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GTLE Economics practice questions

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Question 1Economics content knowledge (subject specialization)

A country's nominal GDP rises by 6% in a year while its GDP deflator rises by 4%. Approximately what is the growth rate of real GDP?

  1. About 1.5%
  2. About 2% Correct answer.
  3. About 24%
  4. About 10%

Explanation

Real GDP growth is the nominal growth rate minus the inflation rate measured by the GDP deflator, so roughly 6% − 4% = 2%. This follows from the identity that nominal GDP equals real GDP multiplied by the deflator. The approximation is close for small rates; the exact figure is (1.06/1.04) − 1 ≈ 1.9%.

Question 2Economics content knowledge (subject specialization)

In a simple Keynesian cross model with no government or trade, if the marginal propensity to consume is 0.75, what is the value of the expenditure multiplier?

  1. 1.75
  2. 4 Correct answer.
  3. 0.75
  4. 1.33

Explanation

The multiplier equals 1/(1 − MPC). With MPC = 0.75, this is 1/0.25 = 4, so an autonomous spending increase raises equilibrium output fourfold. The multiplier exceeds one because induced consumption re-spends part of each initial income increase.

Question 3Economics content knowledge (subject specialization)

Which situation best describes a negative production externality?

  1. A worker gains skills that raise her own future wage
  2. A firm lowers its price and rivals lose sales
  3. A consumer enjoys a vaccine that also protects others
  4. A factory's emissions raise respiratory illness among nearby residents who receive no compensation Correct answer.

Explanation

A negative production externality occurs when a producer's activity imposes uncompensated costs on third parties, as with pollution harming residents. Because the firm does not bear these costs, private marginal cost falls below social marginal cost and output is excessive. The other options involve market rivalry or positive spillovers.

Question 4Economics content knowledge (subject specialization)

A price ceiling set below the free-market equilibrium price will typically produce which outcome?

  1. An upward shift of the supply curve
  2. A shortage, because quantity demanded exceeds quantity supplied Correct answer.
  3. A surplus, because quantity supplied exceeds quantity demanded
  4. No change, because the ceiling is not binding

Explanation

A binding price ceiling holds price below equilibrium, so the quantity demanded rises and the quantity supplied falls, creating excess demand (a shortage). The ceiling does not shift either curve; it creates a gap between the quantities along the existing curves. Non-price rationing usually emerges.

Question 5Economics content knowledge (subject specialization)

For a profit-maximizing firm in perfect competition, the short-run supply curve is best described as which portion of its marginal cost curve?

  1. The average total cost curve above minimum average fixed cost
  2. The entire marginal cost curve
  3. The portion below minimum average variable cost
  4. The portion at or above minimum average variable cost Correct answer.

Explanation

A competitive firm supplies along marginal cost but shuts down when price falls below minimum average variable cost, so only the MC segment at or above that point is the supply curve. Below that threshold, producing adds losses beyond fixed costs. Fixed costs are sunk in the short run and do not determine shutdown.

Question 6Economics content knowledge (subject specialization)

The central bank conducts an open-market purchase of government securities. What is the immediate effect on the banking system?

  1. Bank reserves increase, supporting expansion of deposits and credit Correct answer.
  2. The discount rate is set to zero
  3. The required reserve ratio rises automatically
  4. Bank reserves decrease, contracting deposits and credit

Explanation

When the central bank buys securities, it pays by crediting reserves of the selling banks, so reserves rise. Higher reserves support additional lending and deposit creation through the money multiplier. The reserve ratio and discount rate are separate policy tools not automatically changed by such a purchase.

Question 7Economics content knowledge (subject specialization)

According to the principle of comparative advantage, two countries gain from specialization and trade when:

  1. Their opportunity costs of producing the goods differ Correct answer.
  2. One country can produce every good with fewer inputs
  3. One country has an absolute advantage in all goods
  4. Both countries have identical production possibilities

Explanation

Gains from trade arise from differences in opportunity cost, which is what comparative advantage measures. Even a country with an absolute disadvantage in everything can gain by specializing where its relative cost is lowest. Identical opportunity costs leave no basis for mutually beneficial specialization.

Question 8Economics content knowledge (subject specialization)

Which item is classified as a factor payment in the circular flow of income?

