What is economics?

1 Economics is the study of

A) production technology
B) consumption decisions
C) how society decides what, how, and for whom to produce
D) the best way to run society

2 A resource is scarce if supply exceeds demand at zero price

A) TRUE
B) FALSE

3 The opportunity cost of a good is

A) the time lost in finding it
B) the quantity of other goods sacrificed to get another unit of that good
C) the expenditure on the good
D) the loss of interest in using savings

4 A market can accurately be described as

A) a place to buy things
B) a place to sell things
C) the process by which prices adjust to reconcile the allocation of resources
D) a place where buyers and sellers meet

5 A command economy decides resource allocation by government planning

A) TRUE
B) FALSE

6 In a free market __________ ___________

A) governments intervene
B) governments plan production
C) governments interfere
D) prices adjust to reconcile scarcity and desires

7 In the mixed economy

A) economic problems are solved by the government and market
B) economic decisions are made by the private sector and free market
C) economic allocation is achieved by the invisible hand
D) economic questions are solved by government departments

8 Positive economics studies objective explanations of the workings of the economy

A) TRUE
B) FALSE

9 Normative economics forms ___________ based on _____________

A) positive statements, facts
B) opinions, personal values
C) positive statements, values
D) opinions, facts

10 Microeconomics is concerned with

A) the economy as a whole
B) the electronics industry
C) the study of individual economic behaviour
D) the interactions within the entire economy

11 Macroeconomics is the study of ___________________

A) individual building blocks in the economy
B) the relationship between different sectors of the economy
C) household purchase decisions
D) the economy as a whole
12 An economic model is a physical representation of an economy
A) TRUE
B) FALSE

13 Data are important in economics because __________ and __________

A) they suggest relationships for explanation, allow testing of hypotheses
B) they can be used for tables, they can be graphed
C) they can be used in computers, governments use them
D) they provide interesting information, can be summarised

14 Time series data show information

A) about the same point in time over different places
B) about different points in time over the same variable
C) about different variables over different places
D) about different points in time over different places

15 Index numbers express base data in relation to some relative value

A) TRUE
B) FALSE

16 The retail price index is used to ______________

A) construct price lists
B) compare shop prices
C) measure changes in the cost of living
D) none of the above

17 A real value can be derived from a nominal value by

A) adjusting for changes over time
B) adjusting for data collection errors
C) adjusting for population changes
D) adjusting for changes in prices

18 To find the percentage change in a number, divide the absolute change by the original number and multiply by 100
A) TRUE
B) FALSE

19 If your income during one year is £10,000 and the following year it is £12,000, then it has grown by
A) 20%
B) 2%
C) 12%
D) 16%

20 A straight-line diagram can be drawn knowing the ______ and _________

A) vertical axis and horizontal axis
B) intercept and slope
C) scale and slope
D) intercept and scale

21 On a graph, a positive linear relationship

A) moves down to the right
B) moves up to the left
C) moves up to the right
D) moves down to the left

22 If the diagram of a line shows that lower values on the vertical scale are associated with higher values on the
horizontal scale, this is an example of _____________
A) a nonlinear relationship
B) a positive linear relationship
C) a scatter diagram
D) a negative linear relationship

23 When we know the quantity of a product that buyers wish to purchase at each possible price, we know
A) Demand
B) Supply
 C) Excess demand
D) Excess supply

24 Supply is the quantity of a good sellers wish to sell each time the market opens
A) TRUE
B) FALSE

25 The equilibrium price clears the market; it is the price at which ________ _________
A) Everything is sold
B) Buyers spend all their money
C) Quantity demanded equals quantity supplied
D) Excess demand is zero
E) c and d

26

When a market is in equilibrium

A) Quantity demanded equals quantity supplied
B) Excess demand and excess supply are zero
C) The market is cleared by the equilibrium price
D) All of the above

27

________ and ________ do not directly affect the demand curve

A) the price of related goods, consumer incomes
B) consumer incomes, tastes
C) the costs of production, bank opening hours
D) the price of related goods, preferences

28

A change in price can cause a shift of a demand curve

A) TRUE
B) FALSE

29

A demand curve can shift because of changing

A) incomes
B) prices of related goods
C) tastes
D) all of the above

30

A supply curve is directly affected by

A) technology
B) input costs
C) government regulation
D) all of the above

31

An increase in price will cause a supply curve to shift to the left

A) TRUE
B) FALSE
32

If a price increase of good A increases the quantity demanded of good B, then good B is a
A) substitute good
B) complementary good
C) bargain
D) inferior good

33

An increase in consumer income will increase demand for a _______ but decrease demand for a _________
A) substitute good, inferior good
B) normal good, inferior good
C) inferior good, normal good
D) normal good, complementary good

34

Price ceilings are imposed increase price above the free market equilibrium price
A) TRUE
B) FALSE

Demand and supply decisions

Multiple Choice Quiz

The price elasticity of demand measures ________________

A) the responsiveness of quantity demanded to a change in price
B) how far a demand curve shifts
C) a change in price
D) a change in quantity demanded

If demand is ___________ then price cuts will __________ spending

A) inelastic, increase
B) elastic, increase
C) elastic, decrease
D) none of the above

The cross-price elasticity of demand measures how the quantity demanded of one good is related to consumer income
A) TRUE
B) FALSE

Positive cross-elasticities suggest that goods are _________ and negative cross-elasticities that goods are __________
A) substitutes, inferior
B) normal, complements
C) substitutes, complements
D) normal, inferior
5

A measurement showing how quantity demanded varies with income is the

A) price elasticity of demand
B) cross-price elasticity of demand
C) budget elasticity of demand
D) income elasticity of demand

Inferior goods have ___________ and luxury goods have ____________

A) negative income elasticities, income elasticities greater than 1
B) income elasticities greater than 1, negative income elasticities
C) positive income elasticities, negative income elasticities
D) none of the above

If your income doubles and the prices of the goods you buy double, then your demand for these goods will likely
________
A) increase
B) not change
C) decrease
D) shift

Any price change can be decomposed into an income effect and a complementary effect
A) TRUE
B) FALSE

