Principles of Economics

How long do most business cycles last?A. Two full years B. Two consecutive quarters C. At least 10 yearsD. Varying lengths of time

D Varying lengths of time. The duration of business cycles varies. Some have been as short as two years, while others have lasted almost 10 years. This unpredictability heightens the uncertainty felt by producers and consumers.

To reduce the chance of investigations and orders to cease production, businesses should A. adhere to government regulations. B. specialize. C. purchase the most up-to-date technology available. D. lobby members of Congress.

A Adhere to government regulations. Businesses can reduce the chance of investigations and orders to cease production by obeying laws. Purchasing up-to-date technology is a form of capital investment used to improve productivity. Specializing means making the best use of resources in the production of goods and services. Lobbying members of Congress may result in legislation favorable to a business, but it won't necessarily reduce the chance of investigations.

The category of GDP called gross private domestic investment includes A.all purchases of capital goods. B.all exports of goods and services. C. purchases made by private individuals. D. inventories held over from previous years.

A All purchases of capital goods. If a business trades a piece of equipment for a new piece, the total value of the new piece is counted for GDP, not the difference. Inventories produced in the current year are also counted but not those produced in previous years. Exports are a separate category of GDP. The purchases of individuals are counted as personal consumption expenditures

During the peak phase of a business cycle, a business could be expected to have A. high prices. B. reduced sales. C. low profits.D. staff reductions.

A High prices. Firms can charge higher prices because demand for goods and services begins to exceed the production capacity of producers in this phase. Low profits, reduced sales, and the need to reduce the size of the staff would occur during the contraction phase.

The gross domestic product (GDP) is calculated each year in the United States to determine A. the level of exports.B. the health of the economy.C. whether income taxes should be lowered or raised.D. how much money should be printed during the year

B The health of the economy. Gross domestic product is the final market value of all goods and services produced within a country's geographic boundaries during a year's time. GDP is used as an economic yardstick to measure economic growth. Net exports is one of the statistics used in calculating GDP. GDP does not determine taxes or the amount of money printed by the Government Printing Office.

Mary is a bagger at Glen's Market. On a weekly average, she works 30 hours and fills 876 bags of groceries. Her productivity is ___________ bags of groceries per hour. A. 29.2 B. 26.2 C. 28.6 D. 22.8

A 29.2. Productivity is determined by dividing the outputs of the employee by the inputs. To determine Mary's productivity per hour, divide the total number of bags of groceries by the number of hours she worked (876 ÷ 30 = 29.2). SOURCE: EC:126 SOURCE: EC LAP 18—Make the Most of It (Productivity)

As the gross domestic product increases, it is easier for all levels of government to A. maintain trade deficits. B.carry out their functions. C.reduce their spending. D.conserve natural resources.

B Carry out their functions. As the GDP rises, more people are employed and more businesses are started; therefore, all levels of government have more tax dollars with which to work. Under these circumstances, the government usually increases its spending for domestic and defense programs. Conserving natural resources is not the responsibility of all levels of government. Trade deficits occur when the country imports more goods than it exports. Government would not want to maintain trade deficits because a trade deficit lowers the GDP.

Which of the following is important information that businesses consider when deciding whether it would be profitable to increase production :A. Finance charge B. Discretionary income C. Cash flow D. Marginal cost

D Marginal cost. Marginal cost is the change in cost involved in increasing or decreasing production. It is often used to calculate the extra cost of producing one more item. For example, if a business produces 1,000 widgets each day and is considering increasing production to 1,100 per day, the business needs to know how much it will cost to produce 100 more widgets. If the marginal cost is low, the business might decide to increase production because it will also increase profitability. However, if producing 100 more widgets is expensive, it might not be profitable for the business to increase production. Cash flow is the movement of money, or cash, into and out of a business. Discretionary income is the amount of income people have left to spend or dispose of after they have paid for their taxes and their necessities. Finance charge is interest charged on the outstanding balance of a credit account.

Which of the following would NOT be analyzed in a feasibility study: A. Staffing needs B. The venture's past sales C. Estimated return on investment D. Raw materials needed

B The venture's past sales. Because a feasibility study looks at new ideas, there would not be a sales history to study. Staffing needs, financial estimates of many types (income, expenses, return on investment, etc.), and raw materials necessary would all have to be studied to determine the feasibility of a venture. SOURCE: EN:038 SOURCE: Hofstand, D. (2006, March). Feasibility study outline. Retrieved October 12, 2010 from http://www.extension.iastate.edu/AGDM/wholefarm/html/c5-66.html

One way for a business to increase productivity is to increase its A. imports B. environmental concern. C. prices D. research and development.

D Research and development. Businesses should set aside some company profits for research and development efforts that will enable it to find better methods of production, new sources of resources, and more effective ways to combine resources. Such efforts contribute greatly to a firm's productivity, which is the amount and value of products produced from set amounts of resources. Increasing imports or concerns for the environment could have negative effects on productivity and are not methods for improving it. Increasing prices may reduce demand for the company's product(s), creating a need for more efficient production.

Technological advances may increase the chance of job obsolescence. For workers, this is a(n) __________ labor specialization. A. disadvantage of B. advantage of C.scope factor in D.reason to support

A Disadvantage of. Technological advances are a benefit to businesses, but they are a disadvantage to workers whose jobs are eliminated as a result. Many workers take a negative attitude toward technological advances for this reason. Cutbacks in jobs usually occur in assembly-line occupations where tasks involving high repetition can be done by computerized machinery. Scope is the number of tasks involved in a job and the frequency with which they occur.

What is the most common type of labor specialization? A. Trade or profession B. Stage of production C.Human resources D. Task

A Trade or profession. Your trade or profession is the type of work you have decided to do in order to earn a living. Each separate occupation is classified by the United States Department of Labor according to its specialization. Specialization by task occurs when one worker does one small part of the total job. Specialization by stage of production occurs when more than one stage is needed to change a raw good into a finished product. Human resources are all the people who use their different skills and abilities in jobs for which they are best suited.

The U.S. government is offering a decrease in taxes to citizens who install solar panels on their homes. Using economic terms, how would you describe this incentive? A. Financial and positive B. Non-financial and positive C. Non-financial and negative D. Financial and perverse

A Financial and positive. Since the citizens will pay lower taxes, they will save money, which makes this incentive financial. The incentive (tax decrease) is intended to motivate citizens to do something (buy solar panels), so it is a positive incentive. Negative incentives are intended to discourage certain actions. Perverse incentives occur when the incentive's results are exactly the opposite of its intended purpose. Non-financial incentives are not related to money (an example might be posting the names of solar panel users on a national website). SOURCE: EC:124 SOURCE: Sexton, R.L. (2002). Exploring economics (2nd ed.) [pp. 34-37]. Mason, OH: South-Western.

What is likely to occur when the inflation rate increases, and workers do not receive pay increases? A. Lower standard of living B. Higher consumer demand C. Decreased unemployment D. Increased spending

A Lower standard of living. The inflation rate is the speed in which prices rise in the marketplace. When inflation increases, and employers do not provide their workers with raises to keep up with the rate of inflation, then the employees do not have as much money to spend on goods and services. When workers have less purchasing power, their standard of living (quality of life) may be negatively impacted because they cannot buy things that they were once able to afford. When workers are not earning more money, they are not increasing their spending levels. When people are spending less money, lower demand for some consumer products may occur. When there is a reduced demand for products, businesses often lower production and lay off workers, which increases the level of unemployment.

Why are human resources limited? A. Some people are unable to work. B. New equipment is expensive. C. Countries lack needed technology .D. World population continues to grow.

A: Some people are unable to work. Human resources are limited for many reasons. Only some of the world's people are willing and able to work. Others are too young, too old, disabled, or not interested in working. Also, some people lack the training or skills needed to do the job, or they may not live where the jobs exist. Natural resources are limited by a country's lack of technology to tap them and by the growing population that needs them. Capital resources are limited by a company's inability to purchase equipment to produce them.SOURCE: EC:001SOURCE: Clayton, G.E. (2005). Economics: Principles & practices (pp. 5, 15-17). New York: Glencoe/McGraw-Hill.

The payment of taxes to the federal government allows it to provide goods and services to ___________ and ___________ .A. businesses; resource markets B. businesses; households C. households; product markets D. businesses; product markets

B Businesses; households. The net taxes paid by both are translated by government programs into goods and services for businesses and individuals. Resource markets provide resources to the government and in return receive government expenditures. The product market provides goods and services to the federal government and receives government expenditures as payment.

When a business cycle is affected by international relations, new discoveries, and social or political changes, it is said to have been changed by __________ factors. A. extraneous B. externalC. internalD. intrinsic

B External. External causes take place outside the economic system itself. Extraneous means something unnecessary. Something which is intrinsic does not depend on external circumstances. Internal causes of business cycles, such as changes in aggregate demand, take place within an economic system.

The highest level of labor union organization is the A. state. B. federation.C. national.D. local.

B Federation. A federation consists of a group of national unions. National unions consist of a number of local unions. Local unions are the lowest union level. State is not a level of labor union organization.

What is a likely result when workers' wages rise throughout the economy while productivity decreases? A. Lower prices B. Inflation C.Prosperity D. Increased sales

B Inflation. Inflation is a rapid rise in prices that may occur when demand exceeds supply or when productivity declines and costs of labor go up. A drop in productivity can cause inflation because as productivity drops, labor costs go up and prices rise. When productivity increases, the economy usually prospers, prices are lower, and sales increase.

When union members of Local 654 arrived at work today, they found a sign on the door stating that the business had closed temporarily and the employees were not allowed to work. This is a pressure strategy known as a(n) A. injunction. B. lockout. C. boycott.D. strike vote.

B Lockout. A lockout normally occurs when contract negotiations break down, and company officials want to force the union to bargain. An injunction is a court order forbidding the carrying out of certain acts. A strike vote is taken by union officials to determine whether union members should strike, i.e., stop working in order to force management to meet their demands. A boycott is a strategy in which union members refuse to buy a company's products.

During which phase of the business cycle would there most likely be shortages of workers in certain skill areas? A. Expansion B. PeakC. Trough D. Contraction

B Peak. There is nearly full employment during the peak phase because demand for goods and services has begun to exceed the production capacities of producers. During the expansion phase, employment is increasing but not considered full. Unemployment is characteristic of trough and contraction.

A U.S. company begins selling its products in France. Despite brisk sales, the company doesn't make enough profit to cover its expenses. When setting prices, the company simply used the same prices in both countries. For example, $5.99 = 5.99 French francs; $2.89 = 2.89 French francs. What risk of international business did the company not consider? A. Language variations B. Currency fluctuations C. Differences in laws D. Opportunity costs

B Currency fluctuations. One dollar is not the same value as one franc. Without considering exchange rates and currency fluctuations, the company priced its product too low to be profitable. Language differences do not affect pricing. Although each country has its own laws, French laws did not come into play in this question. Opportunity cost is defined as the value of the next best alternative. Another alternative was not considered in this question. SOURCE: EC:129 SOURCE: International Licensing Industry Merchandisers' Association. (2009). Introduction to licensing: Why license? Retrieved October 27, 2009, from http://www.licensing.org/education/why-license.php

Which of the following government actions is most likely to stimulate the economy: A. Raising the prime interest rate B. Lowering tax rates C. Printing less money D. Borrowing more money

B Lowering tax rates. This will probably stimulate the economy because disposable income, the money people have left after paying taxes, will increase. Raising the prime interest rate, printing less money, and borrowing more money tend to depress the economy. SOURCE: EC:128 SOURCE: EC LAP 16—Regulate and Protect (Government and Business)

John only had $40 to spend and couldn't decide whether to buy a new pair of jeans or to go to an amusement park. He finally decided to spend his money on the amusement park. What was the opportunity cost of his decision? A. $40 B. New pair of jeans C. Trip to amusement park D. No opportunity cost was involved.

B New pair of jeans. When a choice is made about the best use of resources, the alternative that is given up is called the opportunity cost. In this case, John decided to spend his money on a trip to an amusement park, rather than on a new pair of jeans. Since the pair of jeans was given up, it is the opportunity cost. Opportunity costs exist because of scarcity.

What is the effect on society of a falling growth rate in productivity? A. Resources are used more efficiently. B. The standard of living drops. C. Inflation is prevented. D. Increased labor disputes may occur.

B The standard of living drops. A high standard of living is the direct result of high productivity. When the growth of productivity declines, so does the ability to provide needed and desired products. A drop in productivity can cause inflation and less efficient use of resources. The number of labor disputes is not directly tied to productivity. SOURCE: EC:125 SOURCE: EC LAP 18—Make the Most of It (Productivity)

If interest rates go down, which of the following would most likely occur: A. Banks will pay more to borrow money. B. The stock market will go up. C. Consumers will spend less. D. U.S. exports will decrease.

B The stock market will go up. The stock market tends to go up when the Federal Reserve System lowers interest rates because consumers are spending more. This tells investors that companies will be increasing production and creating more jobs. As interest rates fall, the value of the dollar in the foreign exchange market also decreases, making the value of other countries' money worth more when compared to the dollar. Other countries would, therefore, be positioned to buy more U.S. goods, so that U.S. exports would increase.

Why do most businesses use some type of quality control method at work? A. To organize employees B. To minimize errors C. To attract vendors D. To guarantee safety

B To minimize errors. Quality control involves ensuring the degree of excellence of a good or service. Most businesses use some type of quality control method at work in order to achieve excellence and minimize errors. Quality control methods vary depending on the type of business, but they are all intended to help the business operate efficiently and correctly. An example of a quality control method might be having two people conduct an inventory count to minimize the possibility that one person will make a mistake. Businesses do not use quality control methods to organize employees, attract vendors, or guarantee safety. SOURCE: OP:335 SOURCE: Van Weele, A.J. (2002). Purchasing and supply chain management: Analysis, planning and practice (3rd ed.) [pp. 191-193]. London: Thomson Learning.

What is the ratio of a pound of yellow squash @ $ .40 a pound and a pound of butternut squash @ $1.20 a pound? A. 1 to 4 B. 1 to 3 C. 1 to 2 D. 1 to 1

B: 1 to 3. It will cost three times as much to buy one pound of butternut squash as it will to buy one pound of yellow squash. By comparing relative prices of goods and services, people choose the combinations that are most advantageous for them to buy. Likewise, owners of resources can determine where they can most advantageously sell their resources by comparing relative prices in different

Which of the following actions would the Federal Reserve System take to expand monetary policy:A. Raise the Federal Discount Rate B. Buy securities on the open market C. Increase Reserve Requirements D. Open additional financial institutions

B: Buy securities on the open market. To expand monetary policy, the Federal Reserve System can lower the Federal Discount Rate, decrease Reserve Requirements, and buy securities on the open market. All of these actions help to lower interest rates. By buying securities on the open market, the Fed causes those securities' prices to rise. The Fed is not responsible for opening financial institutions.

If a government wants to decrease economic growth, it would use a contractionary fiscal policy that might involve A. increasing government spending. B. increasing taxes. C. decreasing regulations. D. decreasing unemployment.

B:Increasing taxes. A contractionary fiscal policy is intended to control or decrease growth in an economy that is expanding too fast. One way that a government might decrease growth is by increasing taxes. When businesses and individuals pay more taxes, they have less money to spend on other goods and services. Therefore, demand for products decreases, production decreases because of less demand, and the economy slows down

A six-month decline in GDP is known as a A. depression. B. productivity increase. C. recession. D.trade deficit.

C Recession. During this economic decline, production, employment, and demand for goods and services decrease. A depression occurs when the GDP falls rapidly, and the unemployment rate is extremely high. A trade deficit occurs when a country imports more goods than it exports. A productivity increase occurs when the production of goods and services increases due to better utilization of capital and labor

A couple constructs a decision matrix to select which charity will receive a $500 donation. Since "helping children" is the most important criteria to the couple, which of the following weights should it be assigned? A. .325 B. .25 C. .60 D. .100

C .60. The most favored criteria gets the highest weight. Therefore, it is more likely to be the alternative with the highest score and, therefore, chosen. All other numbers are lower than .60. SOURCE: PD:270 SOURCE: The decision matrix. Retrieved October 18, 2010, from http://http-server.carleton.ca/~gkardos/88403/Decision/Matrix/MATRIX3.html

Justin is trying to decide whether he wants to spend a $50 birthday check on a new DVD player or tickets to a concert. If he chooses the DVD player, what is the opportunity cost of this decision? A. Birthday check B. DVD player C. Concert tickets D. $50

C Concert tickets. Opportunity cost is the benefit that is lost when a decision is made to use scarce resources for one purpose rather than for another. In this case, the concert tickets were given up; therefore, they are the opportunity cost.

