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Miami Dade College
ECO 2013.018 Principles of Macroeconomics – Spring 2016
Practice Test #2
1. Market failure is said to occur whenever:
A. private markets do not allocate resources in the most economically desirable way.
B. prices rise.
C. some consumers who want a good do not obtain it because the price is higher than they
are willing to pay.
D. government intervenes in the functioning of private markets.
2. Demand side market failures occur when:
A. the demand and supply curves don't reflect consumers' full willingness to pay for a good
or service.
B. the demand and supply curves don't reflect the full cost of producing a good or service.
C. government imposes a tax on a good or service.
D. a good or service is not produced because no one demands it.
3. Supply side market failures occur when:
A. the demand and supply curves don't reflect consumers' full willingness to pay for a good
or service.
B. the demand and supply curves don't reflect the full cost of producing a good or service.
C. government regulates production of a good or service.
D. a good or service is not supplied because no one wants it.
4. What two conditions must hold for a competitive market to produce efficient outcomes?
A. Demand curves must reflect all costs of production, and supply curves must reflect
consumers' full willingness to pay.
B. Supply curves must reflect all costs of production, and demand curves must reflect
consumers' full willingness to pay.
C. Firms must minimize production costs, and consumers must minimize total expenditures.
D. Firms must maximize profits, and consumers must all pay prices equal to their maximum
willingness to pay.
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5. Consumer surplus:
A. is the difference between the maximum prices consumers are willing to pay for a product
and the lower equilibrium price.
B. the difference between the maximum prices consumers are willing to pay for a product
and the minimum prices producers are willing to accept.
C. the difference between the minimum prices producers are willing to accept for a product
and the higher equilibrium price.
D. rises as equilibrium price rises.
6. Producer surplus:
A. is the difference between the maximum prices consumers are willing to pay for a product
and the lower equilibrium price.
B. rises as equilibrium price falls.
C. is the difference between the minimum prices producers are willing to accept for a
product and the higher equilibrium price.
D. is the difference between the maximum prices consumers are willing to pay for a product
and the minimum prices producers are willing to accept.
7. Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum
acceptable price to the seller, Tony, was $140. Amanda experiences:
A.
B.
C.
D.
a consumer surplus of $10 and Tony experiences a producer surplus of $190.
a producer surplus of $200 and Tony experiences a consumer surplus of $10.
a consumer surplus of $670 and Tony experiences a producer surplus of $200.
a producer surplus of $10 and Tony experiences a consumer surplus of $190.
8. A producer's minimum acceptable price for a particular unit of a good:
A. is the same for all units of the good.
B. will, for most units produced, equal the maximum that consumers are willing to pay for
the good.
C. equals the marginal cost of producing that particular unit.
D. must cover the wages, rent, and interest payments necessary to produce the good but need
not include profit.
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9.
Refer to the diagram. Assuming equilibrium price P1, consumer surplus is represented by areas:
A.
B.
C.
D.
a + b.
a + b + c + d.
c + d.
a + c.
10.
Refer to the diagram. The area that identifies the maximum sum of consumer surplus and
producer surplus is:
A. a + b + c + d + e + f.
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B. c + d + f.
C. a + b + e.
D. a + b + c + d.
11. Which of the following conditions does not need to occur for a market to achieve allocative
efficiency?
A. Consumers' maximum willingness to pay equals producers' minimum acceptable price for
the last unit of output.
B. The sum of producer and consumer surplus is maximized.
C. The total revenue received by producers equals the total cost of production.
D. The marginal benefit of the last unit produced equals the marginal cost of producing that
unit.
12. An efficiency loss (or deadweight loss):
A. is measured as the combined loss of consumer surplus and producer surplus.
B. results from producing a unit of output for which the maximum willingness to pay
exceeds the minimum acceptable price.
C. can result from underproduction, but not from overproduction.
D. can result from overproduction, but not from underproduction
13. Public goods are those for which there:
A.
B.
C.
D.
is no free rider problem.
are no externalities.
are nonrivalry and nonexcludability.
are rivalry and excludability.
14. Which of the following is a key difference between the economic activities of government
and those of private firms?
A.
B.
C.
D.
Private firms face the constraint of scarcity; government does not.
Government focuses primarily on equity; private firms focus only on efficiency.
Private economic activities create externalities; government activities do not.
Government has the legal right to force people to do things; private firms do not.
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15. In a market economy, the government's power to coerce can:
A.
B.
C.
D.
undermine economic efficiency by increasing private sector risk.
improve economic efficiency by directing all resources to their most valued uses.
reduce private sector risk and increase economic efficiency.
cause significant negative externalities.
16. Weak government enforcement of contracts and laws tends to:
A. increase economic efficiency by minimizing government interference.
B. stimulate innovation and investment.
C. discourage economic activity by encouraging private sector coercion such as blackmail
and extortion.
D. not affect economic activity, as incentives for theft and deception are low.
17. Which of the following is a source of government failure?
A.
B.
C.
D.
The invisible hand.
The lack of bureaucracy in government.
The enormous size and scope of government.
Excessive flexibility.
18. The many layers of the federal government in the United States:
A. lead to economic inefficiencies because of difficulty aggregating and conveying
information.
B. enhance government's ability make effective decisions quickly.
C. better allow the invisible hand to direct government resources to their best uses.
D. improve accountability of government officials, thus leading to more efficient policies.
19. Government officials tend to make:
A. better economic decisions than private individuals because of the wealth of information at
their disposal.
B. better economic decisions than private individuals because of the efficient processes and
flexibility built into the government bureaucracy.
