Economics of Social Issues Test Bank by Sharp

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All Possible Questions With Answers

Chapter 01

Alleviating Human Misery: The Role Of Economic Reasoning

Multiple Choice Questions

1. The Fundamental Economic Problem Is
A. Inflation
B. That Resources Are Scarce Relative To Wants
C. Supply And Demand
D. How To Make More Money
E. Unemployment

2. Which Of The Follow Best Describes Human Wants And Desires? They
A. Are Unlimited In The Aggregate
B. Stop After A Person Attains The Things Necessary For Life
C. Do Not Include “Extras” Like Variety
D. Are Not Affected By What Others Have
E. Do Not Change Once We Attain Our Desired Set Of Goods

3. The Means For Satisfying Wants Are
A. Insatiable
B. Unlimited
C. Infinite
D. Scarce
E. Unavailable

4. Economic Reasoning Would Not Be Necessary If
A. Our Wants Were Limited
B. Resources Were Expansive
C. Scarcity Were Decreased
D. We Could Have Everything We Wanted
E. Politicians Were Better At Running The Economy

5. A Three-Year-Old Learns About The Fundamental Economic Problem When She
A. Gets Presents For Her Birthday
B. Is Punished For Drawing On The Walls
C. Has To Eat Green Beans For Dinner
D. Is Told She Can’t Have A Toy At The Store
E. Watches Her Favorite Cartoon

6. Which Of The Following Is The Primary Goal Of An Economy?
A. Maximizing Economic Growth
B. Minimizing Unemployment
C. Minimizing The Effects Of Scarcity
D. Minimizing The National Debt
E. Maximizing Gdp

7. The Fundamental Economic Problem Involves
A. Overpopulation
B. Inflation And Unemployment
C. Scarce Resources And Unlimited Wants
D. Cheap Foreign Labor
E. Supply And Demand

8. Labor Resources Include
A. The Equipment Workers Use To Complete Their Work
B. Only Non-Management Personnel
C. Any Efforts Of A Person To Produce Goods
D. Only The Physical Efforts Of An Economy’s People
E. All Of The Above

9. Which Of The Following Is An Example Of A Capital Resource?
A. A Firm’s Employee
B. Money In A Firm’s Bank Account
C. Agricultural Land
D. A Worker’s Productivity
E. All Of The Above

10. Which Of The Following Is Not An Example Of A Capital Resource?
A. Forests
B. A Printing Press
C. Semi-Finished Materials
D. A Computer Technician
E. Inventories

11. The Know-How And The Means And Methods Of Production Available In An Economy Are Known As
A. Technology
B. Capital
C. Human Capital
D. Labor
E. Management

12. Which Of The Following Is Not A Capital Resource?
A. Land
B. Stocks And Bonds
C. Buildings
D. Tools
E. Mineral Deposits

Questions 13 – 17 Refer To The Graph Below.

13. Given Production Possibilities Curve (A), Point N Suggests That
A. The Economy Is Attaining Full Employment, But Not Full Production
B. The Economy Is Attaining Full Production, But Not Full Employment
C. The Economy Is Using Its Available Resources Inefficiently
D. The Economy Is Attaining Both Full Employment And Full Production
E. Point N Is Unattainable

14. The Movement From Curve (A) To Curve (B) Suggests
A. A Movement From Unemployment To Full Employment
B. An Improvement In Capital Good Technology, But Not In Consumer Good Technology
C. An Improvement In Consumer Good Technology, But Not In Capital Good Technology
D. A Decline In The Total Output Of Society
E. The Society Becomes Worse Off

15. At Which Of The Following Points Is The Economy Producing Efficiently?
A. Q
B. G
C. N
D. B
E. E

16. If The Economy Were Producing Combination G Initially, The Cost Of Producing Additional Bd Units Of Capital Goods Is The Value Of
A. The Resources Used In Producing Od Of Capital Goods
B. The Resources Used In Producing Ef Of Consumer Goods
C. The Resources Used In Producing Oe Of Consumer Goods
D. Bd Units Of Capital Goods
E. Bd Units Of Consumer Goods

