Economics is best defined as the study of how individuals decide to use limited resources in an attempt to satisfy unlimited wants.
Economics studies how decision makers use scarce resources to satisfy unlimited wants.
The problem of scarce resources
a. means that in some cities there are not enough jobs
b. could be solved if the unemployment rate fell
c. is that there are not enough resources to satisfy people's unlimited wants
d. is that resources are used inefficiently
e. can be solved by lowering taxes
Which of the following statements regarding the basic economic problem of scarcity is correct?
a. The problem only exists in countries that are not highly industrialized.
b. The problem is likely to disappear as production increases.
c. The problem is sure to disappear as technology improves.
d. The problem will exist as long as resources are available in limited amounts.
e. The problem will disappear as a person's income falls.
Economics is best defined as the study of how
a. individuals decide to use scarce resources in an attempt to satisfy their unlimited wants
b. to make money
c. the government should deal with unemployment and inflation
d. to eliminate the problem of scarce resources
e. to run a business
Economics is the study of
a. how to get rich by playing the stock market
b. the best ways to reduce people's wants, given the scarcity of resources
c. how rational government officials determine what goods should be produced
d. money and why it is good
e. how people use limited resources to try to satisfy unlimited wants
Which of the following is an example of capital?
a. pizza ovens
c. a college education
d. carpentry skills
e. all of the above
Goods and services are scarce because
a. people are greedy
b. they are produced using scarce resources
c. firms keep production low in order to earn higher profits
d. they are produced by firms that seeks profits
e. government wants to maintain its power over the economy
Considering both product markets and resource markets, most economic decision makers participate in the economy as both buyers and sellers.
Choices made by economic decision makers
a. are government decisions only
b. are the primary focus of economics
c. are not important in economic analysis
d. occur infrequently
e. do not involve ordinary citizens
Rational economic decision makers will make a change only if
a. the change is free of risk
b. there are no costs involved
c. their expectations are correct
d. there is no uncertainty about the results of the change
e. the expected marginal benefit exceeds expected marginal cost
In economics, the term "marginal" usually refers to
a. a small change in an economic variable
b. a low-quality product or resource
c. an unimportant and irrelevant economic variable
d. an all-or-nothing economic decision
e. a footnote or minor point
In economics, marginal means
a. incremental or decremental
c. level or size
d. a border-line situation
e. a bad alternative
You currently subscribe to two magazines and are trying to decide whether you should subscribe to a third. What should determine your decision, if you are rational?
a. the total cost of the magazines compared to the total satisfaction you would receive
b. the total amount of satisfaction you would get from the magazines
c. the enjoyment you would get from the third magazine
d. the cost of the third magazine, including the time it takes to read it
e. the cost of the third magazine compared to the additional enjoyment you would get from it
Theory in economics
a. involves some simplification of reality
b. bears no relation to reality
c. approaches reality in all its complexity
d. involves so much distortion of reality that it is worthless
e. focuses on the unique aspects of each situation
A hypothesis is
a. an assumption about behavior
b. a prediction of what will occur given certain assumptions
c. a prediction of what will occur regardless of assumptions
d. a forecast of future events
e. useful only if the assumptions are realistic
"There should be less discrimination against women" is an example of a positive statement.
Which of the following is an example of a positive statement?
a. Workers with families should be paid at least the minimum wage.
b. If crime rates were reduced, the world would be a better place in which to live.
c. Marginal tax rates should be reduced for individuals in the highest tax brackets.
d. An increase in the price of gasoline will cause a reduction in the amount purchased.
e. Corrupt politicians ought to be voted out of office.
The difference between positive economic statements and normative economic statements is that
a. both c and e are true
b. positive statements are based on opinion while normative statements are based on fact
c. positive statements are true and normative statements are often false
d. positive statements are often false and normative statements are true
e. positive statements are based on fact while normative statements are based on opinion
The association-causation fallacy is the error of assuming that what is true for one member of a group must be true for the group.
The fallacy of composition is the error of believing a cause-effect relationship exists between two events that are associated in time.
