Survey of Economics
Exam Answer Key
Course Introduction
Survey of Economics provides an overview of fundamental economic concepts, principles, and theories, covering both microeconomics and macroeconomics. The course examines how individuals, businesses, and governments make choices with limited resources, explores market structures, and discusses the role of supply and demand in price determination. Students will analyze broader economic indicators such as inflation, unemployment, and economic growth, and investigate the impact of fiscal and monetary policy on the economy. Emphasis is placed on developing an understanding of contemporary economic issues and applying economic reasoning to everyday life and public policy decisions.
Recommended Textbook
Survey of ECON 3rd Edition by Robert L. Sexton
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Chapter 1: The Role and Method of Economics
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Q1) Incorrect. Economics is the study of the choices we make among our many wants and desires given our limited resources.
A)typically uses controlled experiments to learn about consumer and firm behavior. B)uses models that cannot be tested empirically because of the complex nature of the economy.
C)explores how choices are made between conflicting wants and desires in a world of scarcity.
D)relies entirely on normative analysis to validate all hypotheses.
E)relies entirely on empirical analysis to validate all hypotheses.
Answer: C
Q2) The fallacy of composition states that even if something is true for an individual, it is not necessarily true for many individuals as a group.
A)True
B)False
Answer: True
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Chapter 2: The Economic Way of Thinking
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Q1) An increase in the production of one good can have zero opportunity cost only if an economy initially operated at a point inside the production possibilities curve.
A)True
B)False
Answer: True
Q2) A market economy answers the question of what goods will be produced by focusing on:
A)consumers' dollar votes.
B)the least-cost method of production.
C)who can afford these goods.
D)the needs of the society.
E)producers' ability to produce.
Answer: A
Q3) In a market economy, government officials make most production decisions in a centralized manner.
A)True
B)False
Answer: False
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Chapter 3: Supply and Demand
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Sample Questions
Q1) The market supply schedule reflects the total quantity:
A)supplied at the market price.
B)supplied by all of the producers at the equilibrium price.
C)supplied at each price by all of the producers.
D)supplied by an individual firm at each price.
E)supplied by an individual firm at the equilibrium price.
Answer: C
Q2) What is a market? Can you provide three examples of where a market can be found?
Answer: Answers will vary. A market is the process of buyers and sellers exchanging goods and services. Examples are abundant: bookstores, corner grocery markets, stock markets such as the New York Stock Exchange, barbershops, roadside markets, online auction markets, etc. REJ: Please see the section ''Demand'' for more information.
Q3) According to the law of supply, other things equal, when the price of a good or service rises, the quantity supplied increases, but supply does not
A)True
B)False
Answer: True
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Chapter 4: Using Supply and Demand
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Q1) If recent sharp increases in the price of a life-saving drug have had only a small effect on the amount of the drug purchased, then the demand for the drug is said to be:
A)relatively elastic.
B)relatively inelastic.
C)unit elastic.
D)perfectly inelastic.
E)perfectly inelastic
Q2) Identify the correct statement about the price elasticity of demand and the demand curve for a good.
A)The slope of the demand curve is always equal to the elasticity of demand.
B)Moving down along a downward-sloping, linear demand curve, the elasticity of demand increases.
C)The flatter the demand curve passing through a given point, the more elastic the demand.
D)The steeper the demand curve passing through a given point, the more elastic the demand.
E)The price elasticity of demand is, in theory, always positive.
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Chapter 5: Market Failure and Public Choice
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Q1) Which of the following is an example of a public good?
A)Telephone service
B)National defense
C)A city-owned bus service
D)Electricity
E)Education
Q2) What are some of the external costs and the external benefits associated with cellular phone usage in automobiles?
Q3) Public choice theory assumes that voters, politicians, and other political participants are largely motivated by:
A)personal self-interest.
B)altruism.
C)a desire to promote the general welfare.
D)a desire to promote economic efficiency.
E)a desire to promote allocative efficiency.
Q4) Admission to Disney World is an example of a private good from which nonpaying individuals can be excluded.
A)True
B)False
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Chapter 6: Production and Costs
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Q1) From the perspective of a firm, is an accounting profit of zero a good result, a bad result, or merely a satisfactory result? Why? Is an economic profit of zero a good result, a bad result, or merely a satisfactory result? Why?
Q2) The short run is:
A)a period in which firms are able to vary all inputs.
B)a period in which firms are unable to change their scale of production.
C)a period in which inputs can be varied only in equal proportions.
D)a period that is the same for all firms across all industries
E)a period that only has variable costs.
Q3) Explain the cost advantage of a firm operating at constant returns to scale relative to one operating over the range of economies of scale
Q4) The long-run average total cost curve is less U-shaped than the short-run average total cost curve
A)True
B)False
Q5) Sunk costs are important for current business decisions.
A)True
B)False
Q6) What is the law of diminishing marginal product? What causes it?
