Practice Test Questions

Question 1

According to the text, economics is the study of how:

Answer 1

Human beings coordinate their wants and desires in the face of constraints.

Question 2

Dorm rooms are not usually allocated by markets. Allocating dorm rooms is:

Answer 2

An economic problem.

Question 3

Which of the following is not one of the three central coordination problems of the economy given in the book?

Answer 3

Whether.

Question 4

The quantity of goods and services available to society:

Answer 4

Depends on human action.

Question 5

Studies have shown a significant increase in the rate of autism diagnoses in the United States over the last 20 years. Studies have also shown that during the same period the quantity of genetically modified food consumed by US household has increased significantly. These studies demonstrate:

Answer 5

A direct correlation between the consumption of genetically modified food and autism.

Question 6

Tick-borne diseases like Lyme already cost Northeastern states $1.3 billion in annual healthcare costs. Scientists predict that because of climate change the range of the ticks and one of their favorite hosts the white-footed mouse will increase northward into areas that have yet to be exposed to Lyme disease. As a result of the increased range of the ticks healthcare costs related to Lyme are expected to reach $3 billion annually for the region. Assuming that the total annual cost of preventing the climate change is $2.9 billion:

Answer 6

The states should pay the prevention costs because the marginal benefits outweigh the marginal costs of prevention.

Question 7

Economist Steven Landsburg claims that with a death penalty, each execution deters about 8 murders, resulting in a benefit to society of approximately $56 million. He argues that computer hackers do far more damage to society with their worms and viruses. He argues that computer hackers should be executed as well. From a purely economic perspective, the death penalty for computer hackers is:

Answer 7

Reasonable based on cost-benefit analysis, but society must also take into account social, political, and religious factors.

Question 8

The marginal benefit from consuming another unit of a good:

Answer 8

Equals the increase in total benefits from consuming the unit.

Question 9

Sunk costs:

Answer 9

Are irrelevant to economic reasoning.

Question 10

The price of a new model of iPod tends to fall significantly a year after it is first introduced. Suppose Jane bought an iPod as soon as it was introduced (a year ago) and paid a premium price for it. Now she wants to buy a new iPod cover. Which of the following should she consider before buying the new accessory?

Answer 10

The price of the iPod cover and the benefit she’ll receive from using the iPod cover.

Question 11

Chuck offers $70,000 for a house. The seller turns down the offer but says she will sell the house for $72,000. However, Chuck refuses to pay the higher price. If Chuck was following the economic decision rule, the marginal benefit of the house to:

Answer 11

Chuck must be less than $72,000.

Question 12

You’re deciding whether to install a $400 moonroof and a $200 security system in your car. Suppose the marginal benefit from the moonroof is $350 while the marginal benefit from the security system is $300. The economic decision rule dictates that you should:

Answer 12

Purchase only the security system because its marginal benefit exceeds its marginal cost.

Question 13

Economic reasoning would argue that there is an opportunity cost to:

Answer 13

All choices.

Question 14

The opportunity cost of attending college for one year is best measured by the:

Answer 14

Value of the next-best activity forgone by attending college.

Question 15

Brooke and Sandy both attend the same college and have the same expenses for tuition, books, and supplies. However, Brooke is a famous actress who could earn $2 million per year if she were not attending college while Sandy could earn $10,000 a year serving hamburgers if he were not attending college. It follows that the opportunity cost of attending college:

Answer 15

Is greater for Brooke than for Sandy.

Question 16

Economic reasoning would never help you decide:

Answer 16

What is morally right and what is wrong.

Question 17

Prostitution is legal in Churchill County, Nevada, but a referendum threatened to close two brothels (prostitution businesses) in that county. What idea from Chapter 1 of the text does this story best illustrate?

Answer 17

Social and political forces sometimes rein in market forces.

Question 18

Say that an economic model concludes that “government can maintain current Social Security benefit levels for every retiree by raising payroll taxes.” This conclusion is:

Answer 18

Positive statement because raising payroll taxes is one way to maintain Social Security benefits.

Question 19

Which of the following is a normative statement?

Answer 19

The governments should spend more to aid the poor.

Question 20

Because you can only get more of one good by giving up some of another good, the shape of a production possibilities curve is:

Answer 20

Downward sloping.

Question 21

If a production possibility curve representing a tradeoff between a grade in English and a grade in math has a negative slope we know that:

Answer 21

There is an inverse relationship between grades in English and grades in math.

Question 22

Increasing marginal opportunity cost means that the production possibility curve is:

Answer 22

Bowed out so that for every additional unit of a good given up, you get fewer and fewer units of the other good.

Question 23

When you produce cars, it is enormously expensive to produce one car, but then the costs per car decrease as more are produced. This would be an example of:

Answer 23

Decreasing marginal opportunity costs.

Question 24

The principle of increasing marginal opportunity cost does not hold in which of the following cases?

Answer 24

All inputs are equally adaptable to the production of all goods.

Question 25

According to Adam Smith, individuals are directed to do those things for which they have a comparative advantage by:

Answer 25

Their self-interest.

Question 26

The textbook largely attributes the growth of economies over the last 200 years to:

Answer 26

The development of markets.

Question 27

Mexico has a comparative advantage in producing corn:

Answer 27

If its opportunity cost of producing corn is lower than the opportunity cost in other countries.

Question 28

Suppose that in Slovakia, one unit of labor can produce either 20 tons of wheat or 40 tons of soy while in Poland, one unit of labor can produce either 40 tons of wheat or 20 tons of soy. If each country has two units of labor, which of the following consumption combinations can be attained only with trade?

Answer 28

Slovakia consumes 30 tons of both soy and wheat.

Question 29

John and Jane Smith are both economists who are deciding how to split household chores of cooking and cleaning. They discover that John has a comparative advantage in cooking. Does this discovery tell them anything about comparative advantage in cleaning?

Answer 29

Yes; Jane must have a comparative advantage in cleaning.

Question 30

If the quantity demanded for a good rise as the price falls, then the curve representing this relationship will be:

Answer 30

Downward sloping.

Question 31

What kind of relationship exists between the price of gas and the quantity demanded for gas if the quantity demanded for gas falls when the price of gas increases?

Answer 31

Inverse.

Question 32

Market economies are based upon:

Answer 32

Private property and individual planning.

Question 33

A market economy:

Answer 33

Expects people to be self-interested.

Question 34

A socialist economy in theory:

Answer 34

Expects people to be altruistic.

Question 35

In the former USSR, state planners decided what was to be produced. They passed orders down to factories, allocating raw materials, workers, and other factors of production to them. This is an example of (a):

Answer 35

Command economy.

Question 36

In socialism:

Answer 36

Government planning, rather than the market, is relied upon to coordinate economic activity.

Question 37

Which of the following is not one of the three principal components of a socialist economy?

Answer 37

Entrepreneurs are encouraged by the profit motive, rather than government directive, to satisfy consumer wants in the most efficient manner possible.

Question 38

Most economies today are:

Answer 38

Differentiated primarily by the degree to which they depend on markets.

Question 39

In the goods market:

Answer 39

Business produces goods and services and sells them to households and government.

Question 40

Households are on the:

Answer 40

Supply side of factor markets and the demand side of goods markets.

Question 41

Government is on the:

Answer 41

Demand side of both factor markets and goods markets.

Question 42

Profit is:

Answer 42

What’s left over from total revenue after all of the appropriate costs have been subtracted.

Question 43

Business decisions about what and how much to produce are based on what:

Answer 43

Maximizes profits.

Question 44

A defining difference in what makes a firm a sole proprietorship, partnerships, or a corporation is the:

Answer 44

Nature of ownership and accountability for each type of business.

Question 45

A business is likely a sole proprietorship if:

Answer 45

It has only one owner who has unlimited liability.

Question 46

One advantage of a sole proprietorship over a corporation is:

Answer 46

Ease of formation.

Question 47

State and local governments do not receive income directly from which source?

Answer 47

Social security taxes.

Question 48

Which of the following is not an example of government’s role as a referee?

Answer 48

Laws that require states and the federal government to balance their budgets.

Question 49

Which of the following would most likely generate a positive externality?

Answer 49

Education.

Question 50

Suppose a single firm gains control of an industry by preventing other firms from entering the industry. As a result, the price charged by the single firm is much higher than the price that would be charged by many different firms producing this product in a competitive market. This situation can best be described as:

Answer 50

A market failure.

Question 51

Which of the following would most likely generate a negative externality?

Answer 51

Cigarette smoke.

Question 52

Flu vaccinations of school children have the unintended effect of protecting the vulnerable elderly from contracting the virus. This is an example of a:

Answer 52

Positive externality.

