Question 1

Which of the following best describes the purpose of an economic model?

Accepted Answer

To simplify reality in order to generate testable predictions about economic phenomena.

Question 2

Why are assumptions used in economic models, and are they necessarily a weakness?

Accepted Answer

Assumptions simplify models, allowing economists to focus on key relationships, and are not inherently a weakness if they help generate testable predictions.

Question 3

A study finds a positive correlation between ice cream sales and drowning incidents. Which of the following best explains why this does not imply causation?

Accepted Answer

There may be an omitted variable, such as hot weather, that increases both ice cream sales and swimming activity, leading to more drownings.

Question 4

Which of the following is an example of reverse causality?

Accepted Answer

Assuming that higher police presence causes more crime, when in fact higher crime rates may lead to more police being hired.

Question 5

Suppose a government imposes tariffs on imported goods, and inflation rises shortly after. Which of the following is the best way to determine if the tariffs caused the inflation?

Accepted Answer

Analyze variation in exposure to tariffs across different goods and time periods to see if price increases are greater where tariffs were higher.

Question 6

Which of the following is a property of a good economic question?

Accepted Answer

It is relevant, important, and can be answered with a well-defined, testable implication using available data.

Question 7

A firm is deciding whether to hire an additional worker. Which optimization principle should it use?

Accepted Answer

Compare the marginal benefit of hiring the worker to the marginal cost.

Question 8

Which of the following best describes opportunity cost?

Accepted Answer

The value of the next best alternative that is forgone when a choice is made.

Question 9

If the marginal benefit of an action is less than its marginal cost, what should an optimizing individual do?

Accepted Answer

Not undertake the action.

Question 10

A student is deciding whether to spend an extra hour studying for an exam or to go out with friends. The opportunity cost of studying for an extra hour is:

Accepted Answer

The enjoyment and social interaction the student would have experienced by going out with friends.

Question 11

Which of the following scenarios best illustrates optimization in differences?

Accepted Answer

A hiker continues walking uphill until there is no higher point to reach, stopping when the marginal benefit of going further is zero.

Question 12

Which of the following is NOT a reason why causality is difficult to establish in macroeconomics?

Accepted Answer

There is usually a clear comparison group for every policy change.

Question 13

Suppose the Federal Reserve is considering raising interest rates to combat inflation. Which tradeoff are they most likely to consider?

Accepted Answer

The marginal benefit of reducing inflation versus the marginal cost of potentially increasing unemployment.

Question 14

Which of the following statements about optimization is correct?

Accepted Answer

Optimization is never perfect because of limited information and complexity.

Question 15

A country imposes tariffs on imported steel. After one year, domestic steel prices rise. Which of the following is the best way to test if tariffs caused the price increase?

Accepted Answer

Compare price changes in goods with high tariff exposure to those with low or no tariff exposure, controlling for other factors.

Question 16

Which of the following best explains why the proverb 'anything worth doing is worth doing well' may not align with economic optimization?

Accepted Answer

Because the marginal cost of extra effort may be greater than the marginal benefit, so it is not always optimal to do something as well as possible.

Question 17

If a student chooses to attend college instead of working full-time, what is the opportunity cost of attending college?

Accepted Answer

The income the student could have earned by working full-time.

Question 18

Which of the following is an example of a relevant and answerable economic question?

Accepted Answer

How does increasing the minimum wage affect employment rates among teenagers in the United States?

Question 19

Suppose a firm is considering two investment projects. Project A has an expected return of $$10,000, while Project B has an expected return of 8$$,000. If the firm chooses Project A, what is the opportunity cost?

Accepted Answer

$8,000, the expected return from Project B, which is the next best alternative.

Question 20

Which of the following best describes the difference between optimization in levels and optimization in differences?

Accepted Answer

Optimization in levels compares total benefits and total costs, while optimization in differences compares marginal benefits and marginal costs.

Economic Methods, Causation & Correlation, and Optimization in Macroeconomics

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