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 Table of Contents

1-Microeconomics .................................................................................................... 3

2-Macroeconomics ................................................................................................. 20

*All the questions in Test Bank 2.0 are equipped with explanations. Some of these questions (Microeconomics:

1-33; Macroeconomics: 1-31) come from Test Bank 1.0, while others are new questions coming from NEC China

Organizing Committee and NEC Academic Committee. We are sincerely grateful for all teachers contribution

to NEC questions development.

*All questions in this file are not allowed to be used commercially.

2
1-Microeconomics

1) Which of the following conditions distinguishes monopolistic competition ( ) from perfect competition
(模 )?
A. Differentiation of product.
B. Freedom of entry and exit.
C. Small size firms.

Answer: A
In microeconomics, the goods are identical in a perfect competitive market, but differentiated in a
monopolistic competitive market. This explains why advertisement is adopted in monopolistic competition.

2) In a competitive market ( ),
the price of wheat is likely to be increased by
A. a decrease in the supply of wheat.
B. a decrease in the demand for wheat.
C. more capital investment in wheat farms.
D. new machines reducing the cost of producing wheat.

Answer: A
This is another example of how price is determined by supply and demand in competitive markets. A decrease
in the supply of wheat with demand unchanged will increase the equilibrium price of wheat. The factors
referred to in the other answers would reduce the equilibrium price of wheat.

3) The equilibrium market price ( ) can be defined as the price

when
A. the market for the product clears.
B. positive excess demand equals negative supply.
C. producers maximize their profits.

Answer: A
At the equilibrium market price, the quantity demanded equals the quantity supplied and there s no surplus
or shortage. We can say the market is clear.

4) Which of the following firms is the closest to being a perfectly competitive (模

) firm?
A. Microsoft Corporation.
B. Ford Motor Company.
C. A hot dog vendor in New York.

Answer: C

3
 If a firm is in a perfectly competitive market, this firm has many competitors, its products are almost identity
with its competitors products, and this firm is a price taker. The products of Microsoft Corporation and Ford
Motor Company are obviously different from products of their competitors, and they can determine the prices
of their products to a large degree. Compare with them, the hot dog vendor in New York has many competitors
and their products-hot dogs do not have significant difference, so a hot dog vendor is the closest to being a
perfectly competitive firm.

5) Profits are equal to total

A. revenue minus total cost
B. assets minus total liabilities
C. sales minus wages and salaries
D. sales minus taxes and depreciation

Answer: A
Profit is what is left over after all costs of production (total costs) are subtracted from total revenues (price per
unit times the number of units sold). Profit is the fundamental incentive for firms or individuals to engage in
business in a market economy.

6) Why do medical doctors generally earn more than farmers?

A. Medical doctors are more efficient than farmers.
B. Medical doctors provide a service rather than make a product.
C. There are fewer medical doctors than farmers in our economy.
D. Medical doctors are scarcer, given the demand for their services

Answer: D
Medical doctors generally earn more than farmers because these doctors usually have spent large amount of
money and time to accept high-level education, so that they own valuable skills and experience that the
farmers do not have. In other words, these medical doctors are scarcer, given the demand for their services.

7) What is meant by the statement that every economic system faces the problem of scarcity ( )?
A. The additional benefits of goods and services are greater than their additional costs.
B. There are times when some products can be purchased only at high prices.
C. There are never enough productive resources to satisfy all human wants.
D. All economies have recessions during which scarcities exist.

Answer: C
Scarcity, in economics, means that society has more economic wants than it has available productive
resources to satisfy all of these wants. This concept underlies the
idea that ordinarily consumers, businesses, and governments tend to choose the most effective use of limited
resources, i.e., they must follow the principle of economizing . The problem of scarcity is faced continually
by every society, whatever the form of its government or economic system.

4
8) A newspaper reports, "COFFEE GROWERS' MONOPOLY (
) BROKE INTO SEVERAL COMPETING FIRMS." If this is true, we would expect the coffee-growing
industry to
A. decrease output and decrease prices.
B. increase output and increase prices.
C. decrease output and increase prices.
D. increase output and decrease prices.

Answer: D
A monopoly is the only producer in its market, so it can determine the price of its product. Therefore, in order
to maximize its product, the price of a monopoly s product is usually higher than that in other markets and
the quantity of a monopoly s product is usually lower than that in other markets. When a monopoly broke
into several competitive firms, its price will fall and quantity will increase.

9) Which of the following best describes natural monopoly (

)?
A. An eco-friendly monopoly.
B. A firm that can produce at lower average cost than two or more firms.
C. A monopoly on the agricultural market.
D. A monopoly that was created without government intervention.

Answer: B
A natural monopoly is a monopoly that arises because a single firm can supply a good or service to an entire
market at a smaller cost than could two or more firms.

10) The opportunity cost ( ) of a new public high school is the

A. money cost of hiring teachers for the new school.
B. cost of constructing the new school at a later date.
C. change in the annual tax rate to pay for the new school.
D. other goods and services that must be given up for the new school.

Answer: D
The opportunity cost of producing a good or service is the next best alternative good or service that might have
been produced with the same resources. In other words, opportunity cost refers to what is forgone once money
or resources are used for a specific purpose.

11) From an economic point of view, which approach to controlling pollution is most efficient?
A. Abolish the use of toxic chemicals in all production.
B. Use economic resources to eliminate all pollution.
C. Adopt laws and regulations that prohibit economic activities that cause pollution.

5
 D. Reduce pollution as long as the additional benefits are greater than the additional costs.

Answer: D
Efficiency requires undertaking an activity as long as the additional benefit of more of the activity is greater
than the additional cost. The most efficient approach to pollution control is to reduce pollution as long as the
extra benefits of reduction exceed the extra costs. The other solutions would reduce pollution, but the costs of
these policies are likely to far outweigh the extra (or marginal) benefits.

12) The change in a firm s total revenue that results from employing one additional unit of a resource, when all
other factors are kept constant. The statement above describes
A. marginal product
B. marginal revenue product
C. diminishing marginal returns
D. marginal revenue
E. marginal utility

Answer: B
Marginal Revenue Product, or the value of the marginal product, is the marginal product of an input times the
price of the output, or the additional revenue gained from increase the amount of an input by one unit.

13) If a university levied an extra fee on pre-med students, increasing their tuition, the expected result would be:
A. a reduction in the supply of doctors.
B. a decrease in the marginal revenue product of doctors.
C. a shift of the demand curve for doctors to the right.
D. a shift of the demand curve for doctors to the left.
E. a decrease in the wage for doctors.

