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What are the three things to consider when comparing government spending to private sector spending? The textbook answer would be Efficiency, Incentives, and Freedoms. 1. In the space below each of the following, indicate the effect [increase (+), decrease (–)] on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply. P Q (a) Increase in demand, supply constant ___+____ ___+____ (b) Increase in supply, demand constant ___-____ ___+____ (c) Decrease in demand, supply constant ____-___ ____-___ (d) Decrease in supply, demand constant ____+____ ___-____ Notice demand, price and quantity all moves n the same direction. When demand increases so does price and so does quantity. On the other hand notice how supply moves in the price and quantity move in inverse direction. When supply increases, prices falls and quantity increases. 3. Describe the market behavior that should result if the price of a product (haircuts) is below its equilibrium price; then describe the behavior that should occur if the price is above its equilibrium price. If the price is below equilibrium (market price), there will be lines. This is same exact thing is government imposes a price below market. If the price is above market price, there will be no lines and Jim will be standing around (surplus time). 4. What is the difference between a change in supply and a change in quantity supplied? Change in supply is a result of one of the determinants changing. Such as more suppliers entering the market. A change in the quantity supplied is a result of a change in demand. 5. List the basic determinants of market supply. Change in resources Change in technology Changes in Taxes Practice Test – Economics Page 1 Change in prices of other goods Change in expectations Change in the number of suppliers Safety of investment 6. List the basic determinants of demand. Consumer Tastes Emotional disposition of consumer Mental health of consumer Number of Consumers in Market Consumer Incomes Prices of related goods – substitutes Consumer expectations about future prices 7. What happens when governments tries to impose a price which is below (aka price ceiling) the market price? What is an example of this? Quantity Demanded will be greater than Quantity Supplied and there will be a shortage. Some who use to get the product or service will no longer get it. Rent Controls is one example. 8. What happens when government try to fix a price above (aka price floor) the market price? What is an example of this Quantity Supplied will be greater than Quantity Demanded and there will be a surplus. The will be too much of a service or product produced. 9. The demand curve shows the relationship between: a. money income and quantity demanded. b. price and production costs. c. price and quantity demanded. d. consumer tastes and the quantity demanded. 10. The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____. a. direct, inverse b. inverse, direct c. inverse, inverse d. direct, direct 11. A decrease in the demand for golf balls might be caused by an increase in the: a. Decrease in the income of golfers. b. price of playing a round of golf goes up. c. Increase in income of golfers Practice Test – Economics Page 2 d. Price of sailing boats. e. Both a and b 12. Which is higher the amount of goods and services exchanged between countries or the amount of currency (circle good an services or currency). By a lot perhaps 40 times or so. 13. The flow of currency into and out of the USA from other countries impacts a. Interest Rates in the USA b. Rates of Inflation in the USA c. Growth d. All of the above 14. What are some basic tenants of the Chicago School of Economic Thinking? Free Markets, Limited Government Controls, Government is the problem not the solution. 15. What are some basic tenants of Keynesian School of Economic Thinking? Government Controls are good, government is the solution 16. Was Hayek more Chicago School or Keynesian (circle Chicago or Keynesian) Chicago! 17. What was the title of Hayek’s big book? The Road to Serfdom 18. What percent of taxes do the top 10% of income earners pay, how about the top 25%. http://www.softwaremetrics.com/Economics/Taxes%20and%20Contributions.pdf 19. There were 8 items in the last round of tax cuts. Name 4 of those items. http://www.softwaremetrics.com/Economics/EconomicsStimulusPackage.pdf Practice Test – Economics Page 3