ECON 2301 Unit 1 Questions
The agency responsible for compiling the National Income Product Accounts for the US economy is the
Bureau of Economic Analysis
Examples of command economies are
Cuba and North Korea
The group that sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, and bonds) is the
Federal Open Market Committee (FOMC)
A market system tends to restrict business risk to owners and investors. This results in which of the following benefits?
Firms are better able to attract inputs, as these inputs do not have to share the risk
Suppose the total monetary value of all final goods and services produced in a particular country in 2015 is $500 billion and the total monetary value of final goods and services sold is $450 billion. We can conclude that
GDP in 2015 is $500 billion
Which of the following statements is correct?
If supply increases and demand decreases, equilibrium price will fall
Which of the following transactions would be included in GDP?
Peter buys a newly constructed house
Which of the following statements is true about the high rate of mortgage defaults that contributed to the financial crisis of 2007 and 2008?
Prior to the rise in defaults, banks had become lax in their lending practices, resulting in a large number of bad loans
Suppose that the federal government suddenly declared that wheat was to be used as money. What is a possible outcome of that decision?
The value of the "wheat dollar" would be unstable depending on crop yields from year to year. Farmers would replace corn and soy crops with what. Wheat would function as money so long as people accept it in exchange for goods and services
Which one of the following is true about the US Federal Reserve System?
There are 12 regional Federal Reserve Banks
Which of the following statements best describes the 12 Federal Reserve Banks?
They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting general economic welfare
TARP, created in 2008, stands for
Troubled Asset Relief Program
Which of the following will not cause the demand for product K to change?
a change in the price of product K
The economic perspective entails
a comparison of marginal benefits and marginal costs in decision making
Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences
a consumer surplus of $9, and Nathan experiences a producer surplus of $3
One consequence of the asymmetric-information problem in the used car market, if left unresolved, is the higher probability of
a declining quality of used cars for sale in the market
If two goods are complements
a decrease in the price of one will increase the demand for the other
Which would cause an increase in the supply curve of cell-phone services?
a decrease in the wages of cell-phone company workers
Net exports are negative when
a nation's imports exceed its exports
Economists use the term "demand" to refer to
a schedule of various combinations of market prices and amounts/quantities demanded
If you are estimating your total expenses for school next semester, you are using money primarily as
a unit of account
A surplus of a product will arise when price is
above equilibrium, with the result that quantity supplied exceeds quantity demanded
Graphically, producer surplus is measured as the area
above the supply curve and below the actual price
Freedom of enterprise
allows businesses, within broad limits, to choose what goods to produce
Which of the following will cause the demand curve for product A to shift to the left?
an increase in money income if A is an inferior good
A leftward shift of the supply curve for oil in the United States is most likely to result from
an increase in the costs of exploration and drilling for oil
The seven members of the Board of Governors of the Federal Reserve System are
appointed by the president with the confirmation of the Senate
In a situation where an externality occurs, the "third party" refers to those who
are not directly involved in the transaction or activity
Market, viewed from the perspective of the supply and demand model,
assume many buyers and many sellers of a standardized product
A recent study found that an increase in the federal tax on beer (which would increase the price of beer) would reduce the demand for marijuana. Based on this information we can conclude that
beer and marijuana complementary goods
A person should consume more of something when its marginal
benefit exceeds its marginal cost
An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that
bicycles are normal goods
According to the circular flow model, product markets are where
businesses earn their revenues from households
In the circular flow model of the market system, households' major role is to
buy products and sell resources
A nation's gross domestic product (GDP)
can be found by summing C + Ig + G + Xn
Suppose that Julie receives a $20 gift card for the local coffee shop, where she only buys lattes and muffins. If the price of a latte is $4 and the price of a muffin is $2, then we can conclude that Julia
can buy 5 lattes or 10 muffins if she chooses to buy only one of the two goods
If an economy is operating inside its production possibilities curve for consumer goods and capital goods, it
can produce more of both consumer goods and capital goods by using resources that are currently idle
In competitive markets, a surplus or shortage will
cause changes in the quantities demanded and supplied that tend to eliminate the surplus or shortage
Black markets are associated with
ceiling prices and the resulting product shortages
The study of economics is primarily concerned with
choices that are made in seeking the best use of resources
In national income accounting, the consumption category of expenditures includes purchases of
consumer durable goods, consumer nondurable goods, and services
Consider this: In 2013, McDonald's introduced Fish McBites, which failed to catch on with the public and was subsequently dropped from the menu. This failure illustrates the idea of
consumer sovereignty
An increase in the price of a product will reduce the amount of it purchased because
consumers will substitute other products for the one whose price has risen
Demand-side market failures occur when
demand curves don't reflect consumers' full willingness to pay for a good or service
In a market system, resources will move away from an industry when
demand for the industry's product is decreasing
The competitive market system
encourages innovation because successful innovators are rewarded with economic profits
The National Income and Product Accounts (NIPA) help economists and policymakers to
follow the long-run course of the economy to determine whether it has grown or stagnated
Final goods and services refers to
goods and services purchased by ultimate users, rather than for resale or further processing
Which of the following is not a typical characteristic of a market system?