Answer: A
Increase in fee can be considered as input cost of doctors, hence the supply decreases when input cost
increases. Other choices are either irrelevant (b) or incorrect (e).

14) If the price of a product increases by 10%, quantity supplied ( ) increases 10% and the quantity
demanded ( ) falls 20%. Based on the information above, we know:
A. the price elasticity of supply is -1 and the price elasticity of demand is -1/2.
B. the price elasticity of supply is -1 and the price elasticity of demand is -1.
C. the price elasticity of supply is 1 and the price elasticity of demand is -2.
D. the price elasticity of supply is 2 and the price elasticity of demand is -1.
E. the price elasticity of both is 1.

Answer: C
Simple math, involving the concept of elasticity. PES is 10%/10% = 1, and PED is -20%/10%=-2.

6
15) A single corporation owns and operates three separate firms: one grows tomatoes, one produces cans, and the
third packs the tomatoes into the cans. This arrangement is an example of:
A. horizontal integration.
B. a limited liability corporation.
C. a merger.
D. vertical integration.
E. a holding company.

Answer: D
This is the definition of vertical integration: when a firm have control over all steps of production.

16) Significant barriers to entry exist in which of the following market structures?
A. Oligopoly only
B. Monopoly only
C. Monopolistic competition and monopoly
D. Oligopoly and monopolistic competition
E. Oligopoly and monopoly

Answer: E
Oligopoly and monopoly have defining traits that signify barriers to entry, while the other two market
structures (MCM, PCM) do not have significant barriers to entry.

17) In a monopolistic industry ( ) , the prices would be _________ and the

output would be _________ than if the industry were in perfect competition (模
).
A. higher, higher
B. lower, lower
C. higher, lower
D. lower, higher
E. the same, higher

Answer: C
A monopolist produces at the level which MR = MC, which is lower than competitive output but at a higher
price.

18) From an economic perspective, one reason why many restaurants and public places do not allow smoking is to
A. decrease the negative externality caused by second-hand smoke.
B. decrease the positive externality caused by second-hand smoke.
C. cause a market failure by taking away people s freedom to smoke.
D. increase tax revenues collected from smokers.
E. support the tobacco industry.

7
 Answer: A
Smoking is clearly a negative externality. Other choices are either irrelevant (d) or incorrect (b).

19) Which of the following is an advantage of a proprietorship ( ) over a corporation?

A. There is limited liability for the owner of a proprietorship.
B. Proprietorships generally have an easier time raising money for expansion.
C. A proprietor has input from the board of directors of the business.
D. Proprietorships are generally easier to form than corporations.
E. Proprietorships are usually more profitable than corporations.

Answer: D
Proprietorship only need a start-up and is started by one person, while corporation require multiple people
and complex starting processes.

20) When someone receives a flu shot, they reduce the probability that others will contract the flu. In this case, the
flu shot is serving as a:
A. negative externality
B. positive externality
C. perfect substitute
D. perfect complement
E. public good

Answer: B
A person s vaccination bring positive side effects to others, which is a positive externality.

21) Assume that peanut butter is an inferior good ( ) . Which of the following statements describes what is
meant by "an inferior good in economics?"
A. Because peanut butter is a low-quality food, consumers will not buy it.
B. When the supply of peanut butter falls, its price falls.
C. When consumer incomes increase, the demand for peanut butter decreases.
D. Producers of peanut butter will switch to producing jelly, a complement, to increase profits.
E. If the price of almond butter, a substitute, rises, the demand for peanut butter will fall.

Answer: C
An inferior good has a negative income elasticity of demand. The quantity demanded of it will drop as people
earn more.

22) The demand for a product becomes more inelastic as the product
A. has fewer substitutes, is a luxury, and takes a smaller share of the consumer's income.
B. has fewer substitutes, is a necessity, and takes a smaller share of the consumer's income.
C. has fewer substitutes, is a necessity, and takes a larger share of the consumer's income.
D. has more substitutes, is a necessity, and takes a larger share of the consumer's income.

8
 E. has more substitutes, is a necessity, and takes a smaller share of the consumer's income.

Answer: B
When a product cannot be substituted nor abandoned by the consumer, it has an inelastic demand.

23) In economics, we generally assume it is the goal of the firm to:

A. maximize utility.
B. maximize profits.
C. maximize sales revenues.
D. minimize average total costs.
E. minimize total costs.

Answer: B
Profit refers to the monetary benefit or net gain in owning and operating a firm. The goal of all firms is to
maximize benefit and thus maximize profit.

24) Which of the following describes a negative externality ( ) or external cost ( )?

A. The benefits of a public good go to those who do not pay for the good.
B. A consumer purchases a good but then decides to give it to someone in another country.
C. The costs of producing a good are borne by those other than the producer or consumer of the good.
D. The price of producing a good is less than the marginal benefit of consuming the good.
E. Resources are allocated to producing goods that consumers wish to purchase.

Answer: C
Negative externality or external cost refers to the negative impact or cost suffered by a third party, which is not
directly involved in the transaction.

25) In the short run, a pure monopolist ( 务 模

) will
A. always earn economic profits.
B. always earn a normal profit (breakeven).
C. always realize a loss.
D. either earn an economic profit, a loss, or break even depending on revenues and costs.
E. have incentives to produce the largest quantity at the lowest price given by the demand curve.

Answer: D
In the short run, a monopoly may receive profit, break even, or endure loss, depending on comparison
between price and average total cost. Being a monopoly does not guarantee positive profit in the short term.

26) Does the entity that pays for medical services affect the behavior of health-care consumers?
A. Yes; consumers of health-care possess a stronger incentive to economize when their insurance company
pays for their services.

9
 B. No; health care is an essential service, and therefore, the incentive to economize is unaffected by who is
paying for the service.
C. Yes; consumers of health-care possess a stronger incentive to economize when the government pays for
their services.
D. No; the quantity of health-care service demanded is not influenced by the price of health care, and it does
not matter who pays.
E. Yes; consumers of health-care possess a stronger incentive to economize when they pay for their own
services.

Answer: E
The answer is yes, as consumers are more sensitive to their own monetary costs, so having an entity that pays
for medical services certainly changes the behavior of healthcare consumers.

27) Use the table, showing a firm's short-run cost information, to answer the following question. The fixed costs of
producing this product

A. are $6.
B. are $9.
C. are $16.
D. are $34.
E. cannot be determined.

Answer: A
Fixed costs refer to the costs that is independent on the quantity produced. In this situation, it is the cost level
when the quantity of output is zero.

