Principles of Economics

Question 1

A local government is making public policy decisions about spending funds. The residents have differing opinions on whether the funds should be used for road repair, school expansion, health care increases, or construction of a senior center. The local government must decide the priority. Which economic question is this an example of?
A. What to produce
B. Why to produce it
C. How to produce it
D. When to produce it

Answer 1

A. What to produce

Question 2

A newspaper is trying to help citizens understand economic principles. Which misconception should the article address?
A. Consistent rising prices often results in inflation of goods and services.
B. Printing too much money causes the price of goods to increase
C. Increasing the money supply raises the standard of living for consumers in the long run.
D. Inflation decreases the value of money and makes goods more expensive.

Answer 2

C. Increasing the money supply raises the standard of living for consumers in the long run.

Question 3

Which scenario covers a topic included in microeconomics?
A. As a result of a hard freeze, the price of cherries increases.
B. An economist compares the gross domestic product between the United States and China
C. The government changes the tax policy to boost economic growth in the United States
D. The Federal Reserve responds to an increase in inflation by changing the interest rate.

Answer 3

A. As a result of a hard freeze, the price of cherries increases.

Question 4

Which shows the flow of payments between households and firms?
A. Externalities in production
B. Value-added production
C. The circular-flow model
D. The production possibilities model

Answer 4

C. The circular-flow model

Question 5

What accurately characterizes capital?
A. It is in the form of cash
B. it is reliant on a natural resource
C. It must be in the form of physical objects
D. It can be in the form of intellectual discoveries

Answer 5

D. It can be in the form of intellectual discoveries.

Question 6

Why is the circular-flow model used?
A. To describe how factors of production affect the growth and decline
B. To illustrate how capitalism and socialism differ as an economic form
C. To describe the interaction of businesses and households in markets
D. To illustrate primarily the use of labor and natural resources in an economy

Answer 6

C. To describe the interaction of businesses and households in markets.

Question 7

What is a result of increasing opportunity costs?
A. To consume more of one good, a consumer becomes more and more efficient
B. To produce more of one good, the economy gives up more and more of other goods
C. As an economy produces a greater variety of goods, the cost of each good increases
D. When consumers do not want what producers make, increased opportunity for trade is missed.

Answer 7

B. To produce more of one good, the economy gives up more and more of other goods.

Question 8

How would a production possibility frontier be drawn for an economy that produces two goods with homogenous resources?
A. As a constant slope, downward from left to right
B. As a ray out of the origin, with a constant slope
C. As a semicircle centered on the origin, sloping downward from left to right
D. As a limited line, downward from left to right, that does not touch either axis.

Answer 8

A. As a constant slope, downward, from left to right

Question 9

A company is operating at a point inside its production possibility frontier. Which conclusion is accurate about this company?
A. The economy of the company will grow too fast
B. The resources of the company are being inefficiently utilized
C. The company’s resources are being used in the most efficient manner
D. The production possibilities frontier for the company will shift outward

Answer 9

B. The resources of the company are being inefficiently utilized

Question 10

A country produces two goods (A and B) and currently operates on the bowed out production possibilities frontier. What is the relationship between the productions of Good A and Good B?
A. If production of Good A increases, then production of Good B will decrease
B. If production of Good A increases, then production of Good B will increase
C. If production of Good A is constant, then production of Good B will increase
D. If production of Good A is constant, then production of Good B will decrease

Answer 10

A. If production of Good A increases, then production of Good B will decrease.

Question 11

Which description accurately characterizes demand?
A. Changes in buyers’ expectations will shift the demand curve, and changes in buyers’ income will result in a movement along the curve.
B. Changes in the price of a substitute good will shift the demand curve, and changes in buyers’ tastes and preferences will result in a movement along the curve.
C. Changes in the number of buyers in a market will shift the demand curve, and changes in the price of a complement good will result in a movement along the curve.
D. Changes in income will shift the demand curve, and changes in the market price of the good will result in a movement along the curve.

Answer 11

D. Changes in income will shift the demand curve, and changes in the market price of the good will result in a movement along the curve.