Question 53

A public good is a good that:

Answer 53

When consumed by one individual, can still be consumed by others.

Question 54

Which of the following is an international financial institution concerned primarily with monetary issues and international financial arrangements?

Answer 54

The International Monetary Fund.

Question 55

Keynesian economists believe:

Answer 55

Government can implement policy proposals that can positively impact the economy.

Question 56

Laissez-faire economists believe:

Answer 56

Most government policies would probably make things worse.

Question 57

The idea that the economy will solve its own problems and not need any stimulus measures falls under the _________ framework.

Answer 57

Long-run.

Question 58

“Classical economist” is often used interchangeably with which term?

Answer 58

Laissez-faire economist.

Question 59

Keynesian economists focus their analysis on:

Answer 59

The short-run.

Question 60

Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 8 percent. A Keynesian economist would most likely blame this increase in unemployment on:

Answer 60

A decline in the level of aggregate demand.

Question 61

Before the Great Depression the popular view of government was:

Answer 61

Laissez-faire; and after the Great Depression, the popular view of government was activist.

Question 62

Which of the following statements would a Classical economist of the 1930s most likely disagree with?

Answer 62

Unions do not impede wage and price adjustment.

Question 63

The laissez-faire policy prescription to eliminate unemployment was to:

Answer 63

Eliminate labor unions and government policies that hold real wages too high.

Question 64

The Classical economists argued that:

Answer 64

If unemployment occurs, it will cure itself because wages and prices will fall.

Question 65

When Classical economists of the 1930s looked at the Great Depression, they:

Answer 65

Blamed it on activist fiscal and monetary policies.

Question 66

According to Classical economists in the 1930s, a recession will end when:

Answer 66

Wages fall enough to eliminate unemployment.

Question 67

Which of the following was not a solution to the Great Depression favored by Classical economists?

Answer 67

Hire unemployed workers for public works programs.

Question 68

Keynesian economics focuses on:

Answer 68

The short-run.

Question 69

Keynesians:

Answer 69

Generally favor activist government policies.

Question 70

The two frameworks conventional economists generally use to analyze macroeconomic issues are:

Answer 70

The short-run and the long-run frameworks.

Question 71

The combination of prolonged high unemployment and slow growth caused by globalization is known as:

Answer 71

Structural stagnation.

Question 72

Classical economists believe that in the short-run, in the real world:

Answer 72

Prices and wages were flexible.

Question 73

Issues of growth are generally considered in:

Answer 73

The long-run framework.

Question 74

The highest amount of output an economy can sustainably produce and sell using existing production processes and resources is called:

Answer 74

Potential output.

Question 75

If a country of 300 million people has a total income of $12 trillion, its per capita income is:

Answer 75

$40,000.

Question 76

The long-run growth framework focuses on factors affecting:

Answer 76

Incentives to produce.

Question 77

What turns a business cycle into a structural stagnation?

Answer 77

A slow expansion that keeps the economy below trend.

Question 78

Policies that affect work, capital accumulation, and technological change are primarily relevant to:

Answer 78

The long-run growth framework.

Question 79

The secular trend growth rate is the:

Answer 79

The rate of growth of potential output.

Question 80

Per capita real output is a:

Answer 80

Better measure of personal material consumption than output.

Question 81

Fluctuations around the long-term growth rate are called:

Answer 81

Business cycles.

Question 82

If U.S. real GDP increases by 3.3 percent, we can infer that the United States experienced:

Answer 82

An expansion.

Question 83

Which of the following statements best characterizes the Classical view of business cycles?

Answer 83

Fluctuations in business activity are to be expected and should be accepted just as changes in the seasons are accepted.

Question 84

The top of the business cycle is called:

Answer 84

A peak.

Question 85

A structural stagnation is:

Answer 85

Unrelated to business cycles.

Question 86

Unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one is called:

Answer 86

Frictional unemployment.

Question 87

Another term for what the text calls the “target rate of unemployment” is:

Answer 87

The natural rate of unemployment.

Question 88

Cyclical unemployment is defined as unemployment that results from:

Answer 88

Fluctuations in economic activity.

Question 89

Workers at a car-manufacturing plant are let go because automated machinery has been installed that requires fewer employees to operate. What type of unemployment describes the workers’ situation?

Answer 89

Structural unemployment.