28) Use the table, showing a firm's short-run cost information, to answer the following question. The average
variable costs of producing 3 units of output

A. are $6.
B. are $4.
C. are $2.
D. are $12.

10
 E. cannot be determined.

Answer: C
Fixed costs refer to the costs that is independent on the quantity produced. In this situation, it is the cost level
when the quantity of output is zero, so the fixed cost is $6. The average variable costs of producing 3 units of
output = ($12-$6)/3 = $2.

29) The following table depicts the level of labor and production for a firm making shirts. Once ______ workers are
hired, diminishing marginal product ( )
begins.

A. 1
B. 2
C. 3
D. 4
E. 5

Answer: D
Marginal value of the first worker = 4 0 = 4. Marginal value of the second worker = 9 4 = 5. Marginal value of
the third worker = 16 9 = 7. Marginal value of the 4th worker = 22 16 = 6 < 7, so diminishing marginal product
begins at the 4th worker.

30) Assume that an alternative to the iPhone is developed that takes the world by storm, and that a shipment of
the iPhones is on a boat from China that sinks in a storm. What will be the effect of these two events on the
market for iPhones?
A. price increases and quantity decreases
B. price increases and quantity cannot be determined
C. price decreases and quantity decreases
D. price decreases and quantity cannot be determined
E. price cannot be determined and quantity decreases

Answer: E
The quantity demanded does not change with price, implying that the demand is perfectly elastic, and the
demand curve is horizontal. This is a characteristic of PCM.

31) Which of the following is an assumption made about a competitive labor market?

11
 A. A firm must offer a higher wage rate to attract more labor.
B. A firm must offer a lower wage rate to attract more labor.
C. A firm cannot influence the market wage rate.
D. The labor supply curve facing a firm is relatively inelastic.

Answer: C
A perfectly competitive labor market is characterized by a perfectly elastic labor supply curve, such that a firm
cannot change the wage rate no matter what.

32) Value of marginal product is defined as the additional

A. output a firm would receive after hiring one more unit of resource.
B. cost of hiring one more unit of resource.
C. revenue earned by selling one more unit of product.
D. revenue earned by hiring one more unit of resource.

Answer: D
The value of marginal product (MRP) is the additional values gained from hiring one additional labor.

33) The supply curve ( ) for the monopolist ( )

A. is horizontal.
B. is vertical.
C. is a 45-degree line.
D. does not exist.

Answer: D
The supply curve of a monopolist does not exist because a monopoly has complete control over the price and
thus there s no association between a controlled price and the quantity supplied.

34) The table below shows the production costs of product A.

What is the marginal cost of producing the third product?

A. $34.
B. $36.
C. $40.
D. $114.

Answer: B

12
 Marginal cost is the increase in total cost that arises from an extra unit of production. In this case, the marginal
cost of producing the third product = the total cost of the third product the total cost of the second product =
($114+$100) ($78+$100) = $114 - $$78 = $36.

35) What do economists mean when they state that a good is scarce ( )?
A. The amount of the good used involves giving up something else.
B. There is a surplus or more than sufficient supply of the good at the existing price.
C. Government is needed in the market of goods and services.
D. It is impossible to expand the availability of the good beyond the current amount.

Answer: A
When economists state that a good is scare, it mean that society s resources are limited but human wants are
unlimited, so people cannot always own all things they want. Therefore, when a person chose a thing, it always
involve giving up something else.

36) About demand and supply, which of the following statements is incorrect?
A. Equilibrium price is the price that balances quantity supplied and quantity demanded.
B. Equilibrium quantity is the quantity supplied and the quantity demanded at the equilibrium price.
C. When the quantity demanded of a good is greater than quantity supplied of this good, there occurs a surplus.
D. Equilibrium is a situation in which the market price has reached the level at which quantity supplied equals
quantity demanded.

Answer: C
When the quantity demanded of a good is greater than quantity supplied of this good, there occurs a shortage,
instead of a surplus, so C is incorrect.

37) Which of the following will cause an increase of supply for sugar-sweetened drinks? (Credit to Guanzhuo Qu
from International School of Nanjing Yuhuatai High School)
A. More people are aware about their health conditions
B. Workers ask for pay rises in factories producing drinks
C. Government lowered income tax rates
D. Technological advances in producing drinks

Answer: D
Technological advances promote the growth in productivity, therefore increase supply.

38) Which of the following is not a reason why authorities examine mergers and takeovers? (Credit to Guanzhuo
Qu from International School of Nanjing Yuhuatai High School)
A. Economies of scale
B. Price fixing
C. Selling products at prices that are significantly above competitive prices
D. Market sharing

13
 Answer: A
Economies of scale lead to lower long run average costs, which is a benefit to both firms and consumers.

39) Pen is a normal good and pencil is the substitute for the pen. When consumer s income raise, what would
happened for demand for the pen and supply for pencil (Credit to Mengze Lyu from Faragut school Tianjin
Campus)
A. Demand for pen would shift to right and supply for pencil would shift to left.
B. Demand for pen would shift to right and supply for pencil would unchanged.
C. Demand for pen would shift to left and supply for pencil would shift to left.
D. Demand for pen would shift to left and supply for pencil would unchanged.

Answer: B
As the question mentioned, when the income increases, the normal good s demand would shift to right and
there is no influence to the supply curve.

40) Second-hand smoking would cause (Credit to Mengze Lyu from Faragut school Tianjin Campus)
A. Positive externality
B. Negative externality
C. All of above
D. None of above

Answer: B
Second-hand smoking is bad for the people that has no related to this action.

41) Let L represents the number of workers hired by a firm and let Q represent that firm s quantity of output.
Assume 2 points on the firm s producer function are (L=12, Q=122) and (L=13, Q=128). The firm sells the
product at price of $4. What is the marginal product of the 13th worker? (Credit to Zhongyi Yin from Chongqing
Yucai Secondary School)
A. 8
B. 6
C. 32
D. 24
E. 16

Answer: B
128-122=6. Some students may calculate marginal revenue product of labor instead, which is: VMPL=6*4=24.

42) Please see the below diagram to answer the question. A profit-maximizing firm is currently making a profit at a
price of $10 in perfectly competitive industry. If the market demand decreases, and new market equilibrium
price is $6. What price will the firm sell for its product in the long run? (Credit to Mingming Qian from Xiang
Jiang International High School)

14
 A. $10
B. $6
C. $5
D. $2
E. $0

Answer: C
A perfectly competitive firm will make zero economic profit, and therefore in the long run, the firm s price will
be equal to minimum ATC (where MC and ATC intersect) at $5.

