TEST 1: PRACTICE

MULTIPLE-CHOICE QUESTIONS

1. Economics is the study of

a. Money
b. Fiscal and monetary policy
c. Government regulation
d. Choices made by people, firms, and governments

2. Each month, Jim deposit $100 into his saving account. The opportunity cost of doing this is:
a. Nothing because he still has the money
b. Enjoyment that he would receive if he used $100 to buy products and entertainment
c. $100 minus income tax
d. Income he receives on his saving account

3. Steve buys a new big screen TV for $1,000 instead of putting $1,000 into a one-year deposit
with 10% interest. The opportunity cost of buying a TV is
a. $1,000
b. $100
c. $1,000 plus $100 he would have received next year
d. The increased entertainment value from watching this TV
e. The increased entertainment value from watching this TV minus $100 he could have
earned on the deposit

4. The opportunity cost of going to college is…

a. the tuition fee.
b. the sum of all money a student spends on food, clothing, books, transportation, tuition
and other expenses.
c. the value of the best opportunity that a student gives up to attend college.
d. nothing since education will allow the student to earn a larger income after graduation.

5. Which event would shift the demand curve to the left?

a. Rising labour costs
b. Rising costs of inputs for production
c. High inflation
d. Consumers’ pessimism

6. Which event would shift the supply curve to the left?

a. Rising labour costs
b. High inflation
c. Shrinking demand
d. All of the above
7. What happens at a price of $15?
a. There would be a shortage of 400 units.
b. There would be a shortage of 200 units.
c. There would be a surplus of 200 units.
d. There would be a surplus of 400 units.
e. The market would be in equilibrium.

8. What happens at a price of $15?

a. A shortage would exist and the price would tend to fall.
b. A shortage would exist and the price would tend to rise.
c. A surplus would exist and the price would tend to rise.
d. A surplus would exist and the price would tend to fall.

9. Which indicator shows growth of the economy?

a. The growth rate of the nominal GDP
b. The growth rate of the real GDP
c. The growth rate of the GDP deflator
d. The growth rate of prices of the base year.

10. The nominal GDP increased by 3% in 2010. We can conclude that in 2010,
a. The economy produced more of goods and services.
b. Prices for domestically produced goods and services increased.
c. Living standards of people in this country increased.
d. All of the above
e. Neither

11. Suppose the demand for gasoline increases AND the supply of gas decreases. Which of the following
is NOT a possible outcome of these changes in the market for gas?
a. The equilibrium price rises.
b. The equilibrium price stays the same.
c. The equilibrium quantity falls.
d. The equilibrium quantity rises.
12. Suppose that the number of buyers in a market decreases and a technological advancement
occurs. What would we expect to happen in the market?
a. The equilibrium price would increase, but the impact on the amount sold in the
market would be ambiguous.
b. The equilibrium price would decrease, but the impact on the amount sold in the
market would be ambiguous.
c. Equilibrium quantity would increase, but the impact on equilibrium price would
be ambiguous.
d. Both equilibrium price and equilibrium quantity would increase.

13. What will happen to the equilibrium price of new textbooks if more students attend university,
paper becomes cheaper, textbook authors accept lower royalties, and fewer used textbooks are
sold?
a. price will rise
b. price will fall
c. price will stay exactly the same
d. price change will be ambiguous

14. The real GDP measures

a. Prices for domestically produced goods and services in a given year.
b. Domestically produced goods and services at current market prices.
c. Domestically produced goods and services at prices of the base year.
d. Goods and services produced in Canada since the base year.

15. If the unemployment rate increases from 8% to 10%, the growth rate of the unemployment
rate is…
a. 0.2%
b. 2%
c. 20%
d. 25%
e. None of the above.

16. The GDP deflator shows…

a. change in current prices relative to the base year.
b. change in constant prices relative to the base year.
c. change in quantities produced.
d. overall growth of the economy.

17. If the nominal GDP increases, we can conclude that…

a. the country produced more goods and services.
b. prices for domestically produced goods and services increased since the base year.
c. both quantities produced and prices increased.
d. None of the above.
18. If the real GDP increases, we can conclude that…
a. the country produced more goods and services.
b. prices for domestically produced goods and services increased since the base year.
c. both quantities produced and prices increased.
d. None of the above.

19. If the GDP deflator increases, we can conclude that…

a. the country produced more goods and services.
b. prices for domestically produced goods and services increased since the base year.
c. both quantities produced and prices increased.
d. None of the above.

20. Stan spent three hours studying instead of sleeping. What is his tradeoff?
a. The three hours of sleep that he could have gotten
b. The material that he learned while studying
c. There is no tradeoff because we can’t put a price on sleep.
d. There is no tradeoff because it was his conscious choice to sacrifice sleep for studying.

21. During the US presidential election campaign of 2015, Donald Trump said: “Last quarter, it
was just announced that our Gross Domestic Product – the sign of strength but not for us – it
was below zero.” Since neither the nominal nor the real GDP can actually fall below zero, what
did Donald Trump most likely mean?
a. The growth rate of the nominal GDP was negative.
b. The growth rate of the real GDP was negative.
c. The growth rate of the GDP deflator was negative.

22. “Under President Obama, the US economy grew by 1.5% a year.” What does this statement
mean?
a. The nominal GDP grew by 1.5% a year.
b. The real GDP grew by 1.5% a year.
c. The GDP deflator grew by 1.5% a year.
d. All of the above.

23. Country A sells $100 million worth of goods and services to country B. Country B sells $50
million worth of goods and services to country A. If these are the only two countries in the
world, the net exports in country B equal:
a. $50 million.
b. -$50 million.
c. $150 million.
d. -$150 million.
EXERCISES

1. Andrea has decided to do an intense MBA. The tuition fee is $15,000; textbooks cost $1,000;
her meal expenses will amount to $5,000. The university is going to give her a scholarship of
$3,000. What is the opportunity cost for her to pursue a master degree?

2. Gabriella has decided to do a master degree in Sociology. The program will cost $3,000 in
tuition fees. Her textbooks will cost $700. She is going to give up her full-time job with an
annual salary of $36,000 but she is going to work as a research assistant at the department of
Sociology which will give her a salary of $5,000 per year. Her living expenses (food, rent, cloth,
etc) will amount to $25,000 each year. What is the opportunity cost for her to pursue a master
degree?

3. For simplicity, let’s assume that Canada produces only two types of goods, military goods and
consumption goods. Draw the PPF for Canada and show the result of each of the following (use
a separate graph for each question):

a. Each year, Canada admits 400,000 immigrants.

b. More Canadians get university education: if in 1951, 2% of Canadians held a university
degree, currently 15% of Canadians have it.
c. Despite his reputation of pacifist, Pierre Trudeau increased military spending like no
other prime minister of Canada did (in this question, assume that Canada had been
using all its resources).
d. The current recession pushes unemployment up.
e. Technological advances make military production less expensive.
f. In Alberta, intensive oil exploration permanently damages environment.
4.

a. At which point or points can the economy produce?

b. Which point represents the maximum possible production of tubas?
c. At which point or points can the economy NOT produce?
d. Which point or points are efficient?

5. Consider the iTunes Store (Apple’s online store that sells songs). Graphically illustrate the
impact each of the following events would have on demand and/or supply of songs. Answer
how the equilibrium price and quantity would likely change.

a. In 2008-09, when most countries were suffering from severe recession, many people
lost their jobs.
b. In 2009-10, Apple launched new products (iPad, iPod, etc.) that can be used for playing
songs.
c. New songs are added to the iTunes catalog every day.
d. Apple products are getting increasingly popular.
e. What would happen if events in c) and d) happened at the same time?
f. Consumers expect high inflation and therefore, higher prices for downloaded songs in
the near future.
6. This country produces two goods, A and B. Below are quantities and prices for those goods.
2010 2011

Quantity of good A produced (in thousands of 100 105

units)

Prices for good A 10 11

Quantity of good B produced (in thousands of 200 210

units)

Prices for good B 50 51

a) Find the nominal GDP for each year.

b) Find the real GDP for each year taking the year of 2011 as the base year.
c) Find the GDP deflator for each year.
d) Fill in blanks:

 The economy grew by _______% over 2010-2011.