The income effect of a price increase of a normal good is to __________ of that good and the substitution effect is to
_______ of that good
A) increase quantity demanded, reduce quantity demanded
B) increase quantity demanded, increase quantity demanded
C) reduce quantity demanded, reduce quantity demanded
D) reduce quantity demanded, increase quantity demanded

10

The opportunity cost of a student is

A) Course fees and rent
B) A loan from the bank
C) What the student could have earned in the best job available by not studying
D) What the student will earn after graduation

11

Economics assumes that people consume goods and services to achieve

A) Status
B) Prestige
C) Utility
D) Self-esteem
12

The extra utility from consuming one more unit of a good is called
A) Marginal utility
B) Additional utility
C) Surplus utility
D) Bonus utility

13

Adding up the quantities demanded of a good by different people facing the same price gives us the
A) Supply curve
B) Market demand curve
C) Demand curve
D) Market supply curve

14

Firms are assumed to _________ costs and to _________ profits

A) incur, desire
B) pay, make
C) charge, earn
D) minimize, maximize

15

The increase in total cost when one more unit is produced is known as
A) marginal cost
B) opportunity cost
C) limited cost
D) average cost

16

Marginal revenue is the _________ when output is ____________

A) change in average revenue, increased
B) change in total revenue, increased by one unit
C) change in average revenue, increased by one unit
D) change in total revenue, increased

17

Profits are maximized when _________________

A) costs are minimized
B) revenue is maximized
C) average cost is less than average revenue
D) marginal cost equals marginal revenue

18

If a firm is producing a level of output where marginal cost is greater than marginal revenue, it should increase output to
maximise profits
A) TRUE
B) FALSE

19
If a firm's wage costs increase this will cause __________ and ________
A) marginal cost to increase, output to fall
B) marginal revenue to increase, output to fall
C) opportunity cost to increase, the firm will close
D) average cost will rise, output will increase

20

An upward shift in marginal cost ________output and an upward shift in marginal revenue ________ output
A) reduces, reduces
B) reduces, increases
C) increases, increases
D) increases, reduces

21

A firm should close down if profits are zero

A) TRUE
B) FALSE

22

A firm that breaks even after all economic costs are paid is earning
A) Economic profit
B) Accounting profit
C) Normal profit
D) Supernormal profit

23

A firm that makes profit in addition to normal profit is making

A) Economic profit
B) Accounting profit
C) Normal profit
D) Supernormal profit

24

If both marginal cost and marginal revenue increase, a firm __________

A) should increase output
B) should reduce output
C) will require further information on how to respond
D) should not change output

Costs, supply, and perfect competition

Multiple Choice Quiz

A production technique is technically efficient if

A) output is maximized
B) inputs are minimized
C) there is no way to make a given output using less of one input and no more of the other inputs
D) costs are minimized
2

A period of time long enough for the firm to adjust all production inputs is described as the long run
A) TRUE
B) FALSE

Decreasing returns to scale means that ___________ as ______________

A) short run marginal costs rises, output rises
B) long run marginal cost rises, output rises
C) short run average cost rises, output rises
D) long run average cost rises, output rises

If a long run average cost curve is falling from left to right this is an example of
A) increasing returns to scale
B) decreasing returns to scale
C) constant returns to scale
D) the minimum efficient scale

If a firm is not operating at the output necessary to achieve all scale economies, it has not achieved its
A) Efficient scale
B) Average efficient scale
C) Maximum efficient scale
D) Minimum efficient scale

When average cost is falling marginal cost is __________ and when average cost is rising marginal cost is __________
A) greater than average cost, greater than average cost
B) less than average cost, greater than average cost
C) less than average cost, less than average cost
D) greater than average cost, less than average cost

The firms long run output decision will be where

A) long run average cost is lowest
B) marginal revenue equals output
C) marginal revenue equals long run marginal cost
D) marginal cost equals output

Short run average total costs are equal to the sum of _________ and __________
A) short run opportunity costs, profit
B) short run variable costs, profit
C) short run average variable costs, profit
D) short run average variable costs, short run average fixed costs

9
The short run marginal cost curve cuts the short run total cost curve and short run average variable cost curve
______________
A) At their lowest points
B) When they are declining
C) When they are increasing
D) When marginal revenue is zero

10

Given a long run average cost curve, every point represents a tangency with the lowest point of a short run average cost
curve for a fixed plant size
A) TRUE
B) FALSE

11

Holding all factors constant except one and increasing a variable factor is expected to lead to steadily decreasing
marginal product of that factor. This is an example of
A) decreasing returns to scale
B) the law of diminishing returns
C) constant returns to scale
D) an inefficient production technique

12

In the short run a firm will produce zero output if __________

A) price is greater than short run average total cost
B) price is between short run average total cost and short run average variable cost
C) price is less than short run average variable cost
D) profit is zero

13

In a competitive industry each buyer and seller _____________

A) Is a price taker
B) Produce different products
C) Believes that can influence price
D) Prevents the entry of competitors

14

For a competitive firm, its short run supply curve is ________ and its long run supply curve is __________
A) SMC, LMC
B) SMC above SAVC, LMC above LAC
C) SMC below SAVC, LMC above LAC
D) SMC below SAVC, LMC below LAC

15

For perfect competition to work there must be

A) many buyers and sellers
B) a standard product
C) free entry and exit
D) perfect information
E) all of the above

16
If there are short run excess profits in a competitive industry, in the long run they will disappear because of new
entrants
A) TRUE
B) FALSE

17

A competitive firms demand curve is

A) horizontal
B) vertical
C) downward sloping
D) fairly elastic

18

A competitive firm produces a level of output at which _________

A) price is greater than marginal cost
B) price equals marginal cost
C) price is less than marginal cost
D) none of the above

Market structure and imperfect competition

Multiple Choice Quiz

The supply rule of the profit maximising monopolist is different from that of a competitive firm
A) TRUE
B) FALSE

Comparing a monopoly and a competitive firm, the monopolist will _______________

A) produce less at a lower price
B) produce more at a lower price
C) produce less at a higher price
D) produce less at a lower price

A discriminating monopolist will charge a higher price to groups with elastic demand
A) TRUE
B) FALSE

Perfect price discrimination means that every customer ____________

A) buys the same amount
B) pays the same price
C) contributes the same revenue
D) pays what she thinks the product is worth

