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Practice Questions for week 1

1. A production possibilities frontier illustrates the ____________ facing an economy that
___________ only two goods.
A) prices, sells
B) trade-offs, produces
C) trade-offs, consumes
D) shortages, produces


Use the following to answer questions 2-3:

Table: Production Possibilities Schedule 1

Alternatives A B C D E F
Consumer goods per period 0 1 2 3 4 5
Capital goods per period 30 28 24 18 10 0



2. (Table: Production Possibilities Schedule 1) If the economy produces 10 units of capital
goods per period, it also can produce at most _______ unit(s) of consumer goods per
period.
A) 5
B) 4
C) 3
D) 2


3. (Table: Production Possibilities Schedule 1) The opportunity cost of producing the
fourth unit of consumer goods is _______ units of capital goods.
A) 2
B) 4
C) 6
D) 8



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Use the following to answer question 4:

Figure: Production Possibilities Curve for Tealand




4. (Figure: Production Possibilities Curve for Tealand) In the accompanying figure, if
Tealand is producing 10 million scones and 10 million cups of tea (point A), then we
know that the economy:
A) is using its resources efficiently.
B) is using its resources inefficiently.
C) is fully-employing its resources.
D) is doing none of the above.


5. Economists usually make the assumption that production is subject to increasing
opportunity costs because
A) higher production usually results in more inflation.
B) all resources are not equally suited to producing every good.
C) individuals desire constantly increasing opportunities to make themselves better off.
D) if production is efficient, it is not possible to increase the production of all goods
simultaneously.


6. When moving along a production possibilities curve, the opportunity cost to society of
getting more of one good:
A) is constant.
B) is measured in dollar terms.
C) is measured by the amount of the other good that must be given up.
D) usually decreases.



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Use the following to answer question 7:

Figure: Strawberries and Submarines




7. (Figure: Strawberries and Submarines) Suppose the economy is operating at point G.
This implies that:
A) the economy can move to a point such as C only if it improves its technology.
B) the economy is experiencing unemployment and/or inefficient allocation of
resources.
C) the economy lacks the resources to achieve a combination such as C.
D) people in this economy don't really like strawberries and submarines.


8. The production possibilities frontier will shift outward for which of the following
reasons?
A) a decrease in the labor force
B) an upgrade of capital to the best available technology that is currently available
C) better technology which improves worker productivity
D) a decrease in the unemployment rate



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Use the following to answer question 9:

Figure: Consumer and Capital Goods




9. (Figure: Consumer and Capital Goods) The movement from Curve 1 to Curve 2
indicates:
A) economic growth.
B) change from unemployment to full employment.
C) a decrease in the level of technology.
D) instability.


10. Positive economics is the branch of economics that makes prescriptions about the way
the economy should work.
A) True
B) False


11. The unemployment rate should be higher is a normative statement.
A) True
B) False


12. For an economist, the cost of something is:
A) the amount of money you paid for it.
B) what you gave up to get it.
C) always equal to its market value.
D) the quantity of resources used to produce it.



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13. The concept of the margin deals with:
A) making incremental choices.
B) one more or one less of something.
C) doing a little more or a little less.
D) all of the above.


14. A tradeoff between equity and efficiency may exist because:
A) allocating resources fairly may cause inefficiency.
B) an efficient allocation of resources may lead to an outcome that most people
consider unfair.
C) policies that promote equity often come at a cost of decreased efficiency.
D) of all of the above.


15. The value of all the following goods is included in the calculation of aggregate output
EXCEPT:
A) the value of Firestone tires sold at your local garage.
B) the value of a new shower installed in a recently purchased 1920's house.
C) the value of the 6-CD player installed to replace the factory-mounted radio-cassette
in your new car.
D) the value of Firestone tires installed on brand-new Volvo station wagons.


16. Real wages:
A) have not been adjusted for change in prices over time.
B) have been adjusted for changes in prices over time.
C) are after-tax wages.
D) are wages as a ratio of the minimum wage.


