Macroeconomics-Spring2011-H2-Practice Exam One

1. The fundamental problem of economics is: A. The law of increasing opportunity costs. B. The scarcity of resources relative to human wants. C. How to get government to operate efficiently. D. How to create employment for everyone. 2. Economics can be defined as the study of: A. For whom resources are allocated to increase efficiency. B. How society spends the income of individuals. C. How scarce resources are allocated to best meet society's goals. D. What scarce resources are used to produce goods and services. 3. Opportunity cost may be defined as the: A. Goods or services that are forgone in order to obtain something else. B. Dollar prices paid for final goods and services. C. Dollar cost of producing a particular product. D. Difference between wholesale and retail prices. 4. A production-possibilities curve indicates the: A. Combinations of goods and services an economy is actually producing. B. Maximum combinations of goods and services an economy can produce given its available resources and technology. C. Maximum combinations of goods and services an economy can produce given unlimited resources. D. Average combinations of goods and services an economy can produce given its available resources and technology. 5. A point on a nation's production-possibilities curve represents: A. An undesirable combination of goods and services. B. Combinations of production that are unattainable, given current technology and resources. C. Levels of production that will cause both unemployment and inflation. D. The full employment of resources to achieve a particular combination of goods and services. 6. According to the law of increasing opportunity costs: A. Greater production leads to greater inefficiency. B. Greater production means factor prices rise. C. Greater production of one good requires increasingly larger sacrifices of other goods. D. Higher opportunity costs induce higher output per unit of input. 7. The points on a production-possibilities curve show: A. Desired output. B. Actual output. C. Potential output. D. All of the above. 8. A technological advance would best be represented by: A. A shift outward of the production-possibilities curve. B. A shift inward of the production-possibilities curve. C. A movement from inside the production-possibilities curve to a point on the production-possibilities curve. D. A movement from the production-possibilities curve to a point inside the production-possibilities curve.

9. Which of the following will cause the production-possibilities curve to shift inward? A. An increase in population B. A decrease in the size of the labor force C. A technological advance D. An increase in knowledge 10. The invisible hand refers to: A. Intervention in the economy by the government bureaucrats we do not see and over whom we have no control. B. Undiscovered natural resources. C. The allocation of resources by market forces. D. The person who has the responsibility to coordinate all the markets in a market economy. 11. When government directives do not produce better economic outcomes, which of the following has occurred? A. Government failure B. Market failure C. Macroeconomic failure D. Scarcity 12. If market signals result in pollution beyond the optimal level then: A. The economy experiences government failure. B. A laissez-faire approach will reduce the level of pollution. C. The market mechanism has failed to achieve social efficiency. D. The government is allocating resources inefficiently.

13. Choose the letter of the curve in Figure 1.2 that best represents a production-possibilities curve for two goods that obey the law of increasing opportunity costs. A. A B. B C. C D. D

14. Using Figure 1.4, an increase in the capacity to produce can be represented by a movement from point: A. A to point B. B. C to point E. C. A to point C. D. D to point E. 15. The best definition for GDP is: A. The sum of the physical amounts of goods and services in the economy. B. A dollar measure of output produced during a given time period. C. A measure of the per capita economic growth rate of the economy. D. A physical measure of the capital stock of the economy. 16. The best measure of how much output the average person would get if all output were divided evenly among the population would be: A. GDP. B. The economic growth of the economy. C. Per capita GDP. D. The capital stock of the economy. 17. Economic growth: A. Is an increase in output or real GDP. B. Causes a contraction in the production-possibilities curve. C. Involves reduced capacity in the short run. D. Cannot be sustained over time. 18. High U.S. incomes have led to the transformation of the United States into: A. A manufacturing economy. B. A consumer good economy. C. An agricultural economy. D. A service economy. 19. Who participates in markets? A. Business firms B. Business firms and consumers C. Consumers and government agencies D. Business firms, consumers, and government agencies

20. Which of the following is purchased in a factor market? A. A bag of jellybeans B. National defense C. The labor of a state university professor D. A motorized scooter 21. According to the law of demand, a demand curve: A. Has a negative slope. B. Is a horizontal, or flat, line. C. Has a positive slope. D. Exceeds the economy's ability to produce. 22. Ceteris paribus, which of the following is most likely to cause an increase in the quantity demanded of perfume? A. A decrease in the price of perfume B. A decrease in tastes for perfume C. An increase in income D. An increase in the price of electricity 23. Ceteris paribus, which of the following would you expect to have no effect on the demand for automobiles? A. A rise in the price of gasoline B. Consumer expectation that the price of automobiles will be lower next year C. Consumer expectation that a significant recession will develop and last for a year D. An increase in the price of automobiles 24. If bagels and donuts are substitutes, then a decrease in the price of donuts will result in: A. An increase in the demand for donuts. B. A decrease in the demand for donuts. C. An increase in the demand for bagels. D. A decrease in the demand for bagels. 25. A change in demand means there has been a shift in the demand curve, and a change in quantity demanded: A. Results from a change in price of other goods. B. Means a shortage or surplus will result from holding prices constant. C. Also means demand has shifted. D. Means that price has changed and there is movement along the demand curve. 26. A shift in supply is defined as a change in: A. Price. B. Quantity supplied because of a change in price. C. Equilibrium quantity. D. Supply because of a change in a non-price determinant. 27. Which of the following events would cause a rightward shift in the market supply curve for automobiles? A. A technological improvement which reduces the cost of production B. An increase in the wages of autoworkers C. A higher sales tax on automobiles D. A decrease in the number of sellers 28. Assume that steel is used to produce monkey wrenches. Ceteris paribus, if the price of steel rises, then: A. The supply curve for monkey wrenches will shift to the left. B. The supply curve for monkey wrenches will shift to the right. C. There will be a leftward movement along the initial supply curve for monkey wrenches. D. There will be a rightward movement along the initial supply curve for monkey wrenches.

29. At the equilibrium price there are: A. Shortages. B. Surpluses. C. Excess inventories. D. No shortages or surpluses. 30. If there is a shortage at a given price, then: A. That price is the equilibrium price. B. That price is greater than the equilibrium price. C. That price is less than the equilibrium price. D. There is no equilibrium price in the market. 31. A ballet performance had many empty seats. This implies that the: A. Hall where the performance was being held was very large. B. Price of the tickets must have been very low because of the low demand. C. Ballet group was not very well known. D. Price of the tickets must have been above the equilibrium price. 32. Assume two goods are substitutes. Ceteris paribus, a decrease in the price of one good will cause the equilibrium price of the other good to: A. Increase and the equilibrium quantity of the other good to increase. B. Increase and the equilibrium quantity of the other good to decrease. C. Decrease and the equilibrium quantity of the other good to increase. D. Decrease and the equilibrium quantity of the other good to decrease.

Macroeconomics-Spring2011-H2-Practice Exam One Key

1. The fundamental problem of economics is: A. The law of increasing opportunity costs. B. The scarcity of resources relative to human wants. C. How to get government to operate efficiently. D. How to create employment for everyone. Wants will always exceed resources. 2. Economics can be defined as the study of: A. For whom resources are allocated to increase efficiency. B. How society spends the income of individuals. C. How scarce resources are allocated to best meet society's goals. D. What scarce resources are used to produce goods and services. Economics studies how we get the most we can out of what we have. 3. Opportunity cost may be defined as the: A. Goods or services that are forgone in order to obtain something else. B. Dollar prices paid for final goods and services. C. Dollar cost of producing a particular product. D. Difference between wholesale and retail prices. The opportunity cost is your best alternative that is forgone. 4. A production-possibilities curve indicates the: A. Combinations of goods and services an economy is actually producing. B. Maximum combinations of goods and services an economy can produce given its available resources and technology. C. Maximum combinations of goods and services an economy can produce given unlimited resources. D. Average combinations of goods and services an economy can produce given its available resources and technology. The production possibilities curve shows us the possible choices we can make in regards to what to produce. 5. A point on a nation's production-possibilities curve represents: A. An undesirable combination of goods and services. B. Combinations of production that are unattainable, given current technology and resources. C. Levels of production that will cause both unemployment and inflation. D. The full employment of resources to achieve a particular combination of goods and services. Being on the curve is efficient, as we are getting the most we can out of our resources. 6. According to the law of increasing opportunity costs: A. Greater production leads to greater inefficiency. B. Greater production means factor prices rise. C. Greater production of one good requires increasingly larger sacrifices of other goods. D. Higher opportunity costs induce higher output per unit of input. The opportunity cost rises, incrementally as more of one particular good is produced. 7. The points on a production-possibilities curve show: A. Desired output. B. Actual output. C. Potential output. D. All of the above. Potential output is the maximum attainable output with our limited resources, and the production-possibilities curve shows the limits of our options.