5
A monopoly may be self-perpetuating because profits may be used for
A) research
B) cost-saving
C) technical advance
D) all of the above

All of the following are types of imperfect competition except

A) monopolistic competition
B) oligopoly
C) monopoly
D) unfair competition

A natural monopoly has a declining ________ over a large range of output

A) long run marginal cost
B) short run marginal cost
C) long run average cost
D) long run marginal cost

When a market is contestable, incumbent firms must _____________ to avoid the entry of new competitors
A) behave like competitive firms
B) agree to act together
C) differentiate their products
D) practise price discrimination

The long run equilibrium in monopolistic competition involves competitors making excess profits
A) TRUE
B) FALSE

10

The reason for the kinked demand curve is that

A) The oligopolist believes that competitors will match output increases but not output reductions
B) The oligopolist believes that competitors will match price increases but not output reductions
C) The oligopolist believes that competitors will match price cuts but not price rises
D) The oligopolist believes that competitors will match price increases but not output increases

11

Game theory studies interdependent decision-making

A) TRUE
B) FALSE

12

The Prisoners' Dilemma Game demonstrates that

A) players are better off to act independently
B) monopoly is better than competition
C) people will always cheat
 D) players are better off if they co-operate

13

In Nash equilibrium each player chooses the best strategy __________

A) assuming other players move first
B) dominated by the other players
C) given the strategies of other players
D) that is a credible threat

14

A dominant strategy is ____________

A) a winning strategy
B) a losing strategy
C) a players best strategy when moving first
D) a player's best strategy whatever the strategies adopted by rivals

15

Strategic entry barriers are made by nature

A) TRUE
B) FALSE

Input markets and income distribution

Multiple Choice Quiz

The substitution effect of a rise in the price of labour will ___________ the quantity of labour and the output effect will
__________ it
A) increase, increase
B) increase, reduce
C) reduce, reduce
D) reduce, increase

As more labour is used the marginal physical product of labour increases

A) TRUE
B) FALSE

A profit-maximizing firm will hire labour until __________ equals the ____________
A) marginal revenue, marginal cost
B) long run marginal revenue, long run marginal cost
C) labour output ratio, capital output ratio
D) marginal cost of labour, marginal revenue product

The downward sloping marginal physical product of labour is the firm's ___________
A) supply of labour
B) short-run demand curve for labour
 C) marginal cost of labour
D) marginal revenue product of labour

When we say that labour demand is a derived demand, we are referring to government initiatives to increase
employment
A) TRUE
B) FALSE

The participation rate in the labour force is affected by

A) higher real wages
B) lower fixed costs of working
C) lower non-labour income
D) changes in tastes between leisure and work
E) all of the above

Top footballers tend to earn more than lecturers because

A) footballers give more entertainment
B) lecturers are lazy
C) the labour markets are imperfect
D) top footballers are relatively scarce in relation to lecturers

Human capital can be described as

A) the tools used by workers to enhance productivity
B) a persons inherited abilities
C) the stock of expertise accumulated by a worker
D) education

The supply of highly educated workers is fixed in long run

A) TRUE
B) FALSE

10

The most important source of wage differentials are

A) regional variation
B) unionization
C) relative danger
D) skills

11

Skilled labour is relatively scarce because

A) there are too few teachers
B) too few student places in higher education
C) it is costly to acquire human capital
D) teachers' salaries are too low
12

The opportunity cost of acquiring education is ____________

A) course fees
B) course fees and living expenses
C) the earnings foregone
D) course fees, living expenses and textbooks

13

By restricting labour supply a trade union can ____________ and ___________

A) increase the wage, increase employment
B) maintain the wage, increase employment
C) increase the wage, lower employment
D) maintain the wage, lower employment

14

In the UK under a _________ of the labour force belong to a trade union

A) quarter
B) third
C) half
D) three-quarters

15

Unions achieve a higher wage differential the more _______________ and the more ___________
A) inelastic the demand for labour, they can restrict the supply of labour
B) members they have, aggressive they behave
C) the economy is growing, people prefer leisure
D) the productivity s growing, vacancies exist

16

A closed shop is a union that has no room for additional members.

A) TRUE
B) FALSE

17

Women and non-whites on average receive lower incomes than white men because
A) they tend to work in relatively unskilled jobs
B) educational disadvantage
C) firms are reluctant to invest in training
D) all of the above

18

In the UK, in recent years, union membership has _________ and days of work lost because of strikes has __________
A) grown, declined
B) declined, declined
C) declined, grown
D) grown, grown

19
Involuntary unemployment exists if workers
A) will not work at the offered wage
B) Would work at the going wage but cant find jobs
C) Will not work because the hours are anti-social
D) Are not prepared to move house to get the job

20

Efficiency wages are _________ that raise ___________

A) low wages, employment
B) high wages, labour supply
C) high wages, productivity
D) high wages, employment

21

The difference between gross investment and net investment is

A) depreciation of the existing capital stock
B) productive investment
C) dwellings
D) inventories

22

The cost of using capital services is the ___________________

A) wage rate of capital
B) interest charges
C) marginal capital cost
D) rental rate for capital

23

The value of an asset depends upon

A) its scrap value
B) its depreciation
C) the present value of the future stream of income it can earn
D) the cost of loans

24

The marginal revenue product of capital is the __________________

A) change in a company's balance sheet when it acquires new plant
B) additional value of output from using more capital
C) change in a company's share price
D) changing value of the capital stock

25

The demand for capital services is derived from a falling MRPK schedule
A) TRUE
B) FALSE

26

In the short run, the supply of capital is ____________ and in the long run will depend on ____________
A) variable, technology
B) fixed, expectations
 C) fixed, rental rate of capital
D) variable, interest rates

27

If workers get a real wage increase this will likely _______________ and ____________
A) encourage the use of more capital in the long run, reduce demand for all inputs
B) encourage the use of more capital, increase demand for all inputs
C) encourage the use of less capital, reduce demand for all inputs
D) encourage the use of less capital, reduce demand for all inputs

28

The supply of land is normally greater in the long run than in the short run
A) TRUE
B) FALSE

29

Land will be allocated between competing uses so that _______________

A) housing gets priority
B) industry gets priority
C) farming gets priority
D) the equilibrium rental rate equilibrates total demand with supply

