease as a share of GDP.
B)national debt will remain a constant share of GDP.
C)national debt will increase as a share of GDP.
D)size of the national debt (in dollar value)will decline.
Q3) Since 1970,the federal debt has expanded rapidly because
A)revenues have gone down,while expenditures have gone up.
B)expenditures have risen faster than revenues.
C)expenditures have increased slightly,while revenues have remained about the same.
D)revenues have fallen faster than expenditures.
Q4) What is the difference between the federal budget deficit and the national debt?
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Page 38
Chapter 37: The Economics of Healthcare
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Sample Questions
Q1) If a third party pays for an individual to consume a good,how is the decision making of consumers affected? How does this affect the actions of suppliers?
Q2) Why is the current U.S.tax-treatment of health insurance purchased through one's employer discriminatory?
A)Health insurance should not be a tax-deductible expense for anyone.
B)The system gives preferential tax treatment to self-employed individuals.
C)The system imposes higher taxes on the direct purchase of health insurance because it is not tax deductible.
D)The system gives preferential tax treatment to people who purchase health insurance directly from a provider.
Q3) By promoting third-party payment of health-care expenses and the purchase of health insurance through employers,health-care policy has
A)eroded the incentive of health-care consumers and providers to economize.
B)undermined the smooth operation of health-care markets.
C)made it more costly for persons without a job to obtain health insurance.
D)done all of the above.
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Chapter 38: Education: Problems and Performance
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Q1) Which of the following is true?
A)The achievement scores of African-American students tend to be lower after one to two years in voucher programs.
B)Most parents of students in charter schools and voucher programs indicate they are dissatisfied with their children's schools.
C)Voucher programs targeted at low- and middle-income families will tend to decrease racial integration in highly segregated communities.
D)The impact of charter schools on student achievement is inconclusive.
Q2) The incentive of schools to provide a high quality education at a low cost and the incentive of parents and students to shop around for the best schools will be weakest when education is produced
A)privately but paid for by taxpayers and provided free of charge.
B)by public schools and the cost of education is covered by taxes.
C)privately and parents must purchase it with their own money.
D)by public schools and parents purchase it with their own money.
Q3) What are charter schools? How do they differ from voucher programs?
Q4) What does the evidence suggest regarding the effects of school choice programs?
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Chapter 39: Earnings Differences Between Men and Women
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Sample Questions
Q1) If a firm refuses to hire any females due to a personal prejudice,its profits will A)increase markedly.
B)decrease.
C)not be affected.
D)increase slightly.
Q2) As the proportion of women preparing for careers as professionals increases,
A)their years of work experience will become more similar to men.
B)the female/male earnings ratio will rise.
C)their level of human capital will become more similar to men.
D)all of the above.
Q3) Which of the following is true?
A)Employers who discriminate against women will have lower costs than rival firms that hire employees strictly on the basis of merit (productivity).
B)If employers can hire equally productive female employees at a lower wage than males,the profit motive gives them a strong incentive to do so.
C)The female/male earnings ratio is higher for persons who are married than for those who remain single.
D)Both a and c are true.
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Chapter 40: Do Labor Unions Increase the Wages of Workers
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Q1) Which of the following will tend to increase the ability of a union to increase the wages of its members?
A)Almost all of the firms in the industry are unionized.
B)Foreign competition for the product produced by the union labor is intense.
C)There is a reduction in the demand for union labor.
D)The demand for the product produced by the union labor is highly elastic.
Q2) Because the demand for a broadly defined product line (automobiles,for example)is less elastic than the demand for a more narrow product category (Fords,for example),a union will be better able to raise wages without large unemployment effects when
A)it has organized an entire industry rather than only one firm.
B)it organizes only a few firms in each industry.
C)it bargains with all firms in a narrow product line but ignores the rest of the industry.
D)only a small part of the industry that makes the broadly defined product is unionized.
Q3) A former union employee states: "We were on strike for two years.I know the eventual wage increase we received will never make up for the wages I lost,but I think the strike was worth it.We forced the company to give in to our demands." Evaluate these comments.
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Page 42
Chapter 41: The Question of Resource Exhaustion
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Q1) "If China and India continue their economic expansion,the world cannot provide enough raw materials without terrible shortages worldwide." Evaluate this statement.
A)True,increased demand from developing countries will swamp the existing supply of resources.
B)True,increased demand from China and India will lead to large shortages in the North America and Europe.
C)False,the shortage will be limited to China and India.
D)False,increasing scarcity will result in higher prices and the deployment of new technologies that increase the efficiency of production,and together these markets forces will help to balance demand and supply worldwide.
Q2) Doomsday projections have generally
A)been correct.
B)been incorrect,but with better technology and the ability to predict the future,these forecasts have become much more accurate in the last few decades.
C)been inconsistent.Some projections came true,others failed.
D)been wrong.
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Chapter 42: Difficult Environmental Cases and the Role of Government
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Q1) Which of the following is,so far,the most utilized method to reduce emissions of industrial pollution to politically chosen levels,while encouraging efficient choices by polluters?
A)government pollution charges or taxes
B)non-tradable emission standards that cap allowable pollution for each emitter
C)cap and trade emission permits
D)regulations that would effectively prohibit all emissions
Q2) It can be difficult to define and enforce property rights against damaging pollutants when
A)many polluters are harming one person.
B)many polluters harm the same large group of people with the same pollutant.
C)the harms are difficult to quantify.
D)All of the above are true.
Q3) Empirical evidence indicates that
A)changes in the earth's cloud cover will clearly enhance the warming effects of carbon dioxide.
B)the increase in carbon dioxide,over thousands of years,is definitely the cause of global warming.
C)if global warming continues,the sea levels will definitely rise.
D)none of the above are true.
Page 44
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