Chapter 2-Thinking Like A Economist

Chapter 2
Thinking Like an Economist

MULTIPLE CHOICE
1. Whichisthebeststatementaboutthewayeconomistsstudytheeconomy?
a. Theystudythepast,butdonottrytopredictthefuture.
b. Theyuseaprobabilisticapproachbasedoncorrelationsbetweeneconomicevents.
c. Theydevisetheories,collectdata,thenanalyzethedatatotestthetheories.
d. Theyusecontrolledexperimentsmuchthesamewayabiologistorphysicistdoes.
ANSWER:c. Theydevisetheories,collectdata,thenanalyzethedatatotestthetheories.
TYPE:MSECTION:1DIFFICULTY:2
2. Termsusedbyaneconomistwouldinclude
a. vectorspacesandaxioms.
b. tortsandvenues.
c. egoandcognitivedissonance.
d. comparativeadvantageandelasticity.
ANSWER:d. comparativeadvantageandelasticity.
3. Byscientificmethodwemean
a. theuseofmodernelectronictestingequipmenttounderstandtheworld.
b. thedispassionatedevelopmentandtestingoftheoriesabouthowtheworldworks.
c. theuseofcontrolledexperimentsinunderstandingthewaytheworldworks.
d. findingevidencetosupportpreconceivedtheoriesabouthowtheworldworks.
ANSWER:b. thedispassionatedevelopmentandtestingoftheoriesabouthowtheworldworks.
4. Whosaid,Thewholeofscienceisnothingmorethantherefinementofeverydaythinking.?
a. IsaacNewton
b. AlbertEinstein
c. SigmundFreud
d. BenjaminFranklin
ANSWER:b. AlbertEinstein
5. AlbertEinsteinoncemadethefollowingobservationaboutscience:
a. Thewholeofscienceisnothingmorethantherefinementofeverydaythinking.
b. Thewholeofscienceisnothingmorethananinterestingintellectualexercise.
c. Inordertounderstandscience,onemustrelysolelyonabstraction.
d. Inordertounderstandscience,onemusttranscendeverydaythinking.
ANSWER:a. Thewholeofscienceisnothingmorethantherefinementofeverydaythinking.
6. SirIsaacNewtonsdevelopmentofthetheoryofgravityafterobservinganapplefallfromatreeisanexampleof
a. controlledexperimentsusedtodevelopscientifictheories.
b. beingintherightplaceattherighttime.
c. anideawhosetimehadcome.
d. theinterplaybetweenobservationandtheoryinscience.
ANSWER:d. theinterplaybetweenobservationandtheoryinscience.
27
Chapt er 2/ Thi nki ng Li ke an Economi st 28

7. Acommonthreadbetweeneconomicsandothersciencessuchasphysicsisthat
a. experimentsaremostoftenconductedinalab.
b. realworldobservationsoftenleadtotheories.
c. aPh.D.isrequiredtotrulyunderstandanyscience.
d. bothdealprimarilywithabstractconcepts.
ANSWER:b. realworldobservationsoftenleadtotheories.
8. Theuseoftheoryandobservationismoredifficultineconomicsthaninsciencessuchasphysicsduetothe
difficultyin
a. evaluatinganeconomicexperiment.
b. devisinganeconomicexperiment.
c. actuallyperforminganexperimentinaneconomicsystem.
d. Alloftheabovearecorrect.
ANSWER:c. actuallyperforminganexperimentinaneconomicsystem.
9. Becauseitisdifficultforeconomiststouseexperimentstogeneratedata,theygenerallymust
a. dowithoutdata.
b. usewhateverdatatheworldgivesthem.
c. selectacommitteeofeconomiststomakeupdataforalleconomiststouse.
d. usehypothetical,computergenerateddata.
ANSWER:b. usewhateverdatatheworldgivesthem.
10. Whentestingtheories,economists
a. mustmakedowithwhateverdatatheworldgivesthem.
b. canmanipulateeconomicconditionseasierthanotherscientificfields.
c. canenlistthegovernmentshelptomanipulateeconomicconditions.
d. canachievestatisticallyvalidresultswithmuchsmallersamplesizes.
ANSWER:a. mustmakedowithwhateverdatatheworldgivesthem.
11. Onedifficultyeconomistsfacethatsomeotherscientistsdonotisthat
a. unlikeothersciences,economicstudiesmustincludethelargesteconomicplayer,thegovernment.
b. economistsunfortunatelyreceivelessgovernmentfundingthanotherscientists.
c. corporationsarereluctanttodisclosenecessaryinformationforeconomicresearch.
d. experimentsareoftendifficultineconomics.
ANSWER:d. experimentsareoftendifficultineconomics.
12. Themostcommondatafortestingeconomictheoriescomefrom
a. carefullycontrolledandconductedlaboratoryexperiments.
b. traditionaleconomies.
c. historicalepisodesofeconomicchange.
d. centrallyplannedeconomies.
ANSWER:c. historicalepisodesofeconomicchange.
13. Foreconomists,substitutesforlaboratoryexperimentsareoften
a. naturalexperimentsofferedbyhistory.
b. computergeneratedexperiments.
c. studiesconductedbyotherdisciplinessuchassociologists.
d. wellconstructedsimulations.
ANSWER:a. naturalexperimentsofferedbyhistory.

14. Economistsmakeassumptions
a. todiminishthechanceofwronganswers.
b. tomaketheworldeasiertounderstand.
c. becauseallscientistsmakeassumptions.
d. tomakecertainthatallnecessaryvariablesareincluded.
ANSWER:b. tomaketheworldeasiertounderstand.
15. Theartofscientificthinkingincludes
a. knowinghowthemajororgansofthehumanbodywork.
b. understandingeveryscientificfieldphysics,biologyandeconomics.
c. decidingwhichassumptionstomake.
d. beingabletomathematicallyexpressnaturalforces.
ANSWER:c. decidingwhichassumptionstomake.
16. Ifaneconomistdevelopsatheoryaboutinternationaltradebasedontheassumptionthatthereareonlytwo
countriesandtwogoods,
a. thetheorycanbeusefulonlyinsituationsinvolvingtwocountriesandtwogoods.
b. itisatotalwasteoftime,sincetheactualworldhasmanycountriestradingmanygoods.
c. thetheorycanbeusefulinhelpingeconomistsunderstandthecomplexworldofinternationaltradeinvolving
manycountriesandmanygoods.
d. thetheorycanbeusefulintheclassroom,buthasnouseintherealworld.
ANSWER:c. thetheorycanbeusefulinhelpingeconomistsunderstandthecomplexworldofinternationaltrade
involvingmanycountriesandmanygoods.
17. The1973warintheMiddleEastprovidedeconomistswiththeopportunitytoobservetheinverserelationship
between
a. oilpricesandlivingstandards.
b. militarybuildupsandgovernmentspending.
c. theflowofcrudeoilandoilprices.
d. theflowofcrudeoilandpoliticalpower.
ANSWER:a. oilpricesandlivingstandards.
18. Historicalepisodesarevaluabletoeconomistsbecause
a. itallowseconomiststoseehowfarthedisciplinehasevolved.
b. hindsightisalways20/20.
c. itiseasiertoevaluateapastsituationthantopredictafuturesituation.
d. theyalloweconomiststoevaluateeconomictheoriesofthepresent.
ANSWER:d. theyalloweconomiststoevaluateeconomictheoriesofthepresent.
19. Whatwouldbethebeststatementaboutatheorybasedonassumptionsthatarenottrue?
a. Iftheassumptionsunderlyingthetheoryarenottrue,thetheorymustbefalse.
b. Theideasmaybegoodintheory,butnotinpractice.
c. Thetheoryisagoodoneifithelpsustounderstandhowtheworldworks.
d. Thetheoryisagoodoneifnologicalmistakesweremadeindevelopingit.
ANSWER:c. Thetheoryisagoodoneifithelpsustounderstandhowtheworldworks.

20. Whatisthegoaloftheories?
a. toprovideaninteresting,butnotuseful,frameworkofanalysis
b. toprovokestimulatingdebateinscientificjournals
c. todemonstratethatthedeveloperofthetheoryiscapableoflogicalthinking
d. tohelpscientistsunderstandhowtheworldworks
ANSWER:d. tohelpscientistsunderstandhowtheworldworks
21. Wheneconomistsattempttosimplifytherealworldandmakeiteasiertounderstandtheymake
a. assumptions.
b. mistakesinjudgment.
c. predictions.
d. evaluations.
ANSWER:a. assumptions.
22. Goodassumptionscan
a. causeeconomiststoleaveoutimportantvariableswhichmaketheirtheoriesworthless.
b. simplifythecomplexworldandmakeiteasiertounderstand.
c. furthercomplicateanalreadydifficulttopic.
d. alloweconomiststoseethebigpictureinsteadofonlysmallsegments.
ANSWER:b. simplifythecomplexworldandmakeiteasiertounderstand.
23. Forascientist,thedecisionofwhichassumptiontomakeis
a. theeasiestpartofthescientificmethod.
b. theflipofacoin.
c. almostimpossible.
d. partart.
ANSWER:d. partart.
24. Theartofscientificthinkingis
a. easierwithasolidmathematicalbackground.
b. theabilitytomakeanabstractsubjecteasytounderstand.
c. decidingwhichassumptionstomake.
d. notnecessarytobeaneconomist.
ANSWER:c. decidingwhichassumptionstomake.
25. Whenscientistsmakegoodassumptions,they
a. greatlysimplifytheproblemwithoutsubstantiallyaffectingtheanswer.
b. furthercomplicateanalreadycomplicatedsubject.
c. canleaveoutnecessaryvariablesthatmayresultinincorrectanswers.
d. maynotbeabletoreachanappropriateconclusion.
ANSWER:a. greatlysimplifytheproblemwithoutsubstantiallyaffectingtheanswer.
26. Anexampleofaproductthatexperiencesinfrequentpricechangeswouldbe
a. stocksontheNewYorkStockExchange.
b. gasolineprices.
c. thenewsstandpriceofmagazines.
d. electricity.
ANSWER:c. thenewsstandpriceofmagazines.

