Principles of Economics I: Micro - Chapter 1 Test

In the United States, real incomes have increased about 2 percent per year. At this growth rate, average income doubles every

35 years.

Fluctuations in economic activity are known as the

Business cycle

True or False: Productivity is NOT important in economics.

False

In the short run, an increase in the money supply will likely cause

a decrease in the unemployment rate and an increase in inflation.

A key feature of market economies is that market economies:

allocate resources by everyone acting in their own self-interest.

In the short run, which of the following rates of growth in the money supply is likely to lead to the highest level of unemployment in the economy? a. 3 percent per year b. 2 percent per year c. 4 percent per year d. 5 percent per year

b. 2 percent per year

Which of the following is an important cause of inflation? a. when individuals fail to respond appropriately to incentives b. growth in the quantity of money c. the influence of negative externalities d. increases in productivity

b. growth in the quantity of money

When the government intervenes in the economy to promote equality, it means that the government is trying to:

create a more fair distribution of income.

The increase in living standards of Americans over the past century is mainly due to

improvements in productivity.

A record company went out of business because too many of its customers downloaded its music illegally from the internet rather than purchasing the digital copy from the record company. This instance serves as an example of:

inadequate enforcement of property rights.

The concept of guns vs. butter represents the classic societal trade-off between spending on

military goods vs. consumer goods.

Adam has $200 to spend and wants to buy either a new amplifier for his guitar or a new cell phone. Both the amplifier and the cell phone cost $200, so he can only buy one. This illustrates the basic concept that:

people face trade-offs.

In economics, we measure the cost of something as

what you give up to get it.

Suppose a publishing company is deciding whether or not to print 50,000 additional copies of an economic textbook. The company should print the textbooks if:

The marginal benefit (additional revenue) from selling the extra books is greater than the marginal cost of printing the books.

To measure a business cycle we look at what is happening to

The production of goods and services.

True or False: An incentive is anything that is designed to change behavior.

True

True or False: Former communist countries are an example of a centrally planned economy.

True

In the 1990s, inflation in the United States was

about 3 percent per year.

If the Federal Reserve announces it will be decreasing the money supply through its monetary policy tools, it tells us the Federal Reserve is

concerned about inflation.

If the Federal Reserve announces that it will be increasing the money supply through its monetary policy tools, it tells us the Federal Reserve is

hoping to stimulate demand for goods and services.

Adam Smith's 'invisible hand' refers to:

how households and firms, acting in their own self-interest, manage to make everyone better off.

Every time we choose to do one thing, we give up doing something else. This best describes the economic principle of:

opportunity cost.

In economics, the phrase "no such thing as a free lunch" means

people face tradeoffs.

The term "productivity"

refers to the quantity of goods and services each unit of labor can produce.

Monica has $500 to spend and wants to buy either a new snowboard or a new laptop. Both the snowboard and the laptop cost around $500, so she can only buy one. This illustrates the basic concept that:

people face trade-offs.

A direct or positive relationship exists between a country's

productivity and its standard of living.

The standard of living in a country is most closely tied to its

productivity.

The main reason households and societies must make many decisions is because

resources are scarce.

Kurt decides to spend 2 hours working rather than hanging out with his friends. He earns $10 per hour for work. His opportunity cost of working is

the utility or enjoyment he would have gotten from hanging out with his friends.

Marginal thinking involves:

weighing the small incremental benefits against the small incremental cost of a decision.

Productivity is defined as the

Amount of output produced from each unit of labor input.

Thousands of people develop asthma and breathing problems from exposure to air pollution. This is an example a:

A market failure caused by an externality.

The idea that trade can make everyone better off applies to which of the following? a. Different countries and states within the United States only b. Different countries, states within the United States, and families c. Different countries only d. Families only

Different countries, states within the United States, and families

True or False: Efficiency means our economic pie is divided into equal slices.

False

True or False: Incentives are not important in economics.

False

Suppose the state of Ohio increases the tax on a pack of cigarettes and, in response to the policy change, Ohio smokers decide to buy cigarettes in neighboring states. Which principle of economics does this illustrate?

People respond to incentives.

A marginal change is best described as:

a small, incremental change from the present situation.

Public policy such as changes in the amount of taxes and subsidies can alter people's behavior by: a. changing the benefits and the costs of an activity. b. offering an incentive or a disincentive to engage in an activity. c. changing the opportunity cost of an activity. d. All of these answers are correct.

d. All of these answers are correct.

Which of the following statements about trade is the most accurate? a. International trade can only make a country better off if the country cannot produce the good itself. b. International trade helps rich nations while hurting poor nations. c. Trade makes some better off and others worse off. d. International trade has the potential to make all countries better off.

d. International trade has the potential to make all countries better off.

A main cause of large or persistent inflation is

excessive growth in the money supply.

When the government intervenes in the economy to promote efficiency, it means that the government is trying to:

increase the size of the economic pie.

One of the reasons that people tend to eat more in an "all you can eat" buffet is because the

marginal benefit from an extra plate of food is greater than the marginal cost of the additional food.

True or False: In the United States, inflation was much higher during the 1990s than it was during the 1970s.

False

True or False: Inflation and unemployment both decrease as the money supply increases.

False

True or False: Normal cost of living expenses, such as room and board, are included in the opportunity cost of attending college.

False

True or False: Suppose that you have already spent 45 minutes grocery shopping, but upon arriving at the checkout line, you realize it's going to be another 15 minutes just to purchase your groceries. Marginal thinking tells you that the decision of whether or not to wait in line depends on the cost of an hour of your time.

