ECONOMIC CHALLENGE

Round 1: Written Test (MCQ)

Full Name:
__________________________________________________
School Name:
__________________________________________________
Instructions:
Do not open this booklet until you are told to do so.
Use a blue/black pen.
There are 60 multiple-choice questions in this test.
Circle the correct answer.
In case you have circled an answer that you feel is incorrect, clearly cut
that answer and circle the answer you feel is correct.
You have exactly 60 minutes to finish the written test.
There is no negative marking and each question carries one mark.

Q1. What is the fundamental problem in economics?

a) There are opportunity costs to the production of certain goods and
services.
b) There are unlimited wants and scarce resources.
c) There is a lack of capital to produce goods.
d) It is difficult to decide what to produce, how to produce and for whom
to produce.

Q2. What is normative economic analysis?

a) It deals with the things as they are and not what is desirable.
b) It deals with the things as they ought to be.
c) It deals with actual situations.
d) It analyses cause and effect relationship involved in actual situations.
Q3. Factors of production will be employed only if it is profitable to do
so is a disadvantage of which type of economy?
a) Market economy
b) Mixed economy
c) Planned economy
d) None of the above
Q4. Which type of economy often experiences high amounts of
unemployment?
a) Planned economy
b) Mixed economy
c) Market economy
d) None of the above

Q5. Which of the statements below is an assumption of the production

possibility curve?
a) Resources are not fully and effectively employed.
b) Resources are not equally efficient in production of all products.
c) Resources are not fixed.
d) Technology does not remain unchanged.
Q6. In 2010, floods caused severe damage to wheat production.
How would this be shown on a market demand and supply diagram for
wheat?
supply curve
a) no change
b) shift to the left
c) shift to the left
d) shift to the right

demand curve
shift to the right
no change
shift to the left
shift to the left

Q7. Why might a free market economy be more advantageous than a

mixed economy?
a) Equality of income is encouraged.
b) In a mixed economy, governments use taxes which are inefficient.
c) Production is determined solely by consumer wishes.

d) Social costs are taken into consideration.

Q8. What is a variable cost to a firm producing bicycles?
a) the component parts of the bicycles
b) the interest on money borrowed
c) the rent of the bicycle factory
d) the salaries of the senior managers
Q9. A country with a low income per head discovers large quantities of
oil, which eventually makes everybody better off. Why is the basic economic
problem of scarcity not solved by this discovery?
a) People may not get jobs in the oil industry.
b) Peoples wants are always changing and increasing.
c) Prices of oil can fluctuate on the world market.
d) Production of oil can damage the environment.

Q10. Two telecommunications companies are to merge to finance investments

in new technology, which will be more efficient and require smaller buildings.
Three hundred workers will lose their jobs. What will happen to the factors of
production used?
land
a) fall
b) fall
c) rise
d) uncertain

labor
fall
fall
rise
rise

capital
rise
uncertain
rise
fall

enterprise
fall
rise
rise
fall

Q11. How do industries under monopolistic competition resemble those

in pure competition?
a) In both market structures, barriers to entry are weak or do not exist.
b) Differentiated products are produced in both market structures.
c) Industries in both market structures consist of only a few firms.
d) Industries in both market structures are price searchers as opposed to
price takers.
Q12. If market failures exist, which of the following is true?
a) Government intervention in economic activities will not improve on
market outcomes.
b) The marginal benefits of production are greater than marginal costs,
regardless of price.
c) The equilibrium price and quantity determined by markets are not
socially optimal.

d) More public goods are produced than private goods.

Q13. When the price of cheddar cheese increased by 14 percent, the
quantity demanded for cheddar cheese decreased by 22 percent. Therefore, we
can conclude that
a) cheddar cheese has no good substitutes.
b) the price elasticity of demand for cheddar cheese is about .64.
c) the income elasticity of demand for cheddar cheese is about 1.6.
d) the demand for cheddar cheese is elastic with respect to price.
Q14. You know that the supply of tennis rackets decreased and the
demand for tennis rackets increased, but you do not know the magnitude of the
changes. Compared to the original equilibrium price and quantity (before the
changes), what can you say for certain?
a) The equilibrium quantity of tennis rackets will decrease.
b) The equilibrium price of tennis rackets will decrease.
c) The equilibrium quantity of tennis rackets will increase.
d) The equilibrium price of tennis rackets will increase.
Directions: Use the diagram below, which shows the supply and demand
Directions:
Use theto
diag
ram below
, which show
and demand for avocados, to answer
for
cucumbers,
answer
questions
15,s the
16,supply
and 17.
questions 7, 8, and 9.

