Economics Quiz Questions

Topic 1
1. Refer to Figure 2.5. If the economy is currently producing at point D, what is
the opportunity cost of moving to point B? O hammers

2. Refer to Figure 2.4. If the economy is currently producing at point Y, the

opportunity cost of moving to point W is __________. Zero

3. Refer to Figure 2.5. What is the opportunity cost of moving to point B if the

economy is currently producing at point A? 6 thousand hammers
4. Figure 2.6 above shows the production possibility frontier for Vidalia, a nation
that produces two goods, roses and orchids. Refer to Figure 2.6. Suppose
Vidalia is currently producing 120 dozen roses per period. How many orchids is it
also producing, assuming that resources are fully utilised? 32 dozen orchids
5. Refer to Figure 2.1. Point C is __________. Unattainable with current resources

6. Refer to Figure 2.1. Point B is __________. Technically efficient

7. Refer to Figure 2.5. If the economy is currently producing at point E, what is
the opportunity cost of moving to point D? 8 thousand wrenches
8. Figure 2.6 above shows the production possibility frontier for Vidalia, a nation
that produces two goods, roses and orchids.Refer to Figure 2.6. What is the
opportunity cost of 100 dozen roses? 40 dozen orchids
9. The ability of an economy to increase the production of goods and services is
__________. Economic growth
10. What points are outside the production possibility frontier? Unattainable
11. Table 2.5 shows the output per month of two people, Fred and Barney. They can
either devote their time to making pogo sticks or making unicycles. Refer to
Table 2.5. What is Fred’s opportunity cost of making a unicycle? 3 pogo sticks

12. Figure 2.3 shows various points on three different production possibility frontiers
for a nation.
Refer to Figure 2.3. A movement from ________ could occur because of an
influx of immigrant labour. W to Z
13. Economic decline (negative growth) is represented on a production possibility
frontier model by the production possibility frontier________. Shifting inwards
14. For each bottle of wine that Italy produces, it gives up the opportunity to make
10 kilograms of cheese. France can produce one bottle of wine for every 25
kilograms of cheese it produces. Which of the following is true about the
comparative advantage between the two countries? Italy has the comparative
advantage in wine.
15. Figure 2.3 shows various points on three different production possibility frontiers
for a nation.
Refer to Figure 2.3. Consider the following events:
a.an increase in the unemployment rate
b.a decrease in a nation’s money supply
c.a war that kills a significant portion of a nation’s population
Which of the events listed above could cause a movement from Y to W? C only
16. A nation’s production possibility frontier would shift outward from________.
Discovering a cheap way to convert sunshine into electricity
17. An inward shift of a nation’s production possibility frontier can occur due
to________. A natural disaster like a hurricane or a bad earthquake
18. Refer to Figure 2.5. If the economy is currently producing at point E, what is
the opportunity cost of moving to point B? 0 wrenches
19. Figure 2.3 shows various points on three different production possibility frontiers
for a nation.
Refer to Figure 2.3. Consider the following events:
a. a decrease in the unemployment rate
b. general technological advancement
c. an increase in consumer wealth
 Which of the events listed above could cause a movement from V to W? A only
20. Table 2.6 shows the number of labour hours required to produce a digital camera
and a kilogram of wheat in China and South Korea.Refer to Table 2.6. China
has a comparative advantage in the production of __________. Wheat
21. Refer to Figure 2.4. If the economy is currently producing at point X, the
opportunity cost of moving to point Y is ___________. 5 million tonnes of steel
22. Figure 2.6 above shows the production possibility frontier for Vidalia, a nation
that produces two goods, roses and orchids.Refer to Figure 2.6. What is the
opportunity cost of 80 dozen orchids? 200 dozen roses
23. What is the opportunity cost of taking a semester long economics class? Equal to
the highest value of an alternative use of the time and money spent on the class
24. Figure 2.3 shows various points on three different production possibility frontiers
for a nation.
Refer to Figure 2.3. A movement from Y to Z __________. is the result of
advancements in plastic production technology
25. Comparative advantage means the ability to produce a good or service________.
At a lower opportunity cost than any other producer.
Topic 2
1. The income effect of a price change refers to the impact of a change in the price
of a good on a consumer’s purchasing power.
2. Which of the following would shift the supply curve for MP3 players to the left? An
increase in the price of an input used to produce MP3 players.
3. Which of the following would cause an increase in the equilibrium price and an
increase in the equilibrium quantity of watermelons? An increase in supply and an
increase in demand greater than the increase in supply.
4. Assume that both the demand curve and the supply curve for MP3 players shift to
the right, but the demand curve shifts more than the supply curve. As a result,
both the equilibrium price and quantity of MP3 players will increase.
5. What is behavioural economics? The study of situations in which people act in
ways that are not economically rational.
6. Assume that the demand curve for MP3 players shifts to the right and the supply
curve for MP3 players shifts to the left, but the supply curve shifts less than the
demand curve. As a result, both the equilibrium price and quantity of MP3 players
will increase.
7. 'Because apples and oranges are substitutes, an increase in the price of oranges
will cause the demand for apples to increase. This initial shift in demand for
apples results in a higher price for apples; this higher price will cause the demand
curve for apples to shift to the right.' Which of the following correctly comments
on this statement? The statement is false because a change in the price of apples
would not change the demand for apples.
8. Which of the following would cause an increase in the supply of peanut butter? An
increase in the number of firms that product peanut butter.
9. Orange juice drinkers want to consume more orange juice at a lower price. Which
of the following events would have this effect? A decrease in the price of orange
juice processing.
10. In October, market analysts predict that the price of platinum will fall in
November. What happens in the platinum market in October, holding everything
else constant? The supply curve shifts to the right.
11. At a product’s equilibrium price the product’s demand curve crosses the product’s
supply curve.
12. Which of the following would cause the equilibrium price of white bread to
decrease and the equilibrium quantity of white bread to increase? A decrease in
the price of flour.
13. Holding everything else constant, an increase in the price of MP3 players will
result in a decrease in the quantity of MP3 players demanded.
14. Let D = demand, S = supply, P = equilibrium price, Q = equilibrium quantity.
What happens in the market for walnuts if the Centre for Disease Control and
Prevention announces that consuming half a cup of walnuts each week helps to
lower bad levels of cholesterol? D increases, S no change, P and Q decreases
15. Assume that the demand curve for MP3 players shifts to the right and the supply
curve for MP3 players shifts to the left, but the supply curve shifts more than the
demand curve. As a result, the equilibrium price of MP3 players will increase; the
equilibrium quantity will decrease.
16. If more insurance companies decide to cover part of the price of voluntary laser
eye surgery, and more doctors decide to enter the field of laser eye surgery, what
will happen in the market for laser eye surgery as a result of these two factors?
Demand and supply will both increase.
17. The market for smart phones has grown rapidly over the past few years, due in
part to the overwhelming success of the Apple iPhone. Following the successful
launch of the iPhone in 2007, companies such as Samsung, HTC and LG have all
introduced products to compete with the iPhone. The smart phones introduced to
compete with the iPhone would be considered substitutes for the iPhone.
 18. A decrease in the price of GPS systems will result in a smaller quantity of GPS
systems supplied.
19. The endowment effect suggests that people have a strong attachment to things
they already own, regardless of whether they paid to acquire them.
20. Assume that the price for swimming pool maintenance services has risen and
sales of these services have fallen. One can conclude that the supply of swimming
pool maintenance services has decreased.

