Principles of Economics

Principles of Economics

Unit 1
1) The study of economics arises due to
a. greed.
b. scarcity.
c. resources.
d. money.
2) Economists assume that individuals
a. are rational and respond to incentives.
b. prefer to live in a society that values fairness above all else.
c. will never take actions to help others.
d. behave in unpredictable ways.
3) Your roommate, Serafina, a psychology major, said, “The problem with economics is
that it assumes that consumers and firms always make the correct decision. But we
know that everyone’s human, and we all make mistakes.” Is Serafina’s criticism ac-
curate?
a. No. If we cannot assume that decisions are correct, then we will not be able to exam-
ine the moral implications of these decisions.
b. Yes. One cannot make predictions about economic behavior because in reality people
make incorrect choices in many situations.
c. No. Economics assumes that economic agents behave rationally, meaning they make
the best decisions given their knowledge of the costs and benefits of these decisions.
d. Yes. Economic theory should allow for irrational behavior so that we can have more
reliable predictions.
4) In Austria a woman can get up to 48 months of pension benefits and is guaranteed
a maternity allowance two months before and after she gives birth. Further, the Aus-
trian government gives monthly payouts ranging from $132 to $547, depending on
the age of offspring and offers generous tax benefits for families with children. How
will these benefits affect a woman’s decision to have children?
a. These incentives will encourage women to have children and increase the birth rate.
b. These incentives will encourage only less educated women to have more children.
c. These incentives will encourage only women with high opportunity costs to have more
children.
d. These incentives will have no effect on having children; the decision to have children
is a social and psychological decision, not an economic decision.
5) Making “marginal” decisions involves
a. calculating the total benefits of an activity and determining if you are satisfied with
thatamount.calculating the total costs of an activity and determining if you can afford to incur
that expenditure.
c. comparing the additional benefits and the additional costs of an activity.
d. calculating the average benefit and the average cost of an activity to determine if it is
worthwhile to undertake that activity.
Scenario 1-1
Suppose a cell-phone manufacturer currently sells 20,000 cell-phones per week and makes a profit of $5,000 per week. A manager at the plant observes, “Although the last 3,000 cell phones we produced and sold increased our revenue by $6,000 and our costs by $6,700, we are still making an overall profit of $5,000 per week so I think we’re on the right track. We are producing the optimal number of cell phones.”
6) Refer to Scenario 1-1. Using marginal analysis terminology, what is another economic
term for the incremental revenue received from the sale of the last 3,000 cell
phones?
a. gross profit
b. marginal revenue
c. gross earnings
d. sales revenue
7) Automobile manufacturers produce a range of automobiles such as sports utility
vehicles, luxury sedans, pickup trucks and compact cars. What fundamental econom-
ic question are they addressing by making this range of products?
a. How to produce goods that consumers want?
b. What goods and services will be produced?
c. Who to produce automobiles for?
d. Why produce a variety of automobiles?
8) Which of the following contributes to the efficiency of markets?
a. Markets promote equal standards of living.
b. Markets promote competition and voluntary exchange.
c. Governments play an active role in the day-to-day operations of markets.
d. Markets are able to bring about an equitable distribution of goods and services.
Figure 1-4

9) Refer to Figure 1-4. Which of the following statements is true?
a. The slope of the tangent at E is positive and the slope of the tangent at F is negative.
b. The slope of the tangent at E and the slope of the tangent at F are negative.
c. The slope of the tangent at E is negative and the slope of the tangent at F is positive.
d. The slope of the tangent at E and the slope of the tangent at F are positive.
10) The production possibilities frontier model assumes all of the following except
a. the economy produces only two products.
b. the level of technology is fixed and unchanging.
c. labor, capital, land and natural resources are fixed in quantity.
d. production of goods requires full employment of all resources.
Figure 2-2

Figure 2-2 above shows the production possibilities frontier for Mendonca, an agrarian na¬tion that produces two goods, meat and vegetables.
11) Refer to Figure 2-2. The linear production possibilities frontier in the figure indicates
that
a. the tradeoff between meat and vegetables is constant.
b. Mendonca has a comparative advantage in the production of vegetables.
c. it is progressively more expensive to produce meat.
d. Mendonca has a comparative disadvantage in the production of meat.
Table 2-3

