A decrease in the general price level of goods and services

An increase in the money supply only

Rising unemployment alongside falling prices

A government subsidy paid to exporters

A limit on the quantity of goods that can be exported

Free GED Social Studies Economics Practice Test — Questions and Answers

Question 1: What is the law of supply?

As price increases, the quantity supplied decreases
As price increases, the quantity supplied increases (Correct answer)
Supply is always equal to demand
Producers supply more when prices fall

Correct answer: As price increases, the quantity supplied increases

The law of supply states that as the price of a good increases (all else equal), producers are willing to supply a greater quantity because higher prices mean higher profits.

Question 2: What is the law of demand?

As price decreases, demand decreases
As price increases, demand increases
As price increases, quantity demanded decreases (Correct answer)
Demand is unrelated to price

Correct answer: As price increases, quantity demanded decreases

The law of demand states that as the price of a good increases (all else equal), consumers will demand a smaller quantity — an inverse relationship between price and quantity demanded.

Question 3: Which term describes the total value of all goods and services produced within a country in one year?

GNP (Gross National Product)
GDP (Gross Domestic Product) (Correct answer)
CPI (Consumer Price Index)
Trade surplus

Correct answer: GDP (Gross Domestic Product)

GDP (Gross Domestic Product) measures the total market value of all goods and services produced within a country's borders in a given year.

Question 4: What is inflation?

A decrease in the general price level of goods and services
A general increase in prices over time, reducing purchasing power (Correct answer)
An increase in the money supply only
Rising unemployment alongside falling prices

Correct answer: A general increase in prices over time, reducing purchasing power

Inflation is the rate at which the general level of prices for goods and services rises over time, thereby reducing the purchasing power of money.

Question 5: In a market economy, prices are primarily determined by:

The government setting fixed prices
Supply and demand (Correct answer)
International trade agreements
Large corporations alone

Correct answer: Supply and demand

In a market (capitalist) economy, prices are determined by the interaction of supply (from producers) and demand (from consumers).

Question 6: What is a tariff?

A government subsidy paid to exporters
A tax on imported goods (Correct answer)
A limit on the quantity of goods that can be exported
A tax on domestic production

Correct answer: A tax on imported goods

A tariff is a tax imposed by a government on imported goods. It raises the price of foreign goods to make domestically produced goods more competitive.

Question 7: What is the difference between monetary policy and fiscal policy?

Monetary policy is controlled by Congress; fiscal policy by the Federal Reserve
Monetary policy involves controlling the money supply and interest rates; fiscal policy involves government spending and taxation (Correct answer)
They are the same type of economic policy
Monetary policy only applies to international trade

Correct answer: Monetary policy involves controlling the money supply and interest rates; fiscal policy involves government spending and taxation

Monetary policy is implemented by the central bank (Federal Reserve) through interest rates and money supply. Fiscal policy is government spending and taxation decisions made by Congress.

Question 8: An economic recession is best described as:

A period of rapid economic growth
Two or more consecutive quarters of declining GDP (Correct answer)
High inflation combined with high unemployment
An increase in the money supply

Correct answer: Two or more consecutive quarters of declining GDP

A recession is technically defined as two consecutive quarters (6 months) of negative GDP growth, typically accompanied by rising unemployment and reduced consumer spending.

Question 9: What does the term 'opportunity cost' mean?

The total cost of a product including taxes
The value of the next best alternative given up when making a choice (Correct answer)
The extra cost of producing one more unit
The cost of missed business opportunities

Correct answer: The value of the next best alternative given up when making a choice

Opportunity cost is the value of the best alternative foregone when a choice is made. If you choose to go to college, the opportunity cost might be the wages you would have earned working instead.

Question 10: What happens to the price of a good when demand increases and supply stays the same?

The price decreases
The price stays the same
The price increases (Correct answer)
The quantity supplied decreases

Correct answer: The price increases

When demand increases (demand curve shifts right) with supply unchanged, the equilibrium price rises. More buyers competing for the same quantity drives up the price.

Question 11: What is the Federal Reserve's main tool for fighting inflation?

Printing more money
Raising interest rates (Correct answer)
Cutting taxes
Increasing government spending

Correct answer: Raising interest rates

The Federal Reserve (the Fed) raises interest rates to fight inflation. Higher interest rates make borrowing more expensive, reducing consumer spending and slowing price increases.

Question 12: Which type of economic system does the United States primarily have?

Command economy
Traditional economy
Mixed market economy (Correct answer)
Pure socialist economy

Correct answer: Mixed market economy

The U.S. has a mixed market economy — primarily private enterprise and free markets, but with significant government regulation, public services, and welfare programs.

Question 13: What is 'scarcity' in economics?