27. Whenstudyingtheeffectsofpublicpolicychanges,economistshaveoftenobservedthat
a. thereisadifferencebetweenthelongrunandshortrun.
b. unemploymentandinflationaredirectlyrelatedintheshortrun.
c. withstockprices,whatgoesup,mustcomedown.
d. ifthepolicyiswelldesigned,itwillalwaysbeeffective.
ANSWER:a. thereisadifferencebetweenthelongrunandshortrun.
28. Whenstudyingtheeffectsofpublicpolicychanges,economists
a. oftenfalsifyresultsifthedesiredeffectisnotreached.
b. maymakedifferentassumptionsforthelongrunandtheshortrun.
c. attempttoconsideronlythedirecteffectsandnotindirecteffects.
d. canimmediatelychangepoliciesiftheyareineffective.
ANSWER:b. maymakedifferentassumptionsforthelongrunandtheshortrun.
29. Goodeconomicmodels
a. oftenleaveoutimportantvariables,causingseriouserrors.
b. omitmanydetailstoallowustoseewhatistrulyimportant.
c. aredesignedtogiveacompletepictureofagivenrelationship.
d. causeeconomicstobemisunderstoodbythegeneralpublic.
ANSWER:b. omitmanydetailstoallowustoseewhatittrulyimportant.
30. Economistsusemodelsinorderto
a. learnhowtheeconomyworks.
b. maketheirprofessionappearmoreprecise.
c. makeeconomicsdifficultforstudents.
d. makesurethatallofthedetailsoftheeconomyareincludedintheiranalysis.
ANSWER:a. learnhowtheeconomyworks.
31. Modelsusedbyeconomists
a. cannotbeusefultoeconomistsiftheyarebasedonfalseassumptions.
b. maketheeconomicsprofessionmoredifficultthannecessary.
c. alloweconomiststolearnhowtheeconomyworks.
d. mustincludeeverypossiblevariableintheeconomytobeusefultoeconomists.
ANSWER:c. alloweconomiststolearnhowtheeconomyworks.
32. Economistsbeginbuildinganeconomicmodelby
a. writinggrantsforgovernmentfunding.
b. conductingcontrolledexperimentsinalab.
c. makingassumptions.
d. reviewingstatisticalforecasts.
ANSWER:c. makingassumptions.
33. Amodelis
a. atheoreticalabstractionwithverylittlevalue.
b. usefultoonlytheoneswhoconstructedit.
c. arealisticandcarefullyconstructedtheory.
d. asimplificationofreallife.
ANSWER:d.asimplificationofreallife.

34. WhichofthefollowingisNOTtrueconcerningmodels?
a. Modelssimplifyreality.
b. Modelscanexplainhowtheeconomyisorganized.
c. Modelsassumeawayirrelevantdetails.
d. Modelscannotbeusedtomakepredictions.
ANSWER:d. Modelscannotbeusedtomakepredictions.
35. WhichofthefollowingisNOTtrueaboutmosteconomicmodels?
a. Theyarebuiltusingthetoolsofmathematics.
b. Theyareusefultoeconomists,butnottopolicymakers.
c. Theydonotincludeeveryfeatureoftheeconomy.
d. Theyarebuiltusingassumptions.
ANSWER:b. Theyareusefultoeconomists,butnottopolicymakers.
36. Whichofthefollowingisthemostaccuratestatementabouteconomicmodels?
a. Economicmodelsattempttomirrorrealityexactly.
b. Economicmodelsareuseful,butshouldnotbeusedforpolicymaking.
c. Economicmodelsomitmanydetailstoallowustoseewhatistrulyimportant.
d. Economicmodelscannotbeusedintherealworldbecausetheyomitdetails.
ANSWER:c. Economicmodelsomitmanydetailstoallowustoseewhatistrulyimportant.
37. Thefoundationstonesfromwhicheconomicmodelsarebuiltare
a. economicpolicies.
b. thelegalsystem.
c. assumptions.
d. statisticalforecasts.
ANSWER:c. assumptions.
38. Thecircularflowdiagramisa
a. visualmodelofhowtheeconomyisorganized.
b. mathematicalmodelofhowtheeconomyworks.
c. modelthatshowstheeffectsofgovernmentontheeconomy.
d. visualmodeloftherelationshipamongmoney,prices,andbusinesses.
ANSWER:a. visualmodelofhowtheeconomyisorganized.
39. Acircularflowdiagramisamodelthat
a. illustratescostbenefitanalysis.
b. explainshowtheeconomyisorganized.
c. showstheflowoftrafficinaneconomicregion.
d. explainshowbankscirculatemoneyintheeconomy.
ANSWER:b. amodelthatexplainshowtheeconomyisorganized.
40. Factorsofproductionare
a. themathematicalcalculationsfirmsmaketodetermineproduction.
b. weatherandsocialandpoliticalconditionsthataffectproduction.
c. thephysicalrelationshipsbetweeneconomicinputsandoutputs.
d. inputsintotheproductionprocess.
ANSWER:d. inputsintotheproductionprocess.

41. Inthesimplecircularflowdiagram,thedecisionmakersconsistof
a. firmsandgovernment.
b. householdsandfirms.
c. householdsandgovernment.
d. households,firms,andgovernment.
ANSWER:b. householdsandfirms.
42. Thetwoloopsinthecircularflowdiagramrepresenttheflowof
a. goodsandtheflowofservices.
b. dollarsandtheflowoffinancialassets.
c. inputsandoutputsandtheflowofdollars.
d. capitalgoodsandtheflowofconsumergoods.
ANSWER:c. inputsandoutputsandtheflowofdollars.
43. Inacircularflowdiagram,
a. taxesflowfromhouseholdstofirms,andtransferpaymentsflowfromfirmstohouseholds.
b. incomepaymentsflowfromfirmstohouseholds,andsalesrevenueflowsfromhouseholdstofirms.
c. resourcesflowfromfirmstohouseholds,andgoodsandservicesflowfromhouseholdstofirms.
d. inputsandoutputsflowinthesamedirectionastheflowofdollars,fromfirmstohouseholds.
ANSWER:b. incomepaymentsflowfromfirmstohouseholds,andsalesrevenueflowsfromhouseholdstofirms.
44. Inthecircularflowdiagram,
a. firmsaresellersintheresourcemarketandtheproductmarket.
b. firmsarebuyersintheproductmarket.
c. householdsaresellersintheresourcemarket.
d. spendingongoodsandservicesflowsfromfirmstohouseholds.
ANSWER:c. householdsaresellersintheresourcemarket.
45. Inthecircularflowdiagram,
a. incomefromfactorsofproductionflowsfromfirmstohouseholds.
b. goodsandservicesflowfromhouseholdstofirms.
c. factorsofproductionflowfromfirmstohouseholds.
d. spendingongoodsandservicesflowfromfirmstohouseholds.
ANSWER:a. incomefromfactorsofproductionflowsfromfirmstohouseholds.
46. WhichofthefollowingwouldNOTbeconsideredafactorofproduction?
a. labor
b. land
c. capital
d. money
ANSWER:d. money
47. Anothernameforgoodsandservicesproducedbyfirmsis
a. factorsofproduction.
b. output.
c. inputs.
d. resources.
ANSWER:b. output.
48. Factorsofproductionare
a. usedtoproducegoodsandservices.
b. ownedbyfirms.
c. abundantinmosteconomies.
d. usedbybothfirmsandhouseholds.
ANSWER:a. usedtoproducegoodsandservices.
TYPE:MSECTION:1DIFFICULTY:
49. Anothertermforfactorsofproductionis
a. inputs.
b. output.
c. goods.
d. services.
ANSWER:a. inputs.
50. Accordingtoasimplecircularflowdiagram,householdsandfirmsinteractin
a. onlyonetypeofmarket.
b. twotypesofmarkets.
c. threetypesofmarkets.
d. Householdsandfirmsdonotinteract.
ANSWER:b. twotypesofmarkets.
51. Inthesimplecircularflowdiagram,marketsconsistof
a. themarketforgoodsandservices,thefinancialmarket,andthemarketforthefactorsofproduction.
b. factorsofproductionandthefinancialmarket.
c. themarketforgoodsandservicesandthefinancialmarket.
d. themarketforgoodsandservicesandthemarketforfactorsofproduction.
ANSWER:d. themarketforgoodsandservicesandthemarketforfactorsofproduction.
52. Inthegoodsandservicesmarket,households
a. andfirmsarebothbuyers.
b. aresellersandfirmsarebuyers.
c arebuyersandfirmsaresellers.
d andfirmsarebothsellers.
ANSWER:c arebuyersandfirmsare
sellers.
53. Inthefactorsofproductionmarket,
households
a. aresellersandfirmsarebuyers.
b. arebuyersandfirmsaresellers.
c andfirmsarebothbuyers.
d andfirmsarebothsellers.
ANSWER:a. aresellersandfirmsare
buyers.

54. Inthecircularflowdiagramshown,whicharrowshowstheflowofgoodsandservices?
a. A
b. B
c. C
d. D
ANSWER:b. B
55. Inthecircularflowdiagramshown,whicharrowshowstheflowofspendingbyhouseholds?
a. A
b. B
c. C
d. D
ANSWER:a. A
56. Inthecircularflowdiagramshown,whicharrowshowstheflowofthefactorsofproduction?
a. A
b. B
c. C
d. D
ANSWER:c. C
57. Inthecircularflowdiagramshown,whicharrowshowstheflowofincomepayments?
a. A
b. B
c. C
d. D
ANSWER:d. D
58. Inthecircularflowdiagramshown,boxesAandBrepresent
a. firmsandhouseholds.
b. governmentandtheforeignsector.
c. thegoodsandservicesmarketandthefactorsofproductionmarket.
d. householdsandgovernment.
ANSWER:a. firmsandhouseholds.