Which of the following would policy makers monitor to understand personal consumption expenditures (PCEs): A. S&P 500 Stock Index B. Consumer Price Index (CPI) C. Retail sales D. Real Gross Domestic Product (GDP

C Retail sales. The retail sales figure is an estimate of the total sales of goods by all retail establishments in the United States; however, the sale of services is accounted for separately. By monitoring retail sales, policy makers are able to make an assessment of the likely growth of PCE for the current and future quarters. The Consumer Price Index is used to monitor inflation. The S&P 500 Stock Index is designed to measure changes in the price of a broad array of stocks and measures the current value of the nation's stock of capital. Policy makers watch the S&P 500 Stock Index to gauge business and consumer confidence regarding the future. Real Gross Domestic Product (GDP) is the total value of goods and services produced within the borders of the United States, regardless of who owns the assets or the nationality of the labor used in producing that output. Real GDP is the most comprehensive measure of the performance of the U.S. economy, and it enables policy makers to assess whether the current monetary policy is consistent with the economy's primary goal.

Which of the following actions would government take to increase economic growth:A. Decrease exports B. Increase taxes C. Increase government spendingD. Decrease government subsidies

C: Increase government spending. Government can use fiscal policy to increase economic growth. The two means at the government's disposal for increasing economic growth through the use of fiscal policy are increasing government spending and decreasing household taxes. Both of these methods pump money into the economy, thereby helping to increase production and demand. Increasing taxes, decreasing exports, and decreasing government subsidies would slow economic growth.

A government's fiscal policies that are intended to encourage economic growth are known as __________ policies.A. appropriate B. complementary C. expansionary D. realistic

C:Expansionary. A fiscal policy is the government policy that sets levels of government spending and taxation. The type of fiscal policy that a government uses depends on what the government wants the economy to do. For example, if the economy is slowing down and heading into a recession, a government would use an expansionary fiscal policy to encourage economic growth. To do this, the government might spend more and cut taxes to encourage businesses to expand. Complementary, appropriate, and realistic are not types of fiscal policies that are intended to encourage economic growth.

The addition of too many workers on a job may cause the marginal product to turn A. variable.B. upward. C. positive.D. negative.

D Negative. The law of diminishing returns states that if all the factors of production remain the same except one, additions to the one variable factor will eventually decrease the level of productivity. If a business adds too many workers, the level of productivity will decrease and may even become negative if those workers do not have sufficient resources to function properly. A business with too many workers may end up spending more money to produce products than the products generate in income. At that point, the marginal product turns negative. The addition of too many workers does not cause the marginal product to turn upward or positive. Workers are a variable factor in production over which a business has control.

The overall objective of workers who form labor unions is to A. obtain reasonable working hours.B. promote better working conditions.C. obtain fair wages.D. strengthen their bargaining power.

D Strengthen their bargaining power. Workers want better wages, working conditions, and hours, but they have no real power as individuals to bargain effectively with management for these things. Banding together in a union gives them this power.

Which of the following is NOT an example of a business process? A. All employees using an organizational chart B. Managers using a list of questions and a group interview for evaluating job applicants C. Purchasing agents completing a checklist of actions before purchases are made D. Employees responding to each of their emails with a personalized message

D Employees responding to each of their emails with a personalized message. While personalized messages may be important in some cases, they are not a business process. A process is a sequence of activities followed to achieve business goals. The remaining choices describe a process an organization uses to operate effectively and efficiently. For example, without an organizational chart, people would not know who reports to whom, creating issues in communication and responsibility. Checklists and other lists are created to have processes and procedures for conducting routine business activities, such as hiring employees or purchasing materials, effectively and efficiently. SOURCE: EC:127 SOURCE: Kotelnikov, V. (n.d.). Business processes. Retrieved October 19, 2010, from http://www.1000ventures.com/business_guide/process.html

A large number of underemployed workers indicates that there is a problem in the economy because underemployment means that A. seasonal employees work only part of the year. B. many people have stopped looking for work. C. some workers are taking time off between jobs. D. there are not enough jobs for qualified people.

D There are not enough jobs for qualified people. The underemployed include workers who are working part-time when they want to work full-time, or who are overqualified for the job they currently have, but cannot find a job that matches their skills. The underemployed are not included in the unemployment rate, because they are working. However, this category is an indication that there is a problem in the economy because there are not enough jobs for qualified workers. This might mean that the economy is in decline. Discouraged workers stop looking for employment. Taking time off between jobs is an example of frictional unemployment. By definition, seasonal employees work only part of the year. Discouraged workers are unemployed rather than underemployed. Seasonal workers are not necessarily underemployed. Workers taking time off between jobs is not an indication that there is a problem in the economy.

An automobile assembly line currently has 75 cars being assembled. These partially-complete cars are considered A. direct labor utilization. B. flow time. C. direct labor content. D. work in process.

D Work in process. All started but incomplete products are counted as work in process. Flow time is how long it takes an input to move through a process from beginning to end. Direct labor content counts how much labor goes into a product throughout a process. Direct labor utilization is the amount of labor capacity actually used as direct labor. SOURCE: EC:127 SOURCE: NetMBA. (2002-2007). Process analysis. Retrieved October 27, 2009, from http://www.netmba.com/operations/process/analysis/

The amount of a product that is produced is most directly affected by A. labor unions. B. product utility. C. product value. D. consumer demand.

D: Consumer demand. Consumer demand is the quantity of a good or service that buyers are ready to buy at a given price at a particular time. Producers will continue to provide a product in direct proportion to the demand for it, as long as it is profitable for them to do so. Producers must carefully watch for fluctuations in consumer demand in order to produce what is wanted by consumers—not necessarily what is demanded by producers. Product utility, or usefulness, and the value of products to consumers are factors that determine demand. Not all products are produced by members of labor unions.SOURCE: EC:005SOURCE: EC LAP 11—It's the Law (Supply and Demand)

Which of the following might cause supply of a good to decrease: A. Advertising B. Sales skills C. Inelastic demand D. Government regulations

D: Government regulations. Government controls, such as taxes, limits on prices, and limitations on the use of resources, all tend to increase production costs and limit the opportunity to make a profit. Manufacturers are less willing to produce under these circumstances, therefore, they decrease supply. Sales skills and advertising would increase demand, which would increase supply. Inelastic demand is a form of demand in which changes in price do not affect demand.SOURCE: EC:005SOURCE: EC LAP 11—It's the Law (Supply and Demand)

The market's way of rationing limited resources, goods, and services to consumers in a market economy is through A. commissions. B. profits. C. incentives. D. prices.

D: Prices. Generally, the higher the price of anything, the less of it people will buy. The lower the price, the more of it people will be willing and able to buy. In a market economy, the incentives that keep producers constantly changing and reallocating their resources are known as profits. Commissions are a form of income for salespersons that are calculated as a percentage of sales.SOURCE: EC:006SOURCE: EC LAP 12—When More Is Less (Functions of Prices)

Which of the following is characteristic of a buyer's market: A. High demand B. Steady demand C. Low supply D. Low prices

D:Low prices. A buyer's market is the best time to buy, since consumers are able to conserve their money by purchasing products at reduced prices. High demand and low supply would indicate a seller's market. Steady demand is not a characteristic of a buyer's market.SOURCE: EC:005SOURCE: EC LAP 11—It's the Law (Supply and Demand)

One of the main functions of a country's monetary policy is to A. monitor government spending. B. supervise the banking system. C. issue new currency. D. regulate the economy.

D:Regulate the economy. A monetary policy is the government policy that determines the amount of money that will be in circulation and the level of interest rates. By adjusting interest rates and the money supply, a government is able to regulate the country's economy. For example, increasing the money supply and lowering interest rates usually helps the economy to grow. If a government raises interest rates and reduces the money supply, economic growth usually slows down. A country's monetary policy does not supervise the banking system, issue new currency, or monitor government spending

A manager's allowing employees to set the pace of their work is an example of providing job A. enrichment. B. enlargement. C.rotation. D. satisfaction.

A Enrichment. Job enrichment involves adding interest and satisfaction to a task in order to increase employee motivation. Allowing employees to set their own pace is one way of enriching jobs. Job enlargement is combining job tasks so that a worker has more responsibility for the completion of a job. Job rotation involves moving people around to different jobs in order to teach them new skills and to show them how tasks are interrelated. Job satisfaction is the degree to which one likes his/her job and is motivated to do it.

When consumers purchase gasoline, telephone services, and tobacco products, they must often pay a(n) ___________ tax.A. excise B. income C. property D. proportional

A Excise. An excise tax is a special government tax on certain items that is included in the price that consumers pay. Gasoline (motor fuel), telephone services, and tobacco products are examples of goods and services that are excise taxed. Income taxes are levied on income earned from a job or other sources. Property taxes are paid on land and buildings. A proportional tax system involves taking the same percentage of money from everyone's income.

When consumer spending and consumption decrease, consumer confidence tends to A. fall. B. rise. C. remain the same. D. be unpredictable.

