Survey of Economics
Exam Answer Key
Course Introduction
Survey of Economics provides students with an introduction to the fundamental principles and concepts of both microeconomics and macroeconomics. The course covers topics such as supply and demand, market structures, consumer behavior, production and costs, national income, fiscal and monetary policy, and the role of government in the economy. Through real-world examples and current events, students will develop an understanding of how economic forces affect individuals, businesses, and society as a whole, equipping them with the analytical tools necessary to interpret economic issues and make informed decisions.
Recommended Textbook
Economics USA 8th Edition Edition by
Nariman Behravesh
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28 Chapters
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Page 2
Chapter 1: What is Economics
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Sample Questions
Q1) The average yearly income per family in the United States is about $60,000.To more meaningfully interpret this figure,we would need information on the
A) output per hour of labor.
B) amount of household consumption expenditures.
C) exchange rate.
D) number of families.
E) distribution of income.
Answer: E
Q2) Adam Smith wrote that
A) the economic problems of eighteenth-century Britain were in part caused by overspecialization.
B) the government should control the economy with an invisible hand.
C) the pursuit of private self-interest tends to promote the public interest.
D) the owners of resources should be given subsidies to induce them to employ those resources in the most efficient way.
E) eighteenth-century Britain needed a better-planned economy.
Answer: C
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Chapter 2: Markets and Prices
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Q1) In a free market,the price system determines how society's output is distributed by
A) ensuring that low income people can buy all the necessities for living.
B) providing goods for those willing and able to pay at least the equilibrium price.
C) determining each person's income in the labor market according to the tax rate imposed by the state.
D) allowing all those who desire a commodity to buy it.
E) ensuring that each commodity is produced by the most efficient technique.
Answer: B
Q2) Which of the following does not result in a change in demand but leads to a change in the quantity demanded?
A) an increase in population
B) a change in taxes
C) an increase or decrease in the price of a substitute or complement
D) a change in income
E) a shift in the supply curve
Answer: E
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4
Chapter 3: The Business Firm: Organization,motivation,and
Optimal Input Decisions
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Q1) Compared to the proprietorship,the partnership has the disadvantage of A) limited liability to each partner.
B) encountering more red tape to remain in existence.
C) double taxation of each partner.
D) finding more difficulty in securing funds and specialized know-how.
E) unlimited liability of each partner.
Answer: B
Q2) The marginal product of the fourth unit of labor is ________ bushels.
A) 1,000
B) 2,000
C) 3,100
D) 3,500
E) 4,000
Answer: B
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5
Chapter 4: Getting Behind the Demand and Supply Curves
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Q1) The Easy Rider Surfboard Company produces 11,000 surfboards annually at a total cost of $484,000.Its total fixed costs are $198,000.The average variable cost of a surfboard must be
A) $18.
B) $26.
C) $44.
D) $62.
E) $70.
Q2) Which of the following short-run cost curves generally declines,then rises as output is increased?
A) average fixed cost and average variable cost
B) average variable cost and average total cost
C) average total cost and average fixed cost
D) average fixed cost only
E) average variable cost only
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6
Chapter 5: Market Demand and Price Elasticity
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Q1) The Turnpike Commission estimates that the price elasticity of demand for travel on the highway is
A) 0.17.
B) 0.30.
C) 0.50.
D) 1.
E) 6.
Q2) The percentage change in the quantity demanded of one commodity resulting from a 1 percent change in the price of a substitute commodity is called the ________ elasticity of demand.
A) income
B) price
C) cross
D) equilibrium
E) arc
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Chapter 6: Economic Efficiency,market Supply,and Perfect Competition
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Q1) In the short run the perfectly competitive firm will produce at a loss rather than discontinue production if
A) there is an output rate at which price exceeds average variable cost.
B) total losses exceed total fixed cost.
C) there is an output rate at which price equals marginal cost.
D) the firm's supply curve is upward sloping.
E) total revenue can be increased by producing more.