  1. Wages paid by a firm to its employees Correct answer.
  2. A firm's purchase of raw materials from another firm
  3. Government spending on road construction
  4. A household's purchase of a new car

Explanation

Factor payments are the incomes households receive for supplying labor, capital, land, and entrepreneurship, such as wages, rent, interest, and profit. Wages paid to employees are a direct payment for labor services. Purchases of goods and intermediate inputs are product-market or intermediate transactions, not factor incomes.

Question 9Economics content knowledge (subject specialization)

A monopolist faces a linear downward-sloping demand curve. At the profit-maximizing output, how does price compare with marginal revenue?

  1. Price equals marginal revenue, as in perfect competition
  2. Price is below marginal revenue because of economies of scale
  3. Price equals marginal cost at the profit-maximizing output
  4. Price exceeds marginal revenue because extra output lowers the price on all units sold Correct answer.

Explanation

A monopolist sets marginal revenue equal to marginal cost, but with downward-sloping demand the price charged exceeds marginal revenue. Selling one more unit requires lowering price on all units, so marginal revenue falls below price. The gap widens as demand becomes less elastic.

Question 10Economics content knowledge (subject specialization)

A bond with a fixed coupon and one year to maturity is bought for less than its face value. What happens to its yield to maturity relative to the coupon rate?

  1. The yield to maturity equals the coupon rate
  2. The yield to maturity exceeds the coupon rate Correct answer.
  3. The yield to maturity is zero
  4. The yield to maturity is below the coupon rate

Explanation

When a bond sells at a discount, the buyer gains both the coupon and the capital gain from price rising to face value at maturity, so the total return exceeds the coupon rate. Yield to maturity therefore exceeds the coupon rate for a discount bond. The reverse holds for a premium bond.

Question 11Economics content knowledge (subject specialization)

An economy is at full employment when the government increases spending financed by borrowing. In the loanable funds framework, what is the most likely short-run effect?

  1. No change in interest rates because saving is fixed
  2. Lower interest rates and expansion of private investment
  3. An immediate fall in the price level
  4. Higher interest rates and crowding out of some private investment Correct answer.

Explanation

Government borrowing raises the demand for loanable funds, pushing the interest rate up and displacing some interest-sensitive private investment, an effect called crowding out. The extent depends on how responsive saving and investment are to the interest rate. At full employment, the competition for resources also tends to raise prices rather than output.

Question 12Economics content knowledge (subject specialization)

If the nominal interest rate is 7% and the expected inflation rate is 3%, what is the approximate real interest rate according to the Fisher equation?

  1. About 21%
  2. About 10%
  3. About 2.3%
  4. About 4% Correct answer.

Explanation

The Fisher equation states that the real rate is approximately the nominal rate minus expected inflation, so 7% − 3% = 4%. The exact calculation is (1.07/1.03) − 1 ≈ 3.9%, close to the approximation. The real rate measures the change in purchasing power of the loan.

Question 13Economics content knowledge (subject specialization)

A firm operating in monopolistic competition earns positive economic profit in the short run. What happens in the long run as entry occurs?

  1. The market price rises until all firms earn positive profit
  2. Demand facing each firm shifts left until price equals average total cost and profit is zero Correct answer.
  3. The firm's marginal cost curve shifts up until price equals marginal cost
  4. The number of firms falls until the remaining firms earn profit

Explanation

Free entry in monopolistic competition draws new firms in, reducing each incumbent's share of demand, so its demand curve shifts left until it is tangent to average total cost. At that tangency price equals average total cost and economic profit is zero, though price still exceeds marginal cost. Profits are competed away, not sustained.

Question 14Economics content knowledge (subject specialization)

Which policy response to a negative supply shock, such as a sharp rise in energy prices, is most consistent with maintaining low inflation?

  1. Loosening monetary policy to offset the fall in output
  2. Cutting interest rates and increasing government spending simultaneously
  3. Tightening monetary policy, accepting lower output in the short run Correct answer.
  4. Imposing a price ceiling on energy to eliminate the shock

Explanation

A negative supply shock raises costs and pushes inflation up while reducing output, creating a policy trade-off. A central bank committed to low inflation tightens policy, accepting a temporary output loss to prevent inflation expectations from rising. Accommodating the shock risks a wage-price spiral. Price controls address symptoms and create shortages.