Topic 3
1. Figure 5.7 shows the market for beer. The government plans to impose a unit tax
in this market. Refer to Figure 5.7. As a result of the tax, is there a loss in
consumer surplus? Yes, because consumers are paying a price above the
economically efficient price.

2. Suppose at the current price, the demand for copper is estimated at −3.14. What
happens to sales revenue if the government imposes a price ceiling below the
free market equilibrium price in the copper market? Sales revenue rises.
3. Suppose a decrease in the supply of paper results in an increase in revenue. This
indicates that________. The demand for paper is inelastic.
4. Figure 5.7 shows the market for beer. The government plans to impose a unit tax
in this market. Refer to Figure 5.7. How much of the tax is paid by producers?
$2
5. If the cross-price elasticity of demand between beer and wine is 0.31, then beer
and wine are ______. Substitutes
6. Suppose when Nablom’s Bakery raised the price of its breads by 10 per cent, the
quantity demanded fell by 15 per cent. What was the effect on sales revenue?
Sales revenue decreased
7. Figure 5.7 shows the market for beer. The government plans to impose a unit tax
in this market. Refer to Figure 5.7. The price buyers pay after the tax is
__________. $27
8. Figure 5.7 shows the market for beer. The government plans to impose a unit tax
in this market. Refer to Figure 5.7. What is the size of the unit tax? $7
9. Where is total revenue the greatest along a downward-sloping, linear demand
curve? Where demand is unit-elastic.
10. When demand is unit-elastic, a change in price causes total revenue to stay the
same because _______. The percentage change in quantity demanded exactly
offsets the percentage change in price.
11. The demand for all carbonated beverages is likely to be ________ the demand
for Pepsi. Less elastic than
12. If the price of steel increases drastically, the quantity of steel demanded by the
building industry will fall significantly over the long run because ________.
Buyers of steel are more sensitive to a price change if they have more time to
adjust to the price change.
13. If the absolute value of the price elasticity of demand for aspirin equals 0.8
then________. The demand for aspirin is inelastic.
14. If the percentage increase in price is 15 per cent and the value of the price
elasticity of demand is – then what is the quantity demanded? Will decrease by
45 per cent
15. The statement which explains why a firm would be interested in knowing the
price elasticity of demand for a good it sells is: The price elasticity of demand
allows the firm to calculate how changes in the price of the good will affect the
firm’s total revenue.
16. Which of the following correctly comments on the following statement? ‘The only
way to increase the revenue from selling a product is to increase the product’s
price.’ This statement is not true. Revenue will increase as the price of the
product increases only if demand is inelastic.
17. Assume that you own a small boutique hotel. In an attempt to raise revenue you
reduce your rates by 20 per cent. However, your revenue falls. What does this
indicate about the demand for your boutique hotel rooms? Demand is inelastic.
18. Assume that the market for barley is in equilibrium and the demand for barley is
inelastic. Predict what happens to the revenue of barley farmers if a prolonged
drought reduces the supply of barley. The drought will cause farm revenue
to________. Rise because the percentage decrease in quantity sold is less than
the percentage increase in price.
19. Suppose the demand curve for a product is horizontal and the supply curve is
upward sloping. If a unit tax is imposed in the market for this product,
_________. Sellers bear the entire burden of the tax.
20. Which of the following statements is true? If the price of a good is raised and
total revenue increases, demand is inelastic.
21. Refer to Figure 4.1. What is the demand curve on which elasticity changes at
every point given? Panel C
Topic 4
1. If fixed costs do not change, then marginal cost _________. Equals the change in
variable cost divided by the change in output.
2. What does the long-run average cost curve show? The lowest average cost of
producing every level of output in the long run.
3. Which of the following is an implicit cost of production? The loss in the value of
capital equipment due to wear and tear.
4. If an airport decides to expand by building an additional passenger terminal, and
in doing so it lowers its average cost per airplane landing, it was previously
operating at _________. Less than minimum efficient scale
5. If, when a firm doubles all its inputs, its average cost of production increases,
then production displays ________. Diseconomies of scale
6. The shape of the average total cost curve is determined by the shape of
_________. The marginal cost curve
7. If production displays diseconomies of scale, the long-run average cost curve is
_________. Upward sloping
8. Refer to Figure 6.1. What is the marginal product of the seventh worker? -2

9. Which of the following are implicit costs for a typical firm? Opportunity costs of
capital owned and used by the firm
10. Table 6.7 shows cost data for Lotus Lanterns, a producer of whimsical night
lights. Refer to Table 6.7. The average total cost of production when the firm
produces 120 lanterns is _________. $14

11. All of the following statements are true of the minimum efficient scale except one.
Which one? An increase in the output level will increase profit.
12. Refer to Table 6.7. The marginal cost per unit of production when the firm
produces 100 lanterns is _________. $32
13. Which of the following is a reason why a firm would experience diseconomies of
scale? As the size of the firm increases, it becomes more difficult to coordinate
the operations of its manufacturing plants.
14. Refer to Figure 6.1. In a diagram that shows the marginal product of labour on
the vertical axis and labour on the horizontal axis, the marginal product curve
__________. Intersects the horizontal axis at a point corresponding to the fifth
worker
15. Gertrude Stork’s Chocolate Shoppe normally employs four workers. When the
Chocolate Shoppe hired a fifth worker the Shoppe’s total output decreased.
Therefore, ________. The marginal product of the fifth worker is negative.
16. Refer to Figure 6.2. At what point is short run output maximised? L^3

17. Fancy Footwear manufactures shoes. Figure 6.3 shows Fancy Footwear’s marginal
product of labour and average product of labour curves in the short run. Refer to
Figure 6.3. Which of the following statements correctly describes the curves in
the figure? The marginal product of labour curve is represented by curve B and
the average product of labour curve is represented by curve A.

18. Marginal cost is calculated for a particular increase in output by _________.

Dividing the change in total cost by the change in output.
19. Refer to Figure 6.2. The curve labelled ‘F’ is __________. The average product
curve.
20. What happens when a firm experiences a positive technological change? The firm
is able to produce more output using the same inputs, or the same outputs using
fewer inputs.
21. One reason why, in the short run, the marginal product of labour might increase
initially as more workers are hired is that _________. Specialisation allows a
worker to focus on one task, thereby increasing her proficiency at that task.
22. What is true, in the short run, if marginal product is at its maximum? Marginal
cost is at its minimum.
23. In the long run _________. All of the firm’s costs are variable costs.
24. The change in a firm’s total cost from producing one more unit of a good or
service is _________. The definition of marginal cost.
25. Which of the following is true if marginal product is greater than average product?
Marginal product could either be increasing or decreasing.
26. If a firm produces 20 units of output and incurs a total cost of $1 000, and the
variable cost is $700, what is the firm’s average fixed cost of production if it
expands output to 25 units? $12
27. Economies of scale exist as a firm increases its size in the long run because of all
of the following except: As a firm expands its production, its profit margin per
unit of output increases.
28. Refer to Figure 6.10. Identify the minimum efficient scale of production. Q^b

