Mid-term Exam

Multiple Choice Questions

1. Economics is a social science that studies how individuals, institutions, and society may: A. Expand the amount of productive resources available to them B. Attain a minimum level of unemployment C. Best use scarce resources to achieve the maximum satisfaction of economic wants D. Reduce the prices of goods and services to consumers

2. The key economic concept that serves as the basis for the study of economics is: A. Inflation B. Unemployment C. Money D. Scarcity

3. A recurring theme in economics is that people: A. Have unlimited resources, but limited economic wants B. Can increase resources by limiting their economic wants C. Have limited economic wants and limited resources D. Have unlimited economic wants, but limited resources

4. As a consequence of the problem of scarcity: A. There is never enough of anything B. Individuals have to make choices from among alternatives C. Production has to be planned by government D. Things which are plentiful have relatively high prices

5. What is the economic meaning of the expression that "there is no such thing as a free lunch"? A. It means that scarce resources are used up to provide freebies and giveaways B. It means that sometimes people may take friends out to lunch and pay for them C. It means that all items in the lunch menu have specific prices D. It means that products only have value because people are willing to pay for them

6. The idea in economics that "there is no free lunch" means that: A. Businesses would go bankrupt if they offered free lunches B. The thought of a free lunch is often better than the reality of consuming it C. There are opportunity costs involved when scarce resources are used up for free lunches D. Businesses use free lunches to attract customers but this advertising practice is inefficient

7. Opportunity cost is best defined as: A. Marginal cost minus marginal benefit B. The time spent on an economic activity C. The value of the best forgone alternative D. The money cost of an economic decision

8. Tammie makes $150 a day as a bank clerk. She takes off two days off work without pay to fly to another city to attend the concert of her favorite music group. The cost of transportation for the trip is $250. The cost of the concert ticket is $50. The opportunity cost of Tammie's attending the concert is: A. $600 B. $450 C. $300 D. $50

9. When a state government chooses to build more roads, the required resources are no longer available for spending on public education. This dilemma illustrates the concept of: A. Production expenses B. Unemployment issues C. Unintended consequences D. Opportunity cost

10. The opportunity cost of constructing a new public highway is the: A. Money cost of hiring contractors and construction workers for the new highway B. Value of other goods and services that must be sacrificed to construct the new highway C. Expected cost of constructing the new highway in a future year D. Value of shorter driving times and distances when the new highway is completed

11. After graduating from high school, Ron Willis plans to go to college. The college tuition is $15,000 a year. Instead of going to college, Ron could take a full-time job that pays $20,000. If Ron decides to go to college, what is his opportunity cost of attending for one year? A. $5,000 B. $15,000 C. $20,000 D. $35,000

12. The opportunity cost to a consumer who smokes cigarettes is the: A. Products that the consumer could have bought instead of cigarettes B. Costs imposed on others who inhale tobacco smoke C. Amount of tax levied on the cigarettes this consumer buys D. Cost of complementary products such as lighters, ashtrays, and cigarette holders

13. One major assumption of the economic perspective is: A. That scarcity is more important than choice B. That costs are more important than benefits C. That individuals' behavior reflect rational self-interest D. That there are scarce resources in the economy

14. The observation that people compare the marginal benefits with the marginal costs in making such decisions as how to spend time, which products to buy, whether or not to work, and which goods to produce and sell, is most closely associated with: A. The other things being equal assumption B. The economic perspective C. Macroeconomic analysis D. Policy economics

15. Which expression is another way of saying "marginal cost"? A. Scarce resources B. Additional cost C. Opportunity cost D. Unrecognized cost

16. Which expression is another way of saying "marginal benefit"? A. Benefits given up B. Unintended gain C. Employment benefits D. Extra benefit

17. Henry wants to buy a book. The economic perspective suggests that Henry will buy the book if: A. He has enough money to pay for the marginal cost of the book B. The marginal benefit of the book is a positive value C. The marginal cost of the book is greater than its marginal benefit D. The marginal benefit of the book is greater than its marginal cost

18. From an economic perspective, when a consumer decides to buy more life insurance, the consumer has most likely concluded that the: A. Marginal costs of more insurance coverage is negative B. Marginal benefits of more insurance coverage is greater than zero C. Marginal benefits of more insurance coverage are greater than the marginal costs D. Marginal costs of more insurance coverage are equal to the payment for the extra coverage