A Fall. Consumer spending is an effective economic indicator because changes in the level of spending indicate trends or conditions in the economy. If consumers are spending less, they do not have confidence in the health of the economy. When consumer spending and consumption increase, consumer confidence tends to rise. When consumer spending and consumption remain the same for a period of time, consumer-confidence levels tend to remain the same. The effect of consumer spending and consumption is predictable.

To stimulate the economy, the government is likely to A. increase spending. B. restrict trade. C. raise prices. D. decrease expenses.

A Increase spending. To jumpstart a sagging economy, the government may increase its spending levels. Sponsoring new projects often leads to a need for more workers. When there are more people working and earning an income, they tend to spend more of their income on consumer goods and services. The downside to increasing spending is that the country's expenses and debt level increase. Opening trade, rather than restricting it, may also stimulate the economy. The government obtains additional revenue from raising taxes, rather than raising prices. SOURCE: EC:128 SOURCE: Heakal, R. (2009). What is fiscal policy? Retrieved November 3, 2009, from http://www.investopedia.com/articles/04/051904.asp

The best time for a business to purchase new equipment is when A. interest rates are low. B. consumer demand decreases. C. job growth declines. D. the gross domestic product falls.

A Interest rates are low. Interest is the money payments for the use of borrowed money. Payment amounts vary when interest rates change. The best time for a business to make an expensive purchase is when the interest rates are low because the business will pay less money to finance the loan so it can obtain the equipment. Low interest rates are common during an expansion of the business cycle. Declines in consumer demand, job growth, and the gross domestic product are economic conditions that often occur when the business cycle experiences a contraction.

What usually results when interest rates continue to increase? A. Spending decreases. B. Production increases. C. Purchasing power increases. D. Unemployment decreases.

A Spending decreases. The interest is money payments for the use of borrowed money. When the interest rate increases, such as from 6% to 10%, the cost of borrowing money increases. Therefore, a lot of businesses and consumers decrease spending, especially for expensive items that they pay for with credit. High interest rates have a negative impact on the economy because decreased spending leads to a decrease in production, a decrease in purchasing power, and an increase in unemployment.

Which of the following does consumption rely on to provide goods and services: A. Producers B. Consumers C. Owners D. Deciders

A: Producers. Producers are the people who make or provide goods and services. Consumption relies on producers to provide goods and services. The relationship between consumption and production needs to be balanced so that enough goods and services are produced to satisfy consumers' wants, but not so many that producers lose money. A consumer is anyone who uses goods and services. Owners have possession of their resources. Deciders make decisions.SOURCE: EC:001SOURCE: EC LAP 6—Are You Satisfied? (Concept of Economics)

The use of robots in assembly-line work is a form of specialization involving A. natural resources. B.capital goods. C.capitalism. D. human resources.

B Capital goods. The use of specialized types of machinery to do specific tasks at high rates of speed is specialization involving capital goods. Capitalism is an economic system that is characterized by free enterprise. Natural resources are resources found in nature. Human resources are the people who use their skills in different jobs.

If three employees each work 35 hours a week and produce a total of 9,765 items, what is their total hourly productivity level? A. 31 B. 93 C. 67 D. 105

B 93. Productivity is measured by dividing output by input. Outputs are goods and services produced as the result of combining inputs, or resources, which include the amount of time required to do the work. In order to measure the total hourly productivity of three employees producing 9,765 items (outputs) in a 35-hour week (inputs), first determine the total number of hours worked (35 x 3 = 105). Then, divide the number of items produced by the number of hours (9,765 ÷ 105 = 93). The three employees have a productivity level of 93 items per hour. SOURCE: EC:126 SOURCE: EC LAP 18—Make the Most of It (Productivity)

How do spending levels impact the economy in an inflationary period? A. Overall spending generally remains unchanged. B. Consumers and businesses spend less. C. Consumers spend less, but businesses tend to spend more. D. Consumers keep spending no matter what; businesses are more cautious.

B Consumers and businesses spend less. When inflation sets in and prices rise, consumers change their spending habits, which is disruptive to the economy. Depending on the degree of inflation, consumer spending can fall dramatically, especially on larger purchases such as homes. The housing industry has been hard-hit during inflationary periods. Businesses also adjust their spending habits, and when interest rates on business loans are high, for example, they may cut back on factory orders to reduce the cost of borrowing. A decline in orders often causes factory layoffs. Changes in spending habits cause ripple effects and can have a dramatic impact on the economy.

In some states, it is against the law to sell alcohol on Sundays. This law was created to honor the Christian religious belief that Sunday is a special day of rest. This is an example of culture impacting the __________ of goods. A. production B. distribution C. pricing D. packaging

B Distribution. Distribution is the movement of goods and services through a distribution channel from the producer. Under this law, the distribution of alcohol to the final consumer is prohibited on Sundays. Production is not affected by this law. Manufacturers are still able to produce alcohol on any day of the week. The price and packaging of the good are not affected by when the product can be sold.

Interest rates rising and falling by a wide range on a regular basis often are an indication of A. seasonal unemployment. B. economic instability. C. flexible capital. D. price equilibrium.

B Economic instability. Interest rate is the percentage figure used in calculating interest charges. The interest is the price of borrowing money. Interest rates rising and falling by a wide range on a regular basis often is an indication of economic instability. The interest rate has an effect on the amount of money available to loan and the amount that businesses and individuals are willing to borrow. For example, when rates are high, borrowing decreases because the price of borrowing is high. This tends to slow down the economy. In a stable economy, interest rates remain fairly constant and fluctuate by only a few percentage points. Interest rates rising and falling by a wide range on a regular basis is not an indication of seasonal unemployment, flexible capital, or price equilibrium.

When consumer spending is high, the economy usually is in a(n) A. depression. B. growth stage. C. inflationary period. D. recession.

B Growth stage. Consumer spending is an effective economic indicator because changes in the level of spending indicate trends or conditions in the economy. When consumer spending is high, the economy usually is in a growth stage. Spending by consumers indicates that they have funds available to spend, which encourages businesses to expand to provide additional goods. The result often is more profit for businesses so they continue to expand and provide more jobs, which increases the employment level and leads to more growth. When consumer spending is high, the economy is not in a depression, an inflationary period, or a recession.

A country's standard of living can be calculated by dividing the goods and services its people have by A. social services. B. population. C. output. D. total production.

B Population. Standard of living is a per capita, or per person, measurement of the amount and quality of goods and services that a nation's people have. The other alternatives, social services, output, and total production, can be parts of the numerator in this equation (goods and services). SOURCE: EC:125 SOURCE: Farese, L.S., Kimbrell, G., & Woloszyk, C.A. (2006). Marketing essentials (p. 62). Woodland Hills, CA: Glencoe/McGraw-Hill.

Why might businesses decide to hold on to products to sell later when the economy is experiencing high levels of inflation? A. Taxes will limit production. B. Prices will continue to rise. C. Cash will be in short supply. D. Income will remain constant.

B Prices will continue to rise. When inflation is at a high level, prices are also high. During times of inflation, prices often continue to rise. As a result, some businesses might decide to hold on to products to sell later because they anticipate that prices will continue to increase and they can sell products for more at a later time. Consequently, inflation can cause a decrease in supply because businesses are waiting to sell products at the highest price possible. Businesses do not hold on to products to sell later because taxes will limit production, cash will be in short supply, or income will remain constant.

Vernon was the milkman in his neighborhood for 30 years. Then, supermarkets started selling milk right in the store, and Vernon's job became obsolete. Vernon is a victim of ___________ unemployment. A. seasonal B. structural C. frictional D. cyclical

B Structural. This type of unemployment refers to larger changes within an economy that renders old jobs and technologies obsolete. Seasonal unemployment refers to workers whose jobs only take up a certain portion of the year, such as migrant workers helping with fall harvests. Frictional unemployment is caused by a worker leaving one job and actively seeking another. Cyclical unemployment is caused by economic recessions, where firms have to cut jobs to reduce production costs.

Why should productivity be measured? A. To find new ways to meet customer needs B. To see whether the business's objectives are being met C. To determine the best ways to invest company profits D.To locate new sources of inputs

B To see whether the business's objectives are being met. Productivity may be measured to see whether a business's goals and objectives are being reached. Productivity doesn't aid in the location of new sources of inputs. Members of the finance department are responsible for determining the best ways to invest company profits. Research and development may find new ways to meet customer needs.

When management and union leaders negotiate but cannot reach an agreement, either one may call for a(n) A. grievance.B. injunction. C. arbitrator. D. probation.

C Arbitrator. Sometimes management and union leaders cannot reach an agreement. When this occurs, either side may call in an arbitrator, a person who will make decisions concerning the final contract. If arbitration is called for, the decision is final and cannot be changed by the union or by management. An injunction is a court order forbidding someone from carrying out an act, such as picketing. A grievance is a disagreement between workers and employers. Probation is the time frame in which an employee is tested on the job.

