Chapter 1 Ten Principles Of Economics

Front 1

The word that comes from the Greek word for "one who manages a household" is
a. market.
b. consumer.
c. producer.
d. economy.

Back 1

D

Front 2

The word “economy” comes from the Greek word oikonomos, which means
a. “environment.”
b. “production.”
c. “one who manages a household.”
d. “one who makes decisions.”

Back 2

C

Front 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.

Back 3

C

Front 4

Economics deals primarily with the concept of
a. scarcity.
b. poverty.
c. change.
d. power.

Back 4

A

Front 5

Which of the following questions is not answered by the decisions that every society must make?
a. What determines consumer preferences?
b. What goods will be produced?
c. Who will produce the goods?
d. Who will consume the goods?

Back 5

A

Front 6

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.

Back 6

A

Front 7

The phenomenon of scarcity 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 restricts production of too many goods and services.
d. resources are limited.

Back 7

D

Front 8

Approximately what percentage of the world's economies experience scarcity?
a. 25%
b. 50%
c. 75%
d. 100%

Back 8

D

Front 9

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. shortages.
c. inefficiencies.
d. inequities.

Back 9

A

Front 10

For society, a good is not scarce if
a. at least one individual in society can obtain all he or she wants of the good.
b. firms are producing the good at full capacity.
c. all members of society can have all they want of the good.
d. those who have enough income can buy all they want of the good.

Back 10

C

Front 11

Which of the following products would be considered scarce?
a. golf clubs
b. Picasso paintings
c. apples
d. All of the above are correct.

Back 11

D

Front 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.

Back 12

C

Front 13

Economics is the study of
a. how society manages its scarce resources.
b. the government's role in society.
c. how a market system functions.
d. how to increase production.

Back 13

A

Front 14

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.

Back 14

D

Front 15

The adage, "There is no such thing as a free lunch," is used to illustrate the principle that
a. goods are scarce.
b. people face tradeoffs.
c. income must be earned.
d. households face many decisions.

Back 15

B

Front 16

The adage, "There is no such thing as a free lunch," means
a. even people on welfare have to pay for food.
b. the cost of living is always increasing.
c. to get something we like, we usually have to give up another thing we like.
d. all costs are included in the price of a product.

Back 16

C

Front 17

Economists use the phrase "There is no such thing as a free lunch," to illustrate the principle that
a. inflation almost always results in higher prices over time.
b. nothing is free in a market economy.
c. making decisions requires trading off one goal against another.
d. if something looks too good to be true, it probably is not worth pursuing.

Back 17

C

Front 18

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.

Back 18

D

Front 19

The principle that "people face tradeoffs" applies to
a. individuals.
b. families.
c. societies.
d. All of the above are correct.

Back 19

D

Front 20

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 equity.
c. inflation and une

Back 20

B

Front 21

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.

Back 21

C

Front 22

When society requires that firms reduce pollution, there is
a. a tradeoff because of reduced incomes to the firms' owners and workers.
b. a tradeoff only if some firms are forced to close.
c. no tradeoff, since the cost of reducing pollution falls only on the firms affected by the requirements.
d. no tradeoff, since everyone benefits from reduced pollution.

Back 22

A

Front 23

A tradeoff exists between a clean environment and a higher level of income in that
a. studies show that individuals with higher levels of income actually pollute less than low-income individuals.
b. efforts to reduce pollution typically are not completely successful.
c. laws that reduce pollution raise costs of production and reduce incomes.
d. by employing individuals to clean up pollution, employment and income both rise.

Back 23

C

Front 24

Which of the following phrases best captures the notion of efficiency?
a. absolute fairness
b. equal distribution
c. minimum waste
d. equitable outcome

Back 24

C

Front 25

Which of the following is true?
a. Efficiency refers to the size of the economic pie; equity refers to how the pie is divided.
b. Government policies usually improve upon both equity and efficiency.
c. As long as the economic pie continually gets larger, no one will have to go hungry.
d. Efficiency and equity can both be achieved if the economic pie is cut into equal pieces.

Back 25

A

Front 26

Efficiency means that
a. society is conserving resources in order to save them for the future.
b. society's goods and services are distributed equally among society's members.
c. society's goods and services are distributed fairly, though not necessarily equally, among society's members.
d. society is getting the maximum benefits from its scarce resources.

Back 26

D

Front 27

Economists use the word equity to describe a situation in which
a. each member of society has the same income.
b. 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. the benefits of society's resources are distributed fairly among society's members.

Back 27

D

Front 28

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.

Back 28

C

Front 29

Which of the following words and phrases best captures the notion of equity?
a. minimum waste
b. maximum benefit
c. sameness
d. fairness

Back 29

D

Front 30

When government policies are enacted,
a. equity can usually be enhanced without an efficiency loss, but efficiency can never be enhanced without an
equity loss.
b. efficiency can usually be enhanced without an equity loss, but equity can never be enhanced without an
efficiency loss.
c. it is always the case that either efficiency and fairness are both enhanced, or efficiency and equity are both
diminished.
d. None of the above are correct.

Back 30

D

Front 31

A likely effect of government policies that redistribute income and wealth from the wealthy to the poor is that those
policies
a. enhance equity.
b. reduce efficiency.
c. reduce the reward for working hard.
d. All of the above are correct.