A shortage of money only
The condition where wants exceed available resources (Correct answer)
A temporary lack of goods during a recession
The inability of all countries to trade freely

Correct answer: The condition where wants exceed available resources

Scarcity is the fundamental economic problem — human wants and needs are unlimited, but the resources available to satisfy them are limited, forcing choices.

Question 14: What is a trade deficit?

When a country exports more than it imports
When a country imports more than it exports (Correct answer)
When imports and exports are equal
A loss in GDP from international trade

Correct answer: When a country imports more than it exports

A trade deficit (or trade gap) occurs when a country's imports exceed its exports. The United States regularly runs a trade deficit.

Question 15: Which of the following is an example of a public good?

A car
A concert ticket
A lighthouse (Correct answer)
A restaurant meal

Correct answer: A lighthouse

A public good is non-excludable (you can't prevent people from using it) and non-rivalrous (one person's use doesn't reduce availability for others). A lighthouse serves all ships without being depleted.

Question 16: What is the unemployment rate?

The percentage of the total population without jobs
The percentage of the labor force actively looking for work but without jobs (Correct answer)
The number of people who retired early
The percentage of workers earning below minimum wage

Correct answer: The percentage of the labor force actively looking for work but without jobs

The unemployment rate is the percentage of the labor force (people working or actively seeking work) who are without jobs.

Question 17: What is 'comparative advantage' in international trade?

Being the largest economy in a trading region
Producing a good at a lower opportunity cost than trading partners (Correct answer)
Having more resources than other countries
Only trading with allies

Correct answer: Producing a good at a lower opportunity cost than trading partners

Comparative advantage is the ability to produce a good at a lower opportunity cost than other producers. Countries benefit by specializing in and exporting goods where they have comparative advantage.

Question 18: Which of the following is an example of fiscal stimulus?

The Federal Reserve lowering interest rates
The government cutting taxes and increasing spending during a recession (Correct answer)
The government raising tariffs on imports
Companies hiring more workers

Correct answer: The government cutting taxes and increasing spending during a recession

Fiscal stimulus involves government actions — like cutting taxes (leaving more money for consumers) and increasing spending — to boost economic activity during a downturn.

Question 19: What is the Consumer Price Index (CPI)?

A measure of corporate profits over time
A measurement that tracks changes in the average price of a basket of goods and services (Correct answer)
The total value of imports into the country
A bank's interest rate on consumer loans

Correct answer: A measurement that tracks changes in the average price of a basket of goods and services

The CPI measures the average change in prices paid by consumers for a representative basket of goods and services. It is the most commonly used measure of inflation.

Question 20: What is a budget deficit?

When a government spends less than it collects in taxes
When a government spends more than it collects in revenue (Correct answer)
When private companies lose money
When imports exceed exports

Correct answer: When a government spends more than it collects in revenue

A budget deficit occurs when a government's expenditures exceed its revenues (tax income). The government must borrow money to cover the difference.

Question 21: Which of the following is an example of a macroeconomic concern?

How a single firm sets the price for its product
Why consumers prefer Brand X over Brand Y
The national unemployment rate and GDP growth (Correct answer)
How much a consumer spends on groceries

Correct answer: The national unemployment rate and GDP growth

Macroeconomics deals with the economy as a whole — national GDP, inflation rates, unemployment, money supply, and government policy. Individual firm and consumer decisions are microeconomic.

Question 22: What is the 'multiplier effect' in economics?

Inflation that multiplies the cost of living over decades
The phenomenon where an initial change in spending leads to a larger total change in economic output (Correct answer)
An investment strategy that doubles money
The compounding of interest over time

Correct answer: The phenomenon where an initial change in spending leads to a larger total change in economic output

The multiplier effect occurs when an initial injection of spending (e.g., government infrastructure investment) cycles through the economy multiple times, creating a total economic impact larger than the original expenditure.

Question 23: Which statement best describes 'supply-side economics'?

Stimulate the economy by increasing consumer spending through higher wages
Promote economic growth by reducing taxes and regulations on producers (Correct answer)
Control inflation through central bank interest rate increases
Use government spending to create jobs directly

Correct answer: Promote economic growth by reducing taxes and regulations on producers

Supply-side economics argues that economic growth is best promoted by policies that encourage production — primarily cutting taxes on businesses and reducing regulations.

Question 24: What are 'externalities' in economics?

Foreign economic impacts on domestic trade
Costs or benefits of a transaction experienced by parties not directly involved (Correct answer)
Extra taxes collected by foreign governments
The gap between supply and demand

Correct answer: Costs or benefits of a transaction experienced by parties not directly involved

Externalities are costs (negative) or benefits (positive) that affect parties outside of a transaction. Factory pollution affecting nearby residents is a negative externality; a neighbor's beautiful garden benefiting you is a positive externality.

