DON’T THANK ME PAY IT FORWARD

1. What is the economic principle that states that people should make decisions based on the
opportunity costs of their actions?
a) Rationality principle
b) Scarcity principle
c) Opportunity cost principle
d) Marginal principle
Answer: c) Opportunity cost principle

2. What is the study of how individual economic agents (such as households and firms) make
decisions and interact with one another in markets?
a) Microeconomics
b) Macroeconomics
c) Econometrics
d) Financial economics
Answer: a) Microeconomics

3. What is the study of the economy as a whole, rather than individual economic agents and
markets?
a) Microeconomics
b) Macroeconomics
c) Econometrics
d) Financial economics
Answer: b) Macroeconomics

4. Which of the following is a characteristic of a perfectly competitive market?

a) Many buyers and sellers
b) Differentiated products
c) High barriers to entry
d) Monopolistic power
Answer: a) Many buyers and sellers

5. Which of the following is an example of a sunk cost?

a) The cost of purchasing materials for a future project
b) The cost of labor for past work on a project
c) The cost of rent for a current facility
d) The cost of marketing for a new product
Answer: b) The cost of labor for past work on a project

6. The demand curve for a product will shift to the left if there is:
a) An increase in the price of a complementary good
b) A decrease in the price of a substitute good
c) A decrease in income for buyers
d) An increase in income for buyers
Answer: c) A decrease in income for buyers

7. Which of the following is a characteristic of a monopoly market?

1
Prepared by: Pay Back Ethiopia,
 DON’T THANK ME PAY IT FORWARD

a) Differentiated products
b) Many buyers and sellers
c) Low barriers to entry
d) Monopolistic power
Answer: d) Monopolistic power

8. The total revenue for a firm is calculated as:

a) Price x Quantity
b) Price - Cost
c) Marginal revenue x Quantity
d) Marginal cost x Quantity
Answer: a) Price x Quantity

9. A market in which prices do not fully reflect all available information is known as:
a) A perfectly competitive market
b) An informational market
c) An efficient market
d) An imperfect market
Answer: d) An imperfect market

10. The formula for calculating price elasticity of demand is:

a) Percentage change in quantity demanded / percentage change in price
b) Percentage change in price / percentage change in quantity demanded
c) Marginal cost / marginal revenue
d) Marginal revenue / marginal cost
Answer: a) Percentage change in quantity demanded / percentage change in price

11. What is the formula for calculating total cost?

a) Fixed cost + Variable cost
b) Variable cost - Fixed cost
c) Total revenue - Total profit
d) Total profit - Opportunity cost
Answer: a) Fixed cost + Variable cost

12. Which of the following is the best definition of opportunity cost?

a) The cost of producing one unit of output
b) The cost of using one input in production
c) The cost of the next best alternative use of a resource
d) The cost of supplying one unit of output to the market
Answer: c) The cost of the next best alternative use of a resource

13. Which of the following is not a factor of production?

a) Labor
b) Capital
c) Land
d) Money

2
Prepared by: Pay Back Ethiopia,
 DON’T THANK ME PAY IT FORWARD

Answer: d) Money

14. The law of diminishing marginal returns states that:

a) As the quantity of a good produced increases, the opportunity cost of producing an additional
unit increases
b) As the quantity of a good produced increases, the marginal cost of producing an additional
unit decreases
c) As the quantity of a good produced increases, the marginal product of an additional unit
decreases
d) As the quantity of a good produced increases, the demand for the good also increases
Answer: c) As the quantity of a good produced increases, the marginal product of an additional
unit decreases

15. The term "marginal" refers to:

a) The total effect of a decision
b) The additional effect of a decision
c) The average effect of a decision
d) The long-term effect of a decision
Answer: b) The additional effect of a decision

16. The income elasticity of demand for a product is 0.8. This means that the product is:
a) A normal good
b) An inferior good
c) A luxury good
d) A complementary good
Answer: a) A normal good

17. Which of the following would cause a leftward shift in the supply curve of a product?
a) An increase in production costs
b) A decrease in taxes on production
c) An increase in labor productivity
d) An increase in the price of the product
Answer: a) An increase in production costs