29. When the average total cost is $16 and the total cost is $800, how many units is
the firm producing? 50
30. The marginal cost curve has a U shape because _________ initially, the marginal
product of labour rises, then falls.
31. Table 6.1 shows the technology of production at the Matsuko’s Mushroom Farm
for the month of May. Refer to Table 6.1. The average product of labour when
the farm hires 5 workers is ________. 10.8 metrics

32. Average fixed costs of production __________. Fall as long as output is

increased.
Topic 5
1. If the market price is $25, what is the average revenue of selling five units? $25
2. Table 7.4 shows the short-run cost data of a perfectly competitive firm. Assume
that output can only be increased in batches of 20 units. Refer to Table 7.4. If
the market price is $45, how many units will the firm produce? 80 units

3. Figure 7.4 shows the cost and demand curves for a profit-maximising firm in a
perfectly competitive market. Refer to Figure 7.4. If the market price is $30
and if the firm is producing output, the amount of its total variable cost is —.
$3960

4. Assume the market for organic produce sold at farmers’ markets is perfectly
competitive. All else equal, as more farmers choose to produce and sell organic
produce at farmers’ markets, what is likely to happen to the equilibrium price of
the produce and profits of the organic farmers in the long run? The equilibrium
price is likely to decrease, and profits are likely to decrease.
5. Arnie sells basketballs in a perfectly competitive market. Table 7.3 summarises
Arnie’s output per day (Q), total cost (TC), average total cost (ATC), and
marginal cost (MC). Refer to Table 7.3. What will Arnie’s output be and how
much profit will he earn if the market price of basketballs is $5.00? Q=3; profit=-
$7.50
6. Figure 7.4 shows the cost and demand curves for a profit-maximising firm in a
perfectly competitive market. Refer to Figure 7.4. If the market price is $30
and the firm is producing output, the amount of the firm’s profit or loss is —. Loss
of $1080

7. Refer to Figure 7.2. Why is the total revenue curve a ray from the origin?
Because the firm can sell its product at a constant price

8. Which of the following is not true for a firm in perfect competition? Average

revenue is great than marginal revenue.
9. Which of the following statements is true? When an industry reaches a long-run
competitive equilibrium, the typical firm in the industry breaks even.
10. Suppose the equilibrium price in a perfectly competitive industry is $10 and a firm
in the industry charges $12. Which of the following will happen? The firm will not
sell any output.
11. Some markets have many buyers and sellers but fall into the category of
monopolistic competition rather than perfect competition. The most common
reason for this is firms in these markets do not sell identical products.
12. Refer to Figure 7.8. What is total cost at the profit-maximising output level?
$3300
13. For a perfectly competitive firm, which of the following is not true at profit
maximisation? Market price is greater than marginal cost.
14. Profit is the different between total revenue and total cost.
15. A perfectly competitive firm has to charge the same price as every other firm in
the market. Therefore, the firm is a price taker
16. Which of the following statements is correct? Economic profit takes into account
all costs involved in producing a product.
17. Refer to Figure 7.2. Suppose the firm is currently producing Q2 units. What
happens if it expands output to Q3 units? It makes less profit.
18. Firms in perfect competition are price takers because each firm is too small
relative to the market to be able to influence price.
19. Refer to Figure 7.6. Suppose the market price is $120. Which of the following
is true? The firm suffers a loss equal to the area A.

20. Which of the following describes the difference between the market demand curve
for a perfectly competitive industry and the demand curve for a firm in this
industry? The market demand curve is downward sloping; the firm’s demand
curve is a horizontal line.
21. Refer to Figure 7.1. If the firm is producing 700 units, the amount of its profit
or loss is: There is insufficient information to Answer the question.

22. What is implied by a very large number of small sellers who sell identical
products? The inability of one seller to influence price
Topic 6
1. Which of the following is true for a monopolist? Being the only seller in the
market, the monopolist faces the market demand curve.
2. If a firm’s average total cost is less than price where MR = MC, the firm should
continue to produce the output it is producing.
3. What do economists call firms that face downward-sloping demand curves for
their output in the product market? Price makers
4. How does a monopoly differ from monopolistic competition? In a monopoly there
are significant entry barriers, but there are low barriers to entry in a
monopolistically competitive market structure.
5. Because a monopoly’s demand curve is the same as the market demand curve for
its product The monopoly must lower its price to sell more of its product.
6. What is a price maker? A firm that has some control over the price of the product
it sells.
7. Figure 8.3 above shows the demand and cost curves facing a monopolist. Refer
to Figure 8.3. Suppose the monopolist represented in the diagram above
produces positive output. The profit/loss per unit is —. Loss of $7 per unit.

8. For a natural monopoly to exist, a firm’s long-run average cost curve must exhibit
economies of scale throughout the relevant range of market demand.
9. What must a firm have to maintain a monopoly? An insurmountable barrier to
entry.
10. A monopoly is a seller of a product without a close substitute.
11. Figure 8.4 shows the demand and cost curves for a monopolist. Refer to Figure
8.4. The amount of the monopoly’s profit is —. $2700

12.  Refer to Figure 8.4. What is likely to happen to this monopoly in the long run?
As long as there are entry barriers, this firm will continue to enjoy economics
profits.
13. Refer to Figure 8.4. The amount of the monopoly’s total revenue is —. $20400
14. If a monopolist’s price is $50 per unit and its marginal cost is $25, then not
enough information is given to say what the firm should do to maximise profit.
15. Figure 8.2 above shows the demand and cost curves facing a monopolist. Refer
to Figure 8.2. If the firm’s average total cost curve is ATC3, the firm will suffer a
loss.

16. Why do governments grant patents? To compensate firms for research and
development costs.
17.  Refer to Figure 8.4. The price charged for the profit-maximising output level is
$34
18. A local electricity-generating company has a monopoly that is protected by an
entry barrier that takes the form of economies of scale.
19. A public franchise is a government designation that a private firm is the only legal
producer of a good or service.
20. A monopoly firm’s demand curve is the same as the market demand curve.
21. A monopolist’s profit-maximising price and output correspond to the point on a
graph where marginal revenue equals marginal cost.
22. Which of the following is not a characteristic of a monopoly? There are only a few
sellers each selling a unique product.
23. Refer to Figure 8.3. What happens to the monopolist represented in the
diagram in the long run? If the cost and demand curves remain the same, it will
exit the market.
24. Refer to Figure 8.4. The monopoly’s total cost of production is —. $17700
Topic 7
1. In theory, in the long run, monopolistically competitive firms earn zero profits.
However, in reality, there are some ways by which a firm can avoid losing profits.
Which of the following is one such way? Identify new markets and develop
products precisely for those markets.
2. The marginal revenue of a monopolistically competitive firm _______. Can be
negative if the firm charges a low price
3. Which of the following is true for a monopolistically competitive firm in long-run
equilibrium? P=ATC and MR=MC
4. How does the long-run equilibrium of a monopolistically competitive industry
differ from that of a perfectly competitive industry? A firm in monopolistic
competition does not take full advantage of its economies of scale, but a firm in
perfect competition produces at the lowest average cost possible.
5.  Refer to Figure 9.12. The monopolistic competitor’s profit-maximising price is
______. P^4

