PRINCIPLES OF ECONOMICS
INSTRUCTIONS
Complete all of the multiple choice questions in Part I and answer the problems in Part II. Answers the required essay questions in Part III
PART I -Multiple Choice
1. Which of the following will most likely shift a production possibilities curve to the right?
a. shifting resources from the production of one good to the production of another
b. decline in the size of the labor force
c. an improvement in the education level of the work force of a nation
d. a sudden substantial increase in consumer desires to purchase goods
2. Money must not be considered an economic resource because:
a. it is not a free gift of nature such as land
b. the terms of trade between nations can be specified in non-monetary terms
c. idle money balances do not earn interest income
d. money, as such, is not productive
3. Which of the following is an example of real capital?
a. a phonograph record
b. a share of IBM stock
c. a savings account
d. a dump truck
4. A change in demand means that:
a. the quantity demanded is changing as price changes
b. there has been a change in the price elasticity of demand
c. the shift of a demand curve is taking place
d. a movement along a given demand curve is taking place
5. Which of the following statements is not true of economics?
a. It is a social science.
b. It assumes limited human wants.
c. It is analytical.
d. It promotes material well-being.
6. On the production-possibilities diagram, unemployment is represented by:
a. a point on the production-possibilities curve;
b. a point outside the production-possibilities curve;
c. a point inside the production-possibilities curve;
d. the point at which the production-possibilities curve touches each axis.
7. The production-possibilities curve:
a. shows all of the combinations of two goods which are most preferred by a society;
b. is a frontier between all combinations of two goods which can be produced and those combinations which could not be produced;
c. indicates that any combination of goods lying outside the curve are inefficient;
d. shows all of those levels of production which are consistent with a stable price level.
8. If there is a shortage in the supply of a product, we could conclude that its price:
a. is in equilibrium
b. will fall in the near future
c. is above the equilibrium level
d. is below the equilibrium level
9. An increase in supply and an increase in demand would cause the equilibrium:
a. price to rise and the quantity to change in an indeterminate way;
b. price to fall and the quantity to change in an indeterminate way;
c. price to change in an indeterminate way and the quantity to rise;
d. price to change in an indeterminate way and the quantity to fall.
10. A decrease in supply and an increase in demand would cause the equilibrium:
a. price to rise and the quantity to change in an indeterminate way;
b. price to fall and the quantity to change in an indeterminate way;
c. price to change in an indeterminate way and the quantity to rise;
d. price to change in an indeterminate way and the quantity to fall.
11.Which of the following is most likely to cause a decrease in the current demand for some product X?
a. an increase in consumer prices;
b. a decrease in the price of close substitute product Y;
c. an increase in the expected future price of X;
d. an increase in the price of product X.
12. Which of the following is unique to capitalist ideology?
a. the use of money
b. specialization
c. private property
d. extensive use of capital goods
13. Which of the following would not cause demand for product X to change?
a. a change in consumer tastes
b. an increase in consumer incomes
c. a change in price of substitute product Y
d. a change in the price of product X
14. If X is a normal good, an increase in consumers' money income will shift the:
a. demand curve for X to the right
b. demand curve for X to the left
c. supply curve for X to the right
d. supply curve for X to the left
15. The most efficient combination of resources which can be used to produce a given level of output is that which:
a. conserves most on the resources which are most plentiful
b. uses the smallest total amount of resources
c. comes the closest to using equal quantities of all resources
d. can be employed with the lowest possible cost
16. The enactment of a guaranteed annual income for all families would be an illustration of which of the following governmental functions?
a. stabilization
b. enhancing competition
c. redistribution of income
d. provision of public goods
17. A social good might be defined as one which:
a. yields benefits only to the individual who buys it
b. yields widespread benefits which cannot readily be denied to the public at large
c. entails rising costs of production
d. has no spillovers associated with its production or consumption
18. The price system corrects for a shortage by:
a. lowering the price and profits of firms causing the shortage
b. raising the price and the producer's profits
c. lowering the price, but increasing the producer's profits
d. raising the price, but lowering the producer's profits
19. An owner's liability for the debts of a business is:
a. limited in a partnership
b. limited to the owner's investment in a sole proprietorship
c. unlimited in a partnership
d. is limited to the assets of bondholders in a corporate form of organization
20. Which of the following is the most important source of revenue to the various state governments in the United States?
a. personal income taxes
b. payroll taxes
c. sales taxes
d. corporate income taxes
Answer the next question on the basis of the following data for increasingly extensive flood control projects.
