Answer Key
Chapter 1 Ten Principles of Economics
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University:
Eastern Kentucky University -
Course:
ECO 231 | Fundamentals of Macroeconomics Academic year:
2021
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Views:
359
Pages:
114
Author:
Lance Gutierrez
Chapter 1
Ten Principles of Economics
TRUE/FALSE
1.
Scarcity means that there is less of a good or resource available than people wish to have.
ANS: T
2.
Economics is the study of how evenly goods and services are distributed within society.
ANS: F
3.
Economics is the study of how society allocates its unlimited resources.
ANS: F
4.
With careful planning, we can usually get something that we like without having to give up something else
that we like.
ANS: F
5.
Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff.
ANS: T
6.
Efficiency means everyone in the economy should receive an equal share of the goods and services produced.
ANS: F
7.
Equality refers to how the pie is divided, and efficiency refers to the size of the economic pie.
ANS: T
8.
Government policies that improve equality usually increase efficiency at the same time.
ANS: F
9.
An individual deciding how to allocate her limited time is dealing with both scarcity and trade-offs.
ANS: T
10. The cost of an action is measured in terms of foregone opportunities.
ANS: T
11.
Tuition is the single-largest cost of attending college for most students.
ANS: F
12.
If wages for accountants rose, then accountants’ leisure time would have a lower opportunity cost.
ANS: F
13.
A marginal change is a small incremental adjustment to an existing plan of action.
ANS: T
14.
An increase in the marginal cost of an activity necessarily means that people will no longer engage in any of
that activity.
ANS: F
15.
If the average cost of transporting a passenger on the train from Chicago to St. Louis is $75, it would be
irrational for the railroad to allow any passenger to ride for less than $75.
ANS: F
16.
The fact that people are willing to pay much more for a diamond, which is not needed for survival, than they
are willing to pay for a cup of water, which is needed for survival, is an example of irrational behavior.
ANS: F
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Chapter 1/Ten Principles of Economics
17.
A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.
ANS: F
18.
Suppose one county in Missouri decides it wants to reduce alcohol consumption, so the county passes a law
that raises the price of a bottle of beer by $1. As a result, people drive to other counties to drink alcohol, which
results in an increase in drunk driving. This illustrates the principle that people respond to incentives.
ANS: T
19.
A tax on gasoline is an incentive that encourages people to drive smaller more fuel-efficient cars.
ANS: T
20.
Trade allows each person to specialize in the activities he or she does best, thus increasing each individual's
productivity.
ANS: T
21.
Trade with any nation can be mutually beneficial.
ANS: T
22.
Trade can make everyone better off except in the case where one person is better at doing everything.
ANS: F
23.
The invisible hand ensures that economic prosperity is distributed equally.
ANS: F
24.
A market economy cannot produce a socially desirable outcome because individuals are motivated by their
own selfish interests.
ANS: F
25.
The government can potentially improve market outcomes if market inequalities or market failure exists.
ANS: T
26.
One way that governments can improve market outcomes is to ensure that individuals are able to own and
exercise control over their scarce resources.
ANS: T
27.
Market failure refers to a situation in which the market does not allocate resources efficiently.
ANS: T
28.
Market power and externalities are two possible causes of market failure.
ANS: T
29.
Productivity is defined as the quantity of goods and services produced from each unit of labor input.
ANS: T
30.
Inflation is the primary determinant of a country's living standards.
ANS: F
31.
Inflation increases the value of money.
ANS: F
32.
Inflation measures the increase in the quantity of goods and services produced from each hour of a worker’s
time.
ANS: F
33.
In the long run the primary effect of increasing the quantity of money is higher prices.
ANS: T
34.
The business cycle refers to fluctuations in economic activity such as employment and production.
ANS: T Chapter 1/Ten Principles of Economics
Multiple Choice-Sec00
MULTIPLE CHOICE
1.
The word that comes from the Greek word for "one who manages a household" is
3 4
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
market.
consumer.
producer.
economy.
ANS: D
2.
The word “economy” comes from the Greek word
a. “environment.”
b. “production.”
c. “one who manages a household.”
d. “one who makes decisions.”
ANS: C
, which means
3.
Resources are
a. scarce for households but plentiful for economies.
b. plentiful for households but scarce for economies.
c. scarce for households and scarce for economies.
d. plentiful for households and plentiful for economies.
ANS: C
4.
In considering how to allocate its scarce resources among its various members, a household considers
a. each member’s abilities.
b. each member’s efforts.
c. each member’s desires.
d. all of the above
ANS: D
5.
Economics deals primarily with the concept of
scarcity.
money.
poverty.
banking.
ANS: A
a.
b.
c.
d.
6.
Which of the following is correct?
a. The word economy comes from the Greek word for “rational thinker.”
b. Economists study the management of scarce resources.
c. Because economists believe that people pursue their best interests, they are not interested in how
people interact.
d. All of the above are correct. Chapter 1/Ten Principles of Economics
ANS: B
7.
The overriding reason as to why households and societies face many decisions is that
a. resources are scarce.
b. goods and services are not scarce.
c. incomes fluctuate with business cycles.
d. people, by nature, tend to disagree.
ANS: A
8.
The phenomenon of
stems from the fact that
a. most economies’ production methods are not very good.
b. in most economies, wealthy people consume disproportionate quantities of goods and services.
c. governments restrict production of too many goods and services.
d. resources are limited.
ANS: D
9.
Approximately what percentage of the world's economies experience scarcity?
a. 25%
b. 50%
c. 75%
d. 100%
ANS: D
10.
When a society cannot produce all the goods and services people wish to have, it is said that the economy is
experiencing
a. scarcity.
b. surpluses.
c. inefficiencies.
d. inequalities.
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Chapter 1/Ten Principles of Economics
ANS: A
11. Which of the following products would be considered scarce? Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
golf clubs
Picasso paintings
apples
All of the above are correct.
ANS: D
12.
Economics is the study of
a. production methods.
b. how society manages its scarce resources.
c. how households decide who performs which tasks.
d. the interaction of business and government.
ANS: B
13.
In most societies, resources are allocated by
a. a single central planner.
b. a small number of central planners.
c. those firms that use resources to provide goods and services.
d. the combined actions of millions of households and firms.
ANS: D
1.
a.
b.
c.
d.
The adage, "There is no such thing as a free lunch," means
even people on welfare have to pay for food.
the cost of living is always increasing.
people face tradeoffs.
all costs are included in the price of a product.
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Chapter 1/Ten Principles of Economics
ANS: C
2.
The adage, "There is no such thing as a free lunch," is used to illustrate the principle that
goods are scarce.
people face tradeoffs.
income must be earned.
households face many decisions.
ANS: B
a.
b.
c.
d.
3.
Which of the following statements best represents the principle represented by the adage, "There is no such
thing as a free lunch"?
a. Melissa can attend the concert only if she takes her sister with her.
b. Greg is hungry and homeless.
c. Brian must repair the tire on his bike before he can ride it to class.
d. Kendra must decide between going to Colorado or Cancun for spring break.
ANS: D
4.
The principle that "people face tradeoffs" applies to
a. individuals.
b. families.
c. societies.
d. All of the above are correct.
ANS: D
5.
Sophia is planning her activities for a hot summer day. She would like to go to the local swimming pool and
see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is
open she can only choose one activity. This illustrates the basic principle that
a. people respond to incentives.
b. rational people think at the margin.
c. people face tradeoffs.
d. improvements in efficiency sometimes come at the expense of equality. Chapter 1/Ten Principles of Economics
ANS: C
6.
Mitch has $100 to spend and wants to buy either a new amplifier for his guitar or a new mp3 player to listen to
music while working out. Both the amplifier and the mp3 player cost $100, so he can only buy one. This
illustrates the basic concept that
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Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
trade can make everyone better off.
people face trade-offs
rational people think at the margin.
people respond to incentives. Chapter 1/Ten Principles of Economics
ANS: B
7.
Guns and butter are used to represent the classic societal tradeoff between spending on
a. durable and nondurable goods.
b. imports and exports.
c. national defense and consumer goods.
d. law enforcement and agriculture.
ANS: C
8.
A tradeoff exists between a clean environment and a higher level of income in that
studies show that individuals with higher levels of income pollute less than low-income individuals.
efforts to reduce pollution typically are not completely successful.
laws that reduce pollution raise costs of production and reduce incomes.
employing individuals to clean up pollution causes increases in employment and income.
ANS: C
9.
a.
b.
c.
d.
When society requires that firms reduce pollution, there is
a tradeoff because of reduced incomes to the firms' owners and workers.
a tradeoff only if some firms are forced to close.
no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements.
no tradeoff, since everyone benefits from reduced pollution.
ANS: A
10.
a.
b.
c.
d.
Economists use the word
to describe a situation in which
each member of society has the same income.
each member of society has access to abundant quantities of goods and services, regardless of his or
her income.
c. society is getting the maximum benefits from its scarce resources.
d. society's resources are used efficiently.
a.
b.
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Chapter 1/Ten Principles of Economics
ANS: A
11.
