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Question 1: The demand for a product tends to be price inelastic if:

A. few good complements for the product are available.
B. few good substitutes for the product are available.
C. people spend a large share of their income on the product.
Explanation
B is correct. If a large price change results in a small change in quantity demanded, demand is inelastic. Cigarettes are an
example of a good with inelastic demand.

Question 2: Which of the following most accurately describes a market with a single seller of a product that has no good
substitutes?
A. Monopoly.
B. Monopolistic competition.
C. Oligopoly.
Explanation
A is correct. A monopoly is characterized by one seller, a specific and well-defined product for which there is no good
substitutes, and high barriers to entry.

Question 3: Given the following quotes, GBP/USD 2.0000 and MXN/USD 8.0000, calculate the direct MXN/GBP spot cross
exchange rate.
A. 0.2500.
B. 4.0000.
C. 0.6250.
Explanation
B is correct. Invert the first quote to read USD/GBP 0.5000. Then, 0.5000 × 8.0000 = 4.0000 MXN/GBP.

Question 4: Regional trade agreements exist primarily to:

A. improve economic welfare for their members.
B. lower currency volatility for their members.
C. protect their members from unfair trading practices by non-members.
Explanation
A is correct. The primary reason countries join regional trade agreements is to improve economic welfare by reducing or
eliminating trade restrictions.

Question 5: If the country of Smithia enacts sanctions against the political leaders of Jonesia, Smithia is said to be using:
A. a national security tool of geopolitics.
B. an economic tool of geopolitics.
C. a financial tool of geopolitics.
Explanation
C is correct. Sanctions refer to restrictions on the financial interests of specific geopolitical actors and are considered a
financial tool of geopolitics.

Question 6: A price index that is calculated using the current consumption weights of the index's basket of goods and services
is known as a:
A. Paasche price index.
B. hedonic price index.
C. Laspeyres price index.
Explanation
A is correct. A Paasche index uses the current consumption weights for each good and service in its market basket. A
Laspeyres index is calculated using base period consumption weights for each good and service in the market basket. Hedonic
pricing is a technique used to adjust a price index for upward bias from quality changes of goods in its market basket.

Question 7: The unemployment rate is the number of unemployed individuals divided by the:
A. number of employed individuals.
B. working-age population.
C. total labor force.
Explanation
C is correct. The unemployment rate of a country is the percentage of people in the labor force who are unemployed. It is
calculated as: unemployment rate = (number of unemployed / labor force) × 100. The labor force includes those individuals
who are employed or are actively seeking employment. The working-age population includes individuals not in the labor
force.

Question 8: When potential real GDP is less than actual real GDP, the economy is most likely experiencing:
A. inflation.
B. recession.
C. underemployment.
Explanation
A is correct. The economy is in an inflationary phase if actual real GDP is greater than potential real GDP. When actual real
GDP equals potential real GDP, the economy is said to be at full employment. The economy is in a recessionary phase if real
GDP is less than potential GDP.

Question 9: Concentration measures are most likely to be used to:

A. analyze barriers to entry into an industry.
B. identify the market structure of an industry.
C. measure elasticity of demand facing an industry.
Explanation
B is correct. Concentration measures are used to identify the market structure of an industry (perfect competition,
monopolistic competition, oligopoly, or monopoly). Concentration measures do not directly indicate an industry's barriers to
entry or elasticity of demand.

Question 10: According to the law of diminishing returns, doubling the number of salespeople for a firm will most likely
result in:
A. decreasing the total sales of the firm as a result of competition amongst salespeople.
B. doubling the total sales of the firm.
C. increasing the total sales of the firm and reducing the average sales per salesperson.
Explanation
C is correct. The law of diminishing returns states that as more of a resource is added to a production process, holding other
resource use constant, increases in output will eventually decrease. Therefore, as more salespeople are added they will
generate more sales at a decreasing rate. Total sales will increase and the average sales per salesperson will decrease.