30

Different capital intensity in different industries is mainly explained by _________ and _________
A) wage differentials, skill levels
B) technology, the ease of factor substitution
C) government grants, international competition
D) patents, skill shortages

31

The functional distribution of income shows how national income is divided between
A) employees
B) the population
C) the factors of production
D) the working population

32

A major cause of income inequality in the UK is trade union power

A) TRUE
B) FALSE

33

The transfer earnings of a factor are the payments received in excess of its opportunity cost.
A) TRUE
B) FALSE

Governing the market

Multiple Choice Quiz

1

In the insurance industry, high-risk customers are more likely to take out insurance. This is an example of
A) moral hazard
B) risk aversion
C) adverse selection
D) a poor gamble

Moral hazard means that the act of insuring _____________that the desired outcome will occur
A) reduces the likelihood
B) increases the likelihood
C) guarantees
D) none of the above

An allocation is Pareto-efficient if no reallocation of resources would make some people ____________ without making
others ______________
A) worse off, worse off
B) better off, better off
C) better off, worse off
D) equal, unequal

A competitive equilibrium is Pareto-efficient

A) TRUE
B) FALSE

We cannot say whether one allocation of resources is better than another allocation because
A) some people cant count
B) some people may not be permanent residents
C) not all economic activity is legal
D) we cant make value judgements to compare different people's welfare

A competitive equilibrium is Pareto-efficient because

A) producers are price takers
B) consumers and producers face the same prices
C) marginal costs and benefits are equal
D) prices equal marginal cost and benefit
E) all of the above

The allocation of resources is not efficient if ____________

A) the marginal cost of production does not equal society's marginal benefit
B) the distribution is inequitable
C) economic growth is low
D) unemployment is high
8

If my neighbour burns garden waste causing my house to fill with smoke this is an example of _______________
A) a production externality
B) a second-best solution
C) transaction costs
D) a consumption externality

Externalities arise because there is a divergence between __________ and ___________

A) private costs, private benefits
B) private costs, social costs or benefits
C) social costs, social benefit
D) insiders, outsiders

10

Market failure may arise because of

A) imperfect competition
B) taxation
C) externalities
D) missing markets
E) all of the above

11

Markets sometimes fail to exist because of

A) externalities
B) the free-rider problem
C) poor transport
D) a and b
E) a and c

12

A good example of a public good is ___________

A) public transport
B) the national health service
C) national defence
D) rail transport

13

If the consumption of a good by one person does not reduce the quantity available by others and nobody can be easily
excluded from consumption, we are referring to a
A) private good
B) merit good
C) public good
D) abundant good

14

Satellite television subscription and television detection devices are ways in which broadcasting companies address the
____________ problem
A) externality
B) market imperfection
 C) deadweight burden
D) free-rider

15

Taxes to offset externalities are distortionary

A) TRUE
B) FALSE

16

Except for taxes to offset ____________, taxes are _____________

A) imperfect competition, popular
B) externalities, distortionary
C) inequality, a first best option
D) poor health, unnecessary

17

Taxes create a wedge between the sales price and purchase price that prevents the price system equating _________
and ____________
A) marginal costs, marginal benefits
B) demand, supply
C) marginal cost, marginal revenue
D) marginal cost, average cost

18

The effect of a tax to offset a negative externality will be to ___________ price and ____________ quantity
A) reduce, reduce
B) increase, increase
C) increase, reduce
D) reduce, increase

19

The social costs of monopoly power arises because ________________

A) marginal cost is set equal to marginal revenue
B) price is less than marginal cost
C) marginal consumer benefit is less than marginal revenue
D) there is too little output at too high a cost

20

The Competition Commission in the UK starts with the presumption that monopoly is bad
A) TRUE
B) FALSE

21

If two firms doing the same thing in the same industry join together, this is known as a ____________
A) vertical merger
B) horizontal merger
C) conglomerate merger
D) hostile takeover
22

In the UK mergers can be referred to the Competition Commission if they create a firm with ___________ of the market
A) 15%
B) 20%
C) 25%
D) 30%

23

The problem posed by a natural monopoly is that it faces a ___________ . This means that ____________
A) increasing average cost curve, marginal cost lies above average cost
B) increasing average cost curve, marginal cost lies below average cost
C) decreasing average cost curve, marginal cost lies above average cost
D) decreasing average cost curve, marginal cost lies below average cost

The income and output of nations

Multiple Choice Quiz

The key issues of macroeconomics are

A) unemployment
B) inflation
C) economic growth
D) all of the above

In an economy, measuring (1)total value added, (2)total spending on final goods and (3)total factor earnings gives the
result that
A) 3>2>1
B) 3=2=1
C) 3<2<1
D) any measure can be larger or smaller than any other

In the circular flow of income, saving is an injection and investment is a leakage

A) TRUE
B) FALSE

In the economy when a steel producer sells steel to car producer, it is regarded as ________
A) a final good
B) an intermediate good
C) an injection
D) a leakage

Leakages from the circular flow are ____________, ____________ and ____________
A) investment, savings, government expenditure
B) savings, taxes net of subsidies, imports
C) consumption, investment, government expenditure
 D) consumption, taxes, imports

Injections into the circular flow are ___________, _____________ and _____________
A) consumption, investment, exports
B) investment, exports, transfer payments
C) investment, government expenditure, exports
D) taxes, exports, transfer payments

In the circular flow we would expect leakages to ____________ injections

A) equal
B) be less than
C) be greater than
D) be less or greater than

Gross national product adjusts GDP for net property income from abroad
A) TRUE
B) FALSE

Nominal GNP measures income ____________

A) At the present time
B) Corrected for tax changes
C) Corrected for changes in interest rates
D) At current prices

10

Real GNP measures income _____________

A) including non-market activities
B) adjusted for inflation
C) including externalities
D) including tax evasion

11

Real GNP is a crude measure of national welfare because it excludes

A) consumption
B) investment
C) exports
D) work in the home

12

When we refer to the hidden economy we mean unrecorded income owing to _________
A) tax evasion
B) poor statistics
C) the lags between statistical collection and publication
D) smuggling
13

