Macro Practice Test 1

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1) Scarcity
- A) is found only in developing nations.
- B) occurs because there are too many people.
- C) occurs because of unlimited wants and limited resources available to fulfill these wants.
- D) is not a problem for the wealthy.

About This Quiz

Macro Practice Test 1 assesses understanding of basic economic concepts such as scarcity, market operations, and rational behavior. It explores how individuals and markets respond to various economic incentives and constraints.

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2.

2) Economics is the study of
- A) supply and demand.
- B) how to make money in a market economy.
- C) the choices everybody makes to attain their goals, given their scarce resources.
- D) how to make money in the stock market.
Correct Answer

A. C) the choices everybody makes to attain their goals, given their scarce resources.

Explanation

Economics is the study of the choices that individuals, businesses, and governments make in order to achieve their goals, given the limited resources available to them. It involves analyzing how people allocate their resources, such as time, money, and labor, in order to maximize their satisfaction or utility. This includes studying topics such as supply and demand, market behavior, production, consumption, and distribution of goods and services. Therefore, option C accurately describes the scope and focus of economics.

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1
3.

3) What assumptions about humans do economists make? A) People are greedy and selfish. B) None, because economics takes humans as given. C) Humans prefer to live in a society that values fairness above all else. D) People are rational and respond to incentives.
- A
- B
- C
- D
Correct Answer

A. D

Explanation

Economists make the assumption that people are rational and respond to incentives. This means that individuals make choices based on their own self-interest and are motivated by the potential benefits or rewards they can receive. This assumption is foundational in economic theory and is used to analyze and predict human behavior in various economic situations. It helps economists understand how individuals make decisions regarding consumption, production, investment, and other economic activities.

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4.

4) Where are buyers and sellers brought together? A) Only in cities, towns, and villages. B) A market, which can be a location or an electronic connection. C) A market, which has to be a physical location. D) Only in shopping malls.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

Buyers and sellers are brought together in a market, which can be either a physical location or an electronic connection. This means that they can meet in traditional markets in cities, towns, and villages, as well as in online marketplaces. The correct answer is B.

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5.

5) Which of the following best describes the assumption about human behavior that economics makes? A) People weigh religious, envy, compassion, anger aspects in all decisions they make. B) Assuming rational behavior is useful in explaining choices people make even though they may not behave rationally all the time. C) Economics assumes individuals act rationally all the time in all circumstances. D) None of these describes what economics assumes about human behavior.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

Economics assumes that individuals act rationally in their decision-making process, even though they may not behave rationally all the time. This means that people consider the costs and benefits of their choices and make decisions that maximize their own self-interest. While other factors such as emotions and social influences may also play a role in decision-making, the assumption of rational behavior is still considered useful in explaining the choices people make.

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6.

6) What does the adjective marginal mean in economics? A) Something done at the edge of a market, like buying a table at a garage sale. B) Buying something that is illegal to buy. C) Incremental, additional, or extra of some action. D) None of these illustrate how the word marginal is used in economics.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

The adjective "marginal" in economics means incremental, additional, or extra of some action. It refers to the small changes or additions made to a certain activity or decision. This term is commonly used to analyze the effects of small changes in variables such as production, cost, or revenue on the overall economic outcome.

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7.

7) What does marginal analysis involve? A) Comparing total costs to total benefits. B) Subtracting total costs from total benefits. C) Comparing average costs to average benefits. D) Comparing marginal costs to marginal benefits.
- A
- B
- C
- D
Correct Answer

A. D

Explanation

Marginal analysis involves comparing the additional or incremental costs and benefits associated with a decision or action. It focuses on the changes in costs and benefits rather than the total amounts. By comparing marginal costs to marginal benefits, individuals or businesses can make more informed decisions about whether the additional costs are worth the additional benefits gained. This approach allows for a more precise evaluation of the costs and benefits of different options and helps in optimizing decision-making.

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8.