43) Please see the below diagram to answer the question. A profit-maximizing firm is currently making a profit at
a price of $10 in perfectly competitive industry. If the market demand decreases, and new market equilibrium
price is $6. What total revenue will the firm earn after market demand changes? (Credit to Mingming Qian
from Xiang Jiang International High School)

A. $500
B. $300

15
 C. $252
D. $200
E. $60

Answer: C
A perfectly competitive firm s total revenue equals to price multiplied by quantity. As the firm is price taker,
the price of firm will follow the market price and decreases to $6. At $6, the firm will produce at 42, since
Price=MR=MC for a perfectly competitive firm. Therefore, the total revenue = $6 x 42 = $252.

44) Which of the following characteristics is necessary in order for a firm to price-discriminate (

)? (Credit to Yuanting Xu from Nanjing NO. 1 Middle School)

A. Barriers to entry
B. Differentiated products
C. Small number of sellers
D. Standardized products
E. Control over price

Answer: E
The necessary condition for a firm to price-discriminate is some control over price, which means the demand
curve that the firm faces is downward sloping. The consumers price elasticity of demand are different, so
firms could charge different prices according to different price elasticity of demand for consumers.

45) A leftward shift in the supply curve of automobiles could be caused by

A. a decrease in the price of automobiles
B. an increase in the wages paid to workers in the automobile industry
C. an increase in the price of insurance of automobiles
D. an increase in the consumer income
E. a decrease in the price of parts used in the production of automobile

Answer: B
A leftward shift in the supply curve means that the supply of automobiles decreases. Choice A: The decrease of
the price of automobile itself will cause the movement down on the existing supply curve. Wrong.
Choice B: An increase in the wages paid to workers in the automobile industry cause the cost of producing
automobile increase, which shifts the supply curve to the left. Right.
Choice C: The insurance of automobiles is the complementary goods of the automobile. An increase in the price
of insurance of automobiles will lead consumer buy less automobiles, which shifts the demand curve to the left.
Wrong.
Choice D: An increase in the consumer income will lead consumer buy more automobiles, which shifts the

16
 demand curve to the right. Wrong.
Choice E: A decrease in the price of parts used in the production of automobile cause the cost of producing
automobile decrease, which shifts the supply curve to the right. Wrong.

46) Which of the situation is so called Free-rider problem (

)? (Credit to Mengze Lyu from Faragut school Tianjin Campus)
A. Enjoy a feast with your parents that you don t have to pay for it
B. Pay a little money for expansive public transportation
C. Pay your income tax for the national defense
D. Don t buy the product of ivory

Answer: A
Free-rider problem means that you get the benefit but without pay for it. A is that you get well-feed by the feast
but not pay for it.

47) Which of the following best describes a perfectly competitive market?

A. Many sellers with identical products and no barriers to entry
B. Many sellers, each with a clearly differentiated product, and no barriers to entry
C. A few competing sellers with similar products and high barriers to entry
D. A few competing sellers of identical products and no barriers to entry
E. No competition among sellers and high barriers to entry

Answer: A
Perfect competition is characterized by a large number of sellers with a homogeneous product, infinitely elastic
demand for firms, and no barriers to entry or exit.

48) A perfectly competitive firm has a marginal revenue of $10 and it is currently producing 100 units. At its
current level of output, marginal cost equals marginal revenue. The firm s average total cost is $13, average
variable cost is $12, and average fixed cost is $1. What can you conclude about this firm? (Credit to Robert
March from BASIS International School Park Lane Harbour)
A. The firm is breaking even ( )
B. The firm is making a profit
C. The firm is making a loss and should continue to operate
D. The firm is making a loss and it should shut down
E. The firm should increase its output

Answer: D
The firm is making a loss and it should shut down. If the price falls below average variable cost, then a firm
should shut down. The fixed costs are sunk costs, but a firm should shut down if the revenue is insufficient to
cover all variable costs.

17
49) A specific area of the pacific ocean has recently experienced over-fishing. The availability of shrimp and tuna
has significantly decreased. Economists would argue that this is outcome is consistent with the tragedy of the
commons. What are the characteristics of a common good? (Credit to Robert March from BASIS International
School Park Lane Harbour)
A. Non-excludable and Rivalrous
B. Non-excludable and Non-rivalrous
C. Excludable and non-rivalrous
D. Excludable and rivalrous
E. Excludable only

Answer: A
Fish in the ocean are common goods because they are non-excludable (there is no payment required to access
the good) and rivalrous (if one fishing boat catches a fish, then other fishing boats cannot catch that same fish).
The fishermen will rush to get the fish before their competition, which can lead to over-fishing is certain areas.

50) The following table shows the information of firm Pineapple and Tiger: (Credit to Hiuying Cheung from RDFZ
Chaoyang Branch School)

Firm Pineapple Firm Tiger

Numbers of owners 10 1
Transfer of ownership With the consent of other owners Free
Liability Limited Unlimited
Numbers of labors 10,000 30

According to the above information, which of the following statements is correct?

A. Set up procedures of both firms are complicated.
B. Firms Pineapple s profit tax rate is lower than Firm Tiger s.
C. Firm Pineapple must disclose its financial conditions to the public while Firm Tiger does not.
D. Firm Pineapple can purchase property in its own name while Firm Tiger cannot.
E. Firm Pineapple must be a listed company.

Answer: D
It is because Firm Pineapple is a private limited company while Firm Tiger is a sole proprietorship.

51) If John s income is 5,700 RMB. The income tax rate is 10%. He spends 4,300 RMB and saves 400 RMB this
month. What is his disposable income (
)? (Credit to Hiuying Cheung from RDFZ Chaoyang Branch School)
A. 430 RMB
B. 570 RMB
C. 5,130 RMB

18
 D. 5,700 RMB

Answer: C
Disposable income is the income after tax. So, 5,700 RMB minus 10% of it, which is 570 RMB. The disposable
income equals 5,130 RMB.

52) If the four largest cellphone producers control 80 percent of the total cellphone market, then these producers
are operating in: (Credit to Cuiyan Tan from Guangdong Country Garden School)
A. a monopoly
B. monopolistic competition
C. perfect competition
D. an oligopoly
E. a cartel

Answer: D
The concentration ratio is quite high when top 4 take 80% of market, it belongs to oligopoly. Few large firms,
high concentration ratio.

