1) Economics does not study correct or incorrect behaviors, but rather it assumes that economic agents make the best decisions given their knowledge of the costs and benefits. What term best describes this behavior?
A.
emotionally
B.
equitably
C.
rationally
D.
selfishly
2) What is the term in economics by which a group of buyers and sellers of a product come together to trade?
A.
market
B.
collective
C.
cooperative
D.
trade-off
3) Why do consumers have to make tradeoffs in deciding what to consume?
A.
they are limited by a budget constraint.
B.
not all goods give them the same amount of satisfaction.
C.
the prices of goods vary.
D.
there are not enough of all goods produced.
4) What might you call an outward shift of a nation’s production possibilities frontier?
A.
economic growth.
B.
a situation in which a country produces more of one good and less of another.
C.
rising prices of the two goods on the production possibilities frontier model.
D.
an impossible situation.
5) Which of the following is not a critical function of the government in facilitating the operation of a market economy?
A.
protecting private property.
B.
enforcing contracts.
C.
enforcing property rights.
D.
ensuring an equal distribution of income to all citizens.
6) Which of the following is an example of spending on goods and services in the circular flow model?
A.
Belinda purchases a new computer for her tax-preparation business.
B.
Timmy purchases a new examination table for use in his veterinary clinic.
C.
Javier buys 800 square feet of wood flooring for his vacation home.
D.
Celeste buys fresh herbs at the farmers’ market to use in her restaurant.
7) A demand curve which is ________ represents perfectly inelastic demand, and a demand curve which is ________ represents inelastic demand.
A.
downward sloping; vertical
B.
upward sloping; horizontal
C.
horizontal; downward sloping
D.
vertical; downward sloping+
8) Suppose the value of the price elasticity of demand is -3. What does this mean?
A.
A 1 percent increase in the price of the good causes quantity demanded to increase by 3 percent.
B.
A $1 increase in price causes quantity demanded to fall by 3 units.
C.
A 1 percent increase in the price of the good causes quantity demanded to decrease by 3 percent.
D.
A 3 percent increase in the price of the good causes quantity demanded to decrease by 1 percent.
9) Price elasticity of demand measures
A.
how responsive suppliers are to price changes.
B.
how responsive sales are to a change in buyers’ incomes.
C.
how responsive sales are to changes in the price of a related good.
D.
how responsive quantity demanded is to a change in price.
10) Danielle Ocean pays for monthly pool maintenance for her home swimming pool. Last week the owner of the pool service informed Danielle that he will have to raise his monthly service fee because of increases in the price of pool chemicals. How is the market for pool maintenance services affected by this?
A.
There is a decrease in the quantity of pool maintenance services supplied.
B.
There is an increase in the supply of pool maintenance services.
C.
There is a decrease in the demand for pool maintenance services.
D.
There is a decrease in the supply of pool maintenance services.
11) At a product’s equilibrium price
A.
the quantity of the product demanded is less than the quantity of the product supplied.
B.
the product’s demand curve is the same as the product’s supply curve.
C.
the quantity of the product demanded is greater than the quantity of the product supplied.
D.
the product’s demand curve crosses the product’s supply curve.
12) Which of the following is the correct way to describe equilibrium in a market?
A.
At equilibrium, market forces no longer apply.
B.
At equilibrium, demand equals supply.
C.
At equilibrium, quantity demanded equals quantity supplied.
D.
At equilibrium, scarcity is eliminated.

13) Let MP = marginal product, P = output price, and W = wage, then the equation that represents the condition where a competitive firm would hire another worker is
A.
P × MP > W.
B.
P × MP = W.
C.
P × MP < W.
D.
P × W > MP.
14) Marginal revenue product of labor for a competitive seller is
A.
the output price multiplied by the quantity sold.
B.
the change in total product from hiring one more worker.
C.
equal to the marginal product of labor multiplied by the output price.
D.
the marginal revenue of the product multiplied by the output price.
15) Firms use information on labor’s marginal revenue product to determine
A.
how much marginal product to produce at each wage rate.
B.
how much to produce at each output price.
C.
how many workers to hire at each wage rate.
D.
how much labor services to supply at each wage rate.
16) A decrease in the wage rate causes
A.
an increase in the quantity of labor demanded.
B.
a decrease in labor’s productivity.
C.
a leftward shift of the firm’s labor demand curve.
D.
a rightward shift of the firm’s labor demand curve.
17) How will an increase in population affect the labor market?
A.
It will shift the market supply curve.
B.
It will increase the opportunity cost of leisure.
C.
It will increase the supply of jobs.
D.
It will cause a decrease in the quantity of labor demanded.
18) An individual’s labor supply curve shows
A.
the maximum wage rates offered to that individual by various potential employers.
B.
the relationship between the quantity of hours worked and total income earned by that individual.
C.
the relationship between wages and the quantity of labor that a firm is willing to employ.
D.
the relationship between wages and the quantity of labor that she is willing to supply.
19) Private costs
A.
are borne by producers of a good while social costs are borne by government.
B.
are borne by producers of a good while social costs are borne by those who cannot afford to purchase the good.
C.
are borne by producers of a good while social costs are borne by society at large.
D.
are borne by consumers of a good while social costs are borne by government.
20) Which of the following displays these two characteristics: nonrivalry and nonexcludability in consumption?
A.
public goods
B.
common resources
C.
quasi-public goods
D.
private goods
21) Which of the following is an example of a common resource?
A.
the Sumatran tiger population in the world
B.
taxicab services
C.
the stock of knowledge in the public domain
D.
rabbit fur
22) The reason that the coffeehouse market is monopolistically competitive rather than perfectly competitive is because
A.
products are differentiated.
B.
there are many firms in the market.
C.
entry into the market is blocked.
D.
barriers to entry are very low.
23) A characteristic found only in oligopolies is
A.
independence of firms.
B.
interdependence of firms.
C.
products that are slightly different.
D.
break even level of profits.
24) A monopoly is a seller of a product
A.
with a perfectly inelastic demand.
B.
without a close substitute.
C.
without a well-defined demand curve.
D.
with many substitutes.

