Section 1: Economic Concepts & Strategy

Question 1

Which of the following concepts compares the price of goods in a given year to a base year?

A. Consumer Price Index
B. Consumer Confidence Index
C. Gross National Product
D. Net National Product

Answer 1

A. Consumer Price Index

Question 2

A company manufactures goods in Esland for sale to consumers in Woostland. Currently, the economy of Esland is booming and imports are rising rapidly. Woosland is experiencing an economic recession, and its imports are declining. How will the Esland currency, $E, react to the Woosland currency, $W?

A. The $E will remain constant with respect to the $W
B. The $E will increase with respect to the $W
C. The $E will decline with respect to the $W
D. Changes in imports and exports will not effect currency changes

Answer 2

C. Esland’s increase in demand for Woostland’s goods increases demand for $W, the currency required to pay for Woostland’s goods. Esland’s additional demnd for $W will increase the price of $W in terms of $E. Since $W will be more expensive in terms of $E, the value of $E will decline with respect to $W.

Question 3

What is the effect on prices of U.S. imports and exports when the dollar depreciates.

A. Import prices and export prices will decrease
B. Import prices will decrease and export prices will increase
c. Import prices will increase and export prices will decrease
d. Import prices and export prices will increase

Answer 3

C. When the dollar depreciates, additional dollars are required to pay for imports. Accordingly, import prices increase. Since the dollar’s value declines and U.S. goods are prices in dollars, U.S. exports become cheaper for foreign consumers.

Question 4

To address the problem of a recession, the Federal Reserve Bank most likely would take which of the following actions?

A. Lower the discount rate it charges to banks for loans
B. Sell US government bond in the open-market transactions
C. Increase the federal funds rate charges by banks when they borrow from one another
D. Increase the level of funds a bank is legally required to hold in reserve.

Answer 4

A. Lower the discount rate it charges to banks for loans.

Question 5

Which of the following actions is the acknowledgment preventive measure for a period of deflation?

A. Increasing interest rates
B. Increasing money supply
C. Decreasing interest rates
D. Decreasing money supply

Answer 5

B. Increasing money supply

Question 6

Under which of the following conditions is the supplier most able to influence or control buyers?

A. When the supplier’s products are not differentiated
B. When the supplier does not face the threat of substitute products
C. When the industry is controlled by a large number of companies
D. When the purchasing industry is an important customer to the supplying industry.

Answer 6

B. When the supplier does not face the threat of substitute products.

Question 7

Which of the following segments of the economy will be least affected by the business cycle?

A. Commercial construction industry
B. Machinery and equipment industry
C. Residential construction industry
D. Healthcare industry

Answer 7

D. Healthcare industry

Question 8

All of the following are components of the formula used to calculate gross domestic product except:

A. Household income
B. Foreign net export spending
C. Government spending
D. Gross investment

Answer 8

A. Household income

Question 9

Gross domestic product includes which of the following measures?

A. The size of a population that must share a given output within one year
B. The negative externalities of the production process of a nation within one year.
C. The total monetary value of all final goods and services produced within a nation in one year
D. The total monetary value of goods and services including barter transactions within a nation in one year

Answer 9

C. The total monetary value of all final goods and services produced within a nation in one year

Question 10

Which of the following statements is correct if there is an increase in the resources available within an economy?

A. More goods and services will be produced in the economy
B. The economy will be capable of producing more goods and services
C. The standard of living in the economy will rise
D. The technological efficiency of the economy will improve

Answer 10

B. The economy will be capable of producing more goods and services

Question 11

Which of the following is correct regarding the consumer price index for measuring the estimated decrease in a company’s buying power?

A. The CPI is measured only once every 10 years
B. The products a company buys should differ from that a consumer buys.
C. The CPI measures what consumers will pay for items
D. The CPI is skewed by foreign currency translations

Answer 11

B. The products a company buys should differ from that a consumer buys.

Question 12

A city ordinance that freezes rent prices may cause:

A. The demand curve for rental space to fall
B. The supply curve for rental space to rise
C. Demand for rental space to exceed supply
D. Supply for rental space to exceed demand

Answer 12

C. Demand for rental space to exceed supply

Question 13

What is the effect when a foreign competitor’s currency becomes weaker compared to the US Dollar?

A. The foreign company will have an advantage in the US market
B. The foreign company will be disadvantaged the US market
C. The fluctuation in the foreign currency’s exchange rate has no effect on the US company’s sales or cost of goods sold
D. It is better for the US company when the value of the US dollar strengthens.

Answer 13

A. The foreign company will have an advantage in the US market. When a foreign currency becomes weaker compared to the US dollar, goods and services denominated in that currency become cheaper in terms of US dollars. A foreign competitor’s products will be cheaper for US purchasers and will have a competitive advantage in the US market.

Question 14

Which of the following individuals would be most hurt by an unanticipated increase in inflation?

A. A retiree living on a fixed income
B. A borrower whose debt has a fixed interest rate
C. A union worker whose contract includes a provision for regular cost-of-living adjustments
D. A saver whose savings was places in a variable rate savings account.

