Fundamentals – Test 5

1. According to the definition, when is someone considered unemployed?

A) when a person does not have a job or is working less than 20 hours per week
B) when a person does not have a job and has given up looking for a job
C) when a person does not have a job and receives unemployment compensation
D) When a person does not have a job and is looking for a job

2. When the effect of price changes is taken out of GDP, we have ____.
A) inflated GDP
B) undervalued GDP
C) real GDP
D) GDP per capita

3. How do currency exchange rates affect international trade?

A) The supply and demand for certain currencies can affect the demand for imports and exports.
B) When the dollar is high, imports fall and exports rise.
C) Currency exchange rates do not affect international trade.
D) Changes in the value of international currencies only affects the currency market.

4. In a free enterprise system, the driving force of private businesses is:

A) altruism
B) maximum output
C) profit
D) minimum cost

5. Market competition pushes a price up toward its market-clearing level. Which of the following best
describes that competition?
A) competition between buyers and sellers
B) competition among sellers
C) competition among buyers
D) competition between sellers and the government

6. Let's assume that a firm's total weekly costs are as follows: 1) Salaries = $12,400. 2) Supplies = $1,000. 3)
Rent = $1,800. In addition, the owners could have earned interest of $200 per week if they had chosen to put
$80,000 of their own money into a bank instead of investing it into their business. This firm's weekly explicit
costs are:
A) $15,200.
B) $14,400.
C) $15,000.
D) $14,800.

7. Which one is true in a period of inflation?

A) purchasing power is decreased
B) there is a decrease in the price of goods and services
C) company revenues are increased

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 Fundamentals – Test 5

D) wages are decreased

8. If the demand for sushi increases, what will be the effect on firms already in the market and potential new
entrants?
A) Firms already in the market for sushi will earn higher profits, and new firms will enter the market.
B) Firms already in the market for sushi will earn higher profits, and new firms will avoid the market.
C) Firms already in the market for sushi will earn lower profits, and new firms will avoid the market.
D) Firms already in the market for sushi will earn lower profits, and new firms will enter the market.

9. Which of the following is an example of an incentive?

A) patriotism
B) good health
C) wages
D) All of the above

10. In a monopoly, profits

A) are guaranteed
B) attract other firms to the industry
C) are secure, if earned, because of barriers to entry
D) are never taxed

11. According to Keynesian analysis, a decrease in the money supply would

A) Raise the price level and output in the economy.
B) Lower the price level and output in the economy.
C) Raise the price level in the economy.
D) Lower the price level in the economy.

12. What do economists who belong to the supply-side school of thought believe the response to a cut in
income tax rates will be?
A) smaller government budget deficits in the short run
B) more working, saving, and investing
C) slower economic growth
D) less working, saving, and investing

13. A price ceiling is below the free market price. This causes:
A) neither a shortage nor a surplus.
B) an equilibrium situation.
C) a surplus.
D) a shortage.

14. In the circular flow model, business interacts with individuals that are consumers in the:
A) product market
B) production and distribution market
C) public goods market

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 Fundamentals – Test 5

D) factors of production market

15. Amal is a mechanic who owns his own business shop in Houston.
A) Amal has an incentive to use his tools and equipment carefully and productively
B) Since he owns his shop and has already paid for his tools, Amal has no incentive to use them carefully and
productively in the future
C) both a and b
D) neither a nor b

16. Due to the influences of John Maynard Keynes, many countries around the world decided to increase the
role of the government in their economies. Countries with a combination of private sector and considerable
government influence are called:
A) Mixed economies
B) Laissez-faire economies
C) Command economies
D) Combination economies

17. In competitive labor markets wage and income differentials are generally due to which one of the
following?
A) prejudice and discrimination in the workplace
B) favoritism by the managers of the firm
C) differences in worker productivity
D) random factors, such as height and weight

18. In the system of floating exchange rates, what determines the value of one nation's currency in relation
to those of another nation?
A) International Trade Bank
B) Law of supply and demand
C) Exchange rate determined by each country
D) Securities and Exchange Commission

19. During the contraction phase of the business cycle:

A) business profitability increases.
B) unemployment generally rises.
C) inflation typically increases.
D) smaller companies expand into larger companies.

20. A perfectly elastic demand curve:

A) is perfectly upward sloping at a 45 degree angle from upper right to lower left.
B) runs parallel to the vertical axis.
C) runs parallel to the horizontal axis.
D) is perfectly downward sloping at a 45 degree angle from upper left to lower right.

21. If a purely competitive firm produces 12 products, has an average variable cost of $5, an average total

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 Fundamentals – Test 5

cost of $7, and an average economic profit of $3, then what is the selling price of the product?
A) $10
B) $3
C) $12
D) $15

22. If a business adds a variable input (labor for example) to a fixed input (office space, machinery, etc.), then
its output will:
A) decrease for a while, then increase after a certain amount of the variable input.
B) increase for a while, then decrease after a certain amount of the variable input.
C) decrease indefinitely as long as it keeps adding the variable input.
D) increase indefinitely as long as it keeps adding the variable input.

23. Suppose that 52,000 people attended a concert at a ticket price of $46. A week earlier 48,000 people
attended the same concert at a ticket price of $54. Assuming no changes in other economic variables, the
price elasticity of demand for tickets to this concert based on this example is:
A) 6.7
B) 1.33
C) 2
D) 0.50

24. Reasons for diseconomies of scale include:

A) assembly line type of activities tend to be inefficient.
B) excessive taxes and regulations.
C) large company bureaucracy and too many layers of management.
D) not enough machines for the amount of workers which were hired.

25. The money supply measure that contains only those forms of money that people readily use to purchase
goods and services in grocery stores and department stores, is called:
A) M3
B) The monetary base
C) M2
D) M1

26. Market-clearing prices perform important tasks in a free enterprise economy. Which of the following is
one of those tasks?
A) provide incentives for people to produce goods and services
B) ration goods and services
C) provide information about consumers' wants and producers' costs
D) All of the above

27. Which one of the following would create a significant barrier to entry in a market?
A) diseconomies of scale
B) a patent

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 Fundamentals – Test 5

C) product differentiation
D) a trademark

28. What is traded in stock markets like the New York Stock Exchange?
A) the ownership of businesses
B) U. S. Treasury securities
C) bonds, bills, and notes
D) commodities, such as corn and soybeans

29. Which of the following is accurate about a monopoly industry?

A) A monopolist is always profitable in the short and long run, because there are barriers to entry.
B) A monopolist operates at zero economic profits in the long run.
C) Monopolies can earn economic profits in the long run because there are significant barriers to enter the
industry
D) A monopoly does not have control over the price. It must accept a constant price set by the free market
equilibrium price.

30. Which one of the following is a basic economic question that every economy must answer?
A) What is marginalism?
B) What will be produced?
C) How will the concept of opportunity cost be applied?
D) What is the best way to maximize profit?

31. When the United States sells cars that were produced domestically to China, these are called:
A) imports
B) capital goods
C) exports
D) investment goods

32. The General Agreement on Tariffs and Trade (GATT) is based upon the principle of ___.
A) establishing a world-wide minimum wage law.
B) tariff reductions through negotiations.
C) establishing one currency for the world.
D) converting tariffs into import quotas.

33. Wages are received for

A) land
B) finished goods
C) foreign trade
D) labor

34. In what natural resource is the Middle East abundant?

A) fertile soil
B) oil

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 Fundamentals – Test 5

C) timber
D) silver

35. The median voter theorem suggests ___.

A) voters should pick the candidate with better positions than the median candidate.
B) median voters decide elections.
C) voters should pick the candidate closest to the median position.
D) half the voters are liberal and half are conservative.

36. Which one of the following is a basic element of capitalism?

A) Capital must first be invested in businesses that are failing in profits.
B) Prices are established by the states.
C) The production of goods/services for sale on the market takes place by private companies separated from
the government.
D) There is a lack of a viable monetary system.