8. A technological advance would best be represented by: A. A shift outward of the production-possibilities curve. B. A shift inward of the production-possibilities curve. C. A movement from inside the production-possibilities curve to a point on the production-possibilities curve. D. A movement from the production-possibilities curve to a point inside the production-possibilities curve. The shift would move the production-possibilities curve away from the origin, so that we can get more of both goods. 9. Which of the following will cause the production-possibilities curve to shift inward? A. An increase in population B. A decrease in the size of the labor force C. A technological advance D. An increase in knowledge A decrease in any factor of production will reduce our production possibilities. 10. The invisible hand refers to: A. Intervention in the economy by the government bureaucrats we do not see and over whom we have no control. B. Undiscovered natural resources. C. The allocation of resources by market forces. D. The person who has the responsibility to coordinate all the markets in a market economy. Resources are allocated efficiently as if directed by an unseen force. 11. When government directives do not produce better economic outcomes, which of the following has occurred? A. Government failure B. Market failure C. Macroeconomic failure D. Scarcity Government failure occurs when government action ends up making the market outcomes worse, not better. 12. If market signals result in pollution beyond the optimal level then: A. The economy experiences government failure. B. A laissez-faire approach will reduce the level of pollution. C. The market mechanism has failed to achieve social efficiency. D. The government is allocating resources inefficiently. Government intervention could improve on the market outcome.

13. Choose the letter of the curve in Figure 1.2 that best represents a production-possibilities curve for two goods that obey the law of increasing opportunity costs. A. A B. B C. C D. D A bowed-out production-possibilities curve means opportunity costs are not constant.

14. Using Figure 1.4, an increase in the capacity to produce can be represented by a movement from point: A. A to point B. B. C to point E. C. A to point C. D. D to point E. Production-possibility curves that are further away from the origin represent a greater ability to produce goods and services. 15. The best definition for GDP is: A. The sum of the physical amounts of goods and services in the economy. B. A dollar measure of output produced during a given time period. C. A measure of the per capita economic growth rate of the economy. D. A physical measure of the capital stock of the economy. GDP is a measure of how well a nation is doing economically, especially in terms of its production. 16. The best measure of how much output the average person would get if all output were divided evenly among the population would be: A. GDP. B. The economic growth of the economy. C. Per capita GDP. D. The capital stock of the economy. GDP per capita is an indicator of the average standard of living. 17. Economic growth: A. Is an increase in output or real GDP. B. Causes a contraction in the production-possibilities curve. C. Involves reduced capacity in the short run. D. Cannot be sustained over time. Economic growth allows more production and consumption. 18. High U.S. incomes have led to the transformation of the United States into: A. A manufacturing economy. B. A consumer good economy. C. An agricultural economy. D. A service economy. Once households have enough food they begin to demand many other things including services.

19. Who participates in markets? A. Business firms B. Business firms and consumers C. Consumers and government agencies D. Business firms, consumers, and government agencies Consumers, business firms, government agencies and foreigners participate in the marketplace. 20. Which of the following is purchased in a factor market? A. A bag of jellybeans B. National defense C. The labor of a state university professor D. A motorized scooter A factor market is where the factors of production, in this case labor, are bought and sold.