7. Say that the original supply curve for avocados is the curve labeled S and the demand
curve for avocados is the curve labeled D. If the supply curve moved from S to S1 and
Q15.
Say
thedid
original
supply
for cucumbers
is the
curve that
the dem
andthat
curve
not move,
at thecurve
new equilibrium
we would
conclude

labeled S and the demand curve for cucumbers is the curve labeled D. If the
supply
decreased
decreased.
supplyA.
curve
moved
from and
S toquantity
S1 anddem
theanded
demand
curve did not move, at the
B. supply increased
and
quantity dem
new equilibrium
we would
conclude
thatanded decreased.
C. price decreased and quantity demanded did not change.
D. supply increased and quantity demanded increased.
E. demand increased and quantity supplied increased.

8. Assuming that avocados are a normal good, which of the following might explain a 7
shift
in the demand curve from D1 to D?

a) supply decreased and quantity demanded decreased.

b) supply increased and quantity demanded decreased.
c) supply increased and quantity demanded increased.
d) demand increased and quantity supplied increased.

Q16. Assuming that cucumbers are a normal good, which of the

following might explain a shift in the demand curve from D1 to D?
a) Consumer incomes increase.
b) The price of tortilla chips, a complementary product, decreases.
c) Production technology for cucumbers improves, and sellers flood the
market with avocados.
d) The price of tomatoes, a substitute product, decreases.
Q17. Say that the price of cucumbers in the United States rose from P2 to
P1 and the quantity of cucumbers decreased from Q2 to Q1. Which of the
following would best explain this?
a) There is a plant disease killing cucumber trees in regions where
cucumbers are grown.
b) There is an increase in demand for salad, which is made from
cucumbers.
c) There is an increase in the amount of cucumbers imported from
Mexico.
d) There is an increase in the price of tomatoes, a substitute for
cucumbers.

Q18. 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.

Questions 19, 20, and 21 refer to a firm's short-run cost information,

shown in the table below:

Questions 13, 14, and 15 refer to a frm's short-run cost information, shown in the table below:
Quantity of Output
0
1
2
3

Total Cost
$6
$7
$9
$12

Q19.
The
costs ofthe
producing
theofsecond
13. The
marg
inalmarginal
costs of producing
second unit
output unit of output
A.
B.
C.
D.
E.

are $0.
are $2.
are $4.50.
are $22.
cannot be determined.

14. The fxed costs of producing this product

A.
B.
C.
D.
E.

are $6.
are $9.
are $16.
are $34.
cannot be determined.

15. The average variable costs of producing 3 units of output

a) are $0.
b) are $2.
c) are $4.50.
d) are $22.
Q20. The fixed costs of producing this product
a) are $6.
b) are $9.
c) are $16.
d) are $34.
Q21. The average variable costs of producing 3 units of output
a) are $6.
b) are $4.
c) are $2.
d) are $12.
Q22. The demand for a product becomes more inelastic as the product

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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.
Directions: Use the graph below, which shows the supply and demand for
cheese, to answer question 23. Assume that the price per pound of cheese is
measured on the vertical axis and the quantity
of cheese in pounds is measured on the horizontal axis.

Q23. If the
for the price of
pound,

government made it illegal

cheese to fall below $8 per

a) this would be an example of a price ceiling and would result in a

shortage of 40 pounds of cheese.
b) this would be an example of a price floor and would result in a surplus
of 40 pounds of cheese.
c) this would be an example of a price floor and would result in a
shortage of 40 pounds of cheese.
d) this would be an example of a price floor and would result in a
shortage of 20 pounds of cheese.
Q24. In microeconomics, the basic characteristic of the long run is that

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a) the firm cannot change its plant and equipment.

b) the firm cannot hire and fire workers.
c) all resources and all costs are variable.
d) the firm cannot shut down its operations while remaining in business.
Directions: Answer questions 25, 26, and 27 using the graph below, which
shows demand, marginal cost, average total cost, and average variable cost
curves for a profit-maximizing firm in perfect competition.

Q25. If the competitive firm shown faced a market price of P3, it would
choose to produce
a) output quantity Q1 and it would be making economic profits.
b) output quantity Q2 and it would be breaking even.
c) output Quantity Q3 and it would be making economic losses.
d) output Quantity Q4 and it would be making economic profits.
Q26. In the short run, if the competitive firm shown faced a market price
of P1,
a) the firm would be breaking even.
b) the firm would choose to shut down.

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c) the firm would raise its price to P3 in order to sell more output.
d) the firm would choose to produce output quantity Q2.
Q27. If competitive firms faced a market price of P2 and produced the
profit maximizing quantity of output, in the long run they would
a) be earning economic profits and new firms would enter the industry.
b) be earning zero economic profits and firms would leave the industry.
c) be earning zero economic profits and firms would neither enter nor
leave the industry.
d) be making economic losses and existing firms would stay in the
industry.
Q28. When you buy an egg at the grocery store, the value is considered a
part of GDP. When a restaurant that sells omelets buys an egg, the value of the
egg is not considered to be a part of GDP. Which of the following is true in
explaining the difference?
a) GDP includes the value of only final goods and services.
b) If the restaurant's purchase of the egg were included, the value of the
egg would be double-counted in GDP.
c) If you buy an omelet at the restaurant, the price of the omelet is added
to final GDP.
d) All of the above are correct.
4.

