FSOT Economics Practice Review

1. Which best defines laissez-faire capitalism?

1. Business activity and natural resource usage and distribution are not regulated by the government 
2. Government controlled distribution of natural resources with little involvement in other sectors of the economy 
3. Ownership of the means of productions is split between public and private entities
4. Existence of extensive legislation governing internal trade

2. A statement from Exxon-Mobile that their third quarter profits were down 15% from last year is an example of:

1. Normative economics 
2. Positive economics 
3. Macroeconomics 
4. Differentiated economics

3. Which of the following defines the opportunity cost of production?

1. Using a resource in one capacity in production eliminates the ability to use it in another 
2. Loss of potential profit in order to capture a larger market share 
3. Streamlining production costs to maximize profit 
4. Increasing overhead costs in order to expand production

4. Which best describes the economy of the United Kingdom of Great Britain?

1. Traditional economy 
2. Command economy 
3. Market economy 
4. Mixed economy

5. Economist and philosopher Adam Smith’s expression, “the invisible hand” refers to a theory or belief that:

1. the greed of capitalists seeking wealth actually helps the poor in society 
2. the world economy is governed by a series of natural laws 
3. outside forces beyond human control influence the economy 
4. governments should not impose economic regulation

6. Which best describes the calculation of GNP or Gross National Product?

1. The total value of goods and services produced domestically, plus income earned by citizens outside the country, less foreigner’s income from domestic production 
2. The total value of goods and services produced domestically by all workers 
3. The total value of goods and services produced domestically less production costs except wages paid 
4. The total value of goods and services produced domestically, less income from foreign workers producing domestically, less the total value of goods consumed domestically

7. In the United States changes in the money supply are controlled by:

1. the U.S. Treasury Department 
2. the Federal Reserve Bank 
3. the House Committee on Financial Services 
4. the Bureau of Engraving and Printing

8. If you purchase a 10 year, $15000.00 bond with an annual coupon rate of 6%, what is your total return at maturity?

1. $900.00 
2. $9000.00 
3. $15900.00 
4. $24000.00

9. In graphing supply and demand, at what point is market equilibrium achieved?

1. When supply is slightly above demand 
2. When supply is slightly below demand 
3. When supply and demand intersect 
4. When demand is significantly above supply

10. In the United States which industry could best be defined as an oligopoly?

1. Shoe manufacturing 
2. Automobile manufacturing 
3. Publishing 
4. Home construction

11. What do most economists view as the main economic problem facing the world, the reason for the study of economics?

1. Scarcity 
2. Currency inflation 
3. Trade imbalance 
4. Recession

12. According to the law of demand, the relationship between price and quantity of goods demanded is:

1. inverse 
2. reciprocal 
3. converse 
4. equal

13. Which United States government agency investigates claims of fraud and false advertising as well as allegations of business or industry price fixing?

1. CPSC 
2. FTC 
3. BBB 
4. FCC

14. If productivity is the amount of output that is generated per unit of input, what would the productivity of labor be if ABC Sprockets produced 2,000,000 sprockets in two weeks, while employing 10 workers each working 40 hours per week?

1. 2500 per hour 
2. 400,000 per worker 
3. 4,000,000 per week 
4. 400 per week

15. Which of the following industries in the United States is not an example of monopolistic competition?

1. Electric service providers 
2. Fast food restaurants 
3. Cosmetics companies 
4. Athletic shoe manufacturers

16. Which of the following tax types would affect all groups equally regardless of income?

1. Progressive 
2. Proportional 
3. Regressive 
4. Excise

17. Which action would support the principle of supply side economics?

1. A business slashes prices to move excess inventory 
2. The government cuts taxes to encourage increased investment 
3. The government imposes trade restrictions to increase imports 
4. Industry leaders collaborate on pricing strategies

18. Which government agency regulates the process for certifying labor unions as representatives of certain groups of workers?

1. FTC 
2. AFL 
3. NLRB 
4. NTSB

19. With which of the following nations did the United States have the largest trade deficit in 2005?

1. Japan 
2. Mexico 
3. Canada 
4. China

20. Which of the following would not be associated with the study of macroeconomics?

1. Inflation 
2. National unemployment rates 
3. Production factors 
4. Individual consumer practices

21. Which of the following is the least likely to contribute to economic growth?

1. Technological advances 
2. Labor force education 
3. Increased access to resources 
4. Tighter government regulation

22. In a capitalist market economy, a primary role of government is to:

1. Regulate all key industries to insure consumer advantage in pricing and availability 
2. Protect core services not naturally supplied by market forces 
3. Regulate the distribution and use of scarce resources 
4. Monitor foreign competition and limit imports to improve domestic production