Efficiency means that Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
ANS: D
society is conserving resources in order to save them for the future.
society's goods and services are distributed equally among society's members.
society's goods and services are distributed fairly, though not necessarily equally, among society's
members.
society is getting the maximum benefits from its scarce resources.
12.
The terms equality and efficiency are similar in that they both refer to benefits to society. However they are
different in that
a. equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits
from scarce resources.
b. equality refers to maximizing benefits from scarce resources and efficiency refers to uniform
distribution of those benefits.
c. equality refers to everyone facing identical tradeoffs and efficiency refers to the opportunity cost of
the benefits.
d. equality refers to the opportunity cost of the benefits and efficiency refers to everyone facing
identical tradeoffs.
ANS: A
13.
Which of the following phrases best captures the notion of efficiency?
absolute fairness
equal distribution
minimum waste
equitable outcome
ANS: C
a.
b.
c.
d.
14.
Which of the following words and phrases best captures the notion of
minimum waste
maximum benefit
sameness
efficiency
ANS: C
?
a.
b.
c.
d.
15.
A typical society strives to get the most it can from its scarce resources. At the same time, the society
attempts to distribute the benefits of those resources to the members of the society in a fair manner. In other words,
the society faces a tradeoff between
a. guns and butter.
b. efficiency and equality.
c. inflation and unemployment.
d. work and leisure.
ANS: B
16.
a.
b.
c.
d.
Which of the following is true?
Efficiency refers to the size of the economic pie; equality refers to how the pie is divided.
Government policies usually improve upon both equality and efficiency.
As long as the economic pie continually gets larger, no one will have to go hungry.
Efficiency and equality can both be achieved if the economic pie is cut into equal pieces.
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Chapter 1/Ten Principles of Economics
ANS: A
17.
As a result of a successful attempt by government to cut the economic pie into more equal slices,
it is easier to cut the pie, and therefore the economy can produce a larger pie.
those who earn more income pay less in taxes.
the pie gets smaller, and there will be less pie overall.
government will spend too much time cutting and it causes the economy to lose the ability to
produce enough pie for everyone.
ANS: C
a.
b.
c.
d.
18.
When the government redistributes income from the wealthy to the poor,
efficiency is improved, but equality is not.
both wealthy people and poor people benefit directly.
people work less and produce fewer goods and services.
the government collects less revenue in total.
ANS: C
19.
a.
b.
c.
d.
When the government attempts to improve equality in an economy the result is often
an increase in overall output in the economy.
additional government revenue since overall income will increase.
a reduction in equality.
a reduction in efficiency.
ANS: D
a.
b.
c.
d.
20.
When the government implements programs such as progressive income tax rates, which of the following is
likely to occur?
a. equality is increased and efficiency is increased.
b. equality is increased and efficiency is decreased.
c. equality is decreased and efficiency is increased.
d. equality is decreased and efficiency is decreased.
ANS: B
21.
A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is
that those policies
a. enhance equality.
b. reduce efficiency.
c. reduce the reward for working hard.
d. All of the above are correct.
ANS: D
22. a. When
equality
government
can usually
policies
be enhanced
are enacted,
without an efficiency loss, but efficiency can never be enhanced
without a reduction in equality.
b. efficiency can usually be enhanced without a reduction in equality, but equality can never be
enhanced without an efficiency loss.
c. it is always the case that either efficiency and equality are both enhanced, or efficiency and equality
are both diminished.
ANS: d.D None of the above are correct.
23.
Senator Smith wants to increase taxes on people with high incomes and use the money to help the poor.
Senator Jones argues that such a tax will discourage successful people from working and will therefore make society
worse off. An economist would say that
a. we should agree with Senator Smith.
b. we should agree with Senator Jones.
c. a good decision requires that we recognize both viewpoints.
d. there are no tradeoffs between equity and efficiency. Chapter 1/Ten Principles of Economics
ANS: C
24.
Senator Smith argues that replacing the income tax with a national sales tax would increase the level of
output. Senator Wells objects that this policy would benefit the rich at the expense of the poor.
a. Both Senators’ arguments are primarily about equality.
b. Both Senators’ arguments are primarily about efficiency.
c. Senator Smith’s argument is primarily about equality, while Senator Well’s argument is primarily
about efficiency.
d. Senator Smith’s argument is primarily about efficiency, while Senator Well’s argument is primarily
about equality.
ANS: D
25.
Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs
to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth
a. is more efficient and more equal for society.
b. is more efficient but less equal for society.
c. is more equal but less efficient for society.
d. is less equal and less efficient for society.
ANS: C
26.
The government has just passed a law requiring that all residents earn the same annual income regardless of
work effort. This law is likely to
a. increase efficiency and increase equality.
b. increase efficiency but decrease equality.
c. decrease efficiency but increase equality.
d. decrease efficiency and decrease equality.
ANS: C
27.
a.
b.
c.
d.
The opportunity cost of an item is
the number of hours needed to earn money to buy the item.
what you give up to get that item.
usually less than the dollar value of the item.
the dollar value of the item.
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Chapter 1/Ten Principles of Economics
ANS: B
28.
In economics, the cost of something is
the dollar amount of obtaining it.
always measured in units of time given up to get it.
what you give up to get it.
often impossible to quantify, even in principle.
ANS: C
29.
a.
b.
c.
d.
What you give up to obtain an item is called your
opportunity cost.
explicit cost.
true cost.
direct cost.
ANS: A
30.
a.
b.
c.
d.
Which of the following is correct concerning opportunity cost?
Except to the extent that you pay more for them, opportunity costs should not include the cost of
things you would have purchased anyway.
b. To compute opportunity costs, you should subtract benefits from costs.
c. Opportunity costs and the idea of trade-offs are not closely related.
d. Rational people should compare various options without considering opportunity costs.
ANS: A
a.
31.
High-school athletes who skip college to become professional athletes
obviously do not understand the value of a college education.
usually do so because they cannot get into college.
understand that the opportunity cost of attending college is very high.
are not making a rational decision since the marginal benefits of college outweigh the marginal
costs of college for high-school athletes.
ANS: C
a.
b.
c.
d.
32.
a.
b.
c.
d.
When computing the opportunity cost of attending a concert you should include
the price you pay for the ticket and the value of your time.
the price you pay for the ticket, but not the value of your time.
the value of your time, but not the price you pay for the ticket.
neither the price of the ticket nor the value of your time. Chapter 1/Ten Principles of Economics
ANS: A
33.
Mallory decides to spend three hours working overtime rather than watching a video with her friends. She
earns $8 an hour. Her opportunity cost of working is
a. the $24 she earns working.
b. the $24 minus the enjoyment she would have received from watching the video.
c. the enjoyment she would have received had she watched the video.
d. nothing, since she would have received less than $24 of enjoyment from the video.
ANS: C
34.
Moira decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of
napping is
a. the value of the knowledge she would have received had she attended class.
b. the $30 she could have earned if she had worked at her job for those two hours.
c. the value of her nap less the value of attending class.
d. nothing, since she would valued sleep more than attendance at class.
ANS: A
35.
Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is
the improvement in his grades from studying for the hour.
the improvement in his grades from studying minus the enjoyment of playing tennis.
the enjoyment and exercise he would have received had he played tennis.
zero. Since Russell chose to study rather than to play tennis, the value of studying must have been
greater than the value of playing tennis.
ANS: C
a.
b.
c.
d.
36.
For most students, the largest single cost of a college education is
the wages given up to attend school.
tuition, fees, and books.
room and board.
transportation, parking, and entertainment.
ANS: A
a.
b.
c.
d.
37.
The opportunity cost of going to college is
the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
the value of the best opportunity a student gives up to attend college.
zero for students who are fortunate enough to have all of their college expenses paid by someone
else.
d. zero, since a college education will allow a student to earn a larger income after graduation.
a.
b.
c.
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Chapter 1/Ten Principles of Economics
ANS: B
38.
For a college student who wishes to calculate the true costs of going to college, the costs of room and board Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
should be counted in full, regardless of the costs of eating and sleeping elsewhere.
should be counted only to the extent that they are more expensive at college than elsewhere.
usually exceed the opportunity cost of going to college.
plus the cost of tuition, equals the opportunity cost of going to college.
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Chapter 1/Ten Principles of Economics
ANS: B
39.
Suppose after graduating from college you get a job working at a bank earning $30,000 per year. After two
years of working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate
program that would require you to quit your job at the bank. Which of the following should
be included in a
calculation of your opportunity cost? Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
the cost of tuition and books to attend the graduate program
the $30,000 salary that you could have earned if you retained your job at the bank
the $45,000 salary that you will be able to earn after having completed your graduate program
the value of insurance coverage and other employee benefits you would have received if you
retained your job at the bank.
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Chapter 1/Ten Principles of Economics
ANS: C
40.
For which of the following individuals would the opportunity cost of going to college be highest? Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
a promising young mathematician who will command a high salary once she earns her college
degree
a student with average grades who has never held a job
a famous, highly-paid actor who wants to take time away from show business to finish college and
earn a degree
a student who is the best player on his college basketball team, but who lacks the skills necessary to
play professional basketball
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Chapter 1/Ten Principles of Economics
ANS: C
41.
