FSOT Economic Principles 3 — Questions and Answers
Question 1: Price elasticity of demand measures:
- How supply changes with technology
- The responsiveness of quantity demanded to a price change (Correct answer)
- The relationship between income and consumption
- How quickly markets reach equilibrium
Correct answer: The responsiveness of quantity demanded to a price change
Price elasticity of demand quantifies how much the quantity demanded changes in percentage terms when price changes by a percent.
Question 2: Which of the following best describes a 'public good'?
- A good produced by the government
- A good that is non-rival and non-excludable (Correct answer)
- A good with a perfectly elastic demand curve
- A good provided at zero cost to consumers
Correct answer: A good that is non-rival and non-excludable
Public goods are non-rival (one person's use doesn't reduce availability) and non-excludable (no one can be prevented from using them).
Question 3: Stagflation is characterized by:
- High growth and low unemployment
- High inflation and low economic growth (Correct answer)
- Deflation and high consumer spending
- Low interest rates and high investment
Correct answer: High inflation and low economic growth
Stagflation is the simultaneous occurrence of high inflation and stagnant economic growth, often with high unemployment.
Question 4: In the context of the balance of payments, the current account includes:
- Foreign direct investment flows
- Portfolio investment and loans
- Trade in goods and services, income, and transfers (Correct answer)
- Official reserve transactions only
Correct answer: Trade in goods and services, income, and transfers
The current account records trade in goods and services, factor income (wages, profits), and current transfers like remittances.
Question 5: The multiplier effect in Keynesian economics suggests that:
- A tax cut reduces GDP by more than its face value
- An initial change in spending leads to a larger total change in GDP (Correct answer)
- Interest rate cuts multiply the money supply proportionally
- Trade surpluses multiply domestic investment
Correct answer: An initial change in spending leads to a larger total change in GDP
The multiplier effect means that an initial injection of spending ripples through the economy, generating a magnified increase in total output.
Question 6: Which scenario best illustrates the 'tragedy of the commons'?
- A monopolist restricting output to raise prices
- Overfishing of an open-access ocean fishery (Correct answer)
- A government imposing price ceilings on rent
- Firms colluding to fix prices in an oligopoly
Correct answer: Overfishing of an open-access ocean fishery
The tragedy of the commons occurs when individuals overuse a shared resource because they do not bear the full cost of their consumption.
Question 7: Real GDP differs from nominal GDP in that real GDP:
- Includes only goods, not services
- Is adjusted for population size
- Accounts for changes in price levels over time (Correct answer)
- Measures only domestically consumed output
Correct answer: Accounts for changes in price levels over time
Real GDP adjusts nominal GDP for inflation, allowing meaningful comparisons of economic output across different time periods.
FSOT Economic Principles 3
Price elasticity of demand measures: