Econ 1040 Final

1. According to the text, economics is the study of how:
A. governments allocate resources in the face of constraints.
B. government policies can be used to meet individuals’ wants and desires.
C. human beings coordinate their wants and desires in the face of constraints.
D. scarce resources are allocated to their most productive uses.
. human beings coordinate their wants and desires in the face of constraints

According to the text, economics “is the study of how human beings coordinate their wants and desires given a society’s decision-making mechanisms, social customs, and political realities.”

If allocating dorm rooms changes from allocation by lottery to allocation by the market:
A. it becomes an economic problem.
B. it becomes a political problem but not an economic problem.
C. it becomes a social problem but not an economic problem.
D. the allocation problem is still an economic problem.
the allocation problem is still an economic problem.

The economic problem arises when limited resources must be allocated among individuals. The problem existed before any allocation mechanism was chosen.

. The quantity of goods and services available to society:

A. is fixed.
B. depends on human action.
C. is not of economic importance.
D. will always grow to meet individuals’ wants and desires.

depends on human action

The quantity of goods and services available depends on the incentives to work.

To engage in economic reasoning, you must compare:

A. total cost and total benefit.
B. marginal cost, sunk cost, and total benefit.
C. sunk cost and marginal cost.
D. marginal cost and marginal benefit.

marginal cost and marginal benefit

Such a comparison makes it possible to determine whether the marginal benefit of an action exceeds the marginal cost.

Sunk costs:

A. are essential parts of economic reasoning.
B. are irrelevant to economic reasoning.
C. should be considered, but only when marginal cost is less than marginal benefit.
D. should be considered only when there is no information about marginal cost and marginal benefit.

are irrelevant to economic reasoning.

Sunk costs are costs that have already been incurred and cannot be recaptured. They are in essence “water under the bridge” and as such, they do not influence economic decisions.

Marginal analysis suggests that you will engage in more of an activity if the:

A. total benefit of the activity is less than the total cost.
B. additional benefit from the activity exceeds the additional cost.
C. total benefit from the activity exceeds the total cost.
D. additional cost of the activity exceeds the additional benefit.

additional benefit from the activity exceeds the additional cost

The economic decision rule is to do more of something if the marginal benefit exceeds the marginal cost.

. Your opportunity cost of taking this course is:

A. the tuition you paid for the course.
B. the net benefit of the activity you would have chosen if you had not taken the course.
C. the net benefit of taking this course.
D. the cost of the activity you would have chosen if you had not taken the course.

. the net benefit of the activity you would have chosen if you had not taken the course.

. The price mechanism that guides our actions is called the:

A. invisible market force.
B. invisible hand.
C. invisible handshake.
D. invisible foot.

. invisible hand.

. A cultural norm is:

A. an economic force.
B. a social force.
C. a political force.
D. a market force.

. a social force.

. Experimental economics is:

A. a naturally occurring event that approximates a controlled experiment.
B. not possible given that economists study real-world events.
C. a branch of economics that studies the economy through controlled lab experiments.
D. what all economists do when they develop their models.

a branch of economics that studies the economy through controlled lab experiments

. Modern traditional economists use models that focus on which two assumptions?

A. Rationality and self-interest.
B. Duplicity and self-interest.
C. Predictable irrationality and purposeful self-interest.
D. Predictiable irrationality and efficiency.

Rationality and self-interest.

. Modern behavioral economists are most likely to incorporate an assumption of:

A. Self-interest.
B. Rationality.
C. Predictable irrationality.
D. Efficiency.

Predictable irrationality.

17. An economist who is studying the relationship between the money supply, interest rates, and the rate of inflation is engaged in:
A. microeconomic research.
B. macroeconomic research.
C. theoretical research because there is no data on these variables.
D. empirical research because there is no economic theory related to these variables.
B. macroeconomic research.

18. Which of the following topics is most appropriately studied in a microeconomics course?
A. The decision by a nurse to change professions.
B. When the next recession will arrive.
C. Why unemployment is so low and inflation has not accelerated.
D. How the presidential candidates’ tax plans might affect economic growth.
A. The decision by a nurse to change professions.

Microeconomics is the study of individual choice.

. “Government should not use price controls” is an example of:

A. positive economics.
B. normative economics.
C. the art of economics.
D. Marshallian economics.

B. normative economics.

“Should” statements are always normative, or based upon opinion.

21. The law of demand states that consumers buy more of a good when its price declines:
A. because their income increases at the same time.
B. only if their income increases at the same time.
C. even if other demand determinants change at the same time.
D. provided all else remains constant.
D. provided all else remains constant.

The law of demand states that more of a good will be demanded the lower its price, other things constant, and less of a good will be demanded the higher its price, other things constant.