Q2) Choosing an output rate at which price equals marginal cost maximizes profits for the perfectly competitive firm because further increases in the output rate would
A) increase total cost.
B) decrease total revenue.
C) add more to total cost than it would to total revenue.
D) result in a price decline.
E) increase average fixed cost more than average variable cost.
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8
Chapter 7: Monopoly and Its Regulation
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Q1) When marginal revenue exceeds marginal cost,a monopolist should reduce A) output.
B) price.
C) demand.
D) revenue.
E) employment.
Q2) The marginal revenue associated with the sale of the third unit is
A) $390.
B) $130.
C) $110.
D) $10.
E) $3.
Q3) The monopolist can set a price well above the competitive supply and demand level by
A) advertising to expand the market.
B) pushing the supply curve as far to the right as it will go.
C) restricting output.
D) using technology to speed production.
E) setting price equal to average cost.
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Page 9
Chapter 8: Monopolistic Competition,oligopoly,and Antitrust Policy
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Sample Questions
Q1) A group of firms that produce similar goods is called a ________ group.
A) monopolistic
B) product
C) market
D) retail
E) homogeneous
Q2) Antitrust action is the responsibility of the
A) president of the United States.
B) Supreme Court.
C) Federal Commerce Commission.
D) Department of Justice.
E) FBI.
Q3) Game theory can most effectively be used to postulate behavior in ________ markets.
A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic
E) regulated
Page 10
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Chapter 9: Pollution and the Environment
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Q1) From the perspective of economic analysis,society should
A) try to reduce pollution to a level as close to zero as is humanly possible.
B) realize that it is unrealistic to expect that efforts to reduce pollution will be cost effective from society's standpoint.
C) strive to maximize the difference between the costs of pollution and the costs of pollution control.
D) reduce pollution as long as the reduction in social costs equals or exceeds the additional cost associated with the control program.
E) pursue reduced pollution levels as long as the social cost of achieving these levels exceeds the social cost of polluting.
Q2) Crystal Clear Glass Company uses a refinement method that creates air pollution,causing the recreational industry in the area to suffer and forcing a number of citizens to relocate.This behavior is an example of a(n)
A) private cost.
B) effluent fee.
C) positive externality.
D) external diseconomy.
E) transfer payment.
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Chapter 10: The Supply and Demand for Labor
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Q1) After some point,increased real wage rates that make people richer cause the supply curve of labor to
A) become horizontal.
B)shift to the right.
C) fluctuate unpredictably.
D) remain vertical.
E) bend backward.
Q2) In an open shop,workers
A) must be union members before they can be hired.
B) need not be union members to work.
C) must become union members within a certain period of time once they have been hired.
D) are not able to strike under any circumstances.
E) sign yellow dog contracts before they begin work.
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Chapter 11: Interest,rent,and Profit
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Sample Questions
Q1) If the supply of an input is fixed,its supply curve is a(n)
A) upward-sloping line.
B) vertical line.
C) downward-sloping line.
D) horizontal line.
E) single point.
Q2) One who accepts the risks inherent in introducing and commercializing a new product or manufacturing process is called a(n)
A) socialist.
B) innovator.
C) banker.
D) rentier.
E) economist.
Q3) The interest rate earned on an investment in an asset is called
A) the capital output ratio.
B) depreciation.
C) the risk quotient.
D) capitalization.
E) the rate of return.
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Page 13
Chapter 12: Poverty,income Inequality,and Discrimination
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Q1) Discrimination in labor markets arises because A) race or gender characteristics present barriers to mobility and create noncompeting groups.
B) women and minorities are inherently less productive.
C) the supply curve of women and minorities is smaller than the total labor supply curve.
D) women and minorities typically have more education and experience. E) of various laws such as the Civil Rights Act of 1964.
Q2) A tax that takes a smaller proportion of one's income as that income rises is called a(n)________ tax.
A) progressive
B) regressive
C) income
D) excise
E) proportional
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14
Chapter 13: Economic Growth
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Q1) The number of dollars of investment required to produce an extra dollar of goods or services is called the
A) multiplier.
