ECON 2301 Unit 1 Questions

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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


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