53) One major difference between public goods ( ) and private goods ( ) is that: (Credit to Cuiyan
Tan from Guangdong Country Garden School)
A. public goods exclude nonpaying consumers, while private goods are available to all.
B. public goods are inferior goods, while private goods are normal goods.
C. public goods generate negative externalities, while private goods generate positive externalities.
D. it is difficult to charge customers directly for the provision of public goods.
E. it is impossible for private firms to produce public goods.

Answer: D
Public goods: non-excludable and non-rivalrous . It is difficult to charge people to exclude some to access
public goods. Private goods: excludable and rivalrous.

19
2-Macroeconomics

1) The essential difference between a command economy ( ) and a market economy ( ) is that in a
market economy
A. shortages occur more often than surpluses.
B. buyers and sellers determine resource allocation.
C. central planning creates an effective incentive system for consumers and producers.
D. the prices of products and resources are largely determined by government regulation.

Answer: B
An economic system is a society's framework that coordinates economic activity. Two general types of
economic systems are command-based system and market-based system.
In a command economy, central planning by government determines how productive resources are allocated
to the production of goods and services. In a market economy, buyers and sellers pursue personal goals and
interact through markets, and this determines the allocation of resources.

2) Which one of the following is a factor of production ?

A. Land owned or rented by firms
B. The profits made by firms
C. Money held by firms in bank accounts

Answer: A
Factors of production are the input the firm uses to produce. There are a few types of them: labor, land, Capital
/ Machineries, and entrepreneurship / entrepreneur / enterprise. Entrepreneurship is sometimes excluded.

3) Which one of the following is an instrument of monetary policy ( 务

)?
A. The exchange rate ( )
B. Taxation
C. The inflation rate

Answer: A
Monetary policy involves policies made by central banks, which normally involves changes in interest rate,
money supply and exchange rate.

4) What primary function is money serving when it is used to buy a ticket to a movie?
A. Store of value.
B. Flow of funds.
C. Unit of account.
D. Medium of exchange.

Answer: D

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 Important functions of money:
medium of exchange: an item that buyers give to sellers when they want to purchase goods and services;
unit of account: the yardstick people use to post prices and record debts;
store of value: an item that people can use to transfer purchasing power from the present to the future.
When a person is buying a ticket of movie, the buyers give money to sellers, money is serving the function:
medium of exchange.

5) If your annual income rises by 50% while prices of the things you buy rise by 100%, then your
A. real income has risen.
B. real income has fallen.
C. money income has fallen.
D. real income is not affected.

Answer: B
Real income = nominal income inflation rate. Real income can be regarded as nominal income adjusted for
prices level. If your annual income rises by 50% while prices of the things you buy rise by 100%, your real
income = 50% - 100% = -50%, so your real income decreases 50%.

6) Which one of the following do economists consider to be an example of capital goods (

务 )?
A. Money in a bank.
B. Machines in an auto plant.
C. Corporate bonds of an oil company.
D. Common stocks in a computer business

Answer: B
Capital goods are the buildings, machines, and equipment that are used to produce products or provide
services.

7) An increase in real interest rates ( ) provides an incentive for people to

save
A. less and borrow less.
B. more and borrow less.
C. less and borrow more.
D. more and borrow more.

Answer: B
When real interest rates increase, people are more willing to save money in the bank because they can earn
more interests and they are less willing to borrow money because the borrowing costs increase.

8) An economy will typically experience a decline in its unemployment rate ( ) when there is
A. an increase in population.

21
 B. a decrease in consumer incomes.
C. an increase in economic growth.
D. a decrease in business investment.

Answer: C
Unemployment rate is the percentage of the labor force that is unemployed. The labor force is the total number
of workers, including both the employed and the unemployed.
When the population increases, the changes of unemployment rate is unclear.
When consumer incomes decrease, some businesses may lose incomes because of fewer consumers. Thus,
these businesses may fire employees, causing an increase in unemployment rate.
When the economic growth increases, more employees will be hired to expanse businesses, causing a decline
in unemployment rate.
When business investment decreases, unemployment rate may increase because businesses do not need so
many employees as before.

9) How does a nation typically acquire more capital goods ( 务

)and increase productivity ( )?
A. By increasing the money supply and the rate of inflation.
B. By increasing private saving and business investment.
C. By decreasing the length of the workweek for the labor force.
D. By increasing the growth rate of the population in the nation.

Answer: B
When the private saving increases, banks will have more money to lend to businesses, so the borrowing costs
for businesses will be lower, causing businesses to borrowing money to buy more capital goods and increase
the employees wages. Thus, both the purchase of capital goods and productivity of employees will increase.
When business investments increase, businesses will buy more capital goods and increase the employees
wages too.

10) One reason the federal government might reduce taxes is to

A. slow the rate of inflation.
B. slow a rapid rise in interest rates.
C. decrease business spending on plant and equipment.
D. increase consumer spending and stimulate the economy.

Answer: D
If the government decreases taxes for individuals, people will have more money to consume, leading to the
faster economic growth. If the government decreases taxes for businesses, businesses will have money to
spend on plant and equipment, leading to faster economic growth.

11) All other things being equal, which one of the following is most likely to increase an economy s underlying
trend rate of growth? A rise in the rate of growth of

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 A. household income
B. inflation
C. labor productivity

Answer: C
When the labor productivity increases, the total output of the economy will increases too, causing the increase
of the economy s underlying trend rate of growth. When inflation increases, the nominal GDP may rise too,
but it does mean the economy is truly growing. Thurs, the increase in labor productivity is most likely the right
answer.

12) Which is a basic economic question that must be answered by all economic systems?
A. What will be the share of profits that go to businesses?
B. What will be the amount of the minimum wage for workers?
C. How will goods and services be produced?
D. How will government collect income taxes?

Answer: C
The condition of scarcity (relatively unlimited wants and limited resources) means that people in all economic
systems must decide: (1) which goods and services will be produced; (2) how these goods and services will be
produced; and (3) who will get these goods and services. Not all economic systems include profits, minimum
wage laws, or income taxes, so these questions are not basic.

13) A high school student buys a sweatshirt from a store. The sweatshirt is on sale at a 20 percent discount off the
regular price. In this exchange
A. the student and the store benefit
B. the student benefits, but the store does not
C. the store benefits, but the student does not
D. neither the student nor the store benefits

Answer: A
Voluntary exchange occurs only when the people involved expect to gain from the trade. If neither the student
nor the store expects to gain from this trade (the purchase of the sweatshirt), neither would have made the
exchange.