8) Every society faces economic tradeoffs, which means A) if one political party controls the government, the other party can't. B) some people live better than others do. C) producing less of one good means more of another good can be produced. D) none of these.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

Every society faces economic tradeoffs, which means that producing less of one good means more of another good can be produced. This implies that resources are limited and choices have to be made on how to allocate them. By choosing to produce more of one good, society has to give up the production of another good. This concept of tradeoffs is fundamental to economics and highlights the need for efficient resource allocation.

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9.

9) What forces humans to make tradeoffs? A) productive inefficiency B) confusion C) scarcity D) more than one political party
- A
- B
- C
- D
Correct Answer

A. C

Explanation

Humans are forced to make tradeoffs because of scarcity. Scarcity refers to the limited availability of resources, such as time, money, and natural resources, in relation to the unlimited wants and needs of individuals and society. Due to this scarcity, individuals must make choices and tradeoffs in order to allocate their limited resources effectively. This means that when humans choose to prioritize one thing, they must give up or tradeoff other things.

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10.

10) How is the decision about what goods and services will be produced made in a market economy? A) What will be produced is determined by what society needs the most. B) Producing firms decide to produce only what the boss says must be produced. C) Lawmakers in the government vote on what will be produced. D) By consumers, firms, and government choosing which goods and services to buy.
- A
- B
- C
- D
Correct Answer

A. D

Explanation

In a market economy, the decision about what goods and services will be produced is made by consumers, firms, and the government choosing which goods and services to buy. This means that the production of goods and services is driven by the demand and preferences of the consumers, as well as the decisions made by firms and the government regarding their own needs and priorities. This system allows for a decentralized decision-making process, where multiple stakeholders have a say in determining what is produced.

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11.

11) Which of the following is correct? A) Economics is a decision science that studies the tradeoffs we are forced to make because of scarcity. B) All of these are correct. C) Every individual, no matter how rich or poor, is faced with making tradeoffs. D) Anytime you have to decide which action to take you are facing an economic tradeoff.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

All of the statements A, C, and D are correct. Economics is indeed a decision science that studies the tradeoffs we make due to scarcity. Every individual, regardless of their wealth, has to make tradeoffs. And anytime we have to make a decision, we are faced with an economic tradeoff. Therefore, option B, which states that all of these statements are correct, is the correct answer.

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12.

12) Which of the following is a problem inherent in centrally planned economies? A) Production managers do not satisfy consumer wants but the government's orders. B) There are no problems, everyone including consumers are satisfied. C) Too much production of low-cost, high-quality goods and services. D) None of these describe the problem inherent in a centrally planned economy.
- A
- B
- C
- D
Correct Answer

A. A

Explanation

In centrally planned economies, production managers prioritize fulfilling the government's orders rather than satisfying consumer wants. This can lead to a mismatch between what consumers actually need and what is being produced, resulting in goods and services that may not meet consumer demands or preferences.

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13.

13) Who ultimately decides what goods and services will be produced in a market economy? A) none of these B) producing firms C) the ruling political party D) consumers
- A
- B
- C
- D
Correct Answer

A. D

Explanation

In a market economy, consumers ultimately decide what goods and services will be produced. This is because consumers have the power to determine the demand for different products and services through their purchasing decisions. If consumers demand a certain product or service, businesses will respond by producing more of it to meet the demand. Conversely, if consumers do not demand a certain product or service, businesses will be less likely to produce it. Therefore, the choices and preferences of consumers play a crucial role in shaping the production decisions in a market economy.

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14.

14) What explains the efficiency of markets? A) They always result in equity. B) Markets promote equal standards of living. C) The government stays out. D) Markets promote competition and voluntary exchange.
- A
- B
- C
- D
Correct Answer

A. D

Explanation

The correct answer is D) Markets promote competition and voluntary exchange. This explanation suggests that the efficiency of markets is due to the fact that they encourage competition among businesses, which leads to innovation and lower prices for consumers. Additionally, markets allow for voluntary exchange, meaning that individuals are free to choose what they buy and sell, leading to a more efficient allocation of resources.

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15.

