Exam 2

Practice Questions
Econ 1001
The answers to these questions are given at the end of the document. The majority of the questions are multiple
choice, since many of you have given me feedback that more practice in this area is desirable. Even though some
questions have up to 5 responses (options for e as correct) there will only be 4 possibilities on your exam. There
are a few short answer questions at the bottom of this document and I would highly encourage you to review Aplia
HW3 and Aplia HW4 as a way to gain practice on other computational questions.
See you on Monday!
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1. When production of a good generates external costs, the

a. demand curve for the good will overstate the true social benefits from consumption of the
good.
b. demand curve for the good will understate the true social benefits from consumption of the
good.
c. supply curve for the good will overstate the true social cost of producing the good.
d. supply curve for the good will understate the true social cost of producing the good.

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2. Which of the following correctly describes the external benefit resulting from an individual's purchase of a
winter flu shot?
a. The flu shot is cheaper than the cost of treatment when you get the flu.
b. The income of doctors increases when you get the flu shot.
c. The flu shot reduces the likelihood others will catch the flu.
d. The flu shot reduces the likelihood you will miss work as the result of sickness; therefore,
you will earn more income.

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3. Markets may have difficulty providing the proper quantity of a public good because
a. individuals will tend to become free riders, and private firms will have difficulty
generating enough revenue to produce an efficient quantity of the good.
b. the good generally has a very large value to consumers relative to its cost of production.
c. the good is one that tends to benefit a large number of people.
d. the large profit involved in the production of a public good is generally too much for
private firms to effectively pay out to shareholders.

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4. Markets fail to allocate resources efficiently when

a. prices fluctuate.
b. people who have property rights abuse their privileges.
c. property rights are poorly enforced or not well established.
d. the government refuses to intervene in private markets.

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5. Which of the following would be included in this year's GDP?

a. the value of a used car, at its sale price
b. the value of a new domestic automobile, at its sale price
c. a sale of Microsoft stock from one individual to another
d. the face value of a life insurance policy paid to a woman at the death of her husband

____

6. A real estate salesperson sells a house in 2009 that was built in 1990. How does this transaction get counted in
the GDP statistics?
a. The price of the house and the real estate salesperson's commission are both included in
2009's GDP.
b. Neither the price of the house or the commission is included in 2009's GDP.
c. The real estate salesperson's commission but not the price of the house is included in
2009's GDP.
d. The price of the house would be included in both 1990's GDP and the GDP for 2009.

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7. Gross domestic product is

a. the market value of all goods and services exchanged within a country during a time
period.
b. the market value of all domestic assets, regardless of whether they are owned by citizens or
foreigners.
c. the compensation received during a period for labor services plus interest, rents, and
corporate profits.
d. the market value of final goods and services produced within a country during a time
period.

____

8. General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and sells it in the United
States. In which country's GDP is it included?
a. Sweden and the United States
b. The United States because it was sold there
c. The United States because GM is a U.S. company
d. Sweden because it was produced there

____

9. Which of the following is included as government consumption and gross investment in the national income
accounts?
a. tanks bought for use by the U.S. army
b. interest on public debt
c. unemployment insurance payments
d. social security benefit payments

____ 10. If you were required to write a paper for your history class (or a report for your job) in which you were using
dollar valued data across different years, you would
a. use a price index to remove the effects of inflation to have reliable data measuring changes
in the real value of things.
b. never attempt to correct for inflation because inflation is a key indicator of economic
activity.
c. tell your teacher or boss that you never learned how to correct data for inflation.
d. assume that prices did not change during the period you are studying.
____ 11. Suppose that nominal GDP increased by 3 percent, but the real GDP increased by only 1 percent during that
same period. Which of the following best explains the phenomenon?
a. Prices increased by approximately 1 percent.
b. Prices increased by approximately 2 percent.
c. Prices increased by approximately 3 percent.
d. Prices increased by approximately 4 percent.
____ 12. Suppose that Mike earned $15,000 in 2008 and $15,600 in 2009. If the consumer price index was 100 in 2008
and 103 in 2009, by approximately what percent did Mike's real salary increase?
a. 1 percent