False

True or False: The business cycle refers to the level of growth in the money supply.

False

True or False: The last time the United States experienced high inflation was during the 1990s.

False

True or False: There is no need for a government in a market economy.

False

True or False: There is no relationship between a country's productivity and its standard of living.

False

True or False: When countries trade, one country wins and the other country loses.

False

A fundamental concept in economics is the idea of

Scarcity

True or False: Both the production of goods and services and the unemployment rate are used to measure the business cycle.

True

True or False: Economics is the study of the choices people make in attempting to manage their scarce resources.

True

True or False: Germany's hyperinflation after World War I was primarily due to the rapid increase in the supply of money.

True

True or False: Historically, real income in the United States has risen about 2 percent per year.

True

True or False: Most countries on the planet use a market-based approach to organizing economic activity.

True

True or False: The government plays an important role in a market economy.

True

True or False: When countries trade, it is possible for both countries to benefit.

True

Which of the following is something an economist might study? a. All of these answers are correct. b. Phil decides to work overtime to earn extra income for his upcoming family vacation. c. Roger reads a newspaper article about the decline of the unemployment rate in the United States over the past few years. d. Claire sells her physics textbook from last semester to her roommate for half the price she paid for it.

a. All of these answers are correct.

A reason for government involvement in a market economy is: a. property rights have to be enforced to promote innovation in an economy. b. All of these answers are correct. c. markets sometimes fail to produce an efficient allocation of resources. d. markets sometimes fail to produce a fair distribution of economic resources.

b. All of these answers are correct.

US citizens have better nutrition, better healthcare, and a longer life expectancy than citizens of Nigeria. Which of the following conclusions can be drawn from this statement? a. Productivity in the US is higher than productivity in Nigeria. b. All of these conclusions are correct. c. US citizens have a higher standard of living than Nigerians. d. Average income in the US is higher than the average income Nigeria.

b. All of these conclusions are correct.

Which of the following will happen in the short run if the money supply decreases? a. Decreasing the money supply will lead to increased inflation. b. Decreasing the money supply will lead to a lower rate of inflation. c. Decreasing the money supply will encourage firms to hire more workers. d. Decreasing the money supply will increase the demand for goods and services.

b. Decreasing the money supply will lead to a lower rate of inflation.

According to the FYI insert in your textbook, in The Wealth of Nations, Adam Smith made which of the following observations? a. The more people make, the more they spend. b. Households and firms, acting in their own self-interest, seem guided by an "invisible hand" that leads them to desirable market outcomes. c. People will buy more of an item when its price is low than at a higher price. d. There is no such thing as a free lunch.

b. Households and firms, acting in their own self-interest, seem guided by an "invisible hand" that leads them to desirable market outcomes.

In the short run, if the money supply increases, which of the following is NOT likely to happen? a. Lead to increased inflation. b. Lead to a lower rate of inflation. c. Encourage firms to hire more workers. d. Increase the demand for goods and services.

b. Lead to a lower rate of inflation.

Which of the following is true about market economies? a. Market economies solve the problem of scarcity. b. Market economies are more efficient than centrally planned economies. c. Market economies allow the government to allocate all resources. d. Market economies provide an equal distribution of goods and services.

b. Market economies are more efficient than centrally planned economies.

Which of the following is not a policy typically used in the United States to exploit the relationship between inflation and unemployment? a. Increasing the supply of money b. Reducing immigration. c. Increasing government spending d. Reducing taxes

b. Reducing immigration.

It once took 90 percent of our population to grow our food but now it takes around 3 percent of the population. Which of the following statements is true? a. This reduction in the number of farmers has decreased our productivity and standard of living. b. This is good for our economy because those who would have been farmers years ago can now invent new things and produce other goods. c. The government should provide subsidies to encourage more people to become farmers. d. This loss of agricultural jobs has caused the unemployment rate to increase by 87 percentage points.

b. This is good for our economy because those who would have been farmers years ago can now invent new things and produce other goods.

Reasons why we need government, even in a market economy, include a. the invisible hand is not perfect. b. these are all reasons we need a government in a market economy. c. property rights need to be protected to serve as an incentive for innovation. d. the market may sometimes fail to allocate resources properly.

b. these are all reasons we need a government in a market economy.

Nick is a guitar teacher and Raul is an accountant. If Nick teaches Raul to play the guitar in exchange for Raul helping with Nick's bookkeeping:

both Nick and Raul are made better off by the trade.

Which of the following is true? a. As long as our economic pie continues to grow, everyone will automatically get a bigger piece. b. Government policies always improve upon both equality and efficiency. c. Efficiency refers to the size of the economic pie; equality refers to how the pie is divided. d. Efficiency and equality occur only when our economic pie is cut into equal pieces.

c. Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.

Which of the following is a way in which the government helps enforce property rights? a. Forcing people to own property b. Providing public parks and recreation facilities c. Providing the court system d. Requiring property owners to pay property taxes

c. Providing the court system

Which of the following best summarizes a basic difference between market economies and centrally planned economies? a. The government plays a larger role in a market economy than in a centrally planned economy. b. A market economy has a "more equal" distribution of resources than a centrally planned economy. c. Self-interest and prices serve to allocate resources in a market economy while a central planner typically attempts to allocate resources in a centrally planned economy. d. Centrally planned economies rely more on self-interest and prices to allocate resources than market-based economies.

c. Self-interest and prices serve to allocate resources in a market economy while a central planner typically attempts to allocate