Question 12

Which statement is true about the law of demand, all else being equal?
A. A rise in price will likely increase the quantity demanded
B. A fall in price will likely increase the quantity demanded
C. A fall in price will likely decrease the quantity demanded.
D. A rise in price will not have any impact on the quantity demanded

Answer 12

B. A fall in price will likely increase the quantity demanded.

Question 13

What is the name of a table depicting the relationship between the prices of a product and the quantities that consumers are willing to buy at those prices?
A. Demand schedule
B. demand curve
C. Law of demand
D. Demand factors

Answer 13

A. Demand schedule

Question 14

Which outcome is expected regarding the hot cocoa industry when the cost of cocoa from South America increases in price, making it more expensive to U.S. businesses?
A. Consumers will start to buy hot cocoa mix to make in their own homes
B. Consumers will increase hot cocoa purchases while out at a coffee shop
C. Consumers will feel a rise in price, but it will not affect the quantity demanded
D. Consumers will decrease hot cocoa purchases both to make at home or while out.

Answer 14

D. Consumers will decrease hot cocoa purchases both to make at home or while out.

Question 15

When a resident heard of an expected tornado, the individual ran to the store to stock up on survival items including bread, peanut butter, batteries and water. Which statement is likely to occur on the demand graph in response to this situation?
A. A shift to the right due to an increase in demand in expectation of a shortage
B. A shift to the left due to an increase in demand in expectation of a shortage
C. A downward shift along the demand curve in expectation of a shortage
D. A price decrease as sellers understand that people need these survival items

Answer 15

A. A shift to the right due to an increase in demand in expectation of a shortage.

Question 16

Why do markets with excess demand move toward equilibrium?
A. Excess demand produces excess supply over time
B. Excess demand declines as prices fall
C. Consumers are willing to pay higher prices, and firms will seek higher profits
D. New market entrants will leave the industry

Answer 16

C. Consumers are willing to pay higher prices, and firms will seek higher profits.

Question 17

Which statement describes how higher input costs affect equilibrium in the market for a good?
A. They increase demand, causes prices to rise
B. They reduce supply, causing prices to rise
C. They increase supply, causing prices to fall
D. They reduce demand, causing prices to fall

Answer 17

B. They reduce supply, causing prices to rise.

Question 18

The average price of eggs increases from $1.10 to $1.30. In response, the quantity supplied increases from 220 to 260 eggs. The elasticity of supply is equal to 1. Which term describes the price elasticity of this supply?
A. Elastic
B. Inelastic
C. Unit Elastic
D. Perfectly inelastic

Answer 18

C. Unit Elastic

Question 19

Which type of market is characterized by firms with no market power for any individual firm?
A. Oligopoly
B. Monopoly
C. Perfect competition
D. Monopolistic Competition

Answer 19

C. Perfect competition

Question 20

Generic drugs start appearing after pharmaceutical firms’ patents expire. These generic drugs have the same formulation as name-brand drugs, but they are priced below name-brand medications. Producing generic drugs requires a significant capital investment to establish a modern manufacturing facility and established distribution networks. What is the market structure for these drugs?
A. Monopoly
B. Oligopoly
C. Perfect competition
D. Monopolistic competition

Answer 20

B. Oligopoly

Question 21

How do firms in a perfectly competitive market maximize profits when facing perfectly elastic demand for their products?
A. firms choose how much to produce
B. firms choose their product prices
C. firms change short-term use of fixed inputs
D. Firms choose to advertise

Answer 21

A. Firms choose how much to produce

Question 22

What is an outcome of a perfectly competitive market?
A. firms will experience zero long-run economic profits
B. Firms will experience positive long-run economic profits
C. It is the least productively efficient in the long-run
D. It is the least allocatively efficient in the long-run

Answer 22

A. Firms will experience zero-long run economic profits

Question 23

An individual firm is considering entering a perfectly competitive market. The average total cost of the firm is lower than the market price. What will result if the firm enters the market?
A. the firm will enter the market and make a positive economic profit
B. The firm will enter the market and make a negative economic profit
C. The firm will not enter the market because it will be very difficult to overcome entry barriers
D. The firm will not enter the market because it would be a price taker

