ECO2000 Final Exam – Flashcards
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"Mediocre economists often consider only the immediate direct effects of a change, whereas a good economist will also consider indirect effects that may only become observable over time." This statement most clearly emphasizes A) the law of comparative advantage. B) economizing behavior. C) the importance of secondary effects. D) the gains derived from voluntary exchange.
answer
C) the importance of secondary effects.
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In order to be successful in a market economy, entrepreneurs must A) produce a good that consumers value less than the resources used to produce it. B) combine resources in a manner that increases their value. C) produce anything that consumers value, regardless of cost. D) use only personal financial capital so they can avoid interest payments on borrowed funds.
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B) combine resources in a manner that increases their value.
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Which of the following is a predictable, secondary effect of a sharp increase in gasoline prices? A) The federal government will place a quota on the number of fuel-efficient cars for sale, thus "forcing" consumers to purchase the gas guzzling vehicles. B) Producers will increase the production of fuel-efficient cars. C) the termination of research on the cost-effectiveness of alternative fuels to power automobiles. D) Producers will increase the production of gas guzzling vehicles.
answer
B) Producers will increase the production of fuel-efficient cars.
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Which of the following is the primary source of high earnings in a market economy? A) a willingness to work hard even if you are not productive B) a willingness to exploit workers and consumers C) the ability to provide others with things that they value highly D) a willingness to engage in actions where you gain at the expense of others
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C) the ability to provide others with things that they value highly
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If we are going to get the most value from our resources, entrepreneurs should choose the investment alternatives that A) reduce the value of resources and retard wealth accumulation. B) result in the production of the largest possible output regardless of value to consumers. C) are most heavily subsidized by the government. D) yield a profitable rate of return.
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D) yield a profitable rate of return.
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Individuals economize and respond predictably to A) negative incentives, but not positive incentives. B) positive incentives, but not negative incentives. C) neither positive or negative incentives. D) both positive and negative incentives.
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D) both positive and negative incentives.
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Adam Smith's invisible hand principle stresses the tendency of A) government regulation to bring the self interest of individuals into harmony with the economic welfare of society. B) compassion to encourage productive economic activity. C) the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society. D) self-interested individuals to pursue activities that benefit themselves, but harm the overall economic welfare of society.
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C) the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society.
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The shortsightedness effect suggests that A) politicians have a strong incentive to support projects that yield benefits in the distant future, especially when the costs of the project must be paid for in the current period. B) politicians have a strong incentive to support projects that yield immediate and easily recognized benefits, especially when the costs of the projects are difficult to identify and are observable only in the distant future. C) legislators will be unwilling to trade votes on issues, especially when those issues benefit only special interest groups. D) voters will tend to weigh future costs and benefits more heavily than current costs and benefits.
answer
B) politicians have a strong incentive to support projects that yield immediate and easily recognized benefits, especially when the costs of the projects are difficult to identify and are observable only in the distant future.
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Which of the following best explains why legislators often find debt financing more attractive than taxation? A) The current cost of debt financing is less visible than taxation. B) Taxation allows politicians to supply voters with immediate benefits without having to impose a visible current cost. C) Debt financing exposes the current costs of government programs; taxes do not. D) Debt financing reduces the attractiveness of special-interest spending.
answer
A) The current cost of debt financing is less visible than taxation.
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Which of the following is often referred to as the basic postulate of economics? A) Incentives matter—individuals respond in predictable ways to changes in personal costs and benefits. B) Individuals act only out of selfish motives. C) The accuracy of the assumptions is the best test of an economic theory. D) The value of a good is objective; it is equal to the cost of producing the good.
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A) Incentives matter—individuals respond in predictable ways to changes in personal costs and benefits.
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Incentives matter A) to all human beings regardless of environment. B) only in a free market system. C) only in the private sector. D) only when people are greedy and selfish.
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A) to all human beings regardless of environment.
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Adam Smith believed that if people were free to pursue their own interests, A) less would be produced than if government planners were in charge of the economy. B) they would generally apply their talents to unproductive activities that would generate little value to society. C) they would have little incentive to undertake productive activities. D) the public interest would be served quite well.
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D) the public interest would be served quite well.
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Which of the following is a major implication of the invisible hand concept? A) When directed by competitive market prices, the actions of self-interested individuals will tend to promote overall economic prosperity. B) Prosperity cannot be achieved unless the selfish nature of people can be changed. C) Government-operated firms tend to have lower costs than private sector firms. D) Competition is harmful to the health of an economy because it results in wasteful duplication.
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A) When directed by competitive market prices, the actions of self-interested individuals will tend to promote overall economic prosperity.
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If you want to earn a high income you should figure out what others value because A) you will then be able to charge higher prices than alternative suppliers. B) you will be able to gain at the expense of others. C) you will not have to compete in the job market. D) others will be willing to pay attractive prices for things they value.
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D) others will be willing to pay attractive prices for things they value.
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Which of the following is most consistent with the basic postulate of economics: changes in incentives exert a predictable impact on human behavior? A) People will consume more beef if the price increases from $1 to $2 per pound. B) Farmers produce fewer bushels of wheat in response to an increase in the price of wheat. C) People will buy less gas if the price of gas increases by $0.50 per gallon. D) People will buy more milk at a price of $3 per gallon than at $2 per gallon.
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C) People will buy less gas if the price of gas increases by $0.50 per gallon.
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If a college enforces a new policy where anyone caught cheating is immediately expelled, the basic postulate of economics suggests that A) the amount of cheating will be unaffected. B) any of the above is possible because student behavior is unpredictable. C) fewer students will attempt to cheat. D) cheating will be completely eliminated.
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C) fewer students will attempt to cheat.
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The secondary effects of an economic action refer to the A) impact on the availability of a resource needed to produce a good or service. B) the unintended consequences of a change that are not immediately identifiable but are felt over time. C) best alternative that must be forgone as the result of a choice. D) immediate and visible intended consequences of a change.
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B) the unintended consequences of a change that are not immediately identifiable but are felt over time.
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Which of the following are scarce? A) information B) time for recreation C) clean air D) all of the above
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D) all of the above
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In economics, secondary effects refer to the A) immediate and highly visible intended consequences of an action or policy change. B) value of the goods that an individual must give up as the result of choosing an alternative. C) indirect effects that often result from an action or policy change. D) value of a good derived by the consumer.
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C) indirect effects that often result from an action or policy change.
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Which of the following statements reflect sound economic reasoning? A) If domestic production of a good will employ lots of people, the good should be produced domestically. B) Higher tariffs will increase the total volume of international trade. C) Foreign competition will reduce the wealth of Americans. D) If it is more economical to acquire a good through trade than by self-production, it makes sense to trade for it.
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D) If it is more economical to acquire a good through trade than by self-production, it makes sense to trade for it.
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Which of the following is true? A) Changes in personal costs and benefits will exert a predictable influence on the choices of people. B) If the intentions behind a policy are good, you can be assured that the outcome will be desirable. C) If a good is provided free to an individual by government, its production will not consume valuable scarce resources. D) If one individual gains from an economic activity, then someone else must lose.
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A) Changes in personal costs and benefits will exert a predictable influence on the choices of people.
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The basic task of economics is to A) explain the tax and expenditure policies of governments. B) report on key economic indicators, such as GDP and unemployment. C) explain the forces that underlie human decision making. D) predict the future movements of the stock market.
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C) explain the forces that underlie human decision making.
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The invisible hand principle indicates that competitive markets can help promote the efficient use of resources A) if, and only if, businesses recognize their social obligation to keep costs low and use resources wisely. B) even when market participants care only about their own self interests rather than about the overall efficiency of resource use. C) only if buyers and sellers really care, personally, about economic efficiency. D) even if business firms fail to produce goods efficiently.
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B) even when market participants care only about their own self interests rather than about the overall efficiency of resource use.
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Which of the following is most important if you want to achieve high earnings? A) ability to identify and undertake actions where you can benefit at the expense of others B) willingness to work hard even if you are not productive C) ability to provide others with things that they value highly D) willingness to exploit workers and consumers
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C) ability to provide others with things that they value highly
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In the last 250 years the U.S. economy has succeeded in A) relaxing the grip of scarcity and improving the quality of life. B) eradicating poverty. C) reducing the number of government regulations imposed on households and businesses. D) eliminating scarcity.
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A) relaxing the grip of scarcity and improving the quality of life.
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During 2007-2008, the price of gasoline increased from approximately $1.50 to $4.00 per gallon. As a result, the A) supply of gas guzzling automobiles decreased, causing their price to increase. B) supply of gas guzzling automobiles increased causing their price to fall. C) demand for gas guzzling automobiles, such as the Hummer, decreased, causing their price to decline. D) demand for gas guzzling automobiles increased, causing their price to increase.
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C) demand for gas guzzling automobiles, such as the Hummer, decreased, causing their price to decline.
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The economizing problem is essentially one of deciding how to make the best use of A) unlimited resources to satisfy limited wants. B) unlimited resources to satisfy unlimited wants. C) limited resources to satisfy limited wants. D) limited resources to satisfy virtually unlimited wants.
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D) limited resources to satisfy virtually unlimited wants.
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The invisible hand principle indicates that when individuals are directed by prices determined in competitive markets, their actions will tend to promote the efficient use of resources A) even when each market participant cares only about their own self interest rather than the overall efficiency of resource use. B) even if business firms fail to produce goods efficiently. C) only if buyers and sellers personally care about economic efficiency. D) if, and only if, businesses recognize their social obligation to keep costs low and use resources wisely.
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A) even when each market participant cares only about their own self interest rather than the overall efficiency of resource use.
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The expression, "There's no such thing as a free lunch," implies that A) no one has time for a good lunch anymore. B) opportunity costs are incurred when resources are used to produce goods and services. C) everyone has to pay for his own lunch. D) the person consuming a good must always pay for it.
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B) opportunity costs are incurred when resources are used to produce goods and services.
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The expression "There's no such thing as a free lunch" means A) each person must pay for exactly what he or she receives. B) when scarce resources are used to produce one good they are unavailable to produce others. C) you cannot have a free lunch at the expense of someone else. D) if one person gains, someone else must lose.
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B) when scarce resources are used to produce one good they are unavailable to produce others.
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A local restaurant offers an "all you can eat" Sunday brunch for $12. Jenica eats two servings but leaves half of a third helping uneaten. Why? A) Her marginal value of an additional bite of food has fallen to zero. B) Her marginal value of additional food has fallen below $4 ($12 divided by 3 servings). C) Her marginal value of brunch has fallen below $12. D) The total value she places on brunch today exactly equals $12.
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A) Her marginal value of an additional bite of food has fallen to zero.
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If a nation wants to get the most out of its resources, each productive assignment should be carried out by those persons who A) least enjoy performing the productive activity. B) can complete the productive activity most rapidly. C) have a comparative advantage in the productive activity. D) have the highest opportunity cost.
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C) have a comparative advantage in the productive activity.
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Economic progress A) reflects that people are achieving higher income levels and living standards. B) requires that individuals work longer hours. C) indicates that scarcity is no longer a problem. D) indicates income levels are higher even though environmental and health conditions have worsened.
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A) reflects that people are achieving higher income levels and living standards.
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Economic analysis assumes that A) individuals act only out of selfish motives. B) people are basically altruistic, and their actions are, therefore, impossible to predict. C) changes in the personal benefits and costs associated with a choice will exert a predictable influence on human behavior. D) although individuals are at times selfish and at times altruistic, only their selfish actions may be predicted.
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C) changes in the personal benefits and costs associated with a choice will exert a predictable influence on human behavior.
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Higher standards of living are the result of A) an increase in the availability of goods and services that people value. B) an increase in the general level of prices. C) trade restrictions that favor domestic industries over foreign competition. D) government subsidies that expand employment.
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A) an increase in the availability of goods and services that people value.
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Economic progress comes primarily through A) entrepreneurial action directed by competitive markets. B) central planning. C) imposition of trade barriers. D) government investment in heavy industry.
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A) entrepreneurial action directed by competitive markets.
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Which of the following students would be most likely to drop out of college before completing their degree? A) a junior secondary education major who has just read about the substantial improvement in the job opportunities available for teachers with a college degree B) a senior physics major with a solid B average C) an outstanding baseball player in his junior year that just received a $500,000 offer from a professional team D) a junior economics major who wants to attend law school
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C) an outstanding baseball player in his junior year that just received a $500,000 offer from a professional team
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A highly charitable person, such as Mother Theresa, will be influenced by A) changes in costs, but not benefits. B) both changes in benefits and costs. C) changes in benefits, but not costs. D) neither changes in benefits nor costs.
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B) both changes in benefits and costs.
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When individuals increase their personal wealth through production and exchange, they A) reduce the wealth of others. B) increase the wealth of others. C) must be selfish and greedy. D) must rely heavily on government intervention and regulation.
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B) increase the wealth of others.
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While waiting in line to buy two tacos at 75 cents each and a medium drink for 80 cents, Jordan notices that the restaurant has a value meal containing three tacos and a medium drink all for $2.50. For Jordan, the marginal cost of purchasing the third taco would be A) 75 cents. B) zero. C) 80 cents. D) 20 cents.
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D) 20 cents.
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Why is voluntary exchange an important source of economic prosperity? A) It moves goods from people who value them less to people who value them more. B) It makes it possible to produce a larger output as a result of gains from division of labor and specialization. C) It makes it possible to produce a larger output as a result of lower per unit costs that often accompany large-scale production. D) All of the above are correct.
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D) All of the above are correct.
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Susan is trying to decide whether to quit her $20,000 per year job so she can return to college next year as a full time student. If she goes to college next year, her books and supplies will cost $500, tuition will cost $3,000, and her other expenses (transportation, housing, and food) will increase by $2,000. What is Susan's opportunity cost of attending college next year? A) $5,500 B) $3,000 C) $25,500 D) $3,500
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C) $25,500
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According to economic reasoning, you should offer one hour of volunteer service per week when A) the additional benefits of doing so are greater than the additional costs. B) the additional costs of doing so are the same as the additional benefits. C) the additional costs of doing so are greater than the additional benefits. D) the total benefits of doing so are less than the total costs.
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A) the additional benefits of doing so are greater than the additional costs.
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Voluntary trade promotes economic progress because A) it discourages trade based on the comparative advantage of suppliers. B) This is a trick question; voluntary exchange does not promote economic progress. C) it moves goods, services and resources from people who value them less to individuals who value them more. D) it discourages businesses from seeking lower per-unit costs through adoption of mass production methods.
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C) it moves goods, services and resources from people who value them less to individuals who value them more.
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According to economic reasoning, you should follow Nike's advice and "Just Do It" when A) the additional costs are the same as the additional benefits. B) the additional costs are greater than the additional benefits. C) the additional benefits are greater than the additional costs. D) the total benefits are less than the total costs.
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C) the additional benefits are greater than the additional costs.
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Which of the following is most likely to help the residents of a nation produce more goods and services and achieve higher income levels? A) a smaller trade sector B) a higher rate of investment C) higher tax rates D) greater use of taxation to transfer income from the rich to the poor
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B) a higher rate of investment
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Maria wishes to buy gasoline and have her car washed. She finds that if she buys 9 gallons of gasoline at $2.50 per gallon, the car wash costs $2, but if she buys 10 gallons of gasoline, the car wash is free. For Maria, the marginal cost of the tenth gallon of gasoline is A) $2.50. B) zero. C) $2.00. D) 50 cents.
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D) 50 cents.
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The price of an airline ticket from Denver to Chicago costs $450. A bus ticket costs $150. Traveling by plane takes 2 hours compared with 32 hours by bus. Other things constant, Erica would gain by choosing air travel if, and only if, she values her time at more than A) $5 per hour. B) $300 per hour. C) $10 per hour. D) $9.38 per hour.
answer
C) $10 per hour.
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Which of the following marketing pieces takes the concept of marginalism into account? A) If a company's gross revenues are declining, it should increase its spending on advertising. B) Computers, monitors and other technical equipment in local dumps are causing $1 million dollars in environmental damage. Vote yes to allocate $100,000 in cleanup spending. C) Help save the manatees. Contribute to the campaign to raise $10,000. D) Contribute $50 annually to the Heifer Foundation and give a chicken to a family living in poverty. This gift will help generate an additional $100 in household income through the sale of the eggs produced.
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D) Contribute $50 annually to the Heifer Foundation and give a chicken to a family living in poverty. This gift will help generate an additional $100 in household income through the sale of the eggs produced.
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In a free market economy, current consumption, saving and investment decisions A) shape the future course of the national economy. B) are necessarily controlled by big businesses. C) require protection from foreign forces if individuals desire wealth accumulation. D) are controlled largely by the government.
answer
A) shape the future course of the national economy.
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Which of the following is most important for the achievement of higher income levels and living standards? A) production of additional goods and services that people value highly relative to the cost of their production B) an increase in total employment C) restriction of imports that expand employment in the protected industries D) increases in government spending that create jobs
answer
A) production of additional goods and services that people value highly relative to the cost of their production
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Private ownership A) permits owners to buy, sell and derive income from their property. B) permits anyone to use the property with or without permission, compensation or consideration for the owner. C) provides owners with little incentive to conserve for the future. D) permits owners to do anything they want with their property.
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A) permits owners to buy, sell and derive income from their property.
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Competition is present when A) subsidies assure that inefficient firms remain active in the market. B) there is little incentive to introduce new products and discover better ways of doing things. C) the market is characterized by rising prices and declining product quality. D) freedom of entry and rival firms are present in a market.
answer
D) freedom of entry and rival firms are present in a market.
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Which of the following best summarizes the importance of business failure and the central idea of "creative destruction in a market economy"? A) When a business fails, the assets and resources from that business become unemployed, resulting in higher government subsidies. B) Only through frequent business failure will it be possible to avoid income being concentrated into the hands of a few rich entrepreneurs. C) The new, rival businesses that drive out old competitors tend to be less efficient and less creative than the older established businesses. D) Business failure allows the assets and resources from that business to move into other areas where they will be more productive.
answer
D) Business failure allows the assets and resources from that business to move into other areas where they will be more productive.
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Competition is A) important in both the market and government sectors. B) important in the market sector, but not in the government sector. C) important in the government sector, but not in the market sector. D) not very important in either the government or the market sector.
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A) important in both the market and government sectors.
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Even-handed enforcement of contracts fuels economic prosperity because it A) increases market uncertainty and the probability of contract violations. B) promotes gains from trade by keeping transaction costs low. C) increases transaction costs. D) permits individuals to invade or infringe on the property rights of others.
answer
B) promotes gains from trade by keeping transaction costs low.
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When decentralized governmental units operate independently and compete with each other, governments will attract residents and expand their tax base when A) they discontinue desired government services in order to keep taxes low. B) they increase their tax rates. C) they provide residents with desired services at an attractive tax cost. D) they provide residents with fewer government services.
answer
C) they provide residents with desired services at an attractive tax cost.
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When services are provided and financed by local rather than higher levels of government and people can move freely among governmental units, A) local governments will be in a strong position to exploit various groups of voters. B) a local government will always be able to generate more revenues by raising taxes. C) competition among governmental units will help residents get more for their tax dollars. D) there will be less incentive for government officials to operate efficiently than if there was only one centralized government.
answer
C) competition among governmental units will help residents get more for their tax dollars.
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Even-handed enforcement of contracts fuels economic prosperity because it A) increases market uncertainty and the probability of contract violations. B) promotes gains from trade by keeping transaction costs low. C) permits individuals to invade or infringe on the property rights of others. D) increases transaction costs.
answer
B) promotes gains from trade by keeping transaction costs low.
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Legal entitlement to scientific discoveries, inventions, innovations and intellectual property A) results in an equal distribution of income and profits. B) protects production on the basis of tradition, social customs and habits. C) encourages technological advancements. D) reduces the incentive to invest in research and development.
answer
C) encourages technological advancements.
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Which of the following is a characteristic of "public goods"? A) They must be provided by the government. B) It is difficult to restrict their availability to paying customers. C) It is easy to establish a one-to-one link between consumption of and payment for these goods. D) Scarce resources are not required for their production.
answer
B) It is difficult to restrict their availability to paying customers.
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If a business firm continues to sustain losses, what usually happens in a market economy? A) It remains in business and the resources it is using continue to be employed. B) It reorganizes as a government-supported organization and the resources continue to be employed. C) It goes out of business and the resources it was using become available for use in other areas. D) It reorganizes as a nonprofit organization.
answer
C) It goes out of business and the resources it was using become available for use in other areas.
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Which of the following is the best example of a public good? A) a regional flood control project B) a state university C) a civic center owned and operated by the government D) an amusement park like Disney World
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A) a regional flood control project
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When competition is present and private ownership rights are clearly defined and securely enforced by the legal system, business firms will have a strong incentive to A) innovate and develop better products and lower cost production methods. B) engage in wasteful activities that increase the cost of producing goods and services. C) use resources during the current period rather than conserving them for the future. D) spend time attempting to plunder (take) the resources of others.
answer
A) innovate and develop better products and lower cost production methods.
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"Competition is the great regulator." This statement reflects that A) when competition is present, businesses have a strong incentive to serve the general public and therefore there is little need for regulation of competitive markets. B) government regulation is the key ingredient of competitive markets and therefore markets cannot be competitive without regulation. C) when markets are regulated by the government, there is no need for competition among business firms. D) extensive regulation is needed to assure that businesses will treat consumers properly and serve the interests of the general public.
answer
A) when competition is present, businesses have a strong incentive to serve the general public and therefore there is little need for regulation of competitive markets.
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Which of the following is the best measure of size of government as a share of the economy? A) total government expenditures as a percentage of GDP B) the supply of money as a percentage of GDP C) public consumption plus private investment as a percentage of GDP D) private consumption as a percentage of Gross Domestic Product (GDP)
answer
A) total government expenditures as a percentage of GDP
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A government fulfills a protective function when it A) provides funds for flood control projects and builds highways. B) prevents illegal seizure of private property. C) established and enforces minimum wage laws. D) taxes some citizens in order to provide income transfers to others.
answer
B) prevents illegal seizure of private property.
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Competition among decentralized governmental units will A) make it more difficult for citizens to satisfy their preferences with regard to the goods and services supplied by governments. B) result in wasteful duplication and inefficiency in production of governmental services. C) strengthen the incentive of governments to operate efficiently and cater to the views of citizens. D) evolve naturally because local governments will want to compete with each other.
answer
C) strengthen the incentive of governments to operate efficiently and cater to the views of citizens.
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Legal entitlement to scientific discoveries, inventions, innovations and intellectual property A) reduces the incentive to invest in research and development. B) results in an equal distribution of income and profits. C) encourages technological advancements. D) protects production on the basis of tradition, social customs and habits.
answer
C) encourages technological advancements.
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Intense competition in a market will generally lead to A) dissatisfaction of consumers about the quality and availability of the product. B) high prices and low quality of the product or service. C) improvements in the quality of the good or service available to consumers. D) production inefficiencies and higher costs.
answer
C) improvements in the quality of the good or service available to consumers.
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When services are provided and financed by local rather than higher levels of government and people can move freely among governmental units, A) people will be able to vote only with their ballots. B) people will be able to vote only with their feet. C) people will be able to vote with their feet (choose combinations of taxation and government services more consistent with their preferences) as well as with their ballots. D) local officials will have greater freedom to impose high taxes and provide lousy public services inefficiently.
answer
C) people will be able to vote with their feet (choose combinations of taxation and government services more consistent with their preferences) as well as with their ballots.
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Which of the following is true of taxes? A) Taxes drive a wedge between what buyers pay and what sellers receive. B) Business taxes generate government revenue without imposing a burden on consumers and households. C) Increases in taxes are the primary cause of inflation. D) Taxes increase the volume of mutually advantageous exchanges.
answer
A) Taxes drive a wedge between what buyers pay and what sellers receive.
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When policy makers are constantly shifting back and forth between expansionary and restrictive monetary policy, this is most likely to A) keep the general level of prices relatively stable because the periods of restrictive policy will just offset the periods of expansion. B) help promote economic stability because changes in monetary policy can be counted on to exert a predictable impact on the economy quickly. C) promote economic stability and stimulate employment. D) promote instability because the time lags of monetary policy are long and unpredictable.
answer
D) promote instability because the time lags of monetary policy are long and unpredictable.
question
The experience of the 1930s indicates that substantial tax increases during a severe recession will result in A) an increase in tax revenues that will lead to a balanced budget. B) a reduction in output and employment. C) smaller budget deficits, which will speed an economic recovery. D) an increase in the incentive to earn.
answer
B) a reduction in output and employment.
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As output and employment contracted during the early 1930s, policy makers A) reduced tariffs but increased tax rates. B) reduced both tariffs and tax rates. C) imposed higher tariffs and reduced tax rates. D) increased both tariffs and tax rates.
answer
D) increased both tariffs and tax rates.
question
If the Fed is going to create an environment for economic progress, it should focus on A) the regulation of financial institutions in order to control excessive risk taking. B) keeping interest rates low. C) shifting back and forth between expansionary and restrictive monetary policy in order to better control the growth of real GDP. D) the achievement of price stability.
answer
D) the achievement of price stability.
question
Regulatory policies requiring lenders to extend more low down-payment loans to higher-risk borrowers along with the Fed's low short-term interest rate policy during 2002-2004 caused A) housing prices to fall during that period. B) mal-investment, that is, excessive investment in housing construction during 2002-2005. C) a subsequent increase in interest rates that led to a housing boom. D) a reduction in housing construction during 2002-2005.
answer
B) mal-investment, that is, excessive investment in housing construction during 2002-2005.
question
An increase in income tax rates will A) make it more expensive for an entrepreneur to purchase a tax deductible luxury automobile for business purposes. B) make it less expensive for a successful lawyer to attend a tax deductible professional meeting in Hawaii. C) improve the efficiency of resource use. D) increase the incentive of the spouse of a highly successful lawyer to work and earn additional income.
answer
B) make it less expensive for a successful lawyer to attend a tax deductible professional meeting in Hawaii.
question
Inflation A) is a continuing decline in the general level of prices of goods and services. B) implies that the number of people unemployed has risen. C) reduces the purchasing power of the dollar. D) is an increase in the price of a single good or service.
answer
C) reduces the purchasing power of the dollar.
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When the inflation rate is high and volatile, A) investment is less risky and gains from trade are reduced. B) real output and real wages will grow rapidly. C) employment will expand and the unemployment rate will decline. D) investment is more risky and gains from trade are reduced.
answer
D) investment is more risky and gains from trade are reduced.
question
High marginal tax rates will A) cause some people to work and earn less than would be the case if marginal tax rates were lower. B) attract workers from other countries where tax rates are lower. C) make it expensive for taxpayers to purchase tax deductible items. D) increase the incentive of people to earn.
answer
A) cause some people to work and earn less than would be the case if marginal tax rates were lower.
question
An increase in marginal tax rates will A) increase the incentive of individuals to earn additional income. B) allow taxpayers to keep more of what they earn. C) reduce the share of additional earnings that individuals are permitted to keep. D) make tax deductible purchases more expensive.
answer
C) reduce the share of additional earnings that individuals are permitted to keep.
question
The Fed's low short-term interest rate policy of 2002 to 2004 encouraged decision makers to A) make large down payments when purchasing housing. B) borrow more and increase their purchases of housing. C) borrow less and reduce their purchases of housing. D) purchase housing only if it could be financed with a 30-year, fixed interest-rate mortgage.
answer
B) borrow more and increase their purchases of housing.
question
Real, rather than nominal, figures are important to use when making comparisons of incomes across time periods because A) the real figures are adjusted for changes in the general level of prices. B) the real figures are adjusted for changes in the level of interest rates. C) the real figures are adjusted for changes in the average hours worked per week. D) the real figures are adjusted for changes in taxes.
answer
A) the real figures are adjusted for changes in the general level of prices.
question
Money is valuable because it A) is backed by gold and silver. B) is issued by credit card companies such as American Express, MasterCard, and Visa. C) reduces transaction costs. D) is backed by U.S. Treasury bonds.
answer
C) reduces transaction costs.
question
Money is A) an object that is directly consumed. B) widely used in a barter economy. C) whatever is generally used to pay for goods, services and resources. D) something that can be used to buy things but cannot be saved.
answer
C) whatever is generally used to pay for goods, services and resources.
question
When the purchasing power of money is stable and predictable, this A) increases transactions costs. B) facilitates gains from specialization, investment, and trade. C) encourages the use of bartering. D) makes it risky for individuals and businesses to save and borrow.
answer
B) facilitates gains from specialization, investment, and trade.
question
Monetary and price instability will A) encourage domestic citizens to increase their rate of saving. B) encourage businesses to invest and expand their future output. C) make it easier for both individuals and businesses to plan wisely for the future. D) generate uncertainty, and encourage investors and businesses to move their activities to countries with a more stable monetary environment.
answer
D) generate uncertainty, and encourage investors and businesses to move their activities to countries with a more stable monetary environment.
question
Inflation is A) a one time increase in the general level of prices. B) a persistent increase in the price of an individual good, service or resource. C) a persistent increase in the general level of prices. D) a one time increase in the price of an individual good or service.
answer
C) a persistent increase in the general level of prices.
question
Over the long haul, rapid increases in the supply of money lead to A) inflation. B) higher levels of production and real output. C) rapid growth of real wages. D) lower unemployment rates.
answer
A) inflation.
question
In contrast with nominal values, real values refer to nominal values A) corrected for price changes. B) minus personal income taxes. C) minus interest rates. D) corrected for hours of work.
answer
A) corrected for price changes.
question
When the money supply is expanding rapidly and the general level of prices increasing sharply, economic growth is A) slowed by the resulting unpredictability of the future level of prices. B) enhanced because profits are higher so that capital investment is greater. C) enhanced because existing debt is reduced in value, so people are willing to buy more goods. D) enhanced as economic activity grows more rapidly.
answer
A) slowed by the resulting unpredictability of the future level of prices.
question
Which of the following is the best definition of money? A) Currency plus outstanding credit card balances. B) The outstanding credit debt of households and businesses. C) Anything that widely serves as a medium of exchange, unit of account, and store of value. D) Various types of paper notes and coinage backed by precious metals.
answer
C) Anything that widely serves as a medium of exchange, unit of account, and store of value.
question
If money was not used as a medium of exchange, A) the transaction costs of exchange would be lower. B) our standard of living would probably improve. C) economic efficiency would increase. D) the gains from trade would be severely limited.
answer
D) the gains from trade would be severely limited.
question
Economic analysis indicates that high tax rates will A) promote wasteful use of resources. B) retard capital formation. C) all of the above. D) reduce productive activity.
answer
C) all of the above.
question
Which of the following will discourage investment? A) high and variable rates of inflation B) well-defined property rights C) a low and steady rate of inflation D) low tax rates
answer
A) high and variable rates of inflation
question
Which of the following contributed to the soaring housing prices during 2002-2004? A) the Fed's low-interest rate policy B) the increasing popularity of fixed-rate, long-term loans to lock in low interest rates C) the Fed's high-interest rate policy D) the tightening of loan standards by commercial lenders
answer
A) the Fed's low-interest rate policy
question
If import restrictions prohibit foreigners from selling various goods and services in the U.S. market, A) the U.S. will be able to export more goods abroad. B) the U.S. will be able to produce more output than would be otherwise the case. C) foreigners will have fewer U.S. dollars with which to buy U.S. goods and services. D) the domestic producers in the protected industries will supply goods to U.S. consumers at lower prices than would be otherwise the case.
answer
C) foreigners will have fewer U.S. dollars with which to buy U.S. goods and services.
question
Which of the following would reduce a country's Economic Freedom of the World rating? A) free trade and low taxes B) a legal system that secures private property rights and provides even-handed enforcement of contracts C) competitive markets and minimal government regulation D) monetary instability and trade restrictions
answer
D) monetary instability and trade restrictions
question
The political attractiveness of tariffs, quotas, and other trade restrictions is primarily the result of A) the political clout of foreigners. B) the special interest nature of trade restrictions. C) the political clout of domestic consumers. D) the attractiveness of sound economic policies to elected political officials.
answer
B) the special interest nature of trade restrictions.
question
In order to achieve a high economic freedom rating, a country must A) provide citizens with housing, health care, and other basic goods free of charge. B) protect property rights, enforce contracts even-handedly, and rely extensively on markets to allocate goods and services. C) use the taxing power of the state to redistribute income from the rich to the poor and thereby promote income equality. D) elect political officials democratically.
answer
B) protect property rights, enforce contracts even-handedly, and rely extensively on markets to allocate goods and services.
question
Which of the following is true? A) Even when they are economically free, high-income countries have been unable to achieve high growth rates. B) Even when low-income countries adopt institutions and policies supportive of economic freedom, they are unable to achieve high growth rates. C) When low-income countries adopt institutions and policies supportive of economic freedom, they are able to achieve high growth rates. D) Even when they are economically free, low-income countries have been unable to achieve high growth rates.
answer
C) When low-income countries adopt institutions and policies supportive of economic freedom, they are able to achieve high growth rates.
question
The budget of an unconstrained government is similar to a common pool resource, and this will lead to A) lower interest rates and spending levels consistent with economic efficiency. B) excessive spending and budget deficits. C) lower taxes and a deficient level of spending. D) a deficient level of spending and budget surpluses.
answer
B) excessive spending and budget deficits.
question
Which of the following best describes the relationship between economic freedom and real per capita Gross Domestic Product (GDP)? A) As economic freedom increases, real per capita GDP decreases. B) As economic freedom increases, real per capita GDP increases. C) As economic freedom decreases, real per capita GDP increases. D) There are too many extraneous factors involved to discern a direct relationship.
answer
B) As economic freedom increases, real per capita GDP increases.
question
Are jobs the key to economic progress and the achievement of high income levels? A) Yes, as long as people are working, income levels will be high. B) Uncertain, jobs are the key for a market economy, but they are less important for a centrally planned economy. C) Yes, when full employment is present, the income levels of the residents will be at their maximum. D) No, the people must be employed in jobs where they are producing goods and services that are valued highly relative to cost.
answer
D) No, the people must be employed in jobs where they are producing goods and services that are valued highly relative to cost.
question
Which of the following would increase a country's Economic Freedom of the World rating? A) reliance on central planning rather than open markets B) monetary instability and trade restrictions C) free trade and low taxes D) extensive regulation and restricted entry into markets
answer
C) free trade and low taxes
question
Which of the following economies are most free? A) Bolivia and Venezuela B) Bangladesh and Pakistan C) Algeria and the Democratic Republic of the Congo D) Hong Kong and Singapore
answer
D) Hong Kong and Singapore
question
Private entrepreneurs are likely to make better investment decisions than central planners because A) failure of a government project will reduce the personal wealth of the planners involved in the decision. B) the entrepreneurs can often turn a project's failure into a request for additional funding to rectify the "problem". C) the entrepreneurs seek ever larger budgets, while planners will be more focused on cost reductions and efficiency. D) the entrepreneurs who make mistakes must bear the costs of these mistakes personally.
answer
D) the entrepreneurs who make mistakes must bear the costs of these mistakes personally.
question
Which of the following best describes the relationship between economic freedom and the growth rate of real per capita Gross Domestic Product (GDP)? A) Countries with less economic freedom tend to grow more rapidly than those that are more free. B) There are too many extraneous factors involved to discern any relationship between the two. C) Countries with more economic freedom tend to grow more rapidly than those that are less free. D) Rich countries that are economically free generally grow rapidly, but there is no evidence that economic freedom helps low-income countries.
answer
C) Countries with more economic freedom tend to grow more rapidly than those that are less free.
question
"Trade restrictions such as tariffs and quotas are like a blockade that a nation imposes on its own people." Is this statement true? A) Yes, both the trade restrictions and a blockade will reduce the gains from specialization and trade. B) No, a blockade will help the residents of a nation achieve a higher income level; trade restrictions will not. C) No, trade restrictions will help the residents of a nation achieve a higher income level; a blockade will not. D) Uncertain, the statement is true if the gains of the residents exceed those of foreigners; otherwise it is false.
answer
A) Yes, both the trade restrictions and a blockade will reduce the gains from specialization and trade.
question
If the United States imposed higher tariffs and more restrictive quotas that reduced imports, A) employment in the U.S. would be higher. B) the U.S. would not gain at the cause expense to other countries. C) the U.S. would gain at the expense of other countries. D) the wage rates of U.S. workers would be higher.
answer
C) the U.S. would gain at the expense of other countries.
question
Central planning is an ineffective method to organize an economy because A) central planners do not respond predictably to incentives. B) central planners cannot possibly obtain all the information necessary to allocate resources efficiently. C) most central planners are less intelligent than business entrepreneurs in market economies. D) central planners have inadequate funding to meet the needs of their constituents.
answer
B) central planners cannot possibly obtain all the information necessary to allocate resources efficiently.
question
Which of the following will reduce the effectiveness of centralized economic planning? A) The central planners spending the funds of taxpayers will make poorer investment choices than investors spending their own money. B) The central planners will be unable to obtain sufficient information for a sound economic plan in a world of dynamic change. C) All of the above. D) The choices of the central planners will be influenced by political, rather than economic, considerations.
answer
C) All of the above.
question
A country's level of economic freedom is influenced by A) freedom to trade internationally. B) the relative size of government expenditures, taxes and enterprises. C) the even-handedness of the court system and security of property rights. D) all of the above.
answer
D) all of the above.
question
When enterprises get more funds from government subsidies provided by central planners and less from consumers, they will have incentive to A) spend more time catering to the views of consumers than if they were operating in an unsubsidized, competitive market. B) spend more time trying to satisfy consumers and very little time trying to satisfy politicians. C) spend more time trying to influence politicians and less time trying to reduce costs and please customers. D) produce more efficiently than if they were operating in a competitive market.
answer
C) spend more time trying to influence politicians and less time trying to reduce costs and please customers.
question
Politicians will often be able to gain from support of trade restrictions because A) the restrictions will lead to lower prices and substantial benefits for consumer groups. B) the restrictions will generate substantial benefits for consumer groups at the expense of well-organized labor and industrial interests. C) organized interest groups benefiting from the restrictions will make large contributions to political campaigns while most others will not feel strongly about the restrictions. D) foreigners benefiting from the restrictions will be a major source of political contributions.
answer
C) organized interest groups benefiting from the restrictions will make large contributions to political campaigns while most others will not feel strongly about the restrictions.
question
During the past quarter of a century, the world's extreme poverty rate (per capita income of less than $1.25 per day) has A) declined substantially. B) increased in economically free economies, but fallen in countries with more central planning. C) been virtually unchanged. D) increased substantially.
answer
A) declined substantially.
question
In order to be successful in a market economy, entrepreneurs must A) combine resources in a manner that increases their value. B) produce anything that consumers value, regardless of cost. C) use only personal financial capital so they can avoid interest payments on borrowed funds. D) produce a good that consumers value less than the resources used to produce it.
answer
A) combine resources in a manner that increases their value.
question
Private entrepreneurs are likely to make better investment decisions than central planners because A) entrepreneurs can often turn a project's failure into a request for additional funding to rectify the "problem". B) the failure of a government project reduces the personal wealth of the planners involved in the decision. C) entrepreneurs seek ever larger budgets, while planners are more focused on cost reductions and efficiency. D) investors who make mistakes must bear the costs of these mistakes personally.
answer
D) investors who make mistakes must bear the costs of these mistakes personally.
question
Suppose the government spends $10 billion subsidizing firms producing electricity with wind turbines because these firms are high cost producers. Will the subsidies lead to economic growth and higher income levels? A) No, the turbines are an inefficient form of producing electricity and therefore the subsidies will increase the opportunity cost of supplying it. B) Yes, because more people will be employed by the firms producing electricity with wind turbines. C) Uncertain, higher income levels will be achieved if the employment of the firms producing electricity with the wind turbines expands; if not, incomes will fall. D) Yes, because the government will be able to finance the subsidies without reducing private sector output.
answer
A) No, the turbines are an inefficient form of producing electricity and therefore the subsidies will increase the opportunity cost of supplying it.
question
Which of the following is most important if you want to achieve high earnings? A) ability to identify and undertake actions where you can benefit at the expense of others B) willingness to exploit workers and consumers C) ability to provide others with things that they value highly D) willingness to work hard even if you are not productive
answer
C) ability to provide others with things that they value highly
question
If a nation is going to achieve its full potential, it must have A) a low rate of savings and a high rate of current consumption. B) a mechanism to attract savings and channel them into productive investment projects. C) low real interest rates. D) a central planning agency to allocate investment funds.
answer
B) a mechanism to attract savings and channel them into productive investment projects.
question
Entrepreneurs are vitally important for economic progress because they A) stick with the tried and true methods rather than experimenting with new ways of doing things. B) innovate and discover new ways of bringing items of value to consumers willing to pay for them. C) rely on price controls to determine the prices charged for the items they bring to market. D) rely on government grants and subsidies for the funding of research and development.
answer
B) innovate and discover new ways of bringing items of value to consumers willing to pay for them.
question
Which of the following is an example of entrepreneurship? A) a student who produces and sells t-shirts at a football game B) all of the above C) an employee who figures out how to make her services more valuable to the business for which she works D) a 15-year old who operates a lemonade stand during hot summer days
answer
B) all of the above
question
In a market economy the relationship between making a lot of money and providing services that are highly valued by others is A) negative. B) random. C) controlled by the government. D) positive.
answer
D) positive.
question
Economic analysis indicates that A) no matter what our objectives in life, they are easier to achieve if we have more wealth. B) the desire for more wealth is limited to those who are interested only in their personal welfare. C) wealthy people are happier than those with lots of friends, satisfying marriages, and strong religious convictions. D) single-minded pursuit of money and wealth is the key to happiness.
answer
A) no matter what our objectives in life, they are easier to achieve if we have more wealth.
question
When the government funds a project that will create jobs, the funds for the project A) are essentially free, because the project originated in the government sector. B) will generate additional tax revenues that will pay for the project. C) will have to be either taxed or borrowed from the private sector. D) will leave private sector output and employment unchanged.
answer
C) will have to be either taxed or borrowed from the private sector.
question
Other things constant, countries with higher investment rates will A) have lower standards of living. B) tend to have higher incomes in the future. C) have to use central government planning to allocate investment. D) have to impose high taxes in order to finance the investment.
answer
B) tend to have higher incomes in the future.
question
If a nation is going to achieve and sustain a high rate of economic growth, it must A) have a mechanism capable of attracting savings and channeling them into wealth-creating projects. B) prohibit low-wage foreign producers from supplying goods to the domestic market. C) have an abundant domestic supply of low cost energy resources. D) impose regulations that will limit the intensity of competition among domestic firms.
answer
A) have a mechanism capable of attracting savings and channeling them into wealth-creating projects.
question
When an investment project generates output that is valued more highly than the value of the resources required for its production, A) entrepreneurs seeking profit will have little incentive to undertake such projects. B) entrepreneurs will have to be subsidized by the government if they are going to earn a profit. C) it will be unprofitable to undertake such a project. D) undertaking the project will create wealth.
answer
D) undertaking the project will create wealth.
question
Which of the following is true of entrepreneurs? They A) Generally work fewer hours per week than wage and salary employees. B) All of the above. C) Are adept at discovering profitable opportunities that are often overlooked by others. D) Have low saving rates and excessive debt.
answer
C) Are adept at discovering profitable opportunities that are often overlooked by others.
question
When the government finances a shovel-ready project through taxes or borrowing, this will result in A) lower taxes or interest rates, which will reduce private sector employment. B) lower taxes or interest rates, which will increase private sector employment. C) higher taxes or interest rates, which will reduce private sector employment. D) higher taxes or interest rates, which will increase private sector employment.
answer
C) higher taxes or interest rates, which will reduce private sector employment.
question
Suppose a U.S. government program subsidizes the production of domestic sugar producers and places a tariff (tax) on the importation of sugar from other countries. This program A) helps the producers of sugar, but increase the opportunity cost of obtaining it. B) will reduce the opportunity cost of obtaining sugar and therefore lead to lower sugar prices. C) creates wealth, because the government is providing the subsidies and imposing the tariffs. D) promotes the production of goods that consumers value highly relative to cost.
answer
A) helps the producers of sugar, but increase the opportunity cost of obtaining it.
question
Successful entrepreneurs A) do not have to follow government regulations. B) provide new products and job opportunities for others. C) have high consumption rates and relatively low investment rates. D) are not influenced by government tax policies.
answer
B) provide new products and job opportunities for others.
question
Which of the following is the primary source of high earnings in a market economy? A) a willingness to work hard even if you are not productive B) a willingness to engage in actions where you gain at the expense of others C) the ability to provide others with things that they value highly D) a willingness to exploit workers and consumers
answer
C) the ability to provide others with things that they value highly
question
The income and living standards of a nation will increase when A) the availability of goods and services that people value increases. B) the imports of goods and services fall. C) jobs are protected and total employment expands. D) the prices of goods and services increase.
answer
A) the availability of goods and services that people value increases.
question
In order to prosper, entrepreneurs in a market economy must A) have at least one million dollars of personal wealth for the financing of new projects. B) undertake projects that create wealth and increase the value of resources. C) undertake projects that require resources that are more valuable than the products produced. D) find ways to slow technological change.
answer
B) undertake projects that create wealth and increase the value of resources.
question
Government spending programs that create jobs are often popular because A) when spending programs are funded by the government there are no secondary effects. B) if a spending program is approved by Congress, it means that the value of what is produced is greater than the value of the resources used to produce it. C) the benefits of job creation are always greater than the costs. Jobs are the key to economic progress. D) the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible.
answer
D) the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible.
question
Which of the following is most important for young people wanting to increase their wealth and improve their living standard over time? A) spending all of their current income on consumer goods and services B) extensive use of credit cards to purchase needed items C) purchasing a new car at least every two years D) regularly saving and investing a portion of their income
answer
D) regularly saving and investing a portion of their income
question
Which of the following contributes to the popularity of the argument that government spending expands employment? A) The employment generated by the additional spending can be accomplished without increases in taxes or borrowing. B) The employment generated by the additional spending is highly visible, while the employment crowded out by taxing, spending, and borrowing is largely unseen. C) The employment generated by the additional spending is not easily seen, while the employment crowded out by taxing, spending, and borrowing is highly visible. D) Higher taxes will be popular if they finance spending that expands employment.
answer
B) The employment generated by the additional spending is highly visible, while the employment crowded out by taxing, spending, and borrowing is largely unseen.
question
The employee is thinking like an entrepreneur in which of the following situations? A) A staff member brings a plan to the supervisor which describes how to reduce costs and attract new customers. B) A cashier rings up the total purchase price of the goods in the customer's cart. C) An hourly employee goes to work and performs only the required tasks. D) An employee attends a monthly staff meeting on company policies and procedures.
answer
A) A staff member brings a plan to the supervisor which describes how to reduce costs and attract new customers.
question
Which of the following is true? A) Most entrepreneurs work very few hours. B) Entrepreneurs generally save less of their income than other Americans. C) If you want to make a lot of money, you had better figure out how to provide others with substantial value and find ways to discover and act on strategic opportunities. D) Additional years of schooling will substantially increase your earnings even if they fail to increase your productivity and ability to provide others with things that they value.
answer
C) If you want to make a lot of money, you had better figure out how to provide others with substantial value and find ways to discover and act on strategic opportunities.
question
If we are going to get the most value from our resources, entrepreneurs should choose the investment alternatives that A) are most heavily subsidized by the government. B) yield a profitable rate of return. C) result in the production of the largest possible output regardless of value to consumers. D) reduce the value of resources and retard wealth accumulation.
answer
B) yield a profitable rate of return.
question
What is the most appropriate test to evaluate whether a government-spending program will improve living standards and lead to higher income levels? A) The value of the output generated by the government-spending program compared to its opportunity cost B) The total number of jobs created by the program C) The reduction in the rate of unemployment as the result of the spending on the program D) The taxes necessary to finance the program compared to the revenues generated by the additional employment created by the program
answer
A) The value of the output generated by the government-spending program compared to its opportunity cost
question
A competitive capital market is important to society because it directs resources toward projects that A) can be completed quickly. B) are valued more highly than their cost. C) have an outcome that is known with certainty. D) reduce the value of the resources employed.
answer
B) are valued more highly than their cost.