When you calculate your true costs of going to college, what portion of your room-and-board expenses
should be included? Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
Your full room-and-board expenses should always be included.
None of your room-and-board expenses should ever be included.
You should include only the amount by which your room-and-board expenses exceed the income
you earn while attending college.
You should include only the amount by which your room-and-board expenses exceed the expenses
for rent and food if you were not in college.
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Chapter 1/Ten Principles of Economics
ANS: D
42.
Samantha’s college raises the cost of room and board per semester. This increase raises Samantha’s
opportunity cost of attending college
a. even if the amount she would have to pay for room and board if she didn’t attend college rose by
the same amount. An increase in opportunity cost reduces Samantha’s incentive to attend college.
b. even if the amount she would have to pay for room and board if she didn’t attend college rose by
the same amount. An increase in opportunity cost increases Samantha’s incentive to attend college.
c. only if the amount she would have to pay for room and board if she didn’t attend college rose by
less than the increase in the amount her college charges. An increase in opportunity cost reduces
Samantha’s incentive to attend college.
d. only if the amount she would have to pay for room and board if she didn’t attend college rose by
less than the increase in the amount her college charges. An increase in opportunity cost increases
Samantha’s incentive to attend college.
ANS: C
43.
When calculating the cost of college, which of the following should you probably
The cost of tuition
The cost of books required for college classes
The income you would have earned had you not gone to college
The cost of rent for your off-campus apartment.
ANS: D
44.
a.
b.
c.
d.
include?
When calculating the cost of college, which of the following should you probably include?
The cost of your meal plan for the cafeteria.
The cost of books required for college classes
The income you earn at your part-time job.
The cost of living in the dormitory.
ANS: B
a.
b.
c.
d.
45.
Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus
parking lot.
a. The cost of the parking permit is not part of the opportunity cost of attending college if you would
not have to pay for parking otherwise.
b. The cost of the parking permit is part of the opportunity cost of attending college if you would not
have to pay for parking otherwise.
c. Only half of the cost of the parking permit is part of the opportunity cost of attending college.
d. The cost of the parking permit is not part of the opportunity cost of attending college under any
circumstances.
ANS: B
46.
You have driven 1,000 miles on a vacation and then you notice that you are only 50 miles from an attraction
you hadn’t known about, but would really like to see. In computing the opportunity cost of visiting this attraction
you had not planned to visit, you should include
a. both the cost of driving the first 1,000 and the next 50 miles.
b. the cost of driving the first 1,000 miles, but not the cost of driving the next 50.
c. the cost of driving the next 50 miles, but not the cost of driving the first 1,000.
d. neither the cost of driving the first 1,000 miles nor the cost of driving the next 50 miles.
ANS: C
47.
Pete receives $50 as a birthday gift. In deciding how to spend the money, he narrows his options down to
four choices: Option A, Option B, Option C, and Option D. Each option costs $50. Finally he decides on Option B.
The opportunity cost of this decision is
a. the value to Pete of the option he would have chosen had Option B not been available.
b. the value to Pete of Options A, C and D combined.
c. $50.
d. $100.
ANS: A Chapter 1/Ten Principles of Economics
48.
College-age athletes who drop out of college to play professional sports
are not rational decision makers.
are well aware that their opportunity cost of attending college is very high.
are concerned more about present circumstances than their future.
underestimate the value of a college education.
ANS: B
a.
b.
c.
d.
49.
A rational decisionmaker
ignores marginal changes and focuses instead on “the big picture.”
ignores the likely effects of government policies when he or she makes choices.
takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.
takes an action only if the combined benefits of that action and previous actions exceed the
combined costs of that action and previous actions.
ANS: C
a.
b.
c.
d.
50.
A rational decision maker takes an action only if the
marginal benefit is less than the marginal cost.
marginal benefit is greater than the marginal cost.
average benefit is greater than the average cost.
marginal benefit is greater than both the average cost and the marginal cost.
ANS: B
51.
a.
b.
c.
d.
a.
b.
c.
d.
A rational decisionmaker takes an action if and only if
the marginal benefit of the action exceeds the marginal cost of the action.
the marginal cost of the action exceeds the marginal benefit of the action.
the marginal cost of the action is zero.
the opportunity cost of the action is zero.
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Chapter 1/Ten Principles of Economics
ANS: A
52.
Rational people make decisions at the margin by
following marginal traditions.
behaving in a random fashion.
thinking in black-and-white terms.
comparing marginal costs and marginal benefits.
ANS: D
a.
b.
c.
d.
53.
Making rational decisions "at the margin" means that people
make those decisions that do not impose a marginal cost.
evaluate how easily a decision can be reversed if problems arise.
compare the marginal costs and marginal benefits of each decision.
always calculate the marginal dollar costs for each decision.
ANS: C
a.
b.
c.
d.
54.
A marginal change is a
change that involves little, if anything, that is important.
large, significant adjustment.
change for the worse, and so it is usually a short-term change.
small, incremental adjustment.
ANS: D
a.
b.
c.
d.
55.
People are willing to pay more for a diamond than for a bottle of water because
the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an
extra bottle of water.
b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of
water.
c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of
water have to manipulate water prices.
d. water prices are held artificially low by governments, since water is necessary for life.
ANS: B
a.
56.
It costs a company $40,000 to produce 4000 basketballs. The company’s cost will be $40,009 if it produces
an additional basketball. If the company produces 4,000 basketballs then
a. its average cost is greater than its marginal cost.
b. its average cost and its marginal cost are equal.
c. its average cost is less than its marginal cost.
d. there is insufficient information to compute average and marginal costs..
ANS: A
57. a. The
themarginal
total benefit
benefit
John
John
getsgets
from
from
eating
eating
four
a fourth
cheeseburgers
cheeseburger
minusatthe
a picnic
total benefit
is
John gets from
eating three cheeseburgers.
ANS: b.A the same as the total benefit of eating four cheeseburgers.
58. c. Teresa
eats three
the marginal
orangescost
during
of eating
a particular
the fourth
day. cheeseburger
The marginal since
benefit
heshe
chose
enjoys
to eat
from
the eating
fourth the third
ANS:
A less than
orangea. cheeseburger.
can be thought of as the total benefit Teresa enjoys by eating three oranges minus the total benefit
59. d.After
the much
total
would
benefit
consideration,
have enjoyed
John gets
you
byfrom
eating
have
eating
chosen
just five
theCancun
first
cheeseburgers
twoover
oranges.
Ft. minus
Lauderdale
the total
as your
benefit
Spring
JohnBreak
gets from
destination
ANS:
D she
this year.
b. However,
eating
determines
four
Spring
cheeseburgers.
Teresa’s
Break
willingness
is still months
to payaway,
for the
and
first,
yousecond,
may reverse
and third
thisoranges.
decision. Which of the following
eventsa.
c.would
The
doesprompt
marginal
not depend
youbenefit
to
onreverse
how
of going
many
this decision?
to
oranges
Cancun
increases.
hasweek
already
60.
A furniture
maker
currently
produces
100 Teresa
tables
per
andeaten.
sells them for a profit. She is considering
d. The
b.
All
marginal
the above
cost
ofcorrect.
going
to Cancun
decreases.
expanding
her of
operation
in are
order
to make
more tables.
Should she expand?
c. Yes,
The marginal
benefit of
going
to Ft. Lauderdale decreases.
a.
because making
tables
is profitable.
d. No,
The because
marginalshe
costmay
of going
Ft. to
Lauderdale
decreases.
b.
not betoable
sell the additional
tables.
c. It depends on the marginal cost of producing more tables and the marginal revenue she will earn
from selling more tables.
d. It depends on the average cost of producing more tables and the average revenue she will earn from
selling more tables. Chapter 1/Ten Principles of Economics
ANS: C
61.
The average cost per seat on the 50-passenger Floating-On-Air Bus company's trip from Kansas City to St.
Louis, on which no refreshments are served, is $45. In advance of a particular trip, three seats remain unsold. The
bus company could increase its profit only if it
29 30
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
charged any ticket price above $0 for the three remaining seats.
charged at least $15 for each of the three remaining seats.
charged at least $45 for each of the three remaining seats.
paid three people to occupy the three remaining seats. Chapter 1/Ten Principles of Economics
ANS: A
62.
Tom is restoring a car and has already spent $3500 on the restoration. He expects to be able to sell the car
for $5000. Tom discovers that he needs to do an additional $2000 of work to make the table worth $5000 to
potential buyers. He could also sell the car now, without completing the additional work, for $2800. What should
he do?
31 32
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
He should sell the car now for $2800.
He should keep the car since it wouldn’t be rational to spend $5500 restoring a car and then sell it
for only $5000.
He should complete the additional work and sell the car for $5000.
It does not matter which action he takes since the outcome will be the same either way. Chapter 1/Ten Principles of Economics
ANS: C
63.
Traci is planning to sell her house, and she is considering making two upgrades to the house before listing it
for sale. Replacing the carpeting will cost her $3,000 and replacing the roof will cost her $6,000. Traci expects the
new carpeting to increase the value of her house by $2,500 and the new roof to increase the value of her house by
$7,500.