15) Why does voluntary exchange increase economic efficiency? A) Because the true economic value of the good or service is established. B) Because it is free and consequently does not cost anything. C) Because neither the buyer nor the seller would agree to a trade unless they both benefit. D) It doesn't, only government approved exchange is considered efficient.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

Voluntary exchange increases economic efficiency because both the buyer and the seller would only agree to a trade if they both benefit. This means that resources are allocated to their most valued uses, resulting in a more efficient allocation of goods and services.

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16.

16) Which of the following uses do economic models fulfill? A) Make economic ideas explicit and concrete for use by decision makers. B) Simplification of some aspect of economic life. C) To answer economic questions. D) All of these.
- A
- B
- C
- D
Correct Answer

A. D

Explanation

Economic models fulfill multiple uses. They make economic ideas explicit and concrete for use by decision makers, simplify some aspect of economic life, and help answer economic questions. These models provide a framework for understanding and analyzing complex economic phenomena, allowing decision makers to make informed choices based on data and evidence. By simplifying economic concepts and relationships, these models make them more accessible and easier to comprehend. Ultimately, economic models serve the purpose of providing insights and guidance in the field of economics.

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17.

17) Which of the following is a positive economic statement? A) If the price of gasoline rises, a smaller quantity of it will be bought. B) The government should close income tax loopholes. C) Everyone should live at the same standard of living. D) U.S. firms should not be allowed to practice outsourcing.
- A
- B
- C
- D
Correct Answer

A. A

Explanation

The correct answer is A) If the price of gasoline rises, a smaller quantity of it will be bought. This statement is a positive economic statement because it describes a cause-and-effect relationship in the economy. It states that when the price of gasoline increases, the quantity demanded will decrease, which is a basic economic principle.

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18.

18) Which of the following is a normative statement? A) The current high price of gasoline is the result of strong world wide demand. B) The price of gasoline is too high. C) All of these. D) None of these.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

Option B is a normative statement because it expresses a value judgment or opinion about the price of gasoline being too high. It is subjective and reflects the speaker's personal belief rather than stating a factual observation. Options A, C, and D are not normative statements as they either state a factual observation (option A) or include all possible options (option C) or none of the options (option D).

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19.

19) Why are so many graphs used in economics? A) Complications can be more easily overcome by abstract simplifications made possible using graphs. B) All of these reasons are why so many graphs are used in economics. C) Graphs illustrate and simplify economic ideas. D) Graphs highlight key economic relationships.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

Graphs are used in economics for several reasons. They help to illustrate and simplify economic ideas, allowing for a clearer understanding of complex concepts. Graphs also highlight key economic relationships, making it easier to identify patterns and trends. Additionally, complications in economics can be more easily overcome by using abstract simplifications made possible through graphs. Therefore, all of these reasons contribute to why so many graphs are used in economics.

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20.

20) Which of the following is correct? A) All of these are correct. B) A direct relationship has a positive slope value. C) An inverse relationship has a negative slope value. D) A curved line has slope values that change at every point.
- A
- B
- C
- D
Correct Answer

A. A

Explanation

The correct answer is A) All of these are correct. This means that all of the statements given in options B, C, and D are true. A direct relationship does have a positive slope value, an inverse relationship does have a negative slope value, and a curved line does have slope values that change at every point. Therefore, option A is the correct answer because it encompasses all of the correct statements.

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21.

21) If a graph has a line that shows the amount of outsourcing in the last ten years, it is known as a A) time series graph. B) demand curve for outsourcing. C) pie chart. D) supply curve of outsourcing.
- A
- B
- C
- D
Correct Answer

A. A

Explanation

A time series graph is a type of graph that shows the amount of outsourcing over a period of time, specifically in the last ten years. This graph would plot the outsourcing data on the y-axis and the years on the x-axis, allowing for a visual representation of the trend in outsourcing over time. The other options, such as the demand curve for outsourcing, pie chart, and supply curve of outsourcing, do not accurately describe a graph that shows the amount of outsourcing over time.

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22.