B) rate of innovation.
C) marginal efficiency of investment.
D) capital-output ratio.
E) rate of return.
Q2) Educational expenditures may be viewed as an investment process when
A) the money spent increases the current income to teachers and other related professionals.
B) college tuition expenses are tax deductible.
C) future gains in productivity follow from the sacrifice of current production and consumption.
D) intellectual depreciation is counted as part of GDP.
E) such expenditures represent a noticeable share of our GDP.
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Chapter 14: Public Goods and the Role of the Government
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Q1) There appears to be some consensus that the proper economic role of government includes all of the following EXCEPT
A) providing help for those unable to care for themselves.
B) providing some public goods.
C) maintaining competition.
D) discouraging external economies.
E) maintaining a legal and social framework.
Q2) Policies that benefit special interest groups are often adopted by governments because
A) these groups in the aggregate tend to represent a broad social consensus.
B) such groups are more efficient in the allocation of resources than government bureaucracies; hence, support of their programs raises economic efficiency.
C) doing so equates marginal social benefits with marginal social costs.
D) such groups contribute more to government revenues than they receive in the form of public benefits.
E) the gains of these relatively small groups come at the expense of a large number of people, each of whom loses very little and so is less aware of the loss.
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16
Chapter 15: National Income and Product
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Q1) What effect did the U.S.contribution to the war effort during World War II have on GNP?
A) It boosted GNP dramatically.
B) It boosted GNP slightly.
C) GNP fell to its lowest level in years as resources were depleted.
D) Since resources were only transferred from one kind of production to another, there was virtually no effect.
E) It made GNP difficult to estimate accurately, since output was being diverted to the government.
Q2) If the estimated current dollar GDP is $5,616 billion while real GDP is $4,129 billion,then the prices of goods and services have risen by what percentage from their base-year levels?
A) 26 percent
B) 36 percent
C) 44 percent
D) 74 percent
E) impossible to determine from the information given
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Chapter 16: Business Fluctuations and Unemployment
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Q1) When actual output is below potential output
A) the economic costs of unemployment are zero.
B) everyone actively seeking a job can easily find one.
C) extreme inflationary pressure prevails.
D) less than 95 percent of the labor force is employed.
E) the economy is producing on its production possibilities curve.
Q2) Both aggregate demand and aggregate supply curves are relationships between
A) income and employment.
B) output and income.
C) the price level and real output.
D) interest rates and the prices of financial assets.
E) inflation and unemployment.
Q3) In the long run,the aggregate supply curve is vertical because
A) in the long run, potential output is less than actual output.
B) input prices and output prices are unaffected by changes in aggregate demand.
C) aggregate demand becomes horizontal.
D) input prices change by the same proportion as product prices, leaving output levels unchanged.
E) excess capacity allows firms more resource flexibility.
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Page 18
Chapter 17: The Determination of National Output and the Keynesian Multiplier
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Sample Questions
Q1) An MPC of zero means the value of the multiplier is
A) 0.
B) 1.
C) 2.
D) 2.5.
E) 3.
Q2) The average propensity to consume equals the
A) change in personal consumption expenditures divided by the current level of consumption expenditures.
B) amount spent on consumption divided by the amount of disposable income.
C) change in personal consumption expenditures divided by the change in disposable income.
D) personal consumption expenditures divided by personal saving.
E) sum of personal consumption expenditures and disposable income divided by 2.
Q3) When GDP is at its equilibrium value
A) firms' inventories will neither increase nor decrease unexpectedly.
B) employment and GDP are identical.
C) the multiplier is zero.
D) intended investment equals the 45-degree line.
E) consumption equals disposable income.
Page 19
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Chapter 18: Fiscal Policy and National Output
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Q1) The greatest source of federal government tax receipts is the ________ tax.
A) personal income
B) corporate income
C) estate and gift
D) general sales
E) property
Q2) The tax cut of 1964
A) represents one of the few failures of modern fiscal policy.
