Econ

While resources and products flow in one direction of the circular flow model, what flows the other direction? (A) Money (B) Services (C) Public goods (D) Imported goods (E) Information

(A) Money, in the form of paychecks, profit, and other payments, serves as an incentive for households to provide resources, and for firms to produce products in a market economy.

Market systems promote economic growth and higher standards of living by (A) supporting the development of new technology (B) creating new firms to compete with private industry (C) increasing taxes on businesses that increase investment (D) imposing anti-pollution regulations on corporations (E) rationing capital to ensure all businesses have an opportunity to earn profit

(A) Technological advance allows businesses to create more output with the same amount of resources or fewer resources. Production possibilities increase and standards of living increase.

In the free market system, consumer sovereignty occurs for which of the following reasons? I. Consumers, through their dollar votes, determine how resources are distributed and what goods and services are produced to meet their wants. II. Consumers are free to determine how they earn their income and spend their wages. III. Consumers must buy goods and services that business decides to provide. (A) I only (B) II only (C) III only (D) I and II only (E) I, II, and III

(A) Through their choices about what to buy (their dollar votes), consumers make decisions in the product market and determine the answers to the five fundamental questions that establish the basis for the free market system.

In the free market, if a city finds that the marginal benefit of adding parking spaces exceeds the marginal cost of providing additional parking spaces, then (A) more resources within the city need to be allocated for parking spaces (B) more parking meters need to be installed to ration parking spaces (C) higher parking fees need to be instituted to decrease the demand for parking (D) tougher enforcement of parking violations needs to be implemented (E) greater parking restrictions for non-residents need to be enacted

(A) To achieve optimal resource allocation, if the marginal benefit (MB) exceeds the marginal cost (MC) of producing an additional unit, then parking needs to be expanded and more resources need to be employed producing it. Optimal allocation of resources occurs only when MB=MC.

Why does the opportunity cost increase as the production of capital goods increases? (A) Capital goods are more expensive to produce than consumer goods. (B) Resources are not perfectly interchangeable in the production of the two goods. (C) The lower supply of consumer goods causes their price to increase. (D) Capital goods are more useful to society than consumer goods. (E) Buyers are willing to pay more for consumer goods than for capital goods.

(B) Because resources aren't perfectly interchangeable, when we make more of one product, we have to give up ever-increasing amounts of the other.

In the circular flow model, the factor market determines all of the following EXCEPT (A) employee weekly wages (B) price of used student textbooks in the bookstore (C) price of printing presses for commercial use (D) office rents for lawyers and doctors (E) the price of fertilizer used in the production of cotton

(B) Businesses provide used textbooks in the bookstore to be bought and sold by students in the product market.

Which type of economic system communicates changes in consumer tastes through price and profit signals? (A) A command economy (B) A market economy (C) A traditional economy (D) A communist economy (E) A directed economy

(B) In a market economy, changes in demand cause changes in prices and profit, giving firms an incentive to respond to the change in demand.

In market economies, the incentive that draws entrepreneurs into industry is (A) government bonuses for meeting production quotas (B) the opportunity to gain profit (C) government assumption of the risk of failure (D) government assistance with making output and pricing decisions (E) a guaranteed minimum income level

(B) The profit motive draws new firms into industry in market economies, because private property rights allow firms to keep those profits.

When windmills are placed on farmland, the opportunity cost of that decision includes I. the crops that could have been grown on the land used for the windmills II. the alternative use of the resources used to make the windmills III. the profits earned from selling electricity generated by the windmills (A) I only (B) I and II (C) II and III (D) II only (E) I, II, and III

(B) The resources used to make the windmills have alternative uses, and the decision to place the windmills means that same land cannot be used to grow crops.

If the marginal benefit (MB) is greater than the marginal cost (MC) of a good, then (A) more of this good should be consumed with fewer resources allocated to the production of this good (B) less of this good should be consumed with more resources allocated to the production of this good (C) more of this good should be consumed with more resources allocated to the production of this good (D) more of this and other goods should be consumed with more resources allocated to the production of this and other goods (E) either more of this good should be consumed or fewer resources allocated to the production of this good

(C) As MB>MC, this good is being under-consumed. More of this good should be consumed and more resources allocated to the production of this good until MB=MC.

The economic focus on the cost and benefit of one additional action is known as (A) an economic system (B) the paradox of thrift (C) marginal analysis (D) an economic principle (E) scarcity

(C) Decision-makers must compare the marginal cost and marginal benefit of an action to determine whether to undertake an action.

What did economist Adam Smith identify as the "invisible hand" that directs the decision-making of firms and households in a market economy? (A) Government (B) Product demand (C) Self-interest (D) International trade (E) Entrepreneurial ability

(C) In The Wealth of Nations, Adam Smith recognized that in market economies, market participants make decisions to benefit themselves, but at the same time their decisions will also indirectly benefit society.

In a laissez-faire economy, the primary role of government in the economy is to (A) establish price ceilings and floors (B) regulate industry to ensure worker safety (C) protect private property rights (D) promote international trade (E) stabilize the economy through fiscal and monetary policy

(C) In a laissez-faire economy, the government is prevented from intervening in the economy, other than to protect property rights and create a legal environment for the enforcement of contracts.

Which of the following activities would occur in the resource (factor) market? (A) A teacher buys a new truck from a car dealership. (B) The Department of Defense buys a tank from a weapons manufacturer. (C) A farmer buys farmland from a retiring farmer. (D) A retirement fund buys stock in a major corporation. (E) A welder buys a personal home computer from an electronics store.

(C) In the resource (factor) market, firms buy factors of production (land, labor, capital, and entrepreneurial ability) from resource providers.

In the circular flow model (A) households buy and businesses sell land, labor, and capital in the resource market (B) households sell and businesses buy land, labor, and capital in the product market (C) households sell and businesses buy land, labor, and capital in the resource market (D) households buy and businesses sell land, labor, and capital in the product market (E) both households and businesses buy land, labor, and capital in the resource market

(C) In the resource market, households sell their resources or services to businesses and receive money income in return for their resources and services. Businesses buy the resources and services of households and pays for these with the revenues gained from the final sale of goods and services that those resources and services create.

The study of macroeconomics would include (A) a consumer's decision whether to buy a car or a motorcycle (B) a grocery store's decision to hire another cashier (C) the federal government's decision to increase military spending (D) a clothing manufacturer's decision to raise the price of jeans (E) a woman's decision to open her own business

(C) Macroeconomics is the study of the big picture of the entire national or international economy; microeconomics is the study of the small picture of decision-making by individuals or specific firms.

The use of money facilitates specialization because money I. facilitates trade II. forces a coincidence of wants III. establishes a medium of exchange (A) I only (B) III only (C) I and III only (D) I and II only (E) I, II, and III

(C) Money, unlike barter, facilitates specialization because it does not require buyers and sellers to have exactly the same (coincidence of) wants. As a medium of exchange that is universally accepted, money allows buyers and sellers to engage in mutually beneficial trade.

The resource market determines all of the following EXCEPT (A) a worker's wages (B) the incentives for entrepreneurs (C) the price of a worker's clothing (D) the capital costs of a new factory (E) the per-acre price of farmland

(C) The price of a worker's clothing is determined in the product market, where the final goods and services produced by the economy are bought and sold. In this case, it is the interaction of supply and demand in the product market that determines the price and quantity of a worker's clothing.

The major problems faced by a pure command economy include all of the following EXCEPT (A) limited consumer choice (B) lack of entrepreneurial incentives (C) a lack of central planning (D) inefficient use of resources (E) a lack of fluctuation in prices

(C) The pure command economy functions through central planning by the government. Under the pure command system, the government rather than the market system determines what to produce, how to produce, where to produce, who will produce, how much to produce, and at what price to produce each good and service.

Economics is best defined as the study of (A) why people buy products (B) supply and demand (C) how people satisfy unlimited wants with scarce resources (D) who receives the goods produced in an economy (E) how firms maximize profits

(C) While the other four answers are specific areas within the study of economics, the primary focus of economics is the issue of scarcity.

Positive economic analysis would support which of the following statements? I. Capital formation creates future real economic growth. II. Human capital development increases future real output. III. Corporate income tax rates ought to be raised. (A) I only (B) II only (C) III only (D) I and II only (E) I, II, and III

(D) Both the first and second statements are based on facts that do not involve value judgments, whereas the third involves a value judgment and is subjective.

Capital goods I. are created by the economy to produce future goods and services II. are factors of production but do not produce consumer goods and services III. are investments in factors of production used to produce consumer goods and services IV. are the means by which businesses purchase factors of production to increase output (A) I only (B) II only (C) III only (D) I and III only (E) I, III, and IV only

(D) Capital goods are factors of production that have been created by the economy to produce goods and services for sale in the economy. In economics, the purchase of factors of production is known as investment.

All of the following are key features of the market system EXCEPT (A) the interaction of supply and demand (B) change will be accommodated (C) economic growth and progress (D) the need for central economic planning (E) the trade-off between limited incomes and unlimited wants

(D) Central economic planning is not a feature of a market system, but the central feature of a command economic system.

LaKenya's opportunity cost for attending college includes I. other goods that could have been bought with the money spent for tuition II. clothing LaKenya bought during the four years of college III. income LaKenya could have earned from work at a full-time job (A) I only (B) II only (C) II and III only (D) I and III only (E) I, II, and III

(D) Clothing is not part of the opportunity cost, because clothing would have been purchased whether LaKenya went to college or not.

Which of the following illustrate the use of economic incentives to create the potential for real, long-run economic growth? I. Government grants to students to pay for higher education II. Government tax credits to stimulate research into alternative energy production III. Tariffs and quotas to limit foreign imports (A) I only (B) II only (C) III only (D) I and II only (E) I, II, and III

(D) Encouraging students to pursue higher education increases not only their skill as workers, but also their capacity to create new technology for the future output. Research into alternative energy production has the potential to provide the technology critical in the future. Neither tariffs nor quotas create incentives for increasing the potential for real, long-run economic growth.

An individual's problem in economizing stems from (A) unlimited income and limited wants (B) unlimited income and unlimited wants (C) limited income and limited wants (D) limited income and unlimited wants (E) limited income and limited resources

(D) Given finite income and their desire for an infinite number of goods and services, individuals face the need to budget their expenditures and, as consumers, make difficult choices.

In a command economic system, the answers to the fundamental economic questions are determined by (A) government, businesses, and consumers (B) consumers through their dollar votes and government through its economic mandates (C) consumers, businesses, and government through their trade-offs (D) government alone (E) government and businesses

(D) In a command economic system, the government through central planning determines all the answers to the key economic questions of what is to be produced, how to produce, what quantity to produce, what price will be charged, and for whom goods and services will produced. There is no consumer sovereignty.

In the product market of the circular flow model (A) firms buy finished products from households (B) consumers buy factors of production from firms (C) firms sell factors of production to the government (D) consumers buy finished products from firms (E) firms buy factors of production from consumers

(D) In the product market, firms sell products to consumers.

In the resource market, income flows to households in each of the following forms EXCEPT (A) Wages (B) Rents (C) Interest (D) Taxes (E) Profits

(D) In the resource market, income flows to households to pay for land, labor, capital, and entrepreneurial ability. Taxes are an income flow to the government, not to households.

22. The study of microeconomics would include (A) how the government uses fiscal policy to reduce the effects of a recession (B) how the Federal Reserve uses monetary policy to stabilize the economy (C) how changes in exchange rates affect the trade deficit (D) how a firm determines its output to maximize profit (E) how the banking system changes the money supply

(D) Microeconomics focuses on the decision-making of individual consumers, households, and businesses.

In a mixed economy, the economic decisions of what to produce, how to produce, and who will receive products are made by (A) the government (B) consumers and firms (C) banks and stock markets (D) firms, consumers, and the government (E) banks and the government

(D) Mixed economies provide for some government intervention, such as regulation and the provision of public goods, but primarily rely on the decision-making of firms and consumers in markets.

Each of the following is a factor of production EXCEPT (A) land/natural resources (B) capital (C) labor (D) money (E) entrepreneurial ability

(D) Money is not a resource used to create products. While money can be used to buy factors of production (such as a piece of equipment), the money itself is not a factor of production.

An economy experiences real long-run economic growth when (A) more of a good or service can be produced in a given year (B) more workers are hired to produce goods and services (C) more resources are employed to produce goods and services (D) new technological advances are developed and utilized (E) more existing factories are utilized

(D) Real long-run economic growth occurs when new or more productive ways to use resources are found or when new technology is developed and applied.

Specialization of labor contributes to increased economic output by I. creating optimal use of human resources by taking advantage of the different skills of each individual in the workforce II. encouraging each individual to perform as many different tasks as possible III. taking advantage of skill development as each worker becomes more efficient in performing the same task (A) I only (B) II only (C) III only (D) I and III only (E) I, II, and III

(D) Specialization takes advantage of human differences and builds on the efficiency created by skill development as workers focus on particular tasks. Because of potential for inefficiency, specialization does not encourage workers to perform as many tasks as possible.

An example of normative economic analysis would be best exemplified by which of the following? I. Given environmental risks, offshore drilling should be prohibited. II. Higher education creates potential future economic growth. III. Given budget deficits, taxes must be raised. (A) I only (B) II only (C) III only (D) I and III only (E) I, II, and III

(D) The first and third are value judgments and are subjective statements that suggest what ought to be, whereas the second states what will in fact happen.