Table 2-3 shows the number of labor hours required to produce a digital camera and a pound of wheat in China and South Korea.
12) Refer to Table 2-3. What is South Korea’s opportunity cost of producing one pound of
wheat?
a. 20 digital cameras
b. 0.05 units of a digital camera
c. 60 digital cameras
d. 5 digital cameras
13) Which of the following are flows in the circular flow model?
a. the flow of income earned by factors of production and the flow of expenditures on
goods and services
b. the flow of goods and the flow of services
c. the flow of costs and the flow of revenue
d. the flow of income received by households and the flow of tax revenues paid by house-
holds
14. Which of the following statements about a simple circular flow model is true?
a. Producers are neither buyers nor sellers in the product market.
b. Households are sellers in the product market.
c. Producers are buyers in the factor market.
d. Households are neither buyers nor sellers in the factor market.
15) The term “property rights” refers to
a. the ability to exercise control over one’s own resources within the confines of the law.
b. the government’s right to appropriate land from wealthy individuals to redistribute to
low income families.
c. the physical possession of a house or any other property which the owner legally pur-
chased.
d. the right of a business not to have its assets confiscated by the government in the
event that the business is accused of committing fraud.
Table 3-1

16) Refer to Table 3-1. The table above shows the demand schedules for loose-leaf tee of two individuals (Sunil and Mia) and the rest of the market. If the price of loose-leaf tea rises from $3 to $4 the market quantity demanded would
a. decrease by 32 pounds.
b. decrease by 64 pounds.
c. increase by 64 pounds.
d. increase by 32 pounds.
17) If a firm expects that the price of its product to be higher in the future than it is today
a. the firm has an incentive to decrease supply now and increase supply in the future.
b. the firm has an incentive to decrease quantity supplied now and increase quantity
supplied in the future.
c. the firm will go out of business.
d. the firm has an incentive to increase supply now and decrease supply in the future.
18) Which of the following is the correct way to describe equilibrium in a market?
a. At equilibrium, demand equals supply.
b. At equilibrium, quantity demanded equals quantity supplied.
c. At equilibrium, scarcity is eliminated.
d. At equilibrium, market forces no longer apply.
Figure 3-4
19) Refer to Figure 3-4. The figure represents the market for canvas tote bags. Assume
that the price of tote bags is $15. At this price:
a. the quantity demanded exceeds the quantity supplied of tote bags by 75. The price
will eventually rise to $25 where quantity demanded will equal quantity supplied.
b. there is a shortage, equal to 55 tote bags; the price of tote bags will rise until demand
is equal to supply.
c. the demand exceeds the supply of tote bags by 55. Some consumers will have an
incentive to offer to buy tote bags at a higher price.
d. there is a shortage, equal to 55 tote bags, that will be eliminated when the price rises
to $25.
20) Which of the following would cause the equilibrium price of white bread to decrease
and the equilibrium quantity of white bread to increase?
a. a decrease in the price of flour
b. an increase in the price of butter, a complement for white bread
c. an increase in the price of rye bread, a substitute for white bread
d. an increase in the price of flour
Figure 4-6

Figure 4-6 shows the market for apartments in Bay City. Recently, the government im¬posed a rent ceiling at R0.
21) Refer to Figure 4-6. What is the area that represents the producer surplus after the
imposition of the ceiling?
a. F + G
b. F
c. A + B + D + F + G
d. D + F + G
22) Which term refers to a legally determined minimum price that sellers may receive?
a. A subsidy.
b. A tariff.
c. A price floor.
d. A price ceiling.
23) A positive externality causes
a. the marginal social benefit to be equal to the marginal private cost of the last unit
produced.
b. the marginal social benefit to exceed the marginal private cost of the last unit pro-
duced.
c. the marginal social benefit to be less than the marginal private cost of the last unit
produced.
d. the marginal private benefit to exceed the marginal social cost of the last unit pro-
duced.
Figure 4-15