Total Cost Total Benefit
Per Year Per Year
Plan A - levees $ 3,000 $ 8,000
Plan B - small reservoir 8,000 18,000
Plan C - medium reservoir 15,000 26,000
Plan D - large reservoir 23,000 32,000
21. On the basis of cost-benefit analysis, government should:
a. undertake Plan A
b. undertake Plan B
c. undertake Plan C
d. undertake Plan D
22. A tax is regressive if the:
a. tax rate varies inversely with income
b. percentage of income paid as taxes increases as income increases
c. percentage of income paid as taxes is the same regardless of the amount of income
d. absolute amount paid as taxes varies directly with income
23. The benefits received principle of taxation is most evident in:
a. the corporate income tax
b. excise taxes on gasoline
c. the personal income tax
d. inheritance taxes
24.The economizing problem is essentially one of deciding how the make the best use of:
a. limited resources to satisfy limited wants
b. unlimited resources to satisfy limited wants
c. limited resources to satisfy virtually unlimited wants
d. virtually unlimited resources to satisfy virtually unlimited wants
25. "Because of unseasonably cold weather, the supply of oranges has decreased substantially." This statement indicates that:
a. the price of oranges will soon fall
b. the amount of oranges that will be available at various prices in the market has declined
c. the equilibrium quantity of oranges will rise
d. the demand for oranges will necessarily rise
26. A market is in equilibrium:
a. whenever the demand curve slopes downward and the supply curve slopes upward;
b. if the amount which producers want to sell is equal to the amount which consumers want to buy;
c. at all prices above that shown by intersection of supply an demand;
d. provided there is no surplus in the market.
27. Which of the following best explains the "invisible hand" concept?
a. central direction by the government will improve resource allocation in a capitalist economy
b. mixed capitalism is the best system for overcoming the limited resources- unlimited wants problem
c. the nonsubstitutability of resources gives rise to a conflict between private and public interests and the need for government intervention
d. the desires of resource suppliers and producers to further their own self-interests would automatically further the public interest
28. In 1948, the money GNP was $520 billion and the price index was 120. In order to make the 1948 GNP comparable with the base year, the 1948 GNP must be adjusted to:
a. $370 billion
b. $433 billion
c. $350 billion
d. 280 billion
29. Structural unemployment:
a. occurs because of conflict between labor and management
b. should be zero in a fully employed economy
c. is not counted in the unemployment statistics
d. includes the people displaced by technological change in the economy
30. A $75 price tag on a cashmere sweater in a department store window is an example of money functioning as a:
a. medium of exchange
b. store of value
c. medium of credit
d. standard of value
PART II:
Answer the following questions on the basis of the following hypothetical national income data.
Interest paid by consumers------------------------------------- $ 15
Government purchases of goods & services--------------- 400
Social Security taxes---------------------------------------------- 135
Personal taxes------------------------------------------------------ 320
Corporate income taxes----------------------------------------- 20
Indirect business taxes------------------------------------------- 50
Transfer payments------------------------------------------------ 160
U.S. exports--------------------------------------------------------- 35
Gross private domestic investment--------------------------- 180
Personal consumption expenditures-------------------------- 600
U.S. imports-------------------------------------------------------- 45
Undistributed corporate profits------------------------------- 15
Depreciation-------------------------------------------------------- 60
Gross Domestic Product is:
Net Domestic Product is:
National income is:
Personal Income is:
Disposable Income is:
Saving is:
PART III: Answer two of the following essay questions.
A. Sketch a simple circular flow of income model for a private sector economy. Label all of the flows, and also the markets where all exchanges take place. Describe the exchanges, and comment on the major omissions of the model.
B. Explain how the price system answers the five fundamental questions of economics, and discuss at least two of the short-comings of the capitalist price and market system.
C. Describe the basic process by which an economy moves through a business cycle. What is meant by a demand-pull inflation? How does a demand-pull inflation differ from a cost-push inflation? Describe.