Practice questions.

Part 1. Multiple choice

1. Which of the following is an example of the principle "People face trade-offs"?

A. A student decides to study instead of going to a party.

 This reflects the trade-off between studying and enjoying leisure time. Choosing one means
giving up the other.
B. The government prints more money.
C. The price of a good increases due to high demand.
D. A company increases production.

2. What does the principle "Rational people think at the margin" imply?
A. People always think irrationally under pressure.
B. Decisions are made based on total costs.
C. People make decisions by comparing marginal benefits and marginal costs.

 Rational decision-makers consider the additional (marginal) benefits and costs when making
choices.
D. Resources are allocated evenly.

3. Which principle explains the benefit of globalization?

A. Prices rise with money printing.
B. Trade can make everyone better off.

 Specialization and trade allow countries to enjoy a greater variety of goods and services at
lower costs.
C. Governments always improve outcomes.
D. Society faces no trade-offs.

4. What happens when the government prints too much money?

A. Unemployment decreases.
B. Prices fall.
C. Inflation occurs.

Excessive money supply leads to a general increase in prices.

D. Productivity increases.

5. GDP measures:
A. Only goods produced by the government.
B. The total market value of all final goods and services produced within a country.
 GDP includes all final (not intermediate) goods and services produced domestically in a given
period.
C. The income of only the working population.
D. All financial transactions.

6. Real GDP:
A. Uses current prices.
B. Includes imports.
C. Is adjusted for inflation.

 Real GDP removes the effects of price changes to reflect true economic output.
D. Ignores production changes.

7. Nominal GDP will increase if:

A. Prices rise or quantity increases.

 Nominal GDP is calculated using current prices, so it can rise due to higher prices or more
production.
B. Inflation decreases.
C. The population decreases.
D. Exports fall.

8. Which of the following would be included in GDP?

A. Buying stock in a company.
B. A new car purchased from a dealership.

 Only newly produced goods and services count in GDP; used goods or financial transactions
do not.

C. A used book sale.

D. A gift from a friend.

9. The GDP deflator is used to:

A. Measure cost of living.
B. Calculate inflation using imports.
C. Convert nominal GDP to real GDP. (real GDP = Nominal GDP/GDP deflator)

 The GDP deflator helps adjust nominal GDP by removing inflation to find real GDP.
D. Determine personal income.

10. The CPI measures:

A. The average productivity of firms.
B. The price level of all produced goods.
C. The cost of a fixed basket of goods and services.
 CPI tracks the price changes of a consistent set of consumer goods over time.
D. Only food and fuel prices.

11. A major problem with CPI is:

A. It adjusts for inflation automatically.
B. It understates the cost of living.
C. Substitution bias.

 CPI assumes consumers buy the same items even if prices change, ignoring substitution for
cheaper goods.

When prices change, people often adjust what they buy:

 If beef becomes expensive, people might switch to chicken.

 If gasoline prices rise, someone might take the bus more often.

But CPI doesn't account for this substitution behavior.

So:

 Even if people are spending less (by switching to cheaper alternatives),

 CPI might still show a higher cost of living than what people are really experiencing.

D. It excludes consumer behavior.

12. If the CPI increases, it implies:

A. A decrease in national income.
B. Prices have fallen.
C. The cost of living has increased.

 A rise in CPI means average prices for consumer goods and services have gone up. ->
everything is more expensive
D. Real wages have increased.

13. Investment in GDP includes:

A. Buying stocks.
B. Government bonds.
C. Business spending on equipment.
D. Personal savings.

 GDP investment refers to physical capital spending, not financial investments like stocks or
bonds.
14. What happens in a closed economy if saving exceeds investment?
A. Net exports increase.
B. GDP falls.
C. Interest rates fall.
D. Inflation rises.

 Excess saving leads to a surplus in the loanable funds market, putting downward pressure on
interest rates.

In a closed economy, saving is the supply of loanable funds, and investment is the demand.

If saving > investment → there's extra money to lend → surplus in the loan market → interest
rates fall to balance supply and demand.

15. The supply of loanable funds comes from:

A. Investors
B. Borrowers
C. Banks
D. Saving

 Savings by households and firms supply the funds available for borrowing.

The loanable funds market is where people lend and borrow money.

Supply in this market comes from savers — like households and firms — who don’t spend all their income.

This saved money goes into banks or investments, making it available for others to borrow.

16. A government budget deficit will:

A. Increase private saving.
B. Increase the supply of loanable funds.
C. Crowds out private investment.
D. Lower interest rates.

 When the government runs a budget deficit, it borrows more money from the loan market.

This increases demand for loanable funds.

As a result, interest rates go up.

When interest rates are higher, it's more expensive for businesses to borrow.

So they invest less — this is called "crowding out" private investment.

17. Frictional unemployment occurs when:
A. There is a recession.
B. Workers are between jobs.

 Frictional unemployment (Thất nghiệp tạm thời) happens naturally when people:

 are looking for a new job,

 just graduated,
 or left one job to find another.

It’s not because of the economy, but because finding a good match takes time.

C. Technology replaces labor.

D. Minimum wage is reduced.

18. Structural unemployment (Thất nghiệp cơ cấu) is caused by:

Structural unemployment happens when:

 Workers' skills no longer match the jobs available.

 Often caused by technology changes, automation, or industries moving.

A. Temporary layoffs.
B. Skills mismatch.

 A factory worker loses their job because robots now do the work, and the worker doesn’t
have skills for tech jobs.
C. Excess labor demand.
D. Business cycles.

19. The natural rate of unemployment includes:

A. Frictional and structural unemployment.
B. Cyclical unemployment only.
C. Zero unemployment.
D. Only voluntary unemployment.