Back 31

D

Front 32

When the government implements programs such as progressive income tax rates, which of the following is likely
to occur?
a. Equity is increased and efficiency is increased.
b. Equity is increased and efficiency is decreased.
c. Equity is decreased and efficiency is increased.
d. Equity is decreased and efficiency is decreased.

Back 32

B

Front 33

As a result of a successful attempt by government to cut the economic pie into more equal slices,
a. it is easier to cut the pie, and therefore the economy can produce a larger pie.
b. the government can more easily allocate the pie to those most in need.
c. the pie gets smaller, and there will be less pie overall.
d. government will spend too much time cutting and it causes the economy to lose the ability to produce enough
pie for everyone.

Back 33

C

Front 34

When the government attempts to improve equity in an economy the result is often
a. an increase in overall output in the economy.
b. additional government revenue since overall income will increase.
c. a reduction in equity.
d. a reduction in efficiency.

Back 34

D

Front 35

When the government redistributes income from the wealthy to the poor,
a. efficiency is improved, but equity is not.
b. both wealthy people and poor people benefit directly.
c. people work less and produce fewer goods and services.
d. wealthy people consume fewer goods, but poor people consume more goods, resulting in no real change.

Back 35

C

Front 36

In economics, the cost of something is
a. the dollar amount of obtaining it.
b. always measured in units of time given up to get it.
c. what you give up to get it.
d. often impossible to quantify, even in principle.

Back 36

C

Front 37

What you give up to obtain an item is called your
a. opportunity cost.
b. explicit cost.
c. true cost.
d. direct cost.

Back 37

A

Front 38

The opportunity cost of going to college is
a. the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
b. the value of the best opportunity a student gives up to attend college.
c. 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.

Back 38

B

Front 39

Maurice receives $100 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 $100. Finally he decides on Option B.
The opportunity cost of this decision is
a. the value to Maurice of the option he would have chosen had Option B not been available.
b. the value to Maurice of Options A, C and D combined.
c. $100.
d. $300.

Back 39

A

Front 40

A furniture maker currently produces 100 tables per week and sells them for a profit. She is considering expanding
her operation in order to make more tables. Should she expand?
a. Yes, because making tables is profitable.
b. No, because she may not be able to 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.

Back 40

C

Front 41

For most students, the largest single cost of a college education is
a. the wages given up to attend school.
b. tuition, fees, and books.
c. room and board.
d. transportation, parking, and entertainment.

Back 41

A

Front 42

For a college student who wishes to calculate the true costs of going to college, the costs of room and board
a. should be counted in full, regardless of the costs of eating and sleeping elsewhere.
b. should be counted only to the extent that they are more expensive at college than elsewhere.
c. usually exceed the opportunity cost of going to college.
d. plus the cost of tuition, equals the opportunity cost of going to college.

Back 42

B

Front 43

For which of the following individuals would the opportunity cost of going to college be highest?
a. a promising young mathematician who will command a high salary once she earns her college degree
b. a student with average grades who has never held a job
c. a famous, highly-paid actor who wants to take time away from show business to finish college and earn a
degree
d. a student who is the best player on his college basketball team, but who lacks the skills necessary to play
professional basketball

Back 43

C

Front 44

When you calculate your true costs of going to college, what portion of your room-and-board expenses should be
included?
a. Your full room-and-board expenses should always be included.
b. None of your room-and-board expenses should ever be included.
c. You should include only the amount by which your room-and-board expenses exceed the income you earn
while attending college.
d. 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.

Back 44

D

Front 45

The opportunity cost of an item is
a. the number of hours needed to earn money to buy the item.
b. what you give up to get that item.
c. usually less than the dollar value of the item.
d. the dollar value of the item.

Back 45

B

Front 46

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.

Back 46

C

Front 47

Russell spends an hour studying instead of playing tennis. The opportunity cost to him of studying is
a. the improvement in his grades from studying for the hour.
b. the improvement in his grades from studying minus the enjoyment of playing tennis.
c. the enjoyment and exercise he would have received had he played tennis.
d. 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.

Back 47

C

Front 48

College-age athletes who drop out of college to play professional sports
a. are not rational decision makers.
b. are well aware that their opportunity cost of attending college is very high.
c. are concerned more about present circumstances than their future.
d. underestimate the value of a college education.

Back 48

B

Front 49

A rational decisionmaker
a. ignores marginal changes and focuses instead on “the big picture.”
b. ignores the likely effects of government policies when he or she makes choices.
c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.
d. takes an action only if the combined benefits of that action and previous actions exceed the combined costs of
that action and previous actions.

Back 49

C

Front 50

Rational people make decisions at the margin by
a. following marginal traditions.
b. behaving in a random fashion.
c. thinking in black-and-white terms.
d. comparing marginal costs and marginal benefits.

Back 50

D

Front 51

The word "margin" means
a. edge.
b. distance.
c. space.
d. measure.

Back 51

A

Front 52

Making rational decisions "at the margin" means that people
a. make those decisions that do not impose a marginal cost.
b. evaluate how easily a decision can be reversed if problems arise.
c. compare the marginal costs and marginal benefits of each decision.
d. always calculate the marginal dollar costs for each decision.

Back 52

C

Front 53

A person’s willingness to pay for a good is based on
a. the availability of the good.
b. the marginal benefit that an extra unit of the good would provide for that person.
c. the marginal cost of producing an extra unit of the good.
d. esoteric factors, the study of which lies beyond the boundaries of economics.

