MTTC MTTC Economics 2 — Questions and Answers
Question 1: When the government imposes a price ceiling below the equilibrium price, what is the most likely result?
- A surplus of goods
- A shortage of goods (Correct answer)
- An increase in supply
- An increase in quantity demanded that equals quantity supplied
Correct answer: A shortage of goods
A price ceiling set below equilibrium keeps prices artificially low, causing quantity demanded to exceed quantity supplied, resulting in a shortage.
Question 2: Which economic indicator measures the average change over time in prices paid by urban consumers for a basket of goods and services?
- GDP Deflator
- Producer Price Index
- Consumer Price Index (Correct answer)
- Employment Cost Index
Correct answer: Consumer Price Index
The Consumer Price Index (CPI) tracks price changes for a representative basket of goods and services purchased by urban households.
Question 3: A firm is a natural monopoly when:
- It holds a patent on its product
- Its average total cost continuously declines as output increases over the relevant range of demand (Correct answer)
- The government grants it exclusive rights to operate
- It controls a scarce natural resource
Correct answer: Its average total cost continuously declines as output increases over the relevant range of demand
A natural monopoly exists when economies of scale are so significant that one firm can supply the entire market at a lower average cost than multiple competing firms.
Question 4: Which of the following best describes the concept of comparative advantage?
- A country can produce more of every good than its trading partners
- A country should produce goods in which it has the lowest opportunity cost (Correct answer)
- A country benefits from trade only if it has an absolute advantage
- A country should protect its industries from foreign competition
Correct answer: A country should produce goods in which it has the lowest opportunity cost
Comparative advantage means specializing in producing goods where your opportunity cost is lowest relative to trading partners, enabling mutually beneficial trade.
Question 5: In a recession, which automatic stabilizer would most immediately increase government spending?
- Tax cuts passed by Congress
- Increased unemployment insurance payments (Correct answer)
- Infrastructure investment programs
- Monetary policy rate reductions
Correct answer: Increased unemployment insurance payments
Unemployment insurance payments automatically rise during recessions as more workers qualify, increasing government spending without new legislation.
Question 6: The multiplier effect in macroeconomics means that:
- Taxes reduce GDP by more than the tax amount collected
- An initial change in spending leads to a larger total change in GDP (Correct answer)
- Money supply increases proportionally with bank reserves
- Interest rate cuts multiply investment spending
Correct answer: An initial change in spending leads to a larger total change in GDP
The multiplier effect occurs because an initial injection of spending cycles through the economy as recipients re-spend their income, amplifying the total GDP impact.
Question 7: Which market structure is characterized by many sellers offering differentiated products and relatively 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 and some pricing power due to product differentiation.
MTTC MTTC Economics 2
When the government imposes a price ceiling below the equilibrium price, what is the most likely result?