14) If the Consumer Price Index ( ) were 180

in 2014 and 190 in 2015, the rate of inflation ( ) is:
A. 0.1%
B. 5.6%
C. 10%
D. 5.3%
E. 20.8%

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 Answer: B
The inflation rate is the rate at which prices are rising.
Formula: Inflation rate ={[CPI (this period) CPI (previous period)]/CPI (previous period)}*100% = [(190-
180)/180] * 100%

15) Which of the following will, by the transaction itself, change the value of GDP (Gross domestic product
)?
A. Your old automobile emits a lot of heavy smoke.
B. Your dentist fills her tax accountant s tooth in exchange for accounting services.
C. Someone you know sells illegal goods from her garage.
D. You paint your Grandmother s porch, and she gives you dinner.
E. You hire a commercial lawn service to mow your lawn.

Answer: E
GDP (Gross Domestic Product) measures the total value of all final goods and services produced in a country in
a given year. Thus, the transaction must include the trade of final goods and services with other people. A
domestic exchange with family members is not included in.

16) Money is important to an economy because it fulfills several functions. Which of the following does not
describe one of the functions of money?
A. You put a $20 bill in your desk drawer for use later.
B. You send a check to your landlord for the rent.
C. You exchange shoveling the driveway for use of your landlord s car.
D. You put $50 in your savings account.
E. You decide which gift to buy by comparing their dollar prices.

Answer: C
Money has 4 important functions : 1. medium of exchange to make payments; 2. measure of value of accounts
to fix a price; 3. store of value to purchase in the future; 4. means of deferred payment to repay loans. However,
exchanging shoveling the driveway for use of landlord s car is barter.

17) Aggregate demand ( ) is

A. the relationship between the overall price level and the quantity demanded of aggregate output at a
particular time.
B. the relationship between price and the quantity that sellers demand.
C. a direct relationship between prices and output, given the interest rate.
D. the total amount of any particular good all consumers demand.
E. an upward sloping relationship on a graph.

Answer: A
Aggregate demand includes consumer consumption, government spending, investment and net export.
In the Aggregate Demand and Aggregate Supply diagram, AD is the vertical axis and AS is the horizontal axis.

24
 The point they intercept reflects current price level and real GDP.

18) For Country A, GDP (Gross domestic product

) measures
A. the summed expenditures of consumers, investors, the government, importers, and exporters.
B. the market value of all goods and services produced in Country A during a given period, excluding the
output of foreign-owned firms in Country A.
C. the market value of all final goods and services produced in Country A during a given period, including the
output of foreign firms in Country A.
D. the market value of all production in Country A in a given period of time, excluding capital consumption
allowances.
E. the sum of all factor costs in Country A over a given period of time.

Answer: C
GDP (Gross Domestic Product) measures the total value of all final goods and services produced in a country in
a given year, regardless the products are made by what kind of companies.

19) If nominal GDP ( GDP ) is $10,000 in year 1 and $11,000 in year 2,

and the price index for GDP was 120 in year 1 and 140 in year 2, we can say that:
A. the real GDP ( GDP ) increased between the two years.
B. the real GDP decreased between the two years, and prices fell.
C. the real GDP decreased between the two years, and prices increased.
D. real GDP is above nominal GDP throughout the period.
E. there is not enough information to compare real and nominal GDP changes.

Answer: C
Nominal GDP is real GDP plus inflation. Price index is calculated by tracking changes in the cost of buying a
given market basket, a measure of the overall price level. Thus, rise in price index refers to rise in price level.
According to the formula, the growth in nominal GDP is 10% [=($11,000-$10,000)/$10,000], but compared with
the growth of inflation, 16.7% [=(140-120)/120], the real GDP actually decreases.

20) A business cycle ( ) is best described as

A. a recession or depression, measured by fluctuations in macroeconomic variables.
B. irregular up-and-down movements in economic activity around a trend, measured by fluctuations in
macroeconomic variables.
C. a regular and predictable feature of all free market systems.
D. a boom in economic activity, measured by fluctuations in macroeconomic variables.
E. a sharp fall always followed by a slow rise in economic activity around a trend, measured by fluctuations in
macroeconomic variables.

Answer: B
The alternation between economic downturns and upturns in the macroeconomy is known as the business

25
 cycle. It is irregular and unpredictable. The ups and downs in the cycle are inevitable.

21) Of the following, which is most likely to generate long-term improvements in a nation's standard of living?
A. Increases in population growth
B. Increases in total labor supply
C. Increases in labor productivity
D. Increases in government regulation of business
E. Increases in the money supply

Answer: C
Long-tern improvements in standard of living can be only brought by rightward shifts of Long-Run Aggregate
Supply curve. Only the increase in labor productivity can make LRAS curve shift to the right.

22) U.S. GDP (Gross domestic product

) does not measure which of the following?
A. Consumer spending
B. Business spending
C. Foreign spending on U.S. goods and services
D. Spending on new residences
E. Purchases of stocks and bonds

Answer: E
When people purchase stocks and bonds, firms can use these money to invest, so the purchase of stocks and
bonds have already been included in the accounting of business spending. Thus, GDP does not measure the
purchase of stocks and bonds.

23) Which of these is not considered a type of unemployment?

A. Frictional unemployment
B. Structural unemployment
C. Seasonal unemployment
D. Family unemployment
E. Cyclical unemployment

Answer: D
Frictional unemployment: unemployment that results because it takes time for workers to search for the jobs
that best suit their tastes and skills.
Structural unemployment: unemployment that results because the number of jobs available in some labor
markets is insufficient to provide a job for everyone who wants one.
Cyclical unemployment: periodic unemployment caused by fluctuations in the business cycle.
If a person voluntarily quits her/her job and does not find another one for 5 months, the person is unemployed
because she needs time to find work, so it is an example of frictional unemployment.

26
24) Last year, you earned $30,000. This year you earned $35,000. If the inflation rate (
) is 10%, which of the following is true?
A. Both your nominal and real incomes increased.
B. Both your nominal and real incomes decreased.
C. Your nominal income increased and your real income decreased.
D. Your nominal income decreased and your real income increased.
E. Your nominal income increased and your real income stayed the same.

Answer: A
Growth rate of your nominal income this year = (35,000/30,000)-1 =16.67%
Growth rate of your real income this year = growth rate of your nominal income this year inflation rate this
year = 16.67% - 10% =6.67% >0, so both your nominal and real incomes increased.