33 34
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
Traci should make both improvements to her house.
Traci should replace the carpeting but not replace the roof.
Traci should replace the roof but not replace the carpeting.
Traci should not make either improvement to her house. Chapter 1/Ten Principles of Economics
ANS: C
64.
Sue drinks three sodas during a particular day. The marginal benefit she enjoys from drinking the third soda
35 36
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
can be thought of as the total benefit Sue enjoys by drinking three sodas minus the total benefit she
would have enjoyed by drinking just two sodas.
determines Sue’s willingness to pay for the third soda.
is likely different from the marginal benefit provided to Sue by the second soda.
All of the above are correct. Chapter 1/Ten Principles of Economics
ANS: D
65.
A construction company has built 50 houses so far this year at a total cost to the company of $8 million. If
the company builds a 51st house, its total cost will increase to $8.18 million. Which of the following statements is
correct?
37 38
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
For the first 50 houses, the average cost per house was $160,000.
The marginal cost of the 51st house, if it is built, will be $180,000.
If the company can experience a marginal benefit of $190,000 by building the 51st house, then the
company should build it.
All of the above are correct. Chapter 1/Ten Principles of Economics
39
ANS: D
66.
Mike has spent $500 purchasing and repairing an old fishing boat, which he expects to sell for $800 once the
repairs are complete. Mike discovers that, in addition to the $500 he has already spent, he needs to make an
additional repair, which will cost another $400, in order to make the boat worth $800 to potential buyers. He can sell
the boat as it is now for $300. What should he do? 40
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
He should sell the boat as it is now for $300.
He should keep the boat since it would not be rational to spend $900 on repairs and then sell the
boat for $800.
He should complete the repairs and sell the boat for $800.
It does not matter which action he takes; the outcome is the same either way. Chapter 1/Ten Principles of Economics
41
ANS: C
67.
Bill’s Bakery bakes fresh bread every morning. Any bread not sold by the end of the day is thrown away. A
loaf of bread costs Bill $1.50 to produce, and he prices loaves of bread at $4 per loaf. Suppose near the end of one
day Bill still has 12 loaves of bread on hand. Which of the following is correct? 42
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
Bill should only sell the remaining bread for $4 per loaf since that is the regular price.
Bill should only sell the remaining bread for $1.50 per loaf or more since that is what the bread
costs to make.
Bill should be willing to sell the remaining bread for any price above $0 per loaf since he will have
to throw it away if he does not sell it for something.
Bill should just throw the bread away and change the price of his bread starting tomorrow to make
sure he sells all of his bread each day. Chapter 1/Ten Principles of Economics
ANS: C
68.
A bagel shop sells fresh baked bagels from 5 a.m. until 7 p.m. every day. The shop does not sell day-old
bagels, so all unsold bagels are thrown away at 7 p.m. each day. The cost of making and selling a dozen bagels is
$1.00; there are no costs associated with throwing bagels away. If the manager has 8 dozen bagels left at 6:30 p.m.
on a particular day, which of the following alternatives is most attractive?
43 44
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
Lower the price of the remaining bagels, even if the price falls below $1.00 per dozen.
Lower the price of the remaining bagels, but under no circumstances should the price fall below
$1.00 per dozen.
Throw the bagels away and produce 8 fewer dozen bagels tomorrow.
Starting tomorrow, lower the price on all bagels so they will all be sold earlier in the day. Chapter 1/Ten Principles of Economics
ANS: A
69.
Stan buys a 1966 Mustang for $2,000, planning to restore and sell the car. He goes on to spend $8,000
restoring the car. At this point he can sell the car for $9,000. As an alternative, he can spend an additional $3,000
replacing the engine. With a new engine the car would sell for $12,000. Stan should
45 46
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
complete the repairs and sell the car for $12,000.
sell the car now for $9, 000.
never try such an expensive project again.
be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.
ANS: D
70.
Sarah buys and sells real estate. Two weeks ago, she paid $280,000 for a house on Pine Street, intending to
spend $40,000 on repairs sell the house for $350,000. Last week, the city government announced a plan to build a
new landfill on Pine Street just down the street from the house Sarah purchased. As a result of the city’s announced
plan, Sarah is weighing two alternatives: She can go ahead with the $40,000 in repairs and then sell the house for
$270,000, or she can forgo the repairs and sell the house as it is for $240,000. Sarah should
a. keep the house and live in it.
b. go ahead with the $40,000 in repairs and sell the house for $270,000.
c. forgo the repairs and sell the house as it is for $240,000.
d. move the house from Pine Street to a more desirable location, regardless of the cost of doing so.
ANS: C
71.
You are considering staying in college another semester so that you can complete a major in economics. In
deciding whether or not to stay you should
a. compare the total cost of your education to the total benefits of your education.
b. compare the total cost of your education to the benefits of staying one more semester.
c. compare the cost of staying one more semester to the benefits of staying one more semester.
d. compare the total benefits of your education to the cost of staying one more semester.
ANS: C
72.
Sam and Sadie charge people to park on their lawn while attending a nearby craft fair. At the current price
of $10, eight people park on their lawn. If they raise the price to $15, they know that only six people will want to
park on their lawn. Whether they have eight or six cars parked on their lawn does not affect their costs. From this
information it follows that
a. they should leave the price at $10.
b. it does not matter if they charge $10 or $15.
c. they would do better charging $15 than $10.
d. they should raise the price even more. Chapter 1/Ten Principles of Economics
47
ANS: C
73.
Your professor loves her work, teaching economics. She has been offered other positions in the corporate
world that would increase her income by 25 percent, but she has decided to continue working as a professor. Her
decision would not change unless the marginal
a. cost of teaching increased.
b. benefit of teaching increased.
c. cost of teaching decreased.
d. cost of a corporate job increased.
ANS: A
74.
Suppose your management professor has been offered a corporate job with a 30 percent pay increase. He has
decided to take the job. For him, the marginal
a. cost of leaving was greater than the marginal benefit.
b. benefit of leaving was greater than the marginal cost.
c. benefit of teaching was greater than the marginal cost.
d. All of the above are correct.
ANS: B
75.
Economists are particularly adept at understanding that people respond to
laws.
incentives.
punishments more than rewards.
rewards more than punishments.
ANS: B
76.
a.
b.
c.
d.
People are likely to respond to a policy change
only if they think the policy is a good one.
only if the policy change changes the costs of their behavior.
only if the policy change changes the benefits of their behavior.
if the policy changes either the costs or benefits of their behavior.
ANS: D
a.
b.
c.
d.
77.
a. Government
safety glasspolicies
in all new
can cars.
change the costs and benefits that people face. Those policies have the potential to
a. seat
b.
alterbelts
people’s
in allbehavior.
new cars.
b. alter
c.
air bags
people’s
in all decisions
new cars. at the margin.
c. D stricter
producedrunk
resultsdriving
that policymakers
laws in all states.
did not intend.
ANS: d.
ANS:
80.
79. a.
d.U.S.
B
Following
All
a reduction
laws
of the
requiring
theabove
in
implementation
both
are
that
driver
correct.
drivers
deaths
ofwear
laws
and
seat
requiring
pedestrian
belts have
automobiles
deaths.
resulted in
to have seat belts, which of the following
occurred?
b.D fewer
An individual’s
accidents probability
and fewer deaths
of surviving
per accident.
an auto accident rose..
ANS: a.
78. c.
b.Ralph
There
fewer
Nader's
driver
was anbook
deaths,
increase
fewer
in pedestrian
accidents deaths.
andcaused
fewer Congress
pedestriantodeaths.
require
c. little
d.
Therechange
was aninincrease
the number
in automobile
of driver deaths,
accidents.
but more accidents and more pedestrian deaths.
ANS: d.D All of the above are correct.
81.
Evidence indicates that seat belt laws have led to
fewer pedestrian deaths.
fewer automobile accidents.
fewer deaths per automobile accident.
All of the above are correct.
ANS: C
DIF: 1
REF: 1-1
NAT: Analytic
LOC: The role of incentives
TOP:
MSC: Definitional
82. One effect of the government-imposed seat belt law in the U.S. has been
a. a dramatic decrease in the number of pedestrian deaths.
b. safer driving.
c. an increase in the number of accidents.
d. a dramatic decrease in the number of driver deaths.
a.
b.
c.
d.
Incentives 48
Chapter 1/Ten Principles of Economics
ANS: C
83.
Based on the available evidence, which of the following groups benefits most from mandatory seat belt
laws?
a. automakers
b. pedestrians
c. drivers
d. owners of collision-repair shops
ANS: D
84.
Which of the following can policy do?
alter incentives
alter trade-offs
change opportunity costs
All of the above are correct.
ANS: D
a.
b.
c.
d.
85.
Suppose the state of Iowa passes a law that increases the price of cigarettes by $1 per pack. As a result,
residents in Iowa start purchasing their cigarettes in surrounding states. Which of the following principles does this
best illustrate?
a. People respond to incentives
b. Rational people think at the margin
c. Trade can make everyone better off
d. Markets are usually a good way to organize economic activity
ANS: A
86.