6. One reason why the coffeehouse market is competitive is that _______. Barriers
to entry are low.
7. Producing a homogeneous product occurs in which of the following industries?
Oligopoly and perfect competition
8. You have just opened a new Italian restaurant in your hometown where there are
three other Italian restaurants. Your restaurant is doing a brisk business and you
attribute your success to your distinctive northern Italian cuisine using locally
grown organic produce. What is likely to happen to your business in the long run?
Your success will invite others to open competing restaurants and ultimately your
profits will be driven to zero.
9. What is a characteristic found only in oligopolies? Interdependence of firms
10. The characteristic below that is not common to monopolistic competition and
perfect competition is _____. Firms take market prices as given
11. What must be true for productive efficiency to hold? Average total cost is
minimised in production.
12. How do consumers benefit from monopolistic competition? By being able to
choose from products more closely suited to their tastes.
13. Because the monopolistically competitive firm faces a ________ demand curve
for its product, it ________ the price of its output. Downward-sloping; can
influence.
14. Figure 9.8 shows cost and demand curves for a monopolistically competitive
producer of iced tea. Refer to Figure 9.8. Based on the diagram, one can
conclude that _______. New firms will enter the market.

15. Figure 9.13 shows short-run cost and demand curves for a monopolistically
competitive firm in the market for designer watches. Refer to Figure 9.13.If the
diagram represents a typical firm in the designer watch market, what is likely to
happen in the long run? Some firms will exit the market causing the demand to
increase for firms remaining in the market.

16. Long-run equilibrium under monopolistic competition is similar to that under

perfect competition in that _______. Firms earn normal profits
17. It is true in both monopolistically competitive and perfectly competitive industries
that _______. There are many buyers and sellers
18. When a firm faces a downward-sloping demand curve, marginal revenue
__________. Is less than price because a firm must lower its price to sell more
19. Refer to Figure 9.6. Suppose Dell finds the relationship between the average
total cost of producing notebook computers and the quantity of notebook
computers produced as shown in Figure 9.6. Dell will maximise profits if it
produces ________ notebook computers per month. Not enough information is
given to determine the profit-maximising quantity.
20. If firms in a monopolistically competitive industry are making profits in the short
run, ________. New firms will enter the market.
21. Refer to Figure 9.12. The allocatively efficient output for the firm represented in
the diagram is ______. Q^3 units
22. Suppose a monopolistically competitive firm sells 25 units at a price of $10. What
is its marginal revenue per unit of output if it sells 5 more units of output when it
reduced its price to $9? $4
23. Excess capacity is a characteristic of monopolistically competitive firms. What
does excess capacity mean? It means that firms do not produce the output level
that corresponds to the minimum point on their average total cost curves.
24. Despite being in a market with ________, from the mid-1990s to the mid-2000s
Starbucks was able to significantly differentiate its products from the products of
its competitors. Few barriers to entry.
25. Refer to Figure 9.8.The profit-maximising output level is ______. 22 cases
26. A monopolistically competitive market is described as one in which there are
_____. A large number of firms selling similar, but not identical, products
27. If a typical monopolistically competitive firm is incurring short-run losses, then
______. As some firms leave, the remaining firms will experience an increase in
the demand for their products.
28. A monopolistically competitive industry that earns economic profits in the short
run will ______. Experience the entry of new rival firms into the industry in the
long-run.
29. How is long-run equilibrium under monopolistic competition similar to long-run
equilibrium under perfect competition? Firms break even.
30.  Refer to Figure 9.12. The diagram depicts a firm ________. In long-run
equilibrium.
31. If a monopolistically competitive firm lowers its price and, as a result, its total
revenue decreases, then _________. The output effect of the price change was
less than the price effect.
32. An example of a government-imposed barrier to entry gives a firm the exclusive
right to a new product for a period of 20 years from the date the product is
invented. This entry barrier is known as ______. A patent.
33. Which of the following is true in the typical firm if economies of scale are
relatively important in an industry? Long-run average cost curve will reach a
minimum at a level of output that is relatively large fraction of total industry
sales.
34.  Refer to Figure 9.14. The area that represents the firm’s profit is ______.
P^4edP2.
35. Refer to Figure 9.17. In the long run, why will the firm produce Qf units and
not Qg units, which has a lower average cost of production? Although its average
cost of production is lower when the firm produces Q^g units, to be able to sell
its output the firm will have to charge a price below average cost, resulting in a
loss.

36. If a monopolistically competitive firm is producing 50 units of output where

marginal cost equals marginal revenue, total cost is $1674 and total revenue is
$2000, its average profit is ______. $6.52
37. If the demand curve for a firm is downward sloping, its marginal revenue curve
_____. Will lie below the demand curve.
38. Table 9.3 shows the demand and cost schedules for a monopolistically
competitive firm. Refer to Table 9.3. The profit-maximising/loss-minimising
output level and price are ____. Q=4; P=$17

39. Only one of the following statements is correct. The statements compare perfectly
competitive (PC) markets and monopolistically competitive (MC) markets. Which
statement is correct? Productive efficiency and allocative efficiency are both
achieved in PC markets. Neither is achieved in MC markets.
40. Which of the following is an example of a barrier to entry? Superior technological
knowledge
41. Refer to Table 9.1.What portion of the marginal revenue of the 5th unit is due
to the output effect and what portion is due to the price effect? Output effect =
$5.50; price effect=(box)$2.00

42. Producing a differentiated product occurs in which of the following industries?

Monopolistic competition and oligopoly.
43. Refer to Figure 9.9. The graph in the figure that depicts a monopolistically
competitive firm that is minimising its losses is _______. Panel C

44. In the long run, if the demand curve of a monopolistically competitive firm is
tangent to its average total cost curve, then _______. The firm would earn an
economic profit.
45. Refer to Figure 9.14. If the diagram represents a typical firm in the market,
what is likely to happen in the long run? New firms will enter the market causing
the demand to decrease for existing firms.
46. Which of the following is not a barrier to entry? An inelastic demand curve
47. In the long run, if price is less than average cost, ________. There is an incentve
for firms to exit the market.
48. Which of the following will not happen as a consequence of a monopolistically
competitive firm suffering economic losses in the short run? In the long run, the
firm will be able to charge a price that is greater than its average total cost.
49. Why is a patent a government-imposed entry barrier? It gives a firm the
exclusive right to a new product for a period of 20 years from the date the
product is invented.
50. A reason why there is more competition among restaurants than among large
discount department stores is that restaurants(,) ________. Unlike department
stores, do not have significant economies of scale.
51. Refer to Figure 9.2. The marginal revenue from selling the additional
unit Qb instead of Qa equals _____. The area (H[]E).
52. What is the result when new firms are encouraged to enter a monopolistically
competitive market? Some existing firms must be earning economic profits.
53. Which of the following is a key characteristic of a monopolistically competitive
market? Many small (relative to the total market) sellers acting independently
54. Table 9.5 shows the demand and cost data facing a monopolistically competitive
producer of canvas bags.  Refer to Table 9.5.The firm’s profit-maximising or
loss-minimising price and quantity are ________. Price= $12; quantity= 4