Your friend notices that U.S. auto production and U.S. population growth have moved together over several decades. He reasons that one way to slow population growth is for the government to order the auto makers to cut back on production. You gently point out to him that he
a. is correct only when the economy is in a recession
b. has mistakenly inferred causation from observed correlation
c. has ignored secondary effects
d. has committed the fallacy of composition
e. is correct only when the United States enjoys economic growth
Opportunity cost is the difference between the benefits and the costs of a choice.
A rational decision maker engages in an activity if that activity is more attractive than the best alternative.
The Sultan of Brunei, one of the world's richest people, does not face the problem of scarcity.
Opportunity cost is defined
a. only in terms of money spent
b. as the value of all alternatives not chosen
c. as the value of the best alternative not chosen
d. as the difference between the benefits from a choice and the benefits from the next best alternative
e. as the difference between the benefits from a choice and the costs of that choice
The opportunity cost of an activity is
a. zero if you choose the activity voluntarily
b. the amount of money spent on the activity
c. the value of the best alternative not chosen
d. the sum of benefits from all of the sacrificed alternatives
e. the difference between the benefits and the costs of that activity
Attending college can be viewed as a form of
a. investment in which costs are borne today and benefits are received in the future
b. investment in which benefits are received today and costs are borne in the future
c. consumption, because learning is an enjoyable activity
d. leisure, because learning is an enjoyable activity
e. saving for the future
If people specialize in producing those goods for which they possess a comparative advantage, then the economy as a whole can produce a greater quantity of goods.
The law of comparative advantage says that a person should produce a good if she
a. has the greatest desire to consume that good
b. has the lowest opportunity cost of producing that good
c. has an absolute advantage in a related activity
d. has a comparative advantage in a related activity
e. is equally good at producing this good as someone else is
Comparative advantage is
a. the ability of an individual to specialize and produce a greater amount of some good than can another individual
b. the number of units of one good given up in order to acquire something
c. the ability of an individual to produce a good at a lower opportunity cost than some other individual can
d. an expression for the amount of labor a particular individual needs to produce a fixed amount of capital goods
e. a reference to an individual having the greatest opportunity cost of producing the good and produces it with the fewest resources
At various points along the production possibilities frontier,
a. the greatest achievable output levels are illustrated
b. resources are not fully employed
c. more of one good can be obtained without giving up more of the other
d. more efficient output levels are possible
e. society is equally well off
Of the various types of economic systems, pure market capitalism involves the greatest government interference and control over the economy.
Which of the following is not a characteristic of pure capitalism?
a. private property rights
b. competitive markets
c. laissez-faire policies
d. central planning
e. a reliance on prices to direct resources to their best uses
Adam Smith's term, "the invisible hand," refers to
a. the hidden role of government in setting regulations that govern trading in markets
b. the most capable entrepreneurs in the economy
c. market forces
d. the unseen work of the financial markets that facilitates trade
e. the role of technological change and random events in the economy
The U.S. economy is best characterized as
a. pure capitalism
b. a command economy
d. a mixed capitalist economy
e. market socialism
Which of the four types of economic decision makers is most important?
a. firms, because they produce all goods and services in the economy
b. households, because they demand goods and services and supply resources
c. government, because it ultimately sets and enforces the "rules of the game"
d. government, because it steps in when there is market failure
e. the rest of the world, because there are over 150 countries
Harold, a delivery man, washes and irons his own shirts. Sarah, his boss, sends her clothes to a laundry. Which is the most plausible economic explanation for this difference?
a. Harold must enjoy ironing more than Sarah does.
b. Harold must be better at ironing than Sarah is.
c. The opportunity cost of ironing is greater for Harold.
d. Harold probably has an absolute advantage in ironing.
e. Sarah has a higher opportunity cost of laundering her clothes than Harold does.