government ownership of most property resources
The production possibilities curve illustrates the basic principle that
if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced
You should decide to go to a movie
if the marginal benefit of the movie exceeds its marginal cost
GDP measures and reports output
in dollar amounts and percentage growth
Which of the following best defines disposable income?
income received by households less personal taxes
Government-subsidized student loans tend to
increase demand for higher education, causing the price of education to rise
According to economists, economic self-interest
is a reality that underlies economic behavior
A market
is an institution that brings together buyers and sellers
A nation's gross domestic product (GDP)
is the dollar value of all final output produced within the borders of the nation during a specific period of time
The use of money contributes to economic efficiency because
it promotes specialization by overcoming the problems with barter
The four factors of production are
land, labor, capital, and entrepreneurial ability
The economizing problem is one of deciding how to make the best use of
limited resources to satisfy virtually unlimited wants
If an economy is operating on its production possibilities curve for consumer goods and capital goods, this means that
more consumer goods can only be produced at the cost of fewer capital goods
The system that measures the economy's overall performance is formally known as
national income accounting
Which of the following is an example of market failure?
negative externalities, positive externalities, public goods
If the prices of all goods and services rose, but the quantity produced remained unchanged, what would happen to nominal and real GDP?
nominal GDP would rise, but real GDP would be unchanged
Street entertainers face the free-rider problem when they perform because of the
nonexcludability characteristic
A public good is
nonrival and nonexcludable
National income accountants can avoid multiple counting by
only counting final goods
Joe sold gold coins for $1,000 that he bought a year ago for $1,000. He says, "At least I didn't lost any money on my financial investment." His economist friend points out that in effect he did lose money because he could have received a 3 percent return on the $1,000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in the case incorporates the idea of
opportunity costs
Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather than spend $1 million to expand parking for students. This example illustrates
opportunity costs
The free-rider problem occurs when
people benefit from the public good without contributing to the cost
Specialization in production is economically beneficial primarily because it
permits the production of a larger output with fixed amounts of resources
The demand curve shows the relationship between
price and quantity demanded
The law of demand states that, other things equal,
price and quantity demanded are inversely related
The market system does not produce public goods because
private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them
Market failure is said to occur whenever
private markets do not allocate resources in the most economically desirable way
The law of supply indicates that, other things equal,
producers will offer more of a product at high prices than at low prices
The two basic markets shown by the simple circular flow model are
product and resource
In terms of the circular flow diagram, businesses obtain revenue through the ___ market and make expenditures in the ___ market.
product; resource
In the terms of the circular flow diagram, households make expenditures in the ___ market and receive income through the ___ market
product; resource
An important routine function of the Federal Reserve Bank is to
provide facilities by which commercial banks and thrift institutions may collect checks
Is the US border patrol a public or private good?