Companies producing toilet paper bleach the paper to make it white. The bleach is dis¬charged into rivers and lakes and causes substantial environmental damage. Figure 4-15 illustrates this situation in the toilet paper market.
24) Refer to Figure 4-15. An efficient way to get the firm to produce the socially optimal
output level is
a. to assign property rights to the firms in the industry.
b. to impose a tax to make the industry bear the external costs it creates.
c. to grant a subsidy to enable the industry to internalize the external costs of produc-
tion.
d. for government to set a quota on the quantity of toilet paper that the toilet paper
industry can produce.
25) What is the rationale behind a tradable emissions allowance scheme?
a. to create a market for externalities: the scheme brings together buyers and sellers of
marketable permits
b. to raise revenue for the government through the sale of emission permits and at the
same time set an emissions target
c. to provide firms with the incentive to consider less costly alternatives to pollution
reduction by making firms pay for the right to pollute beyond their specified allowance
d. to discipline polluting firms by specifying the maximum amount of emissions allowed
and giving them permits to pollute up to their allowance

Unit 2
1) What type of business is the easiest to set up?
a. a partnership
b. a sole proprietorship
c. a corporation
d. all types of business require the same amount of effort and expense.
2) Which type of business has the most government rules and regulations affecting it?
a. a corporation
b. a partnership
c. a sole proprietorship
d. All types of business have the same set of rules and regulations.
3) Who controls a sole proprietorship?
a. bondholders
b. the sole proprietor
c. stockholders
d. All of above
4) Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He
is considering setting up his business as a sole proprietorship. What is one advantage
to Jeremy of setting up his business as a sole proprietorship?
a. As a sole proprietor, Jeremy would face limited liability.
b. As a sole proprietor, Jeremy would have both ownership and control over the business.
c. As a sole proprietor, Jeremy would have the ability to share risk with shareholders.
d. All of the above would be advantages of setting up his business as a sole proprietor-
ship.
5) Which of the following is not an advantage of starting a new business as a corpora-
tion?
a. separation of ownership and business liability
b. ability to share risks
c. possibility of double taxation
d. enhanced ability to raise funds
6) Who operates and controls a corporation in its day-to-day activities?
a. the employees
b. the board of directors
c. the corporation’s management
d. the stockholders
7) What do economists call a situation where a hired manager does not have the same
interests as the owners of a business?
a. a financial intermediary problem
b. the financial problem
c. conquest and control
d. a principal-agent problem
8) Which of the following does not take place in the direct finance market?
a. Corporate bonds are sold to savers.
b. Deposits from savers are accumulated and loans made to borrowers.
c. Ownership in corporations is sold in the form of common stock.
d. Ownership in corporations is sold in the form of preferred stock.
9) If a corporation earns a profit, how do owners of the firm share in the profit?
a. by raising the interest rate on bonds
b. dividend payments on shares of that firm’s stock
c. coupon payments on that firm’s bonds
d. by selling any bonds or stocks owned and realizing a capital gain
10) If a corporation retains all its profits and distributes none of the profit to owners, how
can owners benefit?
a. If the retained earnings are expected to create future profits, the market price of the
firm’s stock will increase and create a capital gain for stockholders if the stock is sold.
b. Owners will only benefit if some profits are paid out in the form of dividends.
c. Shares of stock can be converted into bonds so stockholders will be able to earn cou-
pon payments.
d. The owners’ federal income tax liability is reduced by their share of the corporation’s
retained earnings.
11) David Myers, former controller for WorldCom, pleaded guilty to falsely reported costs
for WorldCom that were ________ than they actually were, resulting in reported ac-
counting profits for WorldCom that were ________ than their actual level.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher
12) Most people would prefer to drive a luxury car that has all the options, but more
people buy less expensive cars even though they could afford the luxury car because
a. car buyers are irrational.
b. the marginal utility per dollar spent on the less expensive car is higher than that spent
on luxury cars.
c. the total utility of less expensive cars is greater than that of luxury cars.
d. luxury cars cost a lot more than non-luxury cars.
Table 6-2