Question 15Economics content knowledge (subject specialization)

A consumer's budget line rotates outward along the good X axis while the intercept on the good Y axis is unchanged. What has happened?

  1. The price of good X has fallen Correct answer.
  2. The price of good Y has risen
  3. The consumer's preferences have changed toward good X
  4. Income has risen with both prices constant

Explanation

The intercept on the Y axis equals income divided by the price of Y, so an unchanged Y intercept means income and the price of Y are unchanged. The outward rotation on the X axis means more X is affordable, which occurs when the price of X falls. A parallel shift would indicate an income change.

Question 16Economics content knowledge (subject specialization)

In the AD–AS model, a fall in consumer confidence shifts aggregate demand left. In the short run with sticky wages, which outcome is expected?

  1. Lower output and a higher price level
  2. Higher output and a higher price level
  3. No change in output and a higher price level
  4. Lower output and a lower price level Correct answer.

Explanation

A leftward shift of aggregate demand moves the economy along the upward-sloping short-run aggregate supply curve, reducing both output and the price level. Sticky wages keep costs from falling immediately, so firms respond to weaker demand mainly by cutting production. In the long run, wages adjust and output returns to potential.

Question 17Economics content knowledge (subject specialization)

A country's current account deficit is matched by a capital and financial account surplus. Which interpretation is most consistent with national income accounting?

  1. The country is a net borrower from abroad, financing domestic absorption above domestic output Correct answer.
  2. The country's exports exceed its imports
  3. The country's saving exceeds its domestic investment
  4. The country is a net lender abroad and accumulating foreign assets

Explanation

A current account deficit means imports of goods, services, and income exceed exports, so the country absorbs more than it produces and must borrow abroad. The offsetting financial inflow is the capital and financial account surplus. Equivalently, national saving falls short of domestic investment.

Question 18Economics content knowledge (subject specialization)

In the Solow growth model without technological progress, what happens to the growth rate of output per worker as the capital stock rises toward its steady state?

  1. It stays constant at the saving rate
  2. It declines toward zero as diminishing returns to capital set in Correct answer.
  3. It rises continuously as capital accumulates
  4. It becomes negative once capital exceeds the golden-rule level

Explanation

With diminishing marginal returns to capital, each additional unit of capital adds less to output, so growth of output per worker slows and eventually stops at the steady state. Sustained long-run growth per worker therefore requires technological progress. The saving rate affects the level of steady-state capital, not the long-run growth rate.

Question 19Economics content knowledge (subject specialization)

A firm's production function exhibits economies of scale. What does this imply about long-run average cost?

  1. Long-run average cost is constant at all output levels
  2. Long-run average cost rises as output expands
  3. Long-run average cost falls as output expands Correct answer.
  4. Long-run marginal cost is always below zero

Explanation

Economies of scale mean output rises proportionally more than inputs, so cost per unit declines as the scale of production increases. This corresponds to the downward-sloping portion of the long-run average cost curve. Diseconomies of scale, by contrast, produce rising long-run average cost.

Question 20Economics content knowledge (subject specialization)

A government introduces a per-unit tax on a good with very inelastic demand and very elastic supply. Who bears the larger share of the tax burden?

  1. Producers, because supply is more elastic
  2. The burden is split equally regardless of elasticities
  3. Neither party, because the tax is shifted entirely to the government
  4. Consumers, because quantity barely responds to the price increase Correct answer.

Explanation

Tax incidence falls more heavily on the side of the market that is less able to adjust quantity, which here is consumers with inelastic demand. Producers facing elastic supply can reduce output sharply and avoid much of the tax. The statutory assignment of the tax does not determine who bears it.

Question 21Economics content knowledge (subject specialization)

A central bank follows a Taylor-type rule. Inflation rises above target while the output gap is zero. What does the rule prescribe?

  1. Lower the policy rate to support output
  2. Raise the policy rate by more than the rise in inflation Correct answer.
  3. Reduce the policy rate in proportion to the inflation gap
  4. Keep the policy rate unchanged because the output gap is zero

Explanation

The Taylor principle requires the nominal policy rate to rise by more than one-for-one with inflation so that the real rate increases and dampens demand. With a zero output gap, the inflation term alone drives the response. Failing to raise the real rate would allow inflation to persist.