question
"Wal-Mart is a low-wage firm and this indicates that it exploits its workers." Which of the following should cause one to question the validity of this statement? A) This is a trick question. Wal-Mart does exploit its workers and the below average wage of Wal-Mart employees illustrates this point. B) the large sales revenue of Wal-Mart C) No one is required to work for Wal-Mart and, therefore, it must attract workers by paying them more attractive wages than they could earn elsewhere. D) the high profits of Wal-Mart
answer
C) No one is required to work for Wal-Mart and, therefore, it must attract workers by paying them more attractive wages than they could earn elsewhere.
question
Which of the following is true? A) Entrepreneurs are under-represented among millionaires. B) All of the above are true. C) The parents of successful entrepreneurs almost always have at least a college education. D) Successful entrepreneurs are good at discovering profitable opportunities that have been overlooked by others.
answer
D) Successful entrepreneurs are good at discovering profitable opportunities that have been overlooked by others.
question
The success of self-employed entrepreneurs depends on A) a strong need to stay with tried and true ways of doing things. B) high personal consumption rates. C) an ability to discover and act on valuable opportunities overlooked by others. D) the government and its investment in research and development.
answer
C) an ability to discover and act on valuable opportunities overlooked by others.
question
Which of the following is most important if a country is going to achieve and sustain rapid economic growth? A) an open and competitive capital market B) high tariffs and imposition of other trade restrictions C) high rates of inflation D) high marginal tax rates
answer
A) an open and competitive capital market
question
If you want to earn a high income you should figure out what others value because A) you will be able to gain at the expense of others. B) others will be willing to pay attractive prices for things they value. C) you will not have to compete in the job market. D) you will then be able to charge higher prices than alternative suppliers.
answer
B) others will be willing to pay attractive prices for things they value.
question
In a market economy, persons undertaking an investment project must A) get the approval of several banks before the project can be undertaken. B) obtain approval from political authorities before the project can be undertaken. C) either personally supply the required funds or convince other investors to do so. D) use a corporation as a form of business organization.
answer
C) either personally supply the required funds or convince other investors to do so.
question
Why do nations often impose trade barriers that make it difficult for their own citizens to trade with people in another country? A) Trade restrictions improve the efficiency of resource use. B) Trade restrictions are a good way for a country to increase the income levels of its citizens. C) Trade restrictions provide gains to domestic residents at the expense of foreigners. D) Trade restrictions often provide benefits to highly visible special interest groups while imposing a less visible cost on the general populace.
answer
D) Trade restrictions often provide benefits to highly visible special interest groups while imposing a less visible cost on the general populace.
question
When political officials have substantial discretionary power to override the rule of law, A) uncertainty is reduced and the government will be able to promote economic progress more effectively. B) this creates uncertainty and makes business activity less attractive. C) business investment will increase because the rule of law will no longer stifle investment. D) the incentive to solicit bribes and political favors is weak.
answer
B) this creates uncertainty and makes business activity less attractive.
question
The Smoot-Hawley trade bill of 1930, designed to save jobs and increase revenue for the federal government, resulted in A) the protection of jobs while maintaining the level of trade, but it did not increase federal revenues from tariffs. B) a decline in the volume of trade, but an increase in revenue from tariffs, which made it possible for the federal government to balance its budget. C) an increase in both employment and federal revenues from tariffs. D) a sharp reduction in trade and a decline in federal revenues from tariffs.
answer
D) a sharp reduction in trade and a decline in federal revenues from tariffs.
question
If the United States imposed higher tariffs and more restrictive quotas that reduced imports, A) employment in the U.S. would be higher. B) the wage rates of U.S. workers would be higher. C) the U.S. would gain at the expense of other countries. D) the U.S. would not gain at the cause expense to other countries.
answer
C) the U.S. would gain at the expense of other countries.
question
Who gains in a voluntary trade? A) the buyer only B) both the buyer and the seller, but the seller usually gains more C) the seller only D) both the buyer and the seller
answer
D) both the buyer and the seller
question
When regulatory requirements make it costly and complex to open a business, A) the volume of trade will decline and economic growth will be retarded. B) the level of competition will increase. C) the likelihood government officials will provide favors to specific businesses and engage in corrupt practices will be reduced D) the volume of trade will increase.
answer
A) the volume of trade will decline and economic growth will be retarded.
question
If Sean sells Susan a DVD player for $30, A) both Sean and Susan will gain from this transaction. B) the well-being of both parties will be unchanged. C) Sean will gain from the transaction, but Susan will lose. D) Susan will gain from the transaction, but Sean will lose.
answer
A) both Sean and Susan will gain from this transaction.
question
The exchange rate of the dollar relative to other currencies is determined by market forces. When equilibrium is present in the exchange rate market, A) the purchases of Americans from foreigners will be equal to the sales of Americans to foreigners. B) imports from foreigners will create jobs in other countries but employment in the United States will decline by an equal amount. C) the gains of Americans from international trade will be just equal to the gains of foreigners from the trade. D) Americans will gain from the international trade only if foreigners lose an equal amount.
answer
A) the purchases of Americans from foreigners will be equal to the sales of Americans to foreigners.
question
In recent decades labor markets in European countries like Italy and Spain have been A) less regulated and the unemployment rates of the European countries have been higher than the United States. B) more highly regulated and the unemployment rates of the European countries have been lower than the United States. C) more highly regulated and the unemployment rates of the European countries have been higher than the United States. D) less regulated and the unemployment rates of the European countries have been lower than the United States.
answer
C) more highly regulated and the unemployment rates of the European countries have been higher than the United States.
question
Which of the following resulted from the Smoot-Hawley trade bill of 1930? A) The stock market began a steady recovery from the crash of October 1929. B) Imports decreased, while exports increased, resulting in an overall increase in GDP and tariff revenues. C) The higher tariff rates increased federal revenues and led to a balanced budget the year after passage of the bill. D) The unemployment rate, which stood at less than 8 percent when the bill was passed, soon soared to double-digit levels.
answer
D) The unemployment rate, which stood at less than 8 percent when the bill was passed, soon soared to double-digit levels.
question
When overall production is taken into account, trade restrictions, such as those enacted by the Smoot-Hawley trade bill, A) save good paying jobs. B) reduce imports, without affecting the volume of exports. C) increase employment in the domestic industries that are most productive. D) neither create nor destroy jobs; they reallocate them.
answer
D) neither create nor destroy jobs; they reallocate them.
question
Which of the following is true of exchange? A) Exchange permits trading partners to expand their total output of goods and services as the result of greater specialization in areas where each has a comparative advantage. B) The total output that trading partners are able to produce is not influenced by whether they trade with each other. C) Exchange is a zero sum activity; if one party gains, the other must lose an equal amount. D) The exchange value of a good is determined by the cost of the resources required to produce the good.
answer
A) Exchange permits trading partners to expand their total output of goods and services as the result of greater specialization in areas where each has a comparative advantage.
question
Are jobs the key to economic progress and the achievement of high income levels? A) Yes, when full employment is present, the income levels of the residents will be at their maximum. B) Uncertain, jobs are the key for a market economy, but they are less important for a centrally planned economy. C) No, the people must be employed in jobs where they are producing goods and services that are valued highly relative to cost. D) Yes, as long as people are working, income levels will be high.
answer
C) No, the people must be employed in jobs where they are producing goods and services that are valued highly relative to cost.
question
The political attractiveness of tariffs, quotas, and other trade restrictions is primarily the result of A) the political clout of domestic consumers. B) the attractiveness of sound economic policies to elected political officials. C) the special interest nature of trade restrictions. D) the political clout of foreigners.
answer
C) the special interest nature of trade restrictions.
question
The law of comparative advantage indicates that if a group of individuals wants to maximize their joint output, then each good should be supplied by A) the person with the most advanced technical knowledge. B) the person that can accomplish the task most rapidly. C) the person with the lowest wage rate. D) the low opportunity cost producer.
answer
D) the low opportunity cost producer.
question
Which of the following is true in markets where price controls are applied? A) Price controls distort the incentives faced by both buyers and sellers. B) Price controls clarify the incentives faced by both buyers and sellers. C) Price controls increase the number of exchanges that will occur. D) Price controls are enacted solely with consumers' interests in mind.
answer
A) Price controls distort the incentives faced by both buyers and sellers.
question
Trade restrictions like tariffs and quotas will A) ensure that more dollars stay in the United States. B) protect American jobs and increase employment. C) reduce the value of goods and services that we will be able to produce and consume. D) make all Americans better off.
answer
C) reduce the value of goods and services that we will be able to produce and consume.
question
Which one of the following statements is correct? A) Even if government programs are implemented with good intentions, they may still lead to undesirable outcomes. B) When evaluating a government program, it is vitally important to consider the stated intentions of its proponents. C) If policymakers have good intentions, their proposals will lead to desirable outcomes. D) From the standpoint of economic efficiency, it makes no sense to consider the secondary effects generated by a new government program.
answer
A) Even if government programs are implemented with good intentions, they may still lead to undesirable outcomes.
question
Specialization in goods and services one can produce at a low cost makes it possible for trading partners to produce a larger joint output. This is called A) the law of production possibilities. B) the law of absolute advantage. C) the law of comparative advantage. D) the law of demand.
answer
C) the law of comparative advantage.
question
Voluntary trade promotes economic progress because it A) moves goods, services and resources from people who value them more to individuals who value them less. B) benefits buyers at the expense of sellers. C) encourages individuals to become self-sufficient. D) makes larger outputs possible as a result of specialization.
answer
D) makes larger outputs possible as a result of specialization.
question
"Trade restrictions such as tariffs and quotas are like a blockade that a nation imposes on its own people." Is this statement true? A) Uncertain, the statement is true if the gains of the residents exceed those of foreigners; otherwise it is false. B) Yes, both the trade restrictions and a blockade will reduce the gains from specialization and trade. C) No, a blockade will help the residents of a nation achieve a higher income level; trade restrictions will not. D) No, trade restrictions will help the residents of a nation achieve a higher income level; a blockade will not.
answer
B) Yes, both the trade restrictions and a blockade will reduce the gains from specialization and trade.
question
Which of the following is true of regulation? A) Mortgage lending and banking have historically been unregulated and therefore regulation in these sectors is unpopular. B) Regulatory agencies often ignore the secondary effects of their actions and fail to foresee future problems. C) Policy-makers are hesitant to call for new regulations even when it is clear they would help avert future crises. D) Past regulations have been effective at averting crises, but they are unpopular because they reduce the profitability of the regulated industry.
answer
B) Regulatory agencies often ignore the secondary effects of their actions and fail to foresee future problems.
question
The argument that import restrictions save jobs and promote prosperity fails to recognize that A) import restrictions cannot create jobs in any industry. B) import restrictions cannot create jobs in any industry. C) there are no secondary effects of import restrictions. D) import restrictions will lower prices in the protected industries.
answer
A) import restrictions cannot create jobs in any industry.
question
If higher tariffs and more restrictive quotas reduced the imports of the United States, A) unemployment in the United States would decline. B) U.S. exports would also increase because foreigners would want to buy more from U.S. producers. C) U.S. exports would decline because foreigners would be earning fewer of the dollars needed to purchase goods and services from Americans. D) U.S. employment would increase.
answer
C) U.S. exports would decline because foreigners would be earning fewer of the dollars needed to purchase goods and services from Americans.
question
Why do foreigners export goods and services to buyers in the United States? A) They are forced to sell to Americans. B) They want to harm Americans and one way of doing so is to sell goods at low prices in the U.S. market. C) They want to acquire dollars so they can purchase things from Americans. D) They like helping Americans.
answer
C) They want to acquire dollars so they can purchase things from Americans.
question
When a price control pushes the price of a good or resource below the market equilibrium, then A) the quantity supplied will be greater than the quantity demanded of the good. B) a shortage of the good will develop. C) the scarcity of the good will be eliminated. D) a surplus of the good will develop.
answer
B) a shortage of the good will develop.
question
Which of the following resulted from the Smoot-Hawley trade bill of 1930? A) The stock market began a steady recovery from the crash of October 1929. B) Many countries responded by imposing higher tariffs on American products, and the volume of international trade fell sharply. C) Imports decreased, while exports increased, resulting in an overall increase in GDP and tariff revenues. D) The unemployment rate, which had been rising, began to steadily decline as jobs were protected by the trade restrictions.
answer
B) Many countries responded by imposing higher tariffs on American products, and the volume of international trade fell sharply.
