Practice Test Questions Flashcards by Daniella Frissora

According to the text, economics is the study of how:

Human beings coordinate their wants and desires in the face of constraints.

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Dorm rooms are not usually allocated by markets. Allocating dorm rooms is:

An economic problem.

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Which of the following is not one of the three central coordination problems of the economy given in the book?

Whether.

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The quantity of goods and services available to society:

Depends on human action.

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Studies have shown a significant increase in the rate of autism diagnoses in the United States over the last 20 years. Studies have also shown that during the same period the quantity of genetically modified food consumed by US household has increased significantly. These studies demonstrate:

A direct correlation between the consumption of genetically modified food and autism.

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Tick-borne diseases like Lyme already cost Northeastern states $1.3 billion in annual healthcare costs. Scientists predict that because of climate change the range of the ticks and one of their favorite hosts the white-footed mouse will increase northward into areas that have yet to be exposed to Lyme disease. As a result of the increased range of the ticks healthcare costs related to Lyme are expected to reach $3 billion annually for the region. Assuming that the total annual cost of preventing the climate change is $2.9 billion:

The states should pay the prevention costs because the marginal benefits outweigh the marginal costs of prevention.

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Economist Steven Landsburg claims that with a death penalty, each execution deters about 8 murders, resulting in a benefit to society of approximately $56 million. He argues that computer hackers do far more damage to society with their worms and viruses. He argues that computer hackers should be executed as well. From a purely economic perspective, the death penalty for computer hackers is:

Reasonable based on cost-benefit analysis, but society must also take into account social, political, and religious factors.

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The marginal benefit from consuming another unit of a good:

Equals the increase in total benefits from consuming the unit.

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Sunk costs:

Are irrelevant to economic reasoning.

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The price of a new model of iPod tends to fall significantly a year after it is first introduced. Suppose Jane bought an iPod as soon as it was introduced (a year ago) and paid a premium price for it. Now she wants to buy a new iPod cover. Which of the following should she consider before buying the new accessory?

The price of the iPod cover and the benefit she’ll receive from using the iPod cover.

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Chuck offers $70,000 for a house. The seller turns down the offer but says she will sell the house for $72,000. However, Chuck refuses to pay the higher price. If Chuck was following the economic decision rule, the marginal benefit of the house to:

Chuck must be less than $72,000.

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You’re deciding whether to install a $400 moonroof and a $200 security system in your car. Suppose the marginal benefit from the moonroof is $350 while the marginal benefit from the security system is $300. The economic decision rule dictates that you should:

Purchase only the security system because its marginal benefit exceeds its marginal cost.

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Economic reasoning would argue that there is an opportunity cost to:

All choices.

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The opportunity cost of attending college for one year is best measured by the:

Value of the next-best activity forgone by attending college.

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Brooke and Sandy both attend the same college and have the same expenses for tuition, books, and supplies. However, Brooke is a famous actress who could earn $2 million per year if she were not attending college while Sandy could earn $10,000 a year serving hamburgers if he were not attending college. It follows that the opportunity cost of attending college:

Is greater for Brooke than for Sandy.

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Economic reasoning would never help you decide:

What is morally right and what is wrong.

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Prostitution is legal in Churchill County, Nevada, but a referendum threatened to close two brothels (prostitution businesses) in that county. What idea from Chapter 1 of the text does this story best illustrate?

Social and political forces sometimes rein in market forces.

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Say that an economic model concludes that “government can maintain current Social Security benefit levels for every retiree by raising payroll taxes.” This conclusion is:

Positive statement because raising payroll taxes is one way to maintain Social Security benefits.

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Which of the following is a normative statement?

The governments should spend more to aid the poor.

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Because you can only get more of one good by giving up some of another good, the shape of a production possibilities curve is:

Downward sloping.

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If a production possibility curve representing a tradeoff between a grade in English and a grade in math has a negative slope we know that:

There is an inverse relationship between grades in English and grades in math.

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Increasing marginal opportunity cost means that the production possibility curve is:

Bowed out so that for every additional unit of a good given up, you get fewer and fewer units of the other good.

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When you produce cars, it is enormously expensive to produce one car, but then the costs per car decrease as more are produced. This would be an example of:

Decreasing marginal opportunity costs.

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The principle of increasing marginal opportunity cost does not hold in which of the following cases?

All inputs are equally adaptable to the production of all goods.

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According to Adam Smith, individuals are directed to do those things for which they have a comparative advantage by:

Their self-interest.

The textbook largely attributes the growth of economies over the last 200 years to:

The development of markets.

Mexico has a comparative advantage in producing corn:

If its opportunity cost of producing corn is lower than the opportunity cost in other countries.

