1) According to economics, what causes us to have to make choices?

A. greed.
B. scarcity.
C. unemployment.
D.

unlimited resources.

2) Economics does not study correct or incorrect behaviors, but rather it assumes
that economic agents make the best decisions given their knowledge of the costs
and benefits. What term best describes this behavior?
A. emotionally
B.

rationally

C. equitably
D. selfishly

3) By definition, what is economics the study of?

A. the choices people make to attain their goals, given their scarce
resources.
B. how to make money in a market economy.
C. how to make money in the stock market.
D. supply and demand.

4) If a commercial dairy farm wants to raise funds to purchase feeding troughs, in

which market does it do so?
A. factor market.
B. product market.
C. output market.
D. dairy products market.

5) Which of the following is an example of spending on goods and services in the

circular flow model?
A. Celeste buys fresh herbs at the farmers' market to use in her restaurant.
B. Javier buys 800 square feet of wood flooring for his vacation home.
C. Belinda purchases a new computer for her tax-preparation business.
D.

Timmy purchases a new examination table for use in his veterinary

clinic.

6) What might you call an outward shift of a nation's production possibilities

frontier?
A. an impossible situation.
B.

rising prices of the two goods on the production possibilities frontier

model.
C. economic growth.
D.
another.

a situation in which a country produces more of one good and less of

7) Economists in general
A.
Do not believe that people's tastes determine demand and therefore
they ignore the subject of tastes.
B. Believe that they must be able to explain people's tastes in order to
explain what happens when tastes change.
C. Do not try to explain people's tastes, but they do try to explain what
happens when tastes change.
D. Incorporate tastes into economic models only to the extent that
tastes determine whether pairs of goods are substitutes or complements.
8) If demand is inelastic, the absolute value of the price elasticity of demand is
A. greater than one.
B.

less than one.

C. one.
D. greater than the absolute value of the slope of the demand curve.

9) A demand curve which is ________ represents perfectly inelastic demand, and a

demand curve which is ________ represents inelastic demand.
A. vertical; downward sloping
B. horizontal; downward sloping
C. downward sloping; vertical
D. upward sloping; horizontal

10) If, for a product, the quantity supplied exceeds the quantity demanded, the
market price will fall until
A. all consumers will be able to afford the product.
B. quantity demanded equals quantity supplied. The equilibrium price will
then be lower than the market price.
C. the quantity demanded exceeds the quantity supplied. The market will
then be in equilibrium.
D. quantity demanded equals quantity supplied. The market price
will then equal the equilibrium price.
11) A decrease in the price of GPS systems will result in
A. a decrease in the demand for GPS systems.
B. an increase in the supply of GPS systems.
C. a smaller quantity of GPS systems supplied.
D. a larger quantity of GPS systems supplied.

12) Which of the following is the correct way to describe equilibrium in a market?
A. At equilibrium, market forces no longer apply.
B. At equilibrium, scarcity is eliminated.
C. At equilibrium, demand equals supply.
D.

At equilibrium, quantity demanded equals quantity supplied.

13) At low wages, the labor supply curve for most people slopes upward because

A. as wages increase income also increases unless hours worked decrease.

B. the demand for labor is perfectly elastic at low wages.
C. the supply of labor is perfectly inelastic at low wages.
D. as wages increase the opportunity cost of leisure increases.

14) Let MP = marginal product, P = output price, and W = wage, then the equation
that represents the condition where a competitive firm would hire another worker is
A. P MP > W.
B. P W > MP.
C. P MP = W.
D. P MP < W.
15) Marginal revenue product for a perfectly competitive seller is equal to
A.
worker.

the change in total revenue that results from hiring another

B. the marginal cost of production.

C. the output price multiplied by the total product of labor.
D. the output price multiplied by the number workers hired.

16) A decrease in the wage rate causes

A. a leftward shift of the firm's labor demand curve.
B. a decrease in labor's productivity.
C. an increase in the quantity of labor demanded.
D. a rightward shift of the firm's labor demand curve.
17) An individual's labor supply curve shows
A. the relationship between wages and the quantity of labor that a firm is
willing to employ.
B. the relationship between the quantity of hours worked and total income
earned by that individual.

C. the maximum wage rates offered to that individual by various potential

employers.
D. the relationship between wages and the quantity of labor that
she is willing to supply.

18) The labor supply for an industry would decrease if

A. the government welcomes foreign workers into the country.
B. a greater percentage of women want to work outside the home.
C. the wage rate falls.
D. the percentage of the population from age 16 to 65 decreases.
19) Which of the following displays rivalry and excludability in consumption?
A. quasi-public goods
B. common resources
C. public goods
D. private goods

20) Private costs

A. are borne by producers of a good while social costs are borne by
society at large.
B. are borne by producers of a good while social costs are borne by those
who cannot afford to purchase the good.
C.
are borne by producers of a good while social costs are borne by
government.
D.
are borne by consumers of a good while social costs are borne by
government.

21) Which of the following displays these two characteristics: nonrivalry and
nonexcludability in consumption?
A. quasi-public goods
B. common resources
C. public goods
D. private goods

22) A monopoly is a seller of a product

A. with a perfectly inelastic demand.

B. without a well-defined demand curve.
C. with many substitutes.
D. without a close substitute.

23) One reason why the coffeehouse market is competitive is that

A. consumption takes place in public.
B. demand for specialty coffee is very high.
C.

barriers to entry are low.

D. it is trendy and therefore is likely to have a customer following.

24) The reason that the coffeehouse market is monopolistically competitive rather
than perfectly competitive is because
A. entry into the market is blocked.
B. barriers to entry are very low.
C. products are differentiated.
D. there are many firms in the market.
25) Which of the following would be directly counted in GDP in 2010?
A.
kitchen cabinets purchased from Home Depot in 2010 to be
installed in a house built in 1997
B.
kitchen cabinets built in 1887, extracted from the 1887 home, and
installed in a brand new country-style home
C.
kitchen cabinets built in 1887, extracted from the 1887 home, and
installed in a farm house built in 1950
D. none of the these

26) The Philippines and Vietnam have roughly the same size population. Suppose
the GDP of the Philippines is $1,000 billion and the GDP of Vietnam is $10,000
billion. You should conclude
A. it is not possible to make a good comparison of the economic well being
of a typical individual in the 2 countries without additional information.
B. a typical person in Vietnam is 10 times as well off as the typical
person in the Philippines.

C. a typical person in Vietnam is less than 10 times as well off as the typical
person in the Philippines.
D. a typical person in Vietnam is more than 10 times as well off as the
typical person in the Philippines.
27) Gross domestic product understates the total production of final goods and
services because of the omission of
A. exports.
B. the underground economy.
C. inflation.
D. intermediate goods.

28) Which of the following is an objective of fiscal policy?

A. high rates of economic growth
B. energy independence from Middle East oil
C. discovering a cure for AIDs
D. health care coverage for all Americans

29) Before the Great Depression of the 1930s, the majority of government spending
took place at the ________ and after the Great Depression the majority of
government spending took place at the ________.
A. federal level; state level
B. state and local levels; federal level
C. federal level; state and local levels
D. local level; federal level

30) Fiscal policy refers to changes in

A.
the money supply and interest rates that are intended to achieve
macroeconomic policy objectives.
B.
state and local taxes and purchases that are intended to achieve
macroeconomic policy objectives.
C.
federal taxes and purchases that are intended to fund the war on
terrorism.
D.
federal taxes and
macroeconomic policy objectives.

purchases

that are

intended

to achieve

31) Which of the following assets is most liquid?

A. stock
B. money
C. savings account
D. bond

32) Dollar bills in the modern economy serve as money because

A. people have confidence that others will accept them as money.
B. they are backed by the gold stored in Fort Knox.
C. they have value as a commodity independent of their use as money.
D. they can be redeemed for gold by the central bank.

33) Which of the following functions of money would be violated if inflation were
high?
A. medium of exchange
B. unit of account
C. certificate of gold
D. store of value
34) Dollar bills in the modern economy serve as money because
A. people have confidence that others will accept them as money.
B. they are backed by the gold stored in Fort Knox.
C. they have value as a commodity independent of their use as money.
D. they can be redeemed for gold by the central bank.

35) The M1 measure of the money supply equals

A. currency plus checking account balances plus traveler's checks plus
savings account balances.
B. paper money plus coins in circulation.
C.

currency plus checking account balances plus traveler's checks.

D. currency plus checking account balances.

36) Which of the following functions of money would be violated if inflation were
high?
A. medium of exchange
B. unit of account

C. certificate of gold
D. store of value

37) Money market mutual funds sell shares to investors and use the money to buy
A.
B.
C.
D.

overseas assets through foreign direct investment.

foreign currency.
short-term securities.
mortgage-backed securities.

38) Open market operations refer to the purchase or sale of ________ to control the
money supply.
A. U.S. Treasury securities by the U.S. Treasury
B. U.S. Treasury securities by the Federal Reserve
C. corporate bonds and stocks by the U.S. Treasury
D. corporate bonds and stocks by the Federal Reserve
39) To offset the effect of households and firms deciding to hold less of their money
in checking account deposits and more in currency, the Federal Reserve could
A. lower bank taxes.
B. buy Treasury securities.
C. raise the discount rate.
D. raise the required reserve ratio.

40) Toll Brothers, a residential home builder, did well during the recession in 2001
but did not do so well in 2007 after the housing bubble burst. The reason for this is
A. the Fed raised interest rates in 2001 but lowered interest rates in 2007 to
revive the housing market.
B. the Fed lowered interest rates in 2001 but did not believe that cutting
the interest rate in 2007 would be enough to revive the housing market.
C. the Fed raised interest rates in 2001 but did not believe that cutting the
interest rate in 2007 would be enough to revive the housing market.
D. the Fed lowered interest rates in 2001 but raised interest rates in 2007
to help fight inflation.

41) Monetary policy refers to the actions the

A.
Federal Reserve takes to manage government spending and taxes to
pursue its economic objectives.
B. Federal Reserve takes to manage the money supply and interest rates to
pursue its macroeconomic policy objectives.
C. President and Congress take to manage government spending and taxes
to pursue their economic objectives.
D. President and Congress take to manage the money supply and interest
rates to pursue their economic objectives.
42) The goals of monetary policy tend to be interrelated. For example, when the Fed
pursues the goal of ________, it also can achieve the goal of ________ simultaneously.
A. stability of financial markets; a low current account deficit
B. high employment; lowering government spending
C. economic growth; a low current account deficit
D. high employment; economic growth
43) Specializing in the production of a good or service in which one has a
comparative advantage enables a country to do all of the following except
A.
produce a combination of goods that lies outside its own production
possibilities frontier.
B. increase the variety of products that it can consume with no increase in
resources.
C. consume a combination of goods that lies outside its own production
possibilities frontier.
D. engage in mutually beneficial trade with other nations.

44) Table 2-3

Serena
Bracelets
8
Necklaces 16

Haley
9
12

Refer to Table 2-3. Which of the following statements is true?

A. Haley has a comparative advantage in making necklaces and Serena in
making bracelets.
B. Serena has a comparative advantage in making both products.

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C. Haley has a comparative advantage in making bracelets and Serena in

making necklaces.
D. Haley has a comparative advantage in making both products.

45) For each bottle of wine that Italy produces, it gives up the opportunity to make
10 pounds of cheese. France can produce 1 bottle of wine for every 25 pounds of
cheese it produces. Which of the following is true about the comparative advantage
between the two countries?
A. France has the comparative advantage in wine.
B. Italy has the comparative advantage in wine.
C. France has the comparative advantage in wine and cheese.
D. Italy has the comparative advantage in cheese.

46) When the market value of the dollar rises relative to other currencies around the
world, we say that
A. the supply of dollars has increased.
B. the dollar has depreciated.
C. the demand for dollars has increased.
D. the dollar has appreciated.

47) If the nominal exchange rate between the American dollar and the Canadian
dollar is 0.89 Canadian dollars per American dollar, how many American dollars are
required to buy a product that costs 2.5 Canadian dollars?
A. $2.81
B. $2.23
C. $2.75
D. $1.32

48) How does an increase in a country's exchange rate affect its balance of trade?

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A. An increase in the
increases the balance of trade.
B. An increase in the
reduces the balance of trade.
C. An increase in the
increases the balance of trade.
D. An increase in the
reduces the balance of trade.

exchange rate raises imports, reduces exports, and

exchange rate reduces imports, raises exports, and
exchange rate reduces imports, raises exports, and
exchange rate raises imports, reduces exports, and

49) If relative purchasing power between the United States and Argentina is 3.22
pesos per dollar, under which circumstances would we say that the dollar is
"overvalued"?
A. if the actual exchange rate between the dollar and
is 3 pesos per dollar
B. if the actual exchange rate between the dollar and
is 0.22 pesos per dollar
C. if the actual exchange rate between the dollar and
is 4 pesos per dollar
D. if the actual exchange rate between the dollar and
is 3.22 pesos per dollar

the Argentinean peso

the Argentinean peso
the Argentinean peso
the Argentinean peso

50) If the purchasing power of the dollar is greater than the purchasing power of the
euro, purchasing power parity predicts that the exchange rate will
A. not fluctuate and stay constant in the long run.
B. be equal to the relative purchasing power across the currencies in the
long run.
C. decrease if the exchange rate is less than 1 euro per dollar.
D. increase if the exchange rate is greater than 1 euro per dollar.

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