1Macroenomics Unit 1 Chapter 2

(Consider This) Which of the following statements about insurance and risk is true? Insurance transfers risk from those with a low tolerance for risk to those with a higher tolerance for risk. Insurance transfers risk from those with a high tolerance for risk to those with a low tolerance for risk. Insurance inhibits economic growth and investment by discouraging risk-taking. Insurance companies always earn profits because insurance premiums always exceed the payout for insured events.

A

Economic profits in an industry suggest the industry: should be larger to better satisfy consumers' desire for the product. has excess production capacity. can earn more profits by increasing product price. is the size that consumers want it to be.

A

Specialization—the division of labor—enhances productivity and efficiency by: all of the means identified in the other answers. allowing workers to take advantage of existing differences in their abilities and skills. allowing workers to develop skills by working on one, or a limited number, of tasks. avoiding the time loss involved in shifting from one production task to another.

A

The market system's answer to the fundamental question "How will the system promote progress?" is essentially: "Through the profit potential that encourages development of new technology." "Through government-funded research programs." "Through redistribution of income to promote greater equality." "Through training and retraining programs."

A

The term "laissez-faire" suggests that: government should not interfere with the operation of the economy. land and other natural resources should be publicly owned, but capital should be privately owned. land and other natural resources should be privately owned, but capital should be publicly owned. government action is absolutely necessary if the economy is to achieve full employment and full production.

A

Competition means that: a product can be purchased at a number of different prices. there are independently acting buyers and sellers in each market. there is more than one seller in a market. sellers can manipulate market price by causing product scarcities.

B

Private property: does everything indicated by the other answers. encourages owners to maintain or improve their property so as to preserve or enhance value. discourages cooperation because people don't want to part with what they own. discourages innovation, as people are often afraid to risk losing their own property.

B

The presence of market failures implies that: command systems are superior to market systems in the allocation of resources. there is an active role for government, even in a market system. money is not an effective tool for exchange in a market system. individuals and firms should strive to be self-sufficient rather than specialize.

B

Two major virtues of the market system are that it: eliminates discrimination and minimizes environmental pollution. results in an equitable personal distribution of income and always maintains full employment. allocates resources efficiently and allows economic freedom. results in price level stability and a fair personal distribution of income.

C

From society's point of view, the economic function of profits and losses is to: contribute to a more equal distribution of income. achieve full employment and price level stability. promote the equal distribution of real assets and wealth. reallocate resources from less desired to more desired uses.

D

Of the following countries, which one best exhibits the characteristics of a market economy? Cuba. North Korea. Belarus. Canada.

D

Property rights are important because they: ensure an equal distribution of income. allow the government to control how resources are allocated. guarantee that any exchange will make all parties better off than prior to the exchange. encourage cooperation by improving the chances of mutually agreeable transactions.

D

Which of the following is one of the Five Fundamental Questions? How much should society save? Which products will be in scarce supply and which in excess supply? Who should appoint the head of the central bank? What goods and services will be produced?

D

Which of the following best illustrates the circular flow model in action? All of these answers illustrate the workings of the circular flow model. Bobbie goes to work and builds cars, and uses the income she receives to buy food at the grocery store. Evan buys a new couch; the owner of the furniture store uses some of the money from the sale to pay her supplier, and uses the rest to take her family out to dinner. Boeing experiences a surge in orders for new airplanes, prompting the company to hire more workers.

A

"Consumer sovereignty" refers to the: idea that the pursuit of self-interest is in the public interest. fact that resource prices are higher than product prices in capitalistic economies. idea that the decisions of producers must ultimately conform to consumer demands. fact that a federal agency exists to protect consumers from harmful and defective products.

C

A fundamental difference between the command system and laissez-faire capitalism is that, in command systems: scarcity does not exist, whereas it does in laissez-faire capitalism. money is not used, whereas it is in laissez-faire capitalism. the division of output is decided by central planning rather than by individuals operating freely through markets. all economic decisions are made by the government, whereas there is no government in laissez-faire capitalism.

C

Barter: is used to circumvent the problem of a lack of coincidence of wants among potential buyers and sellers. is the major means of exchange in centrally planned economies. entails the exchange of goods for goods. accounts for over 30 percent of the dollar volume of all exchange in the U.S. economy.

C

Specialization in production is economically beneficial primarily because it: facilitates trade by bartering. allows everyone to have a job that he or she likes. permits the production of a larger output with fixed amounts of resources. guarantees full employment.

C

The invisible hand refers to the: fact that government controls the functioning of the market system. tendency of monopolistic sellers to raise prices above competitive levels. notion that, under competition, decisions motivated by self-interest promote the social interest. fact that the U.S. tax system redistributes income from rich to poor.

C