17. Given Production Possibilities Curve (B), Point Q
A. Can Be Reached Through An Improvement In Technology
B. Represents Some Degree Of Inefficiency In The Use Of Resources
C. Can Be Reached If The Birth Rate Is Reduced
D. Can Be Reached If The Output Of Consumer Goods Is Increased While The Output Of Capital Goods Is Reduced
E. Is Undesirable

18. The Bow Shape Of The Production Possibilities Curve Reflects
A. The Opportunity Cost Concept
B. The Concept Of Increasing Opportunity Costs
C. The Concept Of Diminishing Marginal Returns
D. The Marginal Social Cost/Marginal Social Benefit Principle
E. None Of The Above

19. A Production Possibilities Curve Represents All Of An Economy’s Combinations For Production That Are
A. Possible
B. Efficient
C. Attainable
D. Inefficient
E. Desirable

20. If An Economy Is Experiencing Unemployment, It Is Operating At A Point
A. On Its Ppc
B. Below Its Ppc
C. Beyond Its Ppc
D. At The Horizontal Intercept Of Its Ppc
E. At The Vertical Intercept Of Its Ppc

21. A Point On A Country’s Ppc That Can Not Be Reached, Given The Current Situation, Is
A. On Its Ppc
B. Below Its Ppc
C. Beyond Its Ppc
D. At The Horizontal Intercept Of Its Ppc
E. At The Vertical Intercept Of Its Ppc
22. The Negative Slope Of A Ppc Illustrates
A. Limited Wants
B. Unlimited Wants
C. The Law Of Increasing Opportunity Cost
D. Scarcity
E. Unlimited Resources

Questions 23 – 27 Refer To The Graph Below.

23. Which Point Does Not Represent Efficient Production For Sharpland In 2007?
A. A
B. B
C. C
D. D
E. E

24. Which Of The Following Points Is Unattainable For Sharpland In 2012?
A. A
B. G
C. F
D. D
E. H

25. In 2007, Sharpland Can Increase Its Production Of Food Without Decreasing Its Production Of Education By Moving From Point
A. C To D
B. C To E
C. D To A
D. E To B
E. E To G

26. Which Of The Following Best Explains The Shift Of Sharpland’s Ppc Between 2007 And 2012? An Increase In
A. The Number Of Tractors
B. General Technology
C. Agricultural Land Resources
D. The Quality And Quantity Of Teachers
E. The Demand For Schooling