25) Gross domestic product is calculated by summing up
A.
the total market value of goods and services in the economy.
B.
the total quantity of goods and services produced in the economy during a period of time.
C.
the total market value of final goods and services produced in the economy during a period of time.
D.
the total quantity of goods and services in the economy.
26) Which of the following goods is directly counted in GDP?
A.
a 12-inch Subway sandwich purchased by a student
B.
the bread that Subway purchases for its sandwiches
C.
the plastic bags that Subway purchases to wrap its sandwiches
D.
the lettuce that Subway purchases for its sandwiches
27) The Philippines and Vietnam have roughly the same size population. Suppose the GDP of the Philippines is $1,000 billion and the GDP of Vietnam is $10,000 billion. You should conclude
A.
a typical person in Vietnam is less than 10 times as well off as the typical person in the Philippines.
B.
a typical person in Vietnam is more than 10 times as well off as the typical person in the Philippines.
C.
it is not possible to make a good comparison of the economic well being of a typical individual in the 2 countries without additional information.
D.
a typical person in Vietnam is 10 times as well off as the typical person in the Philippines.
28) If the economy is slipping into a recession, which of the following would be an appropriate fiscal policy?
A.
a decrease in taxes
B.
a decrease in government purchases
C.
a decrease in oil prices
D.
an increase in the money supply and a decrease in interest rates
29) Which of the following is an objective of fiscal policy?
A.
energy independence from Middle East oil
B.
high rates of economic growth
C.
health care coverage for all Americans
D.
discovering a cure for AIDs
30) Fiscal policy refers to changes in
A.
state and local taxes and purchases that are intended to achieve macroeconomic policy objectives.
B.
the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
C.
federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
D.
federal taxes and purchases that are intended to fund the war on terrorism.
31) In economics, money is defined as
A.
the total value of one’s assets in current prices.
B.
any asset people generally accept in exchange for goods and services.
C.
the total value of one’s assets minus the total value of one’s debts, in current prices.
D.
the total amount of salary, interest, and rental income earned during a year.
32) Dollar bills in the modern economy serve as money because
A.
they are backed by the gold stored in Fort Knox.
B.
people have confidence that others will accept them as money.
C.
they can be redeemed for gold by the central bank.
D.
they have value as a commodity independent of their use as money.
33) If credit card balances rise in the economy, then M1 will ________ and M2 will ________.
A.
increase; increase
B.
increase; decrease
C.
not change; increase
D.
decrease; increase
E.
not change; not change

34) Dollar bills in the modern economy serve as money because
A.
they are backed by the gold stored in Fort Knox.
B.
people have confidence that others will accept them as money.
C.
they can be redeemed for gold by the central bank.
D.
they have value as a commodity independent of their use as money.
35) Which of the following functions of money would be violated if inflation were high?
A.
certificate of gold
B.
store of value
C.
unit of account
D.
medium of exchange
36) In an economy with ________, there are more prices than in an economy with ________.
A.
fiat money;commodity money
B.
money; barter
C.
barter; money
D.
fiat money; barter
37) If the central bank can act as a lender of last resort during a banking panic, banks can
A.
borrow more and more money from the central bank, and this will lower its reserves and decrease the public’s faith in the banking system.
B.
satisfy customer withdrawal needs and eventually restore the public’s faith in the banking system.
C.
call in their loans to their customers and eventually restore the public’s faith in the banking system.
D.
encourage the public to borrow directly from the central bank, and this will worsen the banking panic.
38) Which of the following determines the amount of money the banking system as a whole can create?
A.
the quantity of bank reserves
B.
the quantity of vault cash held by banks
C.
the gold reserves held by the Federal Reserve
D.
the limit on profits by banks imposed by the U.S. Congress
39) To offset the effect of households and firms deciding to hold less of their money in checking account deposits and more in currency, the Federal Reserve could
A.
raise the discount rate.
B.
buy Treasury securities.
C.
raise the required reserve ratio.
D.
lower bank taxes.
40) If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time.
A.
high; raises
B.
low; raises
C.
low; lowers
D.
low; does not change
E.
high; lowers
41) Toll Brothers, a residential home builder, did well during the recession in 2001 but did not do so well in 2007 after the housing bubble burst. The reason for this is
A.
the Fed raised interest rates in 2001 but did not believe that cutting the interest rate in 2007 would be enough to revive the housing market.
B.
the Fed lowered interest rates in 2001 but did not believe that cutting the interest rate in 2007 would be enough to revive the housing market.
C.
the Fed lowered interest rates in 2001 but raised interest rates in 2007 to help fight inflation.
D.
the Fed raised interest rates in 2001 but lowered interest rates in 2007 to revive the housing market.
42) The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of ________, it also can achieve the goal of ________ simultaneously.
A.
high employment; economic growth
B.
stability of financial markets; a low current account deficit
C.
economic growth; a low current account deficit
D.
high employment; lowering government spending

