GED Economics Practice
Economics is about 15 percent of the GED Social Studies test. The concepts are few and the questions are consistent, which makes this a reliable place to pick up points.
Question 1 of 16
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A city sets a legal maximum rent that is well below the price at which the number of apartments offered would equal the number people want to rent. What result does basic supply and demand predict?
Economics study guide
Economics on the GED is mostly about reasoning with a few core ideas: scarcity, supply and demand, and how governments and banks influence the economy. Many questions use a graph or table, so the goal is to read it in economic terms.
Scarcity and opportunity cost
Resources are limited and wants are not, so every choice has a cost. Opportunity cost is the value of the next best option you give up. If you spend Saturday working an extra shift instead of attending a class, the class is the opportunity cost of the shift.
Economies answer three basic questions: what to produce, how to produce it, and for whom. In a market economy, prices and private choices answer them. In a command economy, the government does. The United States has a mixed economy that combines both.
Supply and demand
The law of demand says that as price rises, the quantity people want to buy falls. The law of supply says that as price rises, the quantity producers want to sell rises. The equilibrium price is where the two meet.
Separate a movement along a curve from a shift of the whole curve. A price change moves along the curve. A change in something else, such as income, tastes, the price of a substitute, or the cost of materials, shifts the curve.
Worked example
A frost destroys much of the orange crop. What happens to the price of orange juice?
- Fewer oranges means supply decreases; the supply curve shifts left.
- With demand unchanged, the new equilibrium has a higher price and a lower quantity sold.
- Orange juice prices rise.
Measuring the economy
Gross domestic product (GDP) is the total value of final goods and services produced in a country in a year. Inflation is a general rise in prices, which lowers the purchasing power of money. The unemployment rate is the share of people in the labor force who want work but cannot find it.
A recession is a significant decline in economic activity, typically with falling GDP and rising unemployment. Nominal figures are not adjusted for inflation; real figures are, which makes real values better for comparing across years.
Fiscal and monetary policy
Fiscal policy is the government’s use of taxing and spending. To boost a slow economy, the government can cut taxes or increase spending; to cool an overheating economy, it can do the opposite. Spending more than it collects creates a deficit, and accumulated deficits make up the national debt.
Monetary policy is run by the Federal Reserve, the central bank. Lowering interest rates makes borrowing cheaper and encourages spending; raising them slows borrowing and helps control inflation.
Personal finance basics
Some questions apply economics to everyday decisions. Simple interest is principal × rate × time. Compound interest earns interest on past interest, so it grows faster over time, which helps savers and hurts borrowers who carry balances. A budget compares income with expenses, and credit scores reflect how reliably someone repays debt.
Trade, comparative advantage, and tariffs
Countries trade for the same reason people do: no one can make everything well. A nation exports goods it sells to other countries and imports goods it buys from them. When imports are worth more than exports, the country has a trade deficit; when exports are worth more, it has a trade surplus.
The key idea is comparative advantage. A country has a comparative advantage in a good when it can make that good at a lower opportunity cost than another country, meaning it gives up less of other goods to make it. Even a country that is better at making everything gains by specializing in the goods where its advantage is greatest and trading for the rest. Do not confuse this with absolute advantage, which only asks who can make more of a good with the same resources.
Governments sometimes limit trade. A tariff is a tax on imports, which raises their price and helps domestic producers compete, but it also raises costs for consumers and for businesses that use imported parts. A quota caps the amount of a good that can be imported. Trade agreements, such as the one among the United States, Canada, and Mexico, lower these barriers between member countries. Other nations may answer a tariff with tariffs of their own, which can hurt exporters.
Worked example
In one day, Country X can make 60 shirts or 30 radios. Country Y can make 40 shirts or 10 radios. Which country should specialize in radios?
- Find Country X’s cost of one radio: 60 shirts ÷ 30 radios = 2 shirts given up per radio.
- Find Country Y’s cost of one radio: 40 shirts ÷ 10 radios = 4 shirts given up per radio.
- Country X gives up fewer shirts for each radio, so it has the comparative advantage in radios.
- Check the other good: a shirt costs Country X 0.5 radio but costs Country Y only 0.25 radio, so Country Y has the comparative advantage in shirts.
- Country X should make radios, Country Y should make shirts, and both gain by trading.
Checklist before test day
Make sure each of these is clear.
- Identify the opportunity cost in a choice.
- Tell a movement along a demand curve from a shift.
- Predict price changes when supply or demand shifts.
- Define GDP, inflation, and unemployment.
- Separate fiscal policy (Congress and the President) from monetary policy (the Federal Reserve).
- Compute simple interest.
Economics practice set 1: 16 questions with answers
Work each question on paper first, then open the answer to check your reasoning.
