FSOT Economic Principles 2 — Questions and Answers
Question 1: When the price of a good rises and consumers buy less of it, this illustrates the law of:
- Supply
- Diminishing returns
- Demand (Correct answer)
- Comparative advantage
Correct answer: Demand
The law of demand states that as price rises, quantity demanded falls, all else equal.
Question 2: Which market structure has many sellers offering differentiated products, with easy entry and exit?
- Perfect competition
- Oligopoly
- Monopoly
- Monopolistic competition (Correct answer)
Correct answer: Monopolistic competition
Monopolistic competition features many firms selling similar but differentiated products with low barriers to entry.
Question 3: A government budget surplus occurs when:
- Tax revenues exceed government expenditures (Correct answer)
- GDP growth exceeds inflation
- Exports exceed imports
- Investment exceeds savings
Correct answer: Tax revenues exceed government expenditures
A budget surplus means the government collects more in taxes and revenues than it spends.
Question 4: The concept of 'moral hazard' in economics refers to:
- Price discrimination by monopolies
- Reduced incentive to avoid risk when protected from consequences (Correct answer)
- The cost of environmental externalities
- Government corruption in fiscal policy
Correct answer: Reduced incentive to avoid risk when protected from consequences
Moral hazard occurs when an entity takes on more risk because it is insulated from the consequences, such as with insurance.
Question 5: In international trade, a tariff primarily serves to:
- Increase the volume of imports
- Reduce domestic production costs
- Raise the price of imported goods (Correct answer)
- Strengthen the foreign currency
Correct answer: Raise the price of imported goods
A tariff is a tax on imported goods that raises their price, making domestic alternatives more competitive.
Question 6: Which of the following is an example of an automatic stabilizer in fiscal policy?
- A new infrastructure spending bill
- Unemployment insurance payments (Correct answer)
- A Federal Reserve interest rate cut
- A targeted tax credit for small businesses
Correct answer: Unemployment insurance payments
Unemployment insurance automatically increases government spending during recessions without new legislation, stabilizing demand.
Question 7: The term 'crowding out' in economics describes the situation where:
- Inflation reduces real wages
- Government borrowing raises interest rates and reduces private investment (Correct answer)
- Imports outpace domestic production
- Monopolies eliminate competition
Correct answer: Government borrowing raises interest rates and reduces private investment
Crowding out occurs when government borrowing drives up interest rates, making it more expensive for private firms to borrow and invest.
FSOT Economic Principles 2
When the price of a good rises and consumers buy less of it, this illustrates the law of: