Principals of Economics (Q&A) Part 3

Ten Principles of Economics 21 36. A friend of yours asks you why market prices are better than government-determined prices. Because you understand economic principles, you say that market-determined prices are better because they generally reflect a. the value of a good to society, but not the cost of making it. b. the cost of making a good to society, but not its value. c. both the value of a good to society and the cost of making it. d. neither the value of a good to society nor the cost of making it. 37. If the government were to intervene in a market economy and fix the price of visiting a health care provider below the market price, then we would expect, relative to the market outcome, a. an increase in the number of visits people want to make and an increase in the number of visits health care providers want to provide. b. an increase in the number of visits people want to make and a decrease in the number of visits health care providers want to provide. c. a decrease in the number of visits people want to make and an increase in the number of visits health care providers want to provide. d. a decrease in the number of visits people want to make and a decrease in the number of visits health care providers want to provide. 38. If the government were to intervene and set the rent for apartments in New York City below the market rent, then we would expect, relative to the market outcome, a. an increase in the number of people wanting to live in apartments in New York City. b. a decrease in the number of people wanting to live in apartments in New York City. c. an increase in the number of apartments available for rent in New York City. d. None of the above is correct. 39. If the government were to intervene and set a wage for unskilled labor above the market wage, then we would expect, relative to the market outcome, a. an increase in the number of unskilled jobs available. b. a decrease in the number of unskilled jobs available. c. a decrease in the number of workers wanting unskilled jobs. d. None of the above is correct. 40. One reason we need government, even in a market economy, is that a. there is insufficient market power in the absence of government. b. property rights are too strong in the absence of government. c. the invisible hand is not perfect. d. Both a and b are correct. 41. The government enforces property rights by a. requiring property owners to pay property taxes. b. providing police and courts. c. forcing people to own property. d. providing public parks and recreation facilities. 42. A company that formerly produced music CDs went out of business because too many potential customers bought illegally-produced copies of the CDs instead of buying the product directly from the company. This instance serves as an example of a. market power. b. inefficient trade. 22 Ten Principles of Economics c. inadequate enforcement of property rights. d. the invisible hand at work. 43. Public policies a. may be able to improve either economic efficiency or equality. b. may be able to improve economic efficiency but cannot improve equality. c. may be able to improve equality but cannot improve economic efficiency. d. cannot improve either equality or economic efficiency. 44. To say that government intervenes in the economy to promote efficiency is to say that government is attempting to a. create a more fair distribution of income. b. change the way in which the economic pie is divided. c. enlarge the economic pie. d. All of the above are correct. 45. Which of the following could reduce economic efficiency? a. laws that encourage lawsuits b. policies that redistribute income c. policies that impose significant restrictions on international trade d. All of the above are correct 46. The term used to describe a situation in which markets do not allocate resources efficiently is a. economic meltdown. b. market failure. c. equilibrium. d. the effect of the invisible hand. 47. A rationale for government involvement in a market economy is a. markets sometimes fail to produce a fair distribution of economic well-being. b. markets sometimes fail to produce an efficient allocation of resources. c. property rights have to be enforced. d. All of the above are correct. 48. Which of the following is not generally regarded by economists as a legitimate reason for the government to intervene in a market? a. to promote efficiency b. to promote equality c. to enforce property rights d. to protect an industry from foreign competition 49. Which of the following can lead to market failure? a. externalities and market power b. externalities but not market power c. market power but not externalities d. neither externalities nor market power 50. Thousands of people develop lung cancer from second-hand exposure to cigarette smoke. This is an example of a. a market failure caused by an externality. b. a market failure caused by market power. Ten Principles of Economics 23 c. a market failure caused by equality. d. There is no market failure in this case. 51. The term "market failure" a. means the same thing as "market power." b. refers to the dissolution of a market when firms decide to quit producing a certain product. c. refers to the failure of a market to produce an efficient allocation of resources. d. refers to government's failure to enforce the property rights of households or firms that participate in a certain market. 52. If an externality is present in a market, economic efficiency may be enhanced by a. government intervention. b. a decrease in foreign competition. c. fewer market participants. d. weaker property rights. 53. An example of an externality is the impact of a. bad weather on the income of farmers. b. the personal income tax on a person's ability to purchase goods and services. c. pollution from a factory on the health of people in the vicinity of the factory. d. increases in health care costs on the health of individuals in society. 54. The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as a. productivity. b. an externality. c. market power. d. property rights. 55. If an electric power plant does not bear the entire cost of the pollution it emits, it will a. not emit any pollution so as to avoid the entire cost of the pollution. b. emit lower levels of pollution. c. emit an acceptable level of pollution. d. emit too much pollution. 56. Which of the following is an example of an externality? a. A paper mill dumps waste into the river. b. A neighbor’s loud music disrupts sleep. c. A drunk driver causes an accident that injures another person. d. All of the above are correct. 57. Which of these activities will most likely impose an external cost? a. An athlete works out at a gym. b. A secretary smokes a cigarette in a crowded break room. c. A young mother pushes her baby in a stroller. d. A construction worker eats a hotdog during his lunch break. 58. Which of these activities will most likely result in an external benefit? 24 Ten Principles of Economics a. Ted purchases a dilapidated house and cleans up the yard and exterior of the house. b. Tim purchases an iPhone and downloads new apps. c. Terri purchases a new SUV and drives it to work every day. d. Thomas purchases a suit and wears it on his interviews. 59. Market power refers to the a. power of a single person or small group to influence market prices. b. ability of a person or small group to successfully market new products. c. power of the government to regulate a market. d. importance of a certain market in relation to the overall economy. 60. Which of the following firms is likely to have the greatest market power? a. an electric company b. a farmer c. a grocery store d. a local electronics retailer 61. Which of the following firms is most likely to have market power? a. a grocery store in a metropolitan area b. a convenience store in a suburb c. a pub in a college town d. the only gasoline station in a rural area 62. The price of diamonds is high, in part because the majority of the world’s diamonds are controlled by a single firm. This is an example of a. a market failure caused by an externality. b. a market failure caused by market power. c. a market failure caused by equality. d. There is no market failure in this case. 63. Air pollution from burning fossil fuels causes damages to crops and public health. This is an example of a. a market failure caused by an externality. b. a market failure caused by market power. c. a market failure caused by equality. d. There is no market failure in this case. Multiple Choice – Section 03: How the Economy as a Whole Works 1. In 2011, the average American earned about $48,000 while the average Nigerian earned about $1,200. Which of the following statements is likely? a. The average American purchases more televisions than the average Nigerian. b. The average American has better nutrition and healthcare than the average Nigerian. c. The average American has a longer life expectancy than the average Nigerian. d. All of the above are correct. 2. In the United States, incomes historically have grown about 2 percent per year. At this rate, average income doubles every a. 15 years. b. 25 years. Ten Principles of Economics 25 c. 35 years. d. 45 years. 3. Over the past century, the average income in the United States has risen about a. twofold. b. fivefold. c. eightfold. d. tenfold. 4. The term "productivity" a. means the same thing as "efficiency." b. is seldom used by economists, as its meaning is not precise. c. refers to the quantity of goods and services produced from each unit of labor input. d. refers to the variety of goods and services from which households can choose when they shop. 5. Productivity is defined as the a. amount of goods and services produced from each unit of labor input. b. number of workers required to produce a given amount of goods and services. c. amount of labor that can be saved by replacing workers with machines. d. actual amount of effort workers put into an hour of working time. 6. Almost all variation in living standards is attributable to differences in countries' a. population growth rates. b. productivity. c. systems of public education. d. taxes. 7. A direct or positive relationship exists between a country's a. productivity and its standard of living. b. amount of government spending and its productivity. c. total population and its average citizen’s income. d. rate of population growth and the extent of its trade with other countries. 8. The historical rise in living standards of American workers is primarily a result of a. the influence of labor unions in America. b. tariff protection imposed by the American government. c. the enactment of minimum-wage laws in America. d. the rise in American productivity. 9. The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by a. unstable economic conditions in Eastern Europe. b. increased competition from abroad. c. a decline in the rate of increase in U.S. productivity. d. a strong U.S. dollar abroad, hurting U.S. exports. 10. Slow growth in US incomes during the 1970s and 1980s was primarily due to a. slow productivity growth in the US. b. increased competition from Japan. c. increased competition from European countries. d. a rapid decrease in the quantity of money in the economy. 26 Ten Principles of Economics 11. Suppose a typical worker in India can produce 32 units of product in an eight-hour day, while a typical worker in Bangladesh can produce 30 units of product in a 10-hour day. We can conclude that a. worker productivity in Bangladesh is higher than in India. b. the standard of living will likely be higher in India than in Bangladesh. c. productivity is 4 units per hour for the worker in Bangladesh and 3 units per hour for the worker in India. d. there will be no difference between the standard of living in India and Bangladesh. 12. US citizens have better nutrition, better healthcare, and a longer life expectancy than citizens of Ghana. Which of the following conclusions can be drawn from this statement? a. Average income in the US is higher than the average income in Ghana. b. The US has a higher standard of living than Ghana. c. Productivity in the US is higher than productivity in Ghana. d. All of the above are correct. 13. In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker a. decreased by 1.7 percent between 1998 and 2008. b. remained unchanged between 1998 and 2008. c. increased by 4.75 percent between 1998 and 2008. d. increased by 6.25 percent between 1998 and 2008. 14. In a particular country in 1998, the average worker needed to work 40 hours to produce 100 units of output. In that same country in 2008, the average worker needed to work 36 hours to produce 72 units of output. In that country, the productivity of the average worker a. decreased between 1998 and 2008, so we would expect the standard of living to have decreased accordingly. b. increased between 1998 and 2008, so we would expect the standard of living to have increased accordingly. c. decreased between 1998 and 2008, so we would expect inflation to have decreased accordingly. d. increased between 1998 and 2008, so we would expect inflation to have increased accordingly. 15. A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages? a. U.S. textile workers belong to a union, whereas Vietnamese textile workers do not belong to a union. b. There is little demand for cotton cloth in Vietnam and great demand in the U.S. c. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom. d. Vietnam has a low-wage policy to make its textile industry more competitive in world markets. 16. To raise productivity, policymakers could a. increase spending on education. b. provide tax credits to firms for capital improvements. c. fund research and development. d. All of the above are correct. Ten Principles of Economics 27 17. To increase living standards, public policy should a. ensure that workers are well educated and have the necessary tools and technology. b. make unemployment benefits more generous. c. move workers into jobs directly from high school. d. ensure a greater degree of equality, taking all income-earners into account. 18. The increase in living standards of American workers over the past century is primarily due to a. the success of labor unions. b. minimum-wage laws. c. improvements in productivity. d. None of the above are correct. 19. Incomes of U.S. households in the 1970s and 1980s a. grew rapidly, due to the widespread success of labor unions in pushing up wages during those decades. b. grew rapidly, due to several increases in the minimum wage during those decades. c. grew rapidly, due to government policies that discouraged the importation of foreign products during those decades. d. grew slowly, due to slow growth of the output of goods and services per hour of U.S. workers' time during those decades. 20. An increase in the overall level of prices in an economy is referred to as a. the income effect. b. inflation. c. deflation. d. the substitution effect. 21. During the early 1920s in Germany, prices a. doubled annually. b. doubled monthly. c. tripled monthly. d. tripled annually. 22. In less than two years in the early 1920s, the cost of a German newspaper rose from 0.30 marks to 70,000,000 marks. This is a spectacular example of a. market power caused by a change in the country’s standard of living. b. market power caused by a single firm controlling the newspaper production. c. inflation caused by increased productivity in the economy. d. inflation caused by an increase in the quantity of money in the economy. 23. In the United States, the overall level of prices more than doubled during the a. 1950s. b. 1960s. c. 1970s. d. 1980s. 28 Ten Principles of Economics 24. President Gerald Ford referred to inflation as a. a blight on our nation's economy. b. a necessary evil to combat high unemployment. c. public enemy number one. d. a fly in the ointment. 25. In which of the following decades was there both high inflation and rapid money supply growth in the US? a. the 1970’s and the 1990’s b. the 1970’s but not the 1990’s c. the 1990’s but not the 1970’s d. neither the 1970’s nor the 1990’s 26. In the 1990s, inflation in the United States was a. very close to zero. b. about 3 percent per year. c. about 6 percent per year. d. commonly referred to as “public enemy number one.” 27. Large or persistent inflation is almost always caused by a. excessive government spending. b. excessive growth in the quantity of money. c. foreign competition. d. higher-than-normal levels of productivity. 28. Most economists believe that an increase in the quantity of money results in a. an increase in the demand for goods and services. b. lower unemployment in the short run. c. higher inflation in the long run. d. All of the above are correct. 