27. A Movement From Point G To Point E In 2012 Is Optimal Only If
A. People In Sharpland Like Education More Than Food
B. People In Sharpland Like Food More Than Education
C. The Msc > Msb
D. The Msc < Msb E. Point C Is Not An Option Questions 28 – 31 Refer To The Graph Below. 28. For Mary Ann, The Opportunity Cost Of 100 Coconut Cream Pies Is Equal To How Many Grass Huts? A. 5 B. 10 C. 20 D. 100 E. 120 29. Mary Ann’s Straight Line Ppc Indicates That The Opportunity Cost Of Coconut Cream Pies Is A. Increasing B. Decreasing C. Constant D. 100 E. 0 30. Which Of The Following Would Allow Mary Ann To Produce 110 Coconut Cream Pies? A. Decrease In Production Of Grass Huts B. An Improvement In Her Means And Methods Of Pie Production C. A Decrease In The Resources Used For Making Grass Huts D. Putting All Of Her Resources Into Producing Coconut Cream Pies E. Finding A Better Way To Produce Grass Huts 31. If Mary Ann Decides To Swim In The Lagoon In The Afternoon, Instead Of Working, She Will Move To A Point A. Beyond Her Ppc B. Below Her Ppc C. Higher On Her Ppc D. Lower On Her Ppc E. Off The Ppc Graph 32. If Education And Food Are The Two Goods That Society Can Produce, An Increase In The Production Technology For Food Will Result In A. An Increase In General Economic Growth B. A Decrease In The Production Of Education C. An Increase In Specific Economic Growth D. A Decrease In The Production Of Education E. A Decrease In The Opportunity Cost Of Education 33. Why Is There “No Such Thing As A Free Lunch”? A. You End Up Buying The Next Time B. You Often Get Stuck With The Check C. The Time You Spend Eating Lunch Could Be Spent Some Other Way D. “Free” Lunches Often Aren’t Good And Make You Sick Later On E. You Don’t Always Get What You Want To Eat 34. If A Country’s Gdp Increases From $1,000 To $2,000 At The Same Time Prices Double, Real Gdp Will A. Rise B. Fall C. Stay The Same D. Fluctuate E. Be Unable To Be Determined 35. If A Country’s Gdp Increases From $1m To $2m At The Same Time Prices Increase By Half (50%), Real Gdp Will A. Rise B. Fall C. Stay The Same D. Fluctuate E. Be Unable To Be Determined 36. If A Country’s Gdp Increases From $1m To $2m At The Same Time Prices Remain The Same, Real Gdp Will A. Rise B. Fall C. Stay The Same D. Fluctuate E. Be Unable To Be Determined 37. Gross Domestic Product (Gdp) Is Defined As A. The Total Volume Of Goods And Services Produced In The Economy In A Year’s Time B. The Value Of All Goods Produced In The Economy In A Year’s Time, Minus Production Of Capital Goods C. The Value Of All Goods And Services Produced In Final Form In The Economy In A Year’s Time Using Domestically Owned Resources D. The Value Of All Goods And Services That Could Possibly Be Produced In The Economy In A Year’s Time E. None Of The Above 38. If Population In A Country Falls While Gdp Stays The Same, The Country’s A. Real Gdp Falls B. Real Gdp Rises C. Per Capita Gdp Rises D. Per Capita Gdp Falls E. Welfare Falls 39. Which Of The Following Provides The Best Measure Of The Standard Of Living In An Economy In A Single Year? A. The Consumer Price Index B. The Wholesale Price Index C. Gross Domestic Product (Gdp) D. Per Capita Real Gdp E. None Of The Above 40. While Per Capita Gdp Is A Useful Measure Of Economic Well-Being, It Fails To Take Into Account A. The Population Of The Economy B. The Value Of Capital Goods Produced Within The Economy C. The Value Of Goods Produced For Export D. The Distribution Of Gdp Within The Economy E. Whether Goods Were Produced Within The Country 41. Which Of The Following Would Not Be Counted As Part Of U.S. Gdp? A. A Mazda Mx6 Produced In Detroit B. An Apple Computer Produced In California C. A Dodge Intrepid Produced In Canada D. A Six-Pack Of Sam Adams Brewed In Pittsburgh E. A Haircut Given In Washington D.C. 42. If Ford Motors Shifts All Production Outside Of The U.S., Which Of The Following Is ? A. Gnp Would Remain Unchanged And Gdp Would Decline B. Gdp Would Remain Unchanged C. Both Gnp And Gdp Would Remain Unchanged D. Gdp Would Remain Unchanged And Gnp Would Decline E. Gnp Would Increase 43. Suppose That Gross Domestic Product For 2012 Is $600 Million And The Price Index For That Year (2005 = 100) Is 300. Gdp For 2012 In Constant (2005) Dollars Is A. Impossible To Determine With This Information B. $200,000,000 C. $20,000 D. $200,000 E. $2,000,000 44. In 2011, A Country Produces 2 Bushels Of Wheat, Each Selling For $5. In 2012, The Country Also Produces 2 Bushels Of Wheat, But Each Bushel Sells For $10. Which Of The Following Is ? A. Real Gdp Did Not Change Between 2011 And 2012 B. Real Gdp Doubled Between 2011 And 2012 C. Gdp Did Not Change Between 2011 And 2012 D. Gdp Increased By 50% Between 2011 And 2012 E. None Of The Above Is 45. Given The Amounts Of Resources Available For An Economy, Gdp A. Will Be Determined Solely By The Amounts Of Labor And Capital Present B. Will Be Larger