Sample Questions and Answers
A decrease in the price level will likely lead to:
A. An increase in aggregate demand
B. A decrease in aggregate demand
C. A decrease in interest rates
D. A decrease in real GDP
Answer: A
The “crowding out” effect suggests that:
A. Increased government spending leads to a reduction in private sector spending
B. Lower interest rates lead to increased private investment
C. Higher taxes increase private investment
D. Government borrowing leads to increased demand for goods and services
Answer: A
The Phillips curve represents the relationship between:
A. Aggregate supply and output
B. The price level and the unemployment rate
C. Real GDP and nominal GDP
D. The money supply and interest rates
Answer: B
Which of the following is most likely to increase the long-run aggregate supply (LRAS)?
A. A decrease in the price of oil
B. An increase in labor productivity
C. A decrease in the money supply
D. A decrease in government spending
Answer: B
If the economy is experiencing inflation, the central bank might implement:
A. Expansionary fiscal policy
B. Contractionary monetary policy
C. Expansionary monetary policy
D. Contractionary fiscal policy
Answer: B
The formula for calculating the unemployment rate is:
A. (Number of unemployed ÷ Total population) × 100
B. (Number of unemployed ÷ Labor force) × 100
C. (Number of employed ÷ Total population) × 100
D. (Number of unemployed ÷ Employed workers) × 100
Answer: B
Which of the following would cause a rightward shift in the aggregate demand curve?
A. An increase in the money supply
B. A decrease in government spending
C. A decrease in consumer confidence
D. An increase in interest rates
Answer: A
Which of the following is a characteristic of a recession?
A. Decreasing unemployment rates
B. A rise in the stock market
C. Decreasing real GDP
D. Increased consumer confidence
Answer: C
The monetary policy tool most commonly used to control inflation is:
A. Changing government tax rates
B. Adjusting the reserve requirement
C. Changing the interest rate
D. Changing the amount of government spending
Answer: C
The purpose of the Federal Reserve’s open market operations is to:
A. Control the supply of money
B. Influence the interest rate
C. Increase government spending
D. Control inflation
Answer: A
An increase in the inflation rate will likely lead to:
A. A decrease in nominal wages
B. An increase in real wages
C. A decrease in interest rates
D. An increase in nominal wages
Answer: D
Which of the following is likely to increase aggregate supply in the long run?
A. Increased government spending
B. A decrease in resource prices
C. Increased taxes
D. A decrease in government investment
Answer: B
Which of the following is an example of a public good?
A. A bicycle
B. A streetlight
C. A smartphone
D. A sandwich
Answer: B
A perfectly inelastic demand curve:
A. Is vertical
B. Is horizontal
C. Slopes downward
D. Slopes upward
Answer: A
The marginal cost curve typically slopes upward because:
A. Firms face diminishing returns to labor and capital
B. The price of inputs increases as output increases
C. Firms are unable to adjust their production levels
D. The marginal utility of the product decreases
Answer: A
Which of the following best describes monopolistic competition?
A. A market with one dominant firm and many small firms
B. A market with many firms selling identical products
C. A market with many firms selling differentiated products
D. A market with barriers to entry and a single firm
Answer: C
A price ceiling is:
A. A government-imposed maximum price
B. A government-imposed minimum price
C. The price at which demand equals supply
D. The price where total surplus is maximized
Answer: A
The concept of opportunity cost is best illustrated by:
A. The total cost of producing a good
B. The value of the best alternative forgone when making a decision
C. The cost of a good including both fixed and variable costs
D. The benefit of gaining additional units of a good
Answer: B
A natural monopoly occurs when:
A. A firm controls a large portion of the market
B. The firm can produce a good at a lower cost than multiple firms
C. Government regulation ensures competition
D. The market experiences diminishing marginal returns
Answer: B
Which of the following is true about a firm in a perfectly competitive market in the long run?
A. The firm earns an economic profit
B. The firm will face decreasing marginal returns
C. The firm’s economic profit will be zero
D. The firm can increase its price without losing customers
Answer: C
A firm’s average total cost curve is U-shaped because:
A. Marginal cost decreases as output increases
B. Average variable cost decreases as output increases
C. Initially, average total cost falls with increased output, but eventually rises due to diminishing returns
D. Total fixed costs remain constant as output increases
Answer: C
The income effect states that as the price of a good decreases, consumers will:
A. Purchase more of the good because their real income increases
B. Substitute the good with a less expensive alternative
C. Buy less of the good because they feel wealthier
D. Purchase more of the good due to the price being lower
Answer: A
Which of the following describes the “law of supply”?