Question 22Economics content knowledge (subject specialization)

In an Edgeworth box exchange economy, a Pareto-efficient allocation occurs where:

  1. The contract curve intersects the endowment point
  2. The marginal rates of substitution differ between the two consumers
  3. One consumer's utility is maximized regardless of the other's
  4. The consumers' marginal rates of substitution are equal and the indifference curves are tangent Correct answer.

Explanation

Pareto efficiency in exchange requires that no mutually beneficial trade remains, which occurs where indifference curves are tangent and marginal rates of substitution are equal. The set of all such allocations forms the contract curve. Differing marginal rates imply gains from further trade.

Question 23Economics content knowledge (subject specialization)

A risk-averse investor holds a diversified portfolio. According to the capital asset pricing model, which risk determines the expected return on an individual security?

  1. Unsystematic risk, which diversification cannot eliminate
  2. The security's own idiosyncratic variance
  3. Total risk, measured by the security's standard deviation
  4. Systematic risk, measured by the security's beta relative to the market Correct answer.

Explanation

In the CAPM, diversification eliminates firm-specific risk, so investors are compensated only for nondiversifiable market risk captured by beta. The security market line relates expected return to beta with the market risk premium. Total and idiosyncratic risk are not priced because they can be reduced by holding a diversified portfolio.

Question 24Economics content knowledge (subject specialization)

Under purchasing power parity, if a basket of goods costs 100 units of currency A and the same basket costs 50 units of currency B, what is the PPP-implied exchange rate of A per unit of B?

  1. 2 units of A per unit of B Correct answer.
  2. 0.5 units of A per unit of B
  3. 150 units of A per unit of B
  4. 50 units of A per unit of B

Explanation

Absolute PPP implies that the exchange rate equals the ratio of the two price levels. Dividing 100 units of A by 50 units of B gives 2 units of A per unit of B. Deviations occur because of transport costs, nontraded goods, and trade barriers.

Question 25Economics content knowledge (subject specialization)

In a repeated prisoner's dilemma game with an indefinite horizon, what does the folk theorem suggest about cooperation?

  1. Cooperation is impossible because defection always dominates
  2. Cooperation requires a binding third-party contract
  3. Cooperation can be sustained as an equilibrium when players are sufficiently patient Correct answer.
  4. Players always defect in the final period regardless of horizon

Explanation

The folk theorem shows that with a sufficiently high discount factor, trigger strategies can sustain cooperative outcomes as subgame-perfect equilibria, because the future gain from continued cooperation outweighs the one-time benefit of defection. Patience, measured by the discount factor, is the key condition. A definite known final period would unravel backward.

Question 26Economics content knowledge (subject specialization)

A price ceiling is set below the equilibrium price of a competitive market. Which outcome is expected in the short run?

  1. A shortage arises because quantity demanded exceeds quantity supplied Correct answer.
  2. The market clears at the equilibrium quantity
  3. A surplus arises because quantity supplied exceeds quantity demanded
  4. Supply shifts right to meet demand at the ceiling price

Explanation

A binding price ceiling holds price below equilibrium, so the quantity demanded along the demand curve exceeds the quantity supplied along the supply curve. The gap between them is a shortage, and the market cannot clear through price adjustment. Non-price rationing mechanisms typically emerge as a result.

Question 27Economics content knowledge (subject specialization)

Which statement best describes the shape of a typical short-run average total cost curve?

  1. It is horizontal because all inputs are variable in the short run
  2. It falls continuously as output rises because fixed costs are spread thinner
  3. It is U-shaped because marginal cost eventually rises as diminishing returns set in Correct answer.
  4. It rises continuously because fixed costs increase with output

Explanation

In the short run at least one input is fixed, so diminishing marginal returns eventually make marginal cost rise. Average total cost is U-shaped because spreading fixed costs dominates at low output while rising marginal cost dominates at high output. Marginal cost crosses average total cost at its minimum point.

Question 28Economics content knowledge (subject specialization)

A consumer's marginal utility from the last unit of good X is 30 and from the last unit of good Y is 10, while the price of X is 5 and the price of Y is 2. Which adjustment increases total utility?

