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1. Which statement best describes a command economy?
A.  The production of goods and services is determined primarily by markets, but the allocation of goods and services is determined primarily by government
B.  The production of goods and services is determined primarily by government, but the allocation of goods and services is determined primarily by markets
C.  The production and allocation of goods and services is determined primarily through markets
D.  The production and allocation of goods and services is determined primarily through government
D.  The production and allocation of goods and services is determined
 
2. Which statement is correct?
A.  Freedom of choice and enterprise are essential elements of the market system
B.  Producers are "kings" in a market economy because they determine what is produced
C.  The market system is efficient at allocation of resources, but not consumer goods to their most valued uses
D.  The operation of a market system eventually results in an equal distribution of income
 
3. In a competitive economy, prices:
A.  influence consumers in their purchases of goods and services.
B.  influence businesses in their purchases of economic resources.
C.  influence workers in making occupational choices.
D.  do all of these
 
4. The competitive market system:
A.  encourages innovation because government provides tax breaks and subsidies to those who develop new products or new productive techniques.
B.  discourages innovation because it is difficult to acquire additional capital in the form of new machinery and equipment.
C.  discourages innovation because firms want to get all the profits possible from existing machinery and equipment.
D.  encourages innovation because successful innovators are rewarded with economic profits
 
5. Which is not one of the Five Fundamental Questions?
A.  How will the goods and services be produced?
B.  How should the system accommodate change?
C.  Who is to receive the output of the system?
D.  What goods and services should be produced by government?
 
6. The idea that firms and resource suppliers in seeking to further their own self-interests in a competitive market economy also simultaneously promotes the public or social interest is a description of:
A.  The guiding function of prices
B.  Capital accumulation
C.  The "invisible hand"
D.  "Dollar votes"
 
7. Which of the following is a limitation of the simple circular flow model?
A.  product markets are ignored.
B.  resource markets are ignored.
C.  the determination of product and resource prices is not explained.
D.  households are included, but not businesses.
 
8. Households and businesses are:
A.  both buyers in the resource market.
B.  both sellers in the product market.
C.  sellers in the resource and product markets respectively.
D.  sellers in the product and resource markets respectively
 
9. The circular flow model:
A.  Assumes that central planning is taking place
B.  Illustrates how natural resources are created
C.  Illustrates how money is created by the banking system
D.  Illustrates the interdependence of businesses and consumers
 
Because it is difficult for economists to use experiments to generate
data, they generally must
a. use whatever data the world gives them.
b. substitute assumptions for data when data are unavailable.
c. rely upon hypothetical data that were previously concocted by other economists.
d. do without data.
 
Which of the following is an example of a normative, as opposed to positive, statement?
a. The Federal Reserve Bank adjusted interest rates in response to the lower-than-expected growth rate of the economy.
b. The growth rate of the economy last year was higher than any other year in the last decade.
c. The federal government should decrease unemployment benefits to stimulate the economy out of the recession.
d. The federal government reduced spending in the last quarter of the fiscal year.
 
A microeconomist — as opposed to a macroeconomist — might study
a. the effect of a national healthcare program on the nation's unemployment rate.
b. the growth rate of production in the economy.
c. the effect of changes in interest rates on gross domestic product.
d.  the effect of new regulations on production in the pulp and paper industry.
 
The slope of a fairly flat upward-sloping line will be a
a. small positive number.
b. large negative number.
c. large positive number.
d. small negative number.
 
Which of the following would likely be studied by a macroeconomist rather than a microeconomist?
a. the effect of a price war in the airline industry
b. the effect of foreign competition on the domestic auto industry
c. the effect of an increase in the alcohol tax on the market for beer
d.  the effect of an increase in the minimum wage on an economy's overall rate of unemployment
 
When two variables have a negative correlation and the x-variable decreases,
a. the y-variable increases.
b. the x-variable can never be positive.
c. the y-variable stays the same.
d. the y-variable decreases.
 
Policies such as rent control and trade barriers persist
a. because almost all economists agree that those policies are desirable.
b. because economists are about evenly divided as to the merits of those policies.
c. despite the fact that almost all economists agree that those policies are undesirable.
d. because almost all economists agree that those policies have no discernible economic effects.
 
Economists believe that production possibilities frontiers
a. always have a bowed shape.
b. rarely have a bowed shape.
c. never have a bowed shape.
d. often have a bowed shape.
 