22. The use of the phrase “other things constant” in supply and demand analysis indicates that:
A. an equilibrium price has been reached.
B. an equilibrium quantity has been reached.
C. we are considering changes in just one factor.
D. we are considering all the changes which might take place in actual markets.
C. we are considering changes in just one factor.

Other things constant means that all other factors that could affect the analysis remain constant whether they actually do or not. It does not indicate when equilibrium has been reached.

23. Which of the following would likely result in an increase in the demand for beef?
A. A decrease in the supply of beef.
B. An increase in family incomes.
C. An increase in the price of feed grains for cattle.
D. A decrease in the price of pork.
B. An increase in family incomes.

A decrease in the supply of beef would result in a movement along a demand curve as the market price of beef rose. An increase in family incomes would increase the demand for beef. An increase in the price of feed grains would shift the supply curve for beef to the left, resulting in higher market price for beef and a movement along the demand curve for beef. A decrease in the price of pork would decrease the demand for beef.

24. When applied to labor markets, the law of supply suggests that:
A. an increase in the wages earned by nurses will cause the quantity of nurses supplied to increase.
B. a decrease in the wages earned by nurses will cause the quantity of nurses supplied to increase.
C. an increase in the wages earned by nurses will cause the quantity of nurses demanded to increase.
D. a decrease in the wages earned by nurses will cause the quantity of nurses demanded to increase.
A. an increase in the wages earned by nurses will cause the quantity of nurses supplied to increase.

The law of supply states that as the price of a good rises, the quantity of it supplied will rise. The law of supply does not address the relationship between price and quantity demanded.

26. If you observe a market where quantity demanded doesn’t equal quantity supplied, a logical conclusion is that:
A. the law of demand and supply do not hold in the market.
B. the fallacy of composition is not operative in the market.
C. the invisible hand is the only force at work in the market.
D. social and political forces are likely to exist.
D. social and political forces are likely to exist.

Where the invisible hand is the only force, equilibrium is likely to be where quantity demanded equals quantity supplied. But, in the real world, political and social forces are likely to exist so that equilibrium can be where quantity demanded doesn’t equal quantity supplied.

27. In the early 2000s, the number of Eastern Europeans moving to England to join the labor force increased. This has led to fears by British citizens that Eastern Europeans will steal jobs from Western Europeans. What best describes their fear?
A. Wages in Britain will fall as the demand for immigrants increases.
B. Cost of living in Britain will increase as the demand for goods increases.
C. Wages in Britain will fall since the quantity of labor supplied is increasing.
D. Wages in Britain will fall since the supply of labor is increasing.
D. Wages in Britain will fall since the supply of labor is increasing.

An increase in immigration causes the supply curve to shift to the right, putting downward pressure on wages. Although the cost of living may rise, the fear expressed is based on labor market conditions, not goods market condition.

28. The model of supply and demand leads to the prediction that low interest rates cause:
A. an increase in housing prices, especially in cities with plenty of room for expansion.
B. an increase in housing prices, especially in cities with limited land.
C. a decrease in housing prices, especially in cities with plenty of room for expansion.
D. a decrease in housing prices, especially in cities with limited land.
B. an increase in housing prices, especially in cities with limited land.

An increase in demand causes an increase in both equilibrium price and equilibrium quantity. With limited land, the supply is more price-inelastic (steeper), so the increase in equilibrium price is relatively larger in this case.

. In 2004, oil facilities in Iraq were attacked amid strong demand for oil. In response, political pressure motivated OPEC to increase the daily quota by 2 million barrels a day. Assuming demand did not change, which of the following series of prices most likely matches how the price of a barrel of oil changed from (1) before the attack, to (2) just after the attack, to (3) after OPEC increased the quota?
A. $42, $38, $40
B. $38, $40, $42
C. $42, $40, $38
D. $40, $42, $38
D. $40, $42, $38
Events in Iraq initially caused the price to rise from $40 to $42; increased production by OPEC then lowered the price to $38.

Fluctuations around the long-term growth rate are called:
A. recessions. B. depressions. C. expansions. D. business cycles.
D. business cycles.

Expansion occurs when..
Output rises

With respect to the unemployment problem, Keynesian economists generally take the position that:
A. government should guarantee each person a satisfying and high-paying job. B. government should eliminate only frictional unemployment. C. each person should have a job commensurate with their training or past job experience. D. individuals should be responsible for finding their own jobs.
each person should have a job commensurate with their training or past job experience.

A guarantee of a satisfying and high-paying job exceeds the position of Keynesian economists that each person should have a job commensurate with his/her training and past experience.