22) How can the influence of a third variable be shown on a two dimensional graph? A) By drawing a third axis coming out of the two axes. B) By allowing the position of the relationship line or curve to shift on the graph. C) It can't because the graph only has two dimensions. D) None of these.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

The influence of a third variable can be shown on a two dimensional graph by allowing the position of the relationship line or curve to shift on the graph. This means that as the third variable changes, the relationship between the two variables on the graph will also change, indicating the influence of the third variable. This allows for a visual representation of how the third variable affects the relationship between the two variables being plotted.

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23.

23) Which of the following is not a factor of production? A) the manager of the local tire shop B) $1,000 C) a drill press in a machine shop D) an acre of farmland
- A
- B
- C
- D
Correct Answer

A. B

Explanation

The manager of the local tire shop, a drill press in a machine shop, and an acre of farmland are all examples of factors of production. These are resources or inputs used in the production process to create goods and services. However, $1,000 is not a factor of production. It is a form of financial capital or money, which is used to purchase the factors of production but is not a factor itself.

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24.

24) Why do people trade with each other instead of living on what they themselves produce? A) So you can take advantage of others and maybe get something for nothing. B) By engaging in trade people can raise their standard of living. C) To be able to amass large amounts of money like Scrooge. D) Because that is what everybody else does.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

Engaging in trade allows people to specialize in producing what they are most efficient at, while also being able to obtain goods and services that they cannot produce themselves. This leads to increased productivity and efficiency, ultimately raising the standard of living for individuals and society as a whole.

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25.

25) The production possibilities frontier shows A) the various products that can be produced now and in the future. B) what an equitable distribution of products among citizens would be. C) attainable combinations of two products that may be produced with available resources. D) none of these.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

The production possibilities frontier shows the attainable combinations of two products that may be produced with available resources. This means that it represents the different combinations of goods or services that can be produced given the available resources and technology. It illustrates the trade-offs and opportunity costs involved in producing one product over another. It does not represent the distribution of products among citizens or the products that can be produced now and in the future.

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26.

26) What points on a production possibilities frontier are attainable production points. A) Points within the area enclosed by the production possibilities frontier. B) Combinations along the production possibilities frontier. C) Both of these sets of points on a production possibilities frontier. D) None of these sets of points on a production possibilities frontier.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

Points on a production possibilities frontier represent the maximum possible combinations of goods and services that can be produced given the available resources and technology. These points are considered attainable because they can be achieved through efficient allocation of resources. Both options A and B are correct because points within the area enclosed by the production possibilities frontier and combinations along the production possibilities frontier are both attainable production points.

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27.

27) What points are unattainable on a production possibilities frontier? A) Points along the production possibilities frontier. B) Points outside the production possibilities frontier. C) Points within the production possibilities frontier. D) None of these sets of points on a production possibilities frontier.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

The correct answer is B) Points outside the production possibilities frontier. This means that any combination of goods or services that is not achievable given the current resources and technology is considered unattainable. The production possibilities frontier represents the maximum potential output of an economy, so any point beyond that frontier would require more resources or improved technology.

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28.

28) On a production possibilities frontier, a combination of output that is inside the frontier is A) allocatively inefficient. B) productively efficient. C) allocatively efficient. D) productively inefficient.
- A
- B
- C
- D
Correct Answer

A. D

Explanation

A combination of output that is inside the production possibilities frontier is considered to be productively inefficient. This means that resources are not being fully utilized and there is potential to increase output without sacrificing the production of other goods.

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29.

29) Which of the following terms means the highest valued alternative given up when a person chooses to engage in an activity? A) opportunity cost B) accounting cost C) dollar cost D) none of these
- A
- B
- C
- D
Correct Answer

A. A

Explanation

The term that means the highest valued alternative given up when a person chooses to engage in an activity is "opportunity cost". This refers to the value of the next best alternative that is forgone when making a choice. It represents the potential benefits or profits that could have been obtained if a different decision had been made.

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30.