Society's ability to produce more books and computers is limited by (A) consumer demand for the products (B) workers' willingness to accept low wages (C) the wide variety of other products firms could choose to produce (D) available resources and technology (E) government quotas and production requirements

(D) The production possibilities curve assumes resources and technology are fixed in the short run.

Unlike the command economic system, the merits of the market system are I. economic efficiency II. effective central planning III. individual freedom of choice IV. incentives generate innovation (A) I and IV only (B) I and III only (C) I, II, and IV only (D) I, III, and IV only (E) III and IV only

(D) Unlike the command economic system that depends on government central planning, the free market system achieves economic efficiency through emphasis on competition, incentives, and the freedom of choice.

Melissa spends $10 to buy a new dress for her baby. What is her opportunity cost for buying the dress? (A) All of the alternative items she could have spent the $10 to buy (B) The $10 (C) The dress (D) Melissa's enjoyment of seeing her baby in the dress (E) Only the next best alternative use of the $10

(E) Opportunity cost is defined as the next best opportunity forgone as the result of making a decision.

Private property rights are critically important for the development of I. entrepreneurship II. investment III. intellectual property (A) I only (B) III only (C) I and II only (D) II and III only (E) I, III, and III

(E) Private property rights allow producers to keep the profits from their work, giving them the incentive to develop intellectual property, start businesses, and invest in future development.

Fundamental economic questions that every society must answer include I. What will be produced? II. How will goods be produced? III. How will goods be distributed to consumers? (A) I only (B) III only (C) I and II only (D) II and III only (E) I, II, and III

(E) Scarcity forces societies to answer these and other questions about economic growth and security.

23. Which of the following resources would be considered a capital resource? (A) A baker's oven (B) A woman's wedding ring (C) A high school marching band member's tuba (D) A welder (E) An acre of farmland

(A) Capital goods are tools, a factory, or other equipment that can be used to produce other goods, such as an oven being used to produce cakes.

Economic planning by central government agencies is primarily associated with (A) command economies (B) market economies (C) laissez faire economies (D) mixed economies (E) traditional economies

(A) Government planning is the hallmark of a command economy. In other economies, individuals and firms play the central role in decision-making.

A country achieves an optimal point of production outside of its domestic production possibility curve by taking advantage of I. human and geographic specialization II. human and geographic specialization combined with tariffs and quotas III. international trade (A) I only (B) II only (C) III only (D) I and II only (E) I and III only

(E) To achieve an optimal point outside of a country's production possibilities curve, a nation must maximize the benefits and efficiencies of human and geographic specialization combined with efficiencies gained through unhindered international trade.

Assume the nation of Camandland only produces two products: corn and soybeans. (a) Using a correctly labeled production possibilities curve, show the relationship between these products. (b) Assume all resources are fully employed and society decides to produce more corn. (i) Identify what will happen to the production of soybeans. (ii) Explain why the effect on soybean production occurs. (c) Now assume a breakthrough occurs in farming technology. Illustrate the change on your production possibilities curve.

(a) 1 point: 1 point is earned for a correctly labeled production possibilities curve. (b) 2 points: 1 point is earned for correctly stating that the production of soybeans will fall. 1 point is earned for correctly stating that resources and technology limit production; producing more corn requires a lower production of soybeans. (c) 1 point: 1 point is earned for correctly illustrating an outward shift of the production possibilities curve.

Assume a closed economic system in which there is neither foreign trade nor government. Construct and correctly label a circular flow diagram that illustrates the money flow and exchange of goods and services between households and businesses.

7 points: 1 point is earned for a correctly labeled circular flow diagram. 1 point is earned for correctly identifying that households buy products (goods and services) and sell resources. 1 point is earned for correctly identifying that businesses buy resources and sell products. 1 point is earned for correctly identifying the resource market, noting that households sell and businesses buy resources (land, labor, capital, and entrepreneurial ability). 1 point is earned for correctly identifying the product market, noting that households buy and businesses sell final goods and services. 1 point is earned for correctly identifying that resources (land, labor, capital, and entrepreneurial ability) and products (goods and services) flow in one direction. 1 point is earned for correctly identifying that money flows in the opposite direction. In the resource market, money is exchanged between households and businesses (rent for land, wages for labor, interest and profits for entrepreneurial ability). In the product market, money is exchanged between households and businesses for products (goods and services).