question
If import restrictions prohibit foreigners from selling various goods and services in the U.S. market, A) the U.S. will be able to export more goods abroad. B) the U.S. will be able to produce more output than would be otherwise the case. C) foreigners will have fewer U.S. dollars with which to buy U.S. goods and services. D) the domestic producers in the protected industries will supply goods to U.S. consumers at lower prices than would be otherwise the case.
answer
C) foreigners will have fewer U.S. dollars with which to buy U.S. goods and services.
question
Politicians will often be able to gain from support of trade restrictions because A) foreigners benefiting from the restrictions will be a major source of political contributions. B) organized interest groups benefiting from the restrictions will make large contributions to political campaigns while most others will not feel strongly about the restrictions. C) the restrictions will lead to lower prices and substantial benefits for consumer groups. D) the restrictions will generate substantial benefits for consumer groups at the expense of well-organized labor and industrial interests.
answer
B) organized interest groups benefiting from the restrictions will make large contributions to political campaigns while most others will not feel strongly about the restrictions.
question
Which of the following is not a basic freedom guaranteed by the U.S. Constitution? A) freedom of religion B) freedom to trade C) freedom of the press D) freedom of speech
answer
B) freedom to trade
question
If government is going to provide an environment for economic prosperity A) the percentage of citizens voting in major elections must increase. B) it must run budget deficits. C) the self-interest of voters, politicians, and bureaucrats must be brought into harmony with efficient use of resources. D) it must run budget surpluses.
answer
C) the self-interest of voters, politicians, and bureaucrats must be brought into harmony with efficient use of resources.
question
If large budget deficits push government debt as a share of the economy to higher and higher levels, this will eventually lead to A) higher interest rates on the government's bonds because it will be less risky to loan the government funds. B) higher interest rates on the government's bonds because it will be more risky to loan the government funds. C) lower interest rates on the government's bonds because it will be less risky to loan the government funds. D) lower interest rates on the government's bonds because it will be more risky to loan the government funds.
answer
B) higher interest rates on the government's bonds because it will be more risky to loan the government funds.
question
The dominant Keynesian view of the 1960s and 1970s stressed that A) changes in government spending and budget deficits can help stabilize an economy. B) the "invisible hand" would be sufficient to lift the economy out of an economic downturn. C) government should avoid budget deficits at all times as they may destabilize the economy. D) both budget deficits and surpluses should be small relative to the size of the overall economy.
answer
A) changes in government spending and budget deficits can help stabilize an economy.
question
As the baby boomers begin moving into the retirement phase of life during the years following 2010, spending on Social Security and Medicare will A) rise and this will make it easier for the federal government to balance its budget. B) fall and this will make it easier for the federal government to balance its budget. C) fall and this will make it more difficult for the federal government to balance its budget. D) rise and this will make it more difficult for the federal government to balance its budget.
answer
D) rise and this will make it more difficult for the federal government to balance its budget.
question
Compared to the private sector, the distinguishing characteristic of government is its A) ability to produce goods and services that people value. B) monopoly on the legitimate use of force on adults. C) ability to escape the constraints imposed by scarcity. D) ability to consider the benefits of an action as well as its costs.
answer
B) monopoly on the legitimate use of force on adults.
question
Since the wide spread acceptance of the Keynesian view during the 1960s, A) the federal government has run budget deficits during recessions, but substantial budget surpluses during economic expansions. B) perpetual budget deficits have been the norm. C) the federal government has persistently maintained a balanced budget. D) perpetual budget surpluses have been the norm.
answer
B) perpetual budget deficits have been the norm.
question
When there are no constitutional constraints on democracy, politicians will A) find it advantageous to provide income transfers and other favors to interest groups in exchange for votes and political contributions, and this will eventually lead to budget deficits, high taxes, and economic stagnation. B) impose high taxes that will lead to budget surpluses, which will eventually undermine economic progress. C) be reluctant to run budget deficits during a recession and this failure will lead to economic instability and stagnation. D) be reluctant to impose regulations and eventually unbridled market competition will undermine economic progress.
answer
A) find it advantageous to provide income transfers and other favors to interest groups in exchange for votes and political contributions, and this will eventually lead to budget deficits, high taxes, and economic stagnation.
question
The difference between the national debt and a federal budget deficit is A) nothing; the national debt and the budget deficit are the same thing. B) the federal budget deficit represents the total amount of outstanding government debt while the national debt includes only the increase in the debt during the current year. C) the national debt represents the cumulative effect of all previous budget deficits and surpluses, while the federal budget deficit reflects only the additions to the debt during the current year. D) the national debt is financed primarily through government bonds, while the deficit is financed through taxes.
answer
C) the national debt represents the cumulative effect of all previous budget deficits and surpluses, while the federal budget deficit reflects only the additions to the debt during the current year.
question
The political structure that is most consistent with economic growth and progress is A) a dictatorship. B) centralization of power in the hands of an elected legislature and a president or prime minister. C) limited government, protection of individuals from aggression by others, and decentralized political decision-making. D) rule by the majority.
answer
C) limited government, protection of individuals from aggression by others, and decentralized political decision-making.
question
The total indebtedness of the federal government in the form of outstanding interest-earning bonds is the A) budget surplus. B) trade deficit. C) national debt. D) budget deficit.
answer
C) national debt.
question
When decisions are made by majority rule, elected officials have a strong incentive to A) keep taxes low, run budget surpluses, and spend taxpayer funds wisely. B) protect individual rights and avoid favoritism of some individuals and voting blocs relative to others. C) take resources from taxpayers and use them to provide favors for various voting blocs in exchange for contributions and other forms of political support. D) serve the interest of consumers and taxpayers, and undertake only projects that are efficient.
answer
C) take resources from taxpayers and use them to provide favors for various voting blocs in exchange for contributions and other forms of political support.
question
The persistent budget deficits of recent decades are A) an expected result, because politicians have an incentive to levy taxes rather than spend on current programs. B) surprising, because politicians have a strong incentive to balance the government's budget. C) an expected result, because politicians have an incentive to spend on current programs financed by borrowing. D) surprising, because politicians have a strong incentive to run budget surpluses and thereby indicate that their actions have generated a profit.
answer
C) an expected result, because politicians have an incentive to spend on current programs financed by borrowing.
question
Which of the following is true? A) If a majority of voters favor a proposal, it will achieve positive results. B) If there is an economic problem, the government will be able to solve it. C) A good outcome is guaranteed when a government program is created with good intentions. D) Even if government programs are implemented with good intentions, they may lead to undesirable outcomes.
answer
D) Even if government programs are implemented with good intentions, they may lead to undesirable outcomes.
question
If a three-fourths majority of both houses of the U.S. Congress was required for approval of a spending project, economic analysis indicates that A) inefficient government spending programs would expand. B) the political power of special-interest groups would increase. C) federal spending would increase sharply from the current level. D) the power of special interests would be diminished and federal spending reduced.
answer
D) the power of special interests would be diminished and federal spending reduced.
question
Political decision making tends to be biased toward the adoption of programs that have A) future costs and future benefits that are both difficult to identify. B) future costs that are difficult to identify and current benefits that are easily observable. C) current costs that are easily observable and future benefits that are difficult to identify. D) current costs and future benefits that are both easily observable.
answer
B) future costs that are difficult to identify and current benefits that are easily observable.
question
Which of the following is true? A) Voters have a strong incentive to cast a well-informed vote, but consumers have little incentive to make informed choices. B) Both voters and consumers have a strong incentive to make informed choices. C) Voters have little incentive to cast a well-informed vote, but consumers have a strong incentive to make informed choices. D) Neither voters nor consumers have much incentive to make informed choices.
answer
C) Voters have little incentive to cast a well-informed vote, but consumers have a strong incentive to make informed choices.
question
In 2009-2010 the federal government A) achieved a budget surplus for the first time in more than a decade. B) ran a budget surplus, and this reduced the size of the national debt. C) financed approximately 40 percent of its expenditures through borrowing. D) ran a budget deficit, and this reduced the size of the national debt.
answer
C) financed approximately 40 percent of its expenditures through borrowing.
question
The framers of the U.S. Constitution sought to design a political system that would A) limit the powers of the federal government and protect the rights of individuals. B) provide the federal government with virtually unlimited power to promote the general welfare. C) promote efficiency through central planning of the economy. D) be based on majority rule.
answer
A) limit the powers of the federal government and protect the rights of individuals.
question
Which of the following constitutional provisions would help promote economic growth and prosperity? A) the right of individuals and businesses to compete in markets B) protection of private property rights C) the right of citizens to freely engage in exchange with foreigners D) all of the above
answer
D) all of the above
question
Basic economics indicates that the cornerstones of economic progress are A) free elections, the right to bear arms, a written constitution, and a powerful head of state. B) private ownership, freedom of exchange, competitive markets, and monetary stability. C) representative democracy, a powerful chief executive office, protection of domestic business, and government regulation. D) centralized government, free elections, majority rule, and two legislative branches.
answer
B) private ownership, freedom of exchange, competitive markets, and monetary stability.
question
Which of the following is true? A) Voters have a strong incentive to make well-informed choices when voting in state and federal elections. B) Policies favored by a majority will assure that resources are allocated efficiently. C) The rational ignorance effect indicates that voters have very little incentive to be well informed when making political choices. D) Political action is based on voluntary exchange and mutual agreement.
answer
C) The rational ignorance effect indicates that voters have very little incentive to be well informed when making political choices.
question
The Fifth Amendment of the Bill of Rights of the U.S. Constitution states that A) private property shall not be taken except for public use and with compensation. B) Americans have the right to bear arms. C) the government can undertake any activity that is favored by the majority of citizens. D) the freedom of speech of Americans cannot be violated.
answer
A) private property shall not be taken except for public use and with compensation.
question
Government action will often result in the counterproductive use of resources because A) voter participation is low; if more people voted the political process would be more efficient. B) many politicians are not interested in how their legislative votes will influence their chances of winning future elections. C) politicians are often unwilling to listen to interest groups that have specialized knowledge. D) there is often a conflict between winning political elections and adoption of only productive programs.
answer
D) there is often a conflict between winning political elections and adoption of only productive programs.
question
A productive project is one that generates A) something that people value. B) benefits that are greater than the costs of the project. C) benefits for consumers. D) revenues for producers.
answer
B) benefits that are greater than the costs of the project.
question
The national debt is A) the sum of the personal debt of all citizens in the United States. B) the cumulative effect of all past budget deficits and surpluses of the federal government. C) the difference between a nation's exports and imports of goods and services. D) equal to the current size of the budget deficit.
answer
B) the cumulative effect of all past budget deficits and surpluses of the federal government.
question
An individual voter will likely be concerned with A) the views of a particular political candidate on all issues. B) only a few special issues (those that exert the most impact on the voter's personal welfare). C) most issues since information on nearly all issues is available at a low cost on the Internet. D) most issues because they have some impact, however slight, on each citizen.
answer
B) only a few special issues (those that exert the most impact on the voter's personal welfare).
question
During 2009-2010, the federal budget A) ran a surplus of approximately 2 percent of GDP. B) ran a deficit of approximately 2 percent of GDP. C) ran a deficit of approximately 10 percent of GDP. D) was balanced during both years.
answer
C) ran a deficit of approximately 10 percent of GDP.
question
If a government is going to promote economic progress, which of the following is most important? A) redistribution of income from the rich to the poor and price controls to make sure that the prices of essential goods are low B) a balanced federal budget and imposition of trade restrictions that will protect American businesses and assure jobs for all C) regulation of markets and rapid expansion in the supply of money so people will be able to buy goods D) protection of people and their property from aggressors and the provision of a few goods that are difficult to supply through markets
answer
D) protection of people and their property from aggressors and the provision of a few goods that are difficult to supply through markets
question
Which of the following is true? A) A budget surplus will increase the national debt. B) A budget deficit will increase the national debt. C) A budget deficit will reduce the national debt. D) A balanced budget will increase the national debt.
answer
B) A budget deficit will increase the national debt.
question
The framers of the Constitution sought to limit the economic role of the government as evidenced by A) all of the above. B) the enumeration of the permissible powers of the federal government in Article I, Section 8. C) the 5th Amendment's limitation on the government's power to take private property. D) the 10th Amendment's allocation of all non-enumerated powers to the states and the people.
answer
A) all of the above.