Back 53

B

Front 54

To say that "people respond to incentives" is to say that
a. changes in costs (but not changes in benefits) influence people's decisions and their behavior.
b. changes in benefits (but not changes in costs) influence people's decisions and their behavior.
c. changes in benefits or changes in costs influence people's decisions and their behavior.
d. tradeoffs can be eliminated by rational people who think at the margin.

Back 54

C

Front 55

A marginal change is a
a. change that involves little, if anything, that is important.
b. large, significant adjustment.
c. change for the worse, and so it is usually a short-term change.
d. small, incremental adjustment

Back 55

D

Front 56

56. Which of the following is the best example of a marginal change?
a. After graduating college, Audrey's income increases from $500 per month to $3,000 per month.
b. Morgan gets a raise at her part-time job and is now paid $7.25 per hour instead of $7.00.
c. Housing prices in an area increase by 40 percent when a new interstate is built that passes nearby.
d. A hard freeze wipes out half of the orange crop in Florida and the price of orange juice doubles.

Back 56

B

Front 57

57. Which of the following is the best example of a marginal change?
a. The price of housing in Denver increased by 6 percent last year.
b. Kim gets a big promotion at work. She also gets a raise from $35,000 per year to $55,000 per year.
c. Mark graduates from college and takes a job. His income increases from $10,000 per year to $35,000 per year.
d. A drought hits the upper Midwest and the price of wheat increases from $4.00 per bushel to $6.50 per bushel.

Back 57

A

Front 58

58. A marginal change is best illustrated by which of the following?
a. Nancy retires and takes a part-time job. She was working 40 hours per week and now works 15 hours per week.
b. A large, state-supported university has announced that due to state budget deficits, tuition must rise by 20
percent next year.
c. Ryan moved to a new apartment and now pays 40 percent more rent than before.
d. Arizona, which usually receives 10 inches of rain per year, received 11 inches last year.

Back 58

D

Front 59

Teresa eats three oranges during a particular day. The marginal benefit she enjoys from eating the third orange
a. can be thought of as the total benefit Teresa enjoys by eating three oranges minus the total benefit she would
have enjoyed by eating just the first two oranges.
b. determines Teresa’s willingness to pay for the first, second, and third oranges.
c. does not depend on how many oranges Teresa has already eaten.
d. All of the above are correct.

Back 59

A

Front 60

A rational decisionmaker takes an action if and only if
a. the marginal benefit of the action exceeds the marginal cost of the action.
b. the marginal cost of the action exceeds the marginal benefit of the action.
c. the marginal cost of the action is zero.
d. the opportunity cost of the action is zero.

Back 60

A

Front 61

After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year.
However, Spring Break is still months away, and you may reverse this decision. Which of the following events
would prompt you to reverse this decision?
a. The marginal benefit of going to Cancun increases.
b. The marginal cost of going to Cancun decreases.
c. The marginal benefit of going to Ft. Lauderdale decreases.
d. The marginal cost of going to Ft. Lauderdale decreases.

Back 61

D

Front 62

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
a. charged any ticket price above $0 for the three remaining seats.
b. charged at least $15 for each of the three remaining seats.
c. charged at least $45 for each of the three remaining seats.
d. paid three people to occupy the three remaining seats.

Back 62

A

Front 63

Warren drinks four cups of coffee during a particular day. The marginal benefit he enjoys from drinking the fourth
cup
a. can be thought of as the total benefit Warren enjoys by drinking four cups minus the total benefit he would
have enjoyed by drinking just three cups.
b. determines Warren’s willingness to pay for the fourth cup.
c. is likely different from the marginal benefit provided to Warren by the third cup.
d. All of the above are correct.

Back 63

D

Front 64

A rational decision maker takes an action only if the
a. marginal benefit is less than the marginal cost.
b. marginal benefit is greater than the marginal cost.
c. average benefit is greater than the average cost.
d. marginal benefit is greater than both the average cost and the marginal cost.

Back 64

B

Front 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?
a. For the first 50 houses, the average cost per house was $160,000.
b. The marginal cost of the 51st house, if it is built, will be $180,000.
c. If the company can experience a marginal benefit of $190,000 by building the 51st house, then the company
should build it.
d. All of the above are correct.

Back 65

D

Front 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?
a. He should sell the boat as it is now for $300.
b. He should keep the boat since it would not be rational to spend $900 on repairs and then sell the boat for $800.
c. He should complete the repairs and sell the boat for $800.
d. It does not matter which action he takes; the outcome is the same either way.

Back 66

C

Front 67

A donut shop sells fresh baked donuts from 5 a.m. until 3 p.m. every day. The shop does not sell day-old donuts, so
all unsold donuts are thrown away at 3 p.m. each day. The cost of making and selling a dozen donuts is $1.50;
there are no costs associated with throwing donuts away. If the manager has 10 dozen donuts left at 2:30 p.m. on a
particular day, which of the following alternatives is most attractive?
a. Lower the price of the remaining donuts, even if the price falls below $1.50 per dozen.
b. Lower the price of the remaining donuts, but under no circumstances should the price fall below $1.50 per
dozen.
c. Throw the donuts away and produce 10 fewer dozen donuts tomorrow.
d. Starting tomorrow, lower the price on all donuts so they will all be sold earlier in the day.

Back 67

A

Front 68

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
a. complete the repairs and sell the car for $12,000.
b. sell the car now for $9, 000.
c. never try such an expensive project again.
d. be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.