When producers are hopeful about the economic business outlook, they often A. decrease their inventory levels.B. decrease their purchase of new goods. C. increase their investment in capital goods. D. increase their investment in savings.

C Increase their investment in capital goods. Capital goods are all the materials used in the production of goods and services. When producers are optimistic about business, they increase the purchase of capital goods in order to increase production. They want to have enough goods on hand to meet the increased consumer demand. They also increase their purchase of new goods and their inventory levels, while decreasing their level of savings.

Sam has been invited to go to the movies with one friend and to Dairy Queen for ice cream with another friend. Because he has only $5.00, Sam can't do both. If he decides to go the movies, the opportunity cost of his choice is A. staying at home. B. both the ice cream and the movie. C. ice cream at Dairy Queen. D. the movie.

C Ice cream at Dairy Queen. The opportunity cost is the alternative that is given up when a choice is made about the best use of resources. In this case, Sam's $5.00 is the resource, and the alternative he gave up is the ice cream at Dairy Queen. The movie is the alternative he chose to spend his $5.00 resource on. Staying at home was not an alternative Sam considered

The formula that is generally used to measure productivity is A. goods divided by time. B. labor divided by resources. C. outputs divided by inputs. D. inputs divided by labor.

C Outputs divided by inputs. The formula for calculating productivity is goods and services produced (outputs) divided by the resources utilized to produce the goods (inputs). Labor is one of several resources available for use. Goods are only one type of output, and time is only one of several resources. SOURCE: EC:126 SOURCE: EC LAP 18—Make the Most of it (Productivity)

The use of thorough job orientation helps to increase productivity through A. mass production. B.participative decision making .C.training and education. D. quality of work life.

C Training and education. A thorough job orientation helps the worker to cope with anxieties about a new job. It should give the worker a clear understanding of what the job is about so that the worker has a good start toward high levels of productivity. The general conditions in which employees work is known as their quality of work life. Mass production is the production of a few products in large quantities. Participative decision making is the involvement of workers in the decision making of the business.

What kind of strike occurs when the members of a union local stop work without the consent of their national organization? A. SympatheticB. Limited C. JurisdictionalD. Wildcat

D Wildcat. Local members may elect to have a wildcat strike if they feel that company representatives are not bargaining in good faith, and the national union won't call a strike. When the members of one union stop work in order to support the striking members of another union, a sympathetic strike occurs. A jurisdictional strike arises from conflict between two competing unions over which union should be permitted to do a particular kind of work. Limited is a distractor.

What is one reason why the overall unemployment rate understates the actual employment situation? A. The rate reflects regional differences. B. The rate is not seasonally adjusted. C. Underemployed people are listed. D. Discouraged workers are not included.

D Discouraged workers are not included. Discouraged workers are those people who want to work but have given up looking for jobs. Most of these people have been out of work for a long time and no longer show up in the records that track people who are looking for work or receiving unemployment benefits. As a result, the unemployment rate usually is higher than indicated because of the people who are not included. The unemployment rate is seasonally adjusted. Underemployed people are not included in the unemployment rate because they are working. The overall unemployment rate does not reflect regional differences; however, there are rates available for specific geographic areas.

What do businesses usually expect will increase when the economy experiences a continued rise in the level of inflation? A. Consumer spending B. Employment levels C. Industry growth D. Interest rates

D Interest rates. As the level of inflation continues to rise, the value of the dollar decreases. Creditors usually raise interest rates during those times in order to maintain the level of profit they were earning before inflation began to rise. Consequently, when businesses borrow money during periods of high inflation, they can expect to pay higher interest rates than they would during periods of low inflation. The cost of doing business increases because interest rates are higher during inflationary periods. A continued rise in the level of inflation often results in a decrease in employment levels, consumer spending, and industry growth.

Dividing the dollar value of total sales by the cost of making those sales is one way that businesses often measure their A. accountability. B. profitability. C. liability. D. productivity.

D Productivity. Productivity is the amount and the value of goods and services produced (output) from set amounts of resources (input). The method of measuring a business's productivity will vary from one business to another according to the type of business. One method used by businesses to measure their productivity involves dividing the dollar value of total sales by the cost of making those sales. Profitability is the degree or level of profit of a business or a product. Liabilities are debts that the business owes. Accountability involves being responsible for one's actions, such as a business being responsible for paying its bills. SOURCE: EC:126 SOURCE: EC LAP 18—Make the Most of It (Productivity)

What usually decreases as the rate of inflation increases? A. Money supply B. Interest rates C. Export quotas D. Purchasing power

D Purchasing power. Purchasing power is a consumer's ability to purchase goods and services. The rate of inflation, the percentage of change in price levels, has a major effect on purchasing power because when inflation is high, a dollar will not buy as much. For example, if the rate of inflation increases from last year to this year, $1.00 will buy less this year than it did last year. If inflation increases and incomes stay the same, people will lose purchasing power and not be able to buy the same amount of goods and services. Money supply is the total quantity of money that exists at one time in a nation. The interest rate is the percentage figure used in calculating interest charges. Export quotas are the restrictions on the quantity of goods that can move out of a country.

Which of the following is an economic activity: A. Following the stock market B. Reading a bank statement C. Balancing a checkbook D. Purchasing a candy bar

D: Purchasing a candy bar. Economic activities involve the exchange of something having monetary value for something else that has monetary value; therefore, purchasing a candy bar is an economic activity. Balancing a checkbook, reading a bank statement, and following the stock market are ways to keep track of economic activities.SOURCE: EC:001SOURCE: EC LAP 6— Are You Satisfied?

Which of the following is an example of a change in culture affecting the production of a good or service: A. A shortage of chocolate chips causes a cookie company to stop production. B. Laws banning smoking in restaurants result in a decrease in demand for cigarettes. C. An oil spill in the ocean causes local seafood restaurants to lose business. D. The "green movement" leads to an increase in demand for recycled products.

D The "green movement" leads to an increase in demand for recycled products. The green movement is a shift in cultural values that has caused people to become more environmentally conscious, resulting in an increase in the demand for recycled goods. In response, companies are producing more recycled goods than in the past. Laws banning smoking are legal actions that affect demand and, therefore, production. An oil spill is an accident that can impact businesses that rely on the ocean—for seafood, for tourism, etc. It is not a cultural change. A shortage of an ingredient used in the production of a product, in this case, chocolate chip cookies, is a supply issue, not a cultural issue.

Why does the Federal Reserve System raise interest rates? A. To overcome inequalities of income distribution B. To increase demand for products C. To decrease supply of products D. To fight inflation

D To fight inflation. When a product's demand exceeds its supply, the product's price will go up. Then, inflation increases, and economic growth begins to slow. As the product's price increases, its demand decreases. Less demand leads to less production, and eventually, unemployment. By raising interest rates, the Fed strengthens the value of the dollar, attracting foreign investors, putting more money into the economy. Inequalities of income distribution are not addressed by increased interest rates.

Why are resources considered limited? A.Entrepreneurs do not invest enough of them. B.There are not enough available so that everyone can have as much of them as desired. C.Everyone has them, and they change. D.There are so many that people must decide which ones to choose at any one time

B: There are not enough available so that everyone can have as much of them as desired. People want or demand more resources than exist or can be produced easily. Economics is the study of satisfying unlimited wants with limited resources. Everyone has unlimited wants which change. SOURCE: EC:001SOURCE: EC LAP 6—Are You Satisfied? (Concept of Economics)

Many different workers are needed to carry out the steps in processing milk before it can be distributed to consumers. This is an example of A. specialization by profession. B.job obsolescence. C.specialization by stages of production. D. job enlargement.

C Specialization by stages of production. This occurs when more than one stage is required to change a raw material into a finished product. The completion of the final product usually involves different workers at each of the stages of production. Specialization by profession is the type of work you do in order to earn a living. Job enlargement is combining job tasks so that a worker has more responsibility for the completion of a job. Job obsolescence occurs when technological advances cause a job to become outdated.

A country is experiencing civil unrest. What is likely to happen to the value of its currency? A. It will stabilize. B. It will increase. C. It will decrease. D. It will not be affected.

C It will decrease. A country's economic and political stability can affect the value of its currency. If a country is experiencing civil unrest, its political environment is volatile. Because foreign business partners and investors are uncertain about the country's future, they are likely to decrease their business activities, causing the country's currency value to decrease. The value of the currency in a politically unstable environment is not likely to increase, stabilize, or remain unaffected.

A country's easy monetary policy is often used to correct the problem of A. globalization. B. high taxes. C. unemployment. D. import quotas.