Which of the following is not an example of a natural experiment an economist might use to evaluate a theory?
a. Transit ridership increased in Atlanta following an increase in gas prices.
b. Following the imposition of austerity measures, the growth rate of the economy in Greece slowed.
c. Students in a principles of microeconomics course are asked to play a game with classmates to determine what decisions they make under certain  circumstances.
d. Federal tax revenue increased following a decrease in the tax rate.
 
In the circular-flow diagram, in the markets for
a.  the factors of production, households and firms are both buyers.
b.  goods and services, households are sellers and firms are buyers.
c.  the factors of production, households are sellers and firms are buyers.
d.  goods and services, households and firms are both sellers.
 
The field of economics is traditionally divided into two broad subfields,
a.  private sector economics and public sector economics.
b.  microeconomics and macroeconomics.
c.  national economics and international economics.
d.  consumer economics and producer economics.
 
Economic models
are simplifications of reality, and in this respect economic models are no different from other scientific models
 
A demand curve shows the relationship between price and
quantity demanded.
 
You know an economist has crossed the line from scientist to policy adviser when he or she
makes normative statements.
 
Which of the following is an example of a normative - as opposed to a positive - statement?
The government should increase the tax on gasoline.
 
The slope of a steep upward-sloping line will be a
large positive number.
 
Refer to Figure 2-11. The shift of the production possibilities frontier from A to B illustrates
economic growth
 
A relatively flat demand curve indicates that
quantity demanded will adjust significantly to a price change.
 
Factors of production are
inputs into the production process
 
Refer to Figure 2-16. The opportunity cost of obtaining 30 additional widgets by moving from point A to point C is approximately
10 gadgets.
 
In economics, capital refers to
buildings and machines used in the production process
 
The art in scientific thinking is
deciding which assumptions to make
 
In the circular-flow diagram
income paid to the factors of production flows from firms to households
 
Which of the following statements is correct about the roles of economists?
In trying to explain the world, economists are scientists; in trying to improve the world, they are policy advisers.
 
In building economic models, economists often omit
details
 
The opportunity cost of obtaining more of one good is shown on the production possibilities frontier as the
amount of the other good that must be given up.
 
Which of the following is not correct?
Economics has its own language and its own way of thinking, but few other fields of study do.
 
In addition to advising the president, one duty of the Council of Economic Advisers is to
write the annual Economic Report of the President
 
Joe and Fred are economists. Joe thinks that the wealthiest 10% of the US population should be taxed a rate higher than the rest
of society because they can better afford it. Fred thinks that everyone should be taxed at the same rate because that is the fairest scenario and the wealthy should not be penalized for their success. In this example, Joe and Fred
have different normative views about tax policy.
 
The "broken window fallacy"
is illustrated when a government program is justified not on its merits but on the number of jobs it will create
 
Almost all economists agree that rent control
adversely affects the availability and quality of housing.
 
Almost all economists agree that local and state governments should
eliminate subsidies to professional sports franchises
 
In the early 19th century, the Russian government sent doctors to southern Russian villages to provide assistance during a cholera epidemic.  The villagers noticed that wherever doctors appeared, people died.  Therefore, many doctors were chased
away from villages, and some were even killed.  This reaction to the correlation between doctors and deaths is
most likely a problem of reverse causality.
 
In the simple circular-flow diagram, the participants in the economy are
households and firms.
 
A demand curve shows the relationship
between price and quantity demanded.
 
A duty of economists at the Department of Labor is to analyze data on workers.
For a market system, which of the following best answers the question, "What goods and services will be produced?"
the goods and services produced at a continuing profit
 
The command systems of the Soviet Union and eastern Europe failed in part because:
central planners found it increasingly difficult to coordinate the economic decisions of consumers, resource suppliers,
and businesses
 
The competitive market system encourages innovation and technological advance, primarily through:
profitable returns to innovative firms
 
Human specialization, or the division of labor:
increases output by enabling workers to take advantage of differences in their skills
 
Economic profits and losses:
help determine which industries survive or fail
 
If a change in consumer preferences results in many more consumers registering their "dollar votes" in favor of peaches,
which of the following will most likely follow?
Profits of peach growers will rise and peach production will rise
 
