Economics Quiz

What is the fundamental problem that economics attempts to address?

• Determining the appropriate level of government spending in an economy

• How to maintain full employment output

• How to fulfill unlimited wants with limited resources

• What policies will stimulate the most economic growth

• Whether or not to restrict international trade to achieve more favorable terms of trade

Answer explanation

The fundamental problem of economics is how to fulfill unlimited wants with limited resources. This choice highlights the core issue of scarcity, which drives economic decision-making and resource allocation.

Which of the following describes scarcity?

• Wants are limited.

• Wants exceed resources.

• Resources are unlimited.

• Resources are fully employed.

• Resources are allocated efficiently.

Answer explanation

Scarcity occurs when wants exceed resources, meaning there are not enough resources to satisfy all desires. This highlights the fundamental economic problem of limited resources against unlimited wants.

Which of the following describes the law of supply?

• An increase in the price of a good will decrease the quantity demanded.

• The price of a good will increase if production input costs increase.

• An increase in taxes will decrease the supply of a good.

• An increase in the number of sellers will increase the supply of a good.

• An increase in the price of a good will increase the quantity supplied.

Answer explanation

The law of supply states that as the price of a good increases, producers are willing to supply more of it. Therefore, an increase in the price of a good will increase the quantity supplied.

Any point inside a production possibilities curve is

• better than points on the production possibilities curve.

• allocatively efficient but technologically inefficient.

• associated with inefficient use or unemployment of some resources.

• associated with movements along the production possibilities curve.

• associated with constant opportunity costs.

Answer explanation

Any point inside a production possibilities curve indicates that resources are not being used efficiently, leading to potential unemployment of some resources, making this choice the correct answer.

The diagram below shows the production possibilities curve for an economy that produces only two goods: X and Y. The opportunity cost of moving production from point R to point T is

• one unit of Good Y

• five units of Good Y

• six units of Good Y

• three units of Good X

• seven units of Good X

Answer explanation

To find the opportunity cost of moving from point R to point T, we look at the decrease in Good Y produced. The curve shows a decrease of six units of Good Y, making the correct answer six units of Good Y.

The table above shows the quantity demanded and quantity supplied for bushels of wheat at various prices. Which of the following combinations is the equilibrium price and quantity for wheat?

• $1.50, 20,000 bushels

• $1.25, 25,000 bushels

• $1.00, 30,000 bushels

• $0.75, 35,000 bushels

• $2.00, 10,000 bushels

Answer explanation

The equilibrium price occurs where quantity demanded equals quantity supplied. At $1.50, both demand and supply are 20,000 bushels, making it the correct equilibrium price and quantity for wheat.

Which of the following is always true of an economy operating on its production possibilities frontier?

• Its resources are fully employed.

• It is allocatively efficient.

• It cannot trade with other nations because it is the most efficient producer of tradeable goods.

• It will necessarily operate on the same frontier the following year.

• It must be a command economy.

Answer explanation

An economy on its production possibilities frontier uses all its resources efficiently, meaning they are fully employed. This is the defining characteristic of such an economy.

Which of the following is true according to the circular flow model?

• Firms are suppliers in both the product and factor markets.

• Firms are demanders in the product markets and suppliers in the factor markets.

• Households are demanders in both the product and factor markets.

• Households are demanders in the product markets and suppliers in the factor markets.

• The government is a demander in the product market only.

Answer explanation

According to the circular flow model, households purchase goods in product markets (demanders) and provide labor in factor markets (suppliers). Thus, the correct statement is that households are demanders in the product markets and suppliers in the factor markets.

Which of the following will happen if the actual inflation rate is greater than the expected inflation rate?

• Lenders of fixed interest rate loans will be better off.

• Lenders of variable interest rate loans will be worse off.

• Borrowers of fixed interest rate loans will be worse off.

• Borrowers of fixed interest rate loans will be better off.

• Borrowers of variable interest rate loans will be better off.

Answer explanation

If actual inflation exceeds expected inflation, the real value of fixed-rate loan repayments decreases. Thus, borrowers of fixed interest rate loans benefit as they repay less in real terms, making them better off.

According to the business cycle represented in the diagram above, the actual rate of unemployment equals the natural rate of unemployment when the economy is

• in expansion

• in contraction

• at the peak

• at the trough

• on the potential line

Answer explanation

The actual rate of unemployment equals the natural rate when the economy is on the potential line, indicating full employment without cyclical unemployment. This occurs neither in expansion nor contraction.