18. The cross-price elasticity of demand for two goods is negative. This means that the goods
are:
a) Complementary goods
b) Substitute goods
c) Normal goods
d) Inferior goods
Answer: a) Complementary goods

19. Which of the following is not a determinant of demand?

a) Income
b) The prices of related goods
c) The prices of production inputs

3
Prepared by: Pay Back Ethiopia,
 DON’T THANK ME PAY IT FORWARD

d) Tastes and preferences

Answer: c) The prices of production inputs

20. Which of the following is not a determinant of supply?

a) Technology
b) Production costs
c) Government regulations
d) Tastes and preferences
Answer: d) Tastes and preferences

21. The producer surplus in a market is equal to:

a) The total revenue earned by all producers in the market
b) The difference between the price at which a producer sells a product and the cost of
producing that product
c) The difference between the price at which a producer sells a product and the price at which
consumers are willing to buy that product
d) The total profit earned by all producers in the market
Answer: b) The difference between the price at which a producer sells a product and the cost
of producing that product

22. The consumer surplus in a market is equal to:

a) The total revenue earned by all consumers in the market
b) The difference between the price at which a consumer buys a product and the cost of
producing that product
c) The difference between the price at which a consumer buys a product and the price at which
producers are willing to sell that product
d) The total profit earned by all consumers in the market
Answer: c) The difference between the price at which a consumer buys a product and the price
at which producers are willing to sell that product

23. Which of the following is not a goal of macroeconomic policy?

a) High employment
b) Low inflation
c) High profits for firms
d) High economic growth
Answer: c) High profits for firms

24. The unemployment rate is calculated as:

a) The number of employed workers divided by the total labor force
b) The number of unemployed workers divided by the total labor force
c) The number of workers in a specific industry divided by the total labor force
d) The number of workers in a specific region divided by the total labor force
Answer: b) The number of unemployed workers divided by the total labor force

25. The inflation rate is calculated as the:

a) Percentage change in the price level from one year to the next

4
Prepared by: Pay Back Ethiopia,
 DON’T THANK ME PAY IT FORWARD

b) Percentage change in the unemployment rate from one year to the next
c) Percentage change in the interest rate from one year to the next
d) Percentage change in the exchange rate from one year to the next
Answer: a) Percentage change in the price level from one year to the next

26. What is the difference between nominal GDP and real GDP?
a) Nominal GDP includes inflation, while real GDP does not
b) Real GDP includes inflation, while nominal GDP does not
c) Nominal GDP is calculated using current prices, while real GDP is calculated using constant
prices
d) Real GDP is calculated using current prices, while nominal GDP is calculated using constant
prices
Answer: c) Nominal GDP is calculated using current prices, while real GDP is calculated using
constant prices

27. Which of the following is not a component of aggregate demand?

a) Consumption
b) Investment
c) Government spending
d) Production costs
Answer: d) Production costs

28. What is the definition of fiscal policy?

a) The manipulation of monetary policy tools by the central bank to influence the economy
b) The manipulation of government spending and taxation policies to influence the economy
c) The manipulation of international trade policies to influence the economy
d) The manipulation of labor market policies to influence the economy
Answer: b) The manipulation of government spending and taxation policies to influence the
economy

29. What is the definition of monetary policy?

a) The manipulation of fiscal policy tools by the government to influence the economy
b) The manipulation of interest rates and the money supply by the central bank to influence the
economy
c) The manipulation of international exchange rates to influence the economy
d) The manipulation of industrial policy to influence the economy
Answer: b) The manipulation of interest rates and the money supply by the central bank to
influence the economy

30. The government's budget deficit is equal to:

a) Government spending minus tax revenue
b) Tax revenue minus government spending
c) Government spending plus tax revenue
d) Government debt plus tax revenue
Answer: a) Government spending minus tax revenue

5
Prepared by: Pay Back Ethiopia,
 DON’T THANK ME PAY IT FORWARD

31. Which of the following types of unemployment is caused by changes in the structure of the
economy?
a) Structural unemployment
b) Frictional unemployment
c) Cyclical unemployment
d) Seasonal unemployment
Answer: a) Structural unemployment

32. If the price level in the economy is 120 and the nominal wage is $20 per hour, what is the
real wage?
a) $16.67 per hour
b) $20 per hour
c) $24 per hour
d) $25 per hour
Answer: a) $16.67 per hour [Real wage = Nominal wage / Price level = $20 / 1.20 = $16.67]

33. If the government increases taxes on households, what will happen to aggregate demand?
a) Aggregate demand will increase
b) Aggregate demand will decrease
c) Aggregate demand will remain unchanged
d) The effect on aggregate demand cannot be determined solely by the change in taxes
Answer: b) Aggregate demand will decrease

34. What is the difference between a trade surplus and a trade deficit?
a) A trade surplus occurs when a country exports more than it imports, while a trade deficit
occurs when a country imports more than it exports
b) A trade surplus occurs when a country imports more than it exports, while a trade deficit
occurs when a country exports more than it imports
c) A trade surplus occurs when a country has a favorable balance of trade, while a trade deficit
occurs when a country has an unfavorable balance of trade
d) A trade surplus occurs when a country has a negative balance of trade, while a trade deficit
occurs when a country has a positive balance of trade
Answer: a) A trade surplus occurs when a country exports more than it imports, while a trade
deficit occurs when a country imports more than it exports

35. What is the definition of a tariff?

a) A tax on imports
b) A tax on exports
c) A subsidy on imports
d) A subsidy on exports
Answer: a) A tax on imports

36. Which of the following is not a characteristic of a recession?

a) Decreasing unemployment rate
b) Decreasing GDP
c) Decreasing prices

6
Prepared by: Pay Back Ethiopia,
 DON’T THANK ME PAY IT FORWARD

d) Decreasing consumer spending

Answer: a) Decreasing unemployment rate

37. According to the Phillips curve, there is a trade-off between:

a) Inflation and growth
b) Inflation and unemployment
c) Unemployment and growth
d) Production and inflation
Answer: b) Inflation and unemployment

38. What is the difference between a public good and a private good?
a) A public good is non-excludable and non-rival, while a private good is excludable and rival
b) A public good is excludable and rival, while a private good is non-excludable and non-rival
c) A public good is excludable but non-rival, while a private good is non-excludable but rival
d) A public good is non-excludable but rival, while a private good is excludable but non-rival
Answer: a) A public good is non-excludable and non-rival, while a private good is excludable
and rival

39. What is the definition of the labor force?

a) The total number of employed and unemployed persons in the economy
b) The total number of persons in the economy able to work
c) The total number of persons in the economy over the age of 18
d) The total number of persons in the economy receiving government assistance
Answer: a) The total number of employed and unemployed persons in the economy

40. If the central bank lowers interest rates, what will happen to investment and consumption?
a) Investment and consumption will increase
b) Investment and consumption will decrease
c) Investment will increase and consumption will decrease
d) Investment will decrease and consumption will increase
Answer: a) Investment and consumption will increase

41. Which of the following is not a type of cost?

a) Sunk cost
b) Variable cost
c) Fixed cost
d) Market cost
Answer: d) Market cost

42. Which of the following is a characteristic of a monopolistic competition market?

a) Many buyers and sellers
b) Differentiated products
c) Low barriers to entry
d) Price takers
Answer: b) Differentiated products

7
Prepared by: Pay Back Ethiopia,
 DON’T THANK ME PAY IT FORWARD

43. The Herfindahl-Hirschman Index (HHI) is used to measure:

a) The level of competition in a market
b) The level of government regulation in a market
c) The level of international trade in a market
d) The level of monopolistic power in a market
Answer: a) The level of competition in a market

44. A market in which a small number of firms compete is known as:

a) A perfectly competitive market
b) An oligopoly market
c) A monopolistic competition market
d) A monopoly market
Answer: b) An oligopoly market