The Better The Techniques Of Production Used C. Can Increase Only If There Is An Increase In The Quantities Of These Resources D. Will Usually Be Equitably Divided Among The Population E. Will Not Change Over Time 46. In Year 1, An Economy Produces 10m Cars At A Price Of $15,000 Each. In Year 2, The Economy Produces 10m Cars, But The Price Of Each Car Is $20,000. Which Of The Following Is ? A. Real Gdp Has Increased B. Real Gdp Has Decreased C. Current Dollar Gdp Has Increased D. Current Dollar Gdp Has Decreased E. Productivity Has Increased 47. To Correct For Inflation, Gdp Numbers Must Be Converted Using The Price Level In A Given Year Known As The A. Base Year B. Real Year C. Current Year D. Constant Year E. Inflation Year 48. When Analyzing The Performance Of A Single Economy Over Time, Which Measure Is Most Appropriate? A. Real Gdp B. Gdp C. Real Gdp Per Capita D. Gdp Per Capita E. Base Year Gdp 49. When Comparing The Performance Of Economies In Terms Of The Average Well-Being Of Their Inhabitants, Which Measure Is Most Appropriate? A. Real Gdp B. Gdp C. Real Gdp Per Capita D. Gdp Per Capita E. Base Year Gdp 50. Real Per Capita Gdp Is Defined As A. Population/Real Gdp B. Gdp/Population C. Real Gdp/Price Index D. Real Gdp/Population E. Price Index/Gdp 51. The Well-Being Of Ldcs, As Measured By Per Capita Real Gdp, Is Probably Overstated Due To A. Inflation B. Population Increases C. Unemployment D. Income Distribution E. Life Expectancy 52. In A Lesser-Developed Country, A High Rate Of Population Growth A. Stimulates Demand For Products And Accelerates The Development Process B. Seldom Occurs C. Is Not A Serious Problem, Since The Rate Of Growth In Gdp Always Exceeds The Rate Of Population Increase D. May Be A Problem Since, As Development Begins, The Higher Rate Of Population Growth Impedes The Growth Of Per Capita Income E. Is Beneficial For Economic Development 53. The Efficiency Of Resource Usage In Ldcs Can Be Improved By All Of The Following Except: A. The Adaptation Of New Technology B. Increased Capital Investment C. Adopting More Flexible Wage Structures D. Maintaining The Existing Land Ownership, Or Tenure, System E. Upgrading Transportation Networks 54. Increases In A Country’s Population Will Always Have Which Of The Following Effects? A. The Ppc Will Shift Out B. Welfare Will Decline C. Economic Development Will Be Slowed D. Death Rates Will Increase E. None Of The Above 55. The Most Important Key To Improvement In The Quality Of A Country’s Labor Force Is A. Health Care B. Nutrition C. Mobility D. Education E. Population Growth 56. Developing Countries Can Shift Their Production Possibility Curves Out Through A. Improvements Of Labor Force Quality B. Capital Accumulation C. Technological Development D. Discovery Of New Natural Resources E. All Of The Above 57. Which Of The Following Are Potential Obstacles To Economic Development In Ldcs? A. Lack Of Resources B. Lack Of An Education C. War And Political Instability D. Traditional Methods Of Production And Ownership Of Resources E. All Of The Above 58. A Movement Along A Production Possibilities Curve Will Lead To An Increase In Social Well-Being, As Long As A. There Is Enough Labor And Capital Available To Make The Move B. The Msb Of The Move Is Greater Than The Msc C. The Msb Of The Move Is Equal To The Msc D. The Msb Of The Move Is Less Than The Msc E. No One In The Economy Is Left Worse Off By The Move 59. Marginal Social Cost Refers To The A. Cost Incurred Due To An Action Undertaken By Society B. Total Expenditures By Society On A Good Like A Public Park C. Cost Borne By Society When 1 More Unit Of A Good Is Produced D. Cost To Society Of Sub-Standard Production E. Cost To Society When An Additional Unit Of A Social Good Is Produced 60. The Opportunity Cost Borne By Society When An Additional Unit Of A Good Is Produced Is A. Marginal Social Cost B. Marginal Social Benefit C. Cost/Benefit Analysis D. Scarcity Rent E. Gdp 61. If 10 Units Of Food Must Be Given Up To Produce An Additional Unit Of Education, Which Of The Following Is ? A. The Msc Of The Unit Of Education Is 10 B. The Msb Of The Unit Of Education Is 10 C. The Msc Of The Food Is 10 D. The Msb Of The Food Is 10 E. None Of The Above 62. What Is The Msb Of A Shift From The Production Of 20 Units Of Food And 2 Units Of Education To 10 Units Of Food And 3 Units Of Education? A. 20 Units Of Food B. 10 Units Of Food C. 1 Unit Of Education D. 2 Units Of Education E. 3 Units Of Education 63. Which Of The Following Is A Technique Used To Determine The Optimal Level Of An Economic Activity? A. Cost/Benefit Analysis B. Production Possibilities Curve Analysis C. Gdp Analysis D. Opportunity Cost Analysis E. None Of The Above 64. Any Change For Which Msb>Msc Will
A. Increase Social Well-Being
B. Decrease Social Well-Being
C. Not Change Social Well-Being
D. Cost More Than It Is Worth To Society
E. Increase Gdp

65. If The Msc Of An Additional Hour Of An Activity Is Greater Than The Msb, You Should
A. Do More Of The Activity
B. Do Less Of The Activity
C. Not Change Your Level Of The Activity
D. Do Less Of Another Activity
E. Do More Of The Activity If You Like Doing It

66. Cost-Benefit Analysis
A. Is Only Useful When Making Economic Choices
B. Applies Best To Financial Decisions
C. Suggests That An Activity Should Be Expanded If It Yields Greater Marginal Benefits Than Costs
D. Is Useful In Correcting Gdp Numbers For Inflation
E. Suggests An Activity Should Be Expended If Msc > Msb

67. Which Of The Following Is Not A Cause Of Poverty In Ldcs? The
A. Quality Of Labor
B. Stock Of Capital
C. Level Of Technology
D. Population Density
E. Capital Accumulation Rates

68. The Quality Of The Labor Force Is Often Measured By
A. Illiteracy Rates
B. Gdp Per Capita
C. Capital-To-Labor Ratios
D. Life Expectancy
E. Infant Mortality Rates

69. Which Of The Following Is Related To Poverty In Ldcs?
A. Low Capital-To-Labor Ratios
B. Few Available Capital Resources
C. Poor Transportation Networks
D. Limited Mineral Deposits
E. All Of The Above

70. Which Of The Following Is An Example Of Social Infrastructure?
A. The Transportation Network
B. The Communication Network
C. A Power System
D. An Airport
E. All Of The Above

71. With Private Property Rights, The Decision About How To Use Resources Are Made By
A. The Government
B. Private Firms
C. Individual Resource Owners
D. Resource Committees
E. All Of The Above

72. To Promote Development, The Governments Of Ldcs Should Pursue Policies That
A. Improve The Quality Of Labor
B. Enhance Capital Accumulation
C. Raise Technology Levels
D. Increase Efficiency
E. Do All Of The Above

73. Which Of The Following Policies Will Not Contribute To Economic Development In An Ldc?
A. Pursue Economic Stability
B. Promote Capital Accumulation Through Tax Incentives
C. Provide Social Infrastructure
D. Promote Efficiency
E. Pursue Policies Designed To Increase Birth Rates

74. To Help Ldcs Develop, Governments Of Dcs Provide
A. Loans
B. Grants
C. Humanitarian Aid
D. Technical Assistance
E. All Of The Above

75. Which Of The Following Is An Organization Through Which Dcs Jointly Assist Ldcs?
A. The World Bank
B. Nato
C. The Federal Reserve
D. Nafta
E. The Wto

76. A Country Can Shift Out Its Production Possibilities Curve By
A. Improving Its Technology
B. Shifting Its Production From One Good To Another
C. Experiencing A Population Drop
D. Using Its Farmland More Productively
E. All Of The Above