37. In a market economy, what helps to bridge the gap when consumer items are not quite within the
financial reach of the mass of the consuming public?
A) entitlement programs
B) inflation
C) supply
D) credit

38. In industries with natural monopoly-like characteristics, the government has tended to ___.
A) encourage new entry.
B) regulate price and erect legal barriers to competition.
C) encourage existing competition.
D) break up the monopoly.

39. According to the law of demand,

A) buyers purchase more at lower prices than higher prices
B) price changes have little effect on the amount of something people will buy
C) buyers are more willing to pay for things that aren't scarce
D) people buy all they need of something regardless of its price

40. Automatic stabilizers, such as unemployment compensation, welfare programs and pre-approved
subsidies to financially challenged groups do not suffer from the _____ because they _____ from
government or policymakers.
A) recessionary gap; require approval
B) inflationary gap; require approval
C) information and policy lags; don't need approval
D) impartial and discrimination lags; don't need approval

41. The price for peanut butter rises. Assuming the supply for jam is constant, what will happen to the price

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 Fundamentals – Test 5

of jam?
A) It will increase.
B) It cannot be determined.
C) It will stay the same.
D) It will decrease.

42. Which of the following do economists agree is a legitimate argument in favor of trade barriers?
A) they can protect infant industries
B) they raise a country's living standard
C) they increase total employment
D) All of the above

43. Which one of the following statements most accurately describes the risk and return of owning bonds
versus stocks?
A) The average return on stocks is lower than the average return on bonds over the long run, and stocks are
less risky than bonds.
B) The average return on stocks is higher than the average return on bonds over the long run, and stocks are
riskier than bonds.
C) The average return on stocks is lower than the average return on bonds over the long run, and stocks are
riskier than bonds.
D) The average return on stocks is higher than the average return on bonds over the long run, and stocks are
less risky than bonds.

44. The individual firm, operating under perfect competition, is characterized as:
A) a price-maker.
B) one of a few sellers.
C) a price strategies.
D) a price-taker.

45. What is the explanation for the kink in the kinked demand curve of an oligopolist?
A) In an oligopoly industry there are no barriers to entry in the short run, but not in the long run. The
demand curve is more elastic in the short run and less elastic in the long run.
B) When prices increase the elasticity of the oligopolist's demand curve increases. At lower prices, the
elasticity is usually zero or close to zero.
C) In an oligopoly industry there are two firms. Each firm has its own separate demand curve
D) In an oligopoly industry, rival firms usually lower their price if a competitor lowers its price. Rival firms
usually choose to not change their price if a competitor raises its price.

46. Which one is an advantage of consumer credit?

A) buying more than you can afford
B) help for emergencies
C) high interest rates
D) fraud

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 Fundamentals – Test 5

47. If the central bank wanted to use all four of its tools to engage in expansionary monetary policy it would:
A) sell government securities, lower reserve requirements, decrease the discount rate, and decrease the
interest rate on bank reserves
B) sell government securities, raise reserve requirements, increase the discount rate, and increase the
interest rate on bank reserves
C) buy government securities, raise reserve requirements, increase the discount rate, and increase the
interest rate on bank reserves
D) buy government securities, lower reserve requirements, decrease the discount rate, and decrease the
interest rate on bank reserves

48. When economists refer to capital resources, they are describing

A) money in banks
B) factories, equipment, and machinery used for producing goods and services
C) fertile soil, mineral deposits, forests and similar sources of raw materials
D) the workers and manager who produce goods and services

49. When countries restrict free trade through tariffs, quotas, or other forms of protectionism, it generally
leads to:
A) an improved balance of payments.
B) increased domestic employment.
C) a decrease in productivity and a lower standard of living.
D) less short-term employment in the protected industry.

50. What is a tax imposed by a government at the point of sale on retail goods and services?
A) income tax
B) property tax
C) sales tax
D) real estate tax

51. Which one of the following is NOT a barrier to entry?

A) research and development
B) patents
C) great product
D) economies of scale

52. Which of the following is a common misconception about income inequality?

A) Greater income inequality means a higher absolute standard of living for the wealthy and a lower one for
the poor.
B) Countries with greater income inequalities have higher standards of living.
C) Greater income inequality means that the relative difference in incomes between the rich and the poor is
widening.
D) None of the above.

53. In the equation GDP=C+I+G+X, X stands for

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 Fundamentals – Test 5

A) Exports
B) expenditures.
C) exports minus imports
D) imports minus exports

54. In a market economy, prices provide information to consumers. This means that prices
A) identify goods that are not scarce
B) inform the government what goods it should order to be produced
C) tell households which products to buy
D) often tell businesses the value consumers place on different goods

55. Which of the following is a characteristic of an oligopoly industry?

A) There are exactly 2 firms in this industry.
B) Firms in this industry are not dependent on each other's behaviors.
C) There are no barriers for a new firm to enter this industry.
D) None of the above.

56. If the economy is in recession, how might fiscal policy makers try to restore full employment and full
production?
A) by increasing government expenditures and reducing taxes
B) by reducing the money supply and raising interest rates
C) by increasing the money supply and reducing interest rates
D) by reducing government expenditures and increasing taxes

57. Which one of the following would appropriately be called "the nation's bank" or "the bankers' bank?"
A) the Bank of America
B) the Federal Reserve
C) the U. S. Treasury
D) The United States Mint

58. The long-run price for monopolistic competition is

A) price=marginal cost.
B) price=average fixed cost.
C) price=average variable cost.
D) price=average total cost.

59. The four phases of the business cycle, in the correct order, are ___.
A) peak, expansion, trough, contraction.
B) expansion, contraction, peak, trough.
C) contraction, trough, peak, expansion.
D) expansion, peak, contraction, trough.

60. Which one of the following is INCORRECT about a price ceiling?

A) A price ceiling could prevent the price of a good from changing to its market price.

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 Fundamentals – Test 5

B) A price ceiling will likely create a surplus of the good for which it is set.
C) A price ceiling keeps the price of a good below a certain price.
D) A price ceiling set below the market price will create a shortage.

61. Laws that are designed to promote competition and prevent monopolies are called:
A) complex laws
B) antitrust laws
C) trading laws
D) natural laws

62. Tom and Pam can both paint and do accounting. Pam is better at both. She is ten times the painter and
five times the accountant. According to comparative advantage, what should each specialize in?
A) Pam paints and does accounting, Tom does nothing
B) Pam paints, Tom paints
C) Pam paints, Tom does accounting
D) Tom paints, Pam does accounting

63. Because of scarcity, what questions must be answered by the government regarding resources based on a
command economic system?
A) where will production occur and by who
B) what will be produced, by who and for whom
C) why will production occur and for whom
D) when will production occur and for whom

64. If the economy were growing at 6 percent, in real terms, but inflation was 20 percent, the most
appropriate policies would be:
A) expansionary fiscal policy and expansionary monetary policy.
B) restrictive fiscal policy and restrictive monetary policy.
C) restrictive fiscal policy and expansionary monetary policy.
D) expansionary fiscal policy and restrictive monetary policy.

65. According to the Bureau of Labor Statistics, output of the non-farm business sector rose 3.7 percent
during the third quarter of 2013 and hours worked rose by 1.7 percent. What do these economic indicators
reflect?
A) Labor productivity fell 2.0 percent.
B) Labor productivity rose 3.7 percent.
C) Labor productivity rose by 2.0 percent.
D) Labor productivity rose 5.4 percent.

66. Let's suppose that the equilibrium price of gasoline has increased recently. Which of the following
combinations of changes in demand and supply best explains this price increase?
A) Demand has decreased significantly, and supply has decreased slightly.
B) Demand has decreased slightly, and supply has decreased significantly
C) Demand has increased slightly, and supply has increased significantly.

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 Fundamentals – Test 5

D) Demand has decreased slightly, and supply has increased significantly.

67. Which of the following is true in a market economy?

A) savers are seldom able to exchange with businesses that want to invest
B) every dollar of investment requires a dollar's worth of saving
C) investment reduces the quantity of capital resources
D) financial markets have little to do with an economy's growth

68. Expansionary fiscal policies

A) result in less economic activity
B) increase government spending
C) decrease taxes
D) both B and C

69. Henry Ford and his assembly line advanced what economic theory?
A) diminishing returns
B) production possibilities
C) labor unions
D) specialization of labor

70. The income effect as it relates to the law of supply states that:
A) As the price of the product increases, other competing products, ceteris paribus, will become less
attractive to produce.
B) As the price of the product decreases, other competing products, ceteris paribus, will become less
attractive to produce.
C) As the price of the product decreases, the seller's income rises. This gives the seller greater incentive and
ability to produce more products.
D) As the price of the product increases, the seller's income rises. This gives the seller greater incentive and
ability to produce more products.

71. Which of the following is NOT a natural resource?

A) a river
B) a lot on Park Avenue
C) a dam
D) a fish

72. Which of the following is the best definition of profit?

A) the money a business takes in from its sale
B) the money left from sales after expenses have been paid
C) an operational device that makes business owners rich
D) what is left after all merchandise has been sold

73. Competitive behavior and economic choice are the result of ___.
A) scarcity

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 Fundamentals – Test 5

B) greed
C) poor government planning
D) altruism.

74. Improper disposal of hazardous waste is an example of

A) negative externality.
B) positive externality.
C) optimal pollution.
D) None of the above.

75. Let's assume that a country is operating on the production possibilities curve. Without a shift in the curve,
in order to get more of one good, what must happen?
A) The country must eliminate unemployment.
B) It is impossible to get more of one good when you are producing on the curve.
C) The country must produce more of another good.
D) The country must produce less of another good.

76. The cost to produce one more unit of output is called ___.
A) variable cost
B) average cost
C) marginal cost
D) unit cost

77. Which of the following would enable most people in a nation to consume more goods and services over a
period of time?
A) the government distributes more money for people to spend
B) businesses spend less on new capital resources
C) technological changes diminishes
D) labor productivity increases

78. Consumers expect a surplus for a product to develop in a market. What is the likely effect on consumers'
demand for this product today?
A) stay the same
B) decrease
C) fluctuate
D) increase

79. When there is a general increase in consumer demand for products, the outcome might be
A) demand pull inflation
B) a significant decline in the CPI
C) cost-push inflation
D) a significant decrease in GNP

80. Monetary policy differs from fiscal policy in that monetary policy is

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 Fundamentals – Test 5

A) more sensitive to political considerations

B) under the control of the Federal Reserve System
C) more time consuming to implement
D) related to tax increases and decreases

81. The sum of all income earned by citizens or nationals of a country, regardless of whether the underlying
economic activity takes place domestically or abroad.
A) purchasing power parity
B) gross national income
C) gross domestic income
D) average income statement

82. Which one of the following could determine the type of economic system a country has?
A) climate
B) resources
C) scarcity
D) utility

83. Discounting procedures used to measure the value of future income are important in decisions
involving ___.
A) human capital investments but not physical capital investments.
B) both human and physical capital investments.
C) physical capital investments but not human capital investments.
D) neither human nor physical capital investments.

84. Nancy raises the price she charges in her window washing business and her total revenue goes up. This
shows that
A) the window washing business is not a real market
B) the demand for Nancy's cleaning service is inelastic
C) the demand for Nancy's cleaning service is elastic
D) the law of demand does not apply to Nancy's business

85. The term "business cycle" refers to:

A) how business profits are cycled back through an economy
B) the behavior of monetary aggregates over a period of time
C) how small companies grow into large corporations
D) fluctuations in the level of output and employment

86. If the Consumer Price Index consistently overstates the rate of inflation, then people who receive cost of
living allowances will:
A) see their incomes fall faster than the true inflation rate
B) see their relative incomes rise and fall in a somewhat arbitrary manner
C) see their incomes rise faster than the true inflation rate
D) see their incomes remain constant relative to the true inflation rate

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 Fundamentals – Test 5

87. Compared to socialist economies, empirical evidence has demonstrated that market economies:
A) have a more equal distribution of income
B) are more efficient
C) have more built in inefficiencies
D) usually lack sufficient resources to be successful

88. How do buyers compete against each other?

A) by bidding higher prices or waiting in line for shorter periods of time
B) by bidding higher prices or waiting in line for longer periods of time
C) by bidding lower prices or waiting in line for shorter periods of time
D) by bidding lower prices or waiting in line for longer periods of time

89. A stock market, such as the New York Stock Exchange, allows people to:
A) acquire ownership in corporations.
B) sell household items bundled into groupings.
C) improve their purchasing power by combining with other purchasers of retail items.
D) buy and sell real estate.