55. Consider a U-shaped long-run average cost curve that has a minimum efficient
scale at 6000 units of output. In this case, this industry would be _________. An
oligopoly is the market quantity demanded is 18000 units
56. Which of the following is not a characteristic of oligopoly? Low barriers to entry
57. Refer to Figure 9.18. Which of the following statements is true? D^a represents
the long-run demand curve facing a perfect competitor while D^b depicts the
long-run demand curve facing a monopolistic competitor.
58. Long-run equilibrium in a monopolistically competitive market is similar to long-
run equilibrium in a perfectly competitive market in that in both markets, firms
____________. Break even.
59. Refer to Figure 9.17. The productively efficient output for the firm represented
in the diagram is _____. Q^j units
60. Economies of scale can lead to an oligopolistic market structure because
________. If larger firms have lower costs, new small entrants will not be able to
produce at the low costs achieved by the big established firms.
61. Monopolistic competition is a market structure in which _______. Barriers to
entry are low.
62.  Refer to Figure 9.12. The firm represented in the diagram _________. Makes
zero economic profit
63. Which is true about the demand curve of a monopolistically competitive firm? Is
downward sloping because it must but its price to sell more
64. In the long run, firms in both monopolistically competitive markets and perfectly
competitive markets earn zero economic profits, but unlike perfectly competitive
firms in the long run, monopolistically competitive firms ________. Do not
produce at minimum average total cost.
65. Which of the following is not an example of an oligopolistic market? Seafood
restaurant chains
66. What one good thing happens when a monopolistically competitive firm lowers it
price? The output effect
67. A monopolistically competitive firm maximises profit where _____.
Price>marginal cost
68. What one bad thing happens when a monopolistically competitive firm lowers its
price? The price effect.
69. Refer to Figure 9.15. It is possible to lower the average cost of production by
expanding output beyond Q0 to Q1. Why wouldn’t a firm expand its output to Q1?
The firm would suffer an economic loss at Q^1 while it would break even at Q^o.

70. Monopolistically competitive firms have downward-sloping demand curves. In the

long run, monopolistically competitive firms earn zero economic profits. These
two characteristics imply that in the long run ________. Monopolistically
competitive firms have excess capacity.
71. Compared to a perfectly competitive firm, the demand curve facing a
monopolistically competitive firm is ________. Less elastic because
monopolistically competitive forms produce similar, but not identical, products.
72. In monopolistic competition there is/are ______. Many sellers who each face a
downward-sloping demand curve.
73. Refer to Figure 9.12. The productively efficient output for the firm represented
in the diagram is ______. Q^4 units.
74. What is a major difference between monopolistic competition and perfect
competition? That products are not standardised in monopolistic competition,
unlike in perfect competition.
75. Which of the following would not occur as a result of a monopolistically
competitive firm suffering a short-run economic loss? If the firm does not exit the
industry in the long run, its demand curve will shift to the left.
76. In which type of industry is interdependence most common? Oligopolistic
industries.
77. A monopolistically competitive firm that is profitable in the short run will face
competition that will eventually eliminate the firm’s profits in the long run. But
the firm can stave off competition and continue to earn economic profits if
________. It can find new ways to differentiate its product.
78. What is a key characteristic of a monopolistically competitive market structure?
Sellers selling similar but differentiated products
79. The profit-maximising rule for a monopolistically competitive firm is ______. To
produce a quantity such that marginal revenue equals marginal cost.
80. A monopolistically competitive firm faces a downward-sloping demand curve
because _____ of product differentiation.
81. Economists have long debated whether there is a significant loss of well-being to
society in markets that are monopolistically competitive rather than perfectly
competitive. Which of the following offers the best reason why some economists
believe that monopolistically competitive markets are less efficient than perfectly
competitive markets? In contrast to perfectly competitive markets, neither
allocative efficiency nor productive efficiency are achieved in monopolistically
competitive markets.
82. What does it mean if a firm has excess capacity? That the firm is not producing
its minimum efficient scale of output.
83. What must be true for allocative efficiency to hold? Price must equal the marginal
cost of the last unit produced.
84.  Refer to Figure 9.17. Suppose the firm is currently producing Qf units. What
happens if it increases its output to Qg units? It will move from a zero profit
situation to a loss situation.
85. Why do most firms in monopolistic competition typically make zero profit in the
long run? Because the lack of entry barriers would compete away profits.
86. Which of the following statements is true? The marginal revenue of a
monopolistically competitive firm will be positive at high prices and negative at
low prices.
87. Which of the following is not a characteristic of a monopolistically competitive firm
in long-run equilibrium? Price is equal to marginal cost.
88. In long-run equilibrium, compared to a perfectly competitive market, a
monopolistically competitive industry produces a ________ level of output and
charges a ________ price. Lower;higher
89. The statement that is true about marginal revenue is: if marginal revenue is
negative, the additional revenue received from selling 1 more unit of the good is
smaller than the revenue lost from receiving a lower price on all the units that
could have been sold at the original price.
90. If firms in a monopolistically competitive market are earning economic profits,
which of the following scenarios best reflects the change a representative firm
experiences as the market adjusts to its long-run equilibrium? Demand decreases
and becomes more elastic.
91. Refer to Figure 9.12.The amount of excess capacity is _______. Q^4 [] Q^2
units
92. Refer to Figure 9.17. The amount of excess capacity is _______. Q^j [] Q^f
units
93. Refer to Figure 9.14. The profit-maximising output level is __________. Q^4
units
94. Figure 9.8 shows cost and demand curves for a monopolistically competitive
producer of iced tea. Refer to Figure 9.8. At the profit-maximising output level,
the firm will _______. Earn a profit of $88
95. Every firm that has the ability to affect the price of the good or service it sells will
_______. Have a marginal revenue curve that lies below its demand curve.
96. What do the entry and exit of firms in monopolistically competitive market
guarantee? That price equals average total cost in the long run.
97. In the long run, what happens to the demand curve facing a monopolistically
competitive firm that is earning short-run profits? The demand curve will shift to
the left and become more elastic.
98. Refer to Figure 9.9. Which of the graphs in the figure depicts a monopolistically
competitive firm that is earning economic profits? Panel A and Panel B
99. Economists agree that a monopolistically competitive market structure _______.
Benefits consumers because firms produce products that appeal to a wide range
of consumer tastes.
100. Assuming that the total market size remains constant, a monopolistically
competitive firm earning profits in the short run will find the demand for its
product decreasing in the long run because ______. Some of its customers have
switched to purchasing the products of new entrants in the market.
101. Is a monopolistically competitive firm allocatively efficient? No, because
price is greater than marginal cost.
102. Refer to Figure 9.8. The firm’s profit-maximising price is ______. $16
103. Refer to Figure 9.14.Economies of scale are exhausted at which output
level? Q^3 units
104. A monopolistically competitive firm maximises profit in the short run by
producing where _____. Price is greater than marginal cost.
105. A monopolistically competitive firm will _____. Have some control over its
price because its product is differentiated.
106. Which of the following statements is true about monopolistically
competitive firms? Unlike perfectly competitive firms, monopolistically competitive
firms are able to raise their prices without losing all of their customers.
107. Refer to Figure 9.17. The allocatively efficient output for the firm
represented in the diagram is _____. Q^h units
108. Which of the following is true for a firm with a downward-sloping demand
curve for its product? Price equals average revenue but is greater than marginal
revenue.
109. Economists have long debated whether there is a significant loss of well-
being to society in markets that are monopolistically competitive rather than
perfectly competitive. Which of the following offers the best reason why some
economists believe that monopolistically competitive markets benefit consumers
despite any loss of well-being? Although consumers may pay a price greater than
marginal cost and the product is not produced at minimum average total cost,
they benefit from being able to buy a differentiated product more closely suited to
their tastes.
110. The economic analysis of monopolistic competition shows that market
forces eliminate profits in the long run. However, it is possible for a firm to
continue to earn economic profits if the firm ______. Adopts new technologies
that enable it to lower its cost of production.
111. Which of the following is true of a typical firm in a monopolistically
competitive industry? Each firm acts independently
112. A patent is an example of ________. Government-imposed barrier to
entry.
113. Refer to Figure 9.15. Which of the following statements describes the
firm depicted in the diagram? The firm is in long-run equilibrium and is breaking
even.
114. Is a monopolistically competitive firm productively efficient? No, because it
does not produce at minimum average total cost.
115. In contrast with perfect competition, excess capacity characterises
monopolistic competition. Excess capacity is due to which of the following?
Monopolistically competitive firms face downward-sloping demand curves. In the
long-run, firms produce where their demand curves are tangent to their long-run
average total cost curves.
116. Refer to Figure 9.12. The monopolistic competitor’s profit-maximising
output is _______. Q^2 units.
117. Refer to Figure 9.14. The output price is _____. P^4
118. You are planning to open a new Italian restaurant in your hometown
where there are three other Italian restaurants. You plan to distinguish your
restaurant from your competitors by offering northern Italian cuisine and using
locally grown organic produce. What is likely to happen in the restaurant market
in your hometown after you open? The demand curve facing each restaurant
owner becomes more elastic.
119. Tony’s Italian Ice is a monopolistically competitive firm. If Tony’s earns a
profit in the short run, which of the following is most likely to occur? New firms
that sell Italian ice will enter the market and Tony’s demand curve will shift to the
left.
120. Unlike a perfectly competitive firm, for a monopolistically competitive firm
_______. Price ≠ marginal revenue for all output levels.
121.
122.
123.
124.
125.
126.
127.
128.
 129.
130.