C:Unemployment. If a country is experiencing a time of high unemployment, it often relaxes the monetary policy to stimulate economic growth. For example, interest rates might be lowered to encourage businesses to borrow money to expand. As a result, more jobs become available and the high unemployment problem is eliminated. A country's easy monetary policy is not used to correct the problem of high taxes, globalization, or import quotas.

The primary purpose of a feasibility study is to answer which of the following questions: A. Is the business plan valid? B. What technology will be needed for this project? C. What are the opportunity costs of this project? D. Should we proceed with this project?

D Should we proceed with this project? A feasibility study determines if a project is feasible—doable. If the answer is yes, the project proceeds. Assessing technology needs is one piece of a feasibility study. Opportunity cost is the value of the next best alternative. While other alternatives may be considered, a feasibility study focuses on one idea at a time. If a feasibility study indicates a project should move forward, a business plan would then be written. Prior to a feasibility study, a business plan does not exist, so it cannot be validated. SOURCE: EN:038 SOURCE: Hofstand, D. (2006, March). When to do and how to assess a feasibility study. Retrieved October 12, 2010 from http://www.extension.iastate.edu/AGDM/wholefarm/html/c5-65.html

To calculate total revenue, a business multiplies the number of units sold by A. average price per unit. B. marginal revenue. C. fixed costs.D. marginal costs.

A Average price per unit. Total revenue is one of the two key measures of revenue that businesses use to decide what amount of output will produce the greatest profits. It is calculated by multiplying the number of units sold by the average price per unit. Marginal revenue, on the other hand, is the extra revenue associated with the production and sale of one additional unit of output. Marginal revenue is not used to calculate total revenue. Fixed costs are costs that do not change, even if output is zero, and are not used to calculate total revenue. Marginal costs are the extra costs incurred when a business produces one additional unit of a product. Marginal costs are not used to calculate total revenue.

What is often the result when businesses are able to achieve and maintain a quality culture? A. Customer satisfaction B. Technological advantage C. Employee convenience D. Social responsibility

A Customer satisfaction. Businesses that have a quality culture usually are able to satisfy customers because they provide a good product and reliable service. A quality culture often means that employees are constantly trying to do the best job possible, whether it is producing a good or providing a service. Also, in this type of environment, employees understand that satisfying customers is extremely important because they would not have jobs without customers. A quality culture may not be as convenient for employees because they are expected to always be looking for ways to improve. A quality culture does not rely on technology because even very simple businesses can be quality-oriented. Social responsibility is the duty of business to contribute to the well-being of society. SOURCE: OP:335 SOURCE: Kimbrell, G., & Vineyard, B.S. (1998). Succeeding in the world of work: Teacher's wraparound edition (6th ed.) [pp. 282-283]. New York: Glencoe/McGraw-Hill.

A group of entrepreneurs is trying to decide which of five new product ideas to select. Which tool can be used to help make the decision? A. Decision matrix B. Entrepreneurial discovery process C. Business processes D. Opportunity cost analysis

A Decision matrix. A decision matrix is used to systematically determine the best alternative from a list of several. The entrepreneurial discovery process is used to find new ideas by systematically scanning the environment. Those ideas may then become alternatives in a decision matrix. Business processes are a sequence of activities followed to achieve business goals, such as quality management, risk management, etc. Opportunity cost analysis means determining the cost of the next-best alternative. A decision matrix selects one idea from a list of several alternatives. SOURCE: PD:270 SOURCE: The decision matrix. Retrieved October 18, 2010, from http://http-server.carleton.ca/~gkardos/88403/Decision/Matrix/MATRIX3.html

To continuously improve and achieve quality throughout the business, management must A. establish standards. B. eliminate the competition. C. follow rigid rules. D. limit communication.

A Establish standards. Standards are specifications that a business uses as a basis for comparing or judging goods, services, or processes. Management sets standards in order to measure performance in all areas of the business. If the business is performing below its standards, it needs to take corrective action to improve. A business that strives to continuously improve and achieve quality does not limit communication with its employees, vendors, or customers; rather, its management staff asks for suggestions and ideas for improvement. To implement improvements, management must be flexible and allow for change, rather than expect employees to follow rigid, ineffective rules. Management should develop policies that support the business's goals and satisfy customers, which may help the business to improve its market share. Aggressive actions that aim to eliminate competition may violate antitrust laws. SOURCE: OP:163 SOURCE: DuBrin, A.J. (2003). Essentials of management (6th ed.) [pp. 246-247]. Mason, OH: South-Western.

Arm and Hammer baking soda, which was originally developed as a cooking ingredient, is now being sold as an effective refrigerator deodorizer. This is an example of ____________ innovation. A. positioning B. process C. distributed D. associative

A Positioning. Position innovation occurs when an existing product is repositioned. In the situation provided, a new use for the baking soda prompted Arm and Hammer to reposition the product as a deodorizer. The basic product did not change, but the company redesigned the package so that a filtered panel opened on the side of the box for optimal odor absorption. Process innovation involves changing the way that a product is produced or delivered. Distributed innovation refers to a decentralized model used for problem solving. Associative innovation is a fictitious term. SOURCE: PD:126 SOURCE: Bishop, K. (2007). Types of innovation. Retrieved January 11, 2010, from http://ezinearticles.com/?Types-of-Innovation&id=38384

Entrepreneurial discovery is an important process in a free-enterprise economic system because an entrepreneur or small-business owner can A. satisfy an unmet demand. B. form a technological monopoly. C. improve economic sanctions. D. change legal requirements.

A Satisfy an unmet demand. An opportunity is a circumstance that presents itself. Entrepreneurial discovery is the process of detecting and matching product and market opportunities with one another in a manner that satisfies the market and the business. To do that, an entrepreneur or small-business owner must conduct research to discover what the market needs or wants. The entrepreneurial discovery process does not allow an entrepreneur or small-business owner to form a technological monopoly. The process does not affect economic sanctions, and it does not involve changes in legal requirements. SOURCE: EN:002 SOURCE: Wayne Brown Institute. (2004). Fundamentals of a well-built venture. Retrieved April 27, 2010, from http://www.venturecapital.org/fundamentals.htm

Which of the following is an example of paradigm innovation: A. Windows computer operating system B. Energy-saving light bulbs C. The latest model of the Honda Civic D. Rechargeable batteries

A Windows computer operating system. Paradigm innovation takes place when the entire perception of a product, company, or industry takes place. The Windows computer operating system revolutionized the way people input, transfer, share, and export information through personal and networked computers. Businesses worldwide use the Windows operating system. Energy-saving light bulbs, the latest model of the Honda Civic, and rechargeable batteries are examples of product innovation. Product innovation takes place when a company creates a new product or redesigns an existing product. SOURCE: PD:126 SOURCE: Bishop, K. (2007). Types of innovation. Retrieved January 11, 2010, from http://ezinearticles.com/?Types-of-Innovation&id=38384

When assessing global trends for potential business opportunities, an entrepreneur often looks for a market that has A. few financial resources. B. an unmet want. C. a volatile income. D. several tax incentives.

B An unmet want. A business opportunity is a circumstance that presents itself to provide a good or service. The circumstance often involves providing a product to fulfill a want or need. Entrepreneurs monitor trends, or the direction in which society is moving, to determine if there are markets that have unmet wants or needs. If such a market exists, the entrepreneur can develop or obtain products to satisfy the unfulfilled demand, and make a profit. Entrepreneurs do not look for markets that have few financial resources or a volatile (unpredictable) income. Governments, rather than markets, provide tax incentives. SOURCE: EN:002 SOURCE: Kuratko, D.F., & Hodgetts, R.M. (2001). Entrepreneurship: A contemporary approach (5th ed.) [pp. 9, 360, 362]. Mason, OH: South-Western.

Which of the following is a program that some managers implement to achieve quality in all aspects of the business: A. Theory X B. Six Sigma C. PERT D. Gantt chart

B Six Sigma. Six Sigma is a program that emphasizes preventing problems to achieve quality in an organization. It stresses strict measurements in design and manufacturing as well as motivating people to be highly productive. Six Sigma focuses on people working together, often in teams, to create a culture of quality that exists in the business and in the business's dealings with customers. Theory X is an authoritative, traditional view of motivation in which workers were viewed as preferring direction, having little ambition, avoiding responsibility, and wanting security. PERT, or program evaluation and review technique, is a method of planning work activities. A Gantt chart is graphic representation of a project's timeline. SOURCE: OP:163 SOURCE: DuBrin, A.J. (2003). Essentials of management (6th ed.) [pp. 246-247]. Mason, OH: South-Western.