Page 8
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Chapter 7: Firms in Perfectly Competitive Markets
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Q1) The position of a perfectly competitive firm's demand curve remains constant with change in the market price.
A)True
B)False
Q2) Which of the following is a characteristic of a perfectly competitive industry in long-run equilibrium?
A)A profit-maximizing firm may produce any output level at which P < LRATC.
B)Every firm produces at an output level at which MC > LRATC.
C)Firms will continue to enter or exit the industry.
D)No firm earns an economic profit.
E)Every firm earns an economic profit.
Q3) If a perfectly competitive industry uses only a small share of the available inputs in a resource market, then the long-run market supply curve for the industry will most likely be:
A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.
E)concave to the horizontal axis.
Q4) What are the characteristics of a perfectly competitive industry?
Page 9
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Chapter 8: Monopoly
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Q1) A monopolist never incurs a loss.
A)True
B)False
Q2) If the marginal revenue from the tenth unit of output equals $4 for a non-discriminating, profit-maximizing monopolist and the marginal revenue from the ninth unit equals $6, then the price for the tenth unit is:
A)equal to $4.
B)is less than $4.
C)is greater than $4.
D)equal to $2.
E)equal to $6.
Q3) Monopolists have no incentive to innovate as patents expire after a while.
A)True
B)False
Q4) Some near-monopolies have been important innovators.
A)True
B)False
Q5) Monopolists do not worry about efficient production and cost saving since they can just pass along any increase in costs to their consumers. Is this statement true? Explain your answer.
10
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Chapter 9: Monopolistic Competition and Oligopoly
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Q1) During the past 20 years, Marzi Corp., a large firm in an oligopolistic industry, has changed prices a number of times. Each time it does so, the other firms in the industry follow suit. Marzi Corp. is a _____.
A)monopolist
B)perfectly competitive firm
C)price leader
D)price follower
E)monopolistically competitive firm
Q2) Monopolistic competition is a market structure characterized by many small firms selling a homogeneous product.
A)True
B)False
Q3) The prisoners' dilemma is an example of a cooperative game.
A)True
B)False
Q4) Why does inefficiency exist in monopolistic competition?
Q5) Define monopolistic competition.
Q6) How do economies of scale result in barriers to entry into an oligopolistic market structure?
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Chapter 10: Labor Markets, Income Distribution, and Poverty
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Q1) If the demand for opera singers increases faster than the supply increases, wages will rise.
A)True
B)False
Q2) The marginal product of labor measures:
A)the total amount of output produced by all workers combined.
B)the quantity of an input that is combined with labor to produce output.
C)the amount of output an additional worker contributes to a firm's total output.
D)the average productivity of workers hired by a firm.
E)the cost of hiring workers to produce a certain amount of output.
Q3) The concept of derived demand indicates that the demand for a final good or service is determined by the price of the inputs used to produce that final good or service.
A)True
B)False
Q4) The law of diminishing marginal product is a reason why the demand curve for labor is downward sloping
A)True
B)False
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Chapter 11: Introduction to Macroeconomics:
Unemployment, Inflation, and Economic Fluctuations
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Q1) Which of the following is not true?
A)At the natural rate of unemployment, the economy is considered to be at full employment.
B)At full employment, the economy produces its potential output.
C)If the unemployment rate in an economy is greater than its natural rate, the economy produces an output level that is less than its potential output.
D)If the unemployment rate in an economy is less than its natural rate, the economy experiences cyclical unemployment.
E)The natural rate of unemployment increases when there is an increase in frictional unemployment.
Q2) Which of the following groups of people would be included when calculating the official unemployment rate?
A)Part-time workers
B)Workers temporarily laid off from jobs
C)Workers who have stopped looking for jobs after being unsuccessful
D)Full-time college students
E)Workers who possess more skills than what their jobs demand
Q3) What are the three major macroeconomic goals?
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Chapter 12: Economic Growth
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Q1) Which of the following will lead to gross domestic product (GDP) underestimating the actual output in an economy?
A)Mary begins a catering business.
B)James begins drawing Social Security benefits upon his retirement
C)David accepts a position as a software specialist at Microsoft
D)Philomena bakes cookies for her children.
E)Neo buys a new house for his only daughter on her wedding
Q2) Personal income includes income received in the form of transfer payments
A)True
B)False
Q3) According to the circular flow of income:
A)governments sell goods and services to households
B)firms sell goods and services to domestic and foreign consumers.
C)firms provide transfer payments such as unemployment insurance payments
D)households use factors of production to produce goods and services.
E)the value of aggregate income equals the value of gross national product.
Q4) Adam's Ribs in downtown Chicago buys $10,000 worth of beef ribs, $25,000 worth of pork ribs, and $8,000 worth of napkins each month. Are these purchases included in the calculation of gross domestic product?