30) The production possibilities frontier model can be applied to which of the following? A) a firm B) the whole economy C) an individual D) all of these
- A
- B
- C
- D
Correct Answer

A. D

Explanation

The correct answer is D) all of these. The production possibilities frontier model can be applied to a firm, the whole economy, or an individual. This model illustrates the different combinations of goods and services that can be produced given the available resources and technology. It helps to analyze trade-offs and opportunity costs in production decisions. Therefore, it is applicable to all levels of economic analysis, from microeconomic decisions of a firm or individual to macroeconomic decisions of the whole economy.

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31.

31) Assume a firm can produce a combination of 60 units of X together with 80 units of Y but to produce 70 units of X, the firm can only produce 60 units of Y. What is the opportunity cost to produce 10 more units of X? A) two units of Y B) 20 units of Y C) one-half a unit of X D) 10 units of X
- A
- B
- C
- D
Correct Answer

A. B

Explanation

To produce 10 more units of X, the firm has to reduce the production of Y by 10 units. Since the firm can produce 80 units of Y when producing 60 units of X, the opportunity cost of producing 10 more units of X is 20 units of Y. Therefore, the correct answer is B) 20 units of Y.

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32.

32) A production possibilities frontier with a bowed outward shape indicates which of the following? A) Constant opportunity costs as more and more of one good is produced. B) Increasing opportunity costs as more and more of one good is produced. C) The possibility of inefficient production. D) Falling opportunity costs as more and more of one good is produced.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

A production possibilities frontier with a bowed outward shape indicates increasing opportunity costs as more and more of one good is produced. This means that as more units of one good are produced, the opportunity cost of producing additional units of that good increases. In other words, to produce more of one good, society must give up increasing amounts of the other good. This is represented by the curved shape of the production possibilities frontier.

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33.

33) At full employment, an economy that wants to produce more war goods must A) wait until resource supplies have increased. B) be attempting the impossible. C) cut back on the production of other goods. D) increase the production of consumer goods.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

At full employment, an economy is already utilizing all of its available resources and labor. Therefore, if the economy wants to produce more war goods, it would have to reallocate resources from the production of other goods. This means that the production of other goods would have to be cut back in order to increase the production of war goods.

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34.

34) How is economic growth represented on a production possibilities frontier model? A) By the production possibilities frontier tilting on the graph. B) By the production possibilities frontier shifting inward. C) By the production possibilities frontier shifting outward. D) By none of these.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

Economic growth is represented on a production possibilities frontier model by the production possibilities frontier shifting outward. This indicates that an economy is able to produce more goods and services over time, as resources are utilized more efficiently or new resources are discovered. This shift represents an increase in the economy's potential output and reflects economic growth.

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35.

35) Increasing opportunity cost illustrates which of the following important economic concepts? A) The importance of production and exchange. B) The law of scarcity. C) The more resources devoted to any activity, the smaller the payoff of devoting more resources to that activity. D) How easy it is to slip into inefficient production.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

Increasing opportunity cost illustrates the concept that the more resources are devoted to any activity, the smaller the payoff of devoting more resources to that activity. As resources are shifted from one activity to another, the opportunity cost of producing additional units of the original activity increases. This concept highlights the trade-offs and choices that individuals and societies face when allocating scarce resources.

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36.

36) Without an increase in the supplies of factors of production, how can a nation grow economically? A) By lowering the price of factors of production. B) Through technological advance which enables more output with the same resource supplies. C) It cannot. D) By increasing the price of factors of production.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

Technological advance allows a nation to produce more output with the same amount of resources. This means that even without an increase in the supplies of factors of production, the nation can still grow economically by becoming more efficient and productive through the use of technology.

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37.

37) On a production possibilities frontier model, the production of more physical and human capital will have which of the following results. A) Future production possibilities frontiers will be shifted outward. B) Future economic growth is enhanced. C) Less goods for consumption today will be produced. D) All of these will occur.
- A
- B
- C
- D
Correct Answer

A. D

Explanation

The production of more physical and human capital will have multiple results. It will shift the future production possibilities frontiers outward, meaning that the economy will be able to produce more goods and services in the future. This will enhance future economic growth. However, in order to invest in physical and human capital, resources need to be allocated away from the production of goods for immediate consumption. Therefore, less goods for consumption today will be produced. Overall, all of these outcomes will occur when more physical and human capital is produced.