Suppose the state of Massachusetts passes a law that bans smoking in restaurants. As a result, residents of
Rhode Island who do not like breathing second-hand smoke begin driving across the border to Massachusetts to eat
at restaurants there. Which of the following principles does this best illustrate?
a. People respond to incentives
b. Rational people think at the margin
c. Trade can make everyone better off
d. Markets are usually a good way to organize economic activity Chapter 1/Ten Principles of Economics
ANS: A
87.
In the former Soviet Union, producers were paid for meeting output targets, not for selling products. Under
those circumstances, what were the economic incentives for producers?
a. to produce good quality products so that society would benefit from the resources used
b. to conserve on costs, so as to maintain efficiency in the economy
c. to produce enough to meet the output target, without regard for quality or cost
d. to produce those products that society desires most
ANS: C
88.
Which of the following principles is
one of the four principles of
People face tradeoffs.
Trade can make everyone better off.
People respond to incentives.
Rational people think at the margin.
ANS: B
decisionmaking?
a.
b.
c.
d.
89.
Which of the following statements exemplifies a principle of individual decisionmaking?
Trade can make everyone better off.
Governments can sometimes improve market outcomes.
The cost of something is what you give up to get it.
All of the above are correct.
ANS: C
a.
b.
c.
d.
1.
Which of the following is a principle concerning how people interact?
Markets are usually a good way to organize economic activity.
Rational people think at the margin.
People respond to incentives.
All of the above are correct.
ANS: A
a.
b.
c.
d.
2.
a.
b.
c.
d.
Which is the most accurate statement about trade?
Trade can make every nation better off.
Trade makes some nations better off and others worse off.
Trading for a good can make a nation better off only if the nation cannot produce that good itself.
Trade helps rich nations and hurts poor nations.
49 50
Chapter 1/Ten Principles of Economics
ANS: A
3.
The principle that "trade can make everyone better off" applies to interactions and trade between Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
families.
states within the United States.
nations.
All of the above are correct.
ANS: D
4.
The principle that trade can make everyone better off applies to
a. individuals.
b. families.
c. countries.
d. All of the above
ANS: D
5.
Which of the following statements about trade is false?
a. Trade increases competition.
b. With trade, one country wins and one country loses.
c. Bulgaria can benefit, potentially, from trade with any other country.
d. Trade allows people to buy a greater variety of goods and services at lower cost.
51 52
Chapter 1/Ten Principles of Economics
ANS: B
6.
Trade between the United States and India
benefits both the United States and India.
is a losing proposition for the United States because India has cheaper labor.
is a losing proposition for India because capital is much more abundant in the U.S. than in India.
is a losing proposition for India because U.S. workers are more productive.
ANS: A
a.
b.
c.
d.
7.
Canada can benefit from trade
a. only with nations that can produce goods Canada cannot produce.
b. only with less developed nations.
c. only with nations outside of North America.
d. with any nation.
ANS: D
8.
If Japan chooses to engage in trade, it
a. will only benefit if it trades with countries that produce goods Japan cannot produce.
b. cannot benefit if it trades with less developed countries.
c. should first attempt to produce the good itself.
d. can benefit by trading with any other country.
ANS: D
9.
a.
b.
c.
d.
If the United States decides to trade with Mexico, we know that
Mexico will benefit, but trade with a less developed country could not benefit the United States.
it will not benefit Mexico because workers in the United States are more productive.
Mexico and the United States can both benefit.
it will not benefit either country because their cultural differences are too vast. Chapter 1/Ten Principles of Economics
53
ANS: C
10.
Senator Smart, who understands economic principles, is trying to convince workers in her district that trade
with other countries is beneficial. Senator Smart should argue that trade can be beneficial
a. only if it allows us to obtain things that we couldn't make for ourselves.
b. because it allows specialization, which increases total output.
c. to us if we can gain and the others involved in the trade lose.
d. in only a limited number of circumstances because others are typically self-interested.
ANS: B
11.
Suppose that a country that has a high level of output per person agrees to trade with a country that has a low
level of output per person. Which country can benefit?
a. only the one with a low level of output per person.
b. only the one with a high level of output per person.
c. both
d. neither
ANS: C
12.
Suppose that a country that has a high average wage level agrees to trade with a country that has a low average
wage level. Which country can benefit?
a. only the one with a low level of output per person.
b. only the one with a high level of output per person.
c. both
d. neither
ANS: C
13.
Trade between countries tends to
a. reduce both competition and specialization.
b. reduce competition and increase specialization.
c. increase competition and reduce specialization.
d. increase both competition and specialization.
ANS: D
14.
When the United States trades with Singapore,
both countries are likely made better off.
only Singapore benefits since the United States can produce all goods at a higher level of quality
than Singapore.
c. only the United States benefits since Singapore’s low wages guarantee profitable firms in
Singapore regardless of trade.
d. niether country will benefit since the United States is more efficient than Singapore at producing all
goods.
ANS: A
a.
b.
15.
a.
b.
c.
d.
Benefits from trade would
include
the ability of people and nations to specialize.
a greater variety of goods and services becoming available.
less competition.
lower prices. 54
Chapter 1/Ten Principles of Economics
ANS: C
16.
Central planning refers to Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
markets guiding economic activity. Today many countries that had this system have abandoned it.
markets guiding economic activity. Today many countries that did not have this system have
implemented it.
government guiding economic activity. Today many countries that had this system have abandoned
it.
government guiding economic activity. Today many countries that did not have this system have
implemented it.
ANS: C
17.
One advantage market economies have over centrally-planned economies is that market economies
provide an equal distribution of goods and services to households.
establish a significant role for government in the allocation of resources.
solve the problem of scarcity.
are more efficient.
ANS: D
18.
a.
b.
c.
d.
The basic principles of economics suggest that
markets are seldom, if ever, a good way to organize economic activity.
government should become involved in markets when trade between countries is involved.
government should become involved in markets when those markets fail to produce efficient or fair
outcomes.
d. All of the above are correct.
ANS: C
a.
b.
c.
19.
Which of the following statements best characterizes a basic difference between market economies and
centrally-planned economies?
a. Society relies more upon prices to allocate resources when the economy is centrally-planned than
when it is market-based.
b. The self-interest of households is reflected more fully in the outcome of a centrally-planned
economy than in the outcome of a market economy.
c. Government plays a larger role in the economic affairs of a market economy than in the economic
affairs of a centrally-planned economy.
d. None of the above are correct.
ANS: D
20.
Market economies are distinguished from other types of economies largely on the basis of
a. the political affiliations of government officials.
b. the process by which government officials are elected or appointed.
c. the ways in which scarce resources are allocated.
d. the number of retail outlets available to consumers.
55 56
Chapter 1/Ten Principles of Economics
ANS: C
21.
The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the
1960s.
1970s.
1980s.
1990s.
ANS: C
22.
a.
b.
c.
d.
The economy of the former Soviet Union is best described as a
primitive economy.
market economy.
hybrid economy.
centrally-planned economy.
ANS: D
a.
b.
c.
d.
23.
Communist countries worked under the premise that
markets were the best way to organize economic activity.
central planners were in the best position to determine the allocation of scarce resources in the
economy.
c. households and firms, guided by an “invisible hand,” could achieve the most efficient allocation of
scarce resources.
d. allowing the market forces of supply and demand to operate with no government intervention
would acheive the most efficient allocation of scarce resources.
ANS: B
a.
b.
24.
Prior to the collapse of communism, communist countries worked on the premise that economic well-being
could be best attained by
a. a market economy.
b. a strong reliance on prices and individuals’ self-interests.
c. a system of large privately-owned firms.
d. the actions of government central planners. Chapter 1/Ten Principles of Economics
ANS: D
25.
The idea that only the government can organize economic activity in a way that promotes economic wellbeing for a country as a whole
57 58
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
is a basic principle regarding individual decisionmaking.
amounts to a denial of one of the basic principles regarding interactions among people.
supports the idea that the "invisible hand" should guide economic activity.
was promoted by the economist Adam Smith in a well-known 1776 book.
ANS: B
26.
a.
b.
c.
d.
Which of the following statements about markets is most accurate?
Markets are usually a good way to organize economic activity.
Markets are usually inferior to central planning as a way to organize economic activity.
Markets fail and are therefore not an acceptable way to organize economic activity.
Markets are a good way to organize economic activity in developed nations, but not in less
developed nations. Chapter 1/Ten Principles of Economics
ANS: A
27.
Which of the following observations was made famous by Adam Smith in his book
There is no such thing as a free lunch.
People buy more when prices are low than when prices are high.
No matter how much people earn, they tend to spend more than they earn.
Households and firms interacting in markets are guided by an "invisible hand" that leads them to
desirable market outcomes.
ANS: D
a.
b.
c.
d.
28.
The term "invisible hand" was coined by
Adam Smith.
David Ricardo.
Karl Marx.
Benjamin Franklin.
ANS: A
a.
b.
c.
d.