The term "utility" means
b. a low-valued good
The statement "Households maximize utility" means that households
a. try to be as useful as possible to the economy
b. are only interested in maximizing their earnings
c. are assumed to buy useful things before they buy luxuries
d. are only interested in acquiring material wealth
e. are assumed to do what they think will increase their satisfaction
The objective of the household is to
a. maximize household wealth
b. own as much land as possible
c. save as much money as possible
d. acquire as many goods as possible
e. maximize utility
Rationality in the household decision-making process means that
a. all households make the same decisions
b. everyone in the household agrees on all decisions
c. households act in their own best interests
d. households want to earn as much income as possible
e. all households would make the same decisions given the same information on products qualities and prices
Which of the following is an example of a durable good?
a. food prepared at home
b. food eaten at a restaurant
c. high-fashion clothing
e. motor oil
A cottage industry is one that
a. produces rural housing
b. takes advantage of the division of labor
c. uses highly specialized resources in a complex production process
d. produces cottage cheese
e. carries out production in workers' homes
Which form of business organization is the most common in the United States?
a. sole proprietorship
d. nonprofit organization
In terms of the numbers of firms in the U.S. economy, the most common type of firm is the
c. sole proprietorship
d. nonprofit organization
e. limited partnership corporation
Which of the following is most likely to be a partnership?
a. Uncle Mort's Red Wrigglers
b. the accounting firm of Hope and Williams
c. General Motors
d. the Boston Symphony Orchestra
e. the U.S. Post Office
Which of the following is most likely to be a partnership?
a. Uncle Mort's Red Wrigglers
b. the accounting firm of Hope and Williams
c. General Motors
d. the Boston Symphony Orchestra
e. the U.S. Post Office
Owners of corporations are referred to most frequently as
b. lien holders
c. limited partners
The Salvation Army is an example of a(n)
a. military organization
b. not-for-profit organization
e. U.S. government agency
To serve the public interest, government sometimes promotes competition by breaking up natural monopolies.
A public good is available to all regardless of who pays for it and who does not.
When externalities are present, market prices do not reflect all the social costs or benefits of the activity.
It is difficult to exclude individuals from the use of public goods and services.
Natural monopolies occur when
a. government antitrust laws are too weak or not enforced
b. negative externalities are present
c. firms collude to set prices and divide the market among themselves
d. one firm can service the market more cheaply than two or more firms can
e. a public good is produced by a private firm
A public good is one that is supplied to
a. only people who pay for it
b. only people who do not pay for it
c. all people, regardless of whether they pay or not
d. the government from private firms
e. foreign governments from our federal government
Which of the following is not a government transfer program?
a. unemployment compensation
b. Social Security
c. food stamps
e. movement of soldiers to a different military base
The term "fiscal policy" refers to
a. the amount of physical output produced by firms
b. the means by which government policy makes firms more productive
c. the avenue by which government influences credit markets
d. spending and taxing by governments
e. a tool of government that works in the opposite direction of monetary policy
The difference between fiscal policy and monetary policy is that
a. fiscal policy is macroeconomic policy and monetary policy is microeconomic policy
b. monetary policy is macroeconomic policy and fiscal policy is microeconomic policy
c. fiscal policy involves regulation of natural monopolies and monetary policy involves the provision of public goods
d. monetary policy involves regulation of the money supply and fiscal policy involves government spending and taxing
e. fiscal policy involves the promotion of competition and monetary policy involves collecting money to pay for taxes
Most economists assume that the goal of elected officials is to promote the public interest.
A common assumption that economists make about the behavior of elected officials is that they try to
a. maximize the size of their government salaries
b. maximize the size of their control over the budget process
c. maximize the number of votes they receive in the next election
d. minimize the government's expenditures in order to balance the budget
e. conform to the wishes of special interest groups so that the government behaves as a single, consistent decision maker
Which of the following accounts for the largest source of revenue for the federal government?
a. sales tax
b. federal property tax
c. personal income tax
d. corporate income tax
A progressive tax means
a. people who make more money pay less total taxes
b. the marginal tax rate increases as income increases
c. the percentage of income paid out decreases as income increases
d. people who are poor receive the proceeds of the tax
e. the same thing as a flat-rate tax
In recent decades, international trade has been
a. a constant percentage of U.S. GDP
b. a declining fraction of U.S. GDP
c. an increasing fraction of U.S. GDP
d. declining as measured by total dollars spent
e. constant as measured by total dollars spent
A tariff is
a. a tax on imports
b. a legal limit on quantities of goods that can be imported
c. a voluntary limit on quantities of goods that can be imported
d. a quality restriction on imports
e. a subsidy for exports
The demand for a product is the amount that
a. buyers purchase in the market
b. buyers are willing to purchase at a given price
c. sellers are willing to sell at a particular price
d. buyers are willing and able to purchase at alternative prices
e. buyers are able to purchase at a specific price
The substitution effect of a price change describes what happens to the shift in demand for a good when its price changes.