Topic 8
1. An example of a ‘seasonally unemployed’ worker would be a worker employed at
a beachside resort who loses his job in winter.
2. To calculate GDP using the value-added method, we add up the value added by
each firm involved in the production of final goods and services.
3. When an economy is at its natural rate of unemployment, which of the following
will be true? the unemployment rate will be greater than 0%.
4. Figure 11.7 shows a market with an externality. The current market equilibrium
output of Q1 is not the economically efficient output. The economically efficient
output is Q2. Refer to Figure 11.7. Suppose the current market equilibrium
output of Q1 is not the economically efficient output because of an externality.
The economically efficient output is Q2. In that case, diagram shows the effect of
a positive externality in the consumption of a good

5. Gross domestic product is generally ________ net domestic product. Greater

than.
6. Suppose there are several paper mills producing paper for a market. These mills,
located upstream from a fishing village, discharge a large amount of wastewater
into the river. The waste material affects the number of fish in the river, and the
use of the river for recreation and as a public water supply source. Figure 11.6
shows the paper market. Use this Figure to answer the following question(s).
Refer to Figure 11.6. What does S1 represent? The market supply curve that
reflects private cost.
7. A market failure refers to the inability of the market to allocate resources
efficiently up to the point where marginal social benefit equals marginal social
cost.
8. Gross domestic product in the economy is measured by the market value of all
final goods and services produced in the economy.
9. Which of the following transactions would be included in the official calculation of
GDP? You buy a new smartphone.
10. A negative externality is created by keeping a junked car parked on your front
lawn.
11. Which of the following describes how a positive externality affects a competitive
market? The externality causes a difference between the private benefit from
consumption and the social benefit.
12.  Refer to Figure 11.1. The figure above represents the market for pecans.
Assume that this is a competitive market. If the price of pecans is $9, what
changes in the market would result in an economically efficient output? the price
would decrease, the quantity supplied would decrease, and the quantity
demanded would increase.

13. Figure 11.3 shows a market with an externality. The current market equilibrium
output of Q1 is not the economically efficient output. The economically efficient
output is Q2. Refer to Figure 11.3. If, because of an externality, the
economically efficient output is Q2 and not the current equilibrium output of Q1,
what does S1 represent? The market supply curve reflecting private cost.

14. Refer to Figure 11.5. What is the private profit maximising output level? Q^m.

15. Macroeconomics involves the economic issues of how to generate full

employment, create price stability, and maintain long-term economic growth.
16. The demand for new motor vehicles falls when the economy enters a downturn
and as a result, motor vehicle manufacturers sack some workers. This would be
an example of —. Cyclical unemployment.
17. If the social cost of producing a good or service exceeds the private cost, a
negative externality exists.
18. Which of the following will not lower the official measure of the unemployment
rate? People losing their full-time jobs and instead are given part-time jobs
19. The ‘unemployment rate’ is measured as the number of unemployed people
divided by the labour force, multiplied by 100.
20. Medical research that ends in a cure for a serious disease produces positive
externalities. What is the impact of this positive externality on economic
efficiency? At equilibrium, less than the economically efficient quantity of medical
research is produced.
21. When there is an externality in a market, government intervention may increase
economic efficiency.
22. Figure 11.8 shows the market for measles vaccinations, a product whose use
generates positive externalities. Refer to Figure 11.8. What does D1 represent?
The demand curve reflecting private benefit.