Table 6-2 shows Keira’s utility from soup and sandwiches. The price of soup is $2 per cup and the price of a sandwich is $3. Keira has $18 to spend on these two goods.
13) Refer to Table 6-2. What is Keira’s marginal utility per dollar spent on the third cup
of soup?
a. 72 units of utility
b. 36 units of utility
c. 6 units of utility
d. 12 units of utility
14) Firms pay famous individuals to endorse their products because
a. the firms are irrational and are wasting advertising expenditures.
b. famous people obviously know what are the best goods and services.
c. famous people only consume high quality products.
d. apparently demand is affected not just by the number of people who use a product
but also by the type of person that uses the product.
15) If 20 units of a good are sold at a price of $50 and 30 units are sold at a price of
$40, what is the absolute value of the price elasticity of demand? Use the midpoint
formula.
a. 1.
b. 0.56.
c. 2.5
d. 1.8.
16) At a price of $100, Beachside Canoe Rentals rented 11 canoes. When it increased
its rental price to $125, 9 canoes were rented. Calculate the absolute value of the
price elasticity of demand for canoe rentals, using the midpoint formula.
a. 0.75
b. 0.9
c. 2
d. 1.25
17) A demand curve that is horizontal indicates that the commodity
a. is a necessity.
b. must be very cheap.
c. has a large number of substitutes.
d. has few substitutes.
18) With the increased usage of cell-phone services, what has happened to the price
elasticity of demand for land-line telephone services?
a. It has become more elastic.
b. It has become more a luxury.
c. It has become unit-elastic.
d. It has become more inelastic.
19) Suppose the absolute value of the price elasticity of demand for meals at Fortune
Buffet House is 8. What happens to sales revenue if the restaurant increases its price
by 5 percent?
a. Sales revenue falls by less than 5 percent.
b. Sales revenue remains unchanged.
c. Sales revenue cannot be determined without information on prices.
d. Sales revenue falls to zero.
20) A characteristic of the long run is
a. plant capacity cannot be increased or decreased.
b. all inputs can be varied.
c. there are both fixed and variable inputs
d. there are fixed inputs.
Figure 7-1

21) Refer to Figure 7-1. The average product of the 4th worker
a. is 68.
b. is 11.
c. is 17.
d. cannot be determined.
22) Average total cost is equal to
a. total cost divided by the number of workers.
b. marginal cost plus variable cost.
c. average fixed cost minus average variable cost.
d. total cost divided by the quantity of output produced.
23) Adam spent $10,000 on new equipment for his small business, “Adam’s Fitness
Studio.” Membership at his fitness center is very low and at this rate, Adam needs an
additional $12,000 per year to keep his studio open. Which of the following is true?
a. The variable cost of running the studio is $22,000.
b. The fixed cost of running the studio is $22,000.
c. The $10,000 Adam spent on equipment is the total cost of starting the business and
the $12,000 he’ll need to continue operations is a marginal cost.
d. The $10,000 Adam spent on equipment is a fixed cost of business and the $12,000
he’ll need to continue operations is a variable cost.
24) Long run average cost curves are U-shaped because
a. of the law of diminishing returns.
b. of the law of demand.
c. of economies and diseconomies of scale.
d. of the law of supply.
25) Manufacturers of flat-panel televisions expect continued rapid increases in the de-
mand for their products. In response to this forecast, manufacturers are building
increasingly larger plants. At the same time, they expect to sell flat-panel televisions
at lower prices. Which of the following must be true if manufacturers plan to lower
prices and yet expect to cover the average cost of production in their larger plants?
a. They expect that the demand for flat-panels televisions is relatively elastic and there-
fore lowering prices will lead to an increase in total revenue which will comfortably
cover the cost of production.
b. The cost of building a larger plant must be lower than the cost of building smaller
plants.
c. Larger plants are more efficient than smaller plants because the bulk of the cost of
production is fixed costs.
d. They expect that economies of scale will make the cost of production in the larger
plants lower than the cost of production in the smaller plants.

Unit 3
1) “Between 1997 and 2001, many apple farmers switched from traditional to organic
growing methods, increasing production of organically grown apples from 1.2 million
boxes per year to more than 3 million boxes.” If the market for organic apples is per-
fectly competitive, which of the following statements is inconsistent with the state-
ment above?
a. Organic apple farmers earned short-run economic profits between 1997 and 2001.
b. The price of organic apples is likely to rise over time as more and more farmers switch
to organic methods of farming.
c. The additional supply of organic apples resulted in a lower price for organic apples.
d. It is relatively easy to enter the organic apples market.
Table 8-1

