Trivia Quiz On Fundamentals Of Economics
Economics is a wide area of study that cuts across different professions as it helps them to meet their goals. This being said, there are some fundamentals when it comes to Economics that someone is expected to have a proper understanding of. Why don’t you try it out and see if you know them by heart or should spend more time studying!
- 1.
Other things being equal, which of the following will increase current GDP in the United States?
- A.
An increase in exports of Boeing 767 airliners to Mexico.
- B.
A decrease in government purchases.
- C.
A decrease in business investment purchases.
- D.
An increase in the purchases of imported Japanese cameras by American consumers.
Correct Answer
A. An increase in exports of Boeing 767 airliners to Mexico.Explanation
An increase in exports of Boeing 767 airliners to Mexico will increase current GDP in the United States because it represents an increase in net exports. Net exports are calculated by subtracting imports from exports, and an increase in exports will lead to a higher value of net exports. Since GDP is the sum of consumption, investment, government spending, and net exports, an increase in net exports will directly contribute to an increase in GDP.Rate this question:
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- 2.
Suppose real GDP in the United States rises by 3% in 2003. If follows that
- A.
The economy will be in an expansion phase of the business cycle that year
- B.
Aggregate real income will also rise by 3% that year.
- C.
Nominal GDP will fall that year.
- D.
Total production of final products will rise by 3% in 2003, but aggregate real income won't increase at all.
- E.
The economy will be in an expansion phase of the business cycle that year and aggregate real income will also rise by 3% that year.
Correct Answer
E. The economy will be in an expansion phase of the business cycle that year and aggregate real income will also rise by 3% that year.Explanation
If real GDP in the United States rises by 3% in 2003, it indicates that the economy is experiencing an expansion phase of the business cycle. This means that overall economic activity and output are increasing. Additionally, aggregate real income will also rise by 3% in the same year, indicating that individuals and households are experiencing an increase in their overall income.Rate this question:
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- 3.
__________ results from shifts in the demand for goods and services, or changes in technology in the economy.
- A.
Structural unemployment
- B.
Cyclical unemployment
- C.
Frictional unemployment
- D.
None of the above.
Correct Answer
A. Structural unemploymentExplanation
Structural unemployment occurs when there is a mismatch between the skills and qualifications of job seekers and the available job opportunities in the market. This mismatch is often caused by shifts in the demand for goods and services or changes in technology, which result in certain industries or occupations becoming obsolete or declining in demand. As a result, individuals who were previously employed in those industries may struggle to find new job opportunities that match their skills and qualifications, leading to structural unemployment.Rate this question:
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- 4.
Suppose the natural rate of unemployment is believed to be 5.8%. If actual unemployment at the time is 6.2%, it follows that
- A.
Cyclical unemployment is 6.2% of the labor force.
- B.
Cyclical unemployment is zero.
- C.
Structural unemployment is 0.4% of the labor force
- D.
Cyclical unemployment is 0.4% of the labor force.
Correct Answer
D. Cyclical unemployment is 0.4% of the labor force.Explanation
The natural rate of unemployment represents the level of unemployment that exists when the economy is in equilibrium. If the actual unemployment rate is higher than the natural rate, it suggests the presence of cyclical unemployment, which is caused by downturns in the business cycle. In this case, the actual unemployment rate is 6.2% while the natural rate is 5.8%, indicating that there is an excess of 0.4% unemployment due to cyclical factors. Therefore, the correct answer is that cyclical unemployment is 0.4% of the labor force.Rate this question:
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- 5.
Which of the following will increase potential real GDP?
- A.
A decrease in the participation of the elderly in the labor force.
- B.
An increase in the productivity of labor.
- C.
A decline in the quality of labor.
- D.
An increase in cyclical unemployment.
Correct Answer
B. An increase in the productivity of labor.Explanation
An increase in the productivity of labor will increase potential real GDP because it means that workers are able to produce more output per hour of work. This can be achieved through various means, such as technological advancements, improved training and education, or better management practices. When workers are more productive, they can produce more goods and services, leading to an increase in potential real GDP.Rate this question:
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- 6.