B) was a factor leading to increased consumption expenditures.
C) was passed over the objections of President Kennedy.
D) was enacted to reduce inflationary pressures.
E) induced a decline in investment expenditures.
Q3) The higher the tax rate,government spending unchanged,the
A) higher the level of intended spending.
B) lower the equilibrium level of GDP.
C) higher the amount of consumption.
D) lower the 45-degree line.
E) higher the amount of disposable income.
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Page 20
Chapter 19: Inflation
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Q1) Inflation
A) hurts people living on fixed incomes.
B) inevitably tends to die out.
C) has been the experience of this country since its founding.
D) does not tend to redistribute income.
E) inevitably leads to deflation.
Q2) The most widely quoted measure of inflation in the United States is the A) Phillips curve.
B) price output ratio.
C) consumer price index.
D) cost of living adjustment.
E) Dow Jones Industrial Average.
Q3) If national output is fixed and there is a 10 percent increase in total spending,the price level will
A) fall by 10 percent.
B) remain constant.
C) rise by 10 percent.
D) rise by 10 percent times the multiplier.
E) rise by 10 percent times the dollar value of output.
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Page 21
Chapter 20: Money and the Banking System
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Q1) The liabilities of a commercial bank include A) loans.
B) time and demand deposits.
C) net worth.
D) deposits at the Federal Reserve Bank.
E) shares of stock.
Q2) Demand deposits in a commercial bank are considered part of the bank's A) assets.
B) liabilities.
C) net exposure.
D) ordinary ratio.
E) fractional multiplier.
Q3) In general,financial institutions
A) exclude those businesses that lend to the public.
B) act as intermediaries between savers and investors.
C) number fewer than a thousand in the United States.
D) hold reserves equal to the value of checkable deposits.
E) operate as nonprofit institutions for the public good.
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Chapter 21: The Federal Reserve and Monetary Policy
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Q1) When the Fed sells government securities on the open market
A) bank reserves decline.
B) the Fed is following an easy money policy.
C) government bond prices rise.
D) bank reserves and interest rates both rise.
E) interest rates fall.
Q2) The 12 Federal Reserve banks
A) hold the deposits of member banks and make loans to them.
B) are all located in Washington, DC, but serve different districts throughout the country.
C) are all headed by members of the Federal Open Market Committee.
D) carry out policies dictated by the Treasury Department.
E) hold about 73 percent of the nation's demand deposits.
Q3) The major asset of the Federal Reserve System is
A) gold certificates.
B) government securities.
C) loans to commercial banks.
D) Federal Reserve notes.
E) treasury deposits.
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23
Chapter 22: Supply Shocks and Inflation
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Q1) The concept of the natural rate of unemployment
A) states that higher inflationary rates are necessary to substantially reduce its value.
B) is credited to A. W. Phillips.
C) reflects, in part, the willingness of workers to remain voluntarily unemployed rather than take unattractive or lower-paying jobs.
D) reflects the fact that people are lazy and will not work unless they have to.
E) denotes workers temporarily unemployed as a result of expansionary monetary and fiscal policies.
Q2) Supply-side inflation
A) generally occurs during periods of full employment of both human and capital resources.
B)shifts the aggregate supply curve downward to the right.
C) causes the prices of important inputs to fall.
D) is caused by large decreases in the money supply.
E) reflects, in part, the market power of labor unions and large corporations.
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Chapter 23: Productivity,growth,and Technology Policy
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Q1) Which of the following would be conducive to developing and commercializing a new technology?
A) keeping personal tax rates low to encourage consumption
B) using monetary policy to keep interest rates high
C) policies to encourage investment in plant and equipment
D) eliminating tax provisions that allow firms to depreciate their plant and equipment
E) providing more funds for low-income families
Q2) Economic growth is generally measured by the rate of increase in A) population.
B) the price level.
C) output per hour of labor.
D) technological change.
E) per capita output.
Q3) Tax revenues rise when the rate is
A) reduced from 0c to 0b.
B) raised from 0d to 0e.
C) reduced from 0a to 0.
D) raised from 0b to 0e.
E) reduced from 0b to 0a.
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Chapter 24: Surpluses,deficits,public Debt,and the Federal Budget
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Q1) Balancing the government's budget every year
A) is necessary because all debts eventually come due.
B) is a fundamental tenet of Keynesian economics.
C) is sensible for the same reasons as is balancing the family budget.
D) makes it difficult to use fiscal policy to stabilize the economy.
E) results in simultaneous inflation and unemployment.
Q2) In addition to annually and cyclically balanced budget policies,a third approach argues that the government's budget should be
A) set to promote the preferred combination of unemployment and inflation.
B) balanced over the course of the business cycle.
C) measured in current rather than constant dollars to accurately reflect the magnitude of fiscal stimulus.
D) designed to ensure persistent surpluses to reduce unemployment.
E) using the tax laws to stimulate investment.
Q3) During the Clinton administration,fiscal policy was
A) successful in keeping the unemployment rate at about 4 percent.
B) the primary policy tool used to combat inflation.
C) exercised through the monetary authorities.
D) focused on reducing both tax rates and government spending.
Page 26
E) dominated by a desire to reduce budget deficits.
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Chapter 25: Monetary Policy,interest Rates,and Economic Activity
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Q1) According to the classical view of the equation of exchange,which of the following two factors are constant?
A) price level and output
B) price level and velocity
C) money supply and velocity
D) velocity and output
E) money supply and price level
Q2) The value of a dollar
A) has steadily declined since the Revolutionary War.
B) is determined by the amount of gold held by the government.
C) is inversely related to the price level.
D) is set by government fiat.
E) depends on the mix of money and near money.
Q3) The crude quantity theory of money states that
A) the money supply is fixed.
B) the equation of exchange is invalid.
C) the velocity of money changes as prices increase.
D) nominal and real GDP are normally identical.
E) the price level is proportional to the money supply.
Page 27
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Chapter 26: Controversies Over Stabilization Policy
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Q1) The basic distinction between a rigid policy rule and a feedback policy rule is that a rigid policy rule
A) specifies completely the behavior of the variable influenced by the rule; a feedback rule allows that variable to change.
B) requires congressional action; a feedback rule is governed by the Fed.
C) targets the money supply; a feedback rule is used when controlling interest rates.
D) is advocated by the new Keynesians; traditional Keynesians favor a feedback policy rule.
E) is used when targeting the full-employment level of real GDP; a feedback rule is used when targeting the full-employment level of nominal GDP.
Q2) The belief that the self-regulating capabilities of a market economy are insufficient to ensure a stable,full-employment equilibrium is associated with A) monetarists.
B) Keynesians.
C) supply siders.
D) rational expectations theorists.
E) new classical macroeconomists.
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Chapter 27: International Trade
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Q1) A secondary reason for a government to impose a tariff is to A) limit its exports.
B) reduce domestic prices.
C) promote free trade.
D) eliminate shortages.
E) raise revenue.
Q2) If the United States imposes a tariff on imported men's shirts,the price of a man's shirt in the United States probably is
A) below $30.
B) $30.
C) between $30 and $40.
D) $40.
E) over $40.
Q3) A tariff is a(n)
A) limit on exports.
B) form of export subsidy.
C) tax on imports.
D) interest rate on foreign exchange.
E) license to import.
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Page 29
Chapter 28: Exchange Rates and the Balance of Payments
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Q1) The exchange rate system for which the International Monetary Fund was designed is best described as
A) fixed.
B) flexible.
C) floating.
D) indexed.
E) the gold standard.
Q2) Under a system of flexible exchange rates,balance-of-payments deficits and surpluses show up
A) in a country's central bank purchases and sales of foreign currencies.
B) in gold flows into and out of the country.
C) as changes in exchange rates rather than as central bank transactions.
D) as the net difference between debit and credit items in the balance of payments accounts.
E) in the unilateral transfer account in the balance-of-payments accounts.
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