Table 8-1 shows the short-run cost data of a perfectly competitive firm that produces plas¬tic camera cases. Assume that output can only be increased in batches of 100 units.
2) Refer to Table 8-1. If the market price of each camera case is $8 what is the firm’s
total revenue?
a. $2,400
b. $3,200
c. $4000
d. $4,800

3) Refer to Figure 8-2. Suppose the firm is currently producing Q2 units. What happens
if it expands output to Q3 units?
a. It will be moving toward its profit-maximizing output.
b. It makes less profit.
c. It incurs a loss.
d. Its profit increases by the size of the vertical distance df.
4) For a perfectly competitive firm, which of the following is not true at profit maximiza-
tion?
a. Total revenue minus total cost is maximized.
b. Marginal revenue equals marginal cost.
c. Price equals marginal cost.
d. Market price is greater than marginal cost.
5) A firm’s total profit can be calculated as all of the following except
a. marginal profit times quantity sold.
b. average profit per unit times quantity sold.
c. total revenue minus total cost.
d. (price minus average total cost) times quantity sold.
Figure 8-4

Figure 8-4 shows the cost and demand curves for a profit-maximizing firm in a perfectly competitive market.
6) Refer to Figure 8-4. If the market price is $30, should the firm represented in the
diagram continue to stay in business?
a. Yes, because it is covering part of its fixed cost.
b. No, it should shut down because it cannot cover its variable cost.
c. Yes, because it is making a profit.
d. No, it should shut down because it is making a loss.
7) If, for a given output level, a perfectly competitive firm’s price is less than its average
variable cost, the firm
a. should increase output.
b. should shut down.
c. should increase price.
d. is earning a profit.
Figure 9-7

Figure 9-7 shows the cost and demand curves for the Erickson Power Company.
8) Refer to Figure 9-7. The firm would maximize profit by producing
a. Q1 units.
b. Q2 units.
c. Q3 units.
d. Q4 units.
Figure 9-1

Figure 9-1 above shows the demand and cost curves facing a monopolist.
9) Refer to Figure 9-1. If the firm’s average total cost curve is ATC3 the firm will
a. break even.
b. make a profit.
c. suffer a loss.
d. face competition.
Table 9-1
Price per unit Quantity demanded (Units) Total cost of production
$200 1 $200
180 2 300
160 3 350
140 4 360
120 5 375
100 6 395
80 7 425

A monopoly producer of a foreign language translation software package faces the demand and cost structure given in Table 9-1.
10) Refer to Table 9-1. What is the marginal revenue from the sale of the third unit?
a. -$5
b. $160
c. $120
d. $80
Figure 9-3

11) Refer to Figure 9-3. What is the monopoly’s profit?
a. $2,700
b. $12,600
c. $10,400
d. $4,200
12) A market economy benefits from market power
a. under no circumstances.
b. if the majority of the population are entrepreneurs.
c. if firms with market power do research and development with the profits earned.
d. if market power gets so bad the government creates public enterprises.
13) Economic efficiency requires that a natural monopoly’s price be
a. equal to the lowest price the firm can charge and still make a normal profit.
b. equal to average variable cost (AVC) where the AVC curve intersects the demand
curve.
c. equal to average total cost (ATC) where the ATC curve intersects the demand curve.
d. equal to marginal cost (MC) where the MC curve intersects the demand curve. Unit 3 Examination 177 Principles of Economics
14) If a firm faces a downward-sloping demand curve
a. it will always make a profit.
b. it can control both price and quantity sold.
c. it must reduce its price to sell more output.
d. the demand for its product must be inelastic.
15) A monopolistically competitive firm will
a. have some control over its price because its product is differentiated.
b. always produce at the minimum efficient scale of production.
c. charge the same price as its competitors do.
d. produce an output level that is productively and allocatively efficient.
Table 10-1
Quantity Price (Dollars) Total Revenue (Dollars)
1 $7.50 $7.50
2 7.00 14.00
3 6.50 19.50
4 6.00 24.00
5 5.50 27.50
6 5.00 30.00

16) Refer to Table 10-1. The table shows
a. an inelastic segment of the demand curve.
b. a demand curve with an elastic segment of the demand curve from $7.50 to $6.50
followed by an inelastic segment.
c. an elastic segment of the demand curve.
d. a demand curve with an inelastic segment of the demand curve from $7.50 to
$6.50 followed by an elastic segment.
Figure 10-3