The price index that measures the average rate of change in the prices received by domestic producers of goods and services is called the:
A. PCE deflator.
B. CPI.
C. GDP deflator.
D. PPI.
D. PPI.

5. The largest expenditure component of GDP is:
A. consumption.
B. investment.
C. net exports.
D. government spending.
A. consumption.

6. If an economy produces 100 pencils and 100 pens and pencils sell for twice as much as pens: A. pencils are weighted as twice as important in the economy compared to pens. B. pens are weighted as twice as important in the economy compared to pencils. C. pencils are weighted as equally important in the economy as pens. D. nothing can be said about the relative importance of pens and pencils in the economy
A. pencils are weighted as twice as important in the economy compared to pens.

Each good is weighted by its market price.

7. Aggregate income is a measure of: A. household and business earnings from the sale of productive resources. B. the market value of total output. C. income households have available to spend before paying personal taxes. D. income households have available to spend after paying personal taxes.
A. household and business earnings from the sale of productive resources.

Aggregate income (National Income) equals the total income earned by citizens and businesses in a country.

8. Personal consumption expenditures consist of: A. household and individual purchases of services and durable and nondurable goods. B. foreign investments in the United States. C. foreign plus domestic investments. D. domestic investments.
. household and individual purchases of services and durable and nondurable goods.

9. Investment includes: A. an increase in corporate stock volumes during the year. B. the purchase of medical supplies by the National Guard. C. an increase in government purchases. D. an increase in business inventories.
D. an increase in business inventories.

Changes in business inventories are part of gross private domestic investment.

10. Real GDP can be used to accurately measure: A. economic welfare over time. B. the size of an economy’s underground economy. C. the change in market production over time. D. the change in market prices over time.
C. the change in market production over time.

Real GDP measures market activity, not human happiness, so it is not a good measure of welfare. It also excludes price changes and the underground economy.

11. If real GDP has increased by 3% and nominal GDP has increased by 5%, then: A. depreciation is 2%. B. net factor income is 2%. C. inflation is 2%. D. net exports are 2%.
inflation is 2%.

Percentage change in real GDP = percentage change in nominal GDP minus the rate of inflation.

12. If a country’s population is 10 million and its GDP is $113 billion, its per capita output is: A. $113. B. $1,130. C. $11,300. D. $113,000.
C. $11,300.

Per capita output is obtained by dividing GDP by the population.

13. In the early 2000s, analysts feared that low academic achievement in math in the United States may reduce U.S. economic growth by as much as half a percentage point a year. In terms of factors leading to growth, the low math scores indicate that the U.S. may be at a disadvantage in terms of: A. social capital. B. human capital. C. growth-compatible institutions. D. technology.
B. human capital.

Human capital is acquired skill that makes people more productive.

14. One reason why the Soviet Union grew slowly in the 20th century compared to the U.S. and Western Europe was that it: A. did not invest as much in capital goods. B. invested in too many consumer goods. C. licensed too many private enterprises, creating destructive competition. D. did not provide incentives for individuals to produce what consumers valued.
D. did not provide incentives for individuals to produce what consumers valued.

The Soviet Union did invest in capital goods (at the expense of consumer goods) but still did not grow. It lacked institutions with incentives for individuals to work hard.

5. According to estimates in the text, which of the following factors made the most important contribution to U.S. growth between 1928 and today? A. Technology. B. Human capital. C. Physical capital. D. Labor.
. Technology.

At 35 percent, technology contributed more to growth than any other factor.

16. According to the Classical growth model, an economy that increases its saving will grow: A. slower because consumption and aggregate demand will be reduced. B. slower because interest rates will fall, causing investment to decline. C. faster since the increase in saving will permit greater investment. D. faster since the increase in saving will permit more rapid technological progress.
C. faster since the increase in saving will permit greater investment.

Greater saving permits higher level of investment and capital accumulation, which in turn stimulate growth.

18. Network externalities: A. can explain why more efficient technologies displace less efficient technologies. B. can explain why the economy fails to adopt the most efficient technologies. C. reduce the cost of switching to new technologies. D. can explain why technological lock-in no longer occurs.
B. can explain why the economy fails to adopt the most efficient technologies.

Network externalities increase the value of a technology as the number of users of that technology increases. This can block the use of more efficient technologies because it increases the cost of switching to these technologies.

19. Per capita real output is a: A. better measure of personal material consumption than real GDP. B. worse measure of personal material consumption than real GDP. C. better measure of the physical environment than real GDP. D. worse measure of the physical environment than real GDP.
. better measure of personal material consumption than real GDP.

Since per capita real output equals real GDP divided by the population, it provides a measure of
a society’s average level of personal consumption, unlike real GDP.

