2. Most governments subsidize basic education because
(A) there are external costs associated with well education citizens.
(B) marginal social benefit of education is greater than marginal private benefit.
(C) of existence of private schools.
(D) None of the above answers are correct.

4. If the purchasing-power parity theory is true, then: (A) the net exports schedule is very steep. (B) all changes in the real exchange rate result from changes in price levels. (C) all changes in the nominal exchange rate result from changes in price levels. (D) changes in saving or investment influence only the real exchange rate.

5. Suppose that when the price of good X falls from $10 to $8, the quantity demanded of good Y rises from 20 units to 25 units. Using the midpoint method, the cross-price elasticity of demand is (A) -1.0, and X and Y are complements. (B) -1.0, and X and Y are substitutes. (C) 1.0, and X and Y are complements. (D) 1.0, and X and Y are substitutes.

6. Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation. (A) increase； higher (B) increase； lower (C) decrease； higher (D) decrease； lower

7. In the Solow growth model, if investment exceeds depreciation, the capital stock will ______ and output will ______ until the steady state is attained. (A) increase； increase (B) increase； decrease (C) decrease； decrease (D) decrease； increase

8. When profit-maximizing firms in competitive markets are earning profits, (A) market demand must exceed market supply at the market equilibrium price. (B) market supply must exceed market demand at the market equilibrium price. (C) new firms will enter the market. (D) the most inefficient firms will be encouraged to leave the market.

9. If a tax is imposed on a market with inelastic supply and elastic demand, then (A) buyers will bear most of the burden of the tax. (B) sellers will bear most of the burden of the tax. (C) the burden of the tax will be shared equally between buyers and sellers. (D) it is impossible to determine how the burden of the tax will be shared.

10. An example of increasing returns to scale is when capital and labor inputs: (A) both increase 10 percent and output increases 5 percent. (B) both increase 10 percent and output increases 10 percent. (C) both increase 5 percent and output increases 10 percent. (D) do not change and output decreases 5 percent.  

11. In the case of unions, the conflict of interest between different groups of workers results in insiders wanting ______, while outsiders want ______. (A) more hirings； high wages (B) high wages； fewer hirings (C) high wages； more hirings (D) fewer hirings； high wages

12. Financial markets have the basic function of (A) getting people with funds to lend together with people who want to borrow funds. (B) assuring that the swings in the business cycle are less pronounced. (C) assuring that governments need never resort to printing money. (D) providing a risk-free repository of spending power.

13. Under which of the following conditions would the interdiction of illegal drugs result in a decrease in the quantity of drugs sold and in a decrease in total spending on illegal drugs by drug users? (A) The price elasticity of demand for illegal drugs is 1.3. (B) The price elasticity of supply for illegal drugs is 0.8. (C) The interdiction has the effect of shifting the demand curve for illegal drugs to the right . (D) As a result of the interdiction, the price of illegal drugs increases by 20 percent and the quantity of illegal drugs sold decreases by 16 percent.

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