If the CPI in year 1 equals 100 and the CPI in year 2 equals 104.6, it can be concluded that
- A.
The rate of inflation from year 1 to year 2 is 104.6%
- B.
There was no inflation from year 1 to year 2.
- C.
The rate of inflation from year 1 to year 2 is 4.6%.
- D.
Year 2 is the base year.
- E.
None of the above
Correct Answer
C. The rate of inflation from year 1 to year 2 is 4.6%.Explanation
The CPI (Consumer Price Index) measures the average change in prices of goods and services over time. In this case, the CPI in year 1 is 100 and in year 2 it is 104.6. To calculate the rate of inflation, we can subtract the CPI in year 1 from the CPI in year 2 and divide it by the CPI in year 1, then multiply by 100. (104.6 - 100) / 100 * 100 = 4.6%. Therefore, the rate of inflation from year 1 to year 2 is 4.6%.Rate this question:
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- 7.
Suppose there's an unanticipated increase in the rate of inflation. Which of the following is likely to be true?
- A.
The real value of outstanding loan balances of debtors will increase.
- B.
Workers whose nominal wages are set at the beginning of the year are likely to enjoy an increase in real wages.
- C.
Workers whose nominal wages are set at the beginning of the year are likely to suffer a decrease in real wages.
- D.
Creditors who made loans based on the anticipated rate of inflation will earn a higher real interest rate than they expected.
Correct Answer
C. Workers whose nominal wages are set at the beginning of the year are likely to suffer a decrease in real wages.Explanation
When there is an unanticipated increase in the rate of inflation, the purchasing power of money decreases. This means that the value of money decreases over time. If workers' nominal wages are set at the beginning of the year, they will not be adjusted to account for the increase in inflation. As a result, their real wages, which represent their purchasing power, will decrease. This means that even though their nominal wages remain the same, they will be able to buy fewer goods and services due to the increase in prices caused by inflation.Rate this question:
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- 8.
An economic contraction can be caused by an increase in
- A.
Investment demand.
- B.
Government purchases.
- C.
Household wealth.
- D.
Real interest rates.
Correct Answer
D. Real interest rates.Explanation
An increase in real interest rates can cause an economic contraction because it makes borrowing more expensive, which reduces investment and consumer spending. Higher interest rates discourage businesses from taking out loans to expand their operations or invest in new projects. It also discourages consumers from taking out loans for big-ticket purchases like houses or cars. As a result, both investment and consumer spending decrease, leading to a contraction in economic activity.Rate this question:
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- 9.
The graph above shows the aggregate demand and aggregate supply curves prevailing for the economy in a given year along with potential real GDP for that year. Given the level of aggregate demand
- A.
The equilibrium level of real GDP will equal potential real GDP.
- B.
There will be no cyclical unemployment for the year.
- C.
There will be cyclical unemployment at the equilibrium level of real GDP.
- D.
There would be unanticipated depletion of inventory if potential real GDP were achieved
- E.
The economy is overheated
Correct Answer
C. There will be cyclical unemployment at the equilibrium level of real GDP.Explanation
At the equilibrium level of real GDP, the aggregate demand and aggregate supply curves intersect. If the equilibrium level of real GDP is below potential real GDP, it means that there is a deficiency in aggregate demand, resulting in cyclical unemployment. This occurs because firms are producing less than their full capacity and are therefore not employing all available resources. Hence, the correct answer is that there will be cyclical unemployment at the equilibrium level of real GDP.Rate this question:
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- 10.
If macroeconomic equilibrium prevails at real GDP of $650 billion, but full-employment real GDP is $750 billion,
- A.
The economy, as measured in real output, will have a natural tendency to expand
- B.
The recessionary GDP gap is $100 billion.
- C.
The equilibrium price level will tend to decline to facilitate the expansion.
- D.
Real GDP of $650 billion impedes desired growth in the economy.
Correct Answer
B. The recessionary GDP gap is $100 billion.Explanation
The correct answer is the recessionary GDP gap is $100 billion. This is because the full-employment real GDP is $750 billion, which means that the economy is currently producing $100 billion less than its potential. This difference between the actual GDP and the full-employment GDP is known as the recessionary GDP gap.Rate this question:
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- 11.
