NAEP Economics Grade 2 — Questions and Answers
Question 1: A bakery sells cupcakes for $3 each. When the price drops to $2, customers buy more cupcakes. This illustrates the law of:
- Supply
- Demand (Correct answer)
- Diminishing returns
- Comparative advantage
Correct answer: Demand
The law of demand states that as price decreases, the quantity demanded increases, all else being equal.
Question 2: A country can produce either 100 cars or 200 tons of wheat using all its resources. If it currently produces 50 cars and 100 tons of wheat, what does this represent?
- A point on its production possibilities frontier
- A point inside its production possibilities frontier (Correct answer)
- A point outside its production possibilities frontier
- An inefficient use of labor only
Correct answer: A point inside its production possibilities frontier
A point inside the production possibilities frontier indicates resources are not being fully or efficiently used.
Question 3: Which government action is an example of a fiscal policy tool?
- Raising the federal funds interest rate
- Increasing government spending on infrastructure (Correct answer)
- Reducing the money supply
- Setting reserve requirements for banks
Correct answer: Increasing government spending on infrastructure
Fiscal policy involves government spending and taxation decisions, while monetary policy involves the money supply and interest rates.
Question 4: A factory dumps waste into a river, harming nearby communities. This is an example of:
- A positive externality
- A negative externality (Correct answer)
- A public good
- Price discrimination
Correct answer: A negative externality
A negative externality occurs when the production or consumption of a good imposes costs on third parties not involved in the transaction.
Question 5: When a country imports more goods than it exports, it has a:
- Trade surplus
- Budget surplus
- Trade deficit (Correct answer)
- Current account surplus
Correct answer: Trade deficit
A trade deficit occurs when a country's imports exceed its exports in value.
Question 6: A student chooses to spend Saturday studying instead of working at a part-time job. The opportunity cost of studying is:
- The cost of textbooks
- The wages not earned from working (Correct answer)
- The value of leisure time lost
- The tuition paid for school
Correct answer: The wages not earned from working
Opportunity cost is the value of the next best alternative forgone, which in this case is the wages the student could have earned.
Question 7: Which of the following best describes a command economy?
- Prices are set by supply and demand
- The government makes most economic decisions (Correct answer)
- Businesses operate freely with minimal regulation
- Consumers decide what gets produced through purchases
Correct answer: The government makes most economic decisions
In a command economy, the government controls production, distribution, and pricing rather than market forces.
NAEP Economics Grade 2
A bakery sells cupcakes for $3 each.
When the price drops to $2, customers buy more cupcakes.
This illustrates the law of: