Part 3 – ECONOMICS (5 items in the CPALE)

Question 1

1. ___ economics is the analysis that generates objective descriptions or predictions that can be verified with data.
   a. Positive
   b. Negative
   c. Normative
   d. Marginal

Answer 1

a. Positive

Question 2

2. Which of the following is an example of a positive economic statement?
   a. Economics is the most useful social science
   b. An increase in income causes an increase in savings
   c. The government should ideally work as a welfare state
   d. Eliminating poverty is more important than reducing inflation

Answer 2

b. An increase in income causes an increase in savings

Question 3

3. ___ economics prescribes what an individual or society ought to do.
   a. Positive
   b. Negative
   c. Normative
   d. Behavioral

Answer 3

c. Normative

Question 4

4. Which of the following is an example of a normative economic statement?
   a. An increase in income is accompanied by an increase in savings
   b. An increase in income is accompanied by an increase in consumption
   c. An increase in the money supply will lead to an increase in inflation rate
   d. An increase in government expenditure will lead to an increase in well-being

Answer 4

d. An increase in government expenditure will lead to an increase in well-being

Question 5

5. Which of the following statements correctly differentiates between positive and normative economics?
   a. Positive economics is descriptive, whereas normative economics is advisory.
   b. Positive economics is based on judgments, whereas normative economics is not.
   c. Positive economics describes what people ought to do, whereas normative economics describes what
   people actually do.
   d. Positive economics is applied to microeconomics, whereas normative economics is applied to
   macroeconomics.

Answer 5

a. Positive economics is descriptive, whereas normative economics is advisory.

Question 6

6. The 3 basic principles in modern economics are optimization, equilibrium and empiricism. EMPERICISM refers to:
   a. The process of choosing the best option from a set of alternatives, given the available information
   {optimization}
   b. A special situation where everyone is simultaneously optimizing, so that nobody will benefit personally
   by changing his or her behavior {equilibrium}
   c. The analysis that is evidenced-based as it uses data to test theories and to determine what is causing
   things to happen in the world
   d. The study of how economic agents choose to allocate scarce resources and how the choices affect society
   {economics}

Answer 6

c. The analysis that is evidenced-based as it uses data to test theories and to determine what is causing
things to happen in the world

Question 7

7. A consumer has P 50 to spend. He must decide between buying two goods: magazines (mags) priced at P 5 each
   and DVDs priced at P 10 each. Pursuant to the principle of optimization, which of the following combinations of the
   two goods will exactly satisfy his budget constraint?
   a. 3 mags, 4 DVDs
   b. 2 mags, 4 DVDs
   c. 6 mags, 1 DVDs
   d. 2 mags, 2 DVDs

Answer 7

b. 2 mags, 4 DVDs
Solution: (2 mags x 5) + (4 DVDs x 10) = 50

Question 8

8. Scenario: Ken must choose between driving and taking a train to destination A. Travelling by train will cost her P
   400 and will take 4 hours. Driving to destination A takes 6 hours, and the required amount of gasoline costs P 250.
   Her opportunity cost of time is P 15 per hour. What must Ken do?
   a. Drive, to save P 120
   b. Drive, to save P 150
   c. Travel by train, since it is quicker
   d. Travel by train, to P 30 in travel time

Answer 8

a. Drive, to save P 120
Solution: Train: 400 + 4 (15) = 460 Drive: 250 + 6 (15) = 340

Question 9

9. The term “free riders” refers to people who:
   a. Don’t contribute but still benefit from others’ actions
   b. Make economic decisions randomly and are not rational
   c. Selflessly pay for others’ consumption of goods and services
   d. Haggle over the prices of the goods and services that they buy

Answer 9

a. Don’t contribute but still benefit from others’ actions

Question 10

10. Which of the following is an example of free riding?
    a. An individual who sneaks inside a music concert
    b. A consumer who buys his groceries from a nearby store
    c. A tax payer who exercises in the public park near his house
    d. A club member who makes voluntary contributions to the club

Question 11

11. Assume that a house is rented by 4 students. When it comes to keeping the house clean, each of the four roommates
    has an incentive to leave cleaning to the others. As a result, the house is never clean. What is the best solution to
    this problem of free riding?
    a. Ask every roommate to clean the house if they dirty it
    b. Require every roommate to contribute to a cleaning service
    c. Require each room mate to pay more toward the house rent and groceries
    d. Assign one roommate the responsibility to keep a watch over the other students

Answer 11

b. Require every roommate to contribute to a cleaning service

Question 12

12. If people expect the price of coffee to rise next month, the demand for coffee will
    a. Decrease now
    b. Increase now
    c. Stay the same now and increase next month
    d. Stay the same now and next month

Answer 12

b. Increase now

Question 13

13. If a small percentage increase in the price of a good results in a rather large percentage reduction in the demanded
    of the good, demand is said to be
    a. Unit-elastic (ED = 1)
    b. Relatively elastic (ED > 1)
    c. Relatively inelastic (ED < 1)
    d. Perfectly inelastic (ED = 0)

Answer 13

b. Relatively elastic (ED > 1)

Question 14

14. When the demand for a product is elastic, an increase in the price of a product will
    a. Increase competition
    b. Increase total revenue
    c. Decrease total revenue
    d. Not affect total revenue

Question 15

15. A shift in the supply curve may result from the following, EXCEPT
    a. Changes in production technology
    b. Changes in the number of sellers in the market
    c. Changes in the number of buyers in the market
    d. Changes or expected changes about future prices of resources

Question 16

16. The competitive model of supply and demand predicts that a surplus can arise only if there is a
    a. Maximum price above the equilibrium price
    b. Minimum price below the equilibrium price
    c. Maximum price below the equilibrium price
    d. Minimum price above the equilibrium price

Question 17

17. The “Social Surplus” (a.k.a. Total or Economic Surplus) is the
    a. Difference between the maximum price a consumer is willing to pay and the price the consumer actually
    pays {Consumer Surplus}
    b. Difference between the price a producer actually gets and the price the producer is willing to take
    {Producer Surplus}
    c. Difference between consumer surplus and producer surplus
    d. Sum of consumer surplus and producer surplus

Question 18

18. Compared with firms in a perfectly competitive market, a monopolist tends to
    a. Produce substantially less but charge a higher price
    b. Produce substantially more and charge a higher price
    c. Produce the same output and charge a higher price
    d. Produce substantially less and charge a lower price

Answer 18

a. Produce substantially less but charge a higher price

Question 19

19. Monopolistic competition is characterized by
    a. A relatively large group of sellers who produce differentiated products
    b. A relatively small group of sellers who produce differentiated products
    c. A monopolistic market where the consumer is persuaded that there is perfect competition
    d. A relatively large group of sellers who produce a homogenous product

Question 20

20. There are different types of unemployment in an economy: Frictional, Structural, Cyclical, and also, Seasonal. Which of the following refers to Frictional Unemployment?
    a. Those seeking first employment, switching jobs or return to work after a while
    b. Mismatch of skills with work required or automation and migration of a business process {Structural}
    c. Laid-off workers due to a poor economy or a downturn in business cycle during recession {Cyclical}
    d. Business slowdown or shutdown due to season changes {Seasonal}

Question 21

21. “Full Employment” occurs when there is only frictional unemployment. Which best describes “Full Employment?”
    a. Everyone who is above 16 years of age has a job.
    b. Everyone in the labor force has a job.
    c. Everyone who wants a job has a job.
    d. No such thing.

Answer 21

c. Everyone who wants a job has a job.

Question 22

22. Natural Rate of Unemployment (NRU) happens in a growing and healthy economy from the combination of economic,
    social, and political factors that exist at given time. Which of the following is the right formula for NRU?
    a. NRU = Frictional Unemployment + Structural Unemployment
    b. NRU = Structural Unemployment + Cyclical Unemployment
    c. NRU = Cyclical Unemployment + Frictional Unemployment
    d. NRU = Frictional Unemployment + Structural Unemployment + Cyclical Unemployment

Answer 22

Note 1: NRU is the unemployment that occurs if the cyclical unemployment is zero.
Note 2: Effective fiscal and monetary policies can address cyclical unemployment, but not NRU

Question 23

23. President FM is concerned that a recent financial crisis will increase the natural rate of unemployment. After three
    full quarters of negative economic growth, the unemployment rate now stands at 10%, and he fears it will persist at this level indefinitely. As the President’s economic advisor, which possible reply to the President’s concerns agrees
    with natural unemployment rate theory?
    a. The natural unemployment rate is calculated independently of the cyclical or structural unemployment rates.
    b. All else being equal, the cyclical unemployment brought about by the recession will not affect the natural
    unemployment rate
    c. As the recession has increased cyclical unemployment, the natural rate of unemployment has indeed
    increased because of this crisis.
    d. All the given choices agree with the nature unemployment rate theory