1.A city sets a legal maximum rent that is well below the price at which the number of apartments offered would equal the number people want to rent. What result does basic supply and demand predict?
- A.Higher rents across the city
- B.A surplus of empty apartments
- C.No change at all in the rental market
- D.A shortage of rental apartments
Show answer
Answer: D. A shortage of rental apartments
A price ceiling below equilibrium raises the quantity demanded and lowers the quantity supplied, creating a shortage. A surplus results from a price set above equilibrium, not below it.
2.In 1933, after thousands of banks failed, Congress created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits up to a set limit. What is the main purpose of the FDIC?
- A.To print all the paper money used in the nation
- B.To set the interest rates that banks charge
- C.To protect depositors’ money if a bank fails
- D.To decide which businesses may borrow money
Show answer
Answer: C. To protect depositors’ money if a bank fails
Deposit insurance means savers get their money back up to the limit even if their bank collapses, which discourages panics. Setting interest rates is a role of the Federal Reserve, not the FDIC.
3.A credit card statement shows a balance of $2,000 at an annual interest rate of 20 percent. The minimum payment this month is $40. Why does paying only the minimum each month make the debt so costly?
- A.Paying the minimum cancels the card’s grace period for good
- B.Interest keeps being charged on the large unpaid balance
- C.The minimum payment is added to the balance each month
- D.The interest rate doubles whenever a minimum is paid
Show answer
Answer: B. Interest keeps being charged on the large unpaid balance
Most of a small minimum payment goes to interest, so the balance shrinks slowly and keeps earning interest for years. The payment itself is not added to the balance; it reduces it, just very little.
4.A young adult wants to qualify for a car loan with a lower interest rate in two years. Which habit would most likely improve her credit score?
- A.Opening several new store cards at once
- B.Paying every bill on time each month
- C.Paying only in cash and never using credit
- D.Using the full limit on each credit card
Show answer
Answer: B. Paying every bill on time each month
Payment history is one of the largest factors in a credit score, so on-time payments help most. Using the full credit limit raises the share of available credit in use, which tends to lower a score.
5.A bank pays savers 1 percent interest on their deposits and charges 7 percent interest on car loans. What is the main way this bank earns a profit?
- A.Printing new money whenever its customers need loans
- B.Collecting taxes from customers on behalf of the state
- C.Keeping all deposits in its vault and charging fees
- D.Charging borrowers more interest than it pays depositors
Show answer
Answer: D. Charging borrowers more interest than it pays depositors
A bank profits from the gap between the interest it earns on loans and the interest it pays on deposits. Banks cannot print money; in the United States, currency is produced by the federal government.
6.Congress has given the Federal Reserve two main goals for the nation’s economy, often called its dual mandate. What are these two goals?
- A.A balanced budget and low taxes
- B.High tariffs and a strong military
- C.Maximum employment and stable prices
- D.Free trade and higher wages for all
Show answer
Answer: C. Maximum employment and stable prices
The Fed is charged with promoting maximum employment and stable prices through monetary policy. A balanced budget and tax levels are fiscal policy, set by Congress and the president.
7.In one country, four large companies provide almost all cell phone service. Each watches the others closely, and when one changes its prices or plans, the others often respond within weeks. Which market structure does this describe?
- A.Oligopoly
- B.Monopoly
- C.Perfect competition
- D.Command economy
Show answer
Answer: A. Oligopoly
An oligopoly is a market controlled by a few large firms whose decisions affect one another. A monopoly has only one seller, but here there are four.
8.In one week, a furniture shop’s workers can build either 50 tables or 200 chairs, or any mix in between at the same trade-off. What is the opportunity cost of building one table?
- A.1 chair
- B.2 chairs
- C.50 chairs
- D.4 chairs
Show answer
Answer: D. 4 chairs
Giving up 200 chairs to make 50 tables means each table costs 200 ÷ 50 = 4 chairs. Fifty is the number of tables, not the cost of one table.
9.A financial counselor suggests keeping an emergency fund equal to 3 to 6 months of essential expenses. A family’s essential expenses are $2,200 per month. Which savings goal falls within the counselor’s range?
- A.$2,200
- B.$4,400
- C.$15,000
- D.$9,000
Show answer
Answer: D. $9,000
The range runs from 3 × $2,200 = $6,600 to 6 × $2,200 = $13,200, and $9,000 falls inside it. $15,000 is more than six months of expenses.
10.In one year, a country exports $2.0 trillion in goods and services and imports $2.8 trillion. Which statement describes this country’s trade balance?
- A.A trade deficit of $0.8 trillion
- B.A trade surplus of $2.8 trillion
- C.A budget deficit of $4.8 trillion
- D.A trade surplus of $0.8 trillion
Show answer
Answer: A. A trade deficit of $0.8 trillion
Imports exceed exports by $2.8 − $2.0 = $0.8 trillion, which is a trade deficit. A budget deficit concerns government spending and taxes, not trade.