Question 11: If private saving equals private business investment, a trade surplus implies that there is:
A. a fiscal surplus.
B. no fiscal surplus or deficit.
C. a fiscal deficit.
Explanation
A is correct. The fundamental relationship among saving, investment, the fiscal balance, and the trade balance is stated as:
(G – T) = (S – I) – (X – M). If S = I, this equation becomes (G – T) = – (X – M), or (T – G) = (X – M). In this case, if the
trade balance is in surplus (exports are greater than imports), the fiscal balance must also be in surplus (taxes are greater than
government spending).

Question 12: Assume the Federal Reserve purchases $1 billion of securities in the open market. What is the maximum
increase in the money supply that can result from this action, if the required reserve ratio is 15%?
A. $1.00 billion.
B. $6.67 billion.
C. $850 million.
Explanation
B is correct. The money multiplier is 1 / 0.15 = 6.67, so the open market purchase can increase the money supply by a
maximum of $6.67 billion.

Question 13: Which of these is most likely to be described as an event risk?

A. An earthquake
B. An election
C. An ongoing civil war
Explanation
B is correct. Event risk evolves around set dates, such as elections and new legislation, or other date-driven milestones, such
as holidays or political anniversaries known in advance. The other choices could not be known in advance. An earthquake
(A) is an example of an exogenous risk. An ongoing civil war (C) is an example of a thematic risk.

Question 14: In the context of foreign trade, limits on the amounts of imports a country allows over some period are best
described as:
A. tariffs.
B. quotas.
C. subsidies.
Explanation
B is correct. Quotas are limits on the amounts of imports allowed into a country in a period of time. Government payments
to firms that export goods are known as export subsidies. Taxes on imported goods collected by the government are known
as tariffs.

Question 15: When forward currency exchange-rate contracts are available, the difference between the spot and forward
exchange rates for a pair of currencies is most likely to reflect the difference between the two countries:
A. economic growth rates.
B. risk-free interest rates.
C. annual inflation rates.
Explanation
B is correct. Investing the domestic currency at the domestic interest rate should earn the same return as buying a foreign
currency at the spot exchange rate, investing at the foreign interest rate, and selling the foreign currency proceeds at the
forward exchange rate. If both currencies trade freely and participants can enter forward contracts, arbitrage trading will cause
the percentage difference between the forward and spot exchange rates to be approximately equal to the difference between
interest rates in the two countries.

Question 16: If the price of its product is less than its average total cost in the long run, a firm operating under perfect
competition should:
A. keep operating only if it is covering its variable costs.
B. shut down.
C. keep operating and attempt to eliminate its fixed costs.
Explanation
B is correct. If the price is below average total cost then the firm is losing money. In the short run a firm should keep operating
if it is covering its variable costs, but in the long run if the firm believes the price will never exceed average total cost, the
only way to eliminate fixed costs is to go out of business.

Question 17: Natural monopolies exist because they can produce at lower costs with greater output, which means there are
economies of scale. Which of the following industries is typically a natural monopoly?
A. Utilities.
B. Technology.
C. Oil.
Explanation
A is correct. With a natural monopoly average costs of production will be lowest when a single large firm produces the entire
output demanded such as a utility.

Question 18: Total investment is one of the components of a country's GDP. Which of the following is least likely to be
considered a source of funds for investment?
A. Household expenditures.
B. National savings.
C. Foreign borrowing.
Explanation
A is correct. Total investment is one of the major components of GDP (the others are consumption, government spending,
and net exports). Investment is defined as expenditures allocated to fixed assets and inventory. The sources of funds for
investment are national savings, foreign borrowing, and government savings.