23. In a free enterprise economy, the market forces of supply and demand that determine the pricing of products and commodities are known as:

1. income effect 
2. capitalism 
3. price mechanism 
4. shortage

24. When the real Gross Domestic Product (GDP) is declining, that period is referred to as a recession. When that trend stops and economic activity begins to rise again it is known as a:

1. peak 
2. cycle 
3. trough 
4. gap

25. The Keynesian theory of economics, practiced in the United States promotes the:

1. importance of both public and private roles in the economy 
2. value of laissez-faire policies in building a strong economy 
3. ability of natural market forces to self regulate the economy 
4. idea that man has very little control in preventing recession or depression

26. Which of the following government regulatory agencies was created in response to wide spread bank failures during the 1930’s?

1. SEC 
2. FDIC 
3. FTC 
4. Federal Reserve Board

27. In a downward stock market in which stockholders may rush to sell shares,increasing the downward spiral, conditions are known as:

1. a bear market 
2. dumping 
3. a trade deficit 
4. a margin call

28. Companies such as Moody’s and Standard & Poor’s provide the service of:

1. regulating public companies for the SEC 
2. determining credit ratings for public and private companies 
3. conducting stock transactions for traders 
4. calculating the DOW Jones average daily

29. Demand pull inflation refers to a situation in which:

1. Output greatly exceeds the aggregate demand 
2. Market supply and demand are very close to equilibrium 
3. Output can not keep up with aggregate demand 
4. Supply exceeds market demand

30. If utility is the measure of satisfaction gained by consuming a good or service,then according to the principle of diminishing marginal utility:

1. Five doughnuts makes you happier than four, but the fifth doughnut does not make you as happy as the first 
2. Five doughnuts makes you happier than four and the third doughnut makes you happier than the first 
3. Five doughnuts does not make you as happy as four because utility has been maximized 
4. Five doughnuts make you happier than one and each additional doughnut makes you happier than the last

31. Consumer or investor behavior in which bargains are accepted that are low risk and low potential payoff and bargains are avoided which are higher risk, but potentially higher payoff is known as:

1. Risk tolerance 
2. Risk aversion 
3. Risk neutral 
4. Risk premium

32. Consider the following formula for compound interest: FV=P(1+I)^N

FV= Future Value 
P= Principal 
I= Interest rate 
N= Number of Years

Which scenario would represent a better investment?

1. Invest $100 for 5 years at 6% 
2. $200 for 4 years at 5% 
3. $300 for 2 years at 5% 
4. $400 for 4years at 2%

1. 1 
2. 2 
3. 3 
4. 1 and 3 are equal

33. Consumer price index is a measure, within a country of:

1. the total cost of living as indicated by total cost of goods and services typically produced 
2. the average consumer cost of goods within a specified industry 
3. the total disposable income consumers have to spend on goods and services 
4. of the effect that consumer demand has had on supply for a specified period of time

34. Which country has the strongest GDP per capita:

W= GDP of $152 billion and a total population of 54,553,000 
X = GDP of $400 billion and a total population of 21,900,000 
Y= GDP of $595 billion and a total population of 38,500,000 
Z = GDP of $ 628 billion and a total population of 43,655,000

1. Country W 
2. Country X 
3. Country Z 
4. Country X and Y are equal

35. When the Fed enacts an expansionary monetary policy in order to increase output,a goal is to increase the monetary supply which is usually accomplished through all of the following Fed actions except:

1. printing additional currency 
2. lowering interest rates 
3. reducing bank reserve requirements 
4. purchasing government bonds

36. The difference between a nominal interest rate and a real interest rate is that:

1. the nominal interest rate is for a fixed period of time 
2. the real interest rate is legally binding 
3. the nominal interest rate includes additional costs financed in a loan 
4. the real interest rate factors in inflation<

37. If a firm desires to improve productivity and expand economic growth over time,the best action to take is:

1. increase capital expenditure 
2. acquire new technology 
3. avoid any new debt 
4. A and B are equally important

38. The process of paying of a debt over a fixed period of time with specified payments and interest rates is known as:

1. fiscal policy 
2. appreciation 
3. amortization 
4. revolving credit

39. Sales tax, income tax, and property tax can all be examples of:

1. ad valorem taxes 
2. a posteriori taxes 
3. regressive taxes 
4. per unit tax

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FSOT Economics – Answer Key

1. A.

Laissez-faire comes from French “to let be”, and generally implies no government interference in a capitalist or free market system.

2. B.

Positive economics or descriptive economics examines data that can be verified or proven.

3. A.

Opportunity cost might be considered the second best choice for using a resource. By using it in its primary way, this second best opportunity is lost.