59. Inthecircularflowdiagramshown,boxesCandDrepresent
a. householdsandfirms.
b. thegoodsandservicesmarketandthefactorsofproductionmarket.
c. thegoodsandservicesmarketandthefinancialmarket.
d. householdsandgovernment.
ANSWER:b. thegoodsandservicesmarketandthefactorsofproductionmarket.
60. Inthecircularflowdiagram,householdsaresellersin
a. thefactorsofproductionmarket.
b. thegoodsandservicesmarket.
c. bothmarkets.
d. neithermarket.
ANSWER:a. thefactorsofproductionmarket.
61. Inthecircularflowdiagram,firmsaresellersin
a. thegoodsandservicesmarket.
b. thefactorsofproductionmarket.
c. bothmarkets.
d. neithermarket.
ANSWER:a. thegoodsandservicesmarket.
62. Accordingtothecircularflowdiagram,factorsofproductionareownedby
a. thegovernment.
b. firms.
c. households.
ANSWER:c. households.
63. Inthecircularflowdiagram,theinnerlooprepresentstheflowof
a. inputstofirmsandoutputtohouseholds.
b. outputtofirmsandinputstohouseholds.
c. spendingtofirmsandfactorpaymentstohouseholds.
d. spendingtohouseholdsandfactorpaymentstofirms.
ANSWER:a. inputstofirmsandoutputtohouseholds.
64. Inthecircularflowdiagram,theouterlooprepresentstheflowof
a. goodsandservices.
b. spending.
c. factorsofproduction.
ANSWER:b. spending.
65. Inthecircularflowdiagram,moneyspentbyhouseholds
a. isearnedfromthesaleoffactorsofproduction.
b. becomesprofittofirms.
c. cannotbetrackedinthediagram.
d. isusedtopurchasefactorsofproduction.
ANSWER:a. isearnedfromthesaleoffactorsofproduction.

66. Inthemarketsforfactorsofproduction,
a. householdsprovidefirmswithlabor,land,andcapital.
b. householdsprovidefirmswithsavingsforinvestment.
c. firmsprovidehouseholdswithgoodsandservices.
d. thegovernmentprovidesfirmswithinputsfortheproductionprocess.
ANSWER:a. householdsprovidefirmswithlabor,land,andcapital.
67. Inthemarketsforgoodsandservices,
a. householdsprovidefirmswithsavingsforinvestment.
b. householdsprovidefirmswithlabor,land,andcapital.
c. firmsprovidehouseholdswiththeoutputtheyproduced.
d. thegovernmentprovidesfirmswithinputsfortheproductionprocess.
ANSWER:c. firmsprovidehouseholdswiththeoutputtheyproduced.
68. Thefoursectorsinamorecomplexcircularflowdiagraminclude
a. households,government,financialmarkets,andinternationaltrade.
b. households,firms,government,andfinancialmarkets.
c. households,firms,financialmarkets,andinternationaltrade.
d. households,firms,government,andinternationaltrade.
ANSWER:d. households,firms,government,andinternationaltrade.
69. Ineconomics,capitalrefersto
a. thefinancesnecessaryforfirmstoproducetheirproducts.
b. buildingsandmachinesusedintheproductionprocess.
c. themoneyhouseholdsusetopurchasefirmsoutput.
d. thecitywherefirmsmustapplyforthebusinesslicenseintheirstate.
ANSWER:b. buildingsandmachinesusedintheproductionprocess.
70. Revenuereceivedbyfirmsfromsaleswhichisnotusedtopayforfactorsofproductioniscalled
a. rent.
b. wages.
c. profit.
d. interest.
ANSWER:c. profit.
71. Anypointonacountrysproductionpossibilitiesfrontierrepresentsacombinationoftwogoodsthataneconomy
a. willneverbeabletoproduce.
b. canproduceusingallavailableresourcesandtechnology.
c. canproduceusingsomeofitsresourcesandtechnology.
d. maybeabletoproducesometimeinthefuturewithadditionalresourcesandtechnology.
ANSWER:b. canproduceusingallavailableresourcesandtechnology.

72. Theproductionpossibilitiesfrontierisa
a. mapwhichshowsthefrontierbeyondwhichagricultureisunprofitable.
b. mapwhichshowsareasoftheworldinwhichcapitalistproductionisnowpossible.
c. graphwhichshowsthevariouscombinationsofresourcesthatcanbeusedtoproduceagivenlevelofoutput.
d. graphthatshowsthevariouscombinationsofoutputtheeconomycanpossiblyproducegiventheavailable
resourcesandtechnology.
ANSWER:d. graphthatshowsthevariouscombinationsofoutputtheeconomycanpossiblyproducegiventhe
availableresourcesandtechnology.
73. Whichofthefollowingisthemostaccuratestatementaboutproductionpossibilities?
a. Aneconomycanproduceonlyontheproductionpossibilitiesfrontier.
b. Aneconomycanproduceatanypointinsideoroutsideaproductionpossibilitiesfrontier.
c. Aneconomycanproduceatanypointonorinsidetheproductionpossibilitiesfrontier,butnotoutsidethe
frontier.
d. Aneconomycanproduceatanypointinsidetheproductionpossibilitiesfrontier,butnotonoroutsidethe
frontier.
ANSWER:c. Aneconomycanproduceatanypointonorinsidetheproductionpossibilitiesfrontier,butnotoutside
thefrontier.
74. Aneconomicoutcomeissaidtobeefficientiftheeconomyis
a. usingalloftheresourcesithasavailable.
b. conservingonresourcesandnotusingallithas.
c. gettingallitcanfromthescarceresourcesithasavailable.
d. abletoproducemorethanitscurrentproductionwithoutadditionalresources.
ANSWER:c. gettingallitcanfromthescarceresourcesithasavailable.
75. Whenconstructingaproductionpossibilitiesfrontier,allofthefollowingareassumptionsEXCEPT
a. theeconomyproducesonly2goods.
b. alltheeconomysfactorsofproductionarebeingused.
c. theeconomyhasafixedleveloftechnology.
d. theeconomymayincreaseitsavailablefactorsofproduction.
ANSWER:d. theeconomymayincreaseitsavailablefactorsofproduction.
76. Onaproductionpossibilitiesfrontier,productionisefficientiftheproductionpointis
a. onthefrontier.
b. outsidethefrontier.
c. onorinsidethefrontier.
d. insidethefrontier.
ANSWER:a. onthefrontier.
77. Ifaneconomyisproducingefficiently
a. thereisnowaytoproducemoreofonegoodwithoutproducinglessoftheother.
b. itispossibletoproducemoreofbothgoods.
c. itispossibletoproducemoreofonegoodwithoutproducinglessoftheother.
d. itisnotpossibletoproducemoreofonegoodatanycost.
ANSWER:a. thereisnowaytoproducemoreofonegoodwithoutproducinglessoftheother.
78. WhichofthefollowingconceptsisNOTillustratedbytheproductionpossibilitiesfrontier?
a. efficiency
b. opportunitycost
c. equity
d. tradeoffs
ANSWER:c. equity
79. Thecurvedshapeoftheproductionpossibilitiesfrontiercanbeexplainedby
a. increasingcostofproduction.
b. constantcostofproduction.
c. scarcity.
d. economicgrowth.
ANSWER:a. increasingcostofproduction.
80. Whenaproductionpossibilitiesfrontierislinearitshows
a. atruerpictureofreallifethanabowedoutproductionpossibilitiesfrontier.
b. thatresourcesareperfectlyshiftablefromtheproductionofonegoodtoanother.
c. anexampleofincreasingopportunitycost.
ANSWER:b. thatresourcesareperfectlyshiftablefromtheproductionofonegoodtoanother.
81. Supposeanationiscurrentlyproducingatapointinsideitsproductionpossibilitiesfrontier.Weknowthat
a. thenationisproducingbeyonditscapacity,andinflationwilloccur.
b. thenationisnotusingallavailableresourcesorhasinefficiencies.
c. thenationisproducinganefficientcombinationofgoods.
d. therewillbealargeopportunitycostifthenationtriestoincreaseproduction.
ANSWER:b. thenationisnotusingallavailableresourcesorhasinefficiencies.

82. Ontheproductionpossibilitiesfrontiershown,theeconomycanproduceatwhichpointorpoints?
a. B,D,E
NSW D,E
YPE 1DIFFICULTY:2
ro ibilitiesfrontiershown,
possible
productionoftubas?
NSW . E.
YPE TION:1DIFFICULTY:2
b. A,B,D,E
c. D,C
d. D
A ER:a. B,
T :M SECTION:
83. Onthep ductionposs
whichpointrepresentsthemaximum
a. A
b. B
c. D
d. E
A ER:d
T :M SEC
84. Ontheproductionpossibilitiesfrontiershown,theeconomyCANNOTproduceatwhichpointorpoints?
a. A
b. C
c. A,C
d. A,C,D,
ANSWER:c. A,C
85. Ontheproductionpossibilitiesfrontiershown,whichpointorpointsareefficient?
a. B,E
b. A,B,E
c. D
d. C
ANSWER:a. B,E
86. Ontheproductionpossibilitiesfrontiershown,which
pointorpointsareinefficient?
a. A,C
b. D,C
c. C
d. D
ANSWER:d. D
87. Theopportunitycostofobtainingmoreofonegoodis
shownontheproductionpossibilitiesfrontierasthe
a. amountoftheothergoodthatmustbegivenup.
b. marketpriceoftheadditionalamountproduced.
c. sourcesthatmustbedevotedtoitsproduction. amountofre
d. numberofdollarsthatmustbespenttoproduceit.
ANSWER:a. amountoftheothergoodthatmustbegivenup.
88. Ontheproductionpossibilitiesfrontiershown,theopportunitycosttotheeconomyofgetting30additional
toothbrushesbymovingfrompointAtopointDis
a. 10toasters.
b. 15toasters.
c. 20toasters.
d. 25toasters.
ANSWER:c. 20toasters.
89. Ontheproductionpossibilitiesfrontiershown,theopportunitycostofgetting15additionaltoastersbymoving
frompointDtopointCis
a. 10toothbrushes.
b. 20toothbrushes.
c. 30toothbrushes.
d. ItisimpossiblefortheeconomytomovefrompointDtopointC.
ANSWER:d. ItisimpossiblefortheeconomytomovefrompointDtopointC.

90. Ontheproductionpossibilitiesfrontiershown,theopportunitycostintermsoftoothbrushesofgetting10additional
toastersbymovingfrompointBtopointAis
a. 20toothbrushes.
b. 10toothbrushes.
c. 5toothbrushes.
d. zero,sincetheeconomyhastheadditional
resourcestoproduce10additionaltoasters.
ANSWER:d. zero,sincetheeconomyhasthe
additionalresourcestoproduce10
additionaltoasters.
91. Intheproductionpossibilitiesfrontiershown,
theshiftofthefrontierfromAtoBwasmost
likelycausedbywhichofthefollowing?
a. technologicalimprovementinthe
productionofbatteries
b. morelaboravailableintheeconomy
c. ageneraltechnologicalbreakthrough
d. morecapitalavailableintheeconomy
ANSWER:a. technologicalimprovementintheproductionofbatteries
92. Intheproductionpossibilitiesfrontiershown,whatistheopportunitycosttosocietyofthemovementfrompointA
topointC?
a. 50baseballs
b. 100baseballs
c. 100bananas
d. 300bananas
ANSWER:b. 100baseballs
93. Intheproductionpossibilitiesfrontiershown,whatistheopportunitycosttosocietyofmovingfrompointBto
pointD?
a. 100bananas
b. 50baseballs
c. both100bananasand50baseballs
d. Nothing,sincethiseconomywouldhaveunused
resources.
ANSWER:c. both100bananasand50baseballs.
94. Intheproductionpossibilitiesfrontiershown,the
movementfrompointCtopointDwasmostlikely
causedby
a. unemployment.
b. adecreaseinsocietyspreferenceforbananas.
c. fewerresourcesavailableforproduction.
ANSWER:a. unemployment.

95. Accordingtothegraph,ifthiseconomyputallavailableresourcesintotheproductionofbananas,itcouldproduce
a. 200bananasandalso150baseballs.
b. 300bananasandalso100baseballs.
c. 400bananasandnobaseballs.
d. Itisimpossibletoknowunlessweknowthequantityofresourcesavailable.
ANSWER:c. 400bananasandnobaseballs.
96. Productionpossibilitiesfrontierscanshiftoutwardif
a. governmentincreasestheamountofmoneyinthe
economy.
b. thereisanincreaseintechnology.
c. resourcescanbemovedfromtheproductionofone
goodtoanother.
d. Bothbandcarecorrect.
ANSWER:b.thereisanincreaseintechnology.
97. Theproductionpossibilitiesfrontierisbowedoutwardif
a. resourcesarenotperfectlyshiftable.
b. theamountofresourcesincreases.
c. theleveloftechnologyincreases.
d. Bothbandcarecorrect
ANSWER:a. resourcesarenotperfectlyshiftable.
98. Whenaproductionpossibilitiesfrontiershiftsoutward,itisdemonstratingtheconceptof
a. tradeoffs.
b. efficiency.
c. economicgrowth.
d. opportunitycost.
ANSWER:c.economicgrowth.
99. Whenaneconomyisoperatinginsideitsproductionpossibilitiesfrontierweknowthat
a. thereareunusedresourcesorinefficienciesintheeconomy.
b. theeconomyisoperatingwithefficiency.
c. movingtoapointonitsproductionpossibilitiesfrontierwouldbeeconomicgrowth.
d. toproducedmoreofonegood,theeconomywouldhavetogiveupsomeoftheothergood.
ANSWER:a.thereareunusedresourcesorinefficienciesintheeconomy.
100. WhichofthefollowingwouldmostlikelyhavecausedtheproductionpossibilitiesfrontiertoshiftoutwardfromA
toBinthegraphshown?
a. anincreaseinresourcesnecessarytoproducecapitalgoods
b. animprovementinthetechnologyofproducingconsumergoods
c. anincreaseintheoverallleveloftechnologyintheeconomy
d. anincreaseinunemployment
ANSWER:c. anincreaseintheoverallleveloftechnologyintheeconomy


101. Inthegraphshown,themovementfromfrontierAtoBcanbestbedescribedas
a. adownturnintheeconomy.
b. economicgrowth.
c. amoreequitabledistributionofincome.
d. animprovementintheallocationofresources.
ANSWER:b. economicgrowth.
102. Unemploymentwouldcauseaneconomyto
a. produceinsideitsproductionpossibilitiesfrontier.
b. produceonitsproductionpossibilitiesfrontier.
c. produceoutsideitsproductionpossibilitiesfrontier.
d. unemploymentcouldactuallycausea,b,orc,dependingonhowsevereitis.
ANSWER:a. produceinsideitsproductionpossibilitiesfrontier.
ProductionPossibilitiesforToyland
Dolls FireTrucks
400 0
300 200
200 350
100 450
0 500
103. Giventhetableshown,whatistheopportunitycosttoToylandofincreasingtheproductionofdollsfrom200to
300?
a. 200firetrucks
b. 150firetrucks
c. 100firetrucks
d. Itisimpossibletotellwhattheopportunitycostissinceinthisexamplecostsarenotconstant.
ANSWER:b. 150firetrucks.
104. Giventhetableshown,whichofthefollowingstatementsaccuratelydescribestheproductionpossibilitiesfor
Toyland?
a.Theopportunitycostofanadditional100dollsis50firetrucks.
b. Theopportunitycostofanadditional100dollsis100firetrucks.
c. Withoutadditionalinformation,itisimpossibletodeterminetheopportunitycostofanadditionaldoll.
d. Theopportunitycostofanadditional100dollsincreasesasmoredollsareproduced.
ANSWER:d. Theopportunitycostofanadditional100dollsincreasesasmoredollsareproduced.

binationofbathtubsandbarrelswouldbe
NSW tubs.
IO
106. Accordingtothegraph,whatisthe
ntAto
tubs
cebetweenthe8bathtubsyou
105. Accordingtothegraph,anefficientcom
a. 30barrelsand6bathtubs.
b. 20barrelsand8bathtubs.
c. 25barrelsand12bathtubs.
d. 15barrelsand12bathtubs.
A ER:a. 30barrelsand6bath
TYPE:MSECT N:1DIFFICULTY:3
opportunitycostofmovingfrompoi
pointB?
a. 8bath
b. 20barrels
c. thedifferen
getandthe20barrelsyougiveup
d. thedifferencebetweenthe20barrelsyougetandthe8bathtubsyougiveup
ANSWER:b. 20barrels
107. Accordingtothegraph,ifthiseconomyputsallofitsresourcesintotheproductionofbathtubsitcouldproduce
a. 20barrelsand12bathtubs.
b. 35barrelsandnobathtubs.
c. nobarrelsand16bathtubs.
d. Thiseconomywouldnotchoosetoputallofitsresourcesintotheproductionofonegood.
ANSWER:c. nobarrelsand16bathtubs.
108. Accordingtothegraph,whichofthefollowingcombinationsisimpossibleforthiseconomytoproduce?
a. 30barrelsand6bathtubs
b. 25barrelsand12bathtubs
c. 20barrelsand8bathtubs
d. 10barrelsand14bathtubs
ANSWER:b. 25barrelsand12bathtubs
109. Accordingtothegraph,ifthiseconomymovedfrompointCtopointE,
a. itstillwouldnotbeproducingefficiently.
b. therewouldbenogainineitherbathtubsorbarrels.
c. itwouldbeproducingmorebarrelsandmorebathtubsthanatpointC.
d. ItisnotpossibleforthiseconomytomovefrompointCtopointEwithoutadditionalresources.
ANSWER:a. itstillwouldnotbeproducingefficiently.
110. Thefieldofeconomicsistraditionallydividedintotwobroadsubfields,
a. nationaleconomicsandinternationaleconomics.
b. consumereconomicsandproducereconomics.
c. privatesectoreconomicsandpublicsectoreconomics.
d. microeconomicsandmacroeconomics.
ANSWER:d. microeconomicsandmacroeconomics.

111. Microeconomicsisthestudyof
a. thebehaviorofconsumers.
b. howindividualhouseholdsandfirmsmakedecisions.
c. howgovernmentaffectstheeconomy.
d. howtheeconomyasawholeworks.
ANSWER:b. howindividualhouseholdsandfirmsmakedecisions.
112. Macroeconomicsisthestudyof
a. individualdecisionmakers.
b. economichistory.
c. economywidephenomena.
d. howfirmsmaximizeprofit.
ANSWER:c. economywidephenomena.
113. Whichofthefollowingwouldbeconsideredatopicofstudyinmacroeconomics?
a. theimpactofagriculturalpricesupportprogramsinthecottonindustry
b. theeffectonU.S.steelproducersofanimportquotaimposedonforeignsteel
c. theeffectofanincreaseinthepriceofimportedoilontheU.S.inflationrate
d. theeffectofanincreaseinthepriceofimportedcoffeebeansontheU.S.coffeeindustry
ANSWER:c.theeffectofanincreaseinthepriceofimportedoilontheU.S.inflationrate
114. AmicroeconomistmightstudyeachofthefollowingEXCEPT
a. theeffectsofrentcontrolonhousinginNewYorkCity.
b. howacollegestudentmakesfinancialdecisions.
c. howtariffsonshoesaffectstheshoeindustry.
d. theeffectontheeconomywhenunemploymentrateschange.
ANSWER:d. theeffectontheeconomywhenunemploymentrateschange.
115. AmacroeconomistwouldstudyeachofthefollowingEXCEPTthe
a. impactofminimumwagelawsonemploymentinthefastfoodindustry.
b. effectofchangesinsavingratesonGDP.
c. impactofmonetarypolicyontherateofinflation.
d. effectoftaxpolicyontherateofeconomicgrowth.
ANSWER:a. impactofminimumwagelawsonemploymentinthefastfoodindustry.
116. Whichofthefollowingistrue?
a. Microeconomicsandmacroeconomicsaretwoseparatedivisionsofeconomics,independentofeachother.
b. Itispossibletounderstandmacroeconomicswithoutunderstandingmicroeconomics,butnotviceversa.
c. Microeconomicsandmacroeconomicsaretwodistinctbutcloselyintertwinedfieldsofeconomics.
d. Microeconomicsandmacroeconomicsaretwodifferentnamesforbasicallythesamethingineconomics.
ANSWER:c. Microeconomicsandmacroeconomicsaretwodistinctbutcloselyintertwinedfieldsofeconomics.
117. Wheneconomistsaretryingtoexplaintheworldtheyare
a. scientists.
b. policyadvisors.
c. intherealmofnormativeeconomics.
d. inovertheirheads.
ANSWER:a. scientists.