In a macroeconomic model without foreign trade or a government, aggregate demand is the sum of
A) personal saving and private investment
B) personal saving and personal consumption
C) personal consumption and private investment
D) none of the above

14

The sum of the MPS and MPC is 1

A) TRUE
B) FALSE

15

A linear consumption function with a positive slope less than one means that if income increases, consumption will
___________
A) fall
B) not change
C) fluctuate
D) increase

16

Short-run equilibrium output means that aggregate demand _________ actual output
A) is less than
B) equals
C) is greater than
D) fluctuates around

17

If desired spending in the economy exceeds income we would expect _________

A) households to save more
B) firms to produce less
C) firms to produce more
D) the MPC to change

18

In equilibrium savings exceed investment

A) TRUE
B) FALSE

19

When investment is assumed to autonomous the slope of the AD schedule is determined by the _______________
A) marginal propensity to invest
B) disposable incomes
C) marginal propensity to consume
D) average propensity to consume

20

The multiplier tells us how much ____________ changes after a shift in ________________
A) consumption, income
 B) investment, output
C) savings, investment
D) output, aggregate demand

21

The multiplier is calculated as

A) 1/(1 - MPC)
B) 1/MPS
C) 1/MPC
D) a or b

22

If the MPC is 0.5, the multiplier is ________

A) 2
B) 1/2
C) 0.2
D) 20

23

If as a result of households' wish to save more, there is a change in equilibrium income and no change in equilibrium
saving, this is an example of ___________
A) market imperfection
B) the law of diminishing returns
C) the paradox of thrift
D) market failure

24

Aggregate demand without a foreign sector is the sum of

A) C+I
B) C+G
C) I+G
D) C+I+G

25

If the government increases spending and raises taxes by just enough to finance this increase it will ________
A) leave output unchanged
B) increase output
C) reduce output
D) increase the MPC

26

Starting from a balanced budget, for a given tax rate, an increase in income will cause the government budget to
A) move into surplus
B) move into deficit
C) remain unchanged

27

For given government spending and taxation, the government budget deficit will grow in __________ and decline in
___________
A) booms, booms
 B) recession, recession
C) booms, recessions
D) recessions, booms

28

The government budget is a good indicator of fiscal stance

A) TRUE
B) FALSE

29

Aggregate demand in an economy trading internationally with a government sector can be written as _______________
A) AD = C + I
B) AD = C + I + G
C) AD = C + I + G + X + Z
D) AD + C + I + G + X - Z

30

The total multiplier for the economy will reflect _________

A) MPC and MPT
B) MPT and MPZ
C) MPC and MPZ
D) MPC, MPT and MPZ

31

When the level of income _________ there will be a tendency for the trade balance to improve as imports __________
A) increases, increase
B) falls, increase
C) falls, fall
D) increase, fall

32

When an open economy is in equilibrium it means that the trade deficit is zero
A) TRUE
B) FALSE

33

In an open economy leakages to imports ___________ the value of the multiplier

A) reduce
B) increase
C) do not change

34

Higher export demand _____________ output and a higher MPZ __________ output
A) reduces, reduces
B) reduces, increases
C) increases, reduces
D) increases, increases

Money, interest rates, and output

Multiple Choice Quiz

Money has 3 main functions, they are, _________, ____________ and _______________
A) IOU, inflation hedge, store of value
B) Medium of exchange, inflation hedge, store of value
C) Medium of exchange, unit of account, IOU
D) Medium of exchange, unit of account, store of value

The primary function of a bank is to

A) Control the money supply
B) Provide notes and coins for trade
C) Make a profit
D) Provide a cheque clearing system

Banks create money by

A) printing it
B) issuing debit cards
C) accepting cheques
D) lending out part of their deposits

The size of the money multiplier is determined by the marginal propensity to consume
A) TRUE
B) FALSE

The money supply is ___________

A) the Bank of England Issue Department
B) money + bank cards +credit cards
C) Cheques + money + bank cards + credit cards
D) Currency in circulation plus bank deposits

If banks and the private sector decide to hold less cash the money multiplier will be __________
A) unchanged
B) larger
C) smaller
D) unstable

Three variables affect the demand for money; they are ___________, ___________ and ____________
A) bank opening hours, the proportion of weekly paid employees, interest rates
B) the price level, interest rates, real income
C) the time of year, bank opening hours, the price level
D) the proportion of weekly paid employees, the time of year, real income
8

If I keep some money available in case I see a bargain, this is an example of _____________
A) asset demand for money
B) transactions demand for money
C) token demand for money
D) precautionary demand for money

An increase in the price level will likely increase the demand for nominal money
A) TRUE
B) FALSE

10

When interest rate rise, other things equal, we can expect the quantity of real money holdings to _____________
A) fall
B) increase
C) not change

11

When real income increases, other things equal, we can expect the demand for real money holdings to ______________
A) fall
B) not change
C) increase

12

M4 is a _____________ measure of money and includes deposits at both _______ and ____________
A) narrow, banks, building societies
B) wide, banks, insurance companies
C) narrow, banks, insurance companies
D) wide, banks, building societies

13

The monetary base is ___________ and ________________

A) bank deposits, building society deposits
B) currency in circulation, banks' cash reserves
C) retail sight deposits, building society deposits
D) retail deposits, wholesale deposits

14

If the central bank buys financial securities in the open market to increase the monetary base, this is an example of
____________
A) lender of last resort
B) financial intermediation
C) open market operations
D) financial regulation

15

Equilibrium in the money market will change if there is

 A) a change in the real money supply
B) a change in real income
C) a change in competition in the banking industry
D) any of the above

16

The money supply is controlled by using open market operations to determine the money multiplier and by using
reserve requirements and the discount rate to determine the monetary base
A) TRUE
B) FALSE

17

Central banks prefer to fix the __________and accept the resulting _____________
A) demand for money, interest rate
B) interest rate, equilibrium money supply
C) demand for money, equilibrium money supply
D) interest rate, demand for money

18

One of the transmission mechanisms of monetary policy is through consumer demand. When interest rates
___________ household wealth ___________ and consumption _________
A) rise, increases, increases
B) rise, falls, increases
C) rise, increases, falls
D) rise, falls, falls