29.
The famous observation that households and firms interacting in markets act as if they are guided by an
“invisible hand” that leads them to desirable market outcomes comes from whose 1776 book?
a. David Ricardo
b. Thorstein Veblen
c. John Maynard Keynes
d. Adam Smith
ANS: D
30.
Adam Smith's book
1692.
1776.
1816.
1936.
ANS: B
was published in
a.
b.
c.
d.
31.
and
the
Declaration
of Independence share the point of view that
a. Both
advertising.
how central planners
government
actions that
made
distort
economic
prices.
decisions.
a. increased
everythe
person
is entitled
life, liberty,
and the
of happiness.
b.
prices.
how
decisions
competition
of households
intomarkets.
and firms
leadpursuit
to desirable
market outcomes.
b. individuals
are
left
torights.
their
without the government guiding their actions.
c.
central
the
enforcement
control
planning.
that
of best
large
property
firms
haveown
overdevices
the economy.
c. too
the government
plays
a central
role
in organizing
a market
d.
government
much attention
regulations.
regulations
paid
without
to efficiency.
which
the economy
wouldeconomy.
be less efficient.
d.A
because
of hand's
human
nature
a strong
legal
system
is necessary
for
a and
market
system to
ANS:
33. a.
34.
35.
B
The
When
only
invisible
the
the"invisible
values
hand
that
refers
hand"
ability
society
toguides
to
places
coordinate
economic
on those
the
activity,
decisions
products.
prices
of theoffirms
products
households
reflect
insurvive.
the economy can be
hindered
32. The
b.B
"invisible
only the costs
hand"
to directs
societyeconomic
of producing
activity
thosethrough
products.
ANS:
Cby
36. a.
c. The
government
both
invisible
the values
hand
intervention.
that
works
society
to promote
places on
general
thosewell-being
products and
in the
the economy
costs to society
primarily
of producing
through those
b. products.
the political process.
d. none
c.
people’s
of the
pursuit
above;
of when
self-interest.
the "invisible hand" guides economic activity, prices of products are set by
d. the
altruism.
government in a manner that is thought to be "fair."
ANS: C
37.
According to Adam Smith, the success of decentralized market economies is primarily due to
the basic benevolence of society.
society's legal system.
individuals' pursuit of self-interest.
partnerships that are forged between business and government.
ANS: C
a.
b.
c.
d.
38.
by
The self-interest of the participants in an economy is guided into promoting general economic self-interest
a.
b.
c.
d.
the invisible hand.
market power.
government intervention.
.
59 60
Chapter 1/Ten Principles of Economics
ANS: A
39.
In an economy in which decisions are guided by prices and individual self-interest, there is
a. the potential to achieve efficiency in production.
b. a strong need for government intervention in the market.
c. less efficiency than would be observed in a centrally-planned economy.
d. more need for a strong legal system to control individual greed than would be needed in a centrallyplanned economy.
ANS: A
40.
In a market economy, who makes the decisions that guide most economic activity?
firms only
households only
firms and households
government
ANS: C
a.
b.
c.
d.
41.
In a market economy, economic activity is guided by
the government.
corporations.
central planners.
self-interest and prices.
ANS: D
a.
b.
c.
d.
42.
a.
b.
c.
d.
Which of the following statements does
apply to a market economy?
Firms decide whom to hire and what to produce.
The “invisible hand” usually maximizes the well-being of society as a whole.
Households decide which firms to work for and what to buy with their incomes.
Government policies are the primary forces that guide the decisions of firms and households. Chapter 1/Ten Principles of Economics
ANS: D
43.
The decisions of firms and households are guided by prices and self-interest in a
61 62
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
command economy.
centrally-planned economy.
market economy.
All of the above are correct. Chapter 1/Ten Principles of Economics
ANS: C
44.
For markets to work well, there must be
63 64
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
market power.
a central planner.
property rights.
abundant, not scarce, resources. Chapter 1/Ten Principles of Economics
ANS: C
45.
Prices usually reflect
65 66
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
only the value of a good to society.
only the cost to society of making a good.
both the value of a good to society and the cost to society of making the good.
neither the value of a good to society nor the cost to society of making the good. Chapter 1/Ten Principles of Economics
ANS: C
46.
Prices direct economic activity in a market economy by
67 68
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
influencing the actions of buyers and sellers.
reducing scarcity of the goods and services produced.
eliminating the need for government intervention.
allocating goods and services in the most equitable way. Chapter 1/Ten Principles of Economics
ANS: A
47.
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
69 70
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
the value of a good to society, but not the cost of making it.
the cost of making a good to society, but not its value.
both the value of a good to society and the cost of making it.
neither the value of a good to society nor the cost of making it. Chapter 1/Ten Principles of Economics
ANS: C
48.
If the price of visiting a doctor were fixed below the current price, then we would expect
71 72
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
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.
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.
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.
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. Chapter 1/Ten Principles of Economics
ANS: B
49.
If the price of a gallon of milk were fixed above the current price, then we would expect
an increase in the number of gallons of milk people want to buy and an increase in the number of
gallons of milk dairy farmers want to sell.
b. an increase in the number of gallons of milk people want to buy and a decrease in the number of
gallons of milk dairy farmers want to sell.
c. a decrease in the number of gallons of milk people want to buy and an increase in the number of
gallons of milk dairy farmers want to sell.
d. a decrease in the number of gallons of milk people want to buy and a decrease in the number of
gallons of milk dairy farmers want to sell.
ANS: C
50.
a.
When the government prevents prices from adjusting naturally to supply and demand,
it equates the amount buyers want to buy with the amount sellers want to sell.
it adversely affects the allocation of resources.
it improves equality and efficiency.
it improves efficiency but reduces equality.
ANS: B
a.
b.
c.
d.
51.
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.
ANS: C
52.
a.
b.
c.
d.
The government enforces property rights by
requiring property owners to pay property taxes.
providing police and courts.
forcing people to own property.
providing public parks and recreation facilities.
73 74
Chapter 1/Ten Principles of Economics
ANS: B
53.
A company that formerly produced software went out of business because too many potential customers
bought illegally-produced copies of the software instead of buying the product directly from the company. This
instance serves as an example of Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
market power.
inefficient trade.
inadequate enforcement of property rights.
the invisible hand at work.
ANS: C
54.
a.
b.
c.
d.
For which of the following problems can well-designed public policy enhance economic efficiency?
both externalities and market power
externalities, but not market power
market power, but not externalities
neither externalities nor market power
75 76
Chapter 1/Ten Principles of Economics
ANS: A
55.
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.
ANS: A
56.
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.
ANS: C
57.
Which of the following could reduce economic efficiency?
laws that encourage lawsuits.
policies that redistribute income
policies that impose significant restrictions on international trade
All of the above are correct
ANS: D
a.
b.
c.
d.
58.
The term used to describe a situation in which markets do not allocate resources efficiently is
economic meltdown.
market failure.
equilibrium.
the effect of the invisible hand.
ANS: B
a.
b.
c.
d.
59.
A rationale for government involvement in a market economy is as follows:
a. Markets sometimes fail to produce a fair distribution of economic well-being.
b. Markets sometimes fail to produce an efficient allocation of resources.
ANS: c. C
D Property rights have to be enforced.
A
ANS: d.A All of the above are correct.
ANS:
61.
62.
63.
64.
60. a. The
Which
Causes
Market
D means
externalities
a situation
low
term
consumer
of
of
failure
the
"market
market
the
market
same
in
following
can
and
which
demand.
failure
failure
failure"
thing
be
market
caused
the
is
refers
as
include
market
power.
"market
by
generally
to onpower."
its regarded
own fails by
to allocate
economists
resources
as a legitimate
efficiently.
reason for the government to
intervene
a.
b. in
an
market
equilibrium
refers
toapromote
unsuccessful
market?
topower
theefficiency
prices.
dissolution
and
advertising
incorrect
of a campaign
forecasts
market when
of
which
consumer
firms
reduces
decide
demand.
demand
to quit for
producing
a product.
a certain product.
b. to
c.
a situation
externalities
refers
promote
to thein
equality
failure
and
which
foreign
market
of
competition
a market
power.
competition.
toamong
produce
firms
an efficient
becomesallocation
ruthless. of resources.
c. refers
d.
atofirm
incorrect
high
enforce
prices
to
which
government's
forecasts
property
and
is forced
foreign
of
rights
consumer
out
failure
competition.
of business
to demand
enforce
because
and
the property
foreign
of losses.
competition.
rights of households or firms that participate
to aprotect
certainanmarket.
industry from foreign competition
ANS: d.C in
65.
If an externality is present in a market, economic efficiency may be enhanced by
government intervention.
increased competition.
better informed market participants.
weaker property rights.
ANS: A
66.
a.
b.
c.
d.
a.
b.
c.
d.
An example of an externality is the impact of
bad weather on the income of farmers.
the personal income tax on a person's ability to purchase goods and services.
pollution from a factory on the health of people in the vicinity of the factory.
increases in health care costs on the health of individuals in society. Chapter 1/Ten Principles of Economics
ANS: C
67.