17. Inflation is when there is:
A) a rising aggregate price level.
B) an expansion of output.
C) a rise in wages.
D) a rise in the unemployment rate.


18. A nominal measure, as opposed to a real measure, is:
A) an accurate indicator of the general cost of living.
B) a measure that has not been adjusted for changes in prices over time.
C) a measure that has been adjusted for changes in prices over time.
D) inversely affected by inflation.



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19. If workers nominal wages have risen by 50% over a ten-year period and prices have
increased by 40% in that same period, then we can safely conclude that the real wages
of the workers have:
A) fallen.
B) increased.
C) not changed.
D) It is impossible to determine whether real wages have changed and in what
direction.


20. An example of a final good is:
A) a new computer purchased by Federal Express for one of its corporate executives.
B) a storage facility for a moving company.
C) a new car purchased by an employee of a company for personal use.
D) a dump truck purchased by a demolition company.


Use the following to answer question 21:

Table: Furniture Production Schedule

Stage of production Sales value of material
Timber 100
Milled wood 300
Finished wood 600
Assembled furniture 800
Retail price to consumer 1200



21. (Table: Furniture Production Schedule) What is the value added at all stages of the
production process of the furniture as described in the accompanying table?
A) $800
B) $1,200
C) $1,800
D) $2,000



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22. Suppose that Mr. Green Jeans sells $5,000 of wheat to Big Ben Bakery. Big Ben uses
the wheat to make flour and then hamburger buns, which they sell to Hamburger
Heaven for $11,000. Hamburger Heaven also buys $20,000 of beef from a rancher.
Hamburger Heaven uses the beef and buns to make 10,000 hamburgers which are sold
for $5 each. How much do these transactions add to GDP?
A) $86,000
B) $36,000
C) $31,000
D) $50,000


23. Which of the following is included in GDP?
A) the purchase of 100 shares of Microsoft stock
B) the purchase of a 1965 Ford Mustang
C) Social security payments from the U.S. government to retired people
D) the purchase of a ticket to a Rolling Stones concert


24. (Table: Measuring GDP) Government purchases of goods and services are:
A) $50 billion.
B) $100 billion.
C) $200 billion.
D) $300 billion.


25. Gross Domestic Product (GDP) is:
A) the total dollar value of all transactions in the economy in a year.
B) the total value of all final goods and services produced in the economy in a year.
C) the total value of all final goods and services produced by Americans at home and
abroad in a year.
D) the total dollar value of all goods produced in the economy in a year.


Use the following to answer question 26:

Exhibit: Real GDP
Suppose that in year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas
that sell for $8 each. The next year the economy produces 110 golf balls that sell for $3.25 each
and 80 pizzas that sell for $9 each.



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26. (Exhibit: Real GDP) The value of nominal GDP in years 1 and 2 respectively is:
A) $900; $1,077.50.
B) $900; $990.
C) $180,000; $257,400.
D) $1,000; $1,005.


27. A price index:
A) always includes a base year.
B) measures the cost of purchasing a market basket of output across different years.
C) is normalized to 100 for the base year.
D) is all of the above.


28. Gross Domestic Product is defined as:
A) consumer spending + government purchases + financial spending + exports
imports.
B) consumer spending + government transfers + investment spending + exports
imports.
C) disposable income + taxes + investment spending + exports + imports.
D) consumer spending + government purchases + investment spending + exports
imports.


Use the following to answer question 29:

Figure: Circular Flow 1





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29. (Figure: Circular Flow Model 1) What is GDP in this economy?
A) $100
B) $400
C) $500
D) $600


30. According to the circular flow diagram, which of the following economic agents
engages in consumer spending?
A) firms
B) households
C) factor markets
D) financial markets



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Answer Key

1. B
2. B
3. D
4. B
5. B
6. C
7. B
8. C
9. A
10. B
11. A
12. B
13. D
14. D
15. D
16. B
17. A
18. B
19. B
20. C
21. B
22. D
23. D
24. D
25. B
26. A
27. D
28. D
29. C
30. B