19. From an economic perspective, when a student decides to attend another year of college, the student has concluded that the marginal: A. Benefits of attending college are greater than the marginal costs B. Costs of attending college has decreased that year C. Benefits of attending college has increased that year D. Costs of attending college will be partly subsidized by the parents or the government

20. Competition denotes a condition where: A. The diffusion of economic power limits its potential abuse B. A given product can be purchased at a wide range of prices C. There are significant hurdles to entering a market D. A few large sellers are constantly jostling for market share

21. Which statement is correct? A. In a market system, buyers and sellers must be in face-to-face contact with each other B. Prices affect the distribution of goods in a market system but not the allocation of resources C. In a market system, prices serve to ration goods and services to consumers D. The operation of a market system has little, if any, effect on the distribution of income in the economy

22. The construction and use of capital goods to aid in the production of consumer goods illustrates the: A. Division of labor B. Specialization of resources C. Coordinating and regulating function of prices D. Roundabout but more efficient production

23. A characteristic of the market system is: A. Extensive use of direct methods of production B. Extensive use of barter C. Extensive use of capital goods D. Low interest rates

24. All of the following statements describe a market economy except: A. Government prescribes the desired prices for goods and services B. Prices serve as a signaling mechanism to buyers and sellers C. The allocation of resources is determined by their prices D. The actions of buyers and sellers establish a product's price

25. The system where workers concentrate on specialized tasks to make a product is referred to as: A. A coincidence of wants B. Roundabout production C. Freedom of enterprise D. Division of labor

26. How does human specialization contribute to an economy's output? A. It makes use of differences in abilities B. It is a process of creative destruction C. It works like an "invisible hand" D. It decreases derived demand

27. Which of the following is not a reason why specialization and trade are beneficial to society? A. The output of economic goods may be increased even without any increase in resources B. Scarce resources are utilized more efficiently C. Division of labor fosters learning by doing, thus lowering the unit-costs of products D. Firms and workers become less dependent on others for producing goods and services

28. A required element of specialization is: A. A capitalist economy B. Exchange and trade C. Free enterprise D. Competition

29. Which is an example of barter? A. A person trades a desk for a box of tools B. A person buys clothes at a used clothing store C. A gift of tuition money from parents to their children D. The purchase of stock on the New York Stock Exchange

30. An economic system in which money is not used is a: A. Planned economy B. Market economy C. Mixed economy D. Barter economy

31. Which of the following is necessary to make a trade in a barter economy? A. Money B. Unlimited wants C. A medium of exchange D. A coincidence of wants

32. Consider a barter system where you have pens, but you want pencils. To satisfy your want there must be: A. Money in the economy B. Easy entry into the market C. Specialization D. Coincidence of wants

33. The use of money for exchange: A. Increases the use of barter B. Encourages more specialization in production C. Reduces consumer sovereignty D. Raises the need for a coincidence of wants

34. Anything that is generally acceptable in trading for goods and services is a: A. Medium of exchange B. Measure of value C. Store of value D. Token money

35. All of the following would affect the position of the demand curve for personal computers, except the: A. Price of computer software B. Size of the population C. Price of personal computers D. Expected future price of personal computers

36. If the price of ground beef increases, the demand for hamburger buns is predicted to: A. Increase B. Decrease C. Remain constant D. Shift to the right

37. An increase in the price of product B leads to an increase in the demand for product C. This indicates that products B and C are: A. Complementary goods B. Substitute goods C. Inferior goods D. Normal goods

38. All of the following would cause an increase in the demand for private airplanes at a given price, except a(n): A. Decrease in interest rates B. Increase in consumer incomes C. Increase in plane fares D. Decrease in the costs of making private airplanes

39. When economists say that the demand for a product has decreased, they mean that: A. The demand curve has shifted to the right B. The product has become particularly scarce for some reason C. The product has become more expensive and thus consumers are buying less of it D. Consumers are now willing and able to buy less of this product at each possible price

40. Which would have no effect on the demand for motorcycles? A. A change in buyers' incomes B. A change in the prices of cars C. A change in the cost of steel D. A change in the price of gas

41. An increase in the price of product G will result in a: A. Shift of the demand curve for G to the left B. Decrease in the demand for G C. Larger quantity of G demanded D. Movement up and to the left along the demand curve for G