Question 90

Mexico can produce vine-ripened tomatoes at a lower opportunity cost than firms in the United States. Through trade negotiations, the United States lifted quotas limiting the import of tomatoes from Mexico. Some firms in Florida, in the face of this new competition, had to close their farms and let go their workers. Many of the workers could not find new jobs right away. What type of unemployment describes the workers’ situation?

Answer 90

Structural unemployment.

Question 91

If output is below potential output, it is most likely that the economy is:

Answer 91

Near a trough.

Question 92

Suppose capacity utilization in the United States decreased from 80.4 to 74.3. This likely reflects that the U.S. economy most likely moved:

Answer 92

Farther below both potential output and the target rate of unemployment.

Question 93

Aggregate accounting:

Answer 93

Provides a way of measuring total or aggregate production.

Question 94

Which of the following statements about aggregate accounting is false?

Answer 94

It provides the only way to measure social welfare.

Question 95

GDP is the:

Answer 95

Market value of an economy’s production of final goods and services in a one year period.

Question 96

The value of intermediate goods is:

Answer 96

Excluded from both GDP and GNP.

Question 97

The largest expenditure component of GDP is:

Answer 97

Consumption.

Question 98

If you decide not to spend $1,000 you earned at your summer job but instead intend to buy shares in a mutual fund, in terms of aggregate economic accounting you would be:

Answer 98

Saving.

Question 99

Government expenditures for social security and unemployment insurance are, for GDP accounting purposes, considered:

Answer 99

Transfers, and are not included in government spending as part of GDP.

Question 100

Which of the following is not included in GDP but is included in GNP?

Answer 100

Economic activity of U.S. citizens working abroad.

Question 101

If substantially more foreign money is invested in Ireland than Irish citizens have invested abroad, then one will likely expect Irish:

Answer 101

GDP to exceed Irish GNP.

Question 102

If the market prices of publicly traded stocks and bonds rise, while the productive capacity of those assets has not increased, which of the following has occurred?

Answer 102

Nominal wealth has increased.

Question 103

If nominal wealth increases faster than real wealth –

Answer 103

Asset inflation has occurred.

Question 104

Which of the following is an example of an intermediate product?

Answer 104

The lumber produced by Boise Cascade and sold to a builder of old houses.

Question 105

Double counting in the national income accounts will be avoided if GDP is computed by summing all:

Answer 105

Sales of final output.

Question 106

Conceptually, a country’s GDP equals:

Answer 106

The sum of the value added at all stages of production.

Question 107

Suppose the value of your home increases from $100,000 to $125,000. If you continue to live in your home, the increase in its value:

Answer 107

Adds nothing to GDP.

Question 108

Aggregate income is a measure of:

Answer 108

Household and business earnings from the sale of productive resources.

Question 109

Net exports are defined as:

Answer 109

Exports less imports.

Question 110

For the purposes of calculating GDP using the expenditure approach, which of the following is NOT included in the government purchases account?

Answer 110

Welfare payments to the poor.

Question 111

If U.S. net exports are positive, then U.S.:

Answer 111

GDP exceeds the sum of consumption, investment, and government purchases.

Question 112

The largest component of aggregate income is:

Answer 112

Employee compensation.

Question 113

If you know that a meal costing $40 in the United States would cost $2 in Bangladesh and this is representative of the relative prices of most goods, you also know that:

Answer 113

Purchasing power parity would increase comparative GDP for Bangladesh.

Question 114

Comparisons of per capita gross domestic product (GDP) between countries:

Answer 114

Do not necessarily provide a good measure of relative living standards.

Question 115

If the prices used in two countries are exactly the same, then a comparison of the per capita GDPs of the two countries provides:

Answer 115

Some insight into living standards depending on the extent of non-market activities in each country.

Question 116

The total annual market value of a nation’s final output of goods and services computed at existing prices is called:

Answer 116

Nominal GDP.

Question 117

Suppose that both nominal GDP and prices double. We can conclude that real output:

Answer 117

Remained constant.

Question 118

Suppose both nominal GDP and real GDP increase. It can be concluded that:

Answer 118

Output rose.

Question 119

Day laborers who are in the United States without documents and work off the books are:

Answer 119

Part of the underground economy which is not measured in GDP.

Question 120

When someone stops mowing his lawn and hires a teenager for cash that is unreported, what happens to GDP?

Answer 120

It probably does not change. Production has shifted from non-marketed to the underground economy and neither is counted.

Question 121

One of the limitations of aggregate accounting is that:

Answer 121

It measures market activity, not social welfare.