BUS101 - Chapter 1 Test Bank

Which of the following BEST describes what the consumer price index is used to indicate? A) The average wage rate for a given region B) The economic performance of key consumer product companies C) The changes in the cost of consumer products over time D) The percentage of consumers in the total population looking for work E) The number of price increases within a given period of time

C) The changes in the cost of consumer products over time The consumer price index is a measure of the prices of typical products purchased by consumers living in urban areas. It is expressed as a percentage of prices as compared to a base period.

What is the process for converting government enterprises into individually owned firms known as?

Privatization Privatization is the process of converting government enterprises into privately owned companies, which will then have the right to run such a business for profit.

What is the price at which the quantity of goods demanded and the quantity of goods supplied are equal?

The market price The market price, also known as equilibrium price, is set by the demand and supply for a given good. It is defined as the price at which the quantity of goods demanded and the quantity of goods supplied are equal.

Why would a government MOST likely be concerned about its country carrying a trade deficit?

A trade deficit ties up money that could be used for economic growth. A trade deficit implies a carrying of debt. When there is a trade deficit imports are not paid for in full.

Which of the following is a likely cause of increased prices for products, decreased purchasing power, and decreased profit margins? A) Low unemployment B) Stagnant wages C) Declining living standards D) Cyclical inflation E) Limited credit

A) Low unemployment Potential results of low unemployment include increased prices, decreased purchasing power, and decreased profits. Although consumers have more money to inject into the economy, this increase is soon undone by higher prices, so purchasing power declines.

Which indicator refers to the total quantity of goods and services produced by an economic system during a given period?

Aggregate output Aggregate output is the primary measure of growth in the business cycle.

When gross domestic product increases, what is the outcome for economic growth?

Aggregate output will increase.

How would supply affect the aggregate output of an economy?

Aggregate output would grow as supply grows. Supply is the amount of goods available, and aggregate output is the production of goods, so increased supply would increase aggregate output.

In perfect competition, which of the following conditions must prevail?

All firms in a given industry must be small. In perfect competition, all firms in a given industry must be small, the number of firms in the industry must be large, and no single firm is powerful enough to influence the price of its product. Therefore, prices are determined completely by supply and demand.

What does a planned economy rely on a centralized government to do?

Allocate all or most factors of production A centralized government controls all or most of the factors of production.

Which of the following BEST describes nominal GDP? A) Total quantity of goods and services produced by an economic system B) Total value of all goods and services produced within a given period by a national economy through domestic factors of production, measured in current dollars or with all components valued at current prices C) Total value of all goods and services produced within a given period by a national economy regardless of where the factors of production are located D) Total value of all goods and services produced within a given period by a national economy through domestic factors of production, adjusted to account for changes in currency values and price changes E) Total quantity of goods and services that are imported within a given period of time

B) Total value of all goods and services produced within a given period by a national economy through domestic factors of production, measured in current dollars or with all components valued at current prices

What term do economists use for the pattern of short-term expansions and contractions in the economy?

Business cycle Short-term ups and downs are referred to as the business cycle.

Which term refers to the pattern of short-term ups and downs in an economy?

Business cycle The business cycle is the short-term pattern of economic expansions and contractions.

What are the benefits of business for society?

Businesses produce most of the goods and services we consume, and they employ most working people. They create most innovations and provide a vast range of opportunities for new businesses, which serve as their suppliers. A healthy business climate also contributes to the quality of life and standard of living of people in a society. Business profits enhance the personal incomes of millions of owners and stockholders, and business taxes help to support governments at all levels. Many businesses support charities and provide community leadership.

Which of the following is the MOST likely pricing approach for a monopoly? A) Charge customers whatever you please. B) Give customers a real bargain on price. C) Charge a price that will not cause consumer demand to drop. D) Undercut the prices of the competition. E) Give customers a fair price that cannot be matched by competitors.

C) Charge a price that will not cause consumer demand to drop. A monopoly happens when one firm dominates the market. The monopolizing firm does not have to factor competitors' prices when determining its own prices, so it only needs to charge a price that will not be so high that it causes demand to drop.

Which of the following does NOT fall into the degrees of competition continuum? A) Perfect competition B) Monopolistic competition C) Competitive advantage D) Oligopoly E) Monopoly

C) Competitive advantage Competitive advantage occurs when a business produces goods or services efficiently and sells at a reasonable profit and is not a degree on the competition continuum.