Question 25: Which of the following would shift the supply curve to the right (increase supply)?

An increase in the price of raw materials
New technology that makes production cheaper (Correct answer)
A decrease in the number of producers
A government tax on production

Correct answer: New technology that makes production cheaper

New technology that reduces production costs allows producers to supply more at any given price — shifting the supply curve to the right.

Question 26: What is the relationship between bond prices and interest rates?

They move in the same direction
They are unrelated
They move in opposite directions (Correct answer)
Bond prices only change when interest rates reach 10%

Correct answer: They move in opposite directions

Bond prices and interest rates have an inverse relationship. When interest rates rise, new bonds offer higher returns, making existing (lower-rate) bonds less valuable — so their prices fall.

Question 27: What does it mean for a company to have a 'monopoly'?

It is the largest employer in the country
It is the sole provider of a good or service with no close substitutes (Correct answer)
It operates in multiple countries
It has more than 50% market share in any industry

Correct answer: It is the sole provider of a good or service with no close substitutes

A monopoly exists when one firm is the exclusive seller of a product with no close substitutes, giving it significant price-setting power.

Question 28: What are 'progressive taxes'?

Taxes that are the same percentage for everyone
Taxes where the rich pay a lower percentage than the poor
Taxes where the percentage paid increases as income increases (Correct answer)
Taxes on imports and exports

Correct answer: Taxes where the percentage paid increases as income increases

Progressive taxes increase in rate as the taxable amount (income) increases. The U.S. federal income tax is progressive — higher earners pay a larger percentage of their income.

Question 29: What is a 'market equilibrium'?

Equal economic distribution among all citizens
The price at which the quantity supplied equals the quantity demanded (Correct answer)
A balanced government budget
Equal trade between two countries

Correct answer: The price at which the quantity supplied equals the quantity demanded

Market equilibrium is the price at which the supply of a good exactly matches the demand for it — no shortage or surplus exists.

Question 30: Which is the best description of the Federal Reserve's role?

It sets tax rates and approves the federal budget
It serves as the central bank, managing the nation's money supply and interest rates (Correct answer)
It regulates all international trade
It insures all bank deposits directly

Correct answer: It serves as the central bank, managing the nation's money supply and interest rates

The Federal Reserve (the Fed) is the central bank of the United States. It manages monetary policy by controlling the money supply and interest rates to promote stable prices and maximum employment.

Question 31: What does 'specialization' in economics mean?

A country producing only luxury goods
Focusing production on goods a country or individual produces most efficiently (Correct answer)
Owning multiple types of businesses
Limiting imports to special categories

Correct answer: Focusing production on goods a country or individual produces most efficiently

Specialization means focusing on producing goods or services you can produce most efficiently (at the lowest opportunity cost), which increases overall productivity.

Question 32: What is stagflation?

Rapid economic growth combined with low unemployment
High inflation occurring simultaneously with high unemployment and slow economic growth (Correct answer)
A period of stable prices and full employment
Deflation caused by a drop in consumer demand

Correct answer: High inflation occurring simultaneously with high unemployment and slow economic growth

Stagflation is a rare and difficult economic condition where high inflation and high unemployment occur at the same time — as experienced in the U.S. during the 1970s.

Question 33: In economics, 'capital' most commonly refers to:

Money in a checking account
A country's natural resources
Human-made resources (tools, machinery, factories) used in production (Correct answer)
The capital city of a country

Correct answer: Human-made resources (tools, machinery, factories) used in production

In economics, capital refers to human-made assets — machinery, equipment, factories, and technology — used to produce goods and services (distinct from land, labor, or financial capital).

Question 34: When a country devalues its currency, what is the most likely effect on its exports?

Exports become more expensive for foreign buyers and decrease
Exports become cheaper for foreign buyers and increase (Correct answer)
Exports are unaffected by currency changes
Exports decrease because production costs fall

Correct answer: Exports become cheaper for foreign buyers and increase

When a country's currency loses value, its goods become cheaper in foreign currencies. This makes exports more competitive and generally increases export volumes.

Question 35: What is the 'invisible hand' concept introduced by Adam Smith?

Government regulation guiding business decisions secretly
The idea that self-interested actions in a free market naturally lead to beneficial outcomes for society (Correct answer)
Corporations working behind the scenes to fix prices
Foreign investors controlling domestic markets

Correct answer: The idea that self-interested actions in a free market naturally lead to beneficial outcomes for society

Adam Smith's 'invisible hand' theory holds that individuals pursuing their own self-interest in free markets, guided by price signals, inadvertently promote the overall economic well-being of society.

Free GED Social Studies Economics Practice Test

What is the law of supply?