If equilibrium real GDP exceeds potential GDP,
- A.
The economy is overheated.
- B.
Prices increase more rapidly.
- C.
An inflationary GDP gap exists.
- D.
Real GDP increases less for given increases in aggregate demand.
Correct Answer
C. An inflationary GDP gap exists.Explanation
If equilibrium real GDP exceeds potential GDP, it means that the economy is producing more output than it is capable of sustaining in the long run. This situation is known as an inflationary GDP gap. The excess demand in the economy leads to upward pressure on prices, causing prices to increase more rapidly. As a result, the economy becomes overheated, and real GDP increases less for given increases in aggregate demand.Rate this question:
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- 12.
Suppose aggregate demand shifts to the right, causing an inflationary GDP gap. As a result, wages will increase and
- A.
Shift aggregate demand further to the right as the economy enters the second stage of a wage-price spiral.
- B.
Shift aggregate demand back to its initial position
- C.
Push aggregate supply to the right, enabling an expansion to occur in real GDP.
- D.
The price level will decline.
- E.
Cause aggregate supply to shift back to the left.
Correct Answer
E. Cause aggregate supply to shift back to the left.Explanation
When aggregate demand shifts to the right, causing an inflationary GDP gap, it means that the demand for goods and services exceeds the economy's capacity to produce them. This leads to an increase in wages as businesses try to attract more workers to meet the higher demand. However, as wages increase, production costs also rise, causing businesses to face higher expenses. To maintain their profit margins, businesses respond by reducing the quantity of goods and services they supply, shifting aggregate supply back to the left. This helps to alleviate the inflationary pressure and bring the economy back to equilibrium.Rate this question:
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- 13.
According to the classical model of macroeconomic equilibrium,
- A.
A decrease in aggregate demand that causes excessive unemployment will eventually result in a decrease in nominal wages.
- B.
Wage rigidity will result in a lengthy recession when aggregate demand declines.
- C.
The economy does not have a self-correction mechanism to cure recessions.
- D.
A decrease in aggregate demand will not cause nominal wages to decline.
Correct Answer
A. A decrease in aggregate demand that causes excessive unemployment will eventually result in a decrease in nominal wages.Explanation
A decrease in aggregate demand leads to excessive unemployment, which means there is a surplus of labor in the market. When there is a surplus of labor, employers have more bargaining power and can lower wages. As a result, nominal wages will eventually decrease. This is in line with the classical model of macroeconomic equilibrium, which suggests that the labor market will adjust to restore equilibrium in the long run.Rate this question:
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- 14.
The long-run aggregate supply curve, according to the classical model,
- A.
Slopes steeply upward.
- B.
May be downward-sloping.
- C.
Is vertical at potential real GDP.
- D.
Is horizontal at the equilibrium price level.
- E.
Slopes gently upward.
Correct Answer
C. Is vertical at potential real GDP.Explanation
According to the classical model, the long-run aggregate supply curve is vertical at potential real GDP. This means that in the long run, the economy will produce at its full potential output level, regardless of changes in the price level. The classical model assumes that there are no rigidities or frictions in the economy, allowing it to always operate at its maximum productive capacity. Therefore, the long-run aggregate supply curve is perfectly vertical, indicating that changes in the price level do not affect the level of output in the long run.Rate this question:
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- 15.
Suppose aggregate demand decreases from AD1 to AD2 as shown in the graph above. As this occurs the economy moves along the aggregate supply curve AS1 from point E1 to point E2. According to the Keynesian model of macroeconomic equilibrium
- A.
There will be a recessionary GDP gap, which only an increase in spending can eliminate.
- B.
The economy will automatically reequilibrate to achieve full employment.
- C.
There will be an inflationary GDP gap and real GDP will fall as the price level increases
- D.
Aggregate supply will increase and the economy will move from E2 to E3 as real GDP increases and the price level falls
Correct Answer
A. There will be a recessionary GDP gap, which only an increase in spending can eliminate.Explanation
According to the Keynesian model, a decrease in aggregate demand leads to a recessionary GDP gap, which means that the economy is producing below its potential level of output. In order to eliminate this gap and achieve full employment, an increase in spending is necessary. This is because increased spending stimulates aggregate demand, which in turn leads to an increase in production and employment. Therefore, the correct answer is that there will be a recessionary GDP gap, which only an increase in spending can eliminate.Rate this question:
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- 16.