Answer 14

A. A retiree living on a fixed income

Question 15

If the dollar price of the euro rises, which of the following will occur?

A. The dollar depreciates against the euro
B. The euro depreciates against the dollar
C. The euro will buy fewer European goods
D. The euro will buy fewer US goods

Answer 15

A. The dollar depreciates against the euro. If the dollar price of the euro rises, additional dollars are required to purchase euros. When, for example, the dollar price of the euro rises from $1.25 per euro to $1.50 per euro, the dollar is said to depreciate.

Question 16

An economy is at the peak of the business cycle. Which of the following policy packages is the most effective way to dampen the economy and prevent inflation?

A. Increase government spending, reduce taxes, increase money supply, and reduce interest rates.
B. Reduce government spending, increase taxes, increase money supply, and increase interest rates.
C. Reduce government spending, increase taxes, reduce money supply, and increase interest rates.
D. Reduce government spending, reduce taxes, reduce money supply, and reduce interest rates.

Answer 16

C. Reduce government spending, increase taxes, reduce money supply, and increase interest rates.

Question 17

Which of the following strategies would the Federal Reserve most likely pursue under an expansionary policy?

A. Purchase federal securities and lower discount rate
B. Reduce the reserve requirement while raising the discount rate
C. Raise the reserve requirement and lower the discount rate
D. Raise the reserve requirement and raise the discount rate

Answer 17

A. Purchase federal securities and lower discount rate. Purchasing securities increasing the money in circulation

Question 18

Which of the following Federal Reserve policies would increase money supply?

A. Change the multiplier effect
B. Increase reserve requirements
C. Reduce the discount rate
D. Sell more US Treasury bonds

Answer 18

C. Reduce the discount rate

Question 19

What does the consumer price index measure?

A. Cost of capital
B. Average household income
C. Rate of inflation
D. Prime rate of interest

Answer 19

C. Rate of inflation

Question 20

Freely fluctuating exchange rates perform which of the following functions?

A. They automatically correct a lack of equilibrium in the balance of payments
B. They make imports cheaper and exports more expensive
C. They impose constraints on the domestic economy
D. They eliminate the need for foreign currency hedging

Answer 20

A. They automatically correct a lack of equilibrium in the balance of payments

Question 21

Which of the following characteristics would indicate that an item sold would have a high price elasticity of demand?

A. The item has many similar substitutes
B. The cost of the item is low compared to the total budget of the purchaser
C. The item is considered a necessity
D. Changes in the price of the item are regulated by governmental agency

Answer 21

A. The item has many similar substitutes

Question 22

Which of the following statements is true regarding opportunity costs?

A. Opportunity cost is recorded in the accounts of an organization that has a full costing system
B. The potential benefit is not sacrificed when selecting an alternative
C. Idle space that has no alternative use has an opportunity cost of zero
D. Opportunity cost is representative of actual dollar outlay

Answer 22

C. Idle space that has no alternative use has an opportunity cost of zero

Question 23

Which of the following economic terms described a general decline in prices for goods and services and in the level of interest rates?

A. Expansion
B. Inflation
C. Deflation
D. Recession

Answer 23

C. Deflation

Question 24

The primary purpose of the consumer price index is to:

A. Establish a cost-of-living analysis
B. Identify the strength of an economic recovery
C. Help determine the Federal Reserve Bank’s discount rate
D. Compare relative price changes over time

Answer 24

D. Compare relative price changes over time

Question 25

Carter Co. paid $1,000,000 for land three years ago. Carter estimates it can sell the land for $1,200,000, net of selling costs. If the land is not sold, Carter plans to develop the land at a cost of $1,500,000. Carter estimates net cash flow from the development in the first year of operations would be $500,000. What is Carter’s opportunity cost of the development?

A. $1,500,000
B. $1,200,000
C. $1,000,000
D. $500,000

Answer 25

B. $1,200,000

what will be lost if not sold?

Question 26

Which of the following is an assumption in a perfectly competitive financial market?

A. No single trader or traders can have significant impact on market prices
B. Some traders can impact market prices more than others
C. Trading prices vary based on supply only
D. Information about borrowing/lending activities is only available to those willing to pay market prices

Answer 26

A. No single trader or traders can have significant impact on market prices

Question 27

A country’s currency conversion value has recently changed from 1.5 to the US dollar to 1.7 to the US dollar. Which of the following statements about the country is correct?

A. Its exports are less expensive for the US
B. Its currency has appreciated
C. Its imports of US goods are more affordable
D. Its purchases of the US dollar will cost less

Answer 27

A. Its exports are less expensive for the US

Question 28

Variations between business cycles most likely are attributable to which of the following factors?

A. The law of diminishing returns
B. Comparative advantage
C. Duration and intensity
D. Opportunity costs

Answer 28

C. Duration and intensity

Question 29

Which of the following types of risk can be reduced by diversification?