Question 19: Firms' initial responses to an emerging economic contraction are most likely to be:
A. reducing overtime hours.
B. deferring maintenance of machinery.
C. laying off workers.
Explanation
A is correct. Early in an economic contraction, firms typically reduce output by using capital and labor less intensively than
during an expansion (e.g., by reducing overtime). When they believe a contraction is likely to persist, firms decrease capacity
by laying off workers and reducing their physical capital, often by deferring maintenance or not replacing worn-out equipment.

Question 20: Which of the following statements regarding the monetary policy transmission mechanism is most accurate?
A. Central banks can control long-term interest rates directly because decisions by consumers and businesses are based on
these rates.
B. Central banks can control short-term interest rates by increasing the money supply to increase interest rates or by
decreasing the money supply to decrease interest rates.
C. Central banks can control short-term interest rates directly, but long-term interest rates are beyond their control.
Explanation
C is correct. Central banks can control short-term interest rates directly. However, the decisions of consumers and businesses
are based on long-term interest rates, which are beyond the control of central banks. Increasing the money supply will decrease
interest rates and decreasing the money supply will increase interest rates.

Question 21: The Fisher effect holds that a nominal rate of interest equals a real interest rate:
A. plus the expected inflation rate.
B. minus the observed inflation rate.
C. plus the observed inflation rate.
Explanation
A is correct. The Fisher effect states that a nominal rate of interest equals a real rate plus expected inflation.

Question 22: Which group is most likely to benefit from a quota imposed on imports of a good?
A. Domestic producers of the good.
B. Foreign consumers of the good.
C. Domestic consumers of the good.
Explanation
A is correct. Quotas restrict the supply of imported goods, which increases the price domestically, benefiting domestic
producers but harming domestic consumers. While some specific foreign producers may also benefit from the higher prices
created by the quota if they receive the revenue transfer (due to higher prices received for all goods sold under the import
license), foreign producers as a whole are likely to experience decreased sales in the country that imposes a quota.

Question 23: Which of the following statements concerning aggregate demand is most accurate?
A. When price levels fall, real wealth increases, and individuals will spend less.
B. When price levels rise, real wealth increases, and individuals will spend more.
C. When price levels rise, real wealth decreases, and individuals will spend less.
Explanation
C is correct. When price levels rise, real wealth decreases, and we would expect individuals to spend less. If price levels fall,
real wealth increases, and we would expect individuals to spend more.

Question 24: In the dominant firm model of oligopoly, it is least likely that one firm:
A. is the innovation leader in product development.
B. has a significant cost advantage over its competitors.
C. effectively sets the price in the market.
Explanation
A is correct. The dominant firm model of oligopoly is based on the assumption that one firm has a significant cost advantage
which allows it to set the price in the market and control a relatively large share of the industry's production and sales. It does
not assume that the firm will be the innovation leader in product development. In fact, being more innovative is one of the
factors that allow smaller competitors that work at a cost disadvantage to survive.

Question 25: The cross-price elasticity of demand for a substitute good and the income elasticity for an inferior good are:
Cross elasticity Income elasticity
A. <0 <0
B. >0 <0
C. <0 >0
Explanation
B is correct. The cross price elasticity of substitutes is positive, and the income elasticity of an inferior good is negative.

Question 26: The production function approach to explaining economic growth focuses on:
A. the effects on producers of fiscal and monetary policy.
B. shifts in the aggregate demand and supply curves.
C. productivity, the labor force, and the capital stock.
Explanation
C is correct. The production function approach relates a country's economic output to its inputs of capital and labor and its
levels of productivity.

Question 27: The supply of money is primarily determined by:

A. inflation.
B. interest rates.
C. the monetary authorities.
Explanation
C is correct. The monetary authorities determine the quantity of money available to the economy. Inflation and interest rates
affect the demand for money balances.