Q29. The table below shows national income account measures for
Country A from last year:

The table below shows national income account measures for Country A from last year:
Personal Consumption Expenditures
Gross Private Domestic Investment
Exports
Imports
Government Goods and Services Expenditures
Federal Tax Revenues

$7,900
$1,850
$1,350
$1,190
$1,000
$900

What wasWhat
the Gross
of Country
wasDomestic
the grossProduct
domestic
productA?of Country A?
A.
B.
C.
D.
E.
5.

$10,910
$12,390
$13,290
$14,190
$11,910

The money used by the United States is referred to fiat money. This means that it is
A. commodity money.
B. generally accepted because it can be exchanged for a metal such as gold or silver.
C. backed by gold at Fort Knox.

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a) $10,910
b) $12,390
c) $13,290
d) $11,910
Q30. Suppose the economy is in equilibrium at the natural rate of
unemployment. When the supply of money increases, ceteris paribus, we expect
the initial impact on the economy to be that
a) real output will rise.
b) interest rates will fall.
c) aggregate demand will decrease.
d) aggregate supply will increase.
Q31. Along the short run Aggregate Supply Curve, all of the following
are assumed to be held constant, except for:
a) Resource prices
b) Technology
c) Wage rates
d) Price level
Q32. The country of Econia has a balanced government budget and low
inflation but is slipping into a recession because of an international financial
crisis. The use of traditional tools of fiscal and monetary policy would be that

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a) fiscal policy should increase government spending and cut taxes, and
monetary policy should increase the money supply and increase interest rates.
b) fiscal policy should increase government spending and taxes, and
monetary policy should cut the money supply and interest rates.
c) do nothing yet except monitor the situation because it is always better
to wait until the recession is well understood.
d) fiscal policy should increase government spending and cut taxes, and
monetary policy should increase the money supply and cut interest rates.
Q33. Suppose United States consumers suddenly revise upwards their
income expectations. The immediate result is that United States aggregate
demand will
a) increase, because higher income expectations increase consumption.
b) decrease, because consumers will save more of their income.
c) increase, because firms will invest more.
d) not change, because expectations of consumers are not relevant in the
present.
Q34. The country of Econia, an importer of oil, experiences large oil
price increases. The most likely outcome is
a) aggregate demand shifts leftwards as higher prices cause people to cut
back.
b) short run aggregate supply shifts rightwards as prices of inputs rise.
c) short run aggregate supply shifts leftwards as the cost of production for
many goods rises.
d) both aggregate supply and demand shift rightwards, leaving the price
level indeterminate.
Q35. Suppose business firm leaders suddenly revise their expectations
downwards and believe that a recession is coming. Aggregate demand will

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a) shift leftwards as business investment spending adjusts for expected

declines infuture production.
b) shift rightwards because businesses will consume more in preparation
for future production.
c) shift leftwards because interest rates will rise.
d) increase because prices will fall.
Q36. "My income amount went up last year, but I paid the same dollar
amount of taxes." This is an example of a
a) proportional tax rate system.
b) regressive tax rate system.
c) progressive tax rate system.
d) value-added tax rate system.
Q37. Ananya earns Rs. 12000 per year and pays Rs. 3000 in income tax.
Rahul earns Rs. 18000 per year and pays Rs. 6000 in income tax. This income
tax is:
a) proportional
b) regressive
c) progressive
d) a poll tax
Q38. What is a fiscal measure to reduce growth in consumer spending?

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a) Reducing taxes on company profits

b) Increasing the interest rate
c) Raising welfare benefits
d) Increasing income taxes
Q39. What is a tightening monetary policy to reduce consumer demand?
a) Reducing taxes on company profits
b) Increasing the interest rate
c) Raising welfare benefits
d) Increasing income taxes
Q40. What is a supply-side measure to encourage businesses to invest and
expand output?
a) Reducing taxes on company profits
b) Increasing the interest rate
c) Raising welfare benefits
d) Increasing income taxes
Q41. The best material to use for money has all of the following
characteristics except

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a) durability
b) portability
c) indivisibility
d) stable supply and demand
Q42. What is a fiscal policy expansion to encourage economic growth?
a) Reducing taxes on company profits
b) Increasing the interest rate
c) Raising welfare benefits
d) Increasing income taxes
Q43. Which of the following is not included in public expenditure?
a) Capital investments by public limited companies.
b) Wages paid to public sector employees.
c) Interest payments on local authority borrowing.
d) Investments in roads by central government.
Q44. The theory of decreasing marginal utility (decreasing marginal
value) implies that individuals will