The marginal cost of producing lumber for a competitive firm is currently $3 per board foot at its level of daily operations. If the price of lumber is $3.27 per board foot and the firms wishes to maximize profits, it must
- A.
Decrease daily output.
- B.
Shut down.
- C.
Increase daily output.
- D.
Keep producing at its current level of daily output.
Correct Answer
C. Increase daily output.Explanation
If the marginal cost of producing lumber is currently $3 per board foot and the price of lumber is $3.27 per board foot, the firm can increase its profits by increasing its daily output. By increasing the output, the firm can take advantage of the higher price and generate more revenue. Since the marginal cost is lower than the price, producing more lumber will result in additional profits for the firm. Therefore, increasing daily output is the correct answer.Rate this question:
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- 17.
In the long run, economic profits in a perfectly competitive industry will
- A.
Cause firms to leave the industry.
- B.
Cause many firms to shut down.
- C.
Occur only if firms are producing up to the point at which price equals minimum average cost.
- D.
Encourage new firms to enter the industry.
Correct Answer
D. Encourage new firms to enter the industry.Explanation
In a perfectly competitive industry, economic profits are temporary as they attract new firms to enter the industry. When firms earn economic profits, it signals that there is an opportunity for other firms to also make profits. As a result, new firms are encouraged to enter the industry to take advantage of the potential profits. This entry of new firms increases competition, which eventually drives down prices and reduces economic profits. Therefore, the correct answer is that economic profits in a perfectly competitive industry will encourage new firms to enter the industry.Rate this question:
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- 18.
In long-run competitive equilibrium, price equals both
- A.
Marginal cost and minimum possible average cost.
- B.
Marginal cost and total benefit.
- C.
Average variable cost and marginal cost.
- D.
Marginal cost and average variable cost.
- E.
The lowest possible price of the product and total revenue.
Correct Answer
A. Marginal cost and minimum possible average cost.Explanation
In long-run competitive equilibrium, price equals both marginal cost and minimum possible average cost. This means that the price of a product is equal to the additional cost of producing one more unit (marginal cost) and the minimum average cost at which the firm can produce that unit. In this equilibrium, firms are operating efficiently and there is no incentive for them to enter or exit the market. This ensures that resources are allocated optimally and consumers are able to purchase goods at the lowest possible cost.Rate this question:
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- 19.
The existence of losses induces firms to __________ an industry, which shifts the market supply curve to the __________ and __________ market price.
- A.
Enter, right, increases
- B.
Exit, left, increases
- C.
Enter, right, decreases
- D.
Enter, left, decreases
- E.
Exit, right, decreases
Correct Answer
B. Exit, left, increasesExplanation
The existence of losses induces firms to exit an industry, as they are unable to cover their costs and make a profit. When firms exit, the supply of goods or services in the market decreases, shifting the market supply curve to the left. This decrease in supply leads to an increase in the market price, as there are fewer goods or services available to meet the demand.Rate this question:
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- 20.
Suppose the home construction industry is perfectly competitive. When the industry expands or contracts in the long run, the minimum possible average cost of home building remains fixed at $50 per square foot. Suppose the industry is currently in equilibrium. If the demand for housing increases,
- A.
The price of home construction will go up in the short run, but return to an equilibrium price of $50 per square foot in the long run.
- B.
The price of home construction won't go up in the short run or the long run.
- C.
The price of home construction won't go up in the short run, but will go up in the long run.
- D.
The price of home construction will go up in the short run and the long run.
Correct Answer
A. The price of home construction will go up in the short run, but return to an equilibrium price of $50 per square foot in the long run.Explanation
In a perfectly competitive industry, the minimum possible average cost of home building remains fixed at $50 per square foot in the long run. When the demand for housing increases, the price of home construction will go up in the short run due to increased demand. However, in the long run, the industry will adjust to meet the increased demand by expanding production, which will eventually bring the price back to the equilibrium price of $50 per square foot. Therefore, the correct answer is that the price of home construction will go up in the short run, but return to an equilibrium price of $50 per square foot in the long run.Rate this question:
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- 21.