A. High interest rates
B. Inflation
C. Labor strikes
D. Recessions

Answer 29

C. Labor strikes

Question 30

Jones Corp. had an opportunity to use its capacity to produce an extra 5,000 units with a contribution margin of $5 per unit, or to rent out the space for $10,000. What was the opportunity cost of using the capacity?

A. $35,000
B. $25,000
C. $15,000
D. $10,000

Answer 30

D. $10,000

Question 31

Jackson Co. is considering a project that will use 2,000 square feet of storage space one of its facilities to store used equipment. What will determine Jackson’s opportunity cost?

A. The net present value of the project
B. The internal rate of return of the project
C. The value of the next best use of the space
D. The depreciation expense on the space

Answer 31

C. The value of the next best use of the space

Question 32

A company has a policy of frequently cutting prices to increase sales. Product demand significantly elastic. What impact would this have on the company’s situation?

A. Quantity increases proportionately more than the price declines
B. Quantity increases proportionately less than the price declines
C. Price increases proportionately more than quantity declines
D. Price increases proportionately less than quantity declines

Answer 32

A. Quantity increases proportionately more than the price declines

Question 33

Which of the following types of unemployment typically results from technological advances?

A. Cyclical
B. Frictional
C. Structural
D. Short-term

Answer 33

C. Structural

Question 34

Which of the following indicates that the economy is in a recessionary phase?

A. The rate of unemployment decreases
B. The purchasing power of money declines rapidly
C. Potential national income exceeds actual national income
D. There is a shortage of essential raw materials and costs are rising

Answer 34

C. Potential national income exceeds actual national income

Question 35

A hospital is comparing last year’s emergency rescue services expenditures to those from 10 years ago. last year’s expenditures were $100,500. Ten years ago, the expenditures were $72,800. The CPI for last year is 168.5 as compared to 121.3 ten years ago. After adjusting for inflation, what percentage change occurred in expenditures for emergency rescue services?

A. 38.0% increase
B. 13.8% increase
C. 0.6% decrease
D. 18.1% decrease

Answer 35

C. 0.6% decrease

Formula:
(Last year prices/CPI index) = Base year-Last Year Prices
(Previous years prices/CPI index) = Base year-Previous year prices

((Base year-last year prices) - (Base year-previous year) / Base year-previous year)

100,500 / 168.5% = 59,644
72,800 / 121.3% = 60,016
(59,644 - 60,016) / 60,016 = 0.006

Question 36

If a CPA’s client expected in high inflation rate in the future, the CPA would suggest to the client which of the following types of investments?

A. Precious metals
B. Treasury bonds
C. Corporate bonds
D. Common stock

Answer 36

A. Precious metals

Question 37

How does inflation distort reported income?

A. Wages are not reflective of current labor rates
B. Sales are not reflective of current product prices
C. Depreciation is not reflective of current fixed-asset replacement costs
D. Interest expense is not reflective of current borrowing rates

Answer 37

C. Depreciation is not reflective of current fixed-asset replacement costs

Question 38

The federal government measures inflation with which of the following indicators?

A. Dow Jones index
B. Consumer price index
C. Consumer confidence index
D. Corporate profits

Answer 38

B. Consumer price index

Question 39

The controller of Gray, Inc. has decided to use ratio analysis to analyze business cycles for the past two years in an effort to identify seasonal patterns. Which of the following formulas should be used to compute percentage changes for account balances for year 1 to year 2?

A. (Prior balance - current balance) / current balance
B. (Prior balance - current balance) / prior balance
C. (Current balance - prior balance) / current balance
D. (Current balance - prior balance) / prior balance

Answer 39

D. (Current balance - prior balance) / prior balance

Question 40

What market structure have the following characteristics:

• Large number of sellers
• Sell homogenous product (similar)
• No non-price competition (no advertising)
• No barriers to entry
• Demand curve is perfectly elastic (horizontal)

Answer 40

Perfect (or Pure) competition

Question 41

What market structure have the following characteristics:

• One producer
• No close substitutes
• Blocked entry
• Demand curve downward sloping (almost vertical)

Answer 41

Pure monopoly

Question 42

What market structure have the following characteristics:

• Large number of sellers
• Sell heterogeneous product (different)
• Lots of non-price competition (advertising)
• No barriers to entry and/or exit
• Demand curve is slightly or somewhat downward sloping

Answer 42

Monopolistic competition

Question 43

What market structure have the following characteristics:

• Small number of large sellers
• Rival actions are observed (price wars)
• Non-price competition exists
• Barriers to entry (costs of patents
• Demand curve is kinked

Answer 43

Oligopoly

Question 44

What type of unemployment affects workers who are unemployed as a result of the normal turnover of workers between jobs or of new entrants into the work force?

Answer 44

Frictional unemployment

Question 45

What type of unemployment affects workers who lose their jobs as a result of changes in the demands for goods and services, technological changes?

Answer 45

Structural unemployment

Question 46

What type of unemployment involves job losses resulting from the fluctuation in the business cycle?

Answer 46

Cyclical unemployment