Foreign Service Officer Test (FSOT) Economics Syllabus

Economics syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Economics in Foreign Service Officer Test (FSOT), not a summary of it.

1. 1

   Microeconomics

   4 topics

   • Supply and Demand
     • Market equilibrium
     • Price elasticity
     • Shifts versus movements along curves
   • Market Structures
     • Perfect competition and monopoly
     • Oligopoly and monopolistic competition
   • Market Failures and Government Intervention
     • Externalities and public goods
     • Price ceilings and floors
   • Consumer and Producer Behavior
     • Utility and marginal analysis
     • Costs of production
2. 2

   Macroeconomics

   4 topics

   • Measuring the Economy
     • GDP and national income accounting
     • Inflation and the CPI
     • Unemployment measures
   • Business Cycles and Growth
     • Recession, recovery, and expansion
     • Determinants of long-run growth
   • Fiscal Policy
     • Government spending and taxation
     • Budget deficits and the national debt
   • Monetary Policy and Banking
     • The Federal Reserve and its tools
     • Money supply and interest rates
3. 3

   International Economics

   3 topics

   • Trade Theory
     • Comparative and absolute advantage
     • Tariffs, quotas, and protectionism
   • Exchange Rates and Balance of Payments
     • Currency markets
     • Trade deficits and surpluses
   • Global Economic Institutions
     • Role of the IMF and World Bank
     • Economic development strategies

Economics flashcards for Foreign Service Officer Test (FSOT)

23 of 59 cards from the Economics deck — real questions with worked answers.

1. What is the law of demand?

   All else equal, as the price of a good rises, the quantity demanded falls; as price falls, quantity demanded rises. Demand curves slope downward.

2. What is the law of supply?

   All else equal, as the price of a good rises, the quantity supplied rises; as price falls, quantity supplied falls. Supply curves slope upward.

3. What defines market equilibrium?

   The price and quantity where quantity demanded equals quantity supplied; there is no shortage or surplus and no pressure for price to change.

4. What is the difference between a shortage and a surplus?

   A shortage (excess demand) occurs when price is below equilibrium, so quantity demanded exceeds quantity supplied. A surplus (excess supply) occurs when price is above equilibrium, so quantity supplied exceeds quantity demanded.

5. Distinguish a change in quantity demanded from a change in demand.

   A change in quantity demanded is movement along the curve caused by the good's own price. A change in demand is a shift of the whole curve caused by non-price factors (income, tastes, prices of related goods, expectations, number of buyers).

6. What is the formula for price elasticity of demand?

   Price elasticity of demand = (% change in quantity demanded) / (% change in price). Demand is elastic if the absolute value exceeds 1, inelastic if less than 1, and unit elastic if equal to 1.

7. How do substitutes and complements differ in cross-price elasticity?

   Substitutes have a positive cross-price elasticity (price of one rises, demand for the other rises). Complements have a negative cross-price elasticity (price of one rises, demand for the other falls).

8. What is the difference between a normal good and an inferior good?

   Demand for a normal good rises when income rises (positive income elasticity). Demand for an inferior good falls when income rises (negative income elasticity).

9. What are the four main market structures?

   Perfect competition, monopolistic competition, oligopoly, and monopoly, ranging from many firms with no market power to a single firm with full market power.

10. What are the defining features of perfect competition?

    Many small firms, identical (homogeneous) products, free entry and exit, perfect information, and firms are price takers earning zero economic profit in the long run.

11. What characterizes monopolistic competition?

    Many firms selling differentiated products with free entry and exit; firms have some price-setting power but earn zero economic profit in the long run due to entry.

12. What characterizes an oligopoly?

    A few large firms dominate the market, products may be standardized or differentiated, there are high barriers to entry, and firms are interdependent (decisions affect rivals).

13. What defines a monopoly?

    A single seller of a product with no close substitutes, high barriers to entry, and the firm is a price maker that can earn long-run economic profit.

14. What profit-maximizing rule applies to all firms?

    Produce the quantity where marginal revenue equals marginal cost (MR = MC). For a perfectly competitive firm, price equals MR, so it produces where P = MC.

15. What is a natural monopoly?

    An industry in which a single firm can supply the entire market at lower cost than multiple firms, due to large economies of scale (high fixed costs, low marginal costs), e.g., utilities.

16. What is a market failure?

    A situation in which the free market fails to allocate resources efficiently on its own, such as with externalities, public goods, market power, or asymmetric information.

17. What is a negative externality and how can it be corrected?

    A cost imposed on third parties not reflected in the market price (e.g., pollution), causing overproduction. It can be corrected by a Pigouvian tax, regulation, or assigning property rights.

18. What is a positive externality and how can it be corrected?

    A benefit to third parties not reflected in the market price (e.g., vaccination, education), causing underproduction. It can be corrected with subsidies or public provision.

19. What are the two defining characteristics of a public good?

    Non-rivalry (one person's use does not reduce availability to others) and non-excludability (people cannot be prevented from using it), e.g., national defense. This creates the free-rider problem.

20. What is the free-rider problem?

    When people can benefit from a good without paying for it (because it is non-excludable), leading to underprovision by private markets; it justifies government provision of public goods.

21. What is the tragedy of the commons?

    The overuse and depletion of a shared, non-excludable but rival resource (a common-pool resource) because individuals acting in self-interest ignore the cost to the group.

22. What is asymmetric information, with an example?

    When one party in a transaction has more information than the other. Examples: adverse selection (hidden information before a deal, e.g., used-car 'lemons') and moral hazard (hidden action after a deal, e.g., riskier behavior once insured).

23. What is consumer surplus?

    The difference between what consumers are willing to pay and what they actually pay; graphically, the area below the demand curve and above the market price.

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