PE 2

Question 1

In economics, capital refers to

a. The finances necessary for firms to produce their products

b. Buildings and machines used in the production process

c. The money households use to purchase firms’ output

d. Stocks and bonds

Answer 1

b. Buildings and machines used in the production process

Question 2

The outer loop of the circular-flow diagram represents the flows of dollars in the economy. Which of the following does not appear on the outer loop?

a. wages

b. income

c. capital

d. rent

Answer 2

c. capital

Question 3

The inner loop of the circular-flow diagram represents the flows of inputs and outputs. Which of the following does not appear on the inner loop?

a. wages

b. land

c. capital

d. goods and services sold

Answer 3

a. wages

Question 4

In the circular-flow diagram, which of the following items does not flow from households to firms?

a. revenue

b. land, labor, and capital

c. factors of production

d. profit

Answer 4

d. profit

Question 5

In the circular-flow diagram, which of the following items represents a payment for a factor of production

a. interest

b. capital

c. spending by households on goods

d. spending by households on services

Answer 5

a. interest

Question 6

When constructing a production possibilities frontier, which of the following assumptions is not made?

a. The economy produces only 2 goods or 2 types of goods

b. Firms produces goods using factors of production

c. The technology available to firms is given

d. The quantities of the factors of production that are available are increasing over the relevant time period

Answer 6

d. The quantities of the factors of production that are available are increasing over the relevant time period

Question 7

In a certain economy, jam and bread are produced, and the economy currently operates on its production possibilities frontier. Which of the following events would allow the economy to produce more jam and more bread, relative to the quantities of those goods that are being produced now?

a. Unemployed labor is put to work producing jam and bread

b. The economy puts its idle capital to work producing jam and bread

c. The economy experiences economic growth

d. All of the above are correct

Answer 7

c. The economy experiences economic growth

• The production possibilities frontier (PPF) represents the maximum efficient production level of an economy given its available resources and technology.
• If the economy is already operating on the PPF, it means that all available resources (labor, capital, etc.) are fully employed and efficiently used.
• Unemployed labor (option a) and idle capital (option b) do not exist in this scenario since the economy is already at full capacity.
• Economic growth (option c) expands the PPF outward, increasing the overall capacity to produce more jam and bread simultaneously.