118. Wheneconomistsaretryingtohelpimprovetheworldtheyare
a. concernedwithpositiveeconomics.
b. policyadvisors.
c. scientists.
d. meddling.
ANSWER:b. policyadvisors.
119. Whichisthebeststatementabouttherolesofeconomists?
a. Economistsarebestviewedaspolicymakers.
b. Economistsarebestviewedasscientists.
c. Intryingtoexplaintheworld,economistsarepolicymakers;intryingtoimprovetheworld,theyarescientists.
d. Intryingtoexplaintheworld,economistsarescientists;intryingtoimprovetheworld,theyarepolicymakers.
ANSWER:d. Intryingtoexplaintheworld,economistsarescientists;intryingtoimprovetheworld,theyare
policymakers.
120. Foreconomists,statementsabouttheworldareoftwotypes:
a. assumptionsandtheories.
b. truestatementsandfalsestatements.
c. specificstatementsandgeneralstatements.
d. positivestatementsandnormativestatements.
ANSWER:d. positivestatementsandnormativestatements.
121. Economistsviewpositivestatementsas
a. affirmative,justifyingexistingeconomicpolicy.
b. optimistic,puttingthebestpossibleinterpretationonthings.
c. descriptive,makingaclaimabouthowtheworldis.
d. prescriptive,makingaclaimabouthowtheworldoughttobe.
ANSWER:c. descriptive,makingaclaimabouthowtheworldis.
122. Economistsconsidernormativestatementstobe
a. descriptive,makingaclaimabouthowtheworldis.
b. statementsaboutthenormalconditionoftheworld.
c. prescriptive,makingaclaimabouthowtheworldoughttobe.
d. statementswhichestablishproductiongoalsfortheeconomy.
ANSWER:c. prescriptive,makingaclaimabouthowtheworldoughttobe.
123. Whichofthefollowingisanexampleofapositivestatement?
a. Pricesrisewhenthegovernmentprintstoomuchmoney.
b. Ifwelfarepaymentsincrease,theworldwillbeabetterplace.
c. Inflationismoreharmfultotheeconomythanunemployment.
d. Thebenefitstotheeconomyofimprovedequityaregreaterthanthecostsofreducedefficiency.
ANSWER:a. Pricesrisewhenthegovernmentprintstoomuchmoney.
124. Anormativestatementdescribeshowtheworld
a. wasinthepast.
b. is.
c. willbeinthefuture.
d. oughttobe.
ANSWER:d. oughttobe.

125. Whichofthefollowingisanexampleofanormativestatement?
a. Ifthepriceofaproductdecreases,quantitydemandedincreases.
b. Reducingtaxratesonthewealthywouldbegoodforthecountry.
c. Ifthenationalsavingrateweretoincrease,sowouldtherateofeconomicgrowth.
ANSWER:b. Reducingtaxratesonthewealthywouldbegoodforthecountry.
126. Pricesrisewhenthegovernmentprintstoomuchmoneyisanexampleofa
a. positiveeconomicstatement.
b. statementmadebytheCarteradministration.
c. normativeeconomicstatement.
d. welfarestatement.
ANSWER:a. positiveeconomicstatement.
127. EconomistsfromtheTreasuryDepartmentprovide
a. theannualEconomicReportofthePresident.
b. Congresswiththeannualbudget.
c. enforcementoftheU.S.Antitrustlaws.
d. adviceontaxpolicytothePresident.
ANSWER:d. adviceontaxpolicytothePresident.
128. Wheneconomistsarespeakingaspolicyadvisors,theyaremorelikelytouse
a. normativestatements.
b. positivestatements.
c. objectivestatements.
ANSWER:a. normativestatements.
129. Evaluatingapositivestatementinvolves
a. evaluatingvaluesaswellasfacts.
b. examiningevidence.
c. ourviewsonethicsandreligion.
ANSWER:b. examiningevidence.
130. Youknowaneconomisthascrossedthelinefromscientisttopolicyadviserwhenhe
a. explainsjustthefacts.
b. makespositivestatements.
c. makesnormativestatements.
d. cantreachaconclusion.
ANSWER:c. makesnormativestatements.
131. Inadditiontoadvisingthepresident,onedutyoftheCouncilofEconomicAdvisorsisto
a. preparethefederalbudget.
b. writegovernmentregulations.
c. adviseCongressoneconomicmatters.
d. writetheannualEconomicReportofthePresident.
ANSWER:d. writetheannualEconomicReportofthePresident.

132. TheCouncilofEconomicAdvisorsconsistsof
a. threemembersandastaffofseveraldozeneconomists.
b. sixmembersandastaffofseveraldozeneconomists.
c. twelvemembersandastaffofaboutahundredeconomists.
d. severaldozenmembersandastaffofseveralhundredeconomists.
ANSWER:a. threemembersandastaffofseveraldozeneconomists.
133. ThePresidentoftheUnitedStatesreceivestaxpolicyadvicefromeconomistsinthe
a. FederalReserve.
b. DepartmentofJustice.
c. DepartmentofTreasury.
d. CongressionalBudgetOffice.
ANSWER:c. DepartmentofTreasury.
134. Economistsinwhichdepartmenthelpenforceantitrustlaws?
a. DepartmentofLabor
b. DepartmentofJustice
c. DepartmentofTreasury
d. DepartmentofCommerce
ANSWER:b. DepartmentofJustice
135. EconomistswhoareprimarilyresponsibleforadvisingCongressoneconomicmattersworkinwhichagency?
a. theFederalReserve
b. theCongressionalBudgetOffice
c. theDepartmentofTreasury
d. theDepartmentofCommerce
ANSWER:b. theCongressionalBudgetOffice
136. ThePresidentoftheUnitedStateshasreceivedguidancefromtheCouncilofEconomicAdviserssince
a. 1932.
b. 1946.
c. 1955.
d. 1963.
ANSWER:b. 1946.
137. TheCouncilofEconomicAdvisershas
a. 3membersandastaffofeconomists.
b. 5membersandastaffofeconomists.
c. 7membersandastaffofeconomists.
d. 9membersandastaffofeconomists.
ANSWER:a. 3memberandastaffofeconomists.
138. DutiesoftheCouncilofEconomicAdvisersinclude
a. advisingthePresident.
b. designingtaxpolicy.
c. writetheannualEconomicReportofthePresident.
e. Bothaandcarecorrect.
ANSWER:e. Bothaandcarecorrect.

139. Taxpolicyisdesignedbythe
a. CouncilofEconomicAdvisers.
b. DepartmentofTreasury.
c. DepartmentofLabor.
d. DepartmentofJustice.
ANSWER:b. DepartmentofTreasury.
140. Thenationsantitrustlawsareenforcedbythe
a. DepartmentofLabor.
b. CouncilofEconomicAdvisers.
c. DepartmentofJustice.
d. DepartmentofTreasury.
ANSWER:c. DepartmentofJustice.
141. AdutyoftheDepartmentofLaboristo
a. analyzedataonworkers.
b. designtaxpolicy.
c. enforcethenationsantitrustlaws.
d. advisethePresident.
ANSWER:a. analyzedataonworkers.
142. TheFederalReserve
a. designstaxpolicy.
b. enforcesthenationsantitrustlaws.
c. setsthenationsmonetarypolicy.
d. analyzesthedataonworkers.
ANSWER:c. setsthenationsmonetarypolicy.
143. CongressreliesoneconomistsattheCongressionalBudgetOfficeto
a. enforcethenationsantitrustlaws.
b. analyzeeconomicdevelopmentsintheUnitedStates.
c. setthenationsmonetarypolicy.
d. obtainindependentevaluationsofpolicyproposals.
ANSWER:d. obtainindependentevaluationsofpolicyproposals.
144. Supposethatsomeonemakestheargumentthatbecauseemptyalcoholcontainersarefoundatmanyaccidents,the
containerscauseaccidents.Thiswouldbeanexampleof
a. soundlogic.
b. reversecausality.
c. omittedvariables.
d. slope.
ANSWER:c. omittedvariables.

145. Intheearly19thcentury,theRussiangovernmentsentdoctorstosouthernRussianvillagestoprovideassistance
duringacholeraepidemic.Thevillagersnoticedthatwhereverdoctorsappeared,peopledied.Therefore,many
doctorswerechasedawayfromvillages,andsomewereevenkilled.Thisreactiontothecorrelationbetweendoctors
anddeathsismostlikelyaproblemof
a. omittedvariables.
b. reversecausality.
c. governmentpropaganda.
d. medicalincompetence.
ANSWER:b. reversecausality.
146. Onewaytodeterminethedirectionofcausalityisto
a. assumethe2variablesmoveinthesamedirection.
b. assumethe2variablesmoveinoppositedirections.
c. determinewhichvariablemovesfirst.
d. determinewhichvariableisthedependentvariableandwhichvariablecouldbetheindependentvariable.
ANSWER:c. determinewhichvariablemovesfirst.
147. Anyeconomistthatsaysallpolicydecisionsareeasy
a. mustunderstandtherelationshipbetweenamarketeconomyandthegovernment.
b. mustberunningforoffice.
c. hasaPh.D.ineconomics.
d. cannotbetrusted.
ANSWER:d. cannotbetrusted.
148. JohnMaynardKeynesbelievedtheideasofeconomiststobe
a. generallyincorrect.
b. powerful.
c. pieintheskyideals.
d. rantingsofmadmen.
ANSWER:b. powerful.
149. JohnMaynardKeynesreferredtoeconomicsasaneasysubject,
a. atwhichveryfewexcel.
b. butnotaseasyasphilosophyorthepuresciences.
c. whichveryfewcanenjoy.
d. whichdealsprimarilywithcommonsense.
ANSWER:a. atwhichveryfewexcel.
150. GeorgeBernardShaw,amongothers,hascriticizedeconomistsbecause
a. theyhavetoomuchinfluencewithgovernmentdecisions.
b. manyideasaretootheoreticalandthereforedonotworkinreallife.
c. theytendtospeakadifferentlanguage,causingmostpeopletonotunderstandthem.
d. theyseemtogiveconflictingadvicetopolicymakers.
ANSWER:d. theyseemtogiveconflictingadvicetopolicymakers.