question
The U.S. Constitution prohibits government from imposing tariffs and quotas that restrict _______________. The authors of Common Sense Economics would also apply this prohibition to _______. (Fill in the blanks) A) exports; imports B) imports; exports C) budget deficits; budget surpluses D) budget surpluses; budget deficits
answer
A) exports; imports
question
The economic way of thinking indicates that personal benefits and costs influence the actions of A) consumers in the private sector but not voters in the public sector. B) taxpayers, but not recipients of government-provided goods and services. C) consumers, producers, voters, and politicians in both the private and the public sectors. D) producers in the private sector but not politicians in the public sector.
answer
C) consumers, producers, voters, and politicians in both the private and the public sectors.
question
How did people like Mark Zuckerberg of Facebook and the late Steve Jobs of Apple become so rich? A) by obtaining large subsidies from powerful politicians B) mostly by stealing from those who were less fortunate C) by providing highly valued goods and services to consumers at attractive prices D) by acquiring more years of schooling than almost anyone else
answer
C) by providing highly valued goods and services to consumers at attractive prices
question
The employee is thinking like an entrepreneur in which of the following situations? A) A cashier rings up the total purchase price of the goods in the customer's cart. B) A staff member brings a plan to the supervisor which describes how to reduce costs and attract new customers. C) An employee attends a monthly staff meeting on company policies and procedures. D) An hourly employee goes to work and performs only the required tasks.
answer
B) A staff member brings a plan to the supervisor which describes how to reduce costs and attract new customers.
question
Which of the following is most important for the achievement of higher income levels and living standards? A) an increase in total employment B) restriction of imports that expand employment in the protected industries C) production of additional goods and services that people value highly relative to the cost of their production D) increases in government spending that create jobs
answer
C) production of additional goods and services that people value highly relative to the cost of their production
question
Which of the following is true? A) All of the above are true. B) The parents of successful entrepreneurs almost always have at least a college education. C) Successful entrepreneurs are good at discovering profitable opportunities that have been overlooked by others. D) Entrepreneurs are under-represented among millionaires.
answer
C) Successful entrepreneurs are good at discovering profitable opportunities that have been overlooked by others.
question
Which of the following is the primary source of high earnings in a market economy? A) a willingness to engage in actions where you gain at the expense of others B) a willingness to work hard even if you are not productive C) a willingness to exploit workers and consumers D) the ability to provide others with things that they value highly
answer
D) the ability to provide others with things that they value highly
question
Why is voluntary exchange an important source of economic prosperity? A) All of the above are correct. B) It makes it possible to produce a larger output as a result of gains from division of labor and specialization. C) It makes it possible to produce a larger output as a result of lower per unit costs that often accompany large-scale production. D) It moves goods from people who value them less to people who value them more.
answer
A) All of the above are correct.
question
Does voluntary exchange create wealth? A) Yes, exchange makes it possible for the trading partners to gain more value from the existing supply of goods and it also makes larger output levels possible. B) Uncertain, it will increase wealth if it creates more goods and services; otherwise it exerts no impact on the wealth of people. C) No, if one person gains, the other party must lose an equal amount. D) No, exchange merely shuffles the existing supply of goods and services among people.
answer
A) Yes, exchange makes it possible for the trading partners to gain more value from the existing supply of goods and it also makes larger output levels possible.
question
Sound career decision-making involves A) finding the things you enjoy without regard for whether you do them well. B) figuring out the things you do best without regard to whether you find them personally enjoyable or fulfilling. C) figuring out the things you do best, enjoy, and find fulfilling. D) only monetary considerations.
answer
C) figuring out the things you do best, enjoy, and find fulfilling.
question
If we are going to get the most value from our resources, entrepreneurs should choose the investment alternatives that A) result in the production of the largest possible output regardless of value to consumers. B) are most heavily subsidized by the government. C) yield a profitable rate of return. D) reduce the value of resources and retard wealth accumulation.
answer
C) yield a profitable rate of return.
question
In order to be successful in a market economy, entrepreneurs must A) use only personal financial capital so they can avoid interest payments on borrowed funds. B) produce a good that consumers value less than the resources used to produce it. C) combine resources in a manner that increases their value. D) produce anything that consumers value, regardless of cost.
answer
C) combine resources in a manner that increases their value.
question
Finding the occupation or business activity in which you are relatively more productive helps you earn more money than otherwise would be the case. This reflects the A) principle of compound interest. B) law of diversification. C) law of large numbers. D) law of comparative advantage.
answer
D) law of comparative advantage.
question
The law of comparative advantage explains why A) countries but not individuals can benefit from specializing in the activities they do best. B) individuals as well as countries can benefit from specializing in the activities they do best. C) neither individuals nor countries can benefit from specializing in the activities they do best. D) individuals but not countries can benefit from specializing in the activities they do best.
answer
B) individuals as well as countries can benefit from specializing in the activities they do best.
question
In order to prosper, entrepreneurs in a market economy must A) have at least one million dollars of personal wealth for the financing of new projects. B) find ways to slow technological change. C) undertake projects that create wealth and increase the value of resources. D) undertake projects that require resources that are more valuable than the products produced.
answer
C) undertake projects that create wealth and increase the value of resources.
question
Compared to high skilled workers, low skill workers are more A) valuable to businesses employing professionals. B) likely to be successful financially and accumulate wealth. C) likely to be highly productive. D) likely to earn low incomes.
answer
D) likely to earn low incomes.
question
Your comparative advantage in a specific area is determined by A) minimum wage laws, health and safety standards and marginal tax rates. B) the market value of the skill relative to your opportunity cost of supplying it. C) the absolute value of the skill in the performance of a specific job. D) the comparative positions of the wealthy, the middle income individuals and low income individuals.
answer
B) the market value of the skill relative to your opportunity cost of supplying it.
question
Which of the following is true? A) Entrepreneurs generally save less of their income than other Americans. B) If you want to make a lot of money, you had better figure out how to provide others with substantial value and find ways to discover and act on strategic opportunities. C) Additional years of schooling will substantially increase your earnings even if they fail to increase your productivity and ability to provide others with things that they value. D) Most entrepreneurs work very few hours.
answer
B) If you want to make a lot of money, you had better figure out how to provide others with substantial value and find ways to discover and act on strategic opportunities.
question
When you are able to supply others with goods and services they value highly relative to your opportunity costs, A) both you and those with whom you trade will gain. B) you will gain at the expense of others. C) neither you nor those with whom you trade will gain. D) others will gain at your expense.
answer
A) both you and those with whom you trade will gain.
question
A monthly budget can help you achieve financial security by A) expanding the borrowing limits on your existing credit cards and increasing the number of credit cards you hold. B) helping you choose stocks that are most likely to increase in price. C) increasing your financial awareness and helping you allocate your funds more effectively. D) reducing the likelihood that you will face unexpected expenditures for maintenance and repairs.
answer
C) increasing your financial awareness and helping you allocate your funds more effectively.
question
Which of the following outstanding debts should Jillian pay off first? A) A three year loan of $5,000 at 0 percent a year from her mom. B) A $2,000 debt on a credit card charging 18 percent annually. C) A home equity loan of $10,000, which has an effective rate of 6 percent after her tax advantages are taken into account. D) A student loan of $40,000 with a fixed rate of 4 percent.
answer
B) A $2,000 debt on a credit card charging 18 percent annually
question
Should regular saving be an item in your personal budget? A) No, it is not necessary to save as long as you have the borrowing power to deal with unexpected expenditures. B) Yes, regular saving for both unexpected emergency expenses and big-ticket items like the down payment for a house will increase your financial security. C) Yes, but when you are young, it only makes sense to save for big-ticket items like a car or a European vacation. D) No, you can always start saving in the future when you have a larger income.
answer
B) Yes, regular saving for both unexpected emergency expenses and big-ticket items like the down payment for a house will increase your financial security.
question
The interest rates on outstanding credit card balances are generally high because A) the default rate on credit card loans is high and there are no assets backing these loans. B) the banks "price gouge" consumers in this market. C) there is little competition in this lending market. D) the administrative costs associated with these loans are low.
answer
A) the default rate on credit card loans is high and there are no assets backing these loans.
question
Credit cards A) make it easy for people to borrow funds at a low rate of interest. B) are just like money because funds can be used to purchase things up to the credit limit. C) can help you get more from your money because they make it possible for you to spend more than you earn. D) make it easy for people to run up sizeable debt.
answer
D) make it easy for people to run up sizeable debt.
question
Individuals with higher saving and investment rates will more likely A) earn poverty level incomes. B) experience financial difficulties. C) have higher current consumption rates. D) have higher incomes in the future.
answer
D) have higher incomes in the future.
question
The primary purpose of a budget is to A) figure out how to purchase only items that are needed to sustain life. B) make sure you get the most out of your income by spending wisely and saving regularly. C) figure out how to borrow more so you can increase your current consumption. D) make sure that you do not spend too much money on nonessential items like recreation and vacations.
answer
B) make sure you get the most out of your income by spending wisely and saving regularly.
question
Which of the following items would be least prudent to purchase on credit A) a college education B) a vacation C) a house D) an automobile
answer
B) a vacation
question
A prudent person is most likely to find the use of financing attractive when purchasing which one of the following items? A) clothes B) entertainment C) a college education D) rental housing
answer
C) a college education
question
It is costly to purchase a new car every two or three years because A) the financing cost is significantly higher for a new car than for a used one. B) the gasoline tax for the fuel of a new car is generally higher than for a used one. C) the maintenance cost of a new car is generally higher than for a used one. D) a new car will depreciate rapidly in value during the first few years of use.
answer
D) a new car will depreciate rapidly in value during the first few years of use.
question
A couple that is currently renting but is contemplating a move to another city in the near future should A) continue renting because real estate is illiquid and costly to buy and sell. B) buy because real estate will always increase in value. C) continue renting because rental payments are tax-deductible but mortgage interest payments are not. D) buy if they can arrange a monthly mortgage payment less than their current rent.
answer
A) continue renting because real estate is illiquid and costly to buy and sell.
question
Which of the following is most likely to lead to financial trouble? A) using your credit card to buy items on impulse B) buying used books, clothing and furniture C) working a low wage job to finance your college education D) purchasing a three-year old car rather than buying a new one
answer
A) using your credit card to buy items on impulse
question
Which of the following is a major pitfall to avoid when purchasing a home? A) making a large down payment B) use of a fixed rate mortgage to cover 80 percent of the purchase price C) making a small down payment, for example 5 percent or less D) economical purchase of a home that has gone through the foreclosure process
answer
C) making a small down payment, for example 5 percent or less
question
Which of the following is true? A) An outstanding credit card balance is an asset that adds to your personal wealth. B) Interest rates charged by credit card companies are generally high because the loans are unsecured. C) The power of compound interest benefits those with outstanding credit card balances. D) An unused balance on your credit card is like money in the bank.
answer
B) Interest rates charged by credit card companies are generally high because the loans are unsecured.
question
Who is most likely to face the highest finance charges? A) a customer who pays bills online B) an employed individual who makes timely payments C) a person who pays off a credit card balance each month D) a person with a bad credit history and a lot of debt
answer
D) a person with a bad credit history and a lot of debt
question
When you pay for items that are consumed immediately or wear out quickly by financing them with your credit card, your wealth A) decreases. B) is non-taxable. C) expands. D) is saved for future use.
answer
A) decreases.
question
A budget will A) improve your credit standing so you can use borrowing to increase your current consumption. B) All of the above. C) help you focus on those expenditures that you value highly relative to cost. D) make it more attractive for you to buy a car every couple of years.
answer
C) help you focus on those expenditures that you value highly relative to cost.
question
If you are using a credit card prudently, you should A) pay only the interest on any outstanding balance. B) make only the minimum payment each month. C) gradually expand the amount borrowed to the card's credit limit. D) pay the balance in full each month.
answer
D) pay the balance in full each month.
question
It is often substantially cheaper to own and operate a used car rather than a new one because A) the interest rate on a used car loan is generally lower. B) his is a trick question. All things considered, the cost per mile traveled is generally cheapest if you buy a new car every year. C) the depreciation cost for a new car will almost always be substantially higher. D) the maintenance cost of a new car is generally higher.
answer
C) the depreciation cost for a new car will almost always be substantially higher.
