Introduction to Economics Final Exam, MCQ
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195 Terms
In economic experiments with social preferences, what limitation arises from strict adherence to the rational choice assumption?
Predicting genuine altruistic or fairness-driven actions becomes very difficult.
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Why is addressing health inequality important in health economics?
To ensure fair access to health services and reduce disparities in health outcomes.
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Why is the supply of healthcare services often limited even if there is high demand?
Due to scarcity of specialized professionals and limited facility capacity.
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In scholastic debates, what causes inflation and deflation according to monetary theory?
Change in money quantity affecting purchasing power.
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Which concept is central in Classical Political Economy regarding how wealth is created?
Labor as the source of value and wealth generation.
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How does the IS-LM model determine the levels of income and interest rate in the economy?
By the intersection of IS curve representing goods market and LM curve representing money market.
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What is the main goal of countercyclical fiscal policy?
To smooth out economic fluctuations by increasing spending in downturns and decreasing it in booms.
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What condition represents equilibrium in the money market according to Keynes?
When the quantity of money demanded equals the quantity supplied.
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How does Alfred Marshall's partial equilibrium approach help analyze economic situations?
By analyzing supply and demand in a single market holding other factors constant.
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How does the demand curve help in understanding consumer behavior in markets according to the Marshallian approach?
It graphs the relationship between price and quantity demanded, illustrating consumer purchasing choices.
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In Marshall's partial equilibrium analysis, what does the supply curve represent?
The quantity producers are willing to sell at each price.
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What does Pareto Efficiency imply in an economic allocation?
No one can be made better off without making someone else worse off.
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What does the rational expectations hypothesis, associated with new classical economics, suggest about economic agents?
They use all available information efficiently when forming expectations.
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How does technological progress affect the long-run economic growth of a country?
It enhances productivity, increasing output without additional inputs.
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How is exogenous technological change modeled in the augmented Solow framework?
As a factor that grows at a constant rate independent of economic policy.
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How does technological innovation typically influence productivity in an economy?
By introducing new methods or products that boost output per input
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What does the Golden Rule level of capital imply in the Solow-Swan growth model and why is it important for economic growth?
It implies maximizing steady-state consumption; it is important to balance investment and consumption for growth.
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What does the equality of investment and depreciation imply in the steady-state of the Solow-Swan model?
The capital stock remains constant since new investment only replaces depreciated capital.
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What does the IS curve represent in the IS-LM model?
Equilibrium in the goods market where investment equals saving.
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How does crowding-out affect the effectiveness of fiscal policy in the IS-LM model?
It reduces fiscal policy effectiveness as higher government spending raises interest rates, lowering private investment.
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How does a central bank mainly use interest rate policy to influence economic activity?
By adjusting the cost of borrowing money for banks and consumers.
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What real-life behavior does the marginal propensity to consume (MPC) measure?
The fraction of an additional dollar of disposable income spent on consumption.
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What does the IS-LM equilibrium represent in macroeconomic analysis?
The point where the goods market and money market are simultaneously in balance.
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In the context of the IS-LM model, what does simultaneous equilibrium mean?
When both the goods market and the money market are in equilibrium at the same time.
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In the IS-LM framework, what determines the slope of the LM curve?
The sensitivity of money demand to changes in income and interest rates.
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What is the effect of an increase in the central bank's money supply on the LM curve?
The LM curve shifts to the right as higher money supply reduces interest rates for given income.
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What condition defines money market equilibrium in the liquidity preference theory?
Money demand equals money supply at the prevailing interest rate.
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How does an increase in inflation expectations affect the short-run Phillips curve?
It shifts the short-run Phillips curve upward, leading to higher inflation for any unemployment rate.
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How does discretionary monetary policy typically affect inflation in the short run under inflation bias conditions?
It can lead to higher inflation due to policymakers' time inconsistency problems.
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Which factor primarily influences firms to invest in new capital in the neoclassical investment theory?
Expected profitability and interest rates
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What does capital accumulation refer to in macroeconomics?
The process of increasing physical, human, and natural capital over time.
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In the Solow model, why is output per worker a key concept for measuring economic growth?
It reflects productivity and living standards adjusted for labor input.
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In the Neoclassical Investment Model, what characterizes the optimal capital stock for a firm?
The level of capital where the marginal product of capital equals the user cost of capital.