Which of the following measures indicates the prices of typical products purchased by American consumers living in urban areas? A) GDP per capita B) Standard of living C) Consumer price index D) Purchasing power parity E) Economic indicators

C) Consumer price index The consumer price index is a measure of the prices of typical products purchased by consumers living in urban areas. It is used as a comparative standard to tell whether inflation or deflation is occurring, for example.

Which economic system emphasizes the private ownership of most factors of production?

Capitalism Capitalism makes use of the profit incentive for private ownership of the factors of production and encourages entrepreneurship by offering profits as an incentive.

The idea that individuals would contribute according to their abilities and receive benefits according to their needs supports which type of economy?

Communist based economy In a communist-based economy, the government owns and operates all production facilities and assigns people to jobs. They also determine what to charge consumers and how much to pay employees.

Which of the following BEST gives the meaning of the term gross domestic product? A) Total quantity of goods and services produced by an economic system B) Total quantity of goods that a country's citizens can purchase with the currency used in their economic system C) Conditions of the economic system in which an organization operates D) Total value of all goods and services produced within a given period by a national economy through domestic factors of production E) Indicators of available goods and services produced within a specific domestic market

D) Total value of all goods and services produced within a given period by a national economy Gross domestic product (GDP) is the total value of all goods and services produced within a given period by a national economy through domestic factors of production; this figure does not include goods and services produced by domestic firms overseas.

What can be used to determine relationships among different levels of demand and supply, based on price?

Demand and supply curves A demand and supply schedule is obtained from marketing research, historical data, and other studies of the market. Properly applied, they reveal the relationships among different levels of demand and supply at different price levels.

What is profit?

Difference between revenues and expenses Profits represent the difference between an organization's revenues and its expenses and profits are the goal of most businesses and allow people to open and expand businesses.

What is the environment where a firm conducts business known as?

Domestic business environment The domestic business environment is where a firm conducts its operations. A firm positions themselves close to customers, suppliers, and similar type firms.

Where can a firm find statistical information on the strength and performance of an economy?

Economic indicators Statistics can be used to show the strengths, weaknesses, or other changes in an economy and can help a firm to assess the performance of an economy before committing resources.

What term denotes a nation's basis for allocating its resources among its citizens?

Economic system an economic system is a nation's system for allocating its resources among its citizens, both individuals and organizations.

Who is the person who accepts the risks and opportunities inherent in a new business

Entrepreneurs Entrepreneurs are those who create and operate new businesses, thereby accepting the risks, and rewards generated by those businesses.

Graphically, what has been achieved when price of goods demanded is equal to the quantity of goods supplied?

Equilibrium price When demand and supply curves are plotted on the same graph, the point at which they intersect is the market price (also called the equilibrium price) the price at which the quantity of goods demanded and the quantity of goods supplied are equal.

In a market economy, there is a centralized government that controls factors of production and decision making.

FALSE A planned economy relies on a centralized government to control factors of production and make decisions. In a market economy, individuals—producers and consumers— control production and allocation decisions through supply and demand.

Aggregate output refers to a company's annual production of goods or services.

FALSE Aggregate output is the total quantity of goods and services produced by an economic system during a given period.

China functions as a communistic economy and political system.

FALSE China is controlled by the communist party but functions much more like a mixed market economy.

Deflation, an indication that the economy is contracting, is characterized by price stabilization of goods.

FALSE Deflation occurs when there are widespread price cuts. Deflation generally means that the overall economy is shrinking.

If productivity increases, prices charged to consumers will tend to increase as well.

FALSE If productivity increases, it's likely that prices of products will decrease and the standard of living will increase.

In a market system, individuals are limited as to what they can buy and in how they can spend their money.

FALSE In a market system, individuals are free to buy what they choose and free in how they can save, invest, and spend their money.

Inflation results in increased purchasing power for the consumer.

FALSE Inflation occurs when the amount of money injected into an economy exceeds the increase in actual output. When this happens, people will have more money to spend, but there will still be the same quantity of products available for them to buy. As they compete to buy available products, prices go up.

Physical resources include the data and other information used by businesses.

FALSE Physical resources are the tangible resources that organizations use to conduct their business such as natural resources, raw materials, offices, storage and production facilities, parts and supplies, computers and peripherals, and a variety of other equipment.

The technological environment includes only electronics and telecommunications used to perform business activities.

FALSE Technology includes human knowledge, work methods, physical equipment, electronics and telecommunications, and various processing systems that are used to perform business activities.

The United States government manages the collection and spending of its revenues through monetary policy.

FALSE The United States government manages the collection and spending of its revenues through fiscal policy.

One of the four elements that are necessary for private enterprise to be carried out is reasonable prices.

FALSE The four elements that must be present in private enterprise are private property rights, freedom of choice, profits, and competition.

The primary measure of growth in the business cycle is inflation.

FALSE The primary measure of growth in the business cycle is aggregate output.

The customs, values, and demographic characteristics of the society in which an organization functions are the principal elements of the political-legal environment.

FALSE These are the main considerations of the sociocultural environment. The political-legal environment reflects the relationship between business and government, usually in the form of government regulation of business.

What is the general term for resources used by a business to produce a good or service referred to as?

Factors of production Factors of production represent those things needed to produce goods and services and include things like labor, physical resources, capital, and entrepreneurs willing to take the risks.

Which of the following represents the ownership of resources used in a private enterprise system?

Freedom of choice Private property rights support keeping the ownership of the resources used to create wealth in the hands of individuals.

Why is gross national product (GNP) considered to be a less valuable indicator of domestic economic performance than gross domestic product (GDP)?

GNP does not consider where the economic performance was located. GDP and GNP usually differ by less than 1 percent, but economists argue that GDP is a more accurate indicator of domestic economic performance because it focuses only on domestic factors of production.

Factors such as international trade agreements, economic conditions, and political unrest will have the greatest impact on what type of business environment?

Global business environment The global business environment refers to the international forces, such as governmental agreements, exchange rates, and political unrest, which will affect how an organization does business in its local market.

Which of the following is an indication of national economic growth, shown by measuring aggregate output?

Gross domestic product Gross domestic product (GDP) refers to the total value of all goods and services produced within a given period by a national economy through domestic factors of production. GDP is a measure of aggregate output.

Which term refers to the total value of all goods and services produced within a given period by a national economy through domestic factors of production?

Gross domestic product Gross domestic product is the total value of all goods and services produced within a given period by a national economy through domestic factors of production.

National economies, regardless of industry, are measured through what?

Gross domestic product Gross domestic product measures the value of all goods and services in a national economy for a specific period of time, regardless of the location of the output.

What does productivity measure?

How much a system produces with the resources needed to produce it Productivity is a measure of economic performance that compares how much a system produces with the resources needed to produce it.

What is the term for the physical and intellectual contributions of people while engaged in the production of goods and services?

Human resources Human resources, often referred to as labor or human capital, is comprised of those who contribute physically or intellectually to the production of a good or service for economic production.

If, in the long run, international trade improves the standards of living in participating countries, why might some countries want to place trade barriers, such as extra taxes, on imported products?

Imported products compete with domestic products and thus put pressure on local business. In the course of international trade, jobs are often initially lost in those industries in which a country does not have a comparative advantage. Trade barriers are used as a way to protect these industries from strenuous competition.

How do consumer choice and demand affect a capitalistic system?

In a capitalistic system, such as that in the United States, businesses exist to earn profits for owners. Within certain broad constraints, an owner is free to set up a new business, grow that business, sell it, or even shut it down. But consumers also have freedom of choice. In choosing how to pursue profits, businesses must take into account what consumers want or need. No matter how efficient a business is, it won't survive if there is no demand for its goods or services.

How does monopolistic competition differ from perfect competition?

In a market characterized by monopolistic competition, individual firms have some control over price. Individual firms have some control over price in monopolistic competition; in perfect competition, price is determined by supply and demand.

Which of the following best explains the difference between a market economy and a planned economy?

In a planned economy, consumers have little choice in where they work or what they purchase or pay. Market economies contrast sharply with planned economies where individuals are told where they can work, companies are told what they can make, and consumers have little choice in what they purchase.

When a new product has high demand in the market, how should a company react?

Increase the supply of the product. A firm will want to have more products available when demand is high.

What is the economic condition characterized by widespread increased prices without increased purchasing power?

Inflation Inflation is the condition that occurs when widespread price increases are present throughout an economic system. This happens when the amount of money in the economy grows faster than the amount of products available to buy.

What factor of production is used to generate forecasts based on specialized knowledge and economic data?