question
The use of debt financing to purchase food, clothing, vacations, and other non-durable items A) is prudent as long as you have an unused balance on your credit card. B) is imprudent because such purchases will mean that you will soon be making payments on items that have you have already consumed. C) is prudent as long as you plan to save more in the future. D) is imprudent unless you need to purchase these items to impress your friends.
answer
B) is imprudent because such purchases will mean that you will soon be making payments on items that have you have already consumed.
question
Other things constant, an increase in interest rates will A) increase your incentive to borrow. B) increase your incentive to save. C) increase your incentive to buy a new car on credit. D) reduce your incentive to save.
answer
B) increase your incentive to save.
question
Investment in a broad portfolio of stocks is most attractive for A) short-term investors. B) long-term investors. C) investors seeking a fixed rate of return. D) investors who will need the funds for other purposes in about 10 years.
answer
B) long-term investors.
question
Which of the following makes it possible for even a small investor to hold a diverse set of stocks and still keep the cost of purchasing additional stock holdings low? A) an equity (stock) mutual fund B) a real world savings account C) a bond mutual fund D) a checking account at a local bank
answer
A) an equity (stock) mutual fund
question
Which of the following provides young people with a strong incentive to make regular payments into a retirement program and invest these funds in a diverse set of stocks? A) The prices of stocks tend to fluctuate more than the prices of bonds. B) When held over lengthy periods like 30 or 40 years, historically the rate of return on stocks has been both higher and less variable than that of bonds. C) Over short periods of time, variation in the real rate of return of stocks is greater than bonds. D) Lower interest rates will lead to higher bond prices.
answer
B) When held over lengthy periods like 30 or 40 years, historically the rate of return on stocks has been both higher and less variable than that of bonds.
question
Under current legislation, Americans can place a fraction of their incomes into non-taxable, qualified college accounts. This policy the incentive to save for college education. (Fill in the blank) A) increases B) decreases C) does not impact D) has an indeterminate impact on
answer
A) increases
question
Which of the following will reduce the risk of equity (stock) investments? A) The purchase of shares of a mutual fund that holds the stocks of many diverse corporations. B) All of the above. C) The purchase of shares in firms doing business in a wider variety of industries and markets. D) The purchasing and holding of equities over a lengthy period of time.
answer
B) All of the above.
question
Which of the following is true? A) In the long run, corporate bonds can be expected to yield a higher real rate of return than ownership of stocks. B) The risk of stock market investments can be reduced through the holding of a diverse portfolio of unrelated stocks over long periods of time. C) Stock market investors can reduce their risk if they hold shares of specific stocks for only short periods of time. D) People who invest in the stock market are virtually certain to make money.
answer
B) The risk of stock market investments can be reduced through the holding of a diverse portfolio of unrelated stocks over long periods of time.
question
Diversification puts "the law of large numbers" to work for you because it A) eliminates all asset risk. B) reduces tax liabilities on earned dividends. C) increases the chance that a single bond will substantially improve the overall performance of your portfolio. D) lowers the chance that a reduction in the market value of a single asset like a corporate stock will significantly reduce your overall portfolio return.
answer
D) lowers the chance that a reduction in the market value of a single asset like a corporate stock will significantly reduce your overall portfolio return.
question
Which of the following is the best place to set funds aside for "surprise" expenditures? A) ownership of real estate B) your regular checking account. C) the stock market D) a savings account
answer
D) a savings account
question
The variation in the rate of return one can expect from ownership of stocks will generally be smaller A) if a diverse set of stocks is held over a lengthy period of time, such as 30 or 40 years. B) if all of the funds are invested in a specific sector of the economy such as health care. C) if all of the funds are invested in a single stock. D) if the funds are invested for a relatively short period of time.
answer
A) if a diverse set of stocks is held over a lengthy period of time, such as 30 or 40 years.
question
A diversified portfolio is comprised of A) a broad range of various types of assets. B) government bonds issued by federal, state and local governments. C) corporate stocks of several companies in the same industry. D) a diverse set of corporate bonds.
answer
A) a broad range of various types of assets.
question
Diversification A) puts the law of large numbers to work for you. B) eliminates the risk of investing in the stock market. C) generally leads to lower rates of return than an average stock picker could earn from equity investments. D) indicates that you should invest in the company for which you work and in whom you trust.
answer
A) puts the law of large numbers to work for you.
question
Managed equity funds A) that have yielded attractive returns during the recent past can generally be counted on to yield similar returns in the future. B) are tied directly to either the Consumer Price Index or Producer Price Index. C) generally outperform indexed equity mutual funds. D) that yielded a high rate of return in the recent past often perform poorly in the future.
answer
D) that yielded a high rate of return in the recent past often perform poorly in the future.
question
Historically, which of the following has had the highest average annual rate of return? A) U.S. Treasury bonds B) corporate bonds C) money market mutual funds D) corporate stocks
answer
D) corporate stocks
question
The "miracle of compound interest" is best described by which of the following? A) Interest is paid on any currency held in your pockets. B) Interest is paid on the prior interest earned, but not the principal. C) Interest is paid only on the original principal deposited in an account. D) Interest is paid on the principal plus the prior interest earned.
answer
D) Interest is paid on the principal plus the prior interest earned.
question
Which of the following is true? A) Compound interest means that you are earning interest on the principal but not prior interest earned. B) All of the above are true. C) The law of compound interest highlights the importance of beginning to save at a young age. D) Assume a 7 percent rate of interest and a price of $6 per pack of cigarettes. Smoking one pack of cigarettes per day for 50 years will cost the smoker $109,500 (=$6 * 365 days*50 years).
answer
C) The law of compound interest highlights the importance of beginning to save at a young age.
question
During the last two centuries, after adjustment for inflation, A) both corporate stocks and bonds have yielded an average annual real rate of return of about 3 percent. B) corporate stocks have yielded an average annual real return of approximately 7 percent, compared to an average real return of about 3 percent for bonds. C) corporate bonds have yielded an average annual real return of approximately 7 percent, compared to an average real return of about 3 percent for corporate stocks. D) both corporate stocks and bonds have yielded an average annual real rate of return of about 7 percent.
answer
B) corporate stocks have yielded an average annual real return of approximately 7 percent, compared to an average real return of about 3 percent for bonds.
question
To take full advantage of earning compound interest income you should start saving A) after you have purchased the nice car you have always wanted. B) as soon as you get a higher paying job. C) three years from now. D) now.
answer
D) now.
question
Which of the following is true? A) Managed equity funds merely hold stocks in the same proportion they are represented in a broad stock market index such as the Dow Jones Industrials. B) Indexed equity funds generally have lower management and operating costs than managed funds. C) Managed equity funds generally outperform indexed equity mutual funds. D) Indexed equity funds generally engage in more stock trading than managed funds.
answer
B) Indexed equity funds generally have lower management and operating costs than managed funds.
question
If Apple Computer Corporation constitutes a sizeable share of your current stock holdings, the purchase of which of the following stocks would provide you with the greatest reduction in risk? A) Hewlett Packard B) Dell Computer Corporation C) McDonalds D) Gateway
answer
C) McDonalds
question
Historically, when a diverse set of stocks is held over a lengthy time period, stocks have yielded a ______ rate of return and the variation in the rate of return has been _______. (Fill in the blanks) A) low; high B) high; high C) high; low D) low; low
answer
C) high; low
question
If an investor's primary stock holding is currently Exxon Mobil, the purchase of which of the following stocks would provide the investor with the largest reduction in risk? A) Wal-Mart B) Chevron C) Texaco D) Shell Oil Corporation
answer
A) Wal-Mart
question
Which of the following is an advantage of an indexed equity mutual fund relative to a managed equity fund? A) Indexed funds generally have better stock pickers. B) Indexed funds engage in more detailed research. C) The compensation of those directing indexed funds is generally higher than those directing managed funds. D) Indexed funds have lower operating costs because they engage in less stock trading.
answer
D) Indexed funds have lower operating costs because they engage in less stock trading.
question
Which of the following is true? A) Most stockholders own stock because they want to run the business. B) The shareholders of a large well-established firm are guaranteed to earn a real rate of return of about seven percent in the future. C) Ownership of a corporate bond provides the bondholder with an ownership right to a fraction of the firm's future profits. D) Stock ownership makes it possible for investors to own a fractional share of a firm's future profits even if they do not participate in the operation of the firm.
answer
D) Stock ownership makes it possible for investors to own a fractional share of a firm's future profits even if they do not participate in the operation of the firm.
question
Buying shares of corporate stock tends to be risky when A) all of the above are true. B) the stock of a single corporation is purchased. C) the stock may have to be sold within a few months. D) all stocks bought are in the same industry.
answer
A) all of the above are true.
question
A pack of cigarettes costs $6. At the age of 16, some people start smoking one pack per day or 365 packs a year. Assume there is no increase in the future price of cigarettes. How much retirement wealth are these people sacrificing if they smoke until reaching the age of 66? A) $2,190 (=$6 * 365 days). B) $ 109,500 (=$2,190 * 50 years). C) $6. D) $109,500 plus the compound interest income that could have been earned on the funds over the 50 years.
answer
D) $109,500 plus the compound interest income that could have been earned on the funds over the 50 years.
question
It makes sense for you to channel funds regularly into a "real world" savings account so you will A) be prepared to purchase items like gasoline and food that you buy regularly. B) have these funds during your retirement years. C) have funds for a catastrophic expense that is likely to occur only once or twice during your lifetime. D) be prepared to deal with expenses like repairs that you know will occur in the future.
answer
D) be prepared to deal with expenses like repairs that you know will occur in the future.
question
Suppose your employer offers to match funds you place into a savings plan as long as you purchase the company stock and hold it for at least three years. Which of the following is true? A) You should not put funds into this plan unless you expect to hold the company stock for at least ten years. B) You should allocate funds into this plan if the company management recommends it. C) It can be attractive to put funds into a plan like this but you should sell your company stock when permitted in order to diversify your portfolio. D) It does not make any sense to put funds into such a plan.
answer
C) It can be attractive to put funds into a plan like this but you should sell your company stock when permitted in order to diversify your portfolio.
question
Which of the following will tend to result in the least variation in the expected real rate of return from the ownership of stocks? A) ownership of stocks from a specific sector (for example, the technology sector) over a lengthy period of time B) ownership of a single stock over a lengthy period of time C) ownership of a single stock for a short period of time D) ownership of a diverse set of stocks (the Standard & Poor's 500, for example) over a lengthy period of time
answer
D) ownership of a diverse set of stocks (the Standard & Poor's 500, for example) over a lengthy period of time
question
A rise in interest rates will increase your incentive to A) save more, borrow less, and pay off credit card debt. B) consume now, borrow more, and save later. C) buy more things on credit and postpone savings. D) borrow money to buy a new car.
answer
A) save more, borrow less, and pay off credit card debt.
question
Which of the following would provide a reasonable benchmark for how much you should pay monthly into a "real world" savings account? A) Sum your unexpected expenditures over the last 12 months, divide this figure by 12, and allocate this amount into the savings account regularly. B) Sum your unexpected expenditures during the last month, and if this total is greater than the additional amount you can borrow on your credit cards, you do not need a "real world" savings account. C) Sum your unexpected expenditures last month and allocate this amount into the savings account regularly. D) Sum your unexpected expenditures over the last 12 months, divide this figure by 12, and if this total is less than the additional amount you can borrow on your credit cards, you do not need a "real world" savings account.
answer
A) Sum your unexpected expenditures over the last 12 months, divide this figure by 12, and allocate this amount into the savings account regularly.
question
Which of the following is the best example of an item that a "real world" savings account is designed to cover? A) the monthly payment for the lease of your apartment B) the purchase of the gasoline you use driving back and forth to work C) an unexpected expenditure to repair the transmission of your car D) funds you are setting aside for your retirement years
answer
C) an unexpected expenditure to repair the transmission of your car
question
Which of the following has made it possible for investors without any special business skills to benefit from the ownership of corporate America? A) all of the above B) the availability of mutual funds, which make it possible for even small investors to purchase a diverse stock portfolio at a low cost C) the virtual disappearance of business failures among corporations with publicly traded stock shares D) an increased tendency of small investors to buy and sell stock frequently
answer
B) the availability of mutual funds, which make it possible for even small investors to purchase a diverse stock portfolio at a low cost