A. As the price of a good increases, the quantity supplied decreases
B. As the price of a good increases, the quantity supplied increases
C. As the price of a good decreases, the quantity supplied increases
D. As the price of a good decreases, the quantity supplied stays the same
Answer: B
A firm with market power is able to:
A. Set prices higher than in perfectly competitive markets
B. Sell at a price equal to the market equilibrium price
C. Operate without facing any competition
D. Increase its market share by lowering prices
Answer: A
A situation where one firm controls the entire market for a good or service is known as:
A. Monopolistic competition
B. Oligopoly
C. Monopoly
D. Perfect competition
Answer: C
In which of the following market structures are firms most likely to produce at a level where price equals marginal cost?
A. Monopoly
B. Monopolistic competition
C. Perfect competition
D. Oligopoly
Answer: C
The price elasticity of supply is defined as:
A. The percentage change in quantity supplied divided by the percentage change in price
B. The percentage change in price divided by the percentage change in quantity demanded
C. The percentage change in price divided by the percentage change in quantity supplied
D. The percentage change in quantity demanded divided by the percentage change in price
Answer: A
Which of the following would most likely cause a shift in the supply curve for wheat?
A. A change in consumer income
B. A change in the price of fertilizers
C. A change in the price of wheat
D. A change in government policy
Answer: B
Section 2: Macroeconomics
Which of the following is a key characteristic of a recession?
A. Rapid increase in employment
B. A decrease in real GDP
C. A reduction in the inflation rate
D. A rise in consumer spending
Answer: B
Which of the following is NOT a component of the calculation of GDP using the expenditure approach?
A. Consumption
B. Investment
C. Exports
D. Transfer payments
Answer: D
When the government reduces taxes, it is likely to:
A. Increase aggregate demand
B. Decrease aggregate demand
C. Have no effect on aggregate demand
D. Decrease supply in the economy
Answer: A
If the central bank increases the money supply, this is likely to:
A. Lower interest rates
B. Increase interest rates
C. Have no effect on interest rates
D. Decrease investment in the economy
Answer: A
An increase in government spending typically causes:
A. An increase in aggregate supply
B. An increase in aggregate demand
C. A decrease in aggregate demand
D. A decrease in government borrowing
Answer: B
A decrease in the interest rate will likely cause:
A. An increase in aggregate demand
B. A decrease in aggregate supply
C. An increase in taxes
D. A decrease in government spending
Answer: A
In the long run, an economy’s output is determined by:
A. The money supply
B. Government spending
C. Labor, capital, and technology
D. The level of inflation
Answer: C
The Federal Reserve can increase the money supply by:
A. Raising interest rates
B. Selling government bonds
C. Lowering the reserve requirement
D. Increasing taxes
Answer: C
A country’s real GDP can grow if:
A. The country has higher inflation rates
B. The economy experiences more consumption
C. There is an increase in productivity
D. Government spending decreases
Answer: C
Which of the following best describes a budget deficit?
A. Government spending exceeds tax revenue
B. Government spending equals tax revenue
C. Tax revenue exceeds government spending
D. The government borrows money to reduce debt
Answer: A
The labor force participation rate measures:
A. The percentage of the working-age population that is employed
B. The percentage of the population that is either employed or actively seeking work
C. The total number of people employed in the economy
D. The number of people who are unemployed and actively seeking work
Answer: B
The aggregate demand curve slopes downward due to:
A. The wealth effect, interest rate effect, and foreign purchases effect
B. The law of diminishing marginal returns
C. The law of supply and demand
D. The substitution effect
Answer: A
If inflation rises, the central bank may:
A. Increase interest rates to decrease inflation
B. Decrease interest rates to stimulate spending
C. Increase taxes to reduce consumption
D. Decrease government spending to reduce aggregate demand
Answer: A
Which of the following is most likely to increase aggregate supply in the long run?
A. A decrease in government taxes
B. An increase in the cost of raw materials
C. An increase in productivity
D. An increase in interest rates
Answer: C
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