Chapter 1, 2 (Week 1)

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Economics
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the study of how people, institutions, and society make economic choices under conditions of scarcity
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Economic erspective
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a viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs of their actions
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Opportunity Cost
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the value of the good, service, or time forgone to obtain something else
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Utility
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the satisfaction obtained from consuming a good or service
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Marginal Analysis
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the comparison of marginal (“extra” or additional”) benefits and marginal cots, usually for decision making
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Scientific Method
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the systematic pursuit of knowledge by observing facts and formulating and testing hypotheses to obtain theories, principles, and laws
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Principles
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statements about economic behavior that enable prediction of the probably effects of certain actions
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Other-things-equal Assumption
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the assumption that factors other than those being considered do not change
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Microeconomics
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the part of economics concerned with individual decision-making units, such as a consumer, a workers, or a business firm
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Macroeconomics
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the part of economics concerned with the economy as a whole or major components of the economy
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Aggregate
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a collection of specific economic units treated as if they were one unit
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Economic Problem
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the need for individuals and society to make choices because wants exceed means
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Budget Line
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a line that shows various combinations of two products a consumer can purchase with a specific money income, given the products’ prices
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Constant Opportunity Cost
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an opportunity cost that remains the same as consumers shift purchases from one product to another along a straight-line budget line
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Economic Resources
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the land, labor, capital, and entrepreneurial ability used in the production of goods and servies
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Land
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natural resources (“gifts of nature”) used to produce goods and services
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Labor
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the physical and mental talents and efforts of people used to produce goods and services
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Capital
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human-made resources (buildings, machinery, and equipment) used to produce goods and services
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Investment
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the purchase of capital resources
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Entrepreneurial Ability
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the human talent that combines the other resources to produce a product, make strategic decisions, and bear risks
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Factors of Production
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economic resoures: land, labor, capital, and entrepreneurial ability
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Consumer Goods
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products and services that directly satisfy consumer wants
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Capital Goods
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items that are used to produce other goods and therefore do not directly satisfy consumer wants
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Production Possibilities Curve
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a curve showing the different combinations of goods and services that can be produced in a fully employed economy, assuming the available supplies of resources and technology are fixed
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Law of Increasing Opportunity Costs
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the principle that as the production of a good increases, the opportunity cost of producing an additional unit rises
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Economic Growth
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an outward shift of the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology
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D
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Economics is primarily the study of: A) how scarcity can be eliminated. B) how firms manipulate prices. C) how government influences resource allocation decisions. D) the problem of scarce resources relative to human wants
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D
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Suppose you have a $20 iTunes gift card with which you can buy (download) songs or videos. Songs cost $1.00 each and videos cost $2.00 each. The opportunity cost of one video: A) increases as more videos are purchased. B) is $1.00. C) is constant and equal to ½ song. D) is constant and equal to 2 songs.
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B
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You should decide to study an extra hour tonight A) if the marginal cost of studying an extra hour exceeds its marginal benefit. B) if the marginal benefit of studying an extra hour exceeds its marginal cost. C) if you got a lower than expected grade on your last exam. D) because studying harder will improve your test scores.
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A
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Consider the problem Marsha faces of how to allocate her weekly allowance between books and videos. An increase in Marsha’s allowance will: A) shift her budget line to the right. B) shift her budget line to the left. C) rotate her budget line, allowing her to buy more books but not more videos. D) rotate her budget line, allowing her to buy more videos but not more books.
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B
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The negative slope of the production possibilities curve illustrates that: A) some resources are always unemployed. B) when resources are fully employed, an economy can produce more of one thing only by producing less of something else. C) opportunity costs are constant. D) businesses can sell more goods when their prices are low.
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A
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A microeconomist would most likely study: A) how consumers respond to a change in gasoline prices. B) the effects of an income tax reduction on the size of the national budget deficit. C) the effects of aggregate consumer debt on overall consumption spending. D) the relationship between the size of the money supply and the rate of inflation.
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D
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The fundamental problem of economics implies that: A) governments must be relied upon to supply essential goods and services. B) inflation and unemployment are unavoidable. C) growing populations will deplete natural resources. D) individuals and communities must make choices among competing alternatives.
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C
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Margaret decides to stay home and study for her exam rather than going out to a movie with her friends. Her dilemma is an example of: A) the economic perspective. B) marginal analysis. C) opportunity cost. D) allocative efficiency
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Economic System
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a particular set of institutional arrangements and a coordinating mechanism for producing goods and services
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Command system
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an economic system in which most property resources are owned by the government and economic decisions are made by a central government body
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Market System
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an economic system in which property resources are privately owned and markets and prices are used to direct and coordinate economic activities
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Private Property
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the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property
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Freedom of Enterprise
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the freedom of firms to obtain economic resources, to use those resources to produce products of the frims’ own choosing, and to sell their products in markets of their choice
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Freedom of Choice
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the freedom of owners of resources to employ or dispose of their resources as they see fit, and the freedom of consumers to spend their incomes in a manner they think is appropriate
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Self-interest
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the most-advantageous outcome as viewed by each firm, property owner, worker, or consumer
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Competition
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the presence in a market of independent buyers and sellers vying with one another, and the freedom of buyers and sellers to enter and leave the martket
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Market
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an institution or mechanism that brings buyers and sellers together
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Specialization
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the use of resources of an individual, region, or nation to produce one or a few goods and services rather than the entire range of goods and servies
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Division of Labor
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the separation of the work required to produce a product into a number of different tasks that are performed by different workers
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Medium of Exchange
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any item sellers generally accept and buyers generally use to pay for goods and services
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Bater
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the exchange of one good or service for another good or service
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Money
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any item that is generally acceptable to sellers in exchange for goods and services
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Consumer Soverignty
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determination by consumers of the types and quantities of goods and services that will be produced with the economy’s scarce resources
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Dollar Votes
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the “votes” that consumers and entrepreneurs cast for the production of consumer and capital goods when they purchase them in product and resource markets
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Creative Destruction
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the idea that the creation of new products and production methods may simultaneously destroy the market power of existing firms
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Invisible Hand
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the tendency of firms and resource suppliers that are seeking to further their own self-interest in competitive markets to also promote the interest of societ as a whole
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Circular Flow Diagram
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the flow of resources from households to firms and of products from firms to households
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Household
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one or more persons occupying a housing unit that provides resources to the and use income received to purchase goods and services that satisfy economic wants
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Businesses
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firms that purchase resources and provide goods and services to the economy
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Product Market
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a market in which goods and services (products) are sold by firms and bought by households
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Resource Market
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a market in which households sell and firms buy economic resources
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D
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For a market system, which of the following best answers the question, “What goods and services will be produced?” A) Only those goods whose long-term profits are greater than average B) Any good for which consumers are willing to pay a positive price C) Any good whose production is characterized by the least-cost technology D) Any good that returns its producers sufficient revenue to cover its total costs
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B
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The command systems of the Soviet Union and eastern Europe failed in part because: A) previously abundant economic resources became scarce. B) central planners found it increasingly difficult to coordinate the economic decisions of consumers, resource suppliers, and businesses. C) firms manufactured more output than consumers could afford to buy, resulting in a general glut. D) prices were set too low in all markets.
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D
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The competitive market system encourages innovation and technological advance, primarily through: A) the government’s tax code. B) the process of “dollar voting”. C) the guiding function of consumer needs and preferences. D) profitable returns to innovative firms.
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C
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Human specialization, or the division of labor: A) reduces output by dehumanizing workers. B) reduces output by discouraging workers from learning a wide variety of tasks. C) increases output by enabling workers to take advantage of differences in their skills. D) increases output by allowing workers to each perform a wide variety of tasks.
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C
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Economic profits and losses: A) answer the question “Who will get the output?” B) answer the question “How will the goods and services be produced?” C) help determine which industries survive or fail. D) are the expected outcomes of a decrease in dollar votes and an increase in dollar votes, respectively.
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A
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If a change in consumer preferences results in many more consumers registering their “dollar votes” in favor of peaches, which of the following will most likely follow? A) Profits of peach growers will rise and peach production will rise B) Profits of peach growers will rise and peach production will fall C) Profits of peach growers will fall and peach production will rise D) Profits of peach growers will fall and peach production will fall
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D
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The market system is characterized by: A) widespread use of government price controls. B) centralized decision-making. C) limited use of capital goods. D) private property rights.
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D
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A firm will earn a positive economic profit if: A) its total sales revenue equals the total cost of labor, capital, raw materials, and entrepreneurship. B) it produces its output utilizing the least-cost production method. C) it is regulated by government. D) its total sales revenue exceeds the sum of all its costs.
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C
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The production possibilities curve represents which of the following? (Points : 1) the amount of goods attainable with variable resources the maximum amount of goods attainable with variable resources maximum combinations of goods attainable with fixed resources the amount of goods attainable if prices decline
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C
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If an economy is producing at a point inside a production possibilities curve: (Points : 1) the economy is efficient. there is economic growth. resources are unemployed. resources are fully employed.
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B
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Within a market economy, some industries may be declining while other industries may be expanding. This indicates that: (Points : 1) incomes are declining. resources are being reallocated. factors of production are scarce. producers are not maximizing profits.
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A
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A point on the frontier of the production possibilities curve is: (Points : 1) attainable and the economy is efficient. attainable, but the economy is inefficient. unattainable, but the economy is inefficient. unattainable and the economy is efficient.
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C
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Which is a major feature of the market system? (Points : 1) government set prices in all markets reallocation of all resources from private to public uses the right to own private property and control resource use central planning by government to provide goods and services
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C
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Which statement is correct? (Points : 1) In a market system, buyers and sellers must be in face-to-face contact with each other. Prices affect the distribution of goods in a market system but not the allocation of resources. In a market system, prices serve to ration goods and services to consumers. The operation of a market system has little, if any, effect on the distribution of income in the economy.
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C
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In a market economy, entrepreneurs are most concerned with: (Points : 1) maximizing utility or satisfaction from limited incomes. increasing the wages and salaries of workers. maximizing profits or minimizing losses. the selfish pursuit of money.
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A
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Competition is more likely to exist when: (Points : 1) there is free entry into and exit out of industries. there is a single supplier of all goods and services. the government purchases most goods and services. products are produced by a few large firms.
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B
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A point inside the production possibilities curve is: (Points : 1) attainable and the economy is efficient. attainable, but the economy is inefficient. unattainable, but the economy is inefficient. unattainable and the economy is efficient.
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C
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In the circular flow model, households: (Points : 1) buy products and resources. sell products and resources. buy products and sell resources. sell products and buy resources.
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B
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The money income of households consists of the sum of: (Points : 1) wages plus salaries. wages plus rents plus interest plus profits. consumption expenditures plus profits. consumption expenditures plus costs of resources.
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D
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A movement along the production possibilities curve would imply that: (Points : 1) the labor force has grown. productivity has increased. productivity has declined. society has chosen a different set of outputs.

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