151. PresidentRonaldReagansTrivialPursuitgameforeconomistswouldhave
a. noquestionsbuthundredsofanswers.
b. 100questionsand3000answers.
c. 1000questionsbutnoanswers.
d. hundredsofquestionsbutnotanswersthatcouldapplytothequestionsasked.
ANSWER:b. 100questionsand3000answers.
152. The2basicreasonswhyeconomistsoftenappeartogiveconflictingadvicetopolicymakersaredifferencesin
a. opinionsandeducation.
b. scientificjudgmentsandvalues.
c. scientificjudgmentsandeducation.
d. opinionsandvalues.
ANSWER:b. scientificjudgmentsandvalues.
153. The3propositionsaboutwhichmosteconomistsagreemostoftenare(inorderfromfirsttothird)
a. rentcontrol,tariffsandquotas,andfloatingexchangerates.
b. tariffsandquotas,floatingexchangerates,andfiscalpolicy.
c. rentcontrol,fiscalpolicy,andtariffsandquotas.
d. fiscalpolicy,rentcontrol,andfloatingexchangerates.
ANSWER:a. rentcontrol,tariffsandquotas,andfloatingexchangerates.
154. Tariffsandquotasare
a. policiesthatrestricttrade.
b. areimplementedtoincreasetradeefficiency.
c. opposedbyalmostalleconomists.
d. Bothaandcarecorrect.
e. Bothaandbarecorrect.
ANSWER:d. Bothaandcarecorrect.
155. In2002,theBushadministrationimposedlargetariffstoprotectdomestic
a. steelproducers.
b. shoeproducers.
c. wineproducers.
d. clothingproducers.
ANSWER:a. steelproducers.
156. Asurveywhichaskedtheopinionofacademic,business,andgovernmenteconomistsontenpropositionsabout
economicpolicyfoundthat
a. therespondentswerealmostequallydividedonthepropositions.
b. therespondentsfavoredthepropositionsbyaslightmargin.
c. therespondentsdisagreedwiththepropositionsbyaslightmargin.
d. therewasoverwhelmingendorsementofthepropositionsamongtherespondents.
ANSWER:d. therewasoverwhelmingendorsementofthepropositionsamongtherespondents.

157. Almostalleconomistsagreethatrentcontrol
a. improvestheavailabilityandqualityofhousing.
b. allowsthemarketforhousingtoworkmoreefficiently.
c. adverselyaffectstheavailabilityandqualityofhousing.
d. isaveryinexpensivewaytohelpthemostneedymembersofsociety.
ANSWER:c. adverselyaffectstheavailabilityandqualityofhousing.
158. Whichofthefollowingisthebestexplanationforwhypoliciessuchasrentcontrolandimportquotaspersistin
spiteofthefactthatexpertsareunitedintheiroppositiontosuchpolicies?
a. Economistshavenotyetconvincedthegeneralpublicthatthepoliciesareundesirable.
b. Economistsaresimplywrongabouttheeconomicimpactofthesepolicies.
c. Economistshavedifferentvaluesthandomostpeople.
d. Economistsareusuallyofadifferentpoliticalpartythanarelawmakers.
ANSWER:a. Economistshavenotyetconvincedthegeneralpublicthatthepoliciesareundesirable.
159. HowdidthegreateconomistJohnMaynardKeynesexplainhiscommentthatalthougheconomicsisaneasysubject
comparedwiththehigherbranchesofphilosophyorpurescience,itisasubjectatwhichfewexcel?
a. Mostpeoplewhostudyeconomicsarenotverybright.
b. Goodeconomistsmustpossessararecombinationofgifts.
c. Economicsisactuallyquiteboring;hence,peopletendtoloseinterestinit.
d. Goodthinkersbecomefrustratedwitheconomicsbecauseitisnotlogicalorrelevant.
ANSWER:b. Goodeconomistsmustpossessararecombinationofgifts.
160. Economistusegraphsto
a. findhowvariablesarerelatedintherealworld.
b. expresseconomicideasthatcannotbeexpressedwithequationsorwords.
c. visuallyexpressideasmoreclearlythanmightbethecaseiftheyareexpressedwithequationsorwords.
d. Bothaandcarecorrect.
e. Alloftheabovearecorrect.
ANSWER:d. Bothaandcarecorrect.
161. Atypeofgraphthatcanbeusedtodisplaytherelationshipbetweentwovariablesis
a. apiechart.
b. abargraph.
c. atimeseriesgraph.
d. thecoordinatesystem.
ANSWER:d. thecoordinatesystem.
162. Acoordinatesystemisusedto
a. showtheflowofincomeandproductsinaneconomicsystem.
b. organizelaborandotherresourcesintheproductionprocess.
c. alloweconomiststoshowtwovariablesonasinglegraph.
d. teacheconomistshowtodrawgraphsconsistently.
ANSWER:c. alloweconomiststoshowtwovariablesonasinglegraph.
163. Anorderedpairis
a. theprocessofcheckingcalculationstwicebeforeplacingthemonagraph.
b. twonumberswhichcanberepresentedbyasinglepointonagraph.
c. twonumbersthatarerepresentedbysidebysidepointsonagraph.
d. twopointsonagraphwhichareequaldistancesfromtheorigin.
ANSWER:b. twonumberswhichcanberepresentedbyasinglepointonagraph.
164. Theorderedpairthatrepresentstheoriginonagraphis
a. (1,1).
b. (0,0).
c. (0,1).
d. (1,0).
ANSWER:b. (0,0).
165. Thexcoordinateisthe
a. firstnumberofanorderedpairandrepresentsthepointshorizontallocation.
b. secondnumberofanorderedpairandrepresentsthepointshorizontallocation.
c. firstnumberofanorderedpairandrepresentsthepointsverticallocation.
d. secondnumberofanorderedpairandrepresentsthepointsverticallocation.
ANSWER:a. firstnumberofanorderedpairandrepresentsthepointshorizontallocation.
166. Theycoordinateisthe
a. firstnumberofanorderedpairandrepresentsthepointshorizontallocation.
b. secondnumberofanorderedpairandrepresentsthepointshorizontallocation.
c. firstnumberofanorderedpairandrepresentsthepointsverticallocation.
d. secondnumberofanorderedpairandrepresentsthepointsverticallocation.
ANSWER:d. secondnumberofanorderedpairandrepresentsthepointsverticallocation.
167. Thegraphshownisknownasa
a. timeseries.
b. bargraph.
c. scatterplot.
d. piechart.
ANSWER:c. scatterplot.

168. Inthegraphshown,thecorrectdesignationofpointAis:
(6,24)
NSW (24,6)
YPE N:4DIFFICULTY:2
aph,cupsofcoffeeperdayandthe
utsleephave
a. apositivecorrelation.
b. anegativecorrelation.
c. arandomcorrelation.
d. nocorrelation.
ANSWER:a. apositivecorrelation.
a. (6,0)
b. (0,24)
c.
d. (24,6)
A ER:d.
T :M SECTIO
169. According tothegr
hoursthatsomeonecangowitho

utsleep?
drinksperday,themoretimehecangowithoutsleep.
betweenhowmuchcoffeeperdayapersondrinksandhowlongtheycangowithout
apersondrinksperday,thelongerhecangowithoutsleep.
rela ofcoffeeperdayandtimewithoutsleepistoounpredictabletoconsider.
sondrinksperday,thelongerhecangowithoutsleep.
71.
b. dcurves.
frompointAtopointBisa
e.
ecurve.
thecurve.
Bis
beencausedby
tion.
angeinincome.
ngeinthepriceofroses.
ngeinthecostofproducingroses.
ngeinincome.
170. Basedonthegraphshown,whatwouldyousayabouttherelationshipbetweencoffeeandhourswitho
a. Thelesscoffeeaperson
b. Thereisnorelationship
sleep.
c. Themorecoffee
d. The tionshipbetweencups
ANSWER:c. Themorecoffeeaper
1 Inthegraph,thecurvesshownare
a. supplycurves.
deman
c. preferencecurves.
d. incomeconsumptioncurves.
ANSWER:b. demandcurves.
172. Inthegraphshown,themovement
a. shiftofthecurv
b. changeinpreferences.
c. movementalongth
ANSWER:c. movementalong
173. Inthegraphshown,themovementfrompointBto
pointCisa
a. shiftofthecurve.
b. changeinprice.
c. movementalongthecurve.
d. changeincoststothefirm.
ANSWER:a. shiftofthecurve.
174. Inthegraphshown,theslopeofthecurvebetween
pointsAand
a. 5/2
b. 2/5
c. 2/5
d. 5/2
ANSWER:d. 5/2
175. Inthegraphshown,themovementfrompointBtopointCcouldhave
a. infla
b. ach
c. acha
d. acha
ANSWER:b. acha

latedandthereforemoveinthesamedirection.
moveinoppositedirections.
moveinoppositedirections.
thereforemoveinoppositedirections.
y.
x.
x.
ementaboutslope?
teslope,andaverticallinehasazeroslope.
peof1,andaverticallinehasaslopeof1.
rizontallinehasazeroslope,andaverticallinehasaninfiniteslope.
theabovearecorrect.
roslope,andaverticallinehasaninfiniteslope.
correct?
honevariablerespondstochangesinanothervariable.
bydeltax/deltay.
lesaremovinginthesamedirection.
thelineislinear.
deltax/deltay.
176. Inthegraphshown,thepriceofrosesandthequantityofrosesare
a. directlyre
b. directlyrelatedandtherefore
c. inverselyrelatedandtherefore
d. independentofeachother.
ANSWER:c. inverselyrelatedand
177. Theslopeofastraightlineiscalculatedby
a risedividedbyrun.
b. rundividedbyrise.
c. theaverageofriseandrun.
d. riseplusrun.
ANSWER:a. risedividedbyrun.
178. Theslopeofalineiscalculatedby
a. changeinx/changein
b. changeiny/changein
c. x/y.
d. x+y.
ANSWER:b. changeiny/changein
179. Whichofthefollowingisacorrectstat
a. Ahorizontallinehasaninfini
b. Ahorizontallinehasaslo
c. Aho
d. Noneof
ANSWER:c. Ahorizontallinehasaze
180. Theslopeofafairlyflatupwardslopinglinewillbea
a. smallpositivenumber.
b. largepositivenumber.
c. smallnegativenumber.
d. largenegativenumber.
ANSWER:a. smallpositivenumber.
181. WhichofthefollowingstatementsaboutslopeisNOT
a. Slopeexplainshowmuc
b. Slopecanbecomputed
c. Slopeispositiveifthe2variab
d. Slopedoesnotchangeif
ANSWER:b. Slopecanbecomputedby
182. Inapiechart,eachsliceofthepierepresents
a. aspecificpercentageofthetotalpie.
b. anequalshareofthetotalpie.
c. theamountofthepieeachofthetwovariablesrepresents.
d. onehalfofthetotalpie.
ANSWER:a. aspecificpercentageofthetotalpie.

