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

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1 1 chapter 1. Both households and societies face many decisions because a. resources are scarce. b. populations may increase or decrease over time. c. wages for households and therefore society fluctuate with business cycles. d. people, by nature, tend to disagree. 2. Economists use the phrase There is no such thing as a free lunch, to illustrate a. how inflation increases prices. b. that to get one thing, we must give up something else. c. that nothing is free in a market economy. d. that if something looks too good to be true, it probably is. 3. When government policies such as the welfare system try to help the most needy members of society, it a. increases equity and reduces efficiency. b. reduces charitable contributions in an economy. c. increases the productivity of the needy in the society. d. causes market failure to occur. 4. Mallory decides to spend 3 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.

2 5. 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. 6. Your professor loves her work, teaching economics. She has been offered other positions in the corporate world making 25 percent more, but has decided to stay in teaching. 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. 7. Suppose your management professor has been offered a corporate job with a 30% 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. 8. Each of the following statements about trade is true EXCEPT a. Trade increases competition. b. One country wins and one country loses. c. The United States can benefit from trade with any country. d. Trade allows people to buy a greater variety of goods and services at lower cost. 9. Benefits from trade would NOT include a. the ability to specialize. b. a greater variety of goods and services becoming available. c. less competition. d. lower prices. 10. In a market economy, economic activity is guided by a. the government. b. corporations. c. central planners. d. prices.

3 11. The invisible hand directs economic activity through a. advertising. b. prices. c. central planning. d. government regulations. 12. 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 the market. c. extended periods of unemployment. d. a dramatic reduction in consumer spending. 13. One necessary role of government in a market economy is to a. tax goods and services which are most desired by consumers. b. maintain welfare programs for the poor. c. provide services such as mail delivery. d. enforce property rights. 14. 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. 15. Which of the following is most likely to generate an externality? a. Teachers at a local high school have pizza delivered every Friday for lunch. b. A young man from a small town attends medical school to become a doctor. c. A newlywed couple buys a TV for their family room. d. John buys a tractor to mow his newly purchased 5-acre lot. 16. 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. Both a and c are correct. e. All of the above are correct.

4 17. Inflation causes a. incomes to fall. b. productivity to increase. c. the government to lower taxes. d. the value of money to fall. 18. Policymakers can influence the combination of inflation and unemployment the economy experiences by adjusting each of the following EXCEPT a. taxes. b. government spending. c. the money supply. d. market prices. 19. Which of the following is consistent with the Phillips Curve? 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.

5 2 chapter 20. In the simple circular-flow diagram, the decisionmakers consist of a. firms and government. b. households and firms. c. households and government. d. households, firms, and government. 21. In the goods and services market, households a. and firms are both buyers. b. are sellers and firms are buyers. c are buyers and firms are sellers. d and firms are both sellers. 22. In the factors of production market, households a. are sellers and firms are buyers. b. are buyers and firms are sellers. c and firms are both buyers. d and firms are both sellers. 23. In the markets for factors of production, a. households provide firms with labor, land, and capital. b. households provide firms with savings for investment. c. firms provide households with goods and services. d. the government provides firms with inputs for the production process. 24. In the markets for goods and services, a. households provide firms with savings for investment. b. households provide firms with labor, land, and capital. c. firms provide households with the output they produced. d. the government provides firms with inputs for the production process.

6 25. Which of the following concepts is NOT illustrated by the production possibilities frontier? a. efficiency b. opportunity cost c. equity d. tradeoffs 26. On the production possibilities frontier shown, the economy CANNOT produce at which point or points? a. A b. C c. A, C d. A, C, D, 27. On the production possibilities frontier shown, which point or points are efficient? a. B, E b. A, B, E c. D d. C 28. On the production possibilities frontier shown, which point or points are inefficient? a. A, C b. D, C c. C d. D 29. The opportunity cost of obtaining more of one good is shown on the production possibilities frontier as the a. amount of the other good that must be given up. b. market price of the additional amount produced. c. amount of resources that must be devoted to its production. d. number of dollars that must be spent to produce it. 30. A microeconomist might study each of the following EXCEPT a. the effects of rent control on housing in New York City. b. how a college student makes financial decisions.

7 c. how tariffs on shoes affects the shoe industry. d. the effect on the economy when unemployment rates change. 31. A macroeconomist would study each of the following EXCEPT the a. impact of minimum-wage laws on employment in the fast food industry. b. effect of changes in saving rates on GDP. c. impact of monetary policy on the rate of inflation. d. effect of tax policy on the rate of economic growth. 32. Which is the best statement about the roles of economists? a. Economists are best viewed as policymakers. b. Economists are best viewed as scientists. c. In trying to explain the world, economists are policymakers; in trying to improve the world, they are scientists. d. In trying to explain the world, economists are scientists; in trying to improve the world, they are policymakers. 33. Which of the following is an example of a positive statement? a. Prices rise when the government prints too much money. b. If welfare payments increase, the world will be a better place. c. Inflation is more harmful to the economy than unemployment. d. The benefits to the economy of improved equity are greater than the costs of reduced efficiency. 34. Which of the following is an example of a normative statement? a. If the price of a product decreases, quantity demanded increases. b. Reducing tax rates on the wealthy would be good for the country. c. If the national saving rate were to increase, so would the rate of economic growth. d. All of the above are correct. 35. Prices rise when the government prints too much money is an example of a a. positive economic statement. b. statement made by the Carter administration. c. normative economic statement. d. welfare statement.

8 36. A demand curve shows the relationship a. between income and quantity demanded. b. between price and income. c. between price and quantity demanded. d. among income, price, and quantity demanded. 37. The Secretary of Labor states that wage rates in the country have risen by 2 percent this past year. The head of a local labor union states that wage gains should have been higher. The Secretary s statement is a economic statement, and the labor head s statement is a economic statement. a. normative; normative b. normative; positive c. positive; normative d. positive; positive 38. An increase in interest rates will lower economic growth. This statement is a. a positive economic statement. b. a normative economic statement. c. untrue in every case. d. controversial, and so not a valid economic issue.