The market system is characterized by:
private property rights
 
A firm will earn a positive economic profit if:
its total sales revenue exceeds the sum of all its costs
 
How does the type of opportunity cost affect the shape of the PPF? if opportunity cost remains constant, PPF is a
straight line if the opportunity cost of a good rises as economy produces more of the
good, PPF is bow-shaped
 
What causes the PPF to shift or pivot outward? economic growth shifts the PPF outward
when you destroy the factors of production, the PPF shifts inward
 
What is the result of a shift of the PPF?
there are new point of efficiency that the economy should be aiming for
 
What is a normative statement?
claim that attempts to prescribe how the world should be
 
What is a positive statement?
claim that attempts to describe how the world is
 
The accounting framework used in measuring current economic activity is called
the national income accounts.
 
The three approaches to measuring economic activity are the
product, income, and expenditure approaches
 
The value of a producer's output minus the value of the inputs it purchases from other producers is called the producer's
value added
 
The value added of a producer is the value of its output minus the value of the inputs it purchases from
other producers.
 
The Bigdrill company drills for oil, which it sells for $200 million to the Bigoil company to be made into gas. The Bigoil company's
gas is sold for a total of $600 million. What is the total contribution to the country's GDP from companies Bigdrill and Bigoil?
$600 million
 
Sam's Semiconductors produces computer chips, which it sells for $10 million to Carl's Computer Company (CCC).
CCC's computers are sold for a total of $16 million. What is the value added of CCC?
$6 million
 
The Compagnie Naturelle sells mounted butterflies, using butterfly bait it buys from another firm for $20,000. It pays its
workers $35,000, pays $1,000 in taxes, and has profits of $3,000. What is its value added?
$39,000
 
The equation total production = total income = total expenditure is called
the fundamental identity of national income accounting.
 
The fundamental identity of national income accounting is
total production = total income = total expenditure.
 
To ensure that the fundamental identity of national income accounting holds, changes in inventories are
treated as part of expenditure.
 
To what extent are homemaking and child-rearing accounted for in the government's GDP accounts?
Only to the extent that they are provided for pay
 
The measurement of GDP includes
estimated values of activity in the underground economy.
 
Which of the following is included in U.S. GDP?
A newly constructed house
 
Government statisticians adjust GDP figures to include estimates of
the underground economy.
 
Because government services are not sold in markets
they are valued at their cost of production.
 
Intermediate goods are goods that are used up in the production of other goods in the same
period that they were produced.
 
Capital goods are (1)
final goods, because they are not used up during a given year.
 
Capital goods are (2)
goods used to produce other goods.
 
Marvin's Metal Company produces screws that it sells to Ford, which uses the screws as a component of its cars.
In the national income accounts, the screws are classified as
intermediate goods.
 
Larry's Lathe-makers Limited produces lathes, which are purchased by furniture manufacturers all over the world.
The standard lathe depreciates over a twenty-five year period. In the national income accounts, the lathes are classified as
capital goods.
 
Fred the farmer purchased five new tractors at $20,000 each. Fred sold his old tractors to other farmers for $50,000.
The net increase in GDP of these transactions was
$100,000.
 
Inventories include each of the following except
office equipment.
 
GDP differs from GNP because
GDP = GNP - net factor payments from abroad.
 
If an American construction company built a road in Kuwait, this activity would be included in U.S. GNP
only for that portion that was attributable to
American capital and labor.
 
Nations such as Egypt and Turkey may have wide differences between GNP and GDP because both the countries
have a large number of citizens working abroad.
 
If C = $500, I = $150, G = $100, NX = $40, and GNP = $800, how much is NFP?
$10
 
If C = $250, I = $50, G = $60, NX =- $20, and NFP = $5, how much is GNP?
$345
 
If C = $400, I = $100, G = $50, NX = $30, and NFP = $5, how much is GDP?
$580
 
The income-expenditure identity says that
Y = C + I + G + NX.
 
Which of the following is not a category of consumption spending in the national income accounts?
Housing purchases
 
Consumer spending is spending by ________ households on final goods and services produced ________.
domestic; domestically and abroad
 
Business fixed investment includes purchases of
capital equipment and structures.
 
In the expenditure approach to GDP, which of the following would be excluded from measurements of GDP?
Government payments for welfare
 
Net national product equals
gross national product minus depreciation.
 