  1. Buy more X and less Y
  2. Keep the current bundle unchanged
  3. Buy more Y and less X Correct answer.
  4. Buy more of both goods

Explanation

Utility maximization requires equal marginal utility per unit of money spent across goods. Here marginal utility per dollar is 6 for X and 5 for Y, so the last dollar spent on Y yields less satisfaction. Shifting spending toward Y and away from X raises total utility until the ratios equalize.

Question 29Economics content knowledge (subject specialization)

A firm in perfect competition faces a market price equal to its minimum average variable cost. What is the profit-maximizing decision in the short run?

  1. Shut down immediately because price is below average total cost
  2. Produce at the output where average total cost is minimized
  3. Produce where marginal cost equals price and remain indifferent between producing and shutting down Correct answer.
  4. Raise price above the market level to cover fixed costs

Explanation

At the shutdown point, price equals minimum average variable cost, so operating losses equal fixed costs and are the same as shutting down. The firm still sets output where marginal cost equals price. Any price below that minimum would make shutdown strictly preferable.

Question 30Economics content knowledge (subject specialization)

In the market for loanable funds, the government reduces its budget deficit. What happens to the equilibrium real interest rate and quantity of investment?

  1. The interest rate rises and investment falls
  2. The interest rate rises and investment rises
  3. The interest rate falls and investment falls
  4. The interest rate falls and investment rises Correct answer.

Explanation

A smaller deficit means less government borrowing, which reduces the demand for loanable funds in the market. The real interest rate falls, and the lower cost of borrowing raises the quantity of investment. This is the crowding-in logic of deficit reduction.

Question 31Economics content knowledge (subject specialization)

Which item is excluded from a country's GDP for a given year?

  1. A restaurant meal bought by a tourist
  2. A used car sold by one household to another Correct answer.
  3. A consulting service sold to a domestic firm
  4. A newly built house purchased by a household

Explanation

GDP measures the market value of final goods and services produced within the year. A used car was produced in an earlier year, so its resale is a transfer of an existing asset and is not new production. Counting it would double-count output already recorded.

Question 32Economics content knowledge (subject specialization)

A country's consumer price index rises from 120 to 126 over one year. What is the inflation rate?

  1. 1.05 percent
  2. 6.0 percent
  3. 4.8 percent
  4. 5.0 percent Correct answer.

Explanation

The inflation rate is the percentage change in the price index, computed as (126 minus 120) divided by 120, all multiplied by 100. That gives 6 divided by 120, which equals 5 percent. Using the initial index as the base is essential for a correct percentage change.

Question 33Economics content knowledge (subject specialization)

Which group is counted as unemployed in the standard labor force survey?

  1. A person without a job who has actively looked for work in the past four weeks Correct answer.
  2. A full-time student who is not seeking work
  3. A retired worker who does not want a job
  4. A part-time worker who wants full-time hours

Explanation

To be counted as unemployed, a person must be without work, available for work, and actively searching during the survey reference period. Those conditions distinguish unemployment from simply not having a job. People outside the labor force fail at least one of these tests.

Question 34Economics content knowledge (subject specialization)

A bank receives a new deposit of 1,000 and the required reserve ratio is 10 percent. If banks hold no excess reserves, what is the maximum total increase in the money supply from the banking system?

  1. 10,000 Correct answer.
  2. 1,000
  3. 100
  4. 9,000

Explanation

The simple deposit multiplier equals one divided by the reserve ratio, which is 10 here. Multiplying the initial deposit by that multiplier gives a maximum expansion of 10,000 in the money supply. This assumes no excess reserves and no currency leakage.

Question 35Economics content knowledge (subject specialization)

Which combination of events would shift the short-run aggregate supply curve to the left?

  1. A rise in nominal wages and a rise in energy prices Correct answer.
  2. A fall in nominal wages and a fall in input prices
  3. A fall in the capital stock and a rise in consumer confidence
  4. An increase in consumer wealth and a cut in income taxes

Explanation

The short-run aggregate supply curve shifts with changes in production costs. Higher nominal wages and higher energy prices both raise unit costs, reducing the quantity supplied at each price level. The curve therefore shifts left, which is an adverse supply shock.

Question 36Economics content knowledge (subject specialization)

An economy experiences demand-pull inflation. Which policy mix is most consistent with reducing it?