Which of the following is an example of an externality?
Aaron purchases a new flat screen television.
Bonnie cannot catch the flu from Bobby because Bobby got a flu vaccine.
Clyde sells a book to Cathy.
Doug turns up the heat in his apartment.
ANS: B
a.
b.
c.
d.
68.
The willingness of citizens to pay for a 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.
ANS: B
69.
If a paper factory does
bear the entire cost of the pollution it emits, it will
not emit any pollution so as to avoid the entire cost of the pollution.
emit lower levels of pollution.
emit an acceptable level of pollution.
emit too much pollution.
ANS: D
a.
b.
c.
d.
70.
Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is
intended to reduce
a. efficiency.
b. equality.
c. externalities.
d. productivity.
77 78
Chapter 1/Ten Principles of Economics
ANS: C
71.
Which of these consumption activities will most likely impose an external cost? Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
An athlete works out at a gym.
A secretary smokes a cigarette in a crowded break room.
A young mother pushes her baby in a stroller.
A construction worker eats a hotdog during his lunch break.
ANS: B
72.
a.
b.
c.
d.
Which of these activities will most likely result in an external benefit?
A college student buys a deck of cards to play solitaire in her dorm room.
An elderly woman plants a flower garden on the vacant lot next to her house.
An executive purchases a book to read on a business trip.
A ten-year-old uses his allowance to buy new Nike shoes.
79 80
Chapter 1/Ten Principles of Economics
ANS: B
73.
When a single person (or small group) has the ability to influence market prices, there is Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
competition.
market power.
an externality.
a lack of property rights.
ANS: B
74.
a.
b.
c.
d.
Market power refers to the
power of a single person or small group to influence market prices.
ability of a person or small group to successfully market new products.
power of the government to regulate a market.
importance of a certain market in relation to the overall economy.
81 82
Chapter 1/Ten Principles of Economics
ANS: A
75.
Which of the following firms is likely to have the greatest market power?
An electric company
A farmer
A grocery store
A local electronics retailer
ANS: A
76.
a.
b.
c.
d.
Which of the following firms is most likely to have market power?
a grocery store in a metropolitan area
a gas station in a suburb
a pub in a college town
the only hotel in a rural area
ANS: D
77.
a.
b.
c.
d.
An example of a firm with market power is a
delicatessen in New York.
cable TV provider in St. Louis.
clothing store in Los Angeles.
family farm in Illinois.
ANS: B
a.
b.
c.
d.
1.
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.
c. 35 years.
d. 45 years. Chapter 1/Ten Principles of Economics
ANS: C
2.
In the United States, incomes have historically grown
83 84
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
about 0.5 percent per year.
about 2 percent per year.
about 4 percent per year.
about 6 percent per year.
ANS: B
3.
a.
b.
c.
d.
Over the past century, the average income in the United States has risen about
twofold.
fivefold.
eightfold.
tenfold. Chapter 1/Ten Principles of Economics
ANS: C
4.
The term "productivity"
means the same thing as "efficiency."
is seldom used by economists, as its meaning is not precise.
refers to the quantity of goods and services produced from each unit of labor input.
refers to the variety of goods and services from which households can choose when they shop.
ANS: C
5.
a.
b.
c.
d.
Productivity is defined as the
amount of goods and services produced from each unit of labor input.
number of workers required to produce a given amount of goods and services.
amount of labor that can be saved by replacing workers with machines.
actual amount of effort workers put into an hour of working time.
ANS: A
6.
a.
b.
c.
d.
The amount of goods and services produced from each unit of labor input is called
opportunity cost.
productivity.
externality.
marginal benefit.
ANS: B
7.
a.
b.
c.
d.
What is the most important factor that explains differences in living standards across countries?
the quantity of money
the level of unemployment
productivity
equality
ANS: C
8.
a.
b.
c.
d.
Almost all variation in living standards is attributable to differences in countries'
population growth rates.
productivity.
systems of public education.
taxes.
A
ANS: D
B
11. a.
12.
13.
The
The
the
primary
historical
fact
influence
country’s
that
determinant
different
rise
of
ability
in
labor
living
countries
to
ofunions
prevail
a standards
country's
in
experience
over
America.
standard
of
foreign
American
different
competition.
of living
workers
standards
is is primarily
of living aisresult
largely
of explained by differences
9. those
10.
a.
The
direct
productivity
population
income
or positive
of aand
typical
its
relationship
standard
of
in
exists
living.
aAmerican
country
between
most
a country's
closely linked to which of the following?
in
b.A
countries'
the
tariff
populations.
country’s
protection
ability
imposed
toworker
produce
by the
goods
andisgovernment.
services.
amount
government
spending
and
c. productivity
b.
the enactment
totalof
supply
levels.
ofofminimum-wage
money
in the economy.
lawsitsinproductivity.
America.
market
total
population
power
andthe
its
average citizen’s
income.
d. the
c.
locations.
average
rise
in American
age of
productivity.
country's
labor force.
government
rate
ofofpopulation
policies
growth
and the
of by
its differences
trade with other
countries.
d. none
the above;
economists
areextent
puzzled
in standards
of living around the world.
ANS: B
a.
b.
c.
d.
14.
Suppose that the average income of a Kenyan is higher than the average income of a South African. You
might conclude that
a. Kenyan firms are faced with stricter government regulations than South African firms.
b. total income is divided among fewer workers in Kenya since it has a smaller labor force than South
Africa.
c. Kenya's climate allows for longer growing seasons and therefore Kenya can produce large
quantities of grain and other crops.
d. productivity in Kenya is higher than in South Africa.
ANS: D
15.
a.
b.
c.
d.
The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by
unstable economic conditions in Eastern Europe.
increased competition from abroad.
a decline in the rate of increase in U.S. productivity.
a strong U.S. dollar abroad, hurting U.S. exports.
85 86
Chapter 1/Ten Principles of Economics
ANS: C
16.
Suppose a typical worker in France can produce 32 units of product in an eight-hour day, while a typical
worker in Germany can produce 30 units of product in a 10-hour day. We can conclude that Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
worker productivity in Germany is higher than in France.
the standard of living will likely be higher in France than in Germany.
productivity is 4 units per hour for the German worker and 3 units per hour for the French worker.
there will be no difference between the standard of living in France and Germany.
87 88
Chapter 1/Ten Principles of Economics
ANS: B
17.
Suppose that in Chile total annual output is worth $600 million and people work 70 million hours. In
Argentina total annual output is worth $450 million and people work 40 million hours. Productivity is higher Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
in Chile. Most variation in the standard of living across countries is due to differences in
productivity.
in Chile. Differences in productivity explain very little of the variation in the standard of living
across countries.
in Argentina. Most variation in the standard of living across countries is due to differences in
productivity.
in Argentina. Differences in productivity explain very little of the variation in the standard of
living across countries.
89 90
Chapter 1/Ten Principles of Economics
ANS: C
18.
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 Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
decreased by 1.7 percent between 1998 and 2008.
remained unchanged between 1998 and 2008.
increased by 4.75 percent between 1998 and 2008.
increased by 6.25 percent between 1998 and 2008.
91 92
Chapter 1/Ten Principles of Economics
ANS: D
19.
In a particular country in 2000, the average worker needed to work 40 hours to produce 55 units of output.
In that same country in 2008, the average worker needed to work 30 hours to produce 45 units of output. In that
country, the productivity of the average worker Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
decreased by about 6 percent between 2000 and 2008.
remained unchanged between 2000 and 2008.
increased by about 9 percent between 2000 and 2008.
increased by about 18 percent between 2000 and 2008.
93 94
Chapter 1/Ten Principles of Economics
ANS: C
20.
In a particular country in 1998, the average worker needed to work 40 hours to produce 60 units of output.
In that same country in 2008, the average worker needed to work 35 hours to produce 55 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.
ANS: B
21.
In a particular country in 1997, the average worker had to work 18 hours to produce 45 units of output. In
that same country in 2007, the average worker needed to work 24 hours to produce 60 units of output. In that
country, the productivity of the average worker
a. increased by 2 percent between 1997 and 2007.
b. increased by 5 percent between 1997 and 2007.
c. remained unchanged between 1997 and 2007.
d. decreased by 3 percent between 1997 and 2007.
ANS: C
22.
A worker in Thailand can earn $2 per day making cotton cloth on a hand loom. A worker in the United
States can earn $80 per day making cotton cloth with a mechanical loom. What accounts for the difference in
wages?
a. U.S. textile workers belong to a union.
b. There is little demand for cotton cloth in Thailand 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. Thailand has a low-wage policy to make its textile industry more competitive in world markets.
ANS: C
23.
a.
b.
c.
d.
To promote good economic outcomes, policymakers should strive to enact policies that
enhance productivity.
enhance individuals' market power.
result in a rapidly-growing quantity of money.
All of the above are correct. Chapter 1/Ten Principles of Economics
ANS: A
24.
To raise productivity, policymakers could
95 96
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
increase spending on education.
provide tax credits to firms for capital improvements.
fund research and development.
All of the above are correct.
ANS: D
25.
a.
b.
c.
d.