 Prices for domestically produced goods and services increased by ______%.

7. Consider Greece:

2009 2010
GDP, current prices (in billions of 237 238
euro)
GDP deflator (base year is 2000) 131 134
a. What is the growth rate of the GDP in current prices?
b. What is the growth rate of the Real GDP?
c. What is the growth rate of the GDP deflator?
d. If the Real GDP declines by 5% in 2011, what is the Real GDP of 2011?
e. Find the Real GDP of 2008, if you know that during 2008-2009, the Greek economy
declined by 3%.
f. Fill in the blanks:
 The Greek economy _________________________ (grew or declined) by _______ %.

 Prices in Greece _____________________ (increased or decreased) by _____%.

8. Fill in blanks:

2010 2011 2012

Nominal GDP (billions) 15 18

Real GDP (billions) 14 15

GDP deflator (index) 110 111

9. This country produces computers and phones:

Year Computer Price of a Phones Price of a phone

computer

2000 10 $2 20 $4

2001 11 $3 22 $3

2002 15 $4 25 $2

Fill in blanks if the base year is 2002:

The economy ___________________(grew or declined) by _________% in 2001.

The economy ___________________(grew or declined) by _________% in 2002.

Prices for domestically produced goods and services __________________ (rose or fell)

by ________________% in 2001.

Prices for domestically produced goods and services __________________ (rose or fell)

by ________________% in 2002.
10. Fill in blanks:

2020 2021

GDP, current prices ($ billions) 100

Growth rate of GDP in current --- 10

prices (%)

GDP, constant prices ($ billions) 100

Growth rate of GDP in constant ---

prices (%)

GDP deflator (index)

Growth rate of GDP deflator (%) --- 5

SELECTED ANSWERS

Multiple-choice questions:

1d 2b 3b 4c 5d 6a 7a 8b 9b 10e 11b 12b 13d 14c 15d 16a 17d 18a 19b 20a
21b 22b 23b

Exercises:

1. $13,000
2. $34,700

3. On the graph of the PPF, you should show the following:

a. PPF shifts upward;
b. PPF shifts upward;
c. Canada moves along the PPF;
d. Canada moves inside the PPF;
e. PPF shifts upward so that Canada is able to produce more of military goods but the
same amount of consumption goods;
f. PPF shifts inward.

4. a) B,E,D b) E c) A, C d) B,E.

5. You should be able to apply the S&D analysis for these situations. After drawing the S&D
graphs, you should receive these answers:
a. p ↓ q ↓
b. p ↑ q↑
c. p ↓ q↑
d. p ↑ q↑
e. p ? q↑
f. p ↑ q↑

6. a) 11,000 and 11,865 b) 11,300 and 11,865 c) 97.35% and 100%

d) Economy grew by 5%. Prices increased by 2.73%.

7.
a. 0.42%
b. - 1.83%
c. 2.29%
d. 168.73 billion.
e. 186.52 billion.
f. The Greek economy declined by 1.83 %. Prices increased by 2.29%.
8.
2010 2011 2012

Nominal GDP (billions) 15 16.5 18

Real GDP (billions) 14 15 16.22

GDP deflator (index) 107.14 110 111

9. The economy grew by 10% in 2001 and by 25% in 2002. Prices fell by 10% in 2001 and they
fell by 11.11% in 2002.

10.

2020 2021

GDP, current prices ($ billions) 100 110

Growth rate of GDP in current prices (%) --- 10

GDP, constant prices ($ billions) 100 104.76

Growth rate of GDP in constant prices (%) --- 4.76

GDP deflator (index) 100 105

Growth rate of GDP deflator (%) --- 5