Suppose that in Slovakia, one unit of labor can produce either 20 tons of wheat or 40 tons of soy while in Poland, one unit of labor can produce either 40 tons of wheat or 20 tons of soy. If each country has two units of labor, which of the following consumption combinations can be attained only with trade?

Slovakia consumes 30 tons of both soy and wheat.

John and Jane Smith are both economists who are deciding how to split household chores of cooking and cleaning. They discover that John has a comparative advantage in cooking. Does this discovery tell them anything about comparative advantage in cleaning?

Yes; Jane must have a comparative advantage in cleaning.

If the quantity demanded for a good rise as the price falls, then the curve representing this relationship will be:

Downward sloping.

What kind of relationship exists between the price of gas and the quantity demanded for gas if the quantity demanded for gas falls when the price of gas increases?

Inverse.

Market economies are based upon:

Private property and individual planning.

A market economy:

Expects people to be self-interested.

A socialist economy in theory:

Expects people to be altruistic.

In the former USSR, state planners decided what was to be produced. They passed orders down to factories, allocating raw materials, workers, and other factors of production to them. This is an example of (a):

Command economy.

In socialism:

Government planning, rather than the market, is relied upon to coordinate economic activity.

Which of the following is not one of the three principal components of a socialist economy?

Entrepreneurs are encouraged by the profit motive, rather than government directive, to satisfy consumer wants in the most efficient manner possible.

Most economies today are:

Differentiated primarily by the degree to which they depend on markets.

In the goods market:

Business produces goods and services and sells them to households and government.

Households are on the:

Supply side of factor markets and the demand side of goods markets.

Government is on the:

Demand side of both factor markets and goods markets.

Profit is:

What's left over from total revenue after all of the appropriate costs have been subtracted.

Business decisions about what and how much to produce are based on what:

Maximizes profits.

A defining difference in what makes a firm a sole proprietorship, partnerships, or a corporation is the:

Nature of ownership and accountability for each type of business.

A business is likely a sole proprietorship if:

It has only one owner who has unlimited liability.

One advantage of a sole proprietorship over a corporation is:

Ease of formation.

State and local governments do not receive income directly from which source?

Social security taxes.

Which of the following is not an example of government's role as a referee?

Laws that require states and the federal government to balance their budgets.

Which of the following would most likely generate a positive externality?

Education.

Suppose a single firm gains control of an industry by preventing other firms from entering the industry. As a result, the price charged by the single firm is much higher than the price that would be charged by many different firms producing this product in a competitive market. This situation can best be described as:

A market failure.

Which of the following would most likely generate a negative externality?

Cigarette smoke.

Flu vaccinations of school children have the unintended effect of protecting the vulnerable elderly from contracting the virus. This is an example of a:

Positive externality.

A public good is a good that:

When consumed by one individual, can still be consumed by others.

Which of the following is an international financial institution concerned primarily with monetary issues and international financial arrangements?

The International Monetary Fund.

Keynesian economists believe:

Government can implement policy proposals that can positively impact the economy.

Laissez-faire economists believe:

Most government policies would probably make things worse.

The idea that the economy will solve its own problems and not need any stimulus measures falls under the _________ framework.

Long-run.

"Classical economist" is often used interchangeably with which term?

Laissez-faire economist.

Keynesian economists focus their analysis on:

The short-run.

Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 8 percent. A Keynesian economist would most likely blame this increase in unemployment on:

A decline in the level of aggregate demand.

Before the Great Depression the popular view of government was:

Laissez-faire; and after the Great Depression, the popular view of government was activist.

Which of the following statements would a Classical economist of the 1930s most likely disagree with?

Unions do not impede wage and price adjustment.

The laissez-faire policy prescription to eliminate unemployment was to:

Eliminate labor unions and government policies that hold real wages too high.

The Classical economists argued that:

If unemployment occurs, it will cure itself because wages and prices will fall.

When Classical economists of the 1930s looked at the Great Depression, they:

Blamed it on activist fiscal and monetary policies.

According to Classical economists in the 1930s, a recession will end when:

Wages fall enough to eliminate unemployment.

Which of the following was not a solution to the Great Depression favored by Classical economists?

Hire unemployed workers for public works programs.

Keynesian economics focuses on:

The short-run.

Keynesians:

Generally favor activist government policies.

The two frameworks conventional economists generally use to analyze macroeconomic issues are:

The short-run and the long-run frameworks.

The combination of prolonged high unemployment and slow growth caused by globalization is known as:

Structural stagnation.

Classical economists believe that in the short-run, in the real world:

Prices and wages were flexible.

Issues of growth are generally considered in:

The long-run framework.

The highest amount of output an economy can sustainably produce and sell using existing production processes and resources is called:

Potential output.

If a country of 300 million people has a total income of $12 trillion, its per capita income is:

$40,000.

The long-run growth framework focuses on factors affecting:

Incentives to produce.

What turns a business cycle into a structural stagnation?

A slow expansion that keeps the economy below trend.

Policies that affect work, capital accumulation, and technological change are primarily relevant to:

The long-run growth framework.

The secular trend growth rate is the:

The rate of growth of potential output.

Per capita real output is a:

Better measure of personal material consumption than output.

Fluctuations around the long-term growth rate are called:

Business cycles.

If U.S. real GDP increases by 3.3 percent, we can infer that the United States experienced:

An expansion.

Which of the following statements best characterizes the Classical view of business cycles?

Fluctuations in business activity are to be expected and should be accepted just as changes in the seasons are accepted.

The top of the business cycle is called:

A peak.

A structural stagnation is:

Unrelated to business cycles.

Unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one is called:

Frictional unemployment.

Another term for what the text calls the "target rate of unemployment" is:

The natural rate of unemployment.

Cyclical unemployment is defined as unemployment that results from:

Fluctuations in economic activity.

Workers at a car-manufacturing plant are let go because automated machinery has been installed that requires fewer employees to operate. What type of unemployment describes the workers' situation?

Structural unemployment.

Mexico can produce vine-ripened tomatoes at a lower opportunity cost than firms in the United States. Through trade negotiations, the United States lifted quotas limiting the import of tomatoes from Mexico. Some firms in Florida, in the face of this new competition, had to close their farms and let go their workers. Many of the workers could not find new jobs right away. What type of unemployment describes the workers' situation?

Structural unemployment.

If output is below potential output, it is most likely that the economy is:

Near a trough.

Suppose capacity utilization in the United States decreased from 80.4 to 74.3. This likely reflects that the U.S. economy most likely moved:

Farther below both potential output and the target rate of unemployment.

Aggregate accounting:

Provides a way of measuring total or aggregate production.

Which of the following statements about aggregate accounting is false?

It provides the only way to measure social welfare.

GDP is the:

Market value of an economy's production of final goods and services in a one year period.

The value of intermediate goods is:

Excluded from both GDP and GNP.

The largest expenditure component of GDP is:

Consumption.

If you decide not to spend $1,000 you earned at your summer job but instead intend to buy shares in a mutual fund, in terms of aggregate economic accounting you would be:

Saving.

Government expenditures for social security and unemployment insurance are, for GDP accounting purposes, considered:

Transfers, and are not included in government spending as part of GDP.

Which of the following is not included in GDP but is included in GNP?

Economic activity of U.S. citizens working abroad.

If substantially more foreign money is invested in Ireland than Irish citizens have invested abroad, then one will likely expect Irish:

GDP to exceed Irish GNP.

If the market prices of publicly traded stocks and bonds rise, while the productive capacity of those assets has not increased, which of the following has occurred?

Nominal wealth has increased.

If nominal wealth increases faster than real wealth --

Asset inflation has occurred.

Which of the following is an example of an intermediate product?

The lumber produced by Boise Cascade and sold to a builder of old houses.

Double counting in the national income accounts will be avoided if GDP is computed by summing all:

Sales of final output.

Conceptually, a country's GDP equals:

The sum of the value added at all stages of production.

Suppose the value of your home increases from $100,000 to $125,000. If you continue to live in your home, the increase in its value:

Adds nothing to GDP.

Aggregate income is a measure of:

Household and business earnings from the sale of productive resources.

Net exports are defined as:

Exports less imports.

For the purposes of calculating GDP using the expenditure approach, which of the following is NOT included in the government purchases account?

Welfare payments to the poor.

If U.S. net exports are positive, then U.S.:

GDP exceeds the sum of consumption, investment, and government purchases.

The largest component of aggregate income is:

Employee compensation.

If you know that a meal costing $40 in the United States would cost $2 in Bangladesh and this is representative of the relative prices of most goods, you also know that:

Purchasing power parity would increase comparative GDP for Bangladesh.

Comparisons of per capita gross domestic product (GDP) between countries:

Do not necessarily provide a good measure of relative living standards.

If the prices used in two countries are exactly the same, then a comparison of the per capita GDPs of the two countries provides:

Some insight into living standards depending on the extent of non-market activities in each country.

The total annual market value of a nation's final output of goods and services computed at existing prices is called:

Nominal GDP.

Suppose that both nominal GDP and prices double. We can conclude that real output:

Remained constant.

Suppose both nominal GDP and real GDP increase. It can be concluded that:

Output rose.

Day laborers who are in the United States without documents and work off the books are:

Part of the underground economy which is not measured in GDP.

When someone stops mowing his lawn and hires a teenager for cash that is unreported, what happens to GDP?

It probably does not change. Production has shifted from non-marketed to the underground economy and neither is counted.

One of the limitations of aggregate accounting is that:

It measures market activity, not social welfare.