The law of demand says that the lower the price of a good, other things constant,
a. the smaller the demand for that good
b. the larger the demand for that good
c. the smaller the quantity demanded of that good
d. the larger the quantity demanded of that good
e. the smaller the real income of consumers and the lower the quantity demanded of that good
The law of demand states that
a. there is a positive relationship between price and quantity demanded
b. price is the only factor that influences the quantity that people are willing and able to buy
c. price and quantity demanded are inversely related
d. the demand curve shifts whenever the price of a good changes
e. by producing a product, firms create a demand for it
In what way is consumer demand different from consumer wants?
a. Demand is only for necessities.
b. Demand is only for luxuries.
c. Demand takes into account the ability to pay.
d. Consumer wants are only for luxuries.
e. Consumer wants are only for necessities.
Movements along a demand curve are called changes in
b. opportunity costs
c. quantity demanded
d. the substitution effect
Suppose you drink more tea because the price of coffee has increased. Which of the following best explains your action?
a. the law of supply
b. tea and coffee are complements
c. the substitution effect
d. the income effect
e. your nominal income has increaseD
The law of demand is illustrated by a demand curve that is
c. upward sloping
e. downward sloping
For which of the following would the income effect of a price change be greatest?
a. ballpoint pens
b. air travel to Australia
c. chewing gum
e. college textbooks
A demand curve usually has a
a. negative slope because price and quantity demanded are inversely related
b. negative slope because as price rises, demand falls
c. positive slope because price and quantity demanded are positively related
d. positive slope because price and quantity demanded are inversely related
e. slope of zero because there is no change along a demand curve when everything else is held constant
Studies show that the demand curve for peas has shifted. Which of the following explanations would you reject first?
a. The price of string beans has changed.
b. The demand for corn has changed.
c. The demand for string beans has changed.
d. The income of consumers has changed.
e. The price of peas has changed.
The effect of a decrease in the price of personal computers, other things constant, is likely to be best represented by which of the following?
a. a leftward shift of the demand curve
b. a movement leftward along the demand curve
c. a rightward shift of the demand curve
d. a movement rightward along the demand curve
e. a rightward shift of the supply curve
Which of the following will not shift the demand curve for movie tickets?
a. a change in the cost of babysitting services
b. a change in the price of movie tickets
c. a change in the quality of television programs
d. a change in the income of movie-goers
e. a change in the number of consumers
Which of the following is most likely to be an inferior good?
a. airline travel
b. restaurant meals
c. a subscription to the Wall Street Journal
d. soft drinks
e. used clothing
If the price of gasoline (a normal good) decreases, other things constant,
a. the demand for gasoline increases
b. the demand for gasoline decreases
c. the quantity demanded of gasoline increases
d. the quantity demanded of gasoline decreases
e. neither the demand for gasoline nor the quantity demanded of gasoline changes because everything is assumed constant along a demand curve
Two goods are considered substitutes only if a(n)
a. decrease in the demand for one leads to a decrease in the supply of the other
b. increase in the demand for one leads to a decrease in the supply of the other
c. increase in the price of one leads to an increase in the demand for the other
d. decrease in the price of one leads to an increase in the demand for the other
e. decrease in the supply of one leads producers to switch to production of the other
Jennifer learns that the price of CDs will be going up 10 percent next week. She usually buys three CDs per week. What happens to Jennifer's demand for CDs this week?
a. It does not change because only quantity demanded changes when price changes.
b. It increases because the price will be lower next week.
c. It decreases because the price will be higher next week.
d. It increases because the price will be higher next week.
e. It decreases because the price will be lower next week.