The 1990-91 recession caused a decrease in the demand for organically grown food. If the industry was perfectly competitive before the recession,
- A.
The supply of organically grown food was not affected by the price decline in the long run.
- B.
There was no incentive for firms to enter or leave the industry as a result of the price decline
- C.
Firms left the industry and the supply of organically grown food decreased.
- D.
Firms left the industry and the supply of organically grown food increased.
Correct Answer
C. Firms left the industry and the supply of organically grown food decreased.Explanation
During the 1990-91 recession, the decrease in demand for organically grown food caused firms to leave the industry. In a perfectly competitive market, firms are price takers and cannot control the price. As a result, when the price declined, firms had no incentive to stay in the industry and continue producing. This led to a decrease in the supply of organically grown food as fewer firms were producing it. Therefore, the correct answer is that firms left the industry and the supply of organically grown food decreased.Rate this question:
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- 22.
A significant long-run difference between monopoly and competition is that
- A.
The demand curve for the monopolist is the industry demand curve, whereas the demand curve faced by the competitive firm is perfectly elastic.
- B.
There's free entry and exit in a competitive industry, whereas barriers to entry exist in a monopolized market.
- C.
The monopolist controls market supply, whereas the competitive firm's influence on market supply is imperceptible
- D.
All of the above.
- E.
None of the above.
Correct Answer
D. All of the above.Explanation
In a monopoly, the demand curve for the monopolist is the industry demand curve, meaning that the monopolist is the sole provider of the product and has control over the market demand. On the other hand, in a competitive industry, the demand curve faced by the competitive firm is perfectly elastic, indicating that the firm has no control over market demand and must adjust its supply accordingly. Additionally, in a competitive industry, there is free entry and exit, allowing new firms to enter the market and existing firms to leave, while in a monopolized market, barriers to entry exist, limiting competition. Therefore, all of the above statements are correct explanations of the differences between monopoly and competition.Rate this question:
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- 23.
A monopoly firm selling textbooks is currently maximizing profits by charging a price of $100 per book. It follows that the marginal cost of textbooks
- A.
Equals the average revenue from textbooks.
- B.
Is greater than $100
- C.
Is less than $100.
- D.
Is equal to $100.
Correct Answer
C. Is less than $100.Explanation
In order to maximize profits, a monopoly firm sets its price where marginal cost (MC) equals marginal revenue (MR). If the marginal cost of textbooks were equal to $100, the firm would not be maximizing profits by charging $100 per book. Instead, it would be incurring a loss or not maximizing its potential profits. Therefore, the correct answer is that the marginal cost of textbooks is less than $100.Rate this question:
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- 24.
Suppose the DeBeers company exercises monopoly power in the distribution of diamonds. This year, the company earns economic profits and maximizes profit. This implies that the price of diamonds per carat will
- A.
Exceed the marginal cost of diamonds, but be equal to the average cost of diamonds
- B.
Be equal to the marginal cost of diamonds
- C.
Exceed both the marginal cost and average cost of diamonds.
- D.
Be equal to the average cost of diamonds.
Correct Answer
C. Exceed both the marginal cost and average cost of diamonds.Explanation
In a monopoly, the company has the power to set prices higher than the marginal cost in order to maximize profits. Since the question states that the company is earning economic profits and maximizing profit, it implies that the price of diamonds per carat will exceed both the marginal cost and average cost of diamonds. This is because the company can charge a price higher than the cost of producing an additional unit (marginal cost) and also higher than the average cost of producing all units.Rate this question:
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- 25.
The graph above shows the average cost marginal cost demand and marginal revenue curves for a monopoly firm. The maximum possible profit the firm can earn per day is
- A.
$240.
- B.
Zero.
- C.
$120
- D.
$60.