20. U.S. economic growth in output since about 1890 has averaged: A. 0 to 1 percent.B. 1 to 2.5 percent. C. 2.5 to 3.5 percent. D. 5 to 5.5 percent.
C. 2.5 to 3.5 percent.

21. Discouraged workers are people who: A. get discouraged about how full-time work is so full of drudgery and petty backbiting. B. get discouraged when they can’t find a job, and stop looking for one, even though they still want a job. C. are looking for a job at some other firm because they were discouraged from trying to climb the corporate ladder at their current job. D. are looking to change jobs because they were part of a failed effort to install a union at their old job.
B. get discouraged when they can’t find a job, and stop looking for one, even though they still want a job.

Discouraged workers don’t have jobs, but they’d like one. They’re so discouraged that they’ve stopped looking for a job.

The U.S. government reported in March 2009 that there were 81.0 million people not in the labor force; 154.0 million in the civilian labor force, and 140.9 million employed.

22. Based on these numbers, how many people were counted as unemployed? A. 81.0 million. B. 73.0 million. C. 59.9 million. D. 13.1 million.

. 13.1 million.

The unemployed are the labor force minus the employed, or 154.0 – 140.9 = 13.1.

23. Structural unemployment is caused by: A. a general downturn in the economy. B. people quitting a job just long enough to look for and find another one. C. people over 65 who don’t really want to work. D. people losing a job when their skills become obsolete due to technological innovations.
D. people losing a job when their skills become obsolete due to technological innovations.

Structural unemployment is unemployment caused by economic restructuring which makes some skills obsolete

24. The lowest sustainable rate of unemployment that policy makers believe is achievable under existing conditions is: A. zero. B. called the target rate of unemployment. C. called the optimal rate of unemployment. D. called cyclical unemployment.
B. called the target rate of unemployment.

25. How does stock differ from flow? A. A flow concept has meaning over a specified period of time, while a stock concept is a value at a point in time. B. A flow concept is a value at a point in time, while a stock concept has meaning over a specified period of time. C. They do not differ; both flow and stock concepts have meaning only over a specified period of time. D. They do not differ; both flow and stock concepts are values at a point in time.
A flow concept has meaning over a specified period of time, while a stock concept is a value at a point in time

26. Using the expenditure approach, gross domestic product equals: A. gross national product. B. gross national product minus net exports. C. the sum of consumption, investment, government purchases. D. the sum of consumption, investment, government purchases and net exports.
D. the sum of consumption, investment, government purchases and net exports.

The sum of these four components equals total expenditure.

27. The $400 dividend check a stockholder receives is included in aggregate accounting as: A. profits. B. rents. C. employee compensation. D. interest.
A. profits.

Dividends are the means corporations use to distribute profits to stockholders.

9. The size of underground economies differs across countries. In Greece it has been estimated to be as big as 30% of GDP, in Spain 25%, in Italy 20%, and in the United States, about 7%. Given this information, official GDP measures understate true economic activity the most in: A. Greece. B. United States. C. Italy. D. Spain.
A. Greece.

Since Greece has the reportedly largest relative underground economy, official statistics underestimate Greek production the most.

0. The Rule of 72 implies that a country will double its income in about 4 years if its growth rate is: A. 8 percent. B. 12 percent. C. 18 percent. D. 25 percent.
C. 18 percent

The Rule of 72 says that a country’s income will double in the number of years equal to 72 divided by the country’s growth rate. Dividing 72 by 4 gives us a growth rate of 18 percent.

31. Say a pill existed that made people selfless. After taking it they were only interested in others not themselves. Under the coordination definition of economics: A. no economic problem would exist. B. there would still be an economic problem. C. there would be a political problem but not an economic problem. D. there would be a social problem but not an economic problem.
B. there would still be an economic problem.

The coordination definition of economics focuses on the need for the coordination of activities and resources. Even if everyone were selfless, there would still be the need for coordinating the selfless actions so that those actions and resources are allocated efficiently.

32. To engage in economic reasoning, you must compare: A. total cost and total benefit. B. marginal cost, sunk cost, and total benefit. C. sunk cost and marginal cost. D. marginal cost and marginal benefit.
D. marginal cost and marginal benefit.

34. Experimental economics is: A. a naturally occurring event that approximates a controlled experiment. B. not possible given that economists study real-world events. C. a branch of economics that studies the economy through controlled lab experiments. D. what all economists do when they develop their models.
a branch of economics that studies the economy through controlled lab experiments.

35. The invisible hand theorem relates mostly to: A. microeconomics. B. macroeconomics. C. normative economics. D. Marshallian economics.
Microeconomics.

The invisible hand theorem is the price mechanism that affects individual decisions.