An improvement in technology would shift
a. the demand curve leftward
b. the demand curve rightward
c. the supply curve leftward
d. neither the supply nor the demand curve; instead, there is movement along both of them
e. the supply curve rightward
If there is a shortage in the market for jeans,
a. producers' inventories will increase
b. the price should begin to rise
c. the demand curve will shift to restore equilibrium in the market
d. the supply curve will shift to restore equilibrium in the market
e. producers expect government to impose a price ceiling
Two events occur simultaneously in the market for automobiles: (1) an improvement in assembly line technology and (2) the economy enters a recession (which decreases consumers' income). An economist would predict with certainty that
a. equilibrium quantity will rise
b. equilibrium quantity will fall
c. equilibrium price will rise
d. equilibrium price will fall
e. the equilibrium price will remain the same
Rent controls can result in
a. deteriorating or abandoned buildings
b. strong incentives to oust protected tenants
c. payments to motivate tenants to move out
d. benefits to rich people who get a windfall from low rents
e. All of the answers are correct.
The sum of the individual demands of all consumers in the market is called
a. individual demand
b. market demand
c. inferior good
d. market supply
e. quantity demanded
Gross Domestic Product measures the value of all final goods and services produced within a nation's borders.
The ultimate objective of macroeconomics is to
a. reduce the unemployment rate
b. stabilize the economy's growth rate
c. develop and test theories about how the overall economy works
d. improve the international competitiveness of the U.S. financial markets
e. maximize the efficiency of government intervention in the marketplace
Which of the following statements regarding Gross Domestic Product is not true?
a. It is a stock variable.
b. It is measured for a particular time period, usually one year.
c. It is perhaps the most effective means of viewing the same economy over time.
d. It is a measure of the economy's performance.
e. It is a flow variable, not a stock variable.
Which of the following is not the proper subject matter for macroeconomics?
a. unemployment levels
b. inflation rates
c. levels of national output
d. the price of corn
e. the role of government
Which of the following is a stock variable?
a. business spending on capital equipment
b. consumer income
c. the federal government's debt
d. the federal government's budget deficit
e. total expenditure
Which of the following is a stock variable?
a. Gross Domestic Product
b. consumption spending
c. the federal government's spending on Social Security
d. the money supply
e. Federal income tax revenue
If business leaders become optimistic about future sales and profits, they will __________ spending on plant and equipment, which __________ employment and income and, therefore, their expectations are __________.
a. increase; increases; fulfilled
b. increase; increases; not met
c. increase; decreases; fulfilled
d. decrease; decreases; fulfilled
e. decrease; increases; not met
If all firms expect greater demand for their products or services, they will hire __________ resources (e.g., labor and capital) and the economy will experience __________.
a. fewer; recession
b. fewer; growth
c. more; federal budget deficits
d. more; recession
e. more; growth
During the Great Depression, President Hoover
a. correctly called for an increase in taxes
b. incorrectly called for an increase in taxes
c. incorrectly called for a decrease in taxes
d. correctly called for a decrease in government spending
e. incorrectly called for an increase in government spending
A recession is best defined as a period during which
a. the percentage of the population employed is declining
b. employment, output, and income decline
c. the price level is declining
d. more resources are used
e. the budget deficit and trade deficit are both growing
The distinction between recessions and depressions is that recessions are
a. longer than depressions
b. more severe than depressions
c. accompanied by price increases, depressions by price decreases
d. shorter and less severe than depressions
e. accompanied by price decreases, depressions by price increases
A period of sustained growth of output in the economy is referred to as a(n)
The aggregate demand curve slopes downward because households feel poorer after a decrease in the price level.