  1. Increasing transfer payments while the central bank lowers the policy rate
  2. Raising taxes while the central bank sells securities in the open market Correct answer.
  3. Increasing government spending while the central bank buys bonds
  4. Cutting taxes while the central bank lowers the reserve requirement

Explanation

Demand-pull inflation calls for contractionary policy on both fronts. Higher taxes reduce disposable income and consumption, while open-market sales drain reserves and raise interest rates, curbing investment. Together they shift aggregate demand left and ease price pressure.

Question 37Economics content knowledge (subject specialization)

A country fixes its exchange rate to a major currency and runs persistent balance-of-payments deficits. What pressure does this create?

  1. No pressure because the fixed rate is maintained automatically by market forces
  2. Upward pressure on the domestic currency requiring the central bank to buy foreign reserves
  3. Downward pressure on the domestic currency that is resolved by raising the fixed parity
  4. Downward pressure on the domestic currency requiring the central bank to sell foreign reserves Correct answer.

Explanation

Persistent deficits mean excess supply of the domestic currency in the foreign exchange market, creating downward pressure on its value. To defend the peg, the central bank must sell foreign reserves and buy domestic currency. Reserve depletion is the classic constraint on fixed exchange rates.

Question 38Economics content knowledge (subject specialization)

In the IS-LM model with a horizontal LM curve, an increase in government spending has what effect?

  1. No effect on output because crowding out is complete
  2. A partial effect on output with a large rise in the interest rate
  3. A full multiplier effect on output with no rise in the interest rate Correct answer.
  4. A fall in output because investment is crowded out

Explanation

A horizontal LM curve corresponds to the liquidity trap, where the interest rate is fixed at the floor. With the rate unchanged, there is no crowding out of investment, so the fiscal expansion operates at the full multiplier. This is the Keynesian case for fiscal policy effectiveness.

Question 39Economics content knowledge (subject specialization)

A firm's marginal revenue product of labor exceeds the wage rate. What should the profit-maximizing firm do?

  1. Increase employment because each additional worker adds more revenue than cost Correct answer.
  2. Keep employment unchanged because the wage is already paid
  3. Raise the wage to attract more workers
  4. Reduce employment until marginal revenue product equals the wage

Explanation

A firm hires labor up to the point where the marginal revenue product equals the wage. When marginal revenue product exceeds the wage, each additional worker adds more revenue than the cost of hiring. Expanding employment therefore raises profit until the two are equal.

Question 40Economics content knowledge (subject specialization)

Which situation describes a negative externality in production?

  1. A student pays tuition for a course that raises future earnings
  2. A beekeeper's hives improve pollination on a neighboring orchard
  3. A firm's chemical discharge raises the cost of treating drinking water for downstream residents Correct answer.
  4. A homeowner plants flowers visible to passersby

Explanation

A negative externality arises when a producer's activity imposes an uncompensated cost on third parties. Chemical discharge that raises water treatment costs for residents is such a spillover cost. Because the firm does not bear this cost, it produces more than the socially efficient quantity.

Question 41Economics content knowledge (subject specialization)

A good is non-rival in consumption and excludable. Which category does it belong to?

  1. Public good
  2. Club good Correct answer.
  3. Private good
  4. Common resource

Explanation

Goods are classified by rivalry and excludability. Non-rival but excludable goods, such as subscription streaming services or toll roads, are club goods. Excludability allows providers to charge, while non-rivalry means one person's use does not reduce another's.

Question 42Economics content knowledge (subject specialization)

According to the Coase theorem, when does bargaining achieve an efficient allocation despite an externality?

  1. Whenever the government imposes a Pigouvian tax
  2. Only when the party causing the externality is held liable
  3. When property rights are clearly defined and transaction costs are low Correct answer.
  4. When the number of affected parties is very large

Explanation

The Coase theorem states that with well-defined property rights and negligible transaction costs, private bargaining reaches an efficient outcome regardless of who holds the rights. The initial assignment affects distribution but not efficiency. High transaction costs or large numbers of parties undermine the result.

Question 43Economics content knowledge (subject specialization)

A firm charges a lower price to customers who buy in large quantities than to those buying small quantities. Which practice does this illustrate?