42. Refer to the above graph with three demand curves. An increase in quantity demanded would be illustrated by a change from: A. Point 4 to point 6 B. Point 2 to point 1 C. Point 4 to point 1 D. Point 2 to point 5

43. Refer to the above graph with three demand curves. A decrease in demand would be illustrated as a change from: A. Point 1 to point 4 B. Point 1 to point 3 C. Line C to B D. Line A to C

44. Refer to the above graph with three demand curves. An increase in price, other factors constant, would cause a change from: A. Point 4 to point 5 B. Point 3 to point 6 C. Point 1 to point 5 D. Point 2 to point 4

45. An increase in demand is shown graphically by a: A. Shift of the demand curve to the left B. Movement up along the existing curve C. Shift of the demand curve to the right D. Movement down the existing curve

46. A decrease in demand is shown graphically as a: A. Movement down along the demand curve B. Demand curve that slopes up C. Shift of the demand curve to the left D. Movement up along the demand curve

47. Which statement is true about supply? A. There is an inverse relationship between product price and quantity supplied B. There is some price at which quantity supplied of a product is negative C. As product price decreases, producers are willing to put more of the good on the market for sale D. To entice producers to offer more of a product on the market for sale, product price must rise

48. If the price of a product decreases, we would expect: A. Demand to increase B. Quantity supplied to decrease C. Supply to decrease D. Quantity demanded to decrease

49. An "increase in the quantity supplied" suggests a: A. Rightward shift of the supply curve B. Movement down along the supply curve C. Movement up along the supply curve D. Leftward shift of the supply curve

50. Suppose that a more efficient way to produce a good is discovered, thus lowering production costs for the good. This will cause a(n): A. Increase in supply, or a rightward shift of the supply curve B. Decrease in supply, or a leftward shift of the supply curve C. Increase in quantity supplied, or movement down the supply curve D. Decrease in quantity supplied, or movement up the supply curve

51. Which of the following is a determinant of supply? A. Tastes and preferences B. Price of a complementary good C. Consumer income D. Technology

52. If farmers withhold some of their current corn harvest from the market because they anticipate a higher price of corn in the future, then this would cause a(n): A. Rightward shift in the supply of corn B. Decrease in the supply of corn C. Leftward shift in the demand for corn D. Increase in the demand for corn

53. Which of the following will not cause the supply curve to shift? A. A change in the costs of resources needed to produce the good B. A technological change in the production of the good C. A change in the price of the good D. A change in the prices of other goods that could be produced

54. Which would cause a rightward shift in the supply curve for telephone service? A. A decrease in the wages of telephone workers B. An increase in the price of telephones C. An increase in the taxes paid by telephone companies D. A decrease in a subsidy given to telephone companies

55. All of the following would affect the position of the supply curve for cranberries, except the: A. Popularity of cranberry drinks B. Price of agricultural land for cranberries C. Cost of fertilizers for cranberry production D. Development of a new pest control for cranberries

56. A leftward shift of the supply curve for oil in the United States is most likely to result from: A. A decrease in the fees that oil companies must pay for drilling licenses B. An increase in the subsidy for oil exploration and drilling C. A decrease in the world price of oil D. An increase in the costs of exploration and drilling for oil

57. All of the following are assumed to be constant when the supply curve for a product is drawn, except the: A. Price of the product B. State of technology C. Number of producers D. Price of inputs used to make the product

58. Because prices are sticky, positive demand shock will lead to: A. No change in unemployment B. An increase in unemployment C. A decrease in unemployment D. An unpredictable change in unemployment

59. Refer to the graph above. Which of the following best represents a positive demand shock when prices are flexible? A. The shift from D2 to D3 in graph B B. The shift from D2 to D3 in graph A C. The shift from D2 to D1 in graph B D. The shift from D2 to D1 in graph A

60. Refer to the graph above. Which of the following best represents negative demand shock when prices are inflexible? A. The shift from D2 to D3 in graph B B. The shift from D2 to D3 in graph A C. The shift from D2 to D1 in graph B D. The shift from D2 to D1 in graph A

61. Refer to the graph above. Suppose a firm is currently producing 500 computers per week and charging a price of $1000. How will the firm respond to a positive demand shock if prices are inflexible? A. The firm will increase production to 650 computers per week and charge a price of $1000 B. The firm will continue to produce 500 computers per week and charge a price of $1000 C. The firm will cut production to 300 computers per week and charge a price of $1000 D. The firm will cut production to 300 computers per week and charge a price of $600

62. Refer to the graph above. Suppose a firm is currently producing 500 computers per week and charging a price of $1000. How will the firm respond to a negative demand shock if prices are flexible? A. The firm will continue to produce 500 computers per week and charge a price of $600 B. The firm will continue to produce 500 computers per week and charge a price of $1200 C. The firm will cut production to 300 computers per week and charge a price of $1000 D. The firm will cut production to 300 computers per week and charge a price of $600

63. Refer to the graph above. Suppose a firm is currently producing 500 computers per week and charging a price of $1000. What happens to the firm's inventory of computers if there is a negative demand shock and prices are inflexible? A. The firm's inventories will not change B. The firm's inventories will increase by 200 computers per week C. The firm's inventories will decrease by 150 computers per week D. The firm's inventories will increase by 350 computers per week

64. Refer to the graph above. Suppose a firm is currently producing 500 computers per week and charging a price of $1000. What happens to the firm's inventory of computers if there is a negative demand shock and prices are flexible? A. The firm's inventories will not change B. The firm's inventories will increase by 200 computers per week C. The firm's inventories will decrease by 150 computers per week D. The firm's inventories will increase by 350 computers per week

65. Business cycle fluctuations typically arise because: A. The actual supply of goods and services ends up being more or less than what consumers were expecting B. The actual demand for goods and services ends up being more or less than the expected supply of goods and services C. The actual demand for goods and services ends up being more or less than what firms were expecting D. Prices tend to be flexible in the short run

66. Which of the following statements is true? A. Short-run economic fluctuations are made worse because prices are flexible B. Short-run economic fluctuations would be less severe if prices were inflexible C. If prices were fully inflexible, there would be no short-run economic fluctuations D. If prices were fully flexible, there would be no short-run economic fluctuations

67. If prices of goods and services quickly adjust to demand shocks, then: A. Firms would find it difficult to produce at their optimal output rates B. Output rates would quickly adjust to changes in demand C. Firms would find it easier to produce at their optimal output rates D. The economy would experience severe short-run fluctuation

68. If prices of goods and services are free to quickly adjust, then: A. A negative demand shock would lead to increased unemployment in the short run B. A positive demand shock would lead to increased unemployment in the short run C. A negative demand shock would have no short-run effect on unemployment D. There would be no short-run demand shocks

69. If prices of goods and services are inflexible, then: A. A negative demand shock would lead to increased real GDP in the short run B. A positive demand shock would lead to increased real GDP in the short run C. A negative demand shock would have no short-run effect on real GDP D. There would be no short-run demand shocks

70. Inventories: A. Tend to increase the severity of short-run fluctuations B. Tend to reduce the severity of short-run fluctuations C. Are held by businesses because they are a costless way of responding to demand shocks D. Are the result of positive demand shocks

71. Inventories rise when: A. Actual demand for output is more than expected B. Actual demand for output is less than expected C. Actual supply for output is less than expected D. Actual demand for output is about the same as expected

72. Suppose that inventories are rising. We could expect that, in the future A. real GDP will likely increase B. real GDP will likely decrease C. we can't predict what will happen to real GDP D. firms will raise prices of their goods and services

73. Suppose that inventories are falling. We could expect that, in the future A. unemployment will likely increase B. unemployment will likely decrease C. we can't predict what will happen to unemployment D. real GDP will likely increase

74. Suppose that prices are sticky in the short-run. Which of the following best describes the economy's response to a negative demand shock? A. Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will increase. B. Firms' inventories will decrease, causing them to increase production. Ultimately, real GDP will increase and unemployment will decrease. C. Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will increase and unemployment will increase. D. Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will decrease.

75. Refer to the above data. Net exports are equal to: A. - $155 billion B. $288 billion C. - $424 billion D. $1483 billion

76. Refer to the above data. Gross private domestic investment is equal to what percentage of GDP? A. 10 percent B. 15 percent C. 20 percent D. 25 percent

77. Refer to the above data. Corporate profits are equal to: A. $442 billion B. $532 billion C. $621 billion D. $788 billion

78. Refer to the above data. The net domestic product is equal to: A. $6,942 billion B. $7,336 billion C. $8,121 billion D. $9,053 billion

79. Refer to the above data. National income is equal to: A. $5,977 billion B. $7,304 billion C. $8,348 billion D. $9,013 billion