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38.

38) What is the reason people trade with each other? A) All of these reasons. B) By specializing in one activity our production increases. C) Specialization by individual people implies trade by everyone. D) People who specialize must trade with others for what they want to consume.
- A
- B
- C
- D
Correct Answer

A. A

Explanation

People trade with each other for various reasons. By specializing in one activity, our production increases, which leads to economic growth. Specialization by individuals implies trade by everyone, as individuals cannot produce everything they need. People who specialize in certain goods or services must trade with others to obtain what they want to consume. Therefore, all of these reasons contribute to why people trade with each other.

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39.

39) You have an absolute advantage whenever you A) are better educated than someone else. B) can produce more of something than others with the same resources. C) can produce something at a lower opportunity cost than others. D) prefer to do one particular activity.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

An absolute advantage refers to the ability to produce a good or service with fewer resources or at a lower opportunity cost compared to others. Option C correctly identifies this concept by stating that you have an absolute advantage when you can produce something at a lower opportunity cost than others. This means that you can produce more of that particular good or service by sacrificing less of other goods or services. Therefore, option C is the correct answer.

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40.

51) Demand shows the A) quantity that sellers will sell at a given price. B) quantity that buyers will buy at a given price. C) quantities that buyers will buy at all possible prices. D) quantities that sellers will sell at all possible prices.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

Demand refers to the quantity of a good or service that buyers are willing and able to purchase at various prices. It represents the relationship between the price of a product and the quantity demanded by consumers. Option C correctly states that demand shows the quantities that buyers will buy at all possible prices, making it the correct answer. Options A and D are incorrect because they only focus on the sellers' perspective, while option B is incorrect because it does not encompass all possible prices.

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41.

52) Market demand shows the A) quantities that all sellers will sell at all possible prices. B) quantities that all buyers will buy at all possible prices C) quantity that one buyer will buy at a given price. D) quantity that one seller will sell at a given price.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

Market demand shows the quantities that all buyers will buy at all possible prices. This means that it represents the total demand from all buyers in the market for a particular product or service. It takes into account the various price levels and the corresponding quantities that buyers are willing and able to purchase. The market demand curve shows the relationship between price and quantity demanded, indicating the overall demand for a product in the market.

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42.

53) When the price of a good increases A) demand will decrease. B) quantity demanded will decrease. C) demand will increase. D) quantity demanded will increase.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

When the price of a good increases, the quantity demanded will decrease. This is because as the price of a good goes up, consumers are less willing and able to purchase it, resulting in a decrease in the quantity demanded.

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43.

54) When the price of a good decreases A) quantity demanded will decrease. B) demand will increase C) demand will decrease. D) quantity demanded will increase.
- A
- B
- C
- D
Correct Answer

A. D

Explanation

When the price of a good decreases, the quantity demanded will increase. This is because as the price decreases, consumers are more willing and able to purchase the good, leading to an increase in demand for it. The inverse relationship between price and quantity demanded is known as the law of demand.

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44.

55) The law of demand states that A) there is a positive or upsloping relationship between price and quantity. B) there is an inverse or downsloping relationship between price and quantity. C) buyers increase the quantities they buy when their incomes increase. D) buyers decrease the amount of a good bought when there is more in the market.
- A
- B
- C
- D
Correct Answer

A. B

Explanation

The correct answer is B) there is an inverse or downsloping relationship between price and quantity. The law of demand states that as the price of a good or service increases, the quantity demanded decreases, and vice versa. This is because consumers are generally willing to buy more of a good when it is cheaper, and less of it when it is more expensive. This relationship is represented by a downward-sloping demand curve.

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45.

