Examination 1
Basic Economic Concepts

These multiple choice questions are from the exam bank. If you believe one or more answers are not correct, then speak with the instructor. He is human and makes mistakes.

Lesson 1 - An Introduction to Economics

1. For economists, the word "utility" means:

A. versatility and flexibility.
B. rationality.
C. pleasure and satisfaction.
D. purposefulness.

2. Economics may best be defined as the:

A. interaction between macro and micro considerations.
B. social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.
C. empirical testing of value judgments through the use of logic.
D. use of policy to refute facts and hypotheses.

3. Which of the following most closely relates to the idea of opportunity costs?

A. tradeoffs.
B. economic growth.
C. technological change.
D. capitalism.

4. A well-tested economic theory is often called:

A. a hypothesis.
B. a prototype.
C. a principle.
D. an anomaly.

5. The term "ceteris paribus" means:

A. that if event A precedes event B, A has caused B.
B. that economics deals with facts, not values.
C. other things are held constant.
D. prosperity inevitably follows recession.

6. The problems of aggregate inflation and unemployment are:

A. major topics of macroeconomics.
B. not relevant to the U.S. economy.
C. major topics of microeconomics.
D. peculiar to command economies.

7. Microeconomics:

A. is the basis for the "after this, therefore because of this" fallacy.
B. is not concerned with details, but only with the overall big picture of the economy.
C. is concerned with individual economic units and specific markets.
D. describes the aggregate flows of output and income.

8. Which of the following is a positive statement?

A. The humidity is too high today.
B. It is too hot to jog today.
C. The temperature is 92 degrees today.
D. Summer evenings are nice when it cools off.

9. An increase in money income:

A. shifts the consumer's budget line to the right.
B. shifts the consumer's budget line to the left.
C. increases the slope of the budget line.
D. has no effect on the budget line.

10. The four factors of production are:

A. land, labor, capital, and money
B. land, labor, capital, and entrepreneurial ability
C. labor, capital, technology, and entrepreneurial ability
D. labor, capital, entrepreneurial ability, and money

11. Unemployment:

A. causes the production possibilities curve to shift outward.
B. can exist at any point on a production possibilities curve.
C. is illustrated by a point outside the production possibilities curve.
D. is illustrated by a point inside the production possibilities curve.

12. If the production possibilities curve were a straight downsloping line, this would suggest that:

A. resources are perfectly shiftable between the production of these two goods.
B. it is possible to produce more of both products.
C. both products are equally capable of satisfying consumer wants.
D. the two products have identical prices.


1. C 2. B 3. A 4. C 5. C 6. A
7. C 8. C 9. A 10. B 11. D 12. A

Lesson 2 - The Market System and Circular Flow

1. Which of the following is a distinguishing feature of a command system?

A. private ownership of all capital.
B. central planning.
C. heavy reliance on markets.
D. wide-spread dispersion of economic power.

2. Examples of command economies are:

A. The United States and Japan.
B. Sweden and Norway.
C. Mexico and Brazil.
D. Cuba and North Korea.

3. The French term "laissez-faire" means:

A. "there is no free lunch."
B. "let it be."
C. "circular flow."
D. "public ownership."

4. Which of the following is a fundamental characteristic of the market system?

A. property rights.
B. central planning by government.
C. unselfish behavior.
D. government sets wages and prices.

5. The pursuit of self-interest:

A. is highly detrimental to the market system.
B. means the same as "selfishness."
C. is reflected in the behavior of firms, but not in the behavior of consumers.
D. gives direction to the market system.

6. Specialization in production is important primarily because it:

A. results in greater total output.
B. allows society to avoid the coincidence-of-wants problem.
C. allows society to trade by barter.
D. allows society to have fewer capital goods.

7. Barter:

A. is the major means of exchange in centrally planned economies.
B. accounts for over 30 percent of the dollar volume of all exchange in the U.S. economy.
C. entails the exchange of goods for goods.
D. is used to circumvent the problem of a lack of coincidence of wants among potential buyers and sellers.

8. The use of money contributes to economic efficiency because:

A. governmental direction of the production and distribution of output can be avoided by using money.
B. roundabout production could not occur without the availability of money.
C. it is necessary for the creation of capital goods.
D. it promotes specialization by overcoming the problems with barter.

9. The invisible hand refers to the:

A. fact that the U.S. tax system redistributes income from rich to poor.
B. notion that, under competition, decisions motivated by self-interest promote the social interest.
C. tendency of monopolies to raise prices above competitive levels.
D. fact that government controls the functioning of the market system.