The aggregate supply curve indicates
a. the quantity of aggregate output that producers are willing and able to supply at each possible price level
b. the total quantity of a particular good that all producers are willing to supply at each possible price level
c. the total quantity of a particular good that all producers are willing to supply at the equilibrium price level
d. the quantity of aggregate output that producers are willing and able to supply at the equilibrium price level
e. the quantity of aggregate output that producers are willing and able to supply at the equilibrium level of GDP
The aggregate supply curve has
a. a negative slope
b. a positive slope
c. a zero slope (a horizontal line)
d. an infinite slope (a vertical line)
e. a negative slope like the aggregate demand curve, only steeper
When output __________, employment is expected to __________.
a. rises; rise
b. rises; fall
c. falls; rise
d. falls; remain constant
e. remains constant; fall
The laissez-faire approach popular before the Great Depression influenced the U.S. government to see business downturns as
a. natural phases in an otherwise healthy system, and therefore to take short-term deficit spending measures to help recovery
b. natural phases in an otherwise healthy system, and therefore to wait for recovery to occur naturally
c. serious maladies in an otherwise healthy system, and therefore to work to redesign the system to avoid such failure in the future
d. failures of the type of system Adam Smith envisaged, and therefore to work to move toward a modern, more managed economy
e. failures of the system to achieve the form that Adam Smith envisaged, and therefore to work to decrease government interference at the micro level
During the Great Depression,
a. unemployment and prices increased while output decreased
b. unemployment increased and output while prices decreased
c. unemployment and prices decreased while output increased
d. unemployment and output decreased while prices increased
e. unemployment and output increased while prices decreased
The Wealth of Nations was written by
a. John Maynard Keynes
b. Adam Smith
c. François Quesnay
d. Henry Ford
e. John D. Rockefeller
Adam Smith's "invisible hand" explains
a. why people act in their own best interests
b. why the government intervenes to overcome failures in private markets.
c. how people, acting out of self-interest, unintentionally promote the general good
d. how comparative advantage and specialization promote international trade
e. how the creation of goods and services (supply) generates its own demand by creating employment and income
If both aggregate demand and aggregate supply increase, then employment will increase.
Keynes believed that the best method for ending the Great Depression was to reduce government spending and raise taxes, thereby reducing the federal budget deficit.
According to Keynes, "animal spirits"
a. make investment spending unstable
b. make consumption spending unstable
c. make government spending inherently stable
d. guide the economy back to equilibrium after a disruption
e. create the federal government budget deficits that have become so common today
According to Keynes, in order to get the economy out of a recession, the government should
a. plan for a budget deficit
b. encourage firms to export to other nations, thereby jump-starting the economy
c. follow an expansionary monetary policy
d. follow a contractionary monetary policy
e. do nothing and rely on the market system to heal itself
Which of the following best describes the Keynesian approach to economic policy?
Keynes proposed that government should shock the economy out of the Great Depression by
a. increasing aggregate supply
b. increasing aggregate demand
c. raising prices so that firms could earn higher profits and employ more people
d. reducing prices so that people could afford to buy more goods and services
e. subsidizing firms that wanted to buy stocks after the crash
a. a rise in the value of money
b. a decline in nominal income
c. a sustained increase in the price level
d. a general reduction in prices
e. an economic problem only for the retired population
Stagflation refers to
a. a simultaneous reduction in output and the price level
b. a simultaneous increase in output and the price level
c. a decline in the price level accompanied by increases in real output and employment
d. an increase in the price level accompanied by decreases in real output and employment
e. a simultaneous increase in both the trade deficit and the budget deficit
On an aggregate demand and aggregate supply graph, the stagflation of the 1970s can be represented as a
a. leftward shift of the aggregate supply curve
b. rightward shift of the aggregate supply curve
c. rise in the price level that caused an excess demand for output
d. rightward shift of the aggregate demand curve
e. decrease in the price level that caused an excess supply of output
Keynesian policies are ineffective at combating stagflation because stagflation is caused by
a. budget surpluses
b. decreases in aggregate supply
c. trade deficits
d. trade surpluses
e. budget deficits
The Reagan administration's 1981 investment tax changes were designed to
a. stimulate aggregate demand and thereby reduce unemployment
b. stimulate aggregate demand and thereby increase economic growth
c. stimulate aggregate supply and thereby increase economic growth
d. decrease aggregate demand in order to reduce inflation
e. increase tax revenues to reduce the federal budget deficit
In the history of the U.S. economy, which economic era saw both high unemployment and high inflation at the same time?
a. after the Great Depression to the early 1970s
b. since the early 1980s
c. the colonial period
d. before and during the Great Depression
e. from the early 1970s to the early 1980s