Question 28: Which of the following actions by a country is most likely a form of geopolitical cooperation?
A. Acting as a conduit for trade
B. Engaging in rules standardization
C. Opting to use soft power over military retaliation
Explanation
B is correct. Political cooperation is associated with anything related to agreements of rules and standardization, with
countries working together towards some shared goal. A cooperative country is one that engages and reciprocates in rules
standardization. A is incorrect because acting as a conduit of trade, like Panama, involves non-cooperatively using a country’s
geographic location as a lever of power in broader international dynamics. C is incorrect because both soft power and military
retaliation are examples of non-cooperative behavior, with the former being a less extreme means to influence another
country’s decisions without force or coercion.

Question 29: In the Ricardian model of trade, the source of comparative advantage is:
A. capital productivity.
B. labor productivity.
C. the difference between labor productivity and capital productivity.
Explanation
B is correct. The Ricardian model of trade only considers labor as a factor of production. Comparative advantage results from
differences in labor productivity. Labor and capital inputs are both considered in the Heckscher–Ohlin model of trade.

Question 30: If we compare the prices of goods in two countries through time, we can use the price information in concert
with the quoted foreign exchange rate to calculate the:
A. interest rate spread.
B. nominal exchange rate.
C. real exchange rate.
Explanation
C is correct. A comparison of consumption costs between two markets can, in concert with the foreign exchange rate (also
called the nominal exchange rate), be used to calculate the real exchange rate.

Question 31: A government that is implementing a contractionary fiscal policy is most likely to:
A. increase spending on public works.
B. decrease transfer payments to households.
C. decrease income tax rates.
Explanation
B is correct. Decreasing spending or increasing taxes are contractionary fiscal policy actions. Increasing spending or
decreasing taxes are expansionary.

Question 32: When individuals are unemployed because they do not have perfect information concerning available jobs, this
is:
A. frictional unemployment.
B. natural unemployment.
C. structural unemployment.
Explanation
A is correct. Frictional unemployment exists because workers and employers do not have perfect information and must
expend time and resources on search activities.

Question 33: Because some input prices do not adjust rapidly to changes in the price level, the short-run aggregate supply
curve:
A. exhibits a negative relationship between quantity supplied and the price level.
B. is more elastic than the long-run aggregate supply curve.
C. may be interpreted as representing the economy’s potential output.
Explanation
B is correct. The short-run aggregate supply curve slopes upward (i.e., is not perfectly inelastic) because in the short run
some input prices do not adjust fully to changes in the price level. Because firms can increase profit in the short run by
increasing output in response to higher prices, there is a positive short-run relationship between the price level and quantity
supplied.

Question 34: A country's central bank announces a monetary policy goal of a stable exchange rate with the euro, which it
defines as deviations of no more than 3% from its current exchange rate of 2.5000. The country's exchange rate regime is best
described as a:
A. crawling band.
B. fixed peg.
C. target zone.
Explanation
C is correct. This exchange rate regime is best described as a target zone, or a system of pegged exchange rates within
horizontal bands. A target zone allows wider exchange rate fluctuations than a conventional fixed peg arrangement, which
typically limits the permitted range to within 1% of the pegged exchange rate. Management of exchange rates within crawling
bands allows the percentage deviation from the pegged exchange rate to increase over time.

Question 35: The following chart indicates the production possibilities of food and drink per day in Country A and Country
B.
Units of Output Per Day
Country A Country B
Food 9 5
Drink 7 5

Which of the following statements is most accurate?

A. Since B workers can produce more of food and drink than A workers, no gains from trade are possible.
B. Mutual gains could be realized from trade if A specialized in drink production and B specialized in the food production.
C. Mutual gains could be realized from trade if A specialized in food production and B specialized in drink production.
Explanation
C is correct. Mutual gains could be realized from trade if A specialized in food production and B specialized in drink
production. The reason centers on comparative advantage. Country A must give up 7/9th unit of drink to produce one unit of
food. Country B must give up 1 unit of drink to produce one unit of food. Therefore, the opportunity cost of producing food
is greater for B than for A. If B produces 5 units of drink and A produces 9 units of food, total production will be greater than
it would be if both countries produced both goods. By trading, both countries benefit.