29. In the short run, which of the following rates of growth in the money supply is likely to lead to the lowest level of unemployment in the economy? a. 3 percent per year b. 5 percent per year c. 7 percent per year d. 9 percent per year 30. In the short run, which of the following rates of growth in the money supply is likely to lead to the highest level of unemployment in the economy? a. 1 percent per year b. 2 percent per year c. 3 percent per year d. 4 percent per year 31. In the short run, an increase in the money supply is likely to lead to a. lower unemployment and lower inflation. b. lower unemployment and higher inflation. c. higher unemployment and lower inflation. d. higher unemployment and higher inflation. Ten Principles of Economics 29 32. Suppose the Federal Reserve announces that it will be making a change to a key interest rate to increase the money supply. This is likely because a. the Federal Reserve is worried about inflation. b. the Federal Reserve is worried about unemployment. c. the Federal Reserve is hoping to reduce the demand for goods and services. d. the Federal Reserve is worried that the economy is growing too quickly. 33. Low rates of inflation are generally associated with a. low rates of government spending. b. small or nonexistent government budget deficits. c. low rates of productivity growth. d. low rates of growth of the quantity of money. 34. Which of the following is the most correct statement about the relationship between inflation and unemployment? a. In the short run, falling inflation is associated with falling unemployment. b. In the short run, falling inflation is associated with rising unemployment. c. In the long run, falling inflation is associated with falling unemployment. d. In the long run, falling inflation is associated with rising unemployment. 35. Which of the following is an important cause of inflation in an economy? a. increases in productivity in the economy b. the influence of positive externalities on the economy c. lack of property rights in the economy d. growth in the quantity of money in the economy 36. The mainstream view among economists is that a. society faces a tradeoff between unemployment and inflation, but only in the short run. b. society faces a tradeoff between unemployment and inflation, but only in the long run. c. society faces a tradeoff between unemployment and inflation, both in the short run and in the long run. d. no tradeoff exists between unemployment and inflation, either in the short run or in the long run. 37. For a very long time the country of Zeeland has had an inflation rate of 9%. Suddenly its inflation rate drops to 3%. The drop in the inflation rate a. could be due to slower money supply growth. We would expect unemployment to be higher. b. could be due to slower money supply growth. We would expect unemployment to be lower. c. could be due to higher money supply growth. We would expect unemployment to be higher. d. could be due to higher money supply growth. We would expect unemployment to be lower. 38. In the early 1980s, U.S. economic policy was directed toward reducing inflation. What would you have expected to observe during this short period of time? a. Inflation fell and unemployment fell. b. Inflation and unemployment were both unaffected. c. Inflation fell and unemployment increased. d. Inflation fell and unemployment was unchanged. 39. The relatively low inflation experienced in the United States in the 1990s is attributable to 30 Ten Principles of Economics a. slow growth of U.S. productivity during the 1990s. b. slow growth of the quantity of money in the U.S. in the 1990s. c. low levels of government spending in the U.S. in the 1980s and 1990s. d. the eight-year presidency of William Jefferson Clinton during the 1990s. 40. The tradeoff between inflation and unemployment a. implies that policies designed to reduce unemployment also reduce inflation. b. was eliminated by improved economic policies in the 1900s. c. is a long-run tradeoff, persisting for decades, according to most economists. d. None of the above are correct. 41. Germany could have avoided the high inflation that it experienced in the 1920s by a. not directing so many of its resources toward preparation for World War II. b. not increasing taxes so much on the German middle class. c. not allowing the quantity of money to increase so rapidly. d. using government policies to stimulate the economy more so than what was done. 42. In the short run, which of the following is not correct? a. Increasing the money supply increases the demand for goods and services. b. Increasing the money supply encourages firms to hire more workers. c. Lowering the money supply leads to a higher level of unemployment. d. Policies that encourage higher employment will also induce a lower rate of inflation. 43. In response to the deep economic downturn in the US in 2008 and 2009, the US a. reduced taxes. b. increased government spending. c. increased the supply of money. d. All of the above are correct. 44. The combination of President Obama’s strategies and the Federal Reserve’s reaction to the deep economic downturn in the US in 2008 and 2009 a. intended to reduce unemployment. b. may lead to excessive inflation over time. c. resulted in higher taxes and an increased supply of money. d. Both a and b are correct. 45. The short-run tradeoff between inflation and unemployment implies that, in the short run, a. a decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate. b. an increase in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate. c. policymakers are able to reduce the inflation rate and, at the same time, reduce the unemployment rate. d. policymakers can influence the inflation rate, but not the unemployment rate. 46. The business cycle is the a. relationship between unemployment and inflation. b. irregular fluctuations in economic activity. c. positive relationship between the quantity of money in an economy and inflation. d. predictable changes in economic activity due to changes in government spending and taxes.