 The natural rate of unemployment is the normal level of unemployment that:

 Always exists in a healthy economy.

 Includes:
o Frictional (people between jobs),
o Structural (skills mismatch).
It does not include cyclical unemployment, which happens during a recession.

20. Unemployment insurance may:

A. Increase job turnover.
B. Decrease unemployment.
C. Make job search more urgent.
D. Increase frictional unemployment.

 Unemployment insurance gives people money while they’re jobless.

Because they’re not desperate for money right away, they might:

 Take more time to find the right job,

 Or not rush to accept the first offer.

This makes frictional unemployment last longer.

🟢 It helps people, but can slow down the job search a bit.

Part 2. True and false questions

True/False Questions provide explanation

1. The Consumer Price Index (CPI) measures the average price of all goods and services
produced in an economy.
False.

Explanation: CPI measures the average price of a fixed basket of goods and services
consumed by households, not all goods and services produced. It focuses on consumer
goods, not total production.

2. If nominal GDP increases, it always means that the economy is producing more goods
and services.

 False.
Explanation: Nominal GDP can increase due to higher prices (inflation) even if the quantity
of goods and services stays the same. To measure actual output, we use real GDP.

3. Real GDP is adjusted for inflation and reflects actual changes in the quantity of goods
and services produced.
 True.
Explanation: Real GDP removes the effects of inflation and shows the true growth in output
by using constant prices from a base year.

4. An increase in the unemployment rate always indicates that the economy is in a

recession.

 False.
Explanation: The unemployment rate can rise for other reasons, such as more people
entering the labor force and actively looking for jobs, which is not necessarily a sign of
recession.

5. The principle “People respond to incentives” explains why higher taxes on cigarettes can
reduce smoking.

 True.
Explanation: Higher taxes increase the price of cigarettes, creating a financial disincentive
to smoke, which aligns with the idea that people change behavior in response to costs and
benefits.

6. Frictional unemployment includes workers who are between jobs or are searching for
their first job.

 True.
Explanation: Frictional unemployment is short-term and voluntary, including people who
are transitioning between jobs or new entrants into the labor force.

7. Public saving is calculated as government spending minus taxes collected.

 False.
Explanation: Public saving is actually taxes minus government spending (T - G). If the
government spends more than it collects in taxes, public saving is negative (a budget deficit).

8. According to the 10 principles of economics, trade can make everyone better off by
allowing specialization and increased efficiency.

 True.
Explanation: Trade allows people and countries to specialize in what they do best, leading
to greater overall efficiency and mutual gains.

9. The GDP deflator is used to convert real GDP into nominal GDP.
  False.
Explanation: The GDP deflator is used to convert nominal GDP into real GDP by removing
the effects of price changes (inflation). Formula:
Real GDP = Nominal GDP / (GDP Deflator / 100)

10. In a closed economy, saving must equal investment.

 True.
Explanation: In a closed economy (no trade with other countries), all income not used for
consumption or government spending is saved and must equal investment (S = I).

Part 3. Calculation question

Question 1. A basket of goods contains:

 10 units of Good A
 5 units of Good B

Prices:

Year Price of Good A Price of Good B

2020 (Base year) $5 $10
2023 $6 $12

Tasks:

a) Calculate the cost of the Cbasket in 2020 and 2023

Cost of the basket in 2020 = 5x10+10x5= 100$

Cost of the basket in 2023 = 6x10+5x12= 120$

b) Calculate the Consumer Price Index (CPI) for 2023 using 2020 as the base year

CPI = (120:100)x100 = 120%

c) Calculate the inflation rate between 2020 and 2023

Inflaction rate= [120-100/100]X100 = 20%

Question 2 . An economy produces only two goods: pens and notebooks.

Quantities and Prices:

Year Pens (Qty) Pens ($) Notebooks (Qty) Notebooks ($)

2021 100 $2 200 $5
2023 120 $3 220 $6

Tasks:

a) Calculate nominal GDP in 2023

 Nominal GDP = (120×3)+(220×6)=360+1320=$1680
b) Calculate real GDP in 2023 using 2021 as the base year
 Real GDP = (120×2)+(220×5)=240+1100=$1340
c) Calculate the GDP deflator for 2023
 GDP Deflator=(Nomianl GDP/Real GDP)×100 =(1680/1340)×100≈125.37
d) Calculate the inflation rate between 2021 and 2023
 Inflation rate=(125.37-100)/100 x 100 = 25.37%

Question 3: Saving and Investment in a Closed Economy

A closed economy has the following data (in billions of dollars):

 GDP (Y) = $6,000

 Consumption (C) = $4,000
 Government purchases (G) = $1,200
 Net taxes (T) = $1,000

Tasks:

a) Calculate private saving

Private saving = Y - T – C
= 6,000 - 1,000 - 4,000
= $1,000 billion

b) Calculate public saving

Public saving = T - G
= 1,000 - 1,200
 = –$200 billion (a budget deficit)
c) Determine national saving

National saving = Private saving + Public saving

= 1,000 + (–200)
= $800 billion
d) What is the level of investment in this economy?

In a closed economy:
Investment (I) = National saving
So, Investment = $800 billion

Question 4: Unemployment Rate and Labor Force Participation

In a country with 40 million adults:

 28 million are employed

 2 million are unemployed
 5 million are full-time students or retired
 The rest are not in the labor force (not seeking work)

Tasks:

a) Calculate the labor force

 Labor Force=28+2=30 million
b) Calculate the unemployment rate
 Unemployment Rate=(Unemployed/labor force )×100 = (2/30)x100 = 6,67%
c) Calculate the labor force participation rate

Labor Force Participation Rate= (Labor Force/Adult Population)x100% = (30/40)x100% =

75%