The young children's section of a U.S. amusement park features cartoon characters from a German TV show. Although the amusement park signed an agreement and paid a fee to display images of the cartoon characters, the TV show doesn't own or manage the park in any way. This is an example of A. a strategic alliance. B. franchising. C. licensing. D. exporting.

C Licensing. Licensing grants the right to use logos, trademarks, etc., so that the product can be used the same as in its home country. Franchising involves the rights to sell a product according to a set of procedures. While the likeness of the cartoon character helps to bring customers into the park, the question does not mention direct sales of a product that features the character. In a strategic alliance, two or more companies are partners in the ownership and management of a business. Exporting is the transfer of goods and services from one country to another. Again, a physical product or service is not provided. SOURCE: EC:129 SOURCE: Harrington, J.W., Jr. (2003, May 12). Forms of international business. Retrieved October 12, 2010, from http://faculty.washington.edu/jwh/349lec12.htm

What type of government policy involves raising or lowering taxes, and increasing or decreasing government spending?A. Disciplinary B. Monetary C. Fiscal D. Social

C:Fiscal. Fiscal policy is a government policy that sets levels of government spending and taxation. Monetary policy is a government policy that determines the amount of money that will be in circulation and the level of interest rates. Disciplinary policies are the ways in which individuals, groups, or businesses handle inappropriate behavior. Social policies address societal issues (e.g., discrimination).

An important aspect of continuous quality improvement within an entire business organization requires management to A. obtain daily reports to monitor progress. B. make as few changes as possible. C. hire additional staff to oversee quality control. D. solicit input from employees.

D Solicit input from employees. Quality is the degree of excellence of a good or service. It is important for a business's management team to monitor all aspects of the business so it can maintain or exceed the quality level that its customers expect. If quality decreases, the business may lose customers to its competitors. An important part of monitoring quality is soliciting input from the workers who are actually performing the tasks, because they often have ideas that will help them do their jobs with more efficiency. Ongoing communication is necessary for continuous quality improvement because unexpected issues might occur that affect quality, and management needs to know so the problems can be fixed. Continuous quality improvement usually occurs in small increments over time. The number of changes is dependent on the business's goals. It is not always necessary to hire additional staff to oversee quality control programs. The frequency of reports that management requires is dependent on the business's needs, objectives, and procedures. SOURCE: OP:163 SOURCE: DuBrin, A.J. (2003). Essentials of management (6th ed.) [pp. 246-247]. Mason, OH: South-Western.

Which of the following is a decision about production that a business might make based on the law of diminishing returns: A. Establish a desired level of productionB. Produce as many products as possibleC. Limit production to leave room for growthD. Produce the same amount from year to year

A Establish a desired level of production. When making decisions about production, businesses usually consider the law of diminishing returns, which states that continuing to add workers when other resources stay the same will eventually lead to a decrease in productivity. Therefore, businesses determine the most appropriate combination of all resources and establish a level of production that will be the most profitable. For example, a business might decide that producing 500 widgets a day will generate the most profit given its current combination of size, equipment, supplies, raw materials, and employees. If it adds another employee, production might increase slightly but profitability would decrease. Businesses want to produce the number of products that will generate the most profit rather than as many products as possible if that means less profitability. Businesses usually do not limit production to leave room for growth. Businesses often try to increase production over time rather than producing the same amount from year to year.

Which of the following is an example of a business paying property taxes:A. The Bellman Corporation submits a $8,792 check to the government, which is based on the value of its office building. B. Cortland Hotel withholds a certain percentage of its employees' earnings, which it forwards to the federal tax agency. C. Manny's Gas Station collects a gasoline tax from its customers at the point of purchase. D. North-South Airline allocates $4,000 of its earnings to give to a college's scholarship fund.

A The Bellman Corporation submits a $8,792 check to the government, which is based on the value of its office building. Businesses that own buildings and property must pay property taxes to the government at specific intervals. The property-tax amount is based on the value of the land and building. The value of the land and building is affected by many factors, such as the location of the property. Cortland Hotel withholds income tax from its employees' paychecks, and submits the monies to the government at certain timeframes. A gasoline tax is an example of an excise tax, which is a type of sales tax that customers pay for goods and services. An excise tax is often referred to as a "sin tax," and it is levied on nonessential products such as gasoline, cigarettes, and alcohol. The airline is making a charitable donation rather than paying taxes.

When consumers' purchasing power decreases, the economy will experience a period of A. contraction. B. expansion. C. containment. D. emergence.

A Contraction. Free-enterprise economic systems experience changes in business cycles. Business cycles are the periods of expansion and contraction in economic activities. Characteristics of the expansion stage of the business cycle include: increases in spending and borrowing, increases in the demand for products, decreases in unemployment rates, and decreases in loan interest rates. During the contraction stage of the business cycle product demand and consumer spending decrease, while unemployment and loan interest rates increase. Containment and emergence are not terms commonly used to describe the stages of the business cycle.

Higher prices that result from a tax on luxury goods are likely to result in A. fewer customers and less productivity. B. more customers and more productivity. C. fewer customers and more productivity. D. more customers and less productivity.

A Fewer customers and less productivity. Demand for luxury goods is elastic, meaning that customers are not willing to pay higher prices. As customers leave the market, productivity decreases. Higher prices do not result in more customers or more productivity. Customers and productivity are directly related, so having fewer customers and more productivity, or more customers and less productivity, is highly unlikely. SOURCE: EC:128 SOURCE: Clayton, G. (2005). Economics: Principles and practices (p. 225). Columbus, OH: Glencoe/McGraw-Hill.

Which of the following factors affects consumers' decisions to buy goods or services: A. Buying power B. Competition C. Labor costs D. Production costs

A:Buying power. Consumer buying power is the amount of cash or credit a consumer has available to spend. Regardless of the price, if a consumer does not have buying power, there will be no demand for the product by that consumer. Labor, other production costs, and competition often affect the price of products.SOURCE: EC:005SOURCE: EC LAP 11—It's the Law (Supply and Demand)

When changes in a product's price cause corresponding changes in consumer demand, the product has A. elastic demand. B. usefulness. C. utility. D. inelastic demand.

A:Elastic demand. The nature of a product determines its elasticity. Consumers continue to buy a necessity, such as milk, even when its price increases. Milk, therefore, has fairly inelastic demand, whereas a nonessential product, such as a boat, has elastic demand. Product utility is the perceived usefulness of a good or service to consumers.SOURCE: EC:005SOURCE: EC LAP 11—It's the Law (Supply and Demand)

When applying the law of diminishing returns, businesses know that there is a point at which production A. is too expensive to continue. B. reaches its maximum level. C. equals the amount of revenue. D. passes that of the competition.

B Reaches its maximum level. The law of diminishing returns states that, at some point, adding more resources does not proportionately increase productivity. For example, adding more employees when there is limited space and equipment will eventually have a negative effect on production because overcrowding will occur, and no one will be able to work efficiently. Businesses apply this law when deciding whether to hire more employees or purchase more materials and equipment. All of the resources need to be compatible for production to reach its maximum level. Once maximum production occurs, adding more resources will begin to diminish the rate of productivity. The law of diminishing returns does not determine at which point production is too expensive to continue, equals the amount of revenue, or passes that of the competition.

What is one of the main reasons why governments levy taxes? A. To control costs B. To raise revenue C. To regulate money D. To limit salaries

B To raise revenue. Governments levy taxes on businesses and individuals in order to raise the revenue needed to operate the government. The taxes collected are used to fund various programs, such as social services and the military. Without revenue from taxes, most governments would be unable to operate. Governments do not levy taxes to control costs, regulate money, or limit salaries.

Which of the following is a negative economic incentive: A. Tax reductions on fuel-efficient cars B. High taxes on cigarettes C. A 1% decrease in city taxes for residents who recycle D. Free flu shots for all citizens

B High taxes on cigarettes. A negative economic incentive either reduces the benefits or increases the costs of a product, resulting in a decreased level of the related activity or behavior. In this case, the increase in taxes makes cigarettes more expensive, which leads to a decrease in smoking. The remaining choices are all positive economic incentives: they either increase benefits or reduce costs and thus result in an increased level of the related activity or behavior. SOURCE: EC:124 SOURCE: Sexton, R.L. (2003). Essentials of economics (pp. 31-32). Mason, OH: South-Western.

When a nation's inflation rate is low, prices tend to A. increase dramatically. B. remain stable. C. fluctuate daily. D. reduce currency values.

B Remain stable. Inflation is a rapid rise in prices that may occur when demand exceeds supply or when productivity declines and costs of labor go up. Generally, low inflation rates range between one percent and four percent, which indicates a strong economy and stable prices. Although some products' prices fluctuate on a daily basis (e.g., gasoline), not all prices do. High inflation causes a decrease in the value of a nation's currency.