Back 68

D

Front 69

Sarah buys and sells real estate. Two weeks ago, she paid $140,000 for a house on Oak Street, intending to spend
$20,000 on repairs sell the house for $175,000. Last week, the city government announced a plan to build a
“halfway house” for convicted criminals on Oak Street. As a result of the city’s announced plan, Sarah is weighing
two alternatives: She can go ahead with the $20,000 in repairs and then sell the house for $135,000, or she can
forgo the repairs and sell the house as it is for $120,000. Sarah should
a. keep the house and live in it.
b. go ahead with the $20,000 in repairs and sell the house for $135,000.
c. forgo the repairs and sell the house as it is for $120,000.
d. move the house from Oak Street to a more desirable location, irrespective of the cost of doing so.

Back 69

C

Front 70

People are willing to pay more for a diamond than for a bottle of water because
a. 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.

Back 70

B

Front 71

Economists are particularly adept at understanding that people respond to
a. laws.
b. incentives.
c. punishments more than rewards.
d. rewards more than punishments.

Back 71

B

Front 72

Government policies can change the costs and benefits that people face. Those policies have the potential to
a. alter people’s behavior.
b. alter people’s decisions at the margin.
c. produce results that policymakers did not intend.
d. All of the above are correct.

Back 72

D

Front 73

Ralph Nader's book Unsafe at Any Speed caused Congress to require
a. safety glass in all new cars.
b. seat belts in all new cars.
c. air bags in all new cars.
d. stricter drunk driving laws in all states.

Back 73

B

Front 74

U.S. laws requiring that drivers wear seat belts have resulted in
a. a reduction in both driver deaths and pedestrian deaths.
b. fewer accidents and fewer deaths per accident.
c. fewer driver deaths, fewer accidents and fewer pedestrian deaths.
d. little change in the number of driver deaths, but more accidents and more pedestrian deaths.

Back 74

D

Front 75

Evidence indicates that seat belt laws have led to
a. fewer pedestrian deaths.
b. fewer automobile accidents.
c. fewer deaths per automobile accident.
d. All of the above are correct.

Back 75

C

Front 76

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.

Back 76

C

Front 77

Based on what we know about the effects of mandatory seat belt laws, which of the following groups would be
most likely to mount a campaign to repeal those laws?
a. Owners of collision-repair shops.
b. People who walk rather than drive.
c. Policemen who have better things to do than investigate collisions.

Back 77

B

Front 78

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

Back 78

D

Front 79

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

Back 79

C

Front 80

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

Back 80

A

Front 81

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.

Back 81

B

Front 82

When policymakers implement policies that alter incentives, they usually
a. have carefully weighed the direct and indirect effects of the policy.
b. do not observe the intended result of the policies.
c. have considered all possible effects of the incentive changes when they developed the policy, which will make
the policy effective.
d. correctly anticipate the indirect effects, but often miss the direct effects.

Back 82

B

Front 83

Which of the following principles is not one of the four principles of individual decisionmaking?
a. People face tradeoffs.
b. Trade can make everyone better off.
c. People respond to incentives.
d. Rational people think at the margin.

Back 83

B

Front 84

Which of the following is a principle concerning how people interact?
a. Markets are usually a good way to organize economic activity.
b. Rational people think at the margin.
c. People respond to incentives.
d. All of the above are correct.

Back 84

A

Front 85

Which of the following statements exemplifies a principle of individual decisionmaking?
a. Trade can make everyone better off.
b. Governments can sometimes improve market outcomes.
c. The cost of something is what you give up to get it.
d. All of the above are correct

Back 85

C

Front 86

Which is the most accurate statement about trade?
a. Trade can make every nation better off.
b. Trade makes some nations better off and others worse off.
c. Trading for a good can make a nation better off only if the nation cannot produce that good itself.
d. Trade helps rich nations and hurts poor nations.

Back 86

A

Front 87

The principle that "trade can make everyone better off" applies to interactions and trade between
a. families.
b. states within the United States.
c. nations.
d. All of the above are correct.

Back 87

D

Front 88

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.

Back 88

B

Front 89

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.

Back 89

B

Front 90

Benefits from trade would not include
a. the ability of people and nations to specialize.
b. a greater variety of goods and services becoming available.
c. less competition.
d. lower prices.

Back 90

C

Front 91

Trade between the United States and India
a. benefits both the United States and India.
b. is a losing proposition for the United States because India has cheaper labor.
c. is a losing proposition for India because capital is much more abundant in the U.S. than in India.
d. is a losing proposition for India because U.S. workers are more productive.

Back 91

A

Front 92

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.

Back 92

D

Front 93

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.

Back 93

D

Front 94

If the United States decides to trade with Mexico, we know that
a. Mexico will benefit, but trade with a less developed country could not benefit the United States.
b. it will not benefit Mexico because workers in the United States are more productive.
c. Mexico and the United States can both benefit.
d. it will not benefit either country because their cultural differences are too vast.

Back 94

C

Front 95

Which of the following statements about markets is most accurate?
a. Markets are usually a good way to organize economic activity.
b. Markets are usually inferior to central planning as a way to organize economic activity.
c. Markets fail and are therefore not an acceptable way to organize economic activity.
d. Markets are a good way to organize economic activity in developed nations, but not in less developed nations.

Back 95

A

Front 96

Which of the following statements does not apply to a market economy?
a. Firms decide whom to hire and what to produce.
b. No one is looking out for the economic well-being of society as a whole.
c. Households decide which firms to work for and what to buy with their incomes.
d. Government policies are the primary forces that guide the decisions of firms and households.

Back 96

D

Front 97

In a market economy, who makes the decisions that guide most economic activity?
a. firms only
b. households only
c. firms and households
d. government

Back 97

C

Front 98

The decisions of firms and households are guided by prices and self-interest in a
a. command economy.
b. centrally-planned economy.
c. market economy.
d. All of the above are correct.

Back 98

C

Front 99

In a market economy, economic activity is guided by
a. the government.
b. corporations.
c. central planners.
d. self-interest and prices.

Back 99

D

Front 100

The term used to describe a situation in which markets fail to allocate resources efficiently is called
a. economic meltdown.
b. market failure.
c. disequilibrium.
d. the effect of the invisible hand.

Back 100

B

Front 101

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 centrally-planned
economy.

Back 101

A

Front 102

Prices direct economic activity in a market economy by
a. influencing the actions of buyers and sellers.
b. reducing scarcity of the goods and services produced.
c. eliminating the need for government intervention.
d. allocating goods and services in the most equitable way.

Back 102

A

Front 103

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.

Back 103

C

Front 104

Which of the following firms is most likely to have market power?
a. a fast food restaurant in a college town
b. a wheat farm in Kansas
c. the last gas station in New Mexico for 100 miles
d. a shoe store in Kentucky

Back 104

C

Front 105

An example of a firm with market power is a
a. delicatessen in New York.
b. cable TV provider in St. Louis.
c. clothing store in Los Angeles.
d. family farm in Illinois.

Back 105

B

Front 106

One advantage market economies have over centrally-planned economies is that market economies
a. provide an equal distribution of goods and services to households.
b. establish a significant role for government in the allocation of resources.
c. solve the problem of scarcity.
d. are more efficient.

Back 106

D

Front 107

Which of the following statements best characterizes a basic difference between market economies and centrallyplanned
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.

Back 107

D

Front 108

The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the
a. 1960s.
b. 1970s.
c. 1980s.
d. 1990s.

Back 108

C

Front 109

The economy of the former Soviet Union is best described as a
a. primitive economy.
b. market economy.
c. hybrid economy.
d. centrally-planned economy.

Back 109

D

Front 110

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, government-operated, privately-owned firms.
d. the actions of government central planners.

Back 110

D

Front 111

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
a. There is no such thing as a free lunch.
b. People buy more when prices are low than when prices are high.
c. No matter how much people earn, they tend to spend more than they earn.
d. Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable
market outcomes.

Back 111

D

Front 112

The term "invisible hand" was coined by
a. Adam Smith.
b. David Ricardo.
c. Karl Marx.
d. Benjamin Franklin.

Back 112

A

Front 113

The "invisible hand" directs economic activity through
a. advertising.
b. prices.
c. central planning.
d. government regulations.

Back 113

B

Front 114

The idea that only the government can organize economic activity in a way that promotes economic well-being for
a country as a whole
a. is a basic principle regarding individual decisionmaking.
b. amounts to a denial of one of the basic principles regarding interactions among people.
c. supports the idea that the "invisible hand" should guide economic activity.
d. was promoted by the economist Adam Smith in a well-known 1776 book.

Back 114

B

Front 115

Adam Smith argued that in a market system, when people act in their own self-interest, they typically
a. help only themselves.
b. harm others.
c. help others, but not as much as they would have if they were not self-interested.
d. help others even more than when they deliberately try to help others.

Back 115

D

Front 116

The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered
by
a. government actions that distort prices.
b. increased competition in markets.
c. enforcement of property rights.
d. too much attention paid to efficiency.

Back 116

A

Front 117

When the "invisible hand" guides economic activity, prices of products reflect
a. only the values that society places on those products.
b. only the costs to society of producing those products.
c. both the values that society places on those products and the costs to society of producing those products.
d. none of the above; when the "invisible hand" guides economic activity, prices of products are set by the
government in a manner that is thought to be "fair."

Back 117

C

Front 118

Adam Smith's book The Wealth of Nations was published in
a. 1692.
b. 1776.
c. 1816.
d. 1936.

Back 118

B

Front 119

Both The Wealth of Nations and the Declaration of Independence share the point of view that
a. every person is entitled to life, liberty, and the pursuit of happiness.
b. individuals are best left to their own devices without the government guiding their actions.
c. the government plays a central role in organizing a market economy.
d. because of human nature a strong legal system is necessary for a market system to survive.

Back 119

B

Front 120

The invisible hand works to promote general well-being in the economy primarily through
a. government intervention.
b. the political process.
c. people’s pursuit of self-interest.
d. altruism.

Back 120

C

Front 121

Taxes adversely affect the allocation of resources in society because
a. they do not always fall more heavily on the rich than on the poor.
b. the taxes collected are not enough to finance government spending.
c. not everyone pays taxes.
d. they distort prices and thus distort the decisions of households and firms.

Back 121

D

Front 122

A primary function of prices in a market economy is to provide participants with
a. relevant economic information.
b. relevant spending limits.
c. an equitable distribution of goods and services.
d. All of the above are correct.

Back 122

A

Front 123

When the government prevents prices from adjusting naturally to supply and demand,
a. it stabilizes the economy by reducing market uncertainties.
b. it adversely affects the allocation of resources.
c. the improvement in equity justifies the reduction in efficiency.
d. the improvement in efficiency justifies the reduction in equity.

