National Economics Challenge Practice Tests

If market failures exist, which of the following is true?

The equilibrium price and quantity demanded by markets are not socially optimal.

How do industries under monopolistic competition resemble those in pure competition?

In both market structures, barriers to entry are weak or do not exist.

Assume that peanut butter is an inferior good. Which of the following statements describes what is meant by an "inferior good" in economics?

When consumer income increases, the demand for peanut butter decreases.

When the price of cheddar cheese increased by 14 percent, the quantity demand for cheddar cheese decreased by 22 percent. Therefore, we can conclude that

the demand for cheddar cheese is elastic with respect to price.

The demand for a product becomes more inelastic as the product

has fewer substitutes, is a necessity, and takes a smaller share of the consumer's income.

You know that the supply of tennis rackets decreased and the demand for tennis rackets increased, but you do not know the magnitude of the changes. Compared to the original equilibrium price and quantity (before the changes), what can you say for certain?

The equilibrium price of tennis rackets will increase.

Say that the original supply curve for avocados is the curve labeled S and the demand curve for avocados is the curve labeled D. If the supply curve moved from S to S1 (shift to right) and the demand curve did not move, at the new equilibrium we would conclude that

supply increased and quantity demanded increased.

Assuming that avocados are a normal good, which of the following might explain a shift

in the demand curve from D1 to D (shift to left)?

The price of tomatoes, a substitute product, decreases.

Say that the price of avocados in the United States rose from P2 to P1 and the quantity

of avocados decreased from Q2 to Q1. Which of the following would best explain this?

There is a plant disease killing avocado trees in regions where avocados are grown.

Which of the following describes a negative externality or external cost?

The costs of producing a good are borne by those other than the producer or

consumer of the good.

. In the short run, a pure monopolist will

either earn an economic profit, a loss, or break even depending on revenues and

costs

Which of the following is not a characteristic of pure public goods?

The marginal cost of producing the goods increases as more and more people

consume them.

The marginal costs of producing the second unit of output

are $2.

The fixed costs of producing this product

are $6.

The average variable costs of producing 3 units of output

are $2.

The GDP annual rate of change and GDP price index annual rate of change are ____% and

____% respectively.

5.0 and 4.0

The real GDP for 2011, using the year 2010 as a base year, is $_______ (rounded to

nearest $) and the country is _________off this year.

$2019, better

When you buy an egg at the grocery store, the value is considered a part of GDP. When

a restaurant that sells omelets buys an egg, the value of the egg is not considered to be a

part of GDP. Which of the following is true in explaining the difference?

All of the above are correct. (The restaurant will use the egg for making omelets they sell. GDP includes the value of only final goods and services. If the restaurant's purchase of the egg were included, the value of the egg would be

double-counted in GDP. If you buy an omelet at the restaurant, the price of the omelet is added to final GDP.)

What was the Gross Domestic Product of Country A?

$10,910

The money used by the United States is referred to fiat money. This means that it is

money because the government declares that it is.

Which of the following is not considered to be a checkable deposit?

Funds in certificates of deposits in banks

Which of the following is not included in the money measure M2?

Credit card balances

Suppose the Federal Open Market Committee (FOMC) buys $1000 worth of bonds from

the Hometown Bank, which is not short of required reserves.

The Hometown Bank has more reserves and can now offer additional loans.

Which of the following is true of the history of United States business cycles, on the

average?

Expansions are longer than contractions.

Along the short run Aggregate Supply Curve, all of the following are assumed to be held

constant, except for:

Price level

Suppose United States consumers suddenly revise upwards their income expectations.

The immediate result is that United States aggregate demand will

increase, because higher income expectations increase consumption.

The country of Econia has a balanced government budget and low inflation but is slipping

into a recession because of an international financial crisis. The use of traditional tools of

fiscal and monetary policy would be that

fiscal policy should increase government spending and cut taxes, and monetary

policy should increase the money supply and cut interest rates.

Suppose the economy is in equilibrium at the natural rate of unemployment. When the

supply of money increases, ceteris paribus, we expect the initial impact on the economy to

be that

interest rates will fall.

If the country of Econia experiences capital deepening

the productivity of labor will increase.

Which of these is not considered a type of unemployment?

Family unemployment

In the circular flow of production and spending, which of these is true?

Households demand products, and households supply labor.

The top three oil-producing countries in 2010 (measured in average barrels per day) were

Saudi Arabia, Russia, and the United States.