Correct Answer
D. $60.Explanation
The maximum possible profit the firm can earn per day is $60. This can be determined by looking at the graph and identifying the point where the marginal cost curve intersects the marginal revenue curve. At this point, the firm is producing the quantity where marginal cost equals marginal revenue, which maximizes profit. The corresponding average cost at this quantity is $60, indicating the maximum profit that can be earned per day.Rate this question:
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- 26.
If the government attempts to break up a natural monopoly to enforce competition in an industry,
- A.
The average cost of producing the good will increase
- B.
The average cost of producing the good will decrease.
- C.
The price paid by consumers will be expected to remain the same.
- D.
The smallest firm will have a significant cost advantage over the larger, less efficient firms.
Correct Answer
A. The average cost of producing the good will increaseExplanation
When a natural monopoly is broken up to enforce competition in an industry, the average cost of producing the good will increase. This is because natural monopolies often benefit from economies of scale, meaning that they can produce goods at a lower cost due to their large size and production capabilities. Breaking up the monopoly and introducing competition would result in smaller firms having to operate at a smaller scale, leading to higher average costs of production.Rate this question:
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- 27.
If a local movie theater is a monopolist, price discrimination means that
- A.
The theater can charge different prices for its product in different markets.
- B.
The theater can charge a higher price than a competitive firm.
- C.
The theater's price/output decision results in an unequal distribution of income.
- D.
Economic profits earned by the theater will redistribute income from consumers to resource owners.
Correct Answer
A. The theater can charge different prices for its product in different markets.Explanation
Price discrimination refers to the practice of charging different prices for the same product or service in different markets or to different customers. In the context of a local movie theater being a monopolist, price discrimination allows the theater to set different ticket prices based on factors such as location, time of day, or customer segment. By doing so, the theater can maximize its profits by extracting as much consumer surplus as possible. This strategy enables the theater to capture a larger share of the market and increase its revenue compared to a competitive firm.Rate this question:
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- 28.
In a monopolistically competitive market,
- A.
Products of competing firms are standardized.
- B.
The demand curve for any individual firm is a horizontal line.
- C.
Advertising rarely takes place.
- D.
Firms sell a differentiated product.
Correct Answer
D. Firms sell a differentiated product.Explanation
In a monopolistically competitive market, firms sell a differentiated product. This means that each firm offers a product that is unique or has some distinguishing features compared to the products of other firms in the market. This differentiation allows firms to have some control over the price and demand for their product, as consumers may have preferences for certain features or qualities. This differentiation also leads to competition among firms, as they strive to attract customers based on the unique aspects of their product.Rate this question:
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- 29.
Under oligopoly,
- A.
There are no barriers to entry.
- B.
There are many sellers in the industry.
- C.
The demand for each firm's output is perfectly elastic.
- D.
There are only a few sellers in the industry.
Correct Answer
D. There are only a few sellers in the industry.Explanation
Under oligopoly, there are only a few sellers in the industry. This means that the market is dominated by a small number of firms who have significant control over the market. Due to the limited number of sellers, each firm's actions can have a significant impact on the market and its competitors. This can lead to intense competition and strategic behavior among the few sellers, such as price wars or collusion. The presence of only a few sellers also allows for the possibility of barriers to entry, making it difficult for new firms to enter the market and compete with the existing players.Rate this question:
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- 30.
Which of the following conditions is NOT necessary for a cartel to succeed?
- A.
Barriers to entry.
- B.
Agreement on each firm's share of total output
- C.
The ability to enforce the agreement.
- D.
The ability to practice price discrimination.
- E.
Agreement on overall production levels.
Correct Answer
D. The ability to practice price discrimination.Explanation
A cartel is a group of firms that collude to restrict competition and control prices in a market. In order for a cartel to succeed, several conditions must be met. These include barriers to entry, agreement on each firm's share of total output, the ability to enforce the agreement, and agreement on overall production levels. However, the ability to practice price discrimination is not necessary for a cartel to succeed. Price discrimination refers to charging different prices to different customers based on their willingness to pay. While price discrimination can be a profitable strategy for firms, it is not a requirement for a cartel to effectively control prices and restrict competition.Rate this question:
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Mar 20, 2023Quiz Edited by
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Oct 24, 2011Quiz Created by
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