Answer 23

NOTE: OKUN’s LAW in economics states that a country must grow its gross domestic product (GDP) by 2% in order
to achieve a 1% decrease in the unemployment rate. Conversely, economists can use Okun’s law as an indicator of
how much GDP may be lost with rising unemployment rates

Question 24

24. Gross domestic product (GDP) is the value of goods and services made
    a. By Filipinos within the Philippines only
    b. By Filipinos within and outside the Philippines
    c. In the Philippines by Filipino citizens and corporations only
    d. In the Philippines by Filipino and foreign citizens and corporations

Question 25

25. GDP if adjusted for inflation is called (I) _____, while GDP unadjusted for changing prices is called (II) ____ a. (I) real GDP (II) fake GDP b. (I) nominal GDP (II) real GDP c. (I) real GDP (II) nominal GDP d. (I) adjusted GDP (II) real GDP

Answer 25

c. (I) real GDP (II) nominal GDP

Question 26

26. When a country imports more than it exports, the country a. Has negative net imports b. Has negative net exports c. Is suffering from inflation d. Is experiencing an income boom

Answer 26

b. Has negative net exports

Question 27

27. Trade deficit occurs when a. Export of goods < imports of goods b. Export of goods > imports of goods c. Export of services > imports of services d. Export of services < imports of services

Answer 27

a. Export of goods < imports of goods

Question 28

28. Balance of payments is an accounting statement that records monetary transactions between: a. Two residents of the same nation b. Residents and non-residents of a nation c. Residents of a nation and the rest of the world d. Non-residents of a nation and the rest of the world

Answer 28

c. Residents of a nation and the rest of the world

Question 29

29. A Philippine importer of English clothing has contracted to pay an amount fixed in British pounds three months from now. If the importer worries that the Philippine peso may depreciate sharply against the British pound in the interim, it would be well advised to a. Sell pounds in the forward exchange market b. Buy pounds in the forward exchange market c. Sell pesos in the futures market d. Buy pesos in the futures market

Answer 29

b. Buy pounds in the forward exchange market

Question 30

30. A company has recently purchased some stock of a competitor. However, it is somewhat concerned that the market price of this stock could decrease over the short run. The company could hedge against the possible decline in the stock’s market price by: a. Selling a put option on that stock b. Purchasing a put option on that stock c. Purchasing a call option on that stock d. Obtaining a warrant option on that stock

Answer 30

b. Purchasing a put option on that stock

Question 31

31. Which is a positive effect of inflation? a. Uncertainty about future inflation may discourage investment and saving b. Loss in stability in the real value of money and other monetary items over time c. Mitigation of economic recessions and debt relief by reducing the real level of debt d. Shortages of goods if consumers begin hoarding in anticipation of price increase in the future

Question 32

32. STAGFLATION is defined as the “double trouble” of high level of inflation combined with the increase in a. Unemployment b. The price level c. The money supply d. Corporate profits

Answer 32

a. Unemployment

Question 33

33. The most effective fiscal policy program for reducing demand-pull inflation is to: a. Decrease government spending and increase taxes b. Increase government spending and decrease taxes c. Increase both government spending and taxes d. Decrease the money supply

Question 34

34. Which of the following is a tool of monetary policy that a nation’s central bank could use to stabilize the economy during recession? a. Selling government securities b. Lowering bank reserve requirements c. Increasing bank discount rates d. Imposing lower tax rate

Question 35

35. When interest rates increase, ceteris paribus, the demand for money a. Increases b. Decreases c. Remains constant d. May increase or decrease

Answer 35

b. Decreases

Question 36

36. Under the “Loanable Funds” theory, which is determined by the demand and supply of funds in the loan, bond and other credit markets? a. Inflation b. Interest Rate c. Unemployment d. GDP per capita

Answer 36

Note 1: The “loanable funds” theory states that interest rates is determined through the supply and demand for loanable funds --- the ‘supply’ comes from savings, while the ‘demand’ comes from investment opportunities. Note 2: The “loanable funds” theory explains how lenders and borrowers interact to determine the equilibrium interest rate, which is the rate at which the quantity of funds supplied equals the quantity of funds demanded.