Economics Class Quiz
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Questions and Answers

In a market economy, resources are allocated by

  • I do not want to answer
  • the interaction between many firms and households in the market. (correct)
  • the households that consume these goods and services.
  • those firms that use the resources to produce.
  • a central planner.

    • A market fails when

  • it fails to create a for space for consumers and producers to meet.
  • it fails to make everyone happy.
  • it fails to produce an efficient allocation of resources. (correct)
  • it fails to promote policy effectiveness.
  • I do not want to answer

    • Considering the diagram that represents the Circular Flow of the economy, the letter A refers to:

  • Spending
  • I do not want to answer
  • Revenue.
  • Wages
  • Income (correct)

    • With the information provided, we can say that, for Country A,

    <p>the opportunity cost of an Automobile is 10 TVs.</p> Signup and view all the answers

    Still considering the information regarding the production of TV's and Automobiles in countries A and B, we can say that:

    <p>Country B has a comparative advantage producing TVs.</p> Signup and view all the answers

    Considering the demand and supply curves of a given market, if the income of the consumer increases, we will witness:

    <p>an increase in the quantity demanded.</p> Signup and view all the answers

    Considering the demand and supply curves of a given market, if the price of the product increases, we will witness:

    <p>An increase in the quantity demanded.</p> Signup and view all the answers

    If a demand curve is perfectly inelastic, an increase in the supply

    <p>will increase the quantities that are being transacted.</p> Signup and view all the answers

    The following information relates the price and the quantity demanded of Computers during a given month:

    Price Quantity
    €600 1000
    €700 800

    A. calculate the price elastic of demand. B. explain the meaning of value for price elastic of demand.

    <p>A. -1.44</p> <p>B. The price elasticity of demand is -1.44. It indicates that the quantity demanded is relatively sensitive to price changes. A 1% price increase would lead to a 1.44% decrease in the quantity demanded. Therefore, this product is considered price elastic.</p> Signup and view all the answers

    If the market price in €80, the consumer surplus will be

    <p>€700.</p> Signup and view all the answers

    If the production of a good generates pollution, the market equilibrium generates quantity is:

    <p>lower that social optimum.</p> Signup and view all the answers

    In a monopolistic competition market the products sold are

    <p>differentiated.</p> Signup and view all the answers

    The firm is at an equilibrium for a quantity of

    <ol start="16"> <li></li> </ol> Signup and view all the answers

    For the equilibrium the fix costs are

    <p>€600.</p> Signup and view all the answers

    The firm's economic profit is

    <p>€96.</p> Signup and view all the answers

    In a competitive market, the market short run supply curve

    <p>is the sum of all individual supply curves.</p> Signup and view all the answers

    Taking into consideration the following graphic, explain why there is no economic profit in the long run in a competitive market.

    <p>In the long run, under perfect competition, economic profits will eventually disappear. Initially, an increase in market demand (shifting from D1 to D2) creates economic profits for existing firms. However, these profits induce new firms to enter the market, increasing the supply (shifting from S1 to S2). As more firms enter, the market supply increases, leading to a lower equilibrium price that eventually falls to a point where it equals the minimum Average Total Cost (ATC). At this point, firms are only earning normal profits, meaning they are covering all their costs, including the opportunity cost of their resources, but they are not making any extra profits. This process of entry and exit continues until economic profits are eliminated in the long run, leading to a zero-profit equilibrium.</p> Signup and view all the answers

    Which of the following is not included in GDP?

    <p>unpaid cleaning and maintenance of houses</p> Signup and view all the answers

    The price index is 320 in one year and 360 in the next. What was the inflation rate?

    <p>11.1 percent</p> Signup and view all the answers

    New products are invented every year. Consequently real GDP growth

    <p>probably underestimates the rate of real economic growth.</p> Signup and view all the answers

    Productivity

    <p>explains most of the differences across countries in the standard of living.</p> Signup and view all the answers

    In a closed economy, national saving equals

    <p>All of the above are correct.</p> Signup and view all the answers

    What would happen in the market for loanable funds if the government were to increase the tax on interest income?

    <p>The supply of loanable funds would shift left.</p> Signup and view all the answers

    Between 2001 and 2002, the country of Aquilonia reported an increase in the number of people who were employed. It also reported an increase in the unemployment rate. Which of the following would best explain the two reports?

    <p>There was an increase in the size of the labor force between 2001 and 2002.</p> Signup and view all the answers

    The natural unemployment rate includes

    <p>both frictional and structural unemployment.</p> Signup and view all the answers

    As the reserve ratio increases, the money multiplier

    <p>decreases.</p> Signup and view all the answers

    At one time, the country of Sylvania had no banks, but had currency of $10 million. Then a banking system was established with a reserve requirement of 20 percent. The people of Sylvania now keep half their money in the form of currency and half in the form of bank deposits. If banks do not hold excess reserves, how much currency do the people of Sylvania now hold?

    <p>$5 million</p> Signup and view all the answers

    If the money supply is MS2 and the value of money is 2,

    <p>the price level is higher than its equilibrium level.</p> Signup and view all the answers

    If the money supply is MS2 and the value of money is 2, there is excess

    <p>supply equal to the distance between A and C.</p> Signup and view all the answers

    When the money supply curve shifts from MS1 to MS2,

    <p>the equilibrium price level increases.</p> Signup and view all the answers

    If the current money supply is located at MS1,

    <p>there is an excess supply of money if the value of money is 1.</p> Signup and view all the answers

    Answer one of the following five questions with a short, but clear, essay. A) Explain the main argument in favor of economic stabilization. B) Explain the time inconsistency of monetary policy. C) Identify three of the five costs of inflation. D) Deficits do not necessarily burden future generations. Discuss and provide some examples. E) Why do many economists advocate a consumption tax rather than an income tax?