Answer 23

A. The firm will enter the market and make a positive economic profit

Question 24

When will a monopolist choose to produce one more unit of a product?
A. When marginal revenue exceeds marginal cost
B. When marginal cost exceeds marginal revenue
C. If the total revenue exceeds total cost
D. If the total cost exceeds total revenue

Answer 24

A. When the marginal revenue exceeds marginal cost.

Question 25

Which statement accurately describes a concentration ratio for an industry?
A. The combined profits of the most profitable firms
B. The combined market shares of the top-selling firms
C. The combined assets of the firms acquiring the most competitors
D. The combined stock market valuation of the fastest growing firms.

Answer 25

B. The combined market shares of the top-selling firms.

Question 26

Which early tool was used to measure the degree of monopoly power in an industry?
A. Concentration ratio
B. Acquisition
C. Herfindahl-Hirschman Index
D. Cartel

Answer 26

A. Concentration Ratio

Question 27

Why does a price ceiling cause market failure?
A. It reduces the number of exchanges that take place without any shifts in the curve
B. It reduces the quantity demanded by consumers without any shifts in the curve
C. It increases the cost to an amount consumers cannot afford
D. It increases exchanges to an allocative efficient quantity

Answer 27

A. It reduces the number of exchanges that take place without any shifts in the curve.

Question 28

Where does a price floor need to be set to create a surplus?
A. Above the market equilibrium price
B. Below the market equilibrium price
C. Below the marginal external cost
D. Above the marginal external cost

Answer 28

A. Above the market equilibrium price

Question 29

Which type of law causes a price floor?
A. Minimum wage
B. Rent control
C. Automotive warranties
D. Mandatory service contracts

Answer 29

A. Minimum wage

Question 30

Which outcome is caused by adverse selection in the used car market?
A. Sellers of poorly maintained cars admitting that their cars are poorly maintained
B. Only poorly maintained cars being available for sale
C. A higher price for well maintained cars
D. A lower price for poorly maintained cars

Answer 30

B. Only poorly maintained cars being available for sale

Question 31

A local store sells products that have been imported from a country with a reputation for producing low quality electronics. To encourage buyers to purchase the electronic products, the seller offers customers the opportunity to pay a fee and have any required repairs or replacement done for free within the next two years. Which concept is this seller using?
A. Warranty
B. Equilibrium
C. Service contract
D. Money-back guarantee

Answer 31

C. Service contract

Question 32

How does market competition provide incentives for innovation?
A. Firms can earn higher profits from new products
B. New ideas cannot be easily copied from competitors
C. Research and development investment is minimal
D. Technology increases barriers to entry for firms

Answer 32

A. Firms can earn higher profits from new products

Question 33

How should a government overcome the inefficiencies created by negative externalities?
A. Regulate the minimum age students can leave school to 15
B. Provide a private taxicab company a $1.50 subsidy for each rider
C. Place a $2 tax on each item produced that contains harmful chemicals
D. Place legal limits on quantity of goods that can be recycled.

Answer 33

C. Place a $2 tax on each item produced that contains harmful chemicals

Question 34

Which result occurs when adding additional variable inputs according to the law of diminishing marginal returns?
A. Larger increases in output from each unit of input
B. Cost per unit of output dropping by larger amounts
C. Cost per unit of output dropping by smaller amounts
D. Smaller increases in output from each unit of input

Answer 34

D. Smaller increases of output from each unit of input

Question 35

Why is a firm’s total costs in the long run always as low or lower than in the short run?
A. In the long run, a firm has fixed costs but no variable costs.
B. In the short run, a firm has variable costs but no fixed costs
C. In the long run, a firm can alter its use of all factors of production.
D. In the short run, a firm cannot alter its use of the factors of production.

Answer 35

C. In the long run, a firm can alter its use of all the factors of production.

Question 36

What are firms trying to accomplish when they choose particular combinations of inputs such as land, labor, and capital?
A. To maximize the quantity, or output, of products sold.
B. To maximize the marginal cost of producing the products sold
C. To maximize the difference between total revenue and total costs
D. To maximize total revenue generated from the products sold.

