Study Guide
Sample Selected-Response Questions
Field 35: Economics
Practice Questions
Subarea I–Basic Economic Concepts and Microeconomics
Objective 0001: Understand basic economic concepts and terms.
1. The law of scarcity can best be used to explain which of the following?
- why people are willing to accept money as a medium of exchange in commercial transactions
- why most property is privately owned in mixed market economies
- why periods of economic expansion are generally followed by periods of economic contraction
- why consumers have to consider the opportunity costs of the choices they make
- Enter to expand or collapse answer. Answer expanded
- Correct Response: D.
Objective 0001: Understand basic economic concepts and terms.
2. Which of the following best describes an advantage of pure market systems?
- efficient allocation of resources
- timely application of built-in stabilizers
- equitable distribution of income
- effective limitation of negative externalities
- Enter to expand or collapse answer. Answer expanded
- Correct Response: A.
Objective 0002: Understand basic principles of microeconomics.
3. Which of the following is most likely to cause a decline in market supply?
- an increase in the price of commonly used raw materials
- a decrease in interest rates
- an increase in the ratio of capital to labor in major industries
- a decrease in consumer debt
- Enter to expand or collapse answer. Answer expanded
- Correct Response: A.
Objective 0002: Understand basic principles of microeconomics.
4. Which of the following would most likely occur if government price ceilings forced the price of a given commodity below its market equilibrium price?
- The price of complementary goods used with the commodity would increase.
- New producers would enter the market to meet increased demand for the commodity.
- Shortages would develop as producers reduced output of the commodity.
- Demand for the commodity would decrease as product quality declined.
- Enter to expand or collapse answer. Answer expanded
- Correct Response: C.
Objective 0003: Understand concepts, issues, and principles related to how businesses use resources and interact with the marketplace.
5. Economies of scale occur when firms are able to:
- increase revenue as the quantity of production increases.
- expand output by adding to capital stock.
- reduce costs through multiproduct production.
- reduce unit costs as the quantity of production increases.
- Enter to expand or collapse answer. Answer expanded
- Correct Response: D.
Objective 0003: Understand concepts, issues, and principles related to how businesses use resources and interact with the marketplace.
6. Antitrust policy in the United States is designed mainly to preserve and promote which of the following features of the U.S. economic system?
- property rights and economic efficiency
- private ownership and the profit motive
- competitive markets and consumer sovereignty
- economic incentives and government infrastructure
- Enter to expand or collapse answer. Answer expanded
- Correct Response: C.
Subarea II–Macroeconomics, Economic Theories, and International Economics
Objective 0004: Understand basic theories of macroeconomics.
7. The supply-side policies of the Reagan administration during the 1980s were based primarily on the anticipated effect that:
- rising real wages would have on consumers.
- economic incentives would have on producers.
- increased economic freedom would have on consumers.
- competitive pressures would have on producers.
- Enter to expand or collapse answer. Answer expanded
- Correct Response: B.
Objective 0004: Understand basic theories of macroeconomics.
8. Which of the following best describes why U.S. policymakers are more likely to use monetary policy than fiscal policy to combat inflation?
- Using monetary policy has fewer political liabilities than using fiscal policy, which requires unpopular actions such as reducing spending and raising taxes.
- Presidents favor policies that can be implemented by private agencies that are independent of the government.
- In an increasingly interdependent global economy, monetary policy provides a more effective way of containing inflation without disrupting world currency markets.
- Fighting inflation through monetary policy is less likely to disturb the operation of securities markets by dampening investor expectations.
- Enter to expand or collapse answer. Answer expanded
- Correct Response: A.
Objective 0005: Understand principles and concepts related to government decisions on taxation, spending, and regulation.
9. Which of the following best describes the effect of a regressive tax?
- Collection of the tax constricts the production possibilities' frontiers of businesses.
- A larger proportion of the tax burden is placed on lower incomes than on higher incomes.
- The overall tax burden is steadily shifted from consumers to producers.
- Revenue from taxes on businesses is used to finance government transfer payments.
- Enter to expand or collapse answer. Answer expanded
- Correct Response: B.
Objective 0005: Understand principles and concepts related to government decisions on taxation, spending, and regulation.
10. Which of the following would likely benefit most from an inflationary price spiral?
- a business that has issued long-term, low-interest bonds before the onset of inflationary pressures
- a business with high production costs that makes goods for which there is high elasticity of demand
- a pensioned retiree who relies on annual cost of living adjustments for benefit increases
- a salaried worker who relies on annual employment reviews for any adjustment in compensation
- Enter to expand or collapse answer. Answer expanded
- Correct Response: A.
Objective 0006: Understand principles and concepts of money and banking.
11. Which of the following best describes a major role of the Federal Reserve?
- insuring the deposits of savings banks
- serving as the central bank for the federal government
- advising the U.S. Congress on tax policy
- monitoring the nation's balance of payments
- Enter to expand or collapse answer. Answer expanded
- Correct Response: B.
Objective 0006: Understand principles and concepts of money and banking.
12. Which of the following is an important component of monetary policy?
- establishing reserve ratios for depository institutions
- conducting audits of commercial banks
- monitoring the investments of financial institutions
- setting margin rates for securities accounts
- Enter to expand or collapse answer. Answer expanded
- Correct Response: A.
Objective 0007: Understand principles and components of international economics and trade.
13. As a result of a successful marketing campaign sponsored in part by the U.S. Department of Commerce, European demand for U.S.-made products has increased significantly. What is the likely effect of this trend on the foreign exchange rate of the dollar versus the euro?
- The value of the dollar will fall as increased demand for U.S. goods causes interest rates to rise.
- The value of the euro will rise as more Europeans use the currency to purchase U.S. goods.
- The value of the dollar will remain steady because an increase in exports has no effect on currency markets.
- The value of the dollar will rise as an increase in exports generates stronger demand for U.S. currency.
- Enter to expand or collapse answer. Answer expanded
- Correct Response: D.
Objective 0007: Understand principles and components of international economics and trade.
14. The globalization of the U.S. economy during the late twentieth century most adversely affected which of the following groups of U.S. workers?
- service workers in small- to medium-sized retail establishments
- miners and forestry workers in extractive industries
- production workers in industries that manufacture consumer durables
- drivers and warehouse workers in the trucking industry
- Enter to expand or collapse answer. Answer expanded
- Correct Response: C.
Subarea III–Economic Inquiry Skills
Objective 0008: Apply methods for interpreting, organizing, and presenting economic information.
15. When examining patterns of economic development, economists often distinguish between developed and developing economies. Which of the following best describes the occupational structure that an economist would likely associate with a developed economy in the twenty-first-century global economy?
- agriculture: 21 percent
industry: 24 percent
services: 55 percent - agriculture: 15 percent
industry: 25 percent
services: 60 percent - agriculture: 3 percent
industry: 27 percent
services: 70 percent - agriculture: 1 percent
industry: 48 percent
services: 51 percent
- Enter to expand or collapse answer. Answer expanded
- Correct Response: C.
Objective 0008: Apply methods for interpreting, organizing, and presenting economic information.
16. Use the demand curve for batteries below to answer the question that follows.
The vertical axis is labeled Price of Batteries, and has values marked from 1 to 5 dollars in increments of 1 dollar. The horizontal axis is labeled Quantity of Batteries Demanded, and has values marked from 1 to 6 in increments of 1. There are 2 lines plotted, labeled D1 and D2. Line D1 goes from 3 dollars on the vertical axis to 3 batteries on the horizontal axis, and has an arrow extending from the right that points to line D2. Line D2 goes from 4 dollars on the vertical axis to 4 batteries on the horizontal axis.
Which of the following most likely caused the shift from D1 to D2 shown in the graph above?
- an increase in the cost of battery rechargers
- a decrease in the number of firms that produce batteries
- a decrease in the price of portable game players
- the introduction of a new line of longer-lasting batteries
- Enter to expand or collapse answer. Answer expanded
- Correct Response: C.
Objective 0009: Apply methods for analyzing economic issues.
17. Read the excerpt below from a 2003 economic report; then answer the question that follows.
Although consumer demand remained strong throughout the recent recession, many economists are concerned about the future costs. The rapid rise in consumer debt—the main source of much recent consumption—could have negative consequences. Not since the late 1980s have consumers taken on so much debt so quickly. The long-term ramifications are unclear, but historically high consumer debt loads leave many economists very worried.
Which of the following is likely the greatest concern raised by the economic developments described in the excerpt above?
- Reduced savings will ignite an inflationary spiral.
- Increased consumption will depress real wages.
- Reduced savings will restrain business investment.
- Increased consumption will prompt stock speculation.
- Enter to expand or collapse answer. Answer expanded
- Correct Response: C.
Objective 0009: Apply methods for analyzing economic issues.
18. Government planners are using cost-benefit analysis to determine the optimum size of a flood-control project. In doing so, they should seek to identify the project size at which:
- marginal benefits are most nearly equal to marginal costs.
- total annual costs are lowest.
- marginal benefits are most in excess of marginal costs.
- total annual benefits are greatest.
- Enter to expand or collapse answer. Answer expanded
- Correct Response: A.
Subarea IV–Consumer Economics
Objective 0010: Understand how opportunity cost affects personal financial decisions.
19. Mr. Lopez wants to start a small restaurant and is considering two options: a privately owned restaurant or the local franchise of a national firm. Which of the following best describes a likely advantage of purchasing the franchise?
- benefits of centralized purchasing
- less difficulty obtaining capable staff
- reduced operating expenses
- access to a broader range of menu items
- Enter to expand or collapse answer. Answer expanded
- Correct Response: A.
Objective 0011: Understand the opportunity cost involved in the purchase, use, and disposal of goods and services.
20. Which of the following developments would likely have the greatest effect on a family in the process of buying a home?
- enactment of legislation to raise the federal debt ceiling
- adoption of an expansionary fiscal policy by the federal government
- enactment of protectionist trade legislation
- adoption of a tight money policy by the Federal Reserve Board
- Enter to expand or collapse answer. Answer expanded
- Correct Response: D.