77. The Purpose Of A Base Year When Constructing A Price Index Is:
A. Showing How The Output Values Rise From Year To Year
B. Encourage Inflation
C. Providing A Means To Compare The Economy’s Output Across Different Time Periods
D. To Show Why Expenditures On Government Goods And Services Need To Increase
E. Indicate The Progress In Keeping Prices Low

True / False Questions

78. Approximately Two Thirds Of The World’s Population Goes To Sleep Hungry At Night.

79. Approximately One Fifth Of The World Survives On Less Than $1 Per Day.

80. Nowhere In The World Today Experiences Famine.

81. The Developed Countries Are Approaching The Point At Which The Wants Of Their Population Are Fully Satisfied.

82. The Fundamental Economic Problem Is How To Make Money.

83. Economic Problems Arise Because Human Wants Are Unlimited And The Means Available For Satisfying Them Are Limited.

84. If Everyone Could Have Everything He Or She Wanted, There Would Be No Need For Economics.

85. The Quantity Of Goods And Services Per Year That An Economic System Can Produce Is Limited.

86. If Expanding An Activity Leads To Greater Msb Than Msc, Social Well-Being Is Increased By The Expansion.

87. Cost/Benefit Analysis Compares The Msc And Msb Of An Activity To Determine If The Level Of An Activity Should Be Changed.

88. Gdp Measures The Market Value Of All Final Goods And Services Produced Within An Economy During A Time Period, Regardless Of Who Owns The Resources Used In Production.

89. Gnp Would Include The Value Of Value Of Honda Accords Built In Ohio.

90. Per Capita Gdp Is A Near-Perfect Measure Of An Economy’s Standard Of Living Because It Takes Into Account The Distribution Of The Economy’s Income Among The Population.

91. If Data For A Series Of Years Shows Increases In Current Dollar Gdp, We Can Assume The Economy’s Output Is Increasing.

92. Price Index Numbers Are Used To Correct Data Series For Inflation.

93. Current Dollar Gdp Can Increase While Real Gdp Decreases.

94. If Current Dollar Gdp Remains The Same While The Population Declines, Per Capita Gdp Will Decrease.

95. When Comparing Welfare In Two Different Countries, Per Capita Gdp Is A Better Measure Than Current Dollar Gdp.

96. Given That Two Countries, Alpha And Beta, Have The Same Per Capita Gdp, We Can Be Sure That The People Of The Two Countries Are Equally Well-Off.

97. The Expression, “There Ain’t No Such Thing As A Free Lunch,” Only Applies To Goods, Such As Cars, Not To Services, Such As Health Care And Education.

98. Inefficiency Exists Whenever The Economy’s Output Combination Lies Inside Its Production Possibilities Curve.

99. Countries Will Always Produce Outside Their Production Possibilities Curves.

100. Education Is An Example Of A Good That Is “Free,” Since An Improvement In Education Leads To An Outward Shift In The Production Possibilities Curve.

101. Unemployment Will Move An Economy To A Point Below Its Production Possibilities Curve.

102. A Production Possibilities Curve Shows The Possible Trade-Off Of One Good For Another In Production Under Conditions Of Full Employment.

103. An Increase In The Labor Force Will Bring About An Outward Shift In An Economy’s Production Possibilities Curve.

104. An Improvement In Education Leads To An Outward Shift In The Production Possibilities Curve.

105. If A Movement Along The Production Possibilities Curve Yields Greater Benefits To Society Than Costs, The Movement Will Increase Social Well-Being.

106. The Marginal Social Cost Of A Movement Along A Production Possibilities Curve Is The Same As The Opportunity Cost Of The Move.

107. The Fact That Resources Are Rarely Perfectly Substitutable Gives The Production Possibilities Curve Its Bow Shape.

108. Without Increasing Opportunity Costs, A Production Possibilities Curve Will Be A Straight Line.

109. The Term Capital As Used By An Economist Refers To The Money Or The Stocks And Bonds That Are Used To Finance A Business Enterprise.