45. Which of the following is the best definition of productivity?

a) The amount of output produced per unit of labor input
b) The amount of output produced per unit of capital input
c) The amount of output produced per unit of input costs
d) The amount of output produced per unit of sales revenue
Answer: a) The amount of output produced per unit of labor input

46. The law of demand states that:

a) As the price of a product increases, the quantity demanded of the product increases
b) As the price of a product increases, the quantity demanded of the product decreases
c) As the price of a product decreases, the quantity demanded of the product increases
d) As the price of a product decreases, the quantity demanded of the product decreases
Answer: b) As the price of a product increases, the quantity demanded of the product decreases

47. The income elasticity of demand for a product is 2.5. This means that the product is:
a) A normal good
b) An inferior good
c) A luxury good
d) A complementary good
Answer: c) A luxury good

48. Which of the following is a characteristic of a monopoly market?

a) Many buyers and sellers
b) Differentiated products
c) High barriers to entry
d) Price takers
Answer: c) High barriers to entry

49. A market in which no one buyer or seller can affect the price is known as:
a) A perfectly competitive market
b) An oligopoly market
c) A monopolistic competition market

8
Prepared by: Pay Back Ethiopia,
 DON’T THANK ME PAY IT FORWARD

d) A monopoly market
Answer: a) A perfectly competitive market

50. Which of the following is the formula for calculating marginal revenue?
a) Change in total revenue / Change in quantity
b) Change in quantity / Change in total revenue
c) Total revenue / Quantity
d) Quantity / Total revenue
Answer: a) Change in total revenue / Change in quantity

51. Which of the following is a characteristic of a monopolistic competition market?

a) Many buyers and sellers
b) Homogeneous products
c) High barriers to entry
d) Differentiated products
Answer: d) Differentiated products

52. Which of the following is not a type of unemployment?

a) Structural unemployment
b) Frictional unemployment
c) Cyclical unemployment
d) Indentured unemployment
Answer: d) Indentured unemployment

53. What is the definition of the natural rate of unemployment?

a) The rate of unemployment that exists when the economy is operating at its potential output
level
b) The rate of unemployment that exists when the economy is in a recession
c) The rate of unemployment that exists when the economy is overheating
d) The rate of unemployment that exists when the economy is experiencing deflation
Answer: a) The rate of unemployment that exists when the economy is operating at its potential
output level

54. Which of the following is not a tool of monetary policy?

a) Open market operations
b) Reserve requirements
c) Taxation policy
d) The discount rate
Answer: c) Taxation policy

55. Which of the following is not a characteristic of a public good?

a) Exclusion is difficult
b) Use by one person does not reduce availability to others
c) There are high marginal costs of production
d) There are no private market incentives to produce the good
Answer: a) Exclusion is difficult

9
Prepared by: Pay Back Ethiopia,
 DON’T THANK ME PAY IT FORWARD

56. Which of the following is an example of a positive externality?

a) Pollution from a factory
b) A vaccine that prevents the spread of disease
c) Noise pollution from a train
d) Traffic congestion caused by too many cars on the road
Answer: b) A vaccine that prevents the spread of disease

57. What is the difference between a subsidy and a tax?

a) A subsidy is a payment made by the government to suppliers, while a tax is a payment made
by suppliers to the government
b) A subsidy is a payment made by the government to consumers, while a tax is a payment
made by consumers to the government
c) A subsidy is a payment made by suppliers to the government, while a tax is a payment made
by the government to consumers
d) A subsidy is a payment made by the government to suppliers or consumers, while a tax

58. The law of demand states that:

a) as price increases, quantity demanded increases
b) as price increases, quantity demanded decreases
c) as price decreases, quantity demanded increases
d) as price decreases, quantity demanded decreases
Answer: b) as price increases, quantity demanded decreases

59. An increase in the price of a complement to a product will result in:

a) an increase in the demand for the product
b) a decrease in the demand for the product
c) an increase in the supply of the product
d) a decrease in the supply of the product
Answer: b) a decrease in the demand for the product

60. The primary function of money is to:

a) facilitate barter transactions
b) provide a means of exchange
c) serve as a store of value
d) serve as a unit of account

10
Prepared by: Pay Back Ethiopia,