y
ivelyrelated.
tand.
morethan2variables.
variable.
neconomistmustuse
nomics?
erythingelseconstant
relationshipbetween2variables
ationshipbetween2variables
ndingonthequadrant.
epandq,notxandy.
thepoint.
fthepoint.
ofthepoint.
yarezeroisknownasthe
dtomoveinoppositedirections.
tomoveinthesamedirection.
movewhiletheotherremainsconstant.
ementofthetwovariablesisunpredictable.
dtomoveinoppositedirections.
183. Graphssuchasbargraphsarelimitedinthatthe
a. canonlyshowvariablesthatareposit
b. areextremelydifficulttounders
c. provideinformationforonlyasinglevariable.
d. provideinformationonno
ANSWER:c. provideinformationforonlyasingle
184. Inordertoprovideinformationontwovariables,a
a. abargraph.
b. piechart.
c. thecoordinatesystem.
d. atimeseriesgraph.
ANSWER:c. thecoordinatesystem.
185. WhichofthefollowingisNOTaproblemassociatedwithgraphingineco
a. omittedvariables
b. holdingev
c. reversecausality
d. theabilitytoshowa
ANSWER:d. theabilitytoshowarel
186. Thefirstnumberinanorderedpairis
a. theycoordinate.
b. thexcoordinate.
c. eitherxory,depe
d. notusefultoknow,sincemostgraphsineconomicsus
ANSWER:b. thexcoordinate.
187. Thexcoordinategivesthe
a. diagonallocationof
b. verticallocationo
c. horizontallocationofthepoint.
d. thequadrantlocationofthepoint.
ANSWER:c. horizontallocation
188. Thepointwherebothxand
a. origin.
b. null.
c. zerocoordinate.
d. center.
ANSWER:a. origin.
189. When2variableshaveanegativecorrelation,
a. theyten
b. theytend
c. onevariablewill
d. themov
ANSWER:a. theyten

monthateachpricehisdemandcurvewill
andcurvefromlefttoright.
fromrighttoleft.
ndwilladjustslightlytoapricechange.
willadjustgreatlytoapricechange.
willadjustslightlytoapricechange.
eitheraxischanges,
evariablesarerelated.
ontheaxisaffectthecurve.
leisontheverticalaxis,butnotonthehorizontalaxis.
achyou
softhegovernmentseconomicpolicies.
geofeconomics.
swayofthinking.
190. Ademandcurveshowstherelationship
a. betweenincomeandquantitydemanded.
b. betweenpriceandincome.
c. betweenpriceandquantitydemanded.
d. amongincome,price,andquantitydemanded.
ANSWER:c. betweenpriceandquantitydemanded.
191. IfStevenchoosestobuymorebagelsper
a. shiftinward.
b. shiftoutward.
c. notshift,buthewillmovealonghisdem
d. notshift,buthewillmovealonghisdemandcurve
ANSWER:b. shiftoutward.
192. Arelativelysteepdemandcurvemeansthat
a. quantitydema
b. quantitydemand
c. quantitydemandwillnotadjusttoapricechange.
d. thechangeinquantitydemandwillexactlyequalachangeinprice.
ANSWER:a. quantitydemand
193. Whenarelevantvariablethatisnotnamedon
a. therewillbeamovementalongthecurve.
b. thecurvemayormaynotchange.Itdependsonhowth
c. thecurvewillbeunaffectedsinceonlythevariables
d. thecurvewillshift.
ANSWER:d. thecurvewillshift.
194. Whenavariableonanaxisofagraphchanges,thecurve
a. willnotshift.
b. willshift.
c. mayormaynotchange.Itdependsonhowthevariablesarerelated.
d. willshiftifthevariab
ANSWER:a. willnotshift.
195. Thesinglemostimportantpurposeofyourtextbookistote
a. abouttheeffect
b. thelangua
c. theeconomistswayofthinking.
d. howtomakemoney.
ANSWER:c. theeconomist

196. Whichofthefollowingstatementsistrue?
a. Economistsareusuallyallowedtoconductexperimentsinordertotesttheirtheories.
b. Economicsisnotatruesciencebecauseeconomistsarenotusuallyallowedtoconductexperimentstotesttheir
theories.
c. Economicsisasocialscienceratherthanatruesciencebecauseitcannotemploythescientificmethod.
d. Economistsareusuallynotallowedtoconductexperiments,andsomustrelyonnaturalexperimentsofferedby
history.
ANSWER:d. Economistsareusuallynotallowedtoconductexperiments,andsomustrelyonnaturalexperiments
offeredbyhistory.
197. Whichofthefollowingstatementsistrue?
a. Alleconomicmodelsarecreatedusingthesamesetofbasicassumptions.
b. Differenteconomicmodelsemploydifferentsetsofassumptions.
c. Goodeconomicmodelsshouldattempttomimicrealityascloselyaspossible.
d. Economicmodels,tobeaccepted,mustbetestedbyconductingexperiments.
ANSWER:b. Differenteconomicmodelsemploydifferentsetsofassumptions.
198. Productionpossibilitiesfrontiersareusuallybowedoutward.Thisisbecause
a. themoreresourcesasocietyusestoproduceonegood,thefewerresourcesithasavailabletoproduceanother
good.
b. itreflectsthefactthattheopportunitycostofproducingagoodfallsasoneproducesmoreandmoreofit.
c. oftheeffectsoftechnologicalchange.
d. resourcesarespecialized,thatis,somearebetteratproducingparticulargoodsratherthanothergoods.
ANSWER:d. resourcesarespecialized,thatis,somearebetteratproducingparticulargoodsratherthanothergoods.
199. Supposeaneconomyproducestwogoods,foodandmachines.Thiseconomyalwaysoperatesonitsproduction
possibilitiesfrontier.Lastyear,itproduced50unitsoffoodand30machines.Thisyear,itisproducing55unitsof
foodand33machines.Whichofthefollowingwouldnotexplaintheincreaseinoutput?
a. areductioninunemployment
b. anincreaseinthelaborforce
c. animprovementintechnology
ANSWER:a. areductioninunemployment
200. Supposeaneconomyproducestwogoods,foodandmachines.Thiseconomyalwaysoperatesonitsproduction
possibilitiesfrontier.Lastyear,itproduced50unitsoffoodand30machines.Thisyearitexperienceda
technologicaladvanceinitsmachinemakingindustry.Asaresult,thisyearthesocietywantstoproduce55unitsof
foodand30machines.Whichofthefollowingstatementsistrue?
a. Becausethetechnologicaladvanceoccurredinthemachinemakingindustry,itwillnotbepossibletoincrease
foodproductionwithoutreducingmachineproductionbelow30.
b. Becausethetechnologicaladvanceoccurredinthemachinemakingindustry,increasesinoutputcanonlyoccur
inthemachineindustry.
c. Inordertoincreasefoodproductioninthesecircumstanceswithoutreducingmachineproduction,theeconomy
mustreduceinefficiencies.
d. Thetechnologicaladvancereducedtheamountofresourcesneededtoproduce30machines.Theseresources
couldbeusedtoproducemorefood.
ANSWER:d. Thetechnologicaladvancereducedtheamountofresourcesneededtoproduce30machines.These
resourcescouldbeusedtoproducemorefood.