23. Which of the following is not generally a cost posed by inflation? Inflation reduces
the affordability of goods and services to the average consumer.
24. From the list below, the best example of a positive externality is planting trees
along the pavement, which adds beauty and creates shade.
25. How is ‘cyclical unemployment’ defined? Unemployment due to an economic
contraction or recession.
26. Government spending ________ is included in gross domestic product. Federal,
state, and local levels of government.
27. Which of the following describes how a negative externality affects a competitive
market? The externality causes a difference between the private cost of
production and the social cost.
28. Figure 11.7 shows a market with an externality. The current market equilibrium
output of Q1 is not the economically efficient output. The economically efficient
output is Q2. Refer to Figure 11.7. If, because of an externality, the
economically efficient output is Q2 and not the current equilibrium output of Q1,
what does D2 represent? The demand curve reflecting social benefits.
29. The three main methods of measuring GDP are the income method, the
production method, and the expenditure method.
30. Which of the following is not considered part of government purchases? Transfer
payments paid by the government.
31. Refer to Figure 11.6. What is the economically efficient output level? Q^2
32. Refer to Figure 11.6. Why is there a deadweight loss? Because the marginal
social cost of producing each additional unit in excess of Q^2 exceeds the
marginal benefit.
33. Refer to Figure 11.7. If, because of an externality, the economically efficient
output is Q2 and not the current equilibrium output of Q1, what does D1 represent?
The demand curve reflection private benefits.
34. Which of the following issues would be considered as part of the study of
macroeconomics? The unemployment rate.
35. How are ‘intermediate goods’ treated in the calculation of GDP? Their value is not
counted separately, but included as part of the value of the final good of which
they are an input.
36. A woman named Sheila who retired becomes bored and begins to look for a job.
During the time she is searching for work, she would be classified as —.
Frictionally unemployed.
37. When there is a positive externality, the social benefit received by consumers is
greater than the private benefit.
38. The ‘inflation rate’ is measured as the percentage change in the relevant price
index from one time period to another.
39. Mandatory motorcycle helmet laws are designed to reduce the severity of injuries
resulting from motorcycle involvement in traffic accidents. In this sense, these
mandatory helmet laws are reducing ________ of risky behaviour. Negative
externalities.
40. ‘Frictional unemployment’ would increase when the number of individuals who
quit their job to find another job increases.
41. What does a positive externality cause? The marginal social benefit to exceed the
marginal private cost of the last unit produced.
42. Refer to Figure 11.5. The deadweight loss due to the externality is represented
by the area —. msn
43. In the equation GDP = C + I + G + NX, the G component refers to the purchases
of final goods and services by all levels of government, excluding transfer
payments.
44. If an Australian firm produces televisions in China, that production should count
toward Australia’s GNI
45. A woman who quit her job to search for a job that better utilises her skills
represents an example of —. Frictional unemployment
46. When production generates a negative externality, the true cost of production is
the social cost of production
47. ‘Inflation’ is an increase in the general price level in the economy.
48. Which of the following represents the true economic cost of production when
firms produce goods that cause negative externalities? The social cost of
production.
49. A ‘social cost’ of production is the sum of all costs to individuals in society,
regardless of whether the costs are borne by those who produce the products or
consume the product.
50. How is the ‘labour force participation rate’ defined? As the working-age population
in the labour force.
51. ‘Frictional unemployment’ can be defined as unemployed that occurs when people
are re-entering the labour force.
52. An external cost is created when you litter on the side of the road.
53. Which of the following is considered a ‘durable good’? a washing machine.
54. Which of the following transactions would be included in GDP? The purchase of
pencils.
Topic 9
1. ‘Stagflation’ is often a result of a negative supply shock.
2. A ‘technical recession’ is defined as six months of negative economic growth.
3. What does the slope of the aggregate demand curve indicate? That a decrease in
the price level leads to a higher level of aggregate spending.
4. If potential GDP is equal to $1800 billion, what does the long-run aggregate
supply curve look like? It is a vertical line at a level of GDP below $1800 billion
GDP.
5. Why does the short-run aggregate supply curve shift to the left in the long run,
following an increase in aggregate demand? Workers and firms adjust their
expectations of wages and prices upward and they push for higher wages and
prices.
6. What happens if technological change occurs in the economy? The long-run
aggregate supply curve will shift to the right.
7. What happens when a recession ends? Firms increase the amount of borrowing.
8. Suppose the economy is at a short-run equilibrium GDP that lies above potential
GDP. Which of the following will occur because of the automatic mechanism
adjusting the economy back to potential GDP? Aggregate supply will shift to the
left.
9. Which of the following explains why the rate of unemployment continues to rise
once a recession is over? Firms are operating below capacity for some time after
the recession is finished.
10. An increase in aggregate demand causes an increase in ________ only in the
short run, but causes an increase in ________ in both the short run and the long
run. Real GDP; the price level.
11. A decrease in the price level results in a(n) ________ in the quantity of real GDP
demanded because a lower price level ________ consumption, investment and
net exports. Increase; increase
12. Suppose the economy is at point A in Figure 15.1. If consumer spending
increases in the economy, where will the eventual long-run equilibrium be? C

13. When does short-run macroeconomic equilibrium occur? When aggregate demand
and short-run supply intersect.
14. When does long-run macroeconomic equilibrium occur? When aggregate demand
equals short-run aggregate supply and they intersect at a point on the long-run
supply curve.
15. What is the slope of the long-run aggregate supply curve? Vertical Slope
16. The wealth effect occurs when the price level falls, causing the real value of
household wealth to rise.
17. In Figure 15.2, given the economy is at point A in year 1 and point B in year 2,
what is the growth rate in real GDP between those two years?

7.3 per cent

18. How is the ‘inflation rate’ defined? The percentage change in the price level
between time periods.
19. The impact of a natural disaster on consumers in the economy can make them
very pessimistic about their future incomes. How would an increase in pessimism
affect the aggregate demand curve? This will shift the aggregate demand curve to
the left.
20. In Figure 15.1, which of the points are possible long-run equilibriums? A and C
21. What is the result if the economy receives an influx of new workers from
immigration? The long-run aggregate supply curve will shift to the right.
22. Which of the following will shift the aggregate demand curve to the left, ceteris
paribus? An increase in interests.
 23. Suppose the economy is at point C in Figure 15.1. If government spending
decreases in the economy, where will the eventual long-run equilibrium be? A
24. A period of expansion in the business cycle ends when the business cycle reaches
its peak.
25. The distinction between the short-run and long-run aggregate supply curve is
necessary because in the long run changes in the price level do not affect the
level of real GDP but do in the short run.
26. An ‘economic contraction’ begins with a/an ________ in spending by firms on
capital goods and a/an ________ in spending on durable goods by households.
Decrease; decrease
27. The result of lower personal income taxes is an increase in aggregate demand.
28. Changes in the price level do not affect the level of aggregate supply in the long
run.
29. The short-run aggregate supply curve has a ________ slope because as prices of
________ rise, prices of ________ rise more slowly. Positive; final goods and
services; inputs.
30. Which of the points in Figure 15.1 are possible short-run equilibriums but not
long-run equilibriums? B and D
31. The long-run aggregate supply curve shows the relationship between the
________ and ________. Price level; quantity of GDP supplied.
32. Spending on the national defence force is categorised as government purchases.
How do increases in spending on defence affect the aggregate demand curve?
This will shift the aggregate demand curve to the right.
33. Which of the following is an assumption of the basis (static) aggregate demand
and aggregate supply model? The economy does not experience long-run growth.
34. The international-trade effect states that, ceteris paribus, an increase in the price
level will decrease net exports.
35. Which of the following is true of the short-run aggregate supply curve? It has a
positive slope.
36. How do changes in income tax policies affect aggregate demand? Higher taxes
reduce disposable income, consumption and aggregate demand.
37. Which of the following is not a reason why the wages of workers and the prices of
inputs rise more slowly than the prices of final goods and services? Unions are
successful in pushing up wages.
38. ________ of unemployment during ________ make it easier for workers to
________ wages. High levels; a recession; accept lower
39. The interest-rate effect is described as an increase in the price level which: raises
the inter rate, thereby reducing investment and consumption spending.
40. What is the level of real GDP called in the long run? Potential GDP.

Topic 10
1. If the government wants to try to reduce unemployment, it could ________
spending and/or taxes should be ________. Increase; decreased
2. A decrease in individual income taxes ________ disposable income, which
________ consumption spending. Increases; increases
3. Which of the following is the main goal of monetary policy in Australia? Price
stability
4. Which of the following would be considered a fiscal policy action? A tax cut is
designed to stimulate spending during an economic contraction.
5. Refer to Figure 17.1.In this figure, the money demand curve would move from
Money demand1 to Money demand2 if the price level increased.