21. According to the law of demand, a demand curve: A. Has a negative slope. B. Is a horizontal, or flat, line. C. Has a positive slope. D. Exceeds the economy's ability to produce. Because price and quantity demanded are inversely related, the demand curve is downward sloping (has a negative slope). 22. Ceteris paribus, which of the following is most likely to cause an increase in the quantity demanded of perfume? A. A decrease in the price of perfume B. A decrease in tastes for perfume C. An increase in income D. An increase in the price of electricity Quantity demanded and price are inversely related. Tastes and income changes would cause a change in demand (a shift) and the price of electricity would impact the supply of perfume. 23. Ceteris paribus, which of the following would you expect to have no effect on the demand for automobiles? A. A rise in the price of gasoline B. Consumer expectation that the price of automobiles will be lower next year C. Consumer expectation that a significant recession will develop and last for a year D. An increase in the price of automobiles An increase in the price of automobiles will cause a movement along the demand curve. The entire curve would not change. 24. If bagels and donuts are substitutes, then a decrease in the price of donuts will result in: A. An increase in the demand for donuts. B. A decrease in the demand for donuts. C. An increase in the demand for bagels. D. A decrease in the demand for bagels. Consumers will substitute the relatively cheaper donuts when the price of bagels rises, causing the demand for bagels to decrease. 25. A change in demand means there has been a shift in the demand curve, and a change in quantity demanded: A. Results from a change in price of other goods. B. Means a shortage or surplus will result from holding prices constant. C. Also means demand has shifted. D. Means that price has changed and there is movement along the demand curve. Movements along a demand curve are a response to price changes for that good. 26. A shift in supply is defined as a change in: A. Price. B. Quantity supplied because of a change in price. C. Equilibrium quantity. D. Supply because of a change in a non-price determinant. Changes in supply occur because a change in a non-price determinant will cause a shift in the supply curve. 27. Which of the following events would cause a rightward shift in the market supply curve for automobiles? A. A technological improvement which reduces the cost of production B. An increase in the wages of autoworkers C. A higher sales tax on automobiles D. A decrease in the number of sellers Technological improvements that reduce the cost of production will improve profit margins at every price level which increases supply. An increase in wages and a decrease in the number of sellers decrease supply and a higher sales tax will decrease demand.

28. Assume that steel is used to produce monkey wrenches. Ceteris paribus, if the price of steel rises, then: A. The supply curve for monkey wrenches will shift to the left. B. The supply curve for monkey wrenches will shift to the right. C. There will be a leftward movement along the initial supply curve for monkey wrenches. D. There will be a rightward movement along the initial supply curve for monkey wrenches. When steel prices increase, the costs to produce monkey wrenches increase. As costs increase, profit margins decrease, making it less profitable to produce monkey wrenches at all price levels. 29. At the equilibrium price there are: A. Shortages. B. Surpluses. C. Excess inventories. D. No shortages or surpluses. At the equilibrium price, quantity demanded is equal to quantity supplied so there will be no shortages or surpluses. 30. If there is a shortage at a given price, then: A. That price is the equilibrium price. B. That price is greater than the equilibrium price. C. That price is less than the equilibrium price. D. There is no equilibrium price in the market. At prices below equilibrium, quantity demanded will be greater than quantity supplied, so a market shortage will exist. 31. A ballet performance had many empty seats. This implies that the: A. Hall where the performance was being held was very large. B. Price of the tickets must have been very low because of the low demand. C. Ballet group was not very well known. D. Price of the tickets must have been above the equilibrium price. At prices above equilibrium, a market surplus exists. 32. Assume two goods are substitutes. Ceteris paribus, a decrease in the price of one good will cause the equilibrium price of the other good to: A. Increase and the equilibrium quantity of the other good to increase. B. Increase and the equilibrium quantity of the other good to decrease. C. Decrease and the equilibrium quantity of the other good to increase. D. Decrease and the equilibrium quantity of the other good to decrease. If the price of one good decreases, consumers will substitute the relatively cheaper good causing the demand for the other good to decrease. A decrease in demand causes equilibrium price and quantity to decrease.