80. Refer to the above data. Personal income is equal to: A. $8,348 billion B. $8,899 billion C. $9,053 billion D. $10,446 billion

81. Which of the following represents an income flow in the circular flow of domestic output and national income? A. Net exports B. Investment expenditures C. Government purchases D. Corporate profits

82. That portion of corporate profits which is included in personal income is: A. Dividends B. Corporate income taxes C. Consumption of fixed capital D. Undistributed corporate profits

83. Personal income (PI) refers to all income: A. Received B. Earned C. Earned but not received D. Received but not earned

84. Personal income will equal disposable income when: A. Corporate profits are zero B. Personal taxes are zero C. Transfer payments are zero D. Social Security contributions are zero

85. The total income earned through the use of resources, plus taxes on production and on imports, equals: A. National income B. Gross domestic product C. Personal income D. Disposable income

86. The amount of new output produced per year for both consumption and additions to capital stock is measured by: A. GDP B. Net investment C. NDP D. Net exports

87. If the price index is 130, this means that: A. Prices are 130 percent higher than in the base year B. Prices are .13 times that in the base year C. Prices are 30 percent higher than in the base year D. Nominal GDP must be inflated to determine the real GDP

88. Which of the following is a correct statement? A. It is relatively easy to distinguish between cost-push and demand-pull inflation even if you don't know the source of the inflation B. A supply shock will cause a variation of demand-pull inflation that can lead to hyperinflation C. Demand-pull inflation will continue so long as there is excess total spending in the economy D. Demand-pull inflation is usually accompanied by higher unemployment rates

89. Inflation caused by a rise in the prices of inputs is referred to as: A. Cost-push inflation B. Demand-pull inflation C. Unanticipated inflation D. Hyperinflation

90. When oil and energy prices rise, the economy tends to experience: A. Natural inflation B. Demand-pull inflation C. Cost-push inflation D. Unanticipated inflation

91. Only two resources, capital and labor, are used in an economy to produce an output of 600 million units. If the total cost of capital resources is $300 million and the total cost of labor resources is $100 million, then the per-unit production costs in this economy are: A. $0.67 B. $1.50 C. $2.00 D. $3.00

92. In an economy, only two resources, capital and labor, are used to produce 50 units of output. If the total cost of capital resources is $125 and the total cost of labor resources is $25, then the per unit production costs are: A. $150 B. $100 C. $9 D. $3

93. When total input costs rise slower than the total units of output produced, then the per-unit production costs: A. Will decrease B. Will increase C. Would be unaffected D. May either increase or decrease

94. If you knew that the per-unit production cost was $8 and that the total cost of inputs was $1,000, then the number of units of output would be: A. 75 B. 100 C. 125 D. 150

95. Cost-push inflation tends to be characterized by all of the following, except: A. Rising general price level B. Falling real output C. Automatically self-limiting D. Falling unemployment

96. Core inflation refers to the inflation picture after stripping away the: A. Capital goods prices B. Food and energy prices C. Government-regulated prices D. Service-sector prices

97. For a given amount of nominal income, the real income will: A. Fall if the price level rises B. Fall if the price level falls C. Be unaffected if the price level falls D. Rise as the price level rises

98. If the average level of nominal income in a nation is $44,000 and the price level index is 175, the average real income would be about: A. $18,857 B. $25,143 C. $44,000 D. $77,000

99. Real income will rise from one year to the next if nominal income: A. Falls and the price level falls faster B. Rises and the price level rises faster C. Falls and the price level rises D. Falls faster than the price level

100. In Year 1, the price level was 120 and the average nominal income was $30,000. In Year 2, the price level was 125 and the average nominal level of income was $32,000. What happened to real income from Year 1 to Year 2? A. It fell by $400 B. It rose by $400 C. It rose by $600 D. It rose by $2,000

101. If a person's nominal income increases by 5% while the price level increases by 2%, then that person's real income: A. Increases by 3% B. Increases by 5% C. Decreases by 7% D. Decreases by 2%

102. A person's real income will increase by 3% if her nominal income: A. Increases by 5% while the price index falls by 2% B. Increases by 5% while the price index rises by 2% C. Increases by 2% while the price index rises by 5% D. Increases by 2% while the price index falls by 5%

Mid-Term Exam Department of Economics Morgan State University Students name_________________________________________________________

Instructor Charles Nwanegwo Ph.D