6. Money demand will increase if the price level ________ or if real GDP ________.
Increases; increases
7. To ameliorate the effects of a recession, a government could enact appropriate
policies including ________. Increasing government purchases.
8. Which of the following is considered ‘expansionary fiscal policy’? The government
decreases the income tax rate.
9. The money demand curve is downward sloping because lower interest rates lower
the opportunity cost of holding money and cause households and firms to switch
from financial assets to money.
10. If the interest rate increases, then there will be an upward movement along the
money demand curve.
11. Because money serves as a medium of exchange, an increase in real GDP
increases the buying and selling of goods and services and so increases the
demand for money.
12. ‘Fiscal policy’ refers to the _________. Spending and tax policies used by the
government to influence the level of economy activity.
13. When the RBA uses contractionary policy, the price level rises by less than it
would if the RBA did not pursue policy.
14. Refer to Figure 17.2.In this figure, a movement from point A to point B would be
caused by an increase in the interest rate.
15. Which of the following describes what the Reserve Bank of Australia would do to
pursue an expansionary monetary policy? Use open market operations to buy
bonds and securities.
16. An increase in the supply of cash on the overnight money market will lead to a(n)
____________ in interest rates and a(n)_________ in investment expenditure.
Decrease; increase
17. If the equilibrium real GDP were higher than potential GDP, then a contractionary
fiscal policy would cause the inflation rate to be ________ and real GDP to be
________. Lower; lower
18. ‘Fiscal policy’ (discretionary fiscal policy) is defined as changes in federal
________ and ________ to achieve macroeconomic objectives such as price
stability, healthy rates of economic growth, and high employment. Taxes;
purchases.
19. By decreasing government spending and aggregate demand, the policy ________
the price level and ________ equilibrium real GDP, ceteris paribus. Decreases;
decreases
20. Which of the following is a government ‘expenditure’ and not a government
‘purchase’? The federal government pays unemployment benefits.
21. A decrease in real GDP can decrease money demand and decrease the interest
rate.
22. Tax increases on business income slow down the rate of increase in aggregate
demand by decreasing __________. Business investment spending
23. Open market operations occur when the Reserve Bank of Australia purchases or
sells short-dated financial instruments.
24. If policy makers are concerned that the economy is in danger of rising inflation
because aggregate demand is increasing faster than aggregate supply, the
appropriate fiscal policy response is to _________. Increases taxes.
25. Which of the following situations is one in which the Reserve Bank of Australia will
potentially pursue expansionary monetary policy? Potential GDP is forecast to be
higher than equilibrium GDP.
26. The policy aimed at managing interest rates to pursue macroeconomic objectives
is called _________. Monetary policy
27. If the economy moves from A to B in Figure 18.1, which of the following would be
the appropriate fiscal policy to achieve potential GDP? Increase government
spending.

28. Which of the following is an example of discretionary fiscal policy? Tax increases
to combat rising inflation.
29. A contractionary fiscal policy would cause the _________. Aggregate demand
curve to the left.
30. An increase in real GDP will __________ the demand for money and
____________the equilibrium interest rate. Increase; increase.
31. If real equilibrium GDP is below the long-run aggregate supply curve, an
appropriate fiscal policy would be to _________. Increase government purchases
and increase a budget deficit.
32. If the Reserve Bank of Australia pursues expansionary monetary policy, ceteris
paribus, aggregate demand will Rise by more than it otherwise would have and
the price level will rise more than it otherwise would have.
33. The ‘cash rate’ is the interest rate banks charge each other for overnight loans.
34. According to the Reserve Bank of Australia, inflation targeting refers to monetary
policy that aims to achieve a particular annual rate of inflation on average over
the business cycle.
35. Expansionary fiscal policy ________ the price level and ________ equilibrium
real GDP. Increases; increases
36. If the economy is growing beyond potential GDP, which of the following would be
an appropriate fiscal policy to bring the economy back to long-run aggregate
supply? An increase in _________. taxes
37. If the economy were in a recession, we would expect government expenditure to
be _________. High and tax revenues to be low, probably leading to a budget
deficit
38. A decrease in interest rates will usually increase consumption spending.
39. If the Reserve Bank of Australia lowers the interest rate, this will ________
inflation and ________ the rate of growth of real GDP in the short run. Increase;
raise
40. To help fight a recession, the government could _________. Increase
government spending and run a budget deficit.
41. Which of the following are goals of monetary policy? Price stability, economic
growth, and high employment.
42. If the Reserve Bank of Australia lowers its target for the cash rate, this indicates
that it is pursuing an expansionary monetary policy.
43. The money demand curve has a negative slope.
44. A decrease in the supply of cash on the overnight money market will lead to a(n)
____________ in interest rates and a(n)_________ in investment expenditure.
Decrease; increase
45. If interest rates rise, this will _________ the cost of buying new homes, so
________ new homes will be purchased thereby reducing ___________
expenditures. Raise; fewer; investment.
TEST 1 EXAM

1. What is the difference between an 'increase in demand' and an 'increase in quantity

demanded'? An 'increase in demand' is represented by a rightward shift of the
demand curve while an 'increase in quantity demanded' is represented by a
movement along a given demand curve.
2. Increasing opportunity cost is represented by a ________ production possibility
frontier. bowed out
3. Figure 2.7 shows the production possibility frontiers for Pakistan and Indonesia.
Each country produces two goods, cotton and cashews.Refer to Figure
2.7. What is the opportunity cost of producing 1 kilogram of cashews in
Indonesia? 2 2/3 bolts of cotton
4. Suppose a decrease in the supply of wheat results in an increase in revenue. This
indicates that________.  the resulting increase in price is proportionately greater
than decrease in quantity sold
5. Select the phrase that correctly completes the following statement. 'A positive
change in technology caused an increase in the supply of flat-screen televisions;
as a result, ________.' the price of flat-screen televisions decreased, and the
quantity demanded of flat-screen televisions increased
6. In which market are the natural resources used in production available? Factor
market
7. Holding everything else constant, the absolute value of the price elasticity of
demand for Saucony tennis shoes is ________ the price elasticity of demand for
tennis shoes.  greater than
8. Refer to Figure 3-5. At a price of $5, the quantity sold is 2 units.
9. What does price elasticity of demand measure? How responsive quantity
demanded is to a change in price
10. Refer to Figure 3-5. At a price of $20, there would be a surplus of 8 units.

TEST 3 EXAM

1. What is subtracted from GDP to calculate net domestic product (NDP)?

Depreciation
2. Which of the following is not a characteristic of long-run equilibrium in a
monopolistically competitive market? Production is at minimum average total
cost.
3. If the social benefit of consuming a good or a service exceeds the private benefit,
a positive externality exists.
4. If a monopolistically competitive firm breaks even, the firm ________. is earning
an accounting profit and will have to pay taxes on that profit
5. Enterprise bargaining is the negotiation of wages and working conditions at the
workplace level.

TEST 4 EXAM

1. What is the result of an increase in the price level? It will move the economy
up along a stationary short-run aggregate supply curve.