Figure 10-3 shows short run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
17) Refer to Figure 10-3. What area represents the total variable cost of production?
a. 0P0aQa
b. P0abP1
c. P1bdP3
d. 0P1bQa
Figure 10-7

Figure 10-7 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
18) Refer to Figure 10-7. If the diagram represents a typical firm in the designer watch
market, what is likely to happen in the long run?
a. Some firms will exit the market causing demand to increase for firms remaining in the
market.
b. Inefficient firms will exit the market and new cost efficient firms will enter the market.
c. The firms that are making losses will be purchased by their more successful rivals.
d. Firms will have to raise their prices to cover costs of production.
19) Suppose in 2006 you purchased a house built in 2000. Which of the following would
be included in gross domestic product for 2006?
a. The value of the house in 2006 minus depreciation
b. The value of the house in 2000
c. The value of the services of the real estate agent
d. The value of the house in 2006
Scenario 11-1
CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for $300 and uses its labor and intermediate goods to make the canoe. It sells the finished canoe to a retail canoe store for $800. The retail canoe store then sells the canoe to a consumer for $1,200.
20) Refer to Scenario 11-1. The value of each canoe in gross domestic product equals
a. $400.
b. $800.
c. $1,200.
d. $500.
21) Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love,
marry and have eight children. Bob stops working for Mary in order to care for the
children. What will be the effect on GDP?
a. GDP will not change.
b. GDP will decrease.
c. GDP will increase.
d. GDP may increase or may decrease depending on inflation.
22) Disposable personal income equals personal income
a. minus government transfer payments plus personal tax payments.
b. plus government transfer payments.
c. minus personal tax payments plus government transfer payments.
d. minus personal tax payments.
23) The Bureau of Labor Statistics would categorize a retiree who is not working as
________.
a. a discouraged worker
b. unemployed
c. employed
d. out of the labor force
Table 12-1
Total Population 20,000
Working-Age Population 15,000
Employment 1,000
Unemployment 100

Consider the data above for a simple economy.
24) Refer to Table 12-1. The labor force participation rate for this simple economy
equals
a. (1,000/1,100) x 100.
b. (1,100/15,000) x 100.
c. (1,100/20,000) x 100.
d. (1,000/15,000) x 100.
25) Suppose that at the beginning of a loan contract the real interest rate is 4% and
expected inflation is 6%. If actual inflation turns out to be 7% over the loan contract
period, then
a. lenders gain 3%.
b. borrowers lose 3%.
c. borrowers gain 1%.
d. lenders gain 1%.
Unit 4
13-1
Year Real GDP (Billion of 2000 dollars)
2002 $8,700
2003 8,875
2004 9,000
2005 9,280

1) Refer to Table 13-1. Calculate the average annual growth rate from 2002 to 2005.
a. 3%
b. 1%
c. 2%
d. 1.5%
2) What two factors are the keys to determining labor productivity?
a. the average level of education of the workforce and the price level
b. the business cycle and the growth rate of real GDP
c. technology and the quantity of capital per hour worked
d. the growth rate of real GDP and the interest rate
3) Long-run economic growth requires all of the following except
a. technological change.
b. government provision of secure property rights.
c. increases in capital per hour worked.
d. political instability.
4) Which of the following is most liquid?
a. a dollar bill
b. a government bond
c. a corporate bond
d. a mutual fund share
5) Financial securities that represent promises to repay a fixed amount of funds are
known as
a. stocks.
b. insurance premiums.
c. pension funds.
d. bonds.
6) In a closed economy, public saving is equal to which of the following? (Y = GDP, C =
Consumption, G = Government purchases, T = Taxes, and TR = Transfers)
a. Y – C – T
b. Y – C – T + TR
c. Y – G – T
d. T – G – TR
Scenario 13-1
Consider the following data for a closed economy:
Y = $12 trillion
C = $8 trillion
I= $4 trillion
TR = $2 trillion
T = $3 trillion
7) Refer to Scenario 13-1. Based on the information above, what is the level of public
saving?
a. $2 trillion
b. $0
c. $1 trillion
d. negative $1 trillion (a deficit of $1 trillion)
8) What is investment in a closed economy if you have the following economic data?
Y = $10 trillion
C = $5 trillion
TR = $2 trillion
G = $2 trillion
a. $5 trillion
b. $2 trillion
c. $3 trillion
d. cannot be determined without information on taxes (T)
9) If Ebenezer Scrooge spends rather than saves his vast wealth he will
a. promote economic growth because he is increasing the amount of funds available for
investment.
b. slow economic growth because he is reducing the amount of funds available for in-
vestment.
c. slow economic growth because he is increasing the amount of funds available for
investment.
d. promote economic growth because he is decreasing the amount of funds available for
investment.
Figure 13-1