Question 36: The open market sale of Treasury securities by the Federal Reserve is least likely to result in:
A. increased longer-term interest rates.
B. a decreased rate of inflation.
C. increased exports of U.S. goods.
Explanation
C is correct. When the Fed sells Treasuries, it causes both short- and long-term interest rates to increase. This rate increase
causes the dollar to appreciate, which reduces foreign demand for domestic goods, causing exports to decline. The interest
rate increase also puts downward pressure on price levels, which causes inflation to slow.
Question 37: Gene Bawerk, an economics professor, is lecturing on the factors that influence the price elasticity of demand.
He makes the following assertions:

• Statement 1: For most goods, demand is more elastic in the long run than the short run.
• Statement 2: Demand for a good becomes more elastic when a close substitute for it becomes available on the market.

With respect to Bawerk's statements:

A. only statement 1 is correct.
B. only statement 2 is correct.
C. both are correct.
Explanation
C is correct. Both of these statements are accurate. Price elasticity for most goods is greater in the long run because individuals
can make long-term decisions that require different quantities of the good, such as buying more fuel efficient vehicles to use
less gasoline. Price elasticity is greater the better the available substitutes because an increase in price will lead more buyers
to switch to the substitute products.

Question 38: At a recent symposium, "The Great Economic Debate of the Decade" several panelists were asked to state their
opinions on aggregate demand and aggregate supply.
Panelist 1 stated that he believed shifts in both aggregate demand and aggregate supply were driven primarily by changes
in technology over time.
Panelist 2 stated that she believed the focus of economic policy should be to directly increase aggregate demand by
increasing the money supply or through fiscal policy.
The views of Panelist 1 and Panelist 2 would best be described as which economic school of thought?
Panelist 1 Panelist 2
A. Keynesian New Keynesian
B. Neoclassical Keynesian
C. New Classical Monetarist
Explanation
B is correct. The neoclassical economists believe that shifts in both aggregate demand and aggregate supply are primarily
driven by changes in technology over time. Keynesian economists believe that aggregate demand can be increased through
monetary policy (increasing the money supply) or through fiscal policy (increasing government spending, decreasing taxes,
or both). They do not focus on aggregate supply. Monetarists believe that the main factor leading to business cycles and
deviations from full-employment equilibrium is monetary policy.

Question 39: The Marshall-Lerner condition suggests that a country's ability to narrow a trade deficit by devaluing its
currency depends on:
A. capacity utilization in the domestic economy.
B. elasticity of demand for imports and exports.
C. national saving relative to domestic investment.
Explanation
B is correct. The Marshall-Lerner condition is an outcome of the elasticities approach to analyzing the balance of trade. It
suggests that depreciation or devaluation of a currency is more likely to narrow a country's trade deficit if domestic demand
for imports and foreign demand for the country's exports are more elastic. The absorption approach to analyzing the balance
of trade implies that national saving must increase relative to domestic investment for a currency devaluation to narrow a
trade deficit, which in turn depends on whether the economy is producing at maximum capacity (full employment or potential
GDP) when the devaluation occurs.

Question 40:
• Statement 1: "The kinked demand curve model of oligopoly assumes that a decrease in price will not be followed
by other firms in the industry, but a price increase will."
• Statement 2: "Firms in monopolistic competition have high advertising expenses because they want to create the
perception that their product is different from their competitors' products when the competing products are actually
quite similar."
With respect to these statements:
A. both are correct.
B. both are incorrect.
C. only one is correct.
Explanation
C is correct. Statement 1 is incorrect because the kinked demand curve model contends that each firm in oligopoly
competition believes that an increase (not decrease) in its price will not be followed by the competition, but a decrease (not
increase) in price will. Each firm believes that it faces a demand curve that is more elastic (flatter) above a given price, i.e.,
the kink, than it is below the given price.