56) The substitution effect results in A) sellers substituting less expensive inputs in production. B) sellers producing products that are more profitable. C) buyers buying more of a good because their real income has increased. D) buyers buying more of a relatively cheaper good when the price of a substitute rises.
- A
- B
- C
- D
Correct Answer

A. D

Explanation

The correct answer is D. The substitution effect refers to the change in consumer behavior when the price of a substitute good rises. In this case, buyers will choose to buy more of a relatively cheaper good instead of the substitute. This is because the substitute has become more expensive, making the cheaper good a more attractive option. So, the substitution effect leads to buyers buying more of a relatively cheaper good when the price of a substitute rises.

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46.

57) The income effect occurs when A) buyers buying more of a good because their real income has increased. B) buyers buy more of a relatively cheaper good when the price of a substitute rises. C) sellers hire more workers because buyers incomes have increased. D) sellers producing more output because their profit has increased.
- A
- B
- C
- D
Correct Answer

A. A

Explanation

The income effect refers to the phenomenon where buyers increase their consumption of a good when their real income (purchasing power) increases. This means that as individuals have more money to spend, they are able to afford and purchase more of a particular good. This is different from the substitution effect, where buyers switch to a cheaper alternative when the price of a substitute rises. The other options, hiring more workers due to increased buyer incomes and producing more output due to increased profit, are not related to the income effect.

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47.

58) If the price of a product increases from $12 to $15, which of the following will occur? A) Demand for the product will decrease. B) Quantity demanded for the product will increase. C) Quantity demanded for the product will decrease. D) Demand for the product will increase.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

When the price of a product increases, it usually leads to a decrease in the quantity demanded for the product. This is because consumers are less willing to purchase the product at a higher price, resulting in a decrease in demand. Therefore, the correct answer is C) Quantity demanded for the product will decrease.

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48.

59) Which of the following means everything else held constant? A) carpe diem B) post hoc, proctor hoc C) ceterius paribus D) none of these
- A
- B
- C
- D
Correct Answer

A. C

Explanation

The correct answer is C) ceterius paribus. This Latin phrase means "all other things being equal" or "everything else held constant." It is often used in economics and other social sciences to isolate the effect of a specific variable by assuming that all other factors remain unchanged.

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49.

60) Which of the following will NOT cause demand to increase for bananas? A) News that bananas help relieve stress in people. B) Rise in the price of a substitute fruit such as apples or oranges. C) Fall in the price of bananas. D) Buyers switch to a more healthy diet including bananas.
- A
- B
- C
- D
Correct Answer

A. C

Explanation

A fall in the price of bananas will not cause demand to increase for bananas. Typically, a decrease in price would lead to an increase in demand, as consumers are more likely to purchase a product that is cheaper. However, in this case, the question specifically asks for a factor that will not cause demand to increase. Therefore, option C is the correct answer.

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Dec 12, 2010

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Macro Practice Test 1

1) Scarcity

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2) Economics is the study of

3) What assumptions about humans do economists make? A) People are greedy and selfish. B) None, because economics takes humans as given. C) Humans prefer to live in a society that values fairness above all else. D) People are rational and respond to incentives.

4) Where are buyers and sellers brought together? A) Only in cities, towns, and villages. B) A market, which can be a location or an electronic connection. C) A market, which has to be a physical location. D) Only in shopping malls.

7) What does marginal analysis involve? A) Comparing total costs to total benefits. B) Subtracting total costs from total benefits. C) Comparing average costs to average benefits. D) Comparing marginal costs to marginal benefits.

8) Every society faces economic tradeoffs, which means A) if one political party controls the government, the other party can't. B) some people live better than others do. C) producing less of one good means more of another good can be produced. D) none of these.

9) What forces humans to make tradeoffs? A) productive inefficiency B) confusion C) scarcity D) more than one political party

13) Who ultimately decides what goods and services will be produced in a market economy? A) none of these B) producing firms C) the ruling political party D) consumers

14) What explains the efficiency of markets? A) They always result in equity. B) Markets promote equal standards of living. C) The government stays out. D) Markets promote competition and voluntary exchange.