To increase living standards, public policy should
ensure that workers are well educated and have the necessary tools and technology.
make unemployment benefits more generous.
move workers into jobs directly from high school.
ensure a greater degree of equality, taking all income-earners into account. Chapter 1/Ten Principles of Economics
ANS: A
26.
To improve living standards, policymakers should
97 98
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
impose restrictions on foreign competition.
formulate policies designed to increase productivity.
impose tougher immigration policies.
provide tax breaks for the middle class. Chapter 1/Ten Principles of Economics
ANS: B
27.
Incomes of U.S. households in the 1970s and 1980s
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.
ANS: D
a.
28.
An increase in the overall level of prices in an economy is referred to as
the income effect.
inflation.
deflation.
the substitution effect.
ANS: B
a.
b.
c.
d.
29.
Inflation is defined as
a period of rising productivity in the economy.
a period of rising income in the economy.
an increase in the overall level of output in the economy.
an increase in the overall level of prices in the economy.
ANS: D
a.
b.
c.
d.
30.
a.
b.
c.
d.
In the early 1920s,
Germany experienced a very high rate of inflation.
the quantity of German money was declining rapidly.
the value of German money remained almost constant.
All of the above are correct.
99 100
Chapter 1/Ten Principles of Economics
ANS: A
31.
During the early 1920s in Germany, prices Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
doubled annually.
doubled monthly.
tripled monthly.
tripled annually.
ANS: C
32.
One of the 20th century’s worst episodes of inflation occurred in
the United States in the 1960s.
Italy in the 1950s.
Russia in the 1930s.
Germany in the 1920s.
ANS: D
33.
a.
b.
c.
d.
In the United States, the overall level of prices more than doubled during the
1950s.
1960s.
1970s.
1980s.
ANS: C
34.
a.
b.
c.
d.
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.
101 102
Chapter 1/Ten Principles of Economics
ANS: C
35.
The U.S. president who referred to inflation as “public enemy number one” was
a. Richard Nixon.
b. Gerald Ford.
c. Jimmy Carter.
d. Ronald Reagan.
ANS: B
36.
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
ANS: B
37.
In the 1990s, inflation in the United States was
very close to zero.
about 3 percent per year.
about 6 percent per year.
commonly referred to as “public enemy number one.”
ANS: B
38.
a.
b.
c.
d.
Large or persistent inflation is almost always caused by
excessive government spending.
excessive growth in the quantity of money.
foreign competition.
higher-than-normal levels of productivity.
ANS: B
a.
b.
c.
d.
39.
Which of the following would a permanent increase in the growth rate of the money supply change
permanently?
a. an
inflation
increase in the demand for goods and services.
b. lower
unemployment
unemployment in the short run.
c. higher
both inflation
inflation
and
in unemployment
the long run.
neither
of the
inflation
above nor
are correct.
unemployment
ANS: d.A All
40.
ANS:
41.
Most
D
In theeconomists
short run, which
believe
ofthat
the following
an increaserates
in the
of quantity
growth inofthe
money
money
results
supply
in is likely to lead to the lowest
level of D
ANS:
unemployment in the economy?
42. a. In 3the
percent
short run,
per year
which of the following rates of growth in the money supply is likely to lead to the highest
level of
a.
b. unemployment
51 percent per in
year
the economy?
c. 27 percent per year
b.
d. 93 percent per year
c.
ANS: d.A 4 percent per year
43.
In the short run, an increase in the money supply is likely to lead to
lower unemployment and lower inflation.
lower unemployment and higher inflation.
higher unemployment and lower inflation.
higher unemployment and higher inflation.
ANS: B
a.
b.
c.
d.
44.
Suppose that the Federal Reserve Bank 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 Bank is worried about inflation.
b. the Federal Reserve Bank is worried about unemployment.
c. the Federal Reserve Bank is hoping to reduce the demand for goods and services.
d. the Federal Reserve Bank is worried that the economy is growing too quickly. Chapter 1/Ten Principles of Economics
ANS: B
45.
Low rates of inflation are generally associated with
103 104
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
low rates of government spending.
small or nonexistent government budget deficits.
low rates of productivity growth.
low rates of growth of the quantity of money. Chapter 1/Ten Principles of Economics
ANS: D
46.
Which of the following is the most correct statement about the relationship between inflation and
unemployment?
105 106
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
In the short run, falling inflation is associated with falling unemployment.
In the short run, falling inflation is associated with rising unemployment.
In the long run, falling inflation is associated with falling unemployment.
In the long run, falling inflation is associated with rising unemployment. Chapter 1/Ten Principles of Economics
ANS: B
47.
Which of the following is an important cause of inflation in an economy?
107 108
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
increases in productivity in the economy
the influence of positive externalities on the economy
lack of property rights in the economy
growth in the quantity of money in the economy Chapter 1/Ten Principles of Economics
ANS: D
48.
The mainstream view among economists is that
109 110
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
society faces a tradeoff between unemployment and inflation, but only in the short run.
society faces a tradeoff between unemployment and inflation, but only in the long run.
society faces a tradeoff between unemployment and inflation, both in the short run and in the long
run.
no tradeoff exists between unemployment and inflation, either in the short run or in the long run. Chapter 1/Ten Principles of Economics
ANS: A
49.
Which of the following claims is consistent with the views of mainstream economists?
111 112
Chapter 1/Ten Principles of Economics
a.
b.
c.
d.
If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will
temporarily fall.
If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will
temporarily rise.
If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will
permanently fall.
If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will
permanently rise. Chapter 1/Ten Principles of Economics
113
ANS: A
50.
For a very long time Tropicland has had inflation of 12%. Suddenly its inflation rate drops to 4%. 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.
ANS: A
51.
For a number of years country A had inflation of 3% but for the last five years has had inflation of 6%.
Country B had inflation of 4% for many years, but very recently inflation unexpectedly rose to 9%. Other things the
same, in which of the countries would the higher inflation rate be more likely to reduce unemployment?
a. both country A and country B
b. neither country A nor country B
c. country A but not country B
d. country B but not country A
ANS: D
52.
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.
ANS: C
53.
a.
b.
c.
d.
The relatively low inflation experienced in the United States in the 1990s is attributable to
slow growth of U.S. productivity during the 1990s.
slow growth of the quantity of money in the U.S. in the 1990s.
low levels of government spending in the U.S. in the 1980s and 1990s.
the eight-year presidency of William Jefferson Clinton during the 1990s. 114
Chapter 1/Ten Principles of Economics
ANS: B
54.
During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high
levels of inflation. A likely explanation of these facts is that
a. the United Kingdom has a better education system than Turkey.
b. the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey.
c. workers in Turkey are more productive than workers in the United Kingdom.
d. there are more instances of market power in Turkey than in the United Kingdom.
ANS: B
55.
The tradeoff between inflation and unemployment
implies that policies designed to reduce unemployment also reduce inflation.
was eliminated by improved economic policies in the 1900s.
is a long-run tradeoff, persisting for decades, according to most economists.
None of the above are correct.
ANS: D
a.
b.
c.
d.
56.
Germany could have avoided the high inflation that it experienced in the 1920s by
not directing so many of its resources toward preparation for World War II.
not increasing taxes so much on the German middle class.
not allowing the quantity of money to increase so rapidly.
using government policies to stimulate the economy more so than what was done.
ANS: C
a.
b.
c.
d.
57.
In the short run, which of the following is
correct?
Increasing the money supply increases the demand for goods and services.
Increasing the money supply encourages firms to hire more workers.
Lowering the money supply leads to a higher level of unemployment.
Policies that encourage higher employment will also induce a lower rate of inflation.
ANS: D
a.
b.
c.
d.
58.
The short-run tradeoff between inflation and unemployment implies that, in the short run,
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. explains
a.
policymakers
relationship
production
why
ofbetween
inflation
are
goods
ableand
unemployment
to
is services.
reduce
so high.the inflation
and inflation.
rate and, at the same time, reduce the unemployment
b. rate.
irregular
number
is
a justification
offluctuations
peoplefor
employed.
the
in government
economic activity.
to print more money.
d. policymakers
c.
positive
the
is
illustrated
interest
relationship
rate.
when
can influence
a government
betweenthetheinflation
program
quantityrate,
is
of justified
money
but notinnot
the
anunemployment
on
economy
its merits
andbut
inflation.
rate.
on the number of jobs it
predictable
both
create.
a and bchanges in economic activity due to changes in government spending and taxes.
ANS: d.A will
ANS:
60. d.D
61.
B
The
has
business
“broken
nothingwindow
cycle
to doiswith
measured
fallacy”
public by
policy.
the
59.
The
ANS:
C business cycle is the
a.
62.
It once took 90 percent of our population to grow our food. It now takes only 3 percent of the population to
grow our food. Which of the following statements is true?
a. This loss of jobs has been detrimental to our economy.
b. The government should provide subsidies to encourage more people to become farmers.
c. This reduction in the number of farmers explains the increase in the price of food.
d. Economists understand this is progress because the proportion of the population that used to be
farmers is now employed in other professions.
ANS: D
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