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Which of the following best explains how Gross Domestic Product (GDP) is used in macroeconomic measurement?
GDP measures the total value of all goods and services produced within a country in a given period, reflecting economic activity.
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Which of the following best describes Nominal GDP?
GDP calculated using current market prices without adjusting for inflation.
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How is the implicit price deflator used in analyzing GNP?
It adjusts nominal GNP to reflect changes in price levels, giving real GNP.
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How do exports of goods and services affect a country's GDP in the expenditure approach?
They add to GDP because they represent goods and services produced domestically and sold abroad.
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What does the net exports component represent in the expenditure approach to GDP?
Exports minus imports.
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Which of the following best represents 'Wages and Salaries' in the income approach to GDP?
Income earned by workers for their labor services.
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In the circular flow of income model, what does the flow of income represent between households and firms?
Payments by firms to households as factor payments and spending back by households on goods.
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The product approach to measuring GDP sums which of the following?
The value added at each stage of production for all goods and services.
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What is the primary purpose of national income accounting in macroeconomics?
To measure the economic performance by recording income, saving, and spending of a country.
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Which of the following best describes GDP calculated by the expenditure approach?
Sum of consumption, investment, government spending, and net exports.
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What condition defines the social optimum level of production when externalities exist?
Marginal social benefit equals marginal social cost including external effects
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How is welfare loss related to externalities in a market?
It is the reduction in total surplus due to inefficient allocation caused by externalities.
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In factor markets, what determines the price of labor under competitive conditions?
The marginal revenue product of labor equals the wage rate.
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How does graphical optimization analysis assist in solving constrained optimization problems in microeconomics?
By visually showing the feasible region and helping identify optimum points at boundaries or tangencies.
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Which of the following best describes the real-life application of a budget line in consumer choice theory?
It shows all possible combinations of goods a consumer can afford given their income and prices.
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In microeconomic cost-benefit analysis, what is the primary goal when deciding on a policy or project?
Ensure that the total benefits exceed total costs to justify the decision.
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Which situation best illustrates market failure, despite the presence of Pareto efficiency?
When externalities cause private decisions to lead to socially suboptimal outcomes.
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According to the First Welfare Theorem, what outcome does a competitive equilibrium lead to in terms of efficiency?
It leads to a Pareto efficient allocation of resources.
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How does introducing production into a general equilibrium model affect the economy's analysis under perfect competition?
It incorporates firms choosing input and output to maximize profits alongside consumer optimization, achieving equilibrium prices reflecting all markets.
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How does the concept of marginal rate of substitution (MRS) affect consumer choice decisions?
It measures the rate at which a consumer is willing to trade one good for another while maintaining the same utility.
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What can cause the entire market demand curve to shift to the right?
An increase in consumer income for a normal good.
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In consumer theory, what does an interior solution represent when choosing a consumption bundle?
A choice where the consumer purchases positive quantities of all goods within their budget.
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What does the utility maximization concept help a consumer achieve when making choices?
Selecting the combination of goods that yields the highest satisfaction within their budget.
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How does the concept of discounting future utility help explain consumer behavior over time?
Consumers value present consumption more than future consumption due to time preference.
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In a two-period consumption model, how does an increase in interest rates generally affect consumer choices?
Consumers may save more to benefit from higher returns or borrow less due to higher borrowing costs.
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Why is the present discounted value crucial in evaluating future consumption or income streams in multi-period models?
It converts future values to present equivalents by accounting for time preference and interest rates.
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In producer surplus analysis, how does the market price affect the surplus received by producers?
Market price determines the revenue producers receive above their willingness to sell.
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What does the absence of deadweight loss at market equilibrium imply?
The market is efficient and total surplus cannot be increased by changing quantity.
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What usually happens to total surplus (sum of consumer and producer surpluses) after a tax is introduced?
Total surplus decreases, reflecting deadweight loss from distortion.
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Who ultimately bears the burden of a tax imposed on a good?
The burden is shared by consumers and producers depending on their price elasticity of demand and supply.
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In the long run, if all inputs are increased by 10% and output increases by more than 10%, what type of returns to scale does the production exhibit?
Increasing returns to scale
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What does increasing returns to scale imply for a firm's long run production?
Output increases more than proportionally as all inputs increase.
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What distinguishes a firm's short-run supply curve from its long-run supply curve in a competitive market?
The short-run supply includes fixed inputs, while the long-run allows all inputs to vary.