19

A reduction in interest rates, causes an increase in the monetary base that results in an __________ in the availability of
consumer credit and a _______________ in the cost of consumer credit
A) reduction, increase
B) reduction, reduction
C) increase, reduction
D) increase, increase

20

A fall in investment demand can result from

A) higher interest rates
B) lower expected future profits
C) more expensive capital goods
D) all of the above

Aggregate supply, inflation, and unemployment

Multiple Choice Quiz

All of the following are types of monetary policy except

A) a nominal money stock target
B) a balanced budget
C) an inflation target
D) the pursuit of a target real interest rate
2

An increase in government spending will stimulate private spending by causing a reduction in interest rates
A) TRUE
B) FALSE

The classical model of macroeconomics assumes

A) wages and prices are sticky
B) wages and prices are flexible
C) the economy may operate below full capacity
D) the economy is always at full capacity
E) a and c
F) b and d

The AD schedule indicates that __________ inflation is associated with ___________ output
A) higher, lower
B) higher, higher
C) lower, lower
D) zero, zero

In the classical model the AS schedule is vertical

A) TRUE
B) FALSE

If a person thinks they are better off after a 10% wage increase, and all prices have risen 10%, then they are
experiencing ___________
A) inflation
B) a supply shock
C) crowding out
D) inflation illusion

In the classical model, potential output can not be increased by

A) monetary growth
B) better technology
C) more capital
D) higher labour supply

The equilibrium inflation rate is determined by the intersection of __________ and _________
A) demand, supply
B) IS, LM
C) AD, AS
D) Labour demand, labour supply
9

At the intersection of AD and AS equilibrium is achieved in

A) the goods market
B) the money market
C) the labour market
D) all of the above

10

Fiscal expansion in the classical model can increase real output

A) TRUE
B) FALSE

11

The Keynesian model is a good guide to _________ behaviour and the classical model describes behaviour in
_____________
A) long run, short run
B) flexible, imperfect markets
C) short-term, long run
D) long run, imperfect markets

12

Temporary supply shocks alter potential output

A) TRUE
B) FALSE

13

Expansionary fiscal policy in the classical model will cause aggregate demand to ________ potential output
A) exceed
B) fall below
C) fluctuate around
D) remain equal to

14

In the event of an increase in the international price of oil that encouraged the central bank to accept lower real interest
rates, inflation would most likely __________
A) fall
B) increase
C) remain the same
D) fluctuate

15

The quantity theory of money says that changes in ___________ lead to equivalent changes in __________, but have no
effect on ___________
A) prices, wages, output and employment
B) output, prices, employment
C) nominal money, the price level, output and employment
D) nominal money, output, prices

16
Monetarists believe that a reduction in _____________can be achieved by reducing ________
A) unemployment, prices
B) inflation, wages
C) unemployment, wages
D) inflation, the quantity of nominal money

17

Faster nominal money growth leads to either higher inflation or higher nominal interest rates, but not both
A) TRUE
B) FALSE

18

During periods of rising inflation and rising interest rates we expect the demand for real cash to
A) rise
B) fall
C) not change
D) fluctuate

19

Governments may contribute to inflationary pressure on account of building up large _________

A) numbers of employees
B) welfare plans
C) budget deficits
D) expenditure

20

The Phillips curve shows the trade-off between ____________ and ____________
A) the inflation rate, interest rates
B) the inflation rate, the unemployment rate
C) interest rates, output
D) output, employment

21

Equilibrium unemployment is determined by the underlying rate of inflation

A) TRUE
B) FALSE

22

The long-run Phillips curve is __________ at the ________________

A) horizontal, natural rate of inflation
B) horizontal, natural rate of unemployment
C) vertical, natural rate of inflation
D) vertical, equilibrium rate of unemployment

23

The short run Phillips curve can shift in response to changes in ____________
A) Inflationary expectations
B) unemployment
C) the inflation rate
D) wage rates
24

The costs of inflation are

A) shoe leather costs
B) menu costs
C) income redistribution
D) uncertainty
E) all of the above

25

Only an incomes policy can deliver low inflation in the long run
A) TRUE
B) FALSE

26

A person who is made redundant because of the contraction of an industry is a victim of ____________
A) frictional unemployment
B) demand-deficient unemployment
C) classical unemployment
D) structural unemployment

27

An advocate of the classical model of the economy would claim that unemployment is created when the ________ is
above its equilibrium level in the ____________
A) price level, aggregate economy
B) tax rate, government budget
C) wage rate, labour market
D) interest rate, market for loanable funds

28

The natural rate of unemployment, (equilibrium unemployment), will always be zero

A) TRUE
B) FALSE

29

We would normally expect the size of the labour force to be __________ than the number of workers willing to accept
job offers at any real wage rate
A) smaller
B) larger
C) the same size

30

The equilibrium rate of unemployment, at any real wage, is the difference between ____________ and _________
A) those willing to work at the going wage, labour demand
B) labour demand, those willing to work at the going wage
C) labour demand, labour supply
D) those willing to work at the going wage, labour supply

31
If somebody is prepared to work at the going wage rate but cannot find work then they are victims of
A) voluntary unemployment
B) classical unemployment
C) voluntary unemployment
D) Frictional unemployment

32

Policies to reduce unemployment by reducing union power, tax cuts, reductions in unemployment benefit and
investment subsidies are examples of _________
A) Keynesian policies
B) Supply-side policies
C) Monetarist policies
D) Classical policies

33

If the income tax rate changes from 30% to 40% on incomes over £30,000 and a person's income is £31,000 then her
marginal tax rate is _________
A) 30%
B) 10%
C) 70%
D) 40%

34

The abolition of income tax would probably ___________ the number of workers in employment and __________ the
equilibrium rate of unemployment
A) increase, reduce
B) increase, increase
C) reduce, increase
D) reduce, reduce

35

Possible causes of involuntary unemployment are

A) minimum wage agreements
B) trade unions
C) scale economies
D) insider-outsider distinctions
E) efficiency wages
F) all of the above

36

If a worker chooses not to work at the equilibrium wage rate they are involuntarily unemployed
A) TRUE
B) FALSE

Open economy macroeconomics

Multiple Choice Quiz

1
If British residents want more French francs to purchase more French wine, other things equal, then the equilibrium
value of the pound against the French franc will ___________
A) rise
B) fall
C) not change
D) fluctuate