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Chapter 13: Aggregate Demand and Aggregate Supply
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Q1) A fall in the price level will cause the aggregate demand curve to shift to the left.
A)True
B)False
Q2) Higher interest rates will tend to reduce aggregate demand, other things being equal.
A)True
B)False
Q3) Describe the difference between a microeconomic demand curve and an aggregate demand curve.
Q4) The interest rate effect helps explain why a lower price level will reduce the quantity of real goods and services demanded as an economy moves down along its aggregate demand curve.
A)True
B)False
Q5) Explain how changes in the stock of capital affect aggregate supply.
Q6) The short-run aggregate supply curve is vertical at the natural level of real output. A)True B)False
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Chapter 14: Fiscal Policy
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Q1) When payroll taxes and Medicare are taken into consideration, the tax system in the United States becomes more progressive than when viewing the federal income tax individually
A)True
B)False
Q2) Suppose a flat tax plan allows individuals to deduct a standard allowance of $25,000 from their wages and the flat tax rate is 10 percent. Above $25,000 in wages, the average tax rate:
A)would remain constant with an increase in income.
B)would increase with an increase in income.
C)would decrease by 2 percent with an increase in income
D)would decrease by 4 percent with an increase in income.
E)would decrease by 6 percent with an increase in income
Q3) A change in taxes primarily affects aggregate demand by altering:
A)exports and net exports
B)investment by an equal and opposite amount.
C)disposable income and consumption spending.
D)government purchases by an equal amount.
E)imports and net exports
Q4) What are the advantages of a flat tax system?
Page 16
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Chapter 15: Monetary Institutions
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Q1) Suppose a commercial bank faces a reserve requirement of 15 percent on all deposits, and a customer makes a new cash deposit of $50,000. Then, it can be said that a new excess reserve of _____ is created.
A)$7,500
B)$33,000
C)$67,500
D)$42,500
E)$50,000
Q2) Which of the following guarantees the deposits in almost all U.S. banks?
A)The Federal Reserve
B)The Federal Deposit Insurance Corporation
C)The U.S. Treasury
D)The Bank of America Corporation
E)The Reconstruction Finance Corporation
Q3) How is money destroyed in the banking system?
Q4) Why is the money multiplier considered to be a potential multiplier rather than an indication of exactly how much multiplication should be expected?
Q5) What are the inherent disadvantages of a barter system?
Q6) What is fiat money? Why is fiat money important in the United States today?
Page 17
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Chapter 16: The Federal Reserve and Monetary Policy
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Q1) When money demand increases, the Fed cannot keep both the money supply and the interest rate from rising.
A)True
B)False
Q2) Name the six primary functions of the central bank of a country.
Q3) Rising reserve requirements, other things being equal, would tend to:
A)increase the dollar volume of loans made by the banking system
B)increase the money supply.
C)increase aggregate demand
D)decrease the money supply
E)depreciate the value of the currency.
Q4) Most of the key decisions of the Federal Reserve are actually made by its Federal Open Market Committee
A)True
B)False
Q5) When money demand increases, the Fed cannot keep both the money supply and the interest rate from rising
A)True
B)False
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Chapter 17: Issues in Macroeconomic Theory and Policy
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Q1) From early 2007 to mid-2008, the short-run aggregate supply curve of the United States shifted to the left.
A)True
B)False
Q2) Why is indexing not commonly adopted in spite of the fact that it eliminates most of the wealth transfers associated with unexpected inflation?
Q3) Automatic stabilizers are not regarded as important fiscal policies.
A)True
B)False
Q4) Is it possible for monetary policy to be more effective during an expansion than during a recession? If yes, why?
Q5) The crowding-out effect implies that an increase in government borrowing to finance deficit financing results in _____.
A)an increase in the demand for money that causes interest rate to rise
B)a decrease in the demand for money that causes interest rate to rise
C)an increase in private investments by businesses
D)an increase in the demand for money that causes interest rate to fall
E)an increase in consumption spending by households.
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Chapter 18: International Economics
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Q1) The balance of payments is a statement that records:
A)all the exchanges requiring an outflow of funds to foreign nations or an inflow of funds from other nations.
B)the monetary value of all finished goods and services produced within a country's borders in a specific time period.
C)the total income earned by all the people and institutions within a country from the production of goods and services.
D)the additions to the existing stock of plant and equipment used in the production of goods and services.
E)all the exchanges requiring an outflow of funds from the government to the private sector.
Q2) Which of the following arguments does not favor tariffs?
A)Tariffs help infant industries grow.
B)Tariffs increase consumer surplus for domestic consumers.
C)Tariffs reduce domestic unemployment.
D)Tariffs are necessary for national security reasons.
E)Tariffs increase the quantity of goods sold in the market.
Q3) What is consumer surplus? How is it different from producer surplus?
Q4) Why is the demand for foreign currencies known as a derived demand?
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