When customers buy the exact amount of goods that producers are selling at a specific price, the __________ price exists. A. market B. equilibrium C. unit D. production

B: Equilibrium. Equilibrium price is also called market-clearing price because that is often the result of reaching the equilibrium point. Market price is the actual price that prevails in the marketplace at any particular moment. Unit price indicates the price of products by the ounce, pound, or other measurement to enable customers to compare product values. Production price is the total amount of money spent on materials, labor, taxes, etc., to produce economic goods and services.SOURCE: EC:006SOURCE: AmosWEB (n.d.). Equilibrium price. Retrieved August 11, 2009, from http://www.amosweb.com/cgi-bin/awb_nav.pl?s=gls&c=dsp&k=equilibrium+price

Which of the following is a business comparing when it analyzes the cost of buying wood desks versus the cost of buying metal desks: A. Excess demand B. Relative price C. Inflated price D. Incentives

B: Relative price. Relative price refers to one price compared to another, that is, to the ratio between them. In deciding what to buy, consumers often compare one price to another. Inflation is an increase in the average level of prices. In our economy, profits are the incentives which encourage producers to change and reallocate their resources. Excess demand is the situation that exists when demand is greater than supply.SOURCE: EC:006SOURCE: EC LAP 12—When More Is Less (Functions of Prices)

Which of the following actions would the Federal Reserve System take to expand monetary policy:A. Raise the Federal Discount Rate B. Buy securities on the open market C. Increase Reserve Requirements D. Open additional financial institutions

B:Buy securities on the open market. To expand monetary policy, the Federal Reserve System can lower the Federal Discount Rate, decrease Reserve Requirements, and buy securities on the open market. All of these actions help to lower interest rates. By buying securities on the open market, the Fed causes those securities' prices to rise. The Fed is not responsible for opening financial institutions.

Which of the following is an example of excess supply: A. Price = $500, demand = 500, supply = 300 B. Price = $700, demand = 300, supply = 500 C. Price = $600, demand = 400, supply = 400 D. Price = $400, demand = 600, supply = 200

B:Price = $700, demand = 300, supply = 500. Excess supply is the situation that exists when supply is greater than demand. When the price is $600, supply and demand are equal. At the prices of $500 and $400, demand is greater than supply, and excess demand exists.SOURCE: EC:006SOURCE: EC LAP 12—When More Is Less (Functions of Prices)

One of the functions of certain types of taxes is to A. control employee compensation. B. limit business profit. C. regulate business activity. D. decrease employee liability.

C Regulate business activity. Governments levy taxes on businesses and individuals. One of the reasons for levying certain types of taxes on businesses is to regulate business activity. For example, governments often tax imports to control the amount of foreign products that enter the country. Governments also tax certain products, such as alcohol and tobacco, to discourage consumers from buying them. These taxes have an impact on the businesses that produce and sell these products. Although business profit is taxed, the function of the tax is not to limit profit. Employee compensation is taxed; however, the goal is not to control the compensation. Taxes do not decrease employee liability.

Which of the following statements is true regarding a nation's unemployment rates: A. Globalization does not usually have a major effect on a nation's unemployment rates. B. A nation's business cycles do not usually impact the country's unemployment rates. C. A nation always has a certain percentage of unemployed citizens at any given time. D. During times of great expansion, a nation's workers are generally underemployed.

C A nation always has a certain percentage of unemployed citizens at any given time. A nation's unemployment rate refers to the amount of people who do not have jobs and are currently seeking work. All nations have a certain amount of people who are unemployed all the time. Unemployment rates tend to increase during an economic downturn or recession. During an economic expansion period, unemployment still exists, but it is usually low. Therefore, a nation's business cycle impacts its unemployment rates. Globalization is the rapid and unimpeded flow of capital, labor, and ideas across national borders. When jobs, capital, and other resources go to another country, unemployment rates often increase. Underemployed people are highly skilled or trained workers who are overqualified for the jobs that they currently hold. People tend to take jobs for which they are overqualified when jobs are scarce, or during a time of economic contraction.

Which of the following is a true statement about currency exchange rates: A. The value of a nation's currency increases when it experiences rapid inflation. B. World events do not usually impact currency exchange rates. C. Currency exchange rates change frequently. D. When the demand for a nation's currency increases, its currency's value decreases.

C Currency exchange rates change frequently. Because many factors affect the value of a nation's currency, currency exchange rates are constantly fluctuating. For example, if a nation's inflation rate rapidly increases, the nation's currency value will likely fall because it will cost more money to buy goods and services. Or, if a nation experiences political instability, its currency value decreases because the nation's future is uncertain. In this instance, world events impact currency-exchange rates. When the demand for a nation's currency increases, the value of its currency increases.

The government uses some of the tax money it collects from individuals and businesses to support public welfare programs. What is the benefit of these welfare programs to businesses in a private enterprise economy? A. Recipients don't have to work. B. Businesses must budget more money for taxes. C. Funds received by recipients are spent in businesses. D. Government has control of how the recipients spend their money.

C Funds received by recipients are spent in businesses. When government provides funds for the needy, businesses benefit as well. People who receive the funds use them to purchase goods and services they otherwise could not afford to buy. It is not a benefit to any business when people are unable or unwilling to work. In a private enterprise economy, there is very little government control of how the money is spent. It is not a benefit to budget more money for taxes. SOURCE: EC:128 SOURCE: EC LAP 16—Regulate and Protect (Government and Business)

What often happens when a nation has a high unemployment rate? A. The gross domestic product increases. B. The consumer price index decreases. C. The nation experiences an economic slowdown. D. The stock market remains unaffected.

C The nation experiences an economic slowdown. A nation's unemployment rate refers to the amount of people who do not have jobs and are currently seeking work. When a nation has a high number of unemployed people, the country experiences an economic slowdown, which can result in an economic recession. The consumer price index is a tool that measures changes in consumer prices over time. During a recession, people have less money to spend and, therefore, the consumer price index increases (people pay more for products), and stock market activity tends to fall. The gross domestic product is the final market value of the total output of all goods and services produced within a country's geographic boundaries during a year's time. The gross domestic product tends to increase during a time of expansion rather than during a contraction.

A country's easy monetary policy is often used to correct the problem ofA. globalization. B. high taxes. C. unemployment. D. import quotas.

C:Unemployment. If a country is experiencing a time of high unemployment, it often relaxes the monetary policy to stimulate economic growth. For example, interest rates might be lowered to encourage businesses to borrow money to expand. As a result, more jobs become available and the high unemployment problem is eliminated. A country's easy monetary policy is not used to correct the problem of high taxes, globalization, or import quotas.SOURCE: EC:073

Which of the following represents a good time for a country's government to use its fiscal policy to increase taxes:A. While the economy is expanding B. When a recession lasts too long C. When inflation is too high D. While the economy is contracting

C:When inflation is too high. A country's government can use its fiscal policy to increase taxes to withdraw money out of the economy. The government would choose to do this when inflation is too strong, for example. The government would not use its fiscal policy to increase taxes for reasons such as: a recession lasting too long, the economy is expanding, or the economy is contracting.

Which of the following is true when a potato farmer keeps some of the farm's potatoes for personal use: A. The potatoes must be reported in the gross domestic product. B.The farmer is engaging in an illegal activity. C.The farmer is not producing salable goods. D.The potatoes are not counted in the gross domestic product.

D The potatoes are not counted in the gross domestic product. One of the problems in calculating GDP is that not all the goods and services that are produced are sold. When a farmer keeps any part of a crop for personal use, this production is not part of GDP. The farmer is producing salable goods and is not engaging in any illegal activity.

The value of a country's currency declines when it implements policies that restrict trade. The primary factor affecting the change in value of the currency in this situation is A. cultural differences. B. civil unrest. C. demographics. D. isolationism.

D Isolationism. Isolationism occurs when a country abstains from political and economical involvement with other countries. When a country restricts trade, it is limiting the amount of goods and services that move into and out of the country. When a country limits its economic viability, the value of its currency declines. Civil unrest, demographics, and cultural difference may influence the value of a country's currency; however, there is not enough information provided to determine if, or in what ways, these factors have influenced the country's trade restrictions.

One of the main functions of a country's monetary policy is to A. monitor government spending. B. supervise the banking system. C. issue new currency. D. regulate the economy.

D:Regulate the economy. A monetary policy is the government policy that determines the amount of money that will be in circulation and the level of interest rates. By adjusting interest rates and the money supply, a government is able to regulate the country's economy. For example, increasing the money supply and lowering interest rates usually helps the economy to grow. If a government raises interest rates and reduces the money supply, economic growth usually slows down. A country's monetary policy does not supervise the banking system, issue new currency, or monitor government spending.