25) If the price index ( ) increases from 105 to 109, the rate of inflation is:
A. 0.04
B. 0.036
C. 0.038
D. 0.049
E. 0.01

Answer: C
Inflation rate = (price index in year 2-price index in year 1)/ price index in year 1 = (price index in year 2/price
index in year1) -1 = 1(109/105) -1 = 0.038.

26) When government policies are designed, which of the following goals often conflict?
A. Efficiency and equality.
B. Efficiency and quality.
C. Time efficiency and accuracy.
D. Equality and budget deficits.
E. Quality and budget deficits.

Answer: A
Efficiency means that society is getting the maximum benefits from its scarce resources. Equality means that
those benefits are distributed uniformly among society s members. In other words, efficiency refers to the
size of the economic pie, and equality refers to how the pie is divided into individual slices. When the
government tries to cut the economic pie into more equal slices, the pie gets smaller. Therefore, when
government policies are designed, there is trade-off between efficiency and equality.

27) Which of the following would be included in Canadian GDP (

) for a given year? The market value of:
A. wine grown in Canada by US citizens.
B. electronics made in Japan and sold in Canada.

27
 C. movies produced outside Canada by Canadian film makers.
D. All above items should be included in Canadian GDP for a given year.
E. None of above items should be included in Canadian GDP for a given year.

Answer: A
The GDP of Canada is the market value of all final goods and services produced within Canada in a given period
of time, so neither electronics made in Japan nor movies produced outside Canada should not be included in
the GDP of Canada.

28) Real GDP ( GDP GDP) always equals nominal GDP ( GDP
GDP) in:
A. current year.
B. base year.
C. constant year.
D. every year.
E. none of above years.

Answer: B
We calculate real GDP by first designating one year as a base year. We then use the prices of goods in the base
year to compute the value of goods and services in all the years. In other words, the prices in the base year
provide the basis for comparing quantities in different years. Nominal GDP uses current prices to place a value
on the economy s production of goods and services. Real GDP uses constant base-year prices to place a value
on the economy s production of goods and services. Real GDP is not affected by changes in prices in current
years, while nominal GDP is affected by changes in prices in currents years. Therefore, real GDP always equals
nominal GDP in base year, not current year.

29) Some economists feel inflation ( 务 ) is bad:

A. only if it is steady.
B. only if it is anticipated.
C. because it reduces real GDP so much.
D. because it redistributes income arbitrarily.
E. All above statements are correct.

Answer: D
When there is an inflation, the real value of interests paid by loan borrowers decreases, so the real value of
interests received by loan lenders decreases too. Therefore, the interest incomes redistribute from loan lenders
to loan borrowers.

30) Which of the following problems exist both in inflation period ( 务 )

and deflation period ( 务 )?
A. Menu costs.
B. Redistribution of wealth.

28
 C. Reduction of the overall demand for goods and services in the economy.
D. A and B.
E. A, B and C.

Answer: D
When there is an inflation, the real value of interests paid by loan borrowers decreases, so the real value of
interests received by loan lenders decreases too. Therefore, the interest incomes redistribute from loan lenders
to loan borrowers. When there in an deflation, the interest incomes redistribute from loan borrowers to loan
lenders.
Menu costs are the costs of changing prices. Losses always exist whether there is an inflation or there is a
deflation.

31) During a recession ( ) in an economy, there will be an increase in

A. nominal income.
B. unemployment.
C. economic growth.
D. business spending.

Answer: B
According to the definition, recession is a period of declining real incomes and rising unemployment. During a
recession in an economy, both the economy growth and business spending will fall.

32) Which of the following people would be officially counted as unemployed?

A. someone who is a full-time student
B. someone who is retired
C. a person who has just graduated from college looking for a first job
D. a person who has given up looking for work
E. someone who works in the family business without pay

Answer: C
Unemployed people includes those who were not employed, were available for work, and had tried to find
employment during the previous four weeks. Unpaid worker in a family member s business in E is a
employed person, while full-time student in A, retired people in B, people who have given up looking for jobs in
D are neither employed people nor unemployed people.

33) Which one of the following combinations of policy instruments involves only the use of monetary policy (
务 ) measures?
A. Lower interest rates and a reduction in government spending
B. Lower interest rates and a budget deficit
C. Lower taxes and more government spending
D. Lower interest rates and open market operations

29
 Answer: D
Monetary policy is the setting of the money supply by policymakers in the central bank. Changes in interest
rates and open market operation are caused by central bank, while changes in government spending, budget
deficits and taxes are caused by the government.

34) Which of the following is most likely to lead to an increase a nation s GDP, holding all else constant?
A. A decrease in technology
B. A decrease in interest rates
C. A decrease in human capital
D. A decrease in physical capital

Answer: B
GDP = consumption + investment + government purchase + net exports. When the interest rates are lower, people
tend to consume more, instead of saving more money in banks because interests are lower. Therefore, the GDP
will increase. Technology, human capital and physical capital are important factors to increase GDP, so
decreasing them is less likely to increase GDP compared with B.

35) If the government wanted to decrease inflation, it could:

A. Do nothing.
B. Decrease taxes.
C. Decrease interest rates.
D. Decrease government spending.

Answer: D
When there is an inflation, it means that there are too much money in the economic system, so government
should try to decrease money in economic system. Both decreasing taxes and decreasing interest rates will
encourage people to consume, causing more money in economic system, while decreasing government
spending will discourage people to consume and discourage firms to invest more, so the correct answer is D.

36) If a country s nominal Gross Domestic Product in 2020 were growing at 6% and inflation rate was 2% in 2020.
The real Gross Domestic Product in 2020 was:
A. 2%
B. 3%
C. 4%
D. 5%
E. 6%

Answer: C
Real GDP growth rate = Nominal GDP growth rate inflation rate = 6% - 2% = 4%

37) Which of the following statements is a disadvantage of GDP measurement?

A. GDP does not measure the product of foreign labor.

30
 B. GDP does not reflect the value of goods and services produced at home.
C. GDP does not use market value to measure goods and services.
D. GDP measurement does not consider intermediate goods.

Answer: B
GDP measures the market value of all final goods and services produced within a country in a given period of
time, it considers all goods produced within this country, including the product of foreign labor, so A and C are
wrong.
GDP does not measure the value of intermediate goods because the value of intermediate goods has already
been included in the final goods, so D is not a disadvantage of GDP.
House work like child care by parents at home is important for our life, but GDP does not measure its value,
which is a disadvantage of GDP.

38) Which of the following does not contribute to the growth of real GDP?
A. Advancement of technology
B. Growth of the price level.
C. Increase in consumption.
D. Rise in government spending.