10. The failure of Soviet central planning was reflected in:

A. a declining growth rate.
B. poor quality goods.
C. the failure to provide promised consumer goods.
D. all of these.

11. In terms of the circular flow diagram, businesses obtain revenue through the _____ market and make expenditures in the _____ market.

A. product; financial
B. resource; product
C. product; resource
D. capital; product

12. Broadly defined, competition involves:

A. private property and freedom of expression.
B. independently acting buyers and sellers and freedom to enter or leave markets.
C. increasing opportunity costs and diminishing marginal utility.
D. capital goods and division of labor.


1. B 2. D 3. B 4. A 5. D 6. A
7. C 8. D 9. B 10. D 11. C 12. B


Lesson 3 - Supply, Demand, and the Market Process

1. Economists use the term demand to refer to:

A. a particular price-quantity combination on a stable demand curve.
B. the total amount spent on a particular commodity over a stipulated time period.
C. an upward sloping line on a graph that relates consumer purchases and product price.
D. a schedule of various combinations of market prices and amounts demanded.

2. If the price of product L increases, the demand curve for close-substitute product J will:

A. first shifts upward and then downward.
B. shift to the left.
C. shift to the right.
D. remain unchanged.

3. A firm's supply curve is upward sloping because:

A. the expansion of production necessitates the use of qualitatively inferior inputs.
B. mass production economies are associated with larger levels of output.
C. consumers envision a positive relationship between price and quality.
D. beyond some point the production costs of additional units of output will rise.

4. An improvement in production technology will:

A. increase equilibrium price.
B. shift the supply curve to the left.
C. shift the supply curve to the right.
D. shift the demand curve to the left.

5. A surplus of a product will arise when price is:

A. above equilibrium with the result that quantity demanded exceeds quantity supplied.
B. above equilibrium with the result that quantity supplied exceeds quantity demanded.
C. below equilibrium with the result that quantity demanded exceeds quantity supplied.
D. below equilibrium with the result that quantity supplied exceeds quantity demanded.

6. If the supply and demand curves for a product both decrease, then equilibrium:

A. quantity must fall and equilibrium price must rise.
B. price must fall, but equilibrium quantity may either rise, fall, or remain unchanged.
C. quantity must decline, but equilibrium price may either rise, fall, or remain unchanged.
D. quantity and equilibrium price must both decline.

7. Price ceilings and price floors:

A. have no impacts on the market.
B. make the rationing function of free markets more efficient.
C. interfere with the rationing function of prices.
D. have no effect on the rationing function of prices.

8. Data from the registrar's office at Gigantic State University indicate that over the past twenty years tuition and enrollment have both increased. From this information we can conclude that:

A. higher education is an exception to the law of demand.
B. the supply of education provided by GSU has also increased over the twenty-year period.
C. school-age population, incomes, and preferences for education have changed over the twenty-year period.
D. GSU's supply curve of education is downward sloping.

9. An unusually large crop of coffee beans might:

A. increase the supply of coffee.
B. increase the price of coffee.
C. decrease the quantity of coffee consumed.
D. increase the price of tea.

10. Suppose the U.S. government banned the sale and production of cigarettes. Which of the following is likely to occur?

A. The quality of cigarettes sold decreases.
B. The profits of those selling cigarettes increases.
C. The price of cigarettes increases.
D. All of the above are likely to occur.

11. DVD players and DVDs are:

A. complementary goods.
B. substitute goods.
C. independent goods.
D. inferior goods.

12. The income and substitution effects account for:

A. the upward sloping supply curve.
B. the downward sloping demand curve.
C. movements along a given supply curve.
D. the "other things equal" assumption.


1. D 2. C 3. D 4. C 5. B 6. C
7. C 8. C 9. A 10. D 11. A 12. B

Lesson 4 - U.S. Private and Public Sectors

1. Income data that show the percentage of total income received by each fifth of all households describe the:

A. functional distribution of income.
B. horizontal distribution of income.
C. personal distribution of income.
D. vertical distribution of income.

2. Listed in descending order of relative size, households divide their total incomes among:

A. consumption expenditures, saving, and taxes.
B. saving, consumption expenditures, and taxes.
C. consumption expenditures, taxes, and saving.
D. taxes, consumption expenditures, and saving.

3. Since 1940 personal taxes have:

A. risen absolutely, but declined as a percentage of personal income.
B. risen both absolutely and as a percentage of personal income.
C. fallen absolutely, but risen as a percentage of personal income.
D. fallen both absolutely and as a percentage of personal income.

4. The majority of personal consumption expenditures go to purchase:

A. nondurable goods.
B. durable goods.
C. capital goods.
D. services.

5. A firm comprised of plants or units operating in different industries, say, beer and theme parks, best illustrates a:

A. vertically integrated firm.
B. multinational corporation.
C. multiplant firm.
D. conglomerate.

6. Which form of business enterprise accounts for the largest number of firms in the United States?

A. corporations
B. proprietorships
C. partnerships
D. cooperatives

7. The advantages of the corporate form of business include:

A. the ability to raise financial capital by selling stocks and bonds.
B. the fact that owners are subject to unlimited liability.
C. the elimination of the principal-agent problem.
D. single taxation of corporate earnings.

8. Negative externalities arise:

A. when firms pay more than the opportunity cost of resources.
B. when the demand curve for a product is located too far to the left.
C. when firms "use" resources without being compelled to pay for their full costs.
D. only arise in capitalistic societies.

9. Nonrivalry and nonexcludability are the main characteristics of:

A. capital goods.
B. private goods.
C. public goods.
D. consumption goods.

10. The U.S. Food Stamp program, which provides coupons that allow low-income individuals to buy food, is an illustration of:

A. government supplying a public good.
B. the redistributional function of government.
C. a government action designed to enhance competition.
D. the stabilization function of government.

11. A quasi-public good is:

A. a public good that is produced profitably by private firms, without government subsidy.
B. one characterized by nonrivalry and nonexcludability.
C. one characterized by rivalry but not excludability.
D. a good for which exclusion could take place but that has such large spillover benefits that government provides it to prevent an underallocation of resources.

12. With respect to local finance:

A. death and gift taxes are the major source of revenue and most expenditures are for hospitals and health services.
B. the corporate income tax is the major source of revenue and natural resource development the major type of expenditure.
C. property taxes are the basic source of revenue and education is the major type of expenditure.
D. sales and excise taxes are the major source of revenue and highway construction and maintenance is the major type of expenditure.


1. C 2. C 3. B 4. D 5. D 6. B
7. A 8. C 9. C 10. B 11. D 12. C


Lesson 5 - The Global Economy

1. In terms of absolute volumes of imports and exports, the world's leading trading nation is:

A. France.
B. Japan.
C. the United States.
D. South Korea.

2. The average U.S. tariff rate on imported goods is about:

A. 5 percent.
B. 12 percent.
C. 25 percent.
D. 50 percent.

3. Import quotas are:

A. maximum limits on the quantity or total value of specific products imported to a nation.
B. excise taxes or duties placed on imported products.
C. licensing requirements, unreasonable quality standards, and the like designed to impede imports.
D. government payments to domestic producers to reduce the world prices of exported goods.

4. Which of the following nations is not a member of the European Union?

A. Switzerland
B. France
C. Germany
D. Italy

5. A trade bloc is:

A. a tariff or quota that impedes imports.
B. a group of nations that allows free trade among member nations but restrict imports from nonmember nations via tariffs and quotas.
C. an area of a nation where manufacturers can import product components without paying tariffs.
D. a group of nations that advertise their common export goods abroad.

6. Protective tariffs are:

A. maximum limits on the quantity or total value of specific products imported to a nation.
B. excise taxes or duties placed on imported products.
C. licensing requirements, unreasonable quality standards, and the like designed to impede imports.
D. government payments to domestic producers to reduce the world prices of exported goods.

7. Appreciation of the Mexican peso will:

A. make Mexico's exports and imports both more expensive.
B. make Mexico's exports more expensive and its imports less expensive.
C. make Mexico's exports less expensive and its imports more expensive.
D. increase Mexican exports.

8. The emigration of software designers from India to the United States best illustrates a(n):

A. trade flow.
B. resource flow.
C. financial flow.
D. information flow.

9. A nation's true gain from international trade is:

A. decreased employment in the export industries.
B. an overall increase in output obtained through specialization and exchange.
C. added technological knowledge.
D. the tariff revenue that goes to the national treasury.

10. If the exchange rate between Mexico and the United States is $1 = 11 pesos, how much would it cost in pesos to rent a $500 per month condo in Mexico?

A. 500 pesos
B. 34.45 pesos
C. Not enough information is given
D. 5,500 pesos

11. If the exchange rate between Mexico and U.S. was $1 = 11 pesos but is now $1 = 6 pesos, which of following statements is true?

A. Both currencies appreciated
B. Both currencies depreciated
C. The peso depreciated while the U.S. dollar appreciated
D. The peso appreciated while the U.S. dollar depreciated

12. Which is a valid reason why international trade is growing?

A. Governments are increasing non-tariff trade barriers
B. Governments have been lowering their average tariff rates for imports
C. Transporting freight across the ocean has been increasing.
D. Governments have been increasing the average rate of tariffs on imports.


1. C 2. A 3. A 4. A 5. B 6. B
7. B 8. B 9. B 10. D 11. D 12. B