201. ThecountryofEconolandproducestwogoods,textbooksandwidgets.Lastyearitproduced200textbooksand500
widgets.Thisyearitproduced250textbooksand600widgets.Givennootherinformation,whichofthefollowing
couldNOTexplainthechange?
a. Econolandexperiencedareductioninunemployment.
b. Econolandexperiencedanimprovementinwidgetmakingtechnology.
c. Econolandacquiredmoreresources.
d. Noneoftheabovearecorrect.
ANSWER:d. Noneoftheabovearecorrect.
202. Supposetherearetwocountries,FreedoniaandSylvania,whichhaveidenticalamountsofresources,identical
technologies,andidenticalpopulations.Bothproducetwotypesofgoods,consumergoodsandcapitalgoods,and
theybothalwaysoperateontheirproductionpossibilitiesfrontiers.TheonlydifferenceisthatthisyearFreedonia
choosestoproducerelativelymoreconsumergoodsthanSylvania.Asaresult,
a. FreedoniawillhaveahigherlivingstandardthisyearbutwillgrowslowerthanSylvania.
b. FreedoniawillhaveahigherlivingstandardthisyearandwillgrowfasterthanSylvania.
c. SylvaniawillhaveahigherlivingstandardthisyearbutwillgrowslowerthanFreedonia.
d. SylvaniawillhaveahigherlivingstandardthisyearandwillgrowfasterthanFreedonia.
ANSWER:a FreedoniawillhaveahigherlivingstandardthisyearbutwillgrowslowerthanSylvania.
203. WhichofthefollowingisNOTapositivestatement?
a. Highergasolinepriceswillreducegasolineconsumption.
b. Equityismoreimportantthanefficiency.
c. Traderestrictionslowerourstandardofliving.
d. Ifanationwantstoavoidinflation,itshouldnotprinttoomuchmoney.
ANSWER:b. Equityismoreimportantthanefficiency.
204. Twoeconomists,AdamandJoan,arediscussingthepossibilityofsubstantiallyreformingthecurrentfederaltax
system.AdamthinksthecurrentsystemisfinebutJoanisinfavorofreform.Whichofthefollowingistheleast
likelyexplanationforthedisagreement?
a. AdamisapositiveeconomistandJoanisanormativeeconomist.
b. AdamandJoanhavedifferentpositiveviewsabouttheeffectofchangingthetaxsystem.
c. AdamandJoanhavedifferentvalues,andsohavedifferentnormativeviewsaboutpolicy.
d. AdamisbetteroffunderthecurrentsystemandJoanwouldbebetteroffifthereformswereimplemented.
ANSWER:a. AdamisapositiveeconomistandJoanisanormativeeconomist.
205. Billhasnoticedthatincreasesinunemploymentinsuranceclaimsareassociatedwithrecessions,andtherefore
advocateslimitsonunemploymentinsurancesoastopreventrecessions.Marthahasnoticedthatmostdrugaddicts
onceattendedschools,andthereforeadvocatesgettingridofschoolssoastopreventdrugaddiction.
a. ThereasoningofbothBillandMarthasuffersfromtheomittedvariableproblem.
b. ThereasoningofbothBillandMarthasuffersfromthereversecausalityproblem.
c. BillsreasoningsuffersfromthereversecausalityproblemandMarthasreasoningsuffersfromtheomitted
variableproblem.
d. MarthasreasoningsuffersfromthereversecausalityproblemandBillsreasoningsuffersfromtheomitted
variableproblem.
ANSWER:a. ThereasoningofbothBillandMarthasuffersfromtheomittedvariableproblem.
TRUE/FALSE
1. Whilethescientificmethodisapplicabletostudyingnaturalsciences,itisnotusefulinstudyinganeconomic
system.
ANSWER:FTYPE:TSECTION:1
2. Sincenaturalexperimentsofferedbyhistorycantbeusedineconomics,carefullyconstructedlaboratory
experimentsmustbeused.
3. Aneconomicmodelcanaccuratelyexplainhowtheeconomyisorganizedbecauseitisdesignedtoincludeevery
featureoftherealworld.
4. Allscientificmodels,includingeconomicmodels,simplifyrealityinordertoimproveourunderstandingofit.
ANSWER:TTYPE:TSECTION:1
5. Acircularflowdiagramisavisualmodelofhowaneconomyisorganized.
6. Inasimplecircularflowdiagram,firmsownthefactorsofproductionandusethemtoproducegoodsandservices.
7. Inasimplecircularflowdiagram,thetwotypesofmarketsinwhichhouseholdsandfirmsinteractarethemarkets
forgoodsandservicesandthemarketsforfactorsofproduction.
8. Inthemarketsforgoodsandservices,asinthemarketsforthefactorsofproduction,householdsarebuyersand
firmsaresellers.
9. Inacircularflowdiagram,oneloopshowstheflowofrealgoods,servicesandfactorsofproduction,andtheother
loopshowsthecorrespondingflowofdollars.
10. Aproductionpossibilitiesfrontierisagraphwhichshowsthevariouscombinationsofoutputstheeconomycan
possiblyproducegivenitsfactorsofproductionandtechnology.
11. Aneconomycanproduceatanypointonor
outsidetheproductionpossibilitiesfrontier,butit
cannotproduceatpointsinsidethefrontier.
12. Anefficientoutcomeineconomicsisoneinwhich
theeconomyisconservingthelargestpossible
amountofresources,whilestillmeetingtheneeds
ofsociety.
13. Aneconomyisbeingefficientifitisimpossibleto
producemoreofonegoodwithoutproducingless
ofanother.
14. Inthegraphshown,pointsA,B,andDrepresentfeasibleorattainableoutcomesforsociety.


15. Inthegraphshown,theopportunitycosttotheeconomyofmovingfrompointAtopointBis10dishwashers.
16. Inthegraphshown,theopportunitycostofmoredoghousesincreasesasmoredoghousesareproduced.
17. Thetradeoffbetweentheproductionofdifferentgoodscanchangebecauseoftechnologicalimprovementovertime.
18. Economicgrowthcausesaproductionpossibilitiesfrontiertoshiftoutward.
19. IfgovernmentregulationsdesignedtoprotectU.S.wetlandsremovedveryproductivefarmlandfromproduction,
theproductionpossibilitieswouldshiftinward.
20. Thefieldofeconomicsisdividedintotwosubfields:microeconomicsandmacroeconomics.
21. Normativestatementsdescribehowtheworldis,whilepositivestatementsprescribehowtheworldshouldbe.
22. Societywouldbebetterifthewelfaresystemwereabolishedisanormativestatement,notapositivestatement.
23. Wheneconomistsaretryingtoexplaintheworldtheyareactingasscientists,andwhentheyaretryingtoimprove
it,theyarepolicymakers.
24. TheCouncilofEconomicAdvisorshasasitsdutiesbothadvisingthePresidentoftheUnitedStatesandformulating
monetarypolicy.
25. Asurveyofbusiness,government,andacademiceconomistsrevealedwidespreaddisagreementontenpropositions
abouteconomicpolicy.
26. Twovariableswhicharenegativelyrelatedwillmoveinoppositedirections.
SHORTANSWER

APPLICATION/SCENARIO
1. Usingthisoutline,drawacircularflowdiagram
representingtheinteractionsbetweenhouseholdsandfirms ina
simpleeconomy.Explainbrieflythevariouspartsofthe
diagram.
ANSWER:
Thisdiagramshouldduplicatetheessentialcharacteristicsofthediagraminthetext,withanexplanationofthe
meaningofeachflowandeachmarket.Itisimportantthatthestudentunderstandsthattheinnerlooprepresents
theflowofrealgoodsandservicesandthattheouterlooprepresentsthecorrespondingflowofpayments.
TYPE:SKEY1:GSECTION:1OBJECTIVE:3RANDOM:Y
2. Drawaproductionpossibilitiesfrontiershowingincreasingopportunitycostforhammersandhorseshoes.
a. Onagraph,identifytheareaoffeasibleoutcomesandtheareaofinfeasibleoutcomes.
b. Onthegraph,labelapointthatsefficientaspointEandapointthatinefficientaspointI.
c. Onagraph,illustratetheeffectofthediscoveryofanewveinofironore,aresourceneededtomakeboth
horseshoesandhammers,onthiseconomy.
d. Onagraphforhammersandhorseshoes,illustratetheeffectanewcomputerizedassemblylineinthe
productionofhammerswouldhave.
ANSWER:
TYPE:SSECTION:1
3. TheprairiedoghasalwaysbeenconsideredaproblemforAmericancattleranchers.Theydigholesthatcattleand
horsescanstepinandtheyeatgrassnecessaryforcattle.Recently,ranchershavediscoveredthatthereisademand
forprairiedogsaspets.Insomeareasprairiedogscansellforashighas$150.Cattlemenarenowfencingoffprairie
dogtownsontheirlandsothesetownswillnotbedisturbedbytheircattle.
Drawaproductionpossibilitiesfrontiershowingaranchersproductionoptionbetweencattleproduction
andprairiedogproductionshowingincreasingopportunitycostandshowwhatwouldhappenineachofthe
followingsituations.(Useaseparategraphforeachsituation.)
a. Theoutcomeisefficient,withrancherschoosingtoproduceequalnumbersofcattleandprairiedogs.
b. Asaprotestagainstthegovernmentintroducingthegraywolfbackintothewildintheirstate,ranchersdecide
nottouse25%oftheavailablegrasslandforgrazing.
c. Thepriceofprairiedogsincreasesto$200each,soranchersdecidetoallotadditionallandforprairiedogs.
d. Thegovernmentgrantsnewleasestoranchers,givingthem10,000newacresofgrasslandeachforgrazing.
e. Adroughtdestroysmostoftheavailablegrassforgrazingofcattle,butnotprairiedogssincetheyalsoeatplant
roots.

ANSWER:
TYPE:SSECTION:1
4. Identifyeachofthefollowingtopicsasbeingpartofmicroeconomicsormacroeconomics:
a. theimpactofachangeinconsumerincomeonthepurchaseofluxuryautomobiles
b. theeffectofachangeinthepriceofCokeonthepurchaseofPepsi
c. theimpactofawarintheMiddleEastontherateofinflationintheUnitedStates
d. factorsinfluencingtherateofeconomicgrowth
e. factorsinfluencingthedemandfortractors
f. theimpactoftaxpolicyonnationalsaving
g. theeffectofpollutiontaxesontheU.S.copperindustry
h. thedegreeofcompetitioninthecabletelevisionindustry
i. theeffectofabalancedbudgetamendmentoneconomicstability
j. theimpactofderegulationonthesavingsandloanindustry
ANSWER:a,b,e,g,h,andjaremicroeconomictopics.c,d,f,andiaremacroeconomictopics.
TYPE:SSECTION:1
5. Whichofthefollowingstatementsarepositive,andwhicharenormative?
a. Theminimumwagecreatesunemploymentamongyoungandunskilledworkers.
b. Theminimumwageoughttobeabolished.
c. Ifthepriceofaproductinamarketdecreases,otherthingsequal,quantitydemandedwillincrease.
d. Alittlebitofinflationisworseforsocietythanalittlebitofunemployment.
e. Thereisatradeoffbetweeninflationandunemploymentintheshortrun.
f. Ifconsumerincomeincreases,otherthingsequal,thedemandforautomobileswillincrease.
g. TheU.S.incomedistributionisnotequitable.
h. U.S.workersdeservemoreliberalunemploymentbenefits.
i. Ifinterestratesincrease,investmentwilldecrease.
j. Ifwelfarebenefitswerereduced,thecountrywouldbebetteroff.
ANSWER:a,c,e,f,andiarepositivestatements.b,d,g,h,andjarenormativestatements.
TYPE:SSECTION:2

6. Usethefollowingdemandcurvetoanswerthefollowing
questions.
a. HowwouldpointAberepresentedasanordered
pair?
b. Whattypeofcurveisthis?
c. Doesthiscurveshowapositiveornegative
correlationbetweenpriceandquantity?
d. ComputetheslopeoftheD1betweenpointsAandC.
e. WhatistheslopeofD1betweenpointsCandE?Whywouldyounothavetocalculatethisanswer?
f. WhatisitcalledifwemovefromD1toD2?
g. HowdoyouknowthattheslopeofD2isthesameastheslopeofD1?
ANSWER:
a. (20,24)
b. ademandcurve
c. anegativecorrelationbetweenpriceandquantity
d. 8/20or2/5.
e. 2/5;becausetheslopeofastraightlineisconstant.
f. anincreaseindemand.
g. The2linesareparallel.
TYPE:SSECTION:2

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