Answer: B
Real GDP uses constant base-year prices to place a value on the economy s production of goods and services.
Because real GDP is not affected by changes in prices, changes in real GDP reflect only changes in the amounts
being produced. Therefore, Growth of the price level does not contribute to the growth of real GDP.

39) Changes in which of the following items may cause movements along the aggregate demand curve (
)?
A. Technology.
B. Government regulations.
C. Wages and salaries.
D. The price level.

Answer: D
Given a period of time, the vertical line of aggregate demand curve reflects price level, while horizontal line of
aggregate demand curve reflects aggregate demand, so changes in the price level may cause movements along
the aggregate demand curve.

40) Japan will amend laws to guarantee its citizens work until they are 70, in an effort to address a chronic labor
shortage and rising cost of pensions. Apart from raising retirement age, which of the following will not reduce
labor shortage? (Credit to Guanzhuo Qu from International School of Nanjing Yuhuatai High School)
A. Government reduces immigration requirements to Japan
B. Japan reduces unemployment benefits
C. Japanese government provides more favored policies to small enterprises

31
 D. Japanese companies outsource some operations to foreign employees

Answer: C
Creating more working opportunities is likely to aggravate the problem of labor shortage.

41) Under the COVID-19, Chinese government issued the coupons for food and soft drink. Which part of aggregate
demand would be increased due to the coupons? (Credit to Mengze Lyu from Faragut school Tianjin Campus)
A. Consumption
B. Investment
C. Government Purchase
D. Net export

Answer: A
Buying goods and services is for the consumption part in the aggregate demand.

42) The unemployment rate in Sanya in winter is lower than it was in the Autumn, what kind of unemployment is
related to: (Credit to Mengze Lyu from Faragut school Tianjin Campus)
A. Structural unemployment
B. Seasonal unemployment
C. Cyclical unemployment
D. None of above

Answer: B
Seasonal unemployment is a kind of short-run employment.

43) Why is aggregate demand curve ( )

downward sloping? (Credit to Zhongyi Yin from Chongqing Yucai Secondary School)
A. Law of demand, as price increases, real GDP decreases.
B. Price increases, people feel like to purchase more, so consumption increases, real GDP increases.
C. Interest rate increases, investment decreases, as a result, real GDP decreases.
D. As price increases, people consume less, real GDP decreases.

Answer: D
GDP = consumption + investment + government purchase + net exports. When price increases, people will
consume less, so GDP will decreases, causing a downward sloping aggregate demand curve.

44) What is the defining characteristic of the so-called New Economy ( ) (Credit to Zhongyi Yin from
Chongqing Yucai Secondary School)
A. Rapid increase in population.
B. Rapid increase in productivity.
C. Rapid increase in GDP.
D. Increase in capital goods and investment.

32
 Answer: B
New economy is a buzzword to describe new, high-growth industries that are on the cutting edge of
technology and are believed to be the driving force of economic growth and productivity.

45) Who will benefit from an unanticipated deflation? (Credit to Yuanting Xu from Nanjing NO. 1 Middle School)
A. Savers
B. Firms
C. Government
D. Banks
E. Borrowers

Answer: A
An unanticipated deflation will make the real interest rate higher than expected. So savers, who are also
lenders of money, will benefit from it. Borrowers will lose as the real value of money that they need to pay back
is higher than expected. Firms in the economy are usually demanders for funds. Government can either be
saver or borrower according to the budget balance. Banks are financial intermediaries that provides liquid
assets in the form of bank deposits to lenders and uses those funds to finance borrowers investment
spending on illiquid assets.

46) An increase in which of the following is least likely to promote economic growth?
A. Business spending on research and development
B. Government spending in healthcare and education
C. Investment tax credits
D. Capital stock
E. Transfer payments

Answer: E
The increase in the quality and quantity of resource will promote the economic growth.
Choice A: An increase in business spending on research and development will improve the quality of resource,
which will promote economic growth.
Choice B: An increase in government spending in healthcare and education improve the quantity and quality
of human capital, which will promote economic growth.
Choice C: An increase in investment tax credit will stimulate the business investment, thus increase capital
stock, which will promote economic growth.
Choice D: An increase in capital stock will promote economic growth.
Choice E: An increase in transfer payment increases the government spending, which does not affect the
quantity and quality resources directly, thus it is least likely to promote economic growth.

47) Ford motor company produced a truck in 2020 and placed the truck into its inventory. The company decided
to send the truck to a Ford dealership in February 2021 and the truck was sold to a customer two weeks later.
What year would the Ford truck be counted towards GDP and what component of GDP would be impacted?

33
 (Credit to Robert March from BASIS International School Park Lane Harbour)
A. 2021 , Consumer Spending
B. 2020 , Investment Spending
C. 2021 , Investment Spending
D. 2020 , Consumer Spending
E. The truck would not be included in GDP

Answer: B
Inventory is part of Investment Spending. The truck is included in GDP in the year that it is produced, rather
than the year that it is sold.

48) Which of the following is not included in the accounting of GDP? (Credit to Hiuying Cheung from RDFZ
Chaoyang Branch School)
(1) The batch of goods exported to foreign countries.
(2) A grant from the government to poor families.
(3) The commission charged by an agent for selling an old house.
(4) The income from selling second-handed cars.
(5) Selling the shares in the stock market.
(6) The insurance company received an insurance premium from a household.

A. (1) and (2) only

B. (2) and (3) only
C. (2) and (4) only
D. (1) and (4) only
E. (5) and (6) only

Answer: C
Grant from the government to the poor families, which is a transfer payment from government to households,
does not involved in any production of products. Selling second-handed products does not produce any new
products. Therefore, they both are not counted into the GDP calculation.

49) Which of the following will cause aggregate supply to increase in Country X? (Credit to Cuiyan Tan from
Guangdong Country Garden School)
A. An increase in personal income taxes
B. The discovery of low-cost alternative sources of energy
C. A decrease in labor productivity with no change in nominal wages
D. Depreciation of country X s currency on the foreign exchange market
E. An increase in the price level

Answer: B
When cost of factors of production decreases, AS will increase. The discovery of low-cost alternative sources
of energy will make energy cheaper, so AS curve shift to right.

34
50) Investment in physical capital is most likely to occur as a result of an increase in: (Credit to Cuiyan Tan from
Guangdong Country Garden School)
A. interest rates
B. inflation rates
C. business confidence
D. money demand
E. personal consumption

Answer: C
Business confidence is a factor leading to increase in investment.

35