Back 123

B

Front 124

With respect to the attainment of an efficient allocation of resources, which of the following statements is correct?
a. Markets are always a good way to organize economic activity.
b. Markets are often a good way to organize economic activity.
c. Markets are seldom a good way to organize economic activity.
d. Markets are never a good way to organize economic activity.

Back 124

B

Front 125

For markets to work well, there must be
a. market power.
b. a central planner.
c. property rights.
d. abundant, not scarce, resources.

Back 125

C

Front 126

One reason we need government, even in a market economy, is that
a. there are insufficient quantities of externalities in the absence of government.
b. property rights become too entrenched in the absence of government.
c. the invisible hand seldom leads to an efficient allocation of resources in any market.
d. the invisible hand, while powerful, is not perfect.

Back 126

D

Front 127

The basic principles of economics suggest that
a. markets are seldom, if ever, a good way to organize economic activity.
b. government should become involved in markets when trade between countries is involved.
c. government should become involved in markets when those markets fail to produce efficient or equitable
outcomes.
d. All of the above are correct.

Back 127

C

Front 128

One necessary role of government in a market economy is to
a. impose taxes on those goods and services that are most desired by consumers.
b. maintain welfare programs for the poor.
c. provide services such as mail delivery and garbage collection.
d. enforce property rights.

Back 128

D

Front 129

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.

Back 129

B

Front 130

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.

Back 130

C

Front 131

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
a. market power.
b. market failure.
c. inadequate enforcement of property rights.
d. the invisible hand at work.

Back 131

C

Front 132

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.
c. Property rights have to be enforced.
d. All of the above are correct

Back 132

D

Front 133

The term market failure refers to
a. a situation in which the market on its own fails to allocate resources efficiently.
b. an unsuccessful advertising campaign which reduces demand for a product.
c. a situation in which competition among firms becomes ruthless.
d. a firm which is forced out of business because of losses.

Back 133

A

Front 134

Which of the following is not generally regarded as a legitimate reason for the government to intervene in a
market?
a. to promote efficiency
b. to promote equity
c. to enforce property rights
d. to protect an industry from foreign competition

Back 134

D

Front 135

Causes of market failure include
a. externalities and market power.
b. market power and incorrect forecasts of consumer demand.
c. externalities and foreign competition.
d. incorrect forecasts of consumer demand and foreign competition.

Back 135

A

Front 136

Which of the following statements is not true?
a. In the presence of a market failure, government action will always improve on the market outcome.
b. In the presence of a market failure, government action can sometimes improve on the market outcome.
c. In the presence of a market failure, government action might not improve on the market outcome because some
leaders are not fully informed about the effects of their actions.
d. In the presence of a market failure, government action might not improve on the market outcome because
sometimes public policies simply reward the politically powerful.

Back 136

A

Front 137

Market failure can be caused by
a. low consumer demand.
b. government intervention and price controls.
c. externalities and market power.
d. high prices and foreign competition.

Back 137

C

Front 138

Market failure can be caused by
a. low consumer demand.
b. government intervention and price controls.
c. externalities and market power.
d. high prices and foreign competition.

Back 138

C

Front 139

An example of an externality is the impact of
a. John’s actions on Jane’s well-being.
b. John’s actions on John’s own well-being.
c. society's decisions on society’s well-being.
d. society's decisions on John’s well-being.

Back 139

A

Front 140

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.

Back 140

C

Front 141

If an externality is present in a market, economic efficiency may be enhanced by
a. government intervention.
b. increased competition.
c. better informed market participants.
d. weaker property rights.

Back 141

A

Front 142

Which of these statements concerning externalities is correct?
a. There would be no justification for government involvement in the economy if it were not for externalities.
b. An externality can only arise when one person (or a small group of persons) has the ability to unduly influence
market prices.
c. An externality can arise only when two or more countries are engaged in trade with one another.
d. An externality arises when one person's actions have an impact on the well-being of others.

Back 142

D

Front 143

If a copper refinery does not bear the entire cost of the smoke it emits, it will
a. not emit any smoke so as to avoid the entire cost of the smoke.
b. emit lower levels of smoke.
c. emit an acceptable level of smoke.
d. emit too much smoke.

Back 143

D

Front 144

Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is
intended to reduce
a. the influence of the invisible hand.
b. trade.
c. externalities.
d. market power.

Back 144

C

Front 145

A market economy rewards people according to their
a. need for goods and services.
b. willingness to work.
c. ability to produce things that other people are willing to pay for.
d. ability to produce things of cultural importance.

Back 145

C

Front 146

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.

Back 146

C

Front 147

Which of these consumption activities will most likely impose an external cost?
a. An executive plays a vigorous game of golf.
b. A student in a dorm plays her CDs at 120 decibels late at night.
c. A young mother exercises to an aerobics video.
d. A construction worker eats a sandwich during his lunch break.

Back 147

B

Front 148

Which of these activities will most likely result in an external benefit?
a. A college student buys a deck of cards to play solitaire in her dorm room.
b. An elderly woman plants a flower garden on the vacant lot next to her house.
c. An executive purchases a book to read on a business trip.
d. A ten-year-old uses his allowance to buy new Nike shoes.

Back 148

B

Front 149

If education produces external benefits for society, which of the following might NOT be an appropriate policy for
society to adopt regarding education?
a. tax incentives for schooling
b. mandatory minimum levels of education
c. programs which promote the hiring of high school dropouts
d. public subsidies of education

Back 149

C

Front 150

When a single person (or small group) has the ability to influence market prices, there is
a. competition.
b. market power.
c. an externality.
d. a lack of property rights.

Back 150

B

Front 151

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.

Back 151

A

Front 152

Which is the most correct statement about the invisible hand?
a. The invisible hand always ensures both equity and efficiency.
b. The invisible hand is more effective at ensuring equity than it is at ensuring efficiency.
c. The invisible hand is more effective at ensuring efficiency than it is at ensuring equity.
d. Market power is the instrument with which the invisible hand directs economic activity.

Back 152

C

Front 153

According to Adam Smith, the success of decentralized market economies is primarily due to
a. the basic benevolence of society.
b. society's legal system.
c. individuals' pursuit of self-interest.
d. partnerships that are forged between business and government.

Back 153

C

Front 154

The self-interest of the participants in an economy is guided into promoting general economic self-interest by
a. the invisible hand.
b. market power.
c. government intervention.
d. oikonomos.

Back 154

A

Front 155

In the United States, higher income tax rates on rich people could be justified on the basis of
a. superior decision-making by market participants.
b. superior resource allocation.
c. enhanced market efficiency.
d. enhanced equity for society.

Back 155

D

Front 156

The basic principles of economics imply that policymakers should
a. rely on markets to guide economic activity, except when markets produce inefficient or inequitable outcomes.
b. enact policies that discourage people from specializing in particular economic activities.
c. enact policies that lead to high rates of growth of the quantity of money.
d. All of the above are correct.

Back 156

A

Front 157

The primary determinant of a country's standard of living is
a. the country’s ability to prevail over foreign competition.
b. the country’s ability to produce goods and services.
c. the total supply of money in the economy.
d. the average age of the country's labor force.

Back 157

B

Front 158

In 2000 the average American had an income of about
a. $28,400.
b. $34,100.
c. $39,800.
d. $44,500.

Back 158

B

Front 159

In the United States, incomes historically have grown about 2 percent per year. At this rate, average income
doubles every
a. 10 years.
b. 25 years.
c. 35 years.
d. 50 years.

Back 159

C

Front 160

The income of a typical worker in a country is most closely linked to which of the following?
a. population
b. productivity
c. market power
d. government policies

Back 160

B

Front 161

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 hour of a worker's time.
d. refers to the variety of goods and services from which households can choose when they shop.

Back 161

C

Front 162

If the average income of an Australian is higher than the average income of a Russian, it is most likely because
a. productivity is higher in Australia than in Russia.
b. Australia has a more industrial economy than Russia.
c. there is more competition in Australia than in Russia.
d. labor unions are more powerful in Australia than in Russia.

Back 162

A

Front 163

Suppose that the average income of a Kenyan is higher than the average income of a South African. You might
conclude that
a. South African firms are faced with stricter government regulations than Kenyan 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.

Back 163

D

Front 164

A typical worker in Italy can produce 24 units of product in an eight-hour day, while a typical worker in Poland
can produce 25 units of product in a 10-hour day. We can conclude that
a. worker productivity in Poland is higher than in Italy.
b. the standard of living will likely be higher in Italy than in Poland.
c. productivity is 3 units per hour for the Polish worker and 21/2 units per hour for the Italian worker.
d. there will be no difference between the standard of living in Italy and Poland.

Back 164

B

Front 165

A worker in Bangladesh can earn $1 per day making cotton cloth on a hand loom. A worker in the United States
can earn $100 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 Bangladesh 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. Bangladesh has a low-wage policy to make its textile industry more competitive in world markets.

Back 165

C

Front 166

Over the past century, the average income in the United States has risen about
a. twofold.
b. fivefold.
c. eightfold.
d. tenfold.

Back 166

C

Front 167

In the United States, incomes have historically grown
a. about 10 percent per year.
b. about 5 percent per year.
c. about 2 percent per year.
d. about 0.5 percent per year.

Back 167

C

Front 168

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.

Back 168

B

Front 169

Productivity is defined as the
a. amount of goods and services produced from each hour of a worker's time.
b. number of workers required to produce a given amount of goods and services.
c. amount of labor which can be saved by replacing workers with machines.
d. actual amount of effort workers put into an hour of working time.

Back 169

A

Front 170

The amount of goods and services produced from each hour of a worker's time is called
a. total output.
b. productivity.
c. marginal product.
d. efficiency.

Back 170

B

Front 171

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.

Back 171

A

Front 172

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.

Back 172

D

Front 173

The fact that different countries experience different standards of living is largely explained by differences in those
countries'
a. populations.
b. productivity levels.
c. locations.
d. none of the above; economists are puzzled by differences in standards of living around the world.

Back 173

B

Front 174

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.

Back 174

C

Front 175

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

Back 175

D

Front 176

To improve living standards, policymakers should
a. impose restriction on foreign competition.
b. formulate policies designed to increase productivity.
c. impose tougher immigration policies.
d. provide tax breaks for the middle class.

Back 176

B

Front 177

Policies to enhance living standards should be designed to ensure that workers
a. have access to the best available methods of producing goods and services.
b. have the appropriate equipment to produce goods and services.
c. receive good educations.
d. All of the above are correct.

Back 177

D

Front 178

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 equity, taking all income-earners into account.

Back 178

A

Front 179

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.

Back 179

D

Front 180

An increase in the overall level of prices in an economy is referred to as
a. economic growth.
b. inflation.
c. the price effect.
d. the demand effect.