4. D.

A mixed economy as in the UK combines features of centralized control of resources and industries with elements of a market economy in which private business and consumer demand influence the economy.

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5. A.

Political economist and Enlightenment philosopher Adam Smith used this expression several times in his writings including his well known, The Wealth of Nations in 1776 to refer to the unintended societal benefit of wealth seeking industrialists.

6. A.

GNP is a leading economic indicator for the health of a nation and focuses on national production, including production abroad in companies owned by citizens, but not including domestic production contributed by foreigners.

7. B.

The “Fed” has the unique position of function both as a private and public entity. It is not funded by Congress, but is regulated and given specific responsibilities by Congress including regulating other banks, providing financial services to the government, and regulating money supply.

8. B.

The annual coupon rate determines interest on the original bond amount. It is paid every year during the life of the bond, to maturity. The total return includes only money made on the bond, not the original purchase price.

9. C.

Market equilibrium is defined as market demand equaling market supply.

10. B.

Oligopoly is defined as an industry with only a few competitors in which the actions of one impact the others such as with production, pricing, features, etc.

11. A.

Although some have questioned this viewpoint, most economists point to scarcity as the motivating factor behind most personal and business decisions and the reason for making economic choices.

12. A.

As price falls, demand rises. As price rises, demand falls.

13. B.

Consumer rights and protections are a major focus of the Federal Trade Commission.

14. A.

Productivity can be measured in many different ways including labor or units of time. Mathematically this is the only correct choice.

15. A.

Monopolistic competition involves many companies directly competing in the same industry by providing similar but differentiated products. Electric service providers are usually limited in number and provide the exact same product to consumers.

16. B.

Proportional taxes apply the same rate regardless of income.

17. B.

This principle involves government action such as tax cuts or business incentives to stimulate the economy.

18. C.

Originally started in 1935, the National Labor Relations Board serves many functions related to the regulation of labor unions as well as settling disputes between workers and their unions.

19. D.

Although we had trade deficits with all choices, China was by far the greatest. The trade deficit or negative difference between our exports to them and their imports to us, with China was over $200 billion.

20. D.

Macroeconomics looks at the whole economy or big picture while microeconomics focuses on actions of individuals, people, companies, or small groups.

21. D.

Although government interference can stimulate economic growth, it can also have the opposite effect. The other three factors almost always have a positive effect on growth.

22. B.

The primary characteristics of the economic model are maximum profit potential for business and minimum government interference. Government roles should be limited to those of basic protections and providing necessities that the natural market does not adequately produce.

23. C.

This term describes the influence of the forces of supply and demand on the prices that sellers can charge.

24. C.

definition

25. A.

This theory comes from the ideas of John M. Keynes who promoted a mixed economy over a laissez faire approach, arguing that government intervention and regulation were necessary components of maintaining economic health.

26. B.

The Federal Deposit Insurance Corporation was created in 1933 and closely watches banks for failure risk indicators. Additionally, accounts in insured institutions are insured for up to $100,000 in the event of bank failure. This minimizes economic impact of bank failure and improves consumer confidence.

27. A.

A bear market can be favorable for buyers who can find great deals as other shareholders respond to immediate market conditions by panicking and selling. The opposite condition, a bull market, occurs when the value of stocks is rising.

28. B.

These two companies are leaders in the industry of providing financial information including business credit ratings, investment analysis, market performance analysis, and more. The commonly referenced S&P 500 is one such market indices referenced by traders and financial analysts in measuring market performance.

29. C.

Aggregate demand is outpacing output which leads to inflation.

30. A.

Diminishing marginal utility holds that additional units of a commodity increase total utility, but that the increase in utility from unit to unit decreases.

31. B.

definition

32. B.

Investment #2 earns $43.10 return on investment.

33. A.

definition

34. B.

GDP is the total of all goods and services that a country produces. Per capita is simply a division of that number by total population. X produces the highest per capita value at $18,265.

35. A.

Printing money is a responsibility reserved to the Bureau of Engraving and Printing. Except for regulated printing such as replacement, printing additional currency that is not already part of the monetary totals in the economy is strictly limited to legislative acts and oversight. All other choices are used by the Federal Reserve Bank to increase the actual cash available in the economy without changing total value.

36. D.

Real interest rates reflect the nominal rate with the rate of inflation subtracted. This allows an investor to determine if interest earned in the investment will truly stay ahead of inflation.

37. D.

Although capital expenditures are usually called for when promoting increased productivity, technological progress, when available has equal importance, especially long term.

38. C.

Amortization can be charted exactly following the dictates of the loan agreement. Examples would be interest and principal over the life of a mortgage or car loan.

39. A.

These taxes are a percentage of value, increasing as value increases.

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