11.Over one year, the U.S. dollar rises in value against the euro, so one dollar buys more euros than before. What is the most likely effect on trade between the United States and Europe?
- A.European goods become more costly for American buyers
- B.American goods become more costly for European buyers
- C.Trade stops because the two currencies no longer match
- D.Tariffs on all European goods automatically rise
Show answer
Answer: B. American goods become more costly for European buyers
Europeans need more euros to buy each dollar, so U.S. exports cost them more, while European goods become cheaper for Americans. Exchange rates shift prices but do not change tariff laws.
12.Economists group the inputs used to make goods into four factors of production: land (natural resources), labor (human work), capital (tools, machines, and buildings), and entrepreneurship (organizing and taking risks). A bakery buys a new commercial oven. Which factor of production is the oven?
- A.Land
- B.Labor
- C.Capital
- D.Entrepreneurship
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Answer: C. Capital
An oven is equipment used to produce goods, so it is capital. Land refers to natural resources such as soil, water, or the wheat itself.
13.A line graph shows the Federal Reserve’s target interest rate. The rate was cut to near zero in late 2008 and again in March 2020. What did the Fed most likely hope to achieve with both cuts?
- A.Slow down an economy that was growing too fast
- B.Reduce the amount of money banks could lend
- C.Encourage borrowing and spending during a downturn
- D.Raise the value of the dollar against other currencies
Show answer
Answer: C. Encourage borrowing and spending during a downturn
Both cuts came during sharp downturns: the 2008 financial crisis and the start of the COVID-19 pandemic. Low rates make loans cheaper, which is the opposite of slowing an overheated economy.
14.A city’s water is supplied by one company, because building a second set of pipes under every street would be wasteful. A state board must approve any change in the company’s water rates. Why does the government regulate this company’s prices?
- A.The company is owned by customers who set their own rates
- B.With no competitor, nothing else would hold its prices down
- C.Federal law bans any private company from selling water
- D.Many competing water companies keep cutting their prices
Show answer
Answer: B. With no competitor, nothing else would hold its prices down
A single provider is a natural monopoly, so regulation replaces the price pressure competition would normally supply. The passage says there is only one company, so the second choice contradicts it.
15.In a remote farming village, children learn the same trades as their parents. Families grow the same crops each year, and the harvest is shared according to rules passed down for generations. Which type of economic system does this village have?
- A.A traditional economy
- B.A command economy
- C.A market economy
- D.A mixed economy
Show answer
Answer: A. A traditional economy
In a traditional economy, custom and habit answer what to produce, how, and for whom. In a command economy, government planners make those decisions, and no planner appears in the passage.
16.The two largest makers of baby formula in a country announce a plan to merge. Together they would sell about 80 percent of all formula. Government regulators sue to block the merger. What is the regulators’ most likely reason?
- A.To keep competition so prices do not rise
- B.To force both companies to leave the market
- C.To raise the price of formula for buyers
- D.To make the two companies pay more taxes
Show answer
Answer: A. To keep competition so prices do not rise
Antitrust laws aim to keep one firm from controlling a market, because a firm with little competition can raise prices and cut quality. Blocking the merger protects buyers, so raising prices is the opposite of the goal.
More practice sets
Economics has 2 practice sets. None of these questions appear in the full practice tests.
- Set 1: 16 questions (this page)
- Set 2: 16 questions
Supply and demand on the GED Social Studies test
When demand rises and supply holds steady, price rises. When supply rises and demand holds steady, price falls. Most GED market questions are a variation on those two sentences, dressed in a scenario about a shortage, a bumper crop, or a new competitor.
Scarcity underlies the whole subject: resources are limited, so every choice has an opportunity cost: the value of the next best alternative you gave up, not just the money you spent.
Measuring the economy: GDP, inflation, and unemployment
Gross domestic product totals the value of final goods and services produced within a country. Inflation is a sustained rise in the general price level, which reduces what a dollar buys. Unemployment measures people who are actively seeking work but have not found it.
Questions often pair two indicators on a chart and ask what the combination suggests, so practice reading trends rather than memorizing definitions alone.
Fiscal versus monetary policy on the GED
Fiscal policy is government taxing and spending, decided by Congress and the president. Monetary policy is control of the money supply and interest rates, handled by the Federal Reserve. Confusing the two is the most common error on this content area.
A tax cut or a spending package is fiscal. Raising or lowering interest rates is monetary. Expect at least one question that hinges on that distinction.
Frequently asked questions
- How much economics is on the GED?
- About 15 percent of the Social Studies test.
- What is the difference between fiscal and monetary policy?
- Fiscal policy is government taxing and spending. Monetary policy is the central bank's control of interest rates and the money supply.