10) Refer to Figure 13-1. Which of the following is consistent with the graph depicted
above?
a. Technological change increases the profitability of new investment.
b. The government runs a budget surplus.
c. Households become spendthrifts and begin to save less.
d. An expected recession decreases the profitability of new investment.
11) Which of the following would encourage economic growth through increases in the
capital stock?
a. an increase in household savings
b. a change from an income tax to a consumption tax
c. a decrease in the government deficit
d. all of the above
12) During the expansion phase of the business cycle, which of the following eventually
increases?
a. employment
b. income
c. production
d. all of the above
13) From 1991 until 2001 the United States was in a period of
a. business cycle peaks. Unit 4 Examination 208 Principles of Economics
b. business cycle troughs.
c. expansion.
d. recession.
14) As the economy nears the end of a recession, which of the following do we typically
see?
a. increased spending on capital goods by firms
b. increasing interest rates
c. further decreases in consumer spending
d. all of the above
15) When the economy enters a recessionary phase of the business cycle, unemployment
tends to
a. increase.
b. decrease.
c. be unchanged.
d. change in the same direction as the rate of inflation.
16) Since 1950, expansions in the United States have become ________, while reces-
sions have become ________.
a. shorter; longer
b. longer; shorter
c. shorter; shorter
d. longer; longer
17) The aggregate demand curve shows the relationship between the ________ and
________.
a. real interest rate: quantity of real GDP supplied
b. nominal interest rate; quantity of real GDP demanded
c. inflation rate; quantity of real GDP demanded
d. price level; quantity of real GDP demanded
18) Which of the following best describes the “wealth effect”?
a. When the price level falls, the nominal value of household wealth rises.
b. When the price level falls, the real value of household wealth rises.
c. When the price level falls, the real value of household wealth falls.
d. When the price level falls, the nominal value of household wealth falls. Unit 4 Examination 209 Principles of Economics
19) Potential GDP is also referred to as
a. politico-economic GDP.
b. balanced-budget GDP.
c. full-employment GDP.
d. realized GDP.
20) The short-run aggregate supply curve has a
a. negative slope.
b. slope equal to zero.
c. slope equal to infinity.
d. positive slope.
21) If workers leave a country to seek out better opportunities in another country, then
this will
a. shift the short-run aggregate supply curve of the original country to the right.
b. shift the short-run aggregate supply curve of the original country to the left.
c. move the original economy down along a stationary short-run aggregate supply curve.
d. move the original economy up along a stationary short-run aggregate supply curve.
22) Workers expect inflation to rise from 3% to 5% next year. As a result this should
a. move the economy up along a stationary short-run aggregate supply curve.
b. move the economy down along a stationary short-run aggregate supply curve.
c. shift the short-run aggregate supply curve to the right.
d. shift the short-run aggregate supply curve to the left.
23) Which of the following correctly describes the automatic mechanism through which
the economy adjusts to long-run equilibrium?
a. the leftward shift in short-run aggregate supply that occurs after a recession
b. the rightward shift in short-run aggregate supply that occurs after a recession
c. the rightward shift in aggregate demand that occurs after a recession
d. the leftward shift in aggregate demand that occurs after a recession
24) Suppose the economy is at full employment and firms become more optimistic about
the future profitability of new investment. Which of the following will happen in the
short run?
a. Aggregate demand will shift to the left.
b. Output will decline.
c. Unemployment will decline.
d. Prices will decline.

25) Which of the following can explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise?
a. AD shifted to the right by less than SRAS.
b. SRAS shifted to the right by more than LRAS.
c. SRAS and AD do not shift.
d. AD shifted to the right by more than SRAS.
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