If we divide United States households into fifths based on their income group (lowest 20%,

then the next 20%, etc. by income size), which of the following economic measures will be

the least equally distributed among the five groups?

Total net wealth

In the production possibilities of the only two countries of the world (Aconia and Zeconia),

assuming efficient production, which of the following statements is true?

Aconia should specialize in producing corn.

Assume that without specialization and trade, Zeconia produces and consumes 16 yards of

textiles, and Aconia produces and consumes 6 yards of textiles. If they specialize completely

and produce according to comparative advantage, then

the production and consumption of corn and textiles rise by 40 and 2, respectively.

Which of the following is not true about pure public goods?

One person's consumption reduces the amount available for others.

What happened to the "Second Bank of the United States," created in 1816?

Its demise began when President Andrew Jackson vetoed renewal and had

government deposits placed in state banks.

An ad valorem tariff on imports is

a tax placed on the value of an imported good.

The world has two countries, A and Z, which each produce two products, gadgets and

whizbangs. Without world trade, the domestic price of gadgets in A is lower than the price

of gadgets in Z. We can say that

Country A has a comparative advantage in gadgets and should be exporting them.

When a country opens its markets for trading with the world and begins to specialize, then,

within the country, we can say that

overall benefits exceed overall costs for the country as a whole.

An asset price bubble

is fed by buyers' expectations of further increases in prices.

All of the following are arguments for free trade and against protectionism except:

Under protectionism, new industries can be sheltered.

Financial crises

are possible in all industrialized countries.

The General Agreement on Tariffs and Trade (GATT)

was started after World War II to encourage countries to reduce trade barriers.

Over the last decade, the exchange rate for the United States dollar relative to the Euro

reached a low point in the recession of 2008.

The supply of gasoline changes, causing the price of gasoline to change. The resulting

movement from one point to another along the demand curve for gasoline is called

a change in quantity demanded.

Assume that hot dogs and hamburgers are substitutes. If the price of hamburger

increased, the demand curve for hot dogs would

shift to the right and the cross elasticity would be positive.

The ABC Drug Company currently has a monopoly on a medication that it produces. It

is also able to engage in price discrimination between its customers. The company

notes that for some of its customers, demand for the medication is price elastic and for

others demand is price inelastic. In order to maximize profits, the company should

lower the price of the medication to customers whose demand is elastic, and raise the

price to customers whose demand is inelastic.

If the government made it illegal for the price of cheese to fall below $8 per pound,

this would be an example of a price floor and would result in a surplus of 40 pounds

of cheese.

Assume that the market clears at the equilibrium price and quantity. According to the

graph, what is the amount of producer and consumer surplus combined?

$160

In microeconomics, the basic characteristic of the long run is that

all resources and all costs are variable.

If the competitive firm shown faced a market price of P3, it would choose to produce

output Quantity Q4 and it would be making economic profits.

In the short run, if the competitive firm shown faced a market price of P1,

the firm would choose to produce output quantity Q2.

If competitive firms faced a market price of P2 and produced the profit maximizing

quantity of output, in the long run they would

be earning zero economic profits and firms would neither enter nor leave the

industry.

To maximize profits, this firm would choose to produce quantity ________ and would

charge price __________

A, J

Assuming that the firm is producing the profit maximizing quantity and charging the

profit maximizing price, it is

making economic profits

Assume that external benefits exist in the consumption of vaccinations. If these

positive externalities are not taken into account or corrected, then, when compared

with the socially optimal solution,

too few vaccines will be produced by the market, and the government could help to

correct the problem with subsidies that would increase the quantity of vaccines

consumed.

State University makes this announcement: "We are going to raise tuition fees because

we need to increase tuition revenues to the university to make up for losses in

government funding." From this statement we know that State University is assuming

that

demand for their services is inelastic

In the short run, the supply curve of a firm in pure competition

is the marginal cost curve above minimum average variable cost

Suppose that Kim and Robert are the only two members of society. Kim is willing to

pay $9 for the third unit of a public good. Robert is willing to pay $8 for the third unit

of the same public good. The government's marginal cost of producing the third unit of

the public good is $15. If the government's goal is to produce the optimal quantity of

the public good,

the third unit of the public good should be produced

From year 1 to year 2, suppose the nominal GDP of country A increased from $2000 to

$2100, while the price index for the GDP rose from 100 to 120. Nominal GDP changed

by ____%, the GDP price index by ____%, and real GDP changed by ____%.

5, 20, negative 12.5

Suppose your parent earned $20 an hour in the year 1999 and the same wage in 2000.

The Consumer Price Index rose by 3% from 1999 to 2000. The purchasing power of this

wage in 2000, expressed in 1999 prices, was:

$19.42

The Bureau for Economic Analysis (BEA) defines which of the following national income

accounting measures as "all net incomes, net of consumption of fixed capital, earned in

production," for a particular period of time?

National Income

What was the Gross Domestic Product of Country A?

$11910

The best material to use for money has all of the following characteristics except

indivisibility

"Individuals, both in households and businesses, act according to what they expect to

happen in the future, after they consider all available information." This describes what

economists call the

Rational Expectations theory

Since the Great Depression, which ended in March 1933, the United States economy has

gone through ___ economic recessions. According to the official dates kept by the

National Bureau of Economic Research (NBER), the longest recession occurred in the

years _________

13, 2007-2009

Suppose that people hold all of their money in checkable deposits, banks do not hold

excess reserves, and the required reserve ratio is 8%. If the Fed buys $10,000 of bonds

from First National Bank, which of the following statements is true?

The money supply could increase by $125,000, at most

All of the following are included in the Conference Board's Leading Indicators except

the overall unemployment rate

The aggregate demand curve is downward sloping because of the

effect of the price level on household wealth.

Suppose business firm leaders suddenly revise their expectations downwards and believe

that a recession is coming. Aggregate demand will

shift leftwards as business investment spending adjusts for expected declines in

future production.

The country of Econia, an importer of oil, experiences large oil price increases. The most

likely outcome is

short run aggregate supply shifts leftwards as the cost of production for many

goods rises.

Suppose a significant technological advance improves the way credit cards are used for

monetary transactions by consumers and investors. This shifts the demand for money;

however, the central bank does not change the supply of money. Which of these is a

plausible outcome?

Interest rates will fall, and investment levels will rise.

"There is a short-run aggregate relationship between inflation rates and the rates of

unemployment." This statement refers to ___________. The relationship between the

two variables is __________.

the Phillips Curve, inverse.

"My income amount went up last year, but I paid the same dollar amount of taxes." This is

an example of a(n)

regressive tax rate system.

According to Marxist theory, after the dictatorship of the proletariat and the withering

away of the state have taken place, private property would

not exist; there would be communal ownership of property

The theory of decreasing marginal utility (decreasing marginal value) implies that

individuals will

value the third hamburger they consume less than the second.

According to the principle of the invisible hand,

everyone acting in his or her self interest leads to the best outcomes for society

According to the Coase theorem,

under certain conditions, bargaining between private parties can solve externality

problems

"The government bailed out banks that were in financial trouble because they made

risky loans to borrowers who could not repay the loans. Banks therefore had

incentives to make more risky loans because they expected government bailouts if they

got in financial trouble again." Which of the following best describes these statements?

moral hazard

If the world price for gadgets were $4 and there were no trade restrictions, Econia

would have a domestic

surplus of 100 gadgets, and would export 100 gadgets

If the world price for gadgets were $1 and there were no trade restrictions, Econia

would produce _____ gadgets and foreign producers would export ______ gadgets to

Econia.

10; 90

If the world price for gadgets were $1 and a per-unit tariff of $1 was imposed on the

sale of gadgets in Econia, consumers would pay a price of _________. The total

quantity of gadgets sold would be _________, and the total amount of tariff collected

on gadgets would be ________.

$2; 90; $50

Which of the following is not necessarily true?

APC = MPC

If taxpayers with a greater ability to pay are required to pay more taxes than those with

less ability to pay, this is an example of what economists call

vertical equity.

According to the data in the table, the opportunity cost of producing steel is _______

in Country X and ___________ in Country Y. The opportunity cost of producing

bananas is ______ in Country X and ________ in Country Y. (All quantities are in

tons)

1/5 banana; 1/3 banana; 5 steel; 3 steel

If both countries specialize completely according to their comparative advantage, which

of the following is true? (All quantities are in tons.)

Country X will produce 40 steel and Country Y will produce 16 bananas.

Assuming that both countries specialize where they have the comparative advantage,

which of the following are possible terms of trade between Country X and Country Y

that would benefit both countries?

1 ton of bananas for 4 tons of steel

Under a system of freely floating exchange rates, if the US has a trade deficit with China,

this should cause the dollar to __________ and the Chinese renminbi (yuan) to

___________ in foreign exchange markets.

depreciate; appreciate

The Gini coefficient (ratio) for this country can be computed by using the formula

Area X / (Area X + Area Y)