  1. Second-degree price discrimination Correct answer.
  2. Predatory pricing
  3. First-degree price discrimination
  4. Third-degree price discrimination

Explanation

Second-degree price discrimination sets different prices based on the quantity or version purchased rather than on the buyer's identity. Volume discounts let the seller extract more surplus from high-demand buyers while still serving low-demand buyers. First-degree pricing would charge each buyer their exact willingness to pay.

Question 44Economics content knowledge (subject specialization)

Two firms choose output simultaneously in a market and each treats the other's output as fixed. Which model describes this behavior?

  1. Perfect competition
  2. Cournot duopoly Correct answer.
  3. Stackelberg duopoly
  4. Bertrand duopoly

Explanation

The Cournot model has firms choosing quantities simultaneously, with each taking the rival's output as given when maximizing profit. Equilibrium occurs where the reaction functions intersect. Bertrand competition instead involves simultaneous price setting.

Question 45Economics content knowledge (subject specialization)

A firm's accounting profit is 50,000 while the owner could earn 60,000 running another business with the same invested capital. What is the firm's economic profit?

  1. 10,000
  2. 110,000
  3. Negative 10,000 Correct answer.
  4. 50,000

Explanation

Economic profit subtracts both explicit and implicit costs from revenue, while accounting profit subtracts only explicit costs. The forgone 60,000 is an implicit opportunity cost, so economic profit is 50,000 minus 60,000, which equals negative 10,000. A negative economic profit signals that the resources would earn more elsewhere.

Question 46Economics content knowledge (subject specialization)

A Lorenz curve lies farther from the line of perfect equality than before. What does this indicate?

  1. Average income has fallen
  2. Income distribution has become more equal
  3. The poverty rate has necessarily fallen
  4. Income distribution has become less equal Correct answer.

Explanation

The Lorenz curve plots cumulative income shares against cumulative population shares, and the diagonal represents perfect equality. A larger gap between the curve and the diagonal corresponds to a higher Gini coefficient. Moving farther from the diagonal therefore signals greater inequality.

Question 47Economics content knowledge (subject specialization)

A country has a population of 200 million, an adult population of 150 million, a labor force of 100 million, and 8 million unemployed. What is the unemployment rate?

  1. 8.0 percent Correct answer.
  2. 5.3 percent
  3. 16.0 percent
  4. 4.0 percent

Explanation

The unemployment rate divides the number of unemployed by the labor force, not by the total or adult population. Here 8 million divided by 100 million equals 8 percent. Using the labor force as the denominator is the definitional requirement.

Question 48Economics content knowledge (subject specialization)

A central bank lowers its policy rate when inflation is already below target and output is below potential. Which transmission channel supports this action?

  1. Lower rates reduce the cost of capital and stimulate investment and consumption Correct answer.
  2. Lower rates raise borrowing costs and reduce investment
  3. Lower rates appreciate the currency and boost net exports
  4. Lower rates raise saving and reduce current spending

Explanation

Lower policy rates reduce borrowing costs throughout the economy, encouraging investment and durable consumption. They also tend to depreciate the currency, supporting net exports. Both channels raise aggregate demand, which is appropriate when inflation and output are both weak.

Question 49Economics content knowledge (subject specialization)

A tariff is imposed on an imported good in a small open economy. What is the expected welfare effect according to standard trade theory?

  1. No welfare change because the tariff is just a transfer
  2. A net welfare loss from consumption and production distortions, with a terms-of-trade gain only if the country is large Correct answer.
  3. A net welfare gain because domestic producers expand
  4. A net welfare gain because government revenue always exceeds the deadweight loss

Explanation

In a small open economy the tariff cannot affect world prices, so it creates consumption and production deadweight losses with no offsetting terms-of-trade gain. The result is a net welfare loss. Only a large country able to depress world prices may gain through improved terms of trade.

Question 50Economics content knowledge (subject specialization)

In the Solow model with technological progress, what determines the long-run growth rate of output per worker?

  1. The initial capital stock
  2. The rate of technological progress Correct answer.
  3. The rate of population growth alone
  4. The saving rate alone

Explanation

Once the economy reaches its balanced growth path, output per worker grows at the rate of technological progress. The saving rate affects the level of the balanced growth path, not its long-run growth rate. Population growth affects output per worker levels and capital dilution but not the steady-state growth rate of output per worker.