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a) spend less of their income on necessities as consumer incomes

increase.
b) place the most value on the goods for which they are the lowest cost
producers.
c) value the third hamburger they consume less than the second.
d) value the tenth hamburger they consume more than the ninth.
Q45. The national debt of a country is
a) The budget deficit.
b) The annual public sector borrowing requirement.
c) The total stock of public and private sector borrowing.
d) The total accumulated stock of public sector borrowing.
Q46. Under a system of freely floating exchange rates, if the US has a
trade deficit with China, this should cause the dollar to __________ and the
Chinese renminbi (yuan) to ___________ in foreign exchange markets.
a) not change; appreciate
b) appreciate; depreciate
c) depreciate; appreciate
d) depreciate; depreciate
Q47. Which is not included in the current account of the balance of
payments?

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a) Exports of services
b) Portfolio investment
c) Current transfers
d) Income
Q48. Which is not included in the financial account of the balance of
payments?
a) Direct investment
b) Transactions in non-produced, non-financial assets
c) Reserve Assets
d) Portfolio investment
Q49. Which system is defined as a system in which the central bank
allows the exchange rate to be determined by market forces but intervenes at
times to influence the rate?
a) Crawling Peg System
b) Flexible Exchange Rate System
c) Managed Floating System
d) Adjustable Peg System
Q50. Under which system does a country specify a parity value for its
currency and permits the exchange rate to fluctuate within a margin of one per
cent above or below the parity value?
a) Crawling Peg System

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b) Fixed Exchange Rate System

c) Managed Floating System
d) Adjustable Peg System
Q51. What kind of an exchange rate system does India follow?
a) Crawling Peg System
b) Flexible Exchange Rate System
c) Managed Floating System
d) Adjustable Peg System
Q52. If the demand curve for British pounds shifts to the right,
the dollar price of British pounds will increase
a)
the dollar price of British pounds will decrease
b)
the exchange rate between dollars and pounds will be out
c) of equilibrium
the pound will fall in value against the dollar
d)
Q53. If the U.S. dollar appreciates, it means that
the value of the U.S. dollar has decreased
a)
the value of foreign exchange has increased
b)
fewer U.S. dollars are required to purchase foreign
c) exchange
more U.S. dollars are required to purchase foreign
d) exchange

21

Q54. Which one of the following is not true?

a)

b)
c)
d)

An exchange rate is the means by which the price of a

good in one country is translated into the price to the buyer in
another country.
The cost of a foreign good in dollars will depend on the
current exchange rate.
The exchange rate will affect the willingness of foreign
buyers and sellers to trade with each other.
The exchange rate is the price of a currency in terms of
another currency for exchanges of goods and services but not
for financial transactions.

Q55. If on Tuesday you can buy 125 yen per U.S. dollar and on
Wednesday you can buy 120 yen per U.S. dollar,
both the U.S. dollar and the yen have depreciated
a)
the U.S. dollar has appreciated and the yen has depreciated
b)
the U.S. dollar has depreciated and the yen has appreciated
c)
the yen has appreciated and the U.S. dollar has remained
d) constant

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Q56. Imagine that there are only two nations in the world, the United States and
Mexico. If Americans buy more goods made in Mexico, other things constant,
the
U.S. demand curve for Mexican pesos will shift rightward
a)
U.S. demand curve for Mexican pesos will shift leftward
b)
U.S. supply curve of Mexican pesos will shift leftward
c)
Mexico s supply curve of Mexican pesos will shift
d) leftward
Q57. Suppose U.S. consumers start buying more English shoes and fewer
U.S. shoes. What impact will this trend have on the foreign exchange market?
U.S. demand for foreign exchange, in general, and British
a) pounds, in particular, will increase.
U.S. demand for foreign exchange, in general, and British
b)pounds, in particular, will decrease.
U.S. demand for British pounds will increase, but the
c) demand for foreign exchange will probably decrease.
U.S. demand for British pounds will decrease, but the
d)demand for foreign exchange will probably increase.
Q58. A type of unemployment in which workers are in-between jobs or are
searching for new and better jobs is called _______ unemployment:
a) frictional
b) cyclical
c) structural
d) turnover
Q59. Which of the following would cause the aggregate demand curve to shift
to the right?
a) an increase in purchases by the federal government
b) an increase in real interest rates
c) an appreciation of the American dollar
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d) a decrease in the money supply

Q60. Which of the following is an example of "portfolio investment"?
a) An American places funds in a savings account in Canada
b) Tokyo Bank of Japan buys Union Bank of the United States
c) Saturn Corp. (owned by General Motors) builds a new factory in Tennessee
d) An American puts $10,000 into a money market fund

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