Information resources Once dominated by tangible goods, today's economic systems are dominated by information systems, allowing businesses to forecast, plan and sell to new users in an international environment.

Why is it important to calculate purchasing power parity in the global market?

It determines standards of living across the globe. Purchasing power parity gives us a much better idea of what people can actually buy with the financial resources allocated to them by their respective economic systems. In other words, it gives us a better sense of standards of living across the globe.

What takes place when buyers purchase more of a product when the price drops, and less when the price increases?

Laws of demand The premise of the Laws of demand is that buyers will purchase (demand) more of a product as its price drops and less of a product as its price increases.

What is the primary force that determines what a firm buys and sells?

Laws of supply and demand On all economic levels, decisions about what to buy and what to sell are determined primarily by the forces of demand and supply.

In which type of economy do the individual producer and consumer control production through supply and demand?

Market In a market economy, individual producers and consumers control production and allocation by creating combinations of supply and demand.

When making decisions about production and allocation, which type of system depends on individual producers and consumers to create a combination of supply and demand?

Market economy In a market economy, individual producers and consumers control production and allocation by creating combinations of supply and demand.

What type of economy is the United States reflective of?

Mixed There are very few pure market economies today. The United States has features of both planned and market economies and is therefore considered to be a mixed market economy.

Which is the BEST explanation for why standard of living only increases through productivity? A) The more goods that are available, the lower prices will be. B) More goods are available without having to come by additional resources. C) Productivity increases the money supply in an economy. D) Purchasing power increases when there is more consumer choice. E) Prices are determined by the standard of living.

More goods are available without having to come by additional resources. Productivity is the amount of goods that can be made using a given amount of resources. If it takes more resources to produce more goods, prices will not decrease as long as demand keeps pace. But if more goods can be made using the same resources, prices will go down and purchasing power will increase. If your entire economic system increases its productivity, then your overall standard of living improves. In fact, standard of living improves only through increases in productivity. Real growth in GDP reflects growth in productivity.

What is created when one company is able to supply all the goods or services needed by the marketplace?

Natural monopolies Natural monopolies occur when one firm can supply all needed goods or services and are often found in areas such as utilities.

In an oligopoly, when one firm reduces its prices, how do other sellers react?

Other firms reduce their prices also, usually quite quickly. Because there are few firms competing in an oligopoly, competition between firms tends to be close, and firms thus respond quickly to price reductions by one firm. Therefore, other firms will likely quickly reduce their prices as well.

When there are many small firms in a specific industry, what is likely to occur?

Perfect competition Perfect competition occurs only when all firms in the industry are small and the number of firms in the industry is large, limiting the opportunity for any one firm to influence the price of the products.

Which of the following would lead some to become an entrepreneur and influence the choice of goods or services to produce?

Profit The lure of profits (and freedom) leads some people to abandon the security of working for someone else and to assume the risks of entrepreneurship. Anticipated profits also influence individuals' choices of which goods or services to produce.

Which of the following supports the idea that the prices of similar products in different countries should be about the same?

Purchasing power parity Purchasing power parity is the principle that exchange rates are set so that the prices of similar products in different countries are about the same. Purchasing power parity gives us a much better idea of what people can actually buy with the financial resources allocated to them by their respective economic systems.

What occurs when the quantity demanded exceeds the quantity supplied?

Shortage When demand exceeds supply, there will not be enough goods available to meet the demand for them. This is known as a shortage.

What is the condition in an economic system in which the amount of money available and the number of goods and services produced are growing at about the same rate?

Stability Economic stability happens when the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate. When this occurs, there is neither inflation nor deflation.

What type of policy is made up of fiscal and monetary policy?

Stabilization A stabilization policy is a government goal to smooth out fluctuations in output and unemployment and to even out prices.

Which term refers to the total quantity and quality of goods and services that people living in an economic system can purchase?

Standard of living The standard of living is the total quantity and quality of goods and services that people can purchase with the currency used in their economic system. Standard of living is determined by economic conditions such as inflation and purchasing power.

What is the willingness and ability of producers to offer a good for sale referred to as?

Supply Supply represents the willingness and ability of producers to offer a good or service for sale

What is the term used to describe a market condition where buyers are able to satisfy the demand of the consumer, yet have some product remain unsold?

Surplus A surplus is defined as a situation in which quantity supplied exceeds quantity demanded.

The main measure of growth in the business cycle is aggregate output.

TRUE Aggregate output is the total quantity of goods and services produced by an economic system during a given period. When it increases, the economy is considered to be in a growth cycle.

An organization's external environment consists of everything that might affect it.

TRUE All businesses, regardless of size, location, mission, or what they produce, consists of everything outside the organization's boundaries that might affect it.

Economic systems differ in how factors of production are used.

TRUE Different types of economic systems manage the factors of production differently. For instance, in capitalism they are managed by private individuals with capital resources, while in a command economy the government manages the factors of production.,

In a natural monopoly, prices tend to be government regulated.

TRUE Natural monopolies occur in industries in which one company can efficiently supply all needed goods or services. Since they have little or no competition, their prices have to be regulated so that consumers do not have to pay overly high prices.

Product differentiation is common in a market characterized by monopolistic competition.

TRUE Product differentiation also gives sellers some control over prices.

Economic indicators help to assess the performance of an economy.

TRUE Specifically, economic growth is measured via aggregate output, standard of living, gross domestic product, and productivity; stability is reflected through levels of inflation and unemployment.

Tax increases and decreases are a form of fiscal policy.

TRUE Tax rates can play an important role in fiscal policies, helping to manage the economy.

In the United States, the Federal Reserve System, which is the nation's central bank, can influence the ability and willingness of banks to lend money.

TRUE The U.S. Federal Reserve System works with the U.S. government to control the size of the nation's money supply, including the willingness of banks to lend money.

The consumer price index is expressed as a percentage of prices as compared to a base period.

TRUE The current base period used to measure inflation is 1982-1984.

The government can influence the availability of capital through the use of the Federal Reserve System.

TRUE The interest rates set by the Federal Reserve System can influence the ability and willingness of banks throughout the country to lend money.

Stabilization policy is made up of both monetary and fiscal policy.

TRUE The purpose of monetary and fiscal policy is to smooth out fluctuations in output and unemployment and to stabilize prices.

The pursuit of profits is how a business differs from organizations such as public universities, public hospitals, and government agencies.

TRUE The pursuit of profits distinguishes a business from those organizations-such as most universities, hospitals, and government agencies-that run in much the same way but that generally don't seek profits.

The point at which the supply curve and the demand curve intersect is the market price.

TRUE When demand and supply curves are plotted on the same graph, the point at which they intersect is the point at which demand matches supply, and determines the market price.

Which type of business environment can reduce or replace the need for traditional working methods, physical equipment, and other platforms needed to conduct business?

Technological environment Advances in the technological environment have greatly changed how organizations operate, including the need for traditional brick-and-mortar facilities used to reach customers.

What is needed to gain a competitive advantage over competitors?

The ability to produce goods or services efficiently and at a reasonable profit Competition occurs when two or more businesses vie for the same resources or customers. To gain an advantage over competitors, a business must produce its goods or services efficiently and be able to sell at a reasonable profit.

What is the basis for a market economy?

The ability to pursue an interest with minimal government restriction. Market economies rely on a private enterprise system-one that allows individuals to pursue their own interests with minimal government restriction.

Which environment is NOT an important dimension of a business organization's external environment?

The corporate cultural environment The external environment consists of everything outside an organization's boundaries that might affect it. The corporate cultural environment is internal to the organization.

Which of the following is one of the elements required in private enterprise?

The right to ownership of property Necessary elements of capitalism include private property rights, freedom of choice, profits, and competition.

Compare a sociocultural environment to an economic environment.

The sociocultural environment includes the customs, mores, values, and demographic characteristics of the society in which an organization functions. Sociocultural processes also determine the goods and services, as well as the standards of business conduct, that a society is likely to value and accept. The economic environment refers to relevant conditions that exist in the economic system in which a company operates. For example, if an economy is doing well enough that most people have jobs and wages are high, a growing company may find it necessary to pay even higher wages and offer more benefits to attract workers from other companies. But if many people in an economy are looking for jobs, a firm may be able to pay less and offer fewer benefits.

When economists measure gross national product, what is being measured within a specific time period, regardless of location?

The total value of all goods and services Economists also measure gross national product (GNP), which refers to the total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located.

What marks the key difference between economic systems?

The way the factors of production are managed Economic systems manage the factors of production differently. Management of these factors often revolves around the degree of government control of them.

The amount of money that a government owes its creditors is referred to as that country's

national debt. Its national debt is the amount of money that the government owes its creditors.