Answer 36

C. To maximize the difference between total revenue and total costs.

Question 37

Which effect is observed along the total cost curve as it becomes steeper?
A. Diminishing depreciation
B. Diminishing marginal returns
C. Increasing depreciation
D. Increasing marginal returns

Answer 37

B. Diminishing marginal returns

Question 38

Which situation occurs for a firm in the long run?
A. the quantities of all inputs are variable
B. The firm will be unable to build a bigger plant
C. the economic efficiency is achieved
D. The quantities of all inputs are constant

Answer 38

A. The quantities of all inputs are variable

Question 39

The market demand for high-end eyeglass frames is currently at 5,000 units per month, and identical firms operating in this market are facing constant returns to scale in the product range of 500 to 1,000 units per month.
There are currently 10 firms supplying frames to the market. While prices of frames have not changed, their market demand has decreased to 4,500 units per month.
Which change should be expected in the number of firms supplying frames to this market in the long run?
A. A decline in the number of firms; one to five firms will exit the market
B. An increase in the number of firms; one to five firms will enter the market
C. No potential change in the number of firms but an increase in production
D. No potential change in the number of firms but a decrease in production

Answer 39

A. A decline in the number of firms; one to five firms will exit the market.

Question 40

Canada reduces its tariffs by 25% on all manufacturing goods imported from the European Union. What is the long-run effect of this action?
A. It increases the short-run government revenue of Canadian ports
B. It discourages competition in the local manufacturing market.
C. It raises the prices of intermediate manufacturing inputs for other Canadian Industries
D. It decreases the long-run average costs as manufacturing firms face more competition

Answer 40

D. It decreases the long-run average costs as manufacturing firms face more competition.

Question 41

Which trade policy could reduce exports?
A. Increase cost of production by raising taxes
B. Increases GDP by training workers
C. Decrease spending on government healthcare
D. Increase infrastructure spending

Answer 41

A. Increase cost of production by raising taxes

Question 42

Which economic policy is associated with restraining trade between countries?
A. Bretton Woods
B. Comparative advantage
C. Monetary
D. Protectionism

Answer 42

D. Protectionism

Question 43

A government wants to incentivize domestic procedures to grow and sell more organic vegetables locally rather than selling them internationally. The government plans to enact a flat tax on all domestic organic produce shipped outside of the country. Which type of tariff is the government enacting?
A. Export
B. Compound
C. Protective
D. Ad valorem

Answer 43

A. Export

Question 44

Country A provides domestic manufacturers with an export subsidy to incentivize international trade, which allows its companies to sell to Country B at below cost. Country B imposes tariffs on Country A’s imports to protect its domestic manufacturers from any unfair trade practices. Which type of trade barrier is Country B enacting?
A. Tariff quota
B. Absolute quota
C. Ad valorem tariff
D. Countervailing duty

Answer 44

D. Countervailing duty

Question 45

A government imposes a 2.5% tariff on the market value of imported furniture. Which type of tariff is the government enacting?
A. Specific
B. Compound
C. Protective
D. Ad valorem

Answer 45

D. Ad valorem

Question 46

How do payments flow from firms to households in the circular-flow model?
A. Firms will provide households with entrepreneurship
B. Firms will provide households with wages, profit, interest, and rents.
C. Firms will provide households and investment capital
D. Firms will provide households with goods and services.

Answer 46

B. Firms will provide households with wages, profit, interest, and rents.

Question 47

What will households provide to firms in a factor market?
A. Land, labor, capital, and entrepreneurship
B. Wages, profit, interest, and rents
C. Savings for investment
D. Goods and services

Answer 47

A. Land, labor, capital, and entrepreneurship

Question 48

Which element of the circular-flow model is supplied by households?
A. Taxes
B. Wages
C. Rents
D. Interest

Answer 48

A. Taxes

Question 49

What is the largest component of gross domestic product (GDP) in the United States?
A. Consumption
B. Investment
C. Government
D. Exports

Answer 49

A. Consumption

Question 50

Why is the sale of intermediate goods not included in the gross domestic product (GDP) calculation?
A. Final goods include tariffs
B. Intermediate goods are produced in the same year
C. Intermediate goods are not taxed
D. Double counting would overstate the size of the economy

Answer 50

D. Double counting would overstate the size of the economy

Question 51

Which factor determines the distinction between nominal and real gross domestic product (GDP)?
A. Taxes
B. Inflation
C. Investments
D. Location of production

Answer 51

B. Inflation

Question 52

Why is inflation good for borrowers and bad for lenders?
A. Because inflation reduces the total amount of money borrowed
B. Because inflation increases the total amount of money borrowed
C. Because inflation reduces the value of the money paid back to lenders
D. Because inflation increases the value of the money paid back to lenders

Answer 52

C. Because inflation reduces the value of the money paid back to lenders

Question 53

The Federal Reserve has a primary goal of curbing inflation or reducing economic stagnation or recession. Which action is authorized for the Federal Reserve?
A. Buy securities
B. Decrease taxes
C. Increase government spending
D. Introduce commodity-backed currencies

Answer 53

A. Buy securities

Question 54

What allows for the money creation process in the economy?
A. Fractional reserve banking system
B. Barter negotiations
C. Commodity-backed currencies
D. Double coincidence of wants

Answer 54

A. Fractional reserve banking system

Question 55

Which effect does an increase in income have on the money demand curve?
A. Shifts to the right
B. Shifts to the left
C. Bows inward
D. Bows outward

Answer 55

A. Shifts to the right

Question 56

A country is experiencing an inflationary gap. Which type of fiscal policy should the government undertake?
A. Contractionary
B. Expansionary
C. Neutral
D. Protectionist

Answer 56

A. Contractionary

Question 57

A country is experiencing a recessionary gap. Which type of fiscal policy should the government undertake?
A. Contractionary
B. Expansionary
C. Neutral
D. Protectionist

Answer 57

B. Expansionary

Question 58

What is a cause of structural deficits?
A. Wartime spending
B. Recession
C. Depression
D. Political decisions

Answer 58

D. Political decisions

Question 59

Which situation reduces the effectiveness of using the Phillips curve as a policy menu?
A. Stagflation
B. Hyperinflation
C. Deficit spending
D. Discretionary spending

Answer 59

A. Stagflation

Question 60

Which statement describes consumer spending?
A. Disposable income determines consumption spending
B. Consumer spending is based on disposable income minus taxes
C. Only pre-tax income drives consumer spending
D. As taxes increase, consumer spending increases as well

Answer 60

A. Disposable income determines consumption spending

Question 61

Which situation would cause the aggregate demand curve to shift to the right?
A. Higher chance of an upcoming recession
B. Lower chance of an upcoming recession
C. Higher chance of government spending reductions
D. Lower chance that wage increases continue

Answer 61

B. Lower chance of an upcoming recession

Question 62

A government decision was made to spend 10 billion dollars on new technology to combat a serious problem in the country. What will happen to the aggregate demand curve?
A. It will shift to the left
B. It will shift to the right
C. It will move up and to the left along the aggregate demand curve
D. It will move down and to the right along the aggregate demand curve

Answer 62

B. it will shift to the right

Question 63

Which statement accurately characterizes the long-run aggregate supply (LRAS) curve?
A. It is equal to full-employment GDP
B. It is upward sloping
C. It is above potential GDP
D. It is horizontal

Answer 63

A. It is equal to full-employment GDP

Question 64

What is the effect when there is a decrease in aggregate demand?
A. Lower price level and lower unemployment
B. Lower price level and higher unemployment
C. Higher price level and lower unemployment
D. Higher price level and higher unemployment

Answer 64

B. Lower price level and higher unemployment

Question 65

An economy starts in a long-run equilibrium, and then there is a negative supply shock. Which economic outcome will result from this situation?
A. Higher price level and higher unemployment
B. Higher price level and lower unemployment
C. Lower price level and higher unemployment
D. Lower price level and lower unemployment

Answer 65

A. Higher price level and higher unemployment