public good
Nonrivalry and nonexcludability are the main characteristics of
public goods
Consumers spend their incomes to get the maximum benefit or satisfaction from the goods and services the purchase. This is a reflection of
purposeful behavior
If the supply and demand curves for a product both decrease, then equilibrium
quantity must decline, but equilibrium price may rise, fall, or remain unchanged
If the price of a product decreases, we would expect
quantity supplied to decrease
If nominal GDP rises
real GDP may either rise or fall
If Congress decreases the amount of government insurance on bank deposits, then this action would
reduce a moral hazard problem in banking
The output of digital music players should be
reduced if marginal costs exceed marginal benefits
Attaining "allocative efficiency" means that
resources are being devoted to the production of products most desired by society
When an economy is operating under conditions of full employment, the production of more of commodity A will mean the production of less of commodity B because
resources are limited
Market failures
result in overproduction or underproduction of a good
Households and businesses are
sellers in the resource and product markets respectively
An improvement in production technology will
shift the supply curve to the right
The business cycle depicts
short-run fluctuations in output and employment
Economics may best be defined as the
social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity
What two conditions must hold for a competitive market to produce efficient outcomes?
supply curves must reflect all costs of production, and demand curves must reflect consumers' full willingness to pay
The trains of the Transcontinental Railway Company, when shipping goods, sometimes emit sparks that start fires along the tracks and damage the property of others. If Transcontinental does not pay for the damage it causes, what has occurred?
supply-side market failure
Government can reallocate resources away from private goods toward public goods, usually through
taxes and government spending
Where there are spillover (or external) benefits from having a particular product in a society, the government can make the quantity of the product approach the socially optimal level by doing the following, except
taxing the sellers of the product
If intermediate goods and services were included in GDP
the GDP would be overstated
If intermediate goods and services were included in GDP,
the GDP would be overstated
A positive externality or spillover benefit occurs when
the benefits associated with a product exceed those accruing to people who consume it
Opportunity costs exist because
the decision to engage in one activity means forgoing some other activity
Generally, the market demand curve is
the horizontal sum of individual demand curves
The difference between M1 and M2 is that
the latter includes small-denominated time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances
Because of the free-rider problem
the market demand for a public good is nonexistent or understated
GDP excludes
the market of unpaid work in the home
Which of the following guides sensible decisions regarding the management of business risk in a market system?
the profit and loss system
GDP tends to underestimate the productive activity in the economy because it excludes the value of output from
the underground economy
Checkable deposits are classified as money because
they can be readily used in purchasing goods and paying debts
External benefits in consumption refer to benefits accruing to
those other than the ones who consumed the product
In a free-market economy, a product which entails a positive externality will be
underproduced
A large underground economy results in an
understated GDP
Which of the following is most likely to be an inferior good? Gold watches, ocean cruises, used clothing, or steak
used clothing
Real GDP measures
value of final goods and services produced within the borders of a country, corrected for price changes
Public goods are not privately provided because
when goods are nonexcludable, those people purchasing the good could simply allow others the use without requiring compensation
Prices are particularly sticky
when there are widespread macroeconomic and monetary disturbances in the economy
The "dynamic pricing" model used by the ride-sharing firm Uber, along with a few other firms, illustrates which of the following?
when there is a shortage in the market, the equilibrium price will rise
Economic systems differ according to which two main characteristics?
who owns the factors of production and the methods used to coordinate economic activity
Stabilizing a nation's price level and the purchasing power of its money can be achieved
with both fiscal and monetary policy
For the music industry, the rise of Internet file-sharing of music has
worsened the free-rider problem
The market system's answer to the fundamental question "What will be produced?" is essentially
"Goods and services that are profitable."
The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially
"In ways that minimize the cost per unit of output."
The market system's answer to the fundamental question "Who will get the goods and services?" is essentially
"Those most willing and able to pay for them."
The Federal Reserve System was created in
1913
Which of the following is the best example of a supply-side market failure?
A firm keeps its production costs down by dumping its waste in the nearby river, adversely affecting water quality fo residents in the area
