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Sample Test Questions 3. The view that specialization leads to gains from trade is based on which of the following The sample questions that follow illustrate the kinds of questions principles? you will find on the test. They are not, however, representative of the entire scope of the test in either content or difficulty. Answers (1) Comparative advantage with explanations follow the questions. (J) Absolute advantage Directions: Each of the questions or statements below is followed by four suggested answers or (K) Price elasticity completions. Select the one that is best in each case. (L) Market equilibrium Good In the circular flow model of a market economy, which of the following describes the roles of firms and households in the product markets and in the factor markets? Product Markets Factor Market (A) Firms sell goods Firms sell resources to to households. households. (B) Firms sell goods Firms buy resources to households. from households. Good Y (C) Firms buy goods Firms buy resources 1. The diagram above shows the production from households. from households. possibilities curve for an economy. Which of the following is true if the economy is currently producing at point E? (D) Firms buy goods Firms sell resources from households. to households. (A) It is producing the maximum possible output given the scarcity of resources. 5. Assume that the marginal propensity to consume increased from 0.75 in year 1 to (B) It is devoting most of its resources to 0.80 in year 2. Based on this information, producing Good Y. which of the following is a correct conclusion? (C) It is not using its resources fully and (A) In year 1, a $100 billion increase in efficiently. government spending would have increased real output by a maximum of (D) It can increase the production of Good X $75 billion. only if it decreases the production of Good Y. (B) From year 1 to year 2, the spending multiplier increased from 4 to 5. 2. In a command economy, resource allocation is managed primarily by (C) A given change in government spending would have had a more powerful effect in (E) large corporations year 1 than in year 2. (F) labor unions (D) The marginal propensity to save increased from year 1 to year 2. (G) competitive markets (H) central planning6. Assume the money supply is xed by the Federal Fleserve and remains constant. How will an increase in average consumer income affect the demand for money and the nominal interest rate? Money Demand Nominal Interest Rate {A} Decrease {B} Decrease {C} Increase {D} Increase Which of the following is true of a profit- maximizing rm in the short run? {A} The rm will shut down to minimize losses if product price falls below average total cost. {B} The rm will shut down if marginal revenue equals marginal cost but exceeds average variable cost. {C} The rm will continue to produce as long as total revenue exceeds total variable cost. even if it incurs loss. {D} The rm will continue to produce as long as average variable cost is less than average xed cost. Which of the following short-run costs always increases as output increases? {A} Average total cost {B} Marginal cost {C} Total xed cost {D} Total variable cost Assume the demand for wheat is relatively price inelastic. An increase in the supply of wheat will result in which of the following? {A} A decrease in quantity demanded and an increase in total revenue {B} A decrease in quantity demanded and a decrease in total revenue {C} An increase in quantity demanded and an increase in total revenue {D} An increase in quantity demanded and a decrease in total revenue 10. 11. Use the diagram below. which shows the demand and supply curves for leather garments, to answer the next two questions. Demand antiw Assume that leather garments are a normal good. An increase in the price of leather and a simultaneous increase in consumers' income will most likely have which of the following effects on the equilibrium price and quantity of leather garments? Increase lndetenninate Decrease Decrease Increase Increase Indeterminate Decrease If the government places a price ceiling on leather garments that is below the equilibrium price. which of the following will occur in the market for leather garments? {A} There will be a shortage. {B} There will be a surplus. {C} The demand curve for leather garments will shift leftward. {D} The supply curve for leather garments will shift rightward