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C. inefficient choices because they lack the information necessary to accurately weigh
marginal benefits and marginal costs.
D. inefficient choices because the invisible hand directs them away from the resource
allocation where marginal benefits equal marginal costs.
20. In corporations, owners are __________________ and managers are ________________.
A.
B.
C.
D.
agents; principals
stockholders; bondholders
agents; employees
principals; agents
21. "Vote for my special local project and I will vote for yours." This political technique:
A.
B.
C.
D.
illustrates the paradox of voting.
is called "logrolling."
illustrates the median voter model.
undermines the benefitsreceived principle.
22. Factors that impede the attainment of economic efficiency in the public sector are called:
A.
B.
C.
D.
market failures.
externalities.
government failures.
voting irregularities.
23. Suppose American winemakers convince the federal government to issue a directive to serve
only domestically produced wine at government functions. This would be an example of:
A.
B.
C.
D.
moral hazard.
the principal agent problem.
logrolling.
rent seeking behavior.
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24. The pursuit through government of a "transfer of wealth" at someone else's expense refers to:
A.
B.
C.
D.
logrolling.
rent seeking behavior.
the paradox of voting.
the median voter model.
25. The political tendency to favor spending priorities with immediate benefits but deferred costs
results in:
A.
B.
C.
D.
chronic budget deficits.
misdirection of stabilization policy.
unfunded liabilities.
all of these.
26. The U.S. federal government's largest unfunded liability is:
A.
B.
C.
D.
Medicare.
national defense.
Social Security.
unemployment insurance.
27. Macroeconomics is mostly focused on:
A.
B.
C.
D.
the individual markets within an economy.
only the largest industries in the economy.
the economy as a whole.
why specific businesses fail.
28. The two topics of primary concern in macroeconomics are:
A.
B.
C.
D.
short run fluctuations in output and employment and long run economic growth.
unemployment and wage rates in labor markets.
monopoly power of corporations and small business profitability.
oil prices and housing markets.
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29. Which of the following is most closely related to recessions?
A.
B.
C.
D.
Positive long run economic growth.
Rapid growth in the price level.
Falling rates of unemployment.
Negative real growth in output.
30. Real GDP measures the:
A. total dollar value of all goods and services produced within the borders of a country using
current prices.
B. value of final goods and services produced within the borders of a country, corrected for
price changes.
C. total dollar value of all goods and services consumed within the borders of a country,
adjusted for price changes.
D. value of all goods and services produced in the world, using current prices.
31. Real GDP is preferred to nominal GDP as a measure of economic performance because:
A.
B.
C.
D.
nominal GDP uses current prices and thus may over or understate true changes in output.
nominal GDP only includes goods and excludes services.
nominal GDP is not adjusted for population changes.
real GDP accounts for changes in the quality of goods and services produced.
32. Harry's Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold for
$10 each. This year Harry's again produced 10,000 large pepperoni pizzas (identical to last
year's pizzas) but sold them for $12 each. Based on this information we can conclude that
Harry's production of large pepperoni pizzas:
A.
B.
C.
D.
increased both nominal and real GDP from last year.
increased nominal GDP from last year, but real GDP was unaffected.
increased real GDP from last year, but nominal GDP was unaffected.
did not change either nominal or real GDP from last year.
33. Why are high rates of unemployment of concern to economists?
A. Higher rates of unemployment generally lead to higher inflation rates.
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B. Environmental destruction is more prevalent when unemployment rates are high.
C. There is lost output that could have been produced if the unemployed had been working.
D. All of these options are reasons why economists are concerned about high unemployment
rates.
34. Inflation is defined as:
A.
B.
C.
D.
an increase in the overall level of prices.
the rate of growth in nominal GDP.
a situation where all prices in the economy rise simultaneously.
the growth phase of the business cycle.
35. Before the period of modern economic growth:
A.
B.
C.
D.
only civilizations such as the Roman Empire experienced economic growth.
rates of population growth virtually matched rates of output growth.
most economies realized high rates of growth in output per person.
output and population growth were stagnant.
36. Which of the following is used to measure directly the average standard of living across
countries?
A.
B.
C.
D.
Real GDP.
Nominal GDP.
Purchasing power parity.
GDP per person.
37. For an economy to increase investment, it must:
A.
B.
C.
D.
increase saving.
increase present consumption.
buy more stocks and bonds.
increase nominal GDP.
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38. Increased present saving:
A.
B.
C.
D.
comes at the expense of reduced current investment.
comes at the expense of reduced current consumption.
can only occur if the government increases the amount of money in circulation.
is only possible if the economy is experiencing positive growth in real GDP.
39. Shocks to the economy occur:
A.
B.
C.
D.
when expectations are unmet.
whenever the price level changes.
whenever government implements fiscal or monetary policy.
because most economic behavior is unpredictable.
40. Demand shocks:
A. refer to unexpected changes in the desires of households and businesses to buy goods and
services.
B. refer to unexpected changes in the ability of firms to produce and sell goods and services.
C. always have a negative impact on the economy.
D. cause fewer short run fluctuations than supply shocks.
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ECO 2013.018 Principles of Macroeconomics – Spring 2016
Practice Test #2 – Answer Key
1. A
2. A
3. B
4. B
5. A
6. C
7. A
8. C
9. A
10. D
11. C
12. A
13. C
14. D
15. C
16. C
17. C
18. A
19. C
20. D
21. B
22. C
23. D
24. B
25. D
26. C
27. C
28. A
29. D
30. B
31. A
32. B
33. C
34. A
35. B
36. D
37. A
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38. B
39. A
40. A
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