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Why is the marginal utility of consumption important when deciding how much to save under uncertain income?
It measures the additional satisfaction from consuming one more unit, influencing saving to smooth consumption over time.
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What is the primary function of the European Central Bank within the European Monetary Union?
Setting and implementing monetary policy for the euro area
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How does the Ricardian Model explain why countries engage in international trade?
By countries specializing in goods with lower opportunity costs
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How is the autarky price ratio determined in a Ricardian model?
By the relative productivity of labor in producing two goods domestically.
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What does the concept of comparative advantage explain in international trade?
Countries should produce goods for which they have the lowest opportunity cost.
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What are the 'efficiency gains from trade' according to the Ricardian model of comparative advantage?
Overall resource savings and higher combined output produced when countries trade goods they produce comparatively better.
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What does a country's production possibility frontier (PPF) illustrate in the context of international trade?
The trade-offs between producing different combinations of two goods, showing opportunity costs.
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Why is relative productivity important in determining comparative advantage between countries?
It indicates differences in efficiency that affect opportunity costs between countries.
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Which of the following best describes the quantity of labor to produce one unit in the Ricardian model?
The amount of labor (hours) needed to produce a single unit of output.
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How does trade liberalization lead to real income redistribution among factors of production?
Income shifts toward factors used intensively in export industries.
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How does Gross Domestic Product (GDP) influence bilateral trade flows in the gravity equation?
Higher GDPs typically increase the volume of trade between countries.
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Why might sectors using specific factors oppose trade liberalization, according to theories of the political economy of trade policy?
They stand to lose income due to increased competition from imports.
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What is a typical consequence of a fixed exchange rate regime during an international monetary crisis?
Pressure on foreign exchange reserves making it difficult to maintain the fixed rate.
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What is a common trade policy instrument used by governments to protect domestic industries from foreign competition?
Tariffs
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Why does a tariff create deadweight loss in the economy?
Because consumers buy less and producers produce more, leading to inefficient resource allocation.
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What does the deadweight loss from a tariff represent in terms of economic welfare?
The net loss in total welfare due to distortions in consumption and production caused by the tariff.
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How can increased international trade promote economic growth in developing countries?
By facilitating technology transfer and providing access to larger markets.
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How can persistent trade imbalances impact income inequality and poverty in developing countries?
They may worsen inequality by concentrating gains among capital owners while increasing poverty.
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What is the primary focus of labor economics in analyzing the labor market?
The supply and demand for labor and wage determination
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What does the natural rate of unemployment represent in the economy?
Only frictional and structural unemployment.
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What does the equilibrium wage rate represent in a labor market?
The wage rate where labor supply equals labor demand.
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What does high elasticity of substitution between labor and capital imply for labor demand when wages increase?
Firms are likely to substitute labor with capital, reducing labor demand.
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How is the Value of Marginal Product (VMP) of labor calculated?
By multiplying the marginal product of labor by the price of output.
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What role do compensating wage differentials play in labor market equilibrium?
They explain wage differences due to varying job risks or conditions
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How do minimum wage laws affect labor market equilibrium in real-life scenarios?
They can increase wages for low-skilled workers but may lead to reduced hours or employment in some sectors.
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What is a common effect of minimum wage laws on low-skilled workers in the labor market?
They can lead to reduced hours or employment for some low-skilled workers.
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In the context of minimum wage laws, what happens at labor market equilibrium in a competitive market?
Quantity of labor demanded equals quantity of labor supplied at equilibrium wage.
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In the utility-maximizing model of labor supply, what is the Marginal Utility of Consumption?
The additional satisfaction a worker gains from consuming one more unit of a good or service.
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Which type of unemployment results from mismatches between workers' skills and job requirements?
Structural unemployment
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What does the term structure of interest rates represent?
The relationship between interest rates and the time to maturity of debt.
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In the loanable funds theory, what is the effect of increased government borrowing on the real interest rate?
It tends to raise the real interest rate by increasing demand for loanable funds.
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What is a primary objective of inflation targeting in monetary policy frameworks?
To stabilize the price level around a target inflation rate.
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Under which condition can a country effectively maintain an independent monetary policy?
When it adopts capital controls or flexible exchange rates restricting capital mobility.
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What is the policy transmission mechanism in monetary policy?
The process through which monetary policy decisions influence the economy.
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