Monica grows coconuts and catches fish. Last year she harvested 1500 coconuts and 600 fish. She values one
fish as having a worth of three coconuts. She gave Rachel 300 coconuts and 100 fish for helping her to harvest
coconuts and catch fish, all of which were consumed by Rachel.
In terms of fish, Monica's income would equal 900 fish.
 
Monica grows coconuts and catches fish. Last year she harvested 1500 coconuts and 600 fish. She values one fish as
having a worth of three coconuts. She gave Rachel 300 coconuts and 100 fish for helping her to harvest coconuts and
catch fish, all of which were consumed by Rachel. Monica consumed the remaining fish and coconuts. In terms of fish,
total consumption by both Monica and Rachel would equal
1100 fish.
 
Private disposable income equals
GNP - taxes + transfers + interest.
 
The value of a household's assets minus the value of its liabilities is called
wealth.
 
Private saving is defined as
private disposable income minus consumption.
 
In a given year, a country's
GDP = $9841, net factor payments from abroad = $889, taxes = $869, transfers received from the government = $296,
interest payments on the government's debt = $103, consumption = $8148, and government purchases = $185.
The country had private saving equal to
$2112.
 
In a given year, a country's GDP = $9841, net factor payments from abroad = $889, taxes = $869, transfers received from the government = $296, interest payments on the government's debt = $103, consumption = $8148, and
government purchases = $185. The country had government saving equal to
$285.
 
In a given year, a country's GDP = $9841, net factor payments from abroad = $889, taxes = $869, transfers received from the government = $296, interest payments on the government's debt = $103, consumption = $8148,
and government purchases = $185. The country had private saving equal to
$2397.
 
If a local government collects taxes of $500,000, has $350,000 of government consumption expenditures,
makes transfer payments of $100,000, and has no interest payments or investment, its budget would
show a surplus of $50,000.
 
If a local government collects taxes of $250,000, has $175,000 of government consumption expenditures,
makes transfer payments of $75,000, and has no interest payments or investment, its budget would
be in balance with neither a surplus nor a deficit.
 
The government budget surplus equals
government receipts minus government outlays.
 
National saving equals private saving plus government saving, which in turn equals
GDP + NFP - C - G.
 
The uses-of-saving identity says that an economy's private saving is used for
investment, the government budget deficit, and the current account.
 
The uses-of-saving identity shows that if the government budget deficit rises, then one of the following must happen.
Private saving must rise, investment must fall, and/or the current account must fall.
 
Saving is a ________ variable, and wealth is a ________ variable.
flow; stock
 
Suppose that private saving is $1590 billion, investment is $1945 billion, and the current account balance is
$489 billion. From the uses-of-saving identity, how much is government saving?
-$134 billion
 
Suppose that national saving is $1456 billion, investment is $1945 billion, and private saving is $1590 billion.
How much is the current account balance?
-$489 billion
 
In the mid-to-late 1980s, the United States had "twin deficits" because both ________ and ________ were negative.
government saving; the current account
 
The value of real GDP in the current year equals
the value of current-year output in prices of the base year.
 
Currently, the U.S. national income and product accounts (NIPA) use what type of price index to calculate real GDP?
Chain-weight
 
If nominal GDP for 2009 is $6400 billion and real GDP for 2010 is $6720 billion (in 2005 dollars), then the growth
rate of real GDP is
5%.
 
If the price index was 100 in 2000 and 120 in 2010, and nominal GDP was $360 billion in 2000 and $480 billion in 2010,
then the value of 2010 GDP in terms of 2000 dollars would be
$400 billion.
 
Nominal GDP in 1970 was $1,035.6 billion, and in 1980 it was $2,784.2 billion. The GDP price index was 30.6 for
1970 and 60.4 for 1980, where 1992 was the base year. Calculate the percent change in real GDP in the decade
from 1970 to 1980. Round off to the nearest percentage point.
36%
 
Nominal personal consumption expenditures in the United States were $1760.4 billion in 1980 and rose to $3839.3 billion in 1990.
The price index for personal consumption expenditures was 58.5 for 1980 and 92.9 for 1990, where 1992 was the base year.
Calculate the percent change in real personal consumption expenditures (rounded to the nearest percentage point) in the decade.
37%
 
Nominal gross private domestic investment was $1888.0 billion in 2008 and rose to $2057.4 billion in 2009. The chain-weight price index for gross private domestic investment was 106.6 for 2008 and 110.3 for 2009, where 2005 was the base year. Calculate the percent change in real gross private domestic investment (rounded to the nearest percentage point) from 2008 to 2009.
5%
 
A disadvantage of chain-weighting is that
the components of real GDP don't sum to real GDP.
 