    <p>I'm answering question: B) Explain the time inconsistency of monetary policy.</p> <p>The time inconsistency of monetary policy refers to the conflict that arises when policymakers have discretion to set economic policies today but face incentives to deviate from their promises in the future. It arises from the fact that policymakers are tempted to stimulate the economy in the short run, even if it leads to higher inflation and lower economic output in the long term.</p> <p>Imagine a central bank that aims to keep inflation at a low and stable level. In theory, the central bank can achieve this by committing to a policy that targets inflation, such as a rule-based policy that adjusts interest rates based on inflation expectations. However, policymakers might face temptation to deviate from this policy in the short run.</p> <p>If the economy slackens, the central bank might be inclined to lower interest rates to boost economic activity and reduce unemployment. This action could lead to a temporary boost in economic growth, but it would also lead to higher inflation in the long run. As the central bank might experience pressure to reduce inflation again, policymakers might be more inclined to reduce the interest rate again too soon, leading to an even higher inflation. This creates a situation where the government may feel pressure to constantly stimulate the economy for temporary gains, leading to a less credible long-term inflation commitment. The central bank's willingness to stimulate the economy can undermine its credibility and reduce people's expectations of future inflation stability.</p> <p>The time inconsistency of monetary policy underscores the importance of credible policies and a strong institutional framework that prevents policymakers from pursuing short-term gains at the expense of long-term economic stability. Solutions to combat time inconsistency include creating independent central banks with a clear mandate for price stability and establishing rules-based policies that limit policymakers' discretion.</p> Signup and view all the answers

    Study Notes

    Quiz Questions and Answers

    • Question 1: In a market economy, resources are allocated by the interaction between many firms and households in the market.
    • Question 2: A market fails when it fails to produce an efficient allocation of resources.
    • Question 3: In the circular flow diagram, the letter A refers to spending.
    • Question 4: In the circular flow diagram, the letter B refers to factors of production.
    • Question 5: For Country A, the opportunity cost of one Automobile is 10 TVs.
    • Question 6: Country A has an absolute advantage producing TVs.
    • Question 7: If consumer income increases, there is an increase in demand.
    • Question 8: If the price of a product increases, there is an increase in the quantity supplied.
    • Question 9: If a demand curve is perfectly inelastic, an increase in supply will increase the quantities being transacted.
    • Question 10: Elasticity calculation: -1.44. Increase in price will cause an average 1.44% decrease in quantity.
    • Question 11: If the market price is €80, the consumer surplus will be €200.
    • Question 12: If production of a good generates pollution, market equilibrium quantity is lower than the socially optimal quantity.
    • Question 13: In monopolistic competition, the products are differentiated.
    • Question 14: The firm is at equilibrium for a quantity of 20.
    • Question 15: For equilibrium, the fixed costs are €160.
    • Question 16: The firm's economic profit is €80.
    • Question 17: In a competitive market, the short-run supply curve is the sum of all individual supply curves.
    • Question 18: In a competitive market, there is no long-run economic profit because the initial movement of demand, from D1 to D2, allows firms to earn economic profit, attracting new firms (m) to the market, shifting the supply curve from S1 to S2. The equilibrium is reestablished at C, the same price and quantity as the initial point A. Therefore no economic profit exists.
    • Question 19: Unpaid cleaning and maintenance of houses is excluded from GDP.
    • Question 20: The inflation rate from a price index of 320 to 360 is 12.5%.
    • Question 21: New products are invented every year and consequently real GDP growth usually underestimates the rate of real economic growth.
    • Question 22: Productivity explains a significant portion of the differences in living standards across countries.
    • Question 23: In a closed economy, national saving equals private saving plus public saving which is equal to income minus the sum of consumption and government expenditures.
    • Question 24: If government increases tax on interest income, the demand for loanable funds shifts left.
    • Question 25: Between 2001-2002, if Aquilonia reported an increase in employment and unemployment rate, it's likely that there was an increase in the size of the labor force.
    • Question 26: The natural unemployment rate includes both frictional and structural unemployment.
    • Question 27: As the reserve ratio increases, the money multiplier decreases.
    • Question 28: If banks establish a 20% reserve requirement, and people hold half their money in currency and half as deposits, currency will be 5 million.
    • Question 29: If the money supply is MS2 and the value of money is 2, the price level is lower than the equilibrium level. The money supply is greater than money demand.
    • Question 30: If money supply is MS2 and the value of money is 2, the excess demand equal to the distance between A and C.
    • Question 31: When the money supply curve shifts from MS1 to MS2, the equilibrium price level in creases.
    • Question 32: When the money supply curve shifts from MS1 to MS2, the equilibrium value of money decreases.
    • Question 33: If the current money supply is MS1 and the value of money is 2, there is excess supply (A and C distance).
    • Question 34: (Essay Question) Requires an essay response; five topics/arguments are given. The student must answer one of them in full detail.

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    Description

    Test your knowledge on key concepts of a market economy with this quiz. Questions cover resource allocation, market failure, circular flow diagrams, and elasticity. Perfect for students studying economics at any level.

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