16) Which of the following uses do economic models fulfill? A) Make economic ideas explicit and concrete for use by decision makers. B) Simplification of some aspect of economic life. C) To answer economic questions. D) All of these.

18) Which of the following is a normative statement? A) The current high price of gasoline is the result of strong world wide demand. B) The price of gasoline is too high. C) All of these. D) None of these.

20) Which of the following is correct? A) All of these are correct. B) A direct relationship has a positive slope value. C) An inverse relationship has a negative slope value. D) A curved line has slope values that change at every point.

21) If a graph has a line that shows the amount of outsourcing in the last ten years, it is known as a A) time series graph. B) demand curve for outsourcing. C) pie chart. D) supply curve of outsourcing.

22) How can the influence of a third variable be shown on a two dimensional graph? A) By drawing a third axis coming out of the two axes. B) By allowing the position of the relationship line or curve to shift on the graph. C) It can't because the graph only has two dimensions. D) None of these.

23) Which of the following is not a factor of production? A) the manager of the local tire shop B) $1,000 C) a drill press in a machine shop D) an acre of farmland

25) The production possibilities frontier shows A) the various products that can be produced now and in the future. B) what an equitable distribution of products among citizens would be. C) attainable combinations of two products that may be produced with available resources. D) none of these.

28) On a production possibilities frontier, a combination of output that is inside the frontier is A) allocatively inefficient. B) productively efficient. C) allocatively efficient. D) productively inefficient.

29) Which of the following terms means the highest valued alternative given up when a person chooses to engage in an activity? A) opportunity cost B) accounting cost C) dollar cost D) none of these

30) The production possibilities frontier model can be applied to which of the following? A) a firm B) the whole economy C) an individual D) all of these

31) Assume a firm can produce a combination of 60 units of X together with 80 units of Y but to produce 70 units of X, the firm can only produce 60 units of Y. What is the opportunity cost to produce 10 more units of X? A) two units of Y B) 20 units of Y C) one-half a unit of X D) 10 units of X

33) At full employment, an economy that wants to produce more war goods must A) wait until resource supplies have increased. B) be attempting the impossible. C) cut back on the production of other goods. D) increase the production of consumer goods.

34) How is economic growth represented on a production possibilities frontier model? A) By the production possibilities frontier tilting on the graph. B) By the production possibilities frontier shifting inward. C) By the production possibilities frontier shifting outward. D) By none of these.

38) What is the reason people trade with each other? A) All of these reasons. B) By specializing in one activity our production increases. C) Specialization by individual people implies trade by everyone. D) People who specialize must trade with others for what they want to consume.

39) You have an absolute advantage whenever you A) are better educated than someone else. B) can produce more of something than others with the same resources. C) can produce something at a lower opportunity cost than others. D) prefer to do one particular activity.

51) Demand shows the A) quantity that sellers will sell at a given price. B) quantity that buyers will buy at a given price. C) quantities that buyers will buy at all possible prices. D) quantities that sellers will sell at all possible prices.

52) Market demand shows the A) quantities that all sellers will sell at all possible prices. B) quantities that all buyers will buy at all possible prices C) quantity that one buyer will buy at a given price. D) quantity that one seller will sell at a given price.

53) When the price of a good increases A) demand will decrease. B) quantity demanded will decrease. C) demand will increase. D) quantity demanded will increase.

54) When the price of a good decreases A) quantity demanded will decrease. B) demand will increase C) demand will decrease. D) quantity demanded will increase.

58) If the price of a product increases from $12 to $15, which of the following will occur? A) Demand for the product will decrease. B) Quantity demanded for the product will increase. C) Quantity demanded for the product will decrease. D) Demand for the product will increase.

59) Which of the following means everything else held constant? A) carpe diem B) post hoc, proctor hoc C) ceterius paribus D) none of these

60) Which of the following will NOT cause demand to increase for bananas? A) News that bananas help relieve stress in people. B) Rise in the price of a substitute fruit such as apples or oranges. C) Fall in the price of bananas. D) Buyers switch to a more healthy diet including bananas.