b. 3 percent
c. 4 percent
d. 5 percent
____ 13. Economists use the phrase "business cycle" when referring to fluctuations in
a. the rate of real output and employment.
b. interest rates.
c. the consumer price index.
d. the general level of prices.
____ 14. Tom loses his job and immediately begins looking for another. Other things the same, the unemployment rate
a. increases, and the labor-force participation rate decreases.
b. increases, and the labor-force participation rate is unaffected.
c. is unaffected, and the labor-force participation rate increases.
d. decreases, and the labor-force participation rate is unaffected.
____ 15. Suppose that a large number of men who used to work or seek work now no longer do either. Other things the
same, this makes the
a. the number of people unemployed rise but the labor force does not change.
b. the number of people unemployed rise but the labor force falls.
c. the number of people unemployed and the labor force both falls.
d. the number of people unemployed fall while the labor force does not change.
____ 16. Sharon was being treated unfairly by her boss, so she stormed off the job and two days later found another
position. For two days, Sharon experienced
a. cyclical unemployment.
b. structural unemployment.
c. seasonal unemployment.
d. frictional unemployment.
e. being out of the labor force.
Essay
17. Answer the following questions:
a. What does GDP measure, and why is it a useful tool for economists, business decision makers,
and government policy makers?
b. Explain at least two important things that are not included when we do accounting for GDP
Short Answer
18. Place each of the following in the correct location in the table.
Rival?
Yes
Excludable?
a.
b.
c.

Yes
No

Congested toll roads

Knowledge
Fish in the ocean

Private Goods
Common Resources

No
Natural Monopolies
Public Goods

d.
e.
f.
g.
h.
i.
j.
k.
l.

National defense
Congested nontoll roads
Cable TV
The environment
Fire protection
Ice-cream cones
Uncongested toll roads
Clothing
Uncongested nontoll roads

19. The creation of knowledge is a public good. Because knowledge is a public good, profit-seeking firms tend to
free-ride on the knowledge created by others and, as a result, devote too few resources to the creation of
knowledge. How does the U.S. government correct for this apparent market failure?

20. Why do wild salmon populations face the threat of extinction while goldfish populations are in no such
danger?

practice questions Econ 1001

Answer Section
MULTIPLE CHOICE
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D
C
A
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C
D
D
A
A
B
A
A
B
C
D

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1
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OBJ:
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Suggested Quiz
Suggested Quiz
Suggested Quiz
The Potential Shortcomings of the Market
Suggested Quiz
Suggested Quiz
GDP: A Measure of Output
GDP: A Measure of Output
GDP as a Measure of Both Output and Income
Coursebook
Coursebook
Coursebook
Swings in the Economic Pendulum
Economic Fluctuations and the Labor Market
Economic Fluctuations and the Labor Market
Three Types of Unemployment

ESSAY
17. ANS:
a.

b.

GDP measures the productive output of a country's economy. It is a measure of the market
value of all domestically produced final goods and services during a specific period. It gives
economists and other interested parties a way to gauge the health of the economy and to
forecast the economy.
Although GDP is generally a good measure of the productive capacity of an economy, it cannot
measure the quality of goods and the introduction of new goods through time. It also is
incapable of measuring the underground economy (both legal and illegal transactions) or the
extent of nonmarket production in a country. In addition, it excludes leisure and the human cost
associated with the production of goods and services. Lastly, it does not make an adjustment
for the harmful side effects that arise from production and consumption and the events of
nature.

PTS: 1

OBJ: Critical Thinking

SHORT ANSWER
18. ANS:
Rival?

Yes
Excludable?
No

Yes
Private Goods
Ice-cream cones
Clothing
Congested toll roads
Common Resources
Fish in the ocean
The environment
Congested nontoll roads

No
Natural Monopolies
Fire protection
Cable TV
Uncongested toll roads
Public Goods
National defense
Knowledge
Uncongested nontoll roads

PTS: 1
DIF: 1
REF: 11-1
TOP: Excludability | Rivalry in consumption
MSC: Applicative
19. ANS:
The government assigns and protects the property rights of the producers of specific, technological
knowledge through patents. The inventor will obtain much of the benefit of his invention. The U.S.
government also subsidizes basic research in many different fields.
PTS: 1
DIF: 1
REF: 11-2
TOP: Public goods
MSC: Applicative
20. ANS:
No one owns the wild salmon, while private individuals own goldfish. The profit motive leads to different
allocations of the resources. Salmon fishermen have an individual incentive to catch as many salmon as
possible before someone else does. Pet shop owners have a profit incentive to breed goldfish to sell to
consumers.
PTS: 1
MSC: Interpretive

DIF: 2

REF: 11-3

TOP: Common resources