43) Specializing in the production of a good or service in which one has a comparative advantage enables a country to do all of the following except
A.
engage in mutually beneficial trade with other nations.
B.
produce a combination of goods that lies outside its own production possibilities frontier.
C.
consume a combination of goods that lies outside its own production possibilities frontier.
D.
increase the variety of products that it can consume with no increase in resources.
44) Table 2-3
Serena    Haley
Bracelets    8    9
Necklaces    16    12

Refer to Table 2-3. What is Haley’s opportunity cost of making a bracelet?
A.
3/4 of a bracelet
B.
2 necklaces
C.
1 1/3 necklaces
D.
3 bracelets
45) For each bottle of wine that Italy produces, it gives up the opportunity to make 10 pounds of cheese. France can produce 1 bottle of wine for every 25 pounds of cheese it produces. Which of the following is true about the comparative advantage between the two countries?
A.
Italy has the comparative advantage in cheese.
B.
France has the comparative advantage in wine.
C.
France has the comparative advantage in wine and cheese.
D.
Italy has the comparative advantage in wine.
46) How does an increase in a country’s exchange rate affect its balance of trade?
A.
An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade.
B.
An increase in the exchange rate raises imports, reduces exports, and increases the balance of trade.
C.
An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade.
D.
An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade.
47) If there is currently a surplus of dollars, which of the following would you expect to see in the foreign exchange market?
A.
The dollar will appreciate.
B.
There will be a decrease in the supply of dollars.
C.
There will be a decrease in the demand for dollars.
D.
The dollar will depreciate.
48) If the dollar appreciates against the Mexican peso,
A.
Mexican imports to the U.S. become more expensive.
B.
The value of Mexican imports to the United States does not change.
C.
U.S. exports to Mexico become more expensive.
D.
U.S. exports to Mexico become less expensive.
49) If relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is “overvalued”?
A.
if the actual exchange rate between the dollar and the Argentinean peso is 0.22 pesos per dollar
B.
if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollar
C.
if the actual exchange rate between the dollar and the Argentinean peso is 3 pesos per dollar
D.
if the actual exchange rate between the dollar and the Argentinean peso is 3.22 pesos per dollar
50) If the purchasing power of the dollar is greater than the purchasing power of the euro, purchasing power parity predicts that the exchange rate will
A.
be equal to the relative purchasing power across the currencies in the long run.
B.
decrease if the exchange rate is less than 1 euro per dollar.
C.
not fluctuate and stay constant in the long run.
D.
increase if the exchange rate is greater than 1 euro per dollar.
51) You decide to work in Japan for the next 10 years, accumulate some savings, then move back to the United States and convert your savings from yen to dollars. At the time of your move, economists predict that consumers in the United States have reignited their love of Japanese products, especially hybrid cars, and expect that this strong preference for Japanese products will continue for the next decade. How should this influence your decision to work and save in Japan?
A.
You should be encouraged as the growing U.S. preference for Japanese goods should decrease the value of the yen to the dollar and raise the value of your savings when converted to dollars.
B.
You should be discouraged as the growing U.S. preference for Japanese goods should decrease the value of the yen to the dollar and decrease the value of your savings when converted to dollars.
C.
You should be encouraged as the growing U.S. preference for Japanese goods should increase the value of the yen to the dollar and raise the value of your savings when converted to dollars.
D.
You should be discouraged as the growing U.S. preference for Japanese goods should increase the value of the yen to the dollar and decrease the value of your savings when converted to dollars.
52) If interest rates in the United States rise,
A.
the value of the dollar will fall as foreign investors increase their holdings of U.S. investments.
B.
the value of the dollar will rise as the foreign investors increase their holdings of U.S. investments.
C.
the value of the dollar will rise as foreign investors sell their U.S. investments.
D.
the value of the dollar will fall as foreign investors sell their U.S. investments.
53) China has been accused of deliberately undervaluing its currency, the yuan, in order to
A.
prevent deflation.
B.
increase its imports.
C.
maintain purchasing power parity.
D.
increase its exports.
54) What two countries each accounted for more than 25% of all foreign purchases of U.S. stocks and bonds in 2008?
A.
Japan and India
B.
China and the United Kingdom
C.
Mexico and Canada
D.
Japan and Mexico