90. A business owned by a single individual that is responsible for all its debts is called a:
A) corporation
B) agency
C) sole proprietorship
D) partnership

91. According to our text, free international trade:

A) prevents unemployment and inflation (keeps them close to zero percent) in the trading countries in the
short run.
B) in the long run raises total world output and the standard of living of the individual trading countries.
C) hurts domestic industries and lowers the standard of living of most countries in the long run.
D) provides maximum government autonomy over the monetary system in the trading countries.

92. If a customer deposits $2,000 in new money (for example, he sold $2,000 of his government bonds to the
Fed), and if the nation's reserve requirement is 20%, then how much will this deposit maximally be able to
change the entire nation's money supply?
A) $500
B) $2,000
C) $10,000
D) $400

93. What is the primary function of a bank?

A) accepting deposits and making loans
B) striking coins from metal
C) printing currency

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 Fundamentals – Test 5

D) selling safe deposit box services

94. An economist estimates that her country's consumption expenditures this year amount to $15,000, gross
private domestic investments are $5,000, and the government spends $10,000 on final goods and services.
Exports amount to an estimated $3,000, and imports add up to $4,000. Production of intermediate goods
and services are estimated to be $7,000 this year. According to the estimates of this economist, what is this
country's GDP?
A) $44,000
B) $29,000
C) $36,000
D) $37,000

95. How can anyone tell if a good is scarce?

A) The price of a scarce good is positive.
B) The price of a scarce good is negative.
C) The price of a scarce good is necessarily high.
D) The price of a scarce good is zero.

96. A graph of a typical demand curve shows a _____ line which illustrates that as the price of the product
_____, the quantity purchased _____.
A) downward sloping; increases; increases
B) downward sloping; decreases; increases
C) upward sloping; decreases; increases
D) upward sloping; increases; increases

97. If interest rates rise, bond prices will

A) increase.
B) stay the same.
C) decrease.
D) fluctuate.

98. When consumers' tastes and preferences change in a manner that increases the demand for a product
then, in the short run:
A) the price will rise
B) supply will increase
C) the price will fall
D) quantity supplied will decrease

99. _____ is an example of a service.

A) A taxi cab ride
B) A restaurant meal
C) Dry-cleaning fluid
D) A concert t-shirt

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 Fundamentals – Test 5

100. Every country must deal with the situation in which consumers' wants are greater than the resources
available to satisfy those wants. This situation is known as ____.
A) law of demand
B) scarcity
C) production
D) None of the above

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 Fundamentals – Test 5

Answer Keys:
1. D 21. A 41. D 61. B 81. B
2. C 22. B 42. A 62. C 82. B
3. A 23. D 43. B 63. B 83. B
4. C 24. C 44. D 64. B 84. B
5. C 25. D 45. D 65. C 85. D
6. A 26. D 46. B 66. B 86. C
7. A 27. B 47. D 67. B 87. B
8. A 28. A 48. B 68. D 88. B
9. D 29. C 49. C 69. D 89. A
10. C 30. B 50. C 70. D 90. C
11. B 31. C 51. C 71. C 91. B
12. B 32. B 52. A 72. B 92. B
13. D 33. D 53. C 73. A 93. A
14. A 34. B 54. D 74. A 94. B
15. A 35. B 55. D 75. D 95. A
16. A 36. C 56. A 76. C 96. B
17. C 37. D 57. B 77. D 97. C
18. B 38. B 58. D 78. B 98. A
19. B 39. A 59. D 79. A 99. A
20. C 40. C 60. B 80. B 100. B

17