Back 180

B

Front 181

Inflation is defined as
a. a period of rising productivity in the economy.
b. a period of rising income in the economy.
c. an increase in the overall level of output in the economy.
d. an increase in the overall level of prices in the economy.

Back 181

D

Front 182

In the early 1920s,
a. Germany experienced a very high rate of inflation.
b. the quantity of German money was declining rapidly.
c. the value of German money remained almost constant.
d. All of the above are correct.

Back 182

A

Front 183

In Germany in the early 1920s, on average,
a. prices were rising 50 percent every month, while the quantity of money was rising 20 percent every month.
b. prices were doubling every month, while the quantity of money fell 10 percent every month.
c. prices were tripling every month, while the quantity of money remained almost constant every month.
d. prices and the quantity of money both tripled every month.

Back 183

D

Front 184

During the early 1920s in Germany, prices
a. doubled annually.
b. doubled monthly.
c. tripled monthly.
d. tripled annually.

Back 184

C

Front 185

One of the 20th century’s worst episodes of inflation occurred in
a. the United States in the 1960s.
b. Italy in the 1950s.
c. Russia in the 1930s.
d. Germany in the 1920s.

Back 185

D

Front 186

In the United States, the overall level of prices more than doubled during the
a. 1950s.
b. 1960s.
c. 1970s.
d. 1980s.

Back 186

C

Front 187

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.

Back 187

B

Front 188

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.

Back 188

C

Front 189

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.

Back 189

B

Front 190

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.”

Back 190

B

Front 191

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.

Back 191

D

Front 192

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.

Back 192

B

Front 193

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.

Back 193

A

Front 194

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.

Back 194

C

Front 195

Between 1929 and 1933, the U.S. economy went from a situation of full employment to one of 25 percent
unemployment. Which of the following events would you have expected to observe over this relatively short period
of time?
a. The overall price level remained unchanged.
b. The overall price level decreased.
c. The overall price level increased.
d. It is impossible to speculate on what happened to the overall level of prices from the information given.

Back 195

B

Front 196

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.

Back 196

B

Front 197

Which of the following is most likely to raise the average material standard of living in the United States?
a. an increase in investment in new capital
b. a continuation of the economic problems experienced by China, with whom the United States competes in
world markets
c. an increase in the minimum legal wage
d. a shortening of the average work week

Back 197

A

Front 198

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 is more industrialized than Turkey.
b. the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey.
c. workers in the United Kingdom are less productive than workers in Turkey.
d. there were more cases of market failure in Turkey than in the United Kingdom.

Back 198

B

Front 199

Which of the following claims is consistent with the views of mainstream economists?
a. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily
fall.
b. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will temporarily
rise.
c. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently
fall.
d. If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will permanently
rise.

Back 199

A

Front 200

To promote good economic outcomes, policymakers should strive to enact policies that
a. enhance productivity.
b. enhance individuals' market power.
c. result in a rapidly-growing quantity of money.
d. All of the above are correct.

Back 200

A

Front 201

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.

Back 201

D

Front 202

One of history's most severe episodes of inflation occurred
a. in the U.S. in the 1920s.
b. in Germany in the 1920s.
c. in the U.S. in the 1970s.
d. in Germany in the 1970s.

Back 202

B

Front 203

During which decade did the United States experience an inflationary episode similar to that experienced by
Germany during the 1920s?
a. the 1880s
b. the 1930s
c. the 1970s
d. None of the above are correct.

Back 203

D

Front 204

The relatively low inflation experienced in the United States in the 1990s is attributable to
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.

Back 204

B

Front 205

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.

Back 205

C

Front 206

In a particular country in 1995, the average worker needed to work 25 hours to produce 40 units of output. In that
same country in 2005, 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 1995 and 2005.
b. remained unchanged between 1995 and 2005.
c. increased by 4.75 percent between 1995 and 2005.
d. increased by 6.25 percent between 1995 and 2005.

Back 206

D

Front 207

In a particular country in 1995, the average worker needed to work 30 hours to produce 40 units of output. In that
same country in 2005, the average worker needed to work 20 hours to produce 29 units of output. In that country,
the productivity of the average worker
a. decreased between 1995 and 2005, so we would expect the standard of living to have decreased accordingly.
b. increased between 1995 and 2005, so we would expect the standard of living to have increased accordingly.
c. decreased between 1995 and 2005, so we would expect inflation to have decreased accordingly.
d. increased between 1995 and 2005, so we would expect inflation to have increased accordingly.

Back 207

B

Front 208

In the imaginary country of Countriana, in 1996, the average worker had to work 10 hours to produce 20 units of
output. In that same country in 2006, the average worker needed to work 18 hours to produce 36 units of output. In
that country, the productivity of the average worker
a. increased by 2 percent between 1996 and 2006.
b. increased by 5 percent between 1996 and 2006.
c. remained unchanged between 1996 and 2006.
d. decreased by 3 percent between 1996 and 2006.

Back 208

C

Front 209

Which of the following statements is correct about how economists view the effects of increases in the quantity of
money?
a. The short-run effects are well understood, but the long-run effects are still the subject of controversy among
economists.
b. The long-run effects are well understood, but the short-run effects are still the subject of controversy among
economists.
c. Both the short-run effects and the long-run effects are well understood.
d. Neither the short-run effects nor the long-run effects are well understood

Back 209

B

Front 210

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.

Back 210

D

Front 211

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.

Back 211

A