The U.S. inflation rate ________ in the 1960s and 1970s, ________ in the 1980s, and ________ in the 1990s and 2000s.
rose; fell sharply; remained low
 
Two years ago, the GDP deflator for Old York was 300, and today it is 330.75. Based on this information the annual average inflation rate for the two years was
5%.
 
If the price index last year was 1.0 and today it is 1.4, what is the inflation rate over this period?
40%
 
The consumer price index (CPI) was 180 for 2009 when using 1995 as the base year (1995 = 100). Now suppose we switch and use 2009 as the base year (2009 = 100). What is the CPI for 1995 with the new base year?
55.6
 
Nominal government purchases were $2226.2 billion in 2008 and rose to $2372.8 billion in 2009.
Real government purchases were $1940.6 for 2008 and $1958.0 for 2009, where 2005 was the base year. Calculate the percent change in the chain-weight price index for government purchases (rounded to the nearest percentage point) from 2008 to 2009.
6%
 
The Boskin Commission concluded that the CPI overstates increases in the cost of living by ________ percentage point(s) per year.
1 to 2
 
The CPI may overstate inflation for all the following reasons except
changes in Social Security benefits.
 
The Fed prefers to focus on inflation based on which price index?
personal consumption expenditures price index
 
The Federal Reserve focuses on the inflation rate based on the ________ rather than the CPI; to measure the underlying trend in inflation, it focuses on the ________.
PCE price index; core PCE price index
 
The nominal interest rate minus the inflation rate is the
real interest rate.
 
By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest
totaling $436 one year later. During the year the CPI rose from 150 to 162. The nominal interest rate on the
bond was ________, and the real interest rate was ________.
9%; 1%
 
The expected real interest rate (r) is equal to
nominal interest rate minus expected inflation rate.
 
In 2008, inflation exceeded expected inflation. In 2009, expected inflation exceeded inflation.
Therefore the real interest rate was ________ than the expected real interest rate in 2008 and the real
interest rate was ________ than the expected real interest rate in 2009.
less; greater
 
In 2008, expected inflation exceeded inflation. In 2009, inflation exceeded expected inflation.
Therefore the real interest rate was ________ than the expected real interest rate in 2008 and the
real interest rate was ________ than the expected real interest rate in 2009.
greater; less
 
If the expected inflation rate was 2.5%, the expected real interest rate was 4.0%, and the actual inflation
rate turned out to be 3.2%, then the real interest rate equals
3.3%.
 
If the nominal interest rate on a one-year loan was 7%, the expected inflation rate over the year was 3% and the
actual inflation rate over the year turned out to be 3.5%, then the expected real interest rate equals
4.0%
 
By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest
totaling $436 one year later. During the year the CPI rose from 150 to 162, but he had thought the CPI would be at 159
by the end of the year. By Marks had expected the real interest rate to be ________, but it actually turned out to be ________.
3%; 1%
 
Historical analysis of real interest rates in the United States shows that real interest rates were unusually low
in the 1970s and unusually high
in the 1980s.
 
What are the economic models?
circular-flow diagram and production possibilities curve
 
How does the circular flow diagram work? outer arrows show flow of dollars, inner arrows shoe flow of inputs and
outputs
 
Who are the "actors" in the circular flow diagram and what do the do? firms: produce and sell goods and services,
hire and use factors of
production households: buy and consume goods and services, own and sell factors of
production
 
What are the 2 markets in the circular flow diagram?
market for factors of production, market for goods and services
 
What are the factors of production?
land, labor, capitol
 
What are the payments to the factors of production?
land: wager
labor: profit
capitol: rent
 
What does PPF stand for?
production possibilities curve
 
What does the PPF tells us? shows the combinations of outputs that the economy can produce given the
available FOP and the available production technology
 
What is an increasing opportunity cost? constant opportunity cost? the amount or resources that you have to give
up increases with each additional unit of output; the about of resources that you have to give
up remains the same for each additional unit of output