When the $/£ exchange rate rises the pound ___________, and when the $/£ rate falls the pound __________
A) depreciates, appreciates
B) revalues, devalues
C) appreciates, depreciates
D) becomes more expensive, becomes cheaper

When a government follows a fixed exchange rate regime it allows the exchange rate to be determined by market forces
A) TRUE
B) FALSE

In a fixed exchange rate regime, the central bank will intervene by _____ pounds to ________ the exchange rate
A) selling, increase
B) buying, reduce
C) selling, reduce
D) buying, increase
E) a and b
F) c and d

A current account deficit means that a country may ___________

A) reduce its stock of foreign assets
B) increase its stock of foreign assets
C) increase its savings
D) increase its foreign currency reserves

Under floating exchange rates, a current account deficit must be exactly matched by a capital account surplus
A) TRUE
B) FALSE

Starting from a position of internal and external balance, a reduction in aggregate demand will cause a current account
_____________
A) deficit
B) surplus
C) revaluation
D) devaluation

A rise in the real exchange rate will ____________ the competitiveness of the domestic economy
 A) increase
B) reduce
C) do nothing to

Within the circular flow of income, an increase in domestic income will tend to increase
A) exports
B) taxes
C) inventories
D) imports

10

Perfect international capital mobility suggests that international funds will be responsive to _____________ differentials
A) current account
B) interest rate
C) tax
D) price

11

When capital mobility is perfect, interest rate differentials will tend to be offset by ________
A) price differences
B) balance of payments differences
C) current account differences
D) expected exchange rate changes

12

The current account will differ from trade balance because of interest flows from foreign assets and debts
A) TRUE
B) FALSE

13

With fixed exchange rates and no private capital flows, to correct a balance of payments deficit , the central bank will
_______ and ___________
A) buy foreign exchange, sell domestic currency
B) sell foreign exchange, buy domestic currency
C) buy foreign exchange, buy domestic currency
D) sell foreign exchange, sell domestic currency

14

With fixed exchange rates and no private currency flows, when the central bank buys domestic currency the domestic
money supply is _________
A) increased
B) unaffected
C) reduced

15

In the absence of international capital controls, central banks set ________ to provide the correct incentive for
speculators
A) money supply targets
B) incomes policy
 C) interest rates
D) inflation targets

16

A fixed exchange rate, plus perfect capital mobility ________ the scope for monetary policy
A) enhances
B) undermines
C) encourages
D) facilitates

17

The competitive advantage from a devaluation is likely to be offset by __________ and ____________
A) higher import prices, higher wage increases
B) lower export prices, lower import volumes
C) higher import prices, lower export prices
D) higher wage increases, lower import volumes

18

Under floating exchange rates, monetary policy is a powerful tool

A) TRUE
B) FALSE

19

Under floating exchange rates, expectations of higher interest rates are likely to cause an ___________ of the exchange
rate
A) depreciation
B) appreciation
C) fall
D) devaluation

20

In the short run, the level of floating exchange rates is determined mainly by _________
A) interest rates
B) competitiveness
C) trade
D) speculation

21

If one country, with floating exchange rates, has higher inflation than its competitors, we would expect its exchange rate
to __________
A) appreciate
B) depreciate
C) revalue
D) be in short supply

22

Floating exchange rates are _________ in the short run

A) stable
B) predictable
C) volatile
 D) depreciating

23

Fixed exchange rates permit a country to have permanently higher inflation

A) TRUE
B) FALSE

24

Fiscal policy is weak under floating exchange rates as fiscal expansion _____________
A) crowds out imports
B) crowds out public consumption
C) crowds out exports
D) reduces the budget deficit

25

The main factor affecting the long run path of the UK nominal exchange rate is the growth of world trade
A) TRUE
B) FALSE

26

The main features of the European Monetary system are

A) the ECU
B) currency swap agreement between member countries
C) the exchange rate mechanism
D) all of the above

27

In the ERM, each country fixed ____________ against each other ERM participant. Collectively the group _________
against the rest of the world
A) a nominal exchange rate, floated
B) a real exchange rate, pegged
C) a purchasing power parity, pegged
D) a real exchange rate, floated

28

International policy co-ordination allows policy-makers to commit to policies they would otherwise avoid
A) TRUE
B) FALSE

29

The Single European Act committed ____________ governments to a __________ in 1992

A) European union, single market
B) Western European, single currency area
C) European Union, single currency area
D) Western European, single market

30

All of the following are benefits of the Single Market except

 A) it allows countries to exploit their comparative advantage , more fully
B) firms could more readily exploit economies of scale
C) it intensified competition
D) it is easier to book holidays in member countries

31

The Maastricht criteria for joining EMU is that a country must have a high growth rate
A) TRUE
B) FALSE

32

A monetary union means __________, ____________ and ____________

A) permanently fixed capital movements, floating exchange rates, a fixed structure of interest rates
B) permanently fixed exchange rates, free capital movements, a single interest rate
C) a common currency, a single central bank, common monetary policy
D) a common currency, floating exchange rates, common monetary policy

33

The Maastricht criteria for entry to the EMU are that applicants should have
A) low inflation
B) low interest rates
C) stable nominal exchange rates
D) budget deficits and government debt under control
E) all of the above

34

The UK is a member of the EMU

A) TRUE
B) FALSE

35

In the EMU a country's competitiveness can change because of __________

A) interest rate adjustment
B) central bank intervention in the forex
C) domestic wage and price adjustment
D) devaluation

Growth and cycles

Multiple Choice Quiz

GDP per head may be an imperfect measure of economic welfare because it excludes _________
A) the value of leisure
B) externalities
C) untraded goods
D) changes in the distribution of income
E) all of the above

2
Potential output can be increased by _____________ or by ______________
A) increasing the use of labour, increasing the use of land
B) increasing the use of capital, increasing the use of labour
C) increasing the use of land, increasing the use of capital
D) increasing the use of all inputs, technical advances

If a production input is in fixed supply, growth is impossible in the long run

A) TRUE
B) FALSE

The neoclassical theory of growth identifies the steady state rate of growth as the _________ just sufficient to keep
____________ constant while labour grows
A) saving, investment
B) capital per person, productivity
C) labour growth, output
D) investment, capital per person

In the neoclassical theory of growth, a higher saving rate leads to __________

A) a higher growth rate
B) a fluctuating growth rate
C) a lower growth rate
D) no change in the growth rate*

The convergence hypothesis states that poor countries grow more slowly than average, but rich countries grow more
quickly than average
A) TRUE
B) FALSE

Economic growth may depend upon ___________ and ________

A) Population size, x-efficiency
B) Population age distribution, education
C) Population growth, technical progress
D) Population growth, education

The zero-growth proposal argues that it is best to aim for zero-growth in measured GNP to avoid environmental costs
A) TRUE
B) FALSE

The growth rates of economies tend to converge because __________ is easier when capital per worker is low and
because of ______________
A) capital-widening, technical innovation
B) capital-widening, catch-up in technology
 C) capital-deepening, technical innovation
D) capital-deepening, catch-up in technology

10

The business cycle describes fluctuations in output around the ___________

A) trend path of output
B) boom
C) recession
D) short-run fluctuations in output

11

All of the following are parts of the business cycle except __________
A) boom
B) slump
C) recovery
D) acceleration

12

The political business cycle arises because politicians interfere with the economy for political advantage
A) TRUE
B) FALSE

13

The theory that explains business cycles by the dynamic interaction of consumption and investment demand is the
__________
A) sun spot theory
B) multiplier-accelerator model
C) Solow theory
D) New classical theory

14

The multiplier-accelerator model assumes _________ depends on ___________

A) consumption, expected future profits
B) investment, interest rates
C) investment, expected future profits
D) stockbuilding, interest rates

15

Real business cycle theory suggests that _________ not important in explaining short-term fluctuations around actual
output
A) aggregate supply is
B) aggregate demand is
C) potential output is
D) real variables are

16

The impossibility of negative gross investment provides a _________ to fluctuations in _______

A) ceiling, stockbuilding
B) ceiling, capital prices
C) floor, output
 D) floor, the capital-output ratio

17

Output can exceed demand during the recovery phase as firms restore stocks to their target levels
A) TRUE
B) FALSE

18

Real business cycles are cycles in ____________

A) potential output
B) actual output
C) real output
D) international trade

19

Real business cycle theories suggest that ____________ to correct departures from the desired growth path
A) there is a role for fiscal policy
B) there is a role for monetary policy
C) there is a role for supply-side policies
D) there is no case for stabilizing output over the business cycle

20

The business cycle is not transmitted from one country to another through __________
A) private sector imports and exports
B) economic policy
C) the duration of compulsory education
D) labour supply changes

21

Real business cycle theorists argue that ____________ can explain short and long term fluctuations in output
A) imperfect labour markets
B) rational expectations
C) intertemporal decisions of households, firms and government
D) sun spot cycles

22

Keynesian unemployment causes a fall in the real wage

A) TRUE
B) FALSE

Trade and development

Multiple Choice Quiz

International specialization takes place because of __________

A) differences in technology
B) differences in factor endowments
C) scale economies
 D) all of the above

International differences in opportunity costs lead to countries acquiring __________

A) comparative advantage
B) high exchange rates
C) trade barriers
D) trade quotas

If a country does not have an absolute cost advantage in the production of a any good, there is no incentive to trade
A) TRUE
B) FALSE

The main cause of different relative costs between countries are ___________
A) relative factor competition
B) relative factor mobility
C) relative factor substitution
D) relative factor endowments

The level of the equilibrium exchange rate offsets international differences in ____________
A) comparative advantage
B) absolute advantage
C) opportunity cost
D) relative costs

International trade can never hurt any people

A) TRUE
B) FALSE

The imposition of a tariff causes consumption to _________ and imports to ________

A) rise, rise
B) fall, rise
C) fall, fall
D) rise, fall

A tariff causes domestic firms to __________ and consumers to __________

A) overproduce, underconsume
B) overproduce, overconsume
C) underproduce, underconsume
D) underproduce, overconsume

9
Tariffs always distort trade and are never justified.
A) TRUE
B) FALSE

10

An optimal tariff is one which reduces imports to the level at which _________ equals _______
A) imports, exports
B) the balance of trade, zero
C) the demand for currency, the supply of currency
D) social marginal cost, social marginal benefit

11

If goods are exported for less than society's marginal production cost and the marginal benefit to domestic consumers, it
is likely that they benefit from ___________
A) an import subsidy
B) a quota
C) comparative advantage
D) an export subsidy

12

Export subsidies do not involve waste

A) TRUE
B) FALSE

13

Economic transition involves high inflation because ____________ and ___________

A) high monetary growth, high wages
B) high budget deficits, devaluation
C) high monetary growth, devaluation
D) prices surge from an artificially low level to their equilibrium level, the inflation tax is required as source
of government revenue

14

Output fell sharply in the transition economies because

A) banks were unable to function
B) there was little corporate control
C) vital infrastructure was missing
D) all of the above

15

Most transition economies are seeking membership of the EU

A) TRUE
B) FALSE

16

All of the following represent obstacles to LDC development except

A) resource scarcity
B) low levels of investment
C) low population
D) poor infrastructure
 E) poor human capital

17

LDCs often have a comparative advantage in the production of ___________

A) primary products
B) intermediate products
C) manufactured products
D) financial services

18

LDCs are reluctant to pursue development through the export of primary products because of _______________ and
________________
A) the upward trend in commodity prices, the stability of primary products real prices
B) the upward trend in commodity prices, the volatility of primary products real prices
C) the downward trend in commodity prices, the stability of primary products real prices
D) the downward trend in commodity prices, the volatility of primary products real prices

19

Buffer stocks increase price volatility in an unstable market

A) TRUE
B) FALSE

20

Import substitution is the replacement of _____________ by domestic production under the protection of
____________________
A) exports, subsidies
B) exports, patents
C) imports, high tariffs or import quotas
D) imports, subsidies

21

If a country has a burden of debt it cannot sustain it can _______________

A) reschedule debt
B) get a loan from an international organization
C) default on the loan
D) any of the above

22

If an LDC chooses structural adjustment as a strategy for development, it will nationalize its principle industries
A) TRUE
B) FALSE