110. Technology Refers To The Known Means And Methods Available For Combining Resources To Produce Goods And Services.

111. Labor Resources Consist Of All Efforts Of Mind And Muscle That Are Available For Use In Production Processes.

112. Mineral Deposits Found In The Ground Are Not Considered Resources.

113. Population Growth Appears To Be The Major Problem Of Less Developed Countries.

114. The Available Data On Various Countries Of The World Show That There Is An Inverse Relationship Between Population Densities And Per Capita Gdp.

115. The Major Function Of The Federal Reserve Bank Is To Provide Low Interest Loans To Ldcs.

116. In Developing Countries, Reductions In The Death Rate Usually Lag Behind Reductions In The Birth Rate.

117. For Economic Development To Occur In Less-Developed Countries, It Is Important That Their Governments Establish An Economic Climate In Which Education Is Stressed And Capital Accumulation Is Encouraged.

118. A Broad-Based Education Is Generally Ineffective In Improving The Quality Of A Country’s Labor Force.

119. Technological Development Goes Hand In Hand With Advancing Educational Levels And Capital Accumulation.

120. Roads And Bridges Are Examples Of Social Infrastructure.

121. When A Private Firm Builds A New Plant In An Ldc, The Country’s Social Infrastructure Is Increased.

122. Income Inequality Is A Problem Faced By The Developed Countries, As Well As The Developing Countries, Of The World.

123. A Significant Problem Faced By Developing Countries Is The Tendency For Their Relatively Well-Educated Citizens To Leave Their Homes To Work And Live In The Developed World Where Compensation For Their Skills Is High.

124. Capital Flight From Less Developed To Developed Countries Tends To Offset Capital Infusions From Developed Countries.

125. The Governments Of Developed Countries Will Not Help Ldcs Develop By Providing Them With Capital And Technical Assistance Because Ldcs Must Learn To Develop On Their Own.

126. The “Brain Drain” Refers To The Deterioration Of Educational Attainment In Less Developed Countries Due To Poor Nutrition And Sanitation.

127. Poverty Is Primarily A Result Of Rapid Population Growth In Much Of The Underdeveloped World.

Chapter 02
Economic Systems, Resource Allocation, And Social Well-Being: Lessons From China’s Transition

Multiple Choice Questions

1. Which Of The Following Descriptions Fits The American Economy Best?
A. A Pure Market Economy
B. A Mixed Economy
C. Purely Competitive Economy
D. A Command Economy
E. A Monopoly Economy

2. In A Market Economy,
A. Resources Are Allocated By The Private Parties Who Own The Resources
B. Resources Are Allocated By The Various Local, State, And Federal Planning Committees And Zoning Commissions
C. Shortages Never Exist
D. Surpluses Never Exist
E. Both C) And D)

3. In 1978, The Chinese Economy
A. Opened Ties To The Noncommunist World
B. Became A Strictly Centralized Economy Under Joseph Stalin
C. Became Communist Under Mao Zedong
D. Moved To The Island Of Taiwan
E. Became A Purely Market-Oriented Economy

4. In Both The U.S. And Canada, Most, But Not All, Of Economic Resources Are Owned And Controlled By Private Parties Who Make Decisions As To How To Use Those Resources With Somewhat Limited Interference From Government. As Such, These Economies Are Examples Of
A. The Pure Command Economy
B. Mixed Economies, Though Closer To The Market End Of The Spectrum
C. Mixed Economies, Though Closer To The Command End Of The Spectrum
D. The Pure Market Economy
E. The Communist Economy

5. In The Market Economy, Markets Serve The Function Of
A. Coordinating Resource Use Decisions Made By Individual Owners Of Resources
B. Bringing About Resource Allocation Changes Desired By Resource Owners
C. Determining Prices
D. All Of The Above
E. Both (A) And (B)

6. Which Of The Following Is Least Consistent With The Pure Market Economy?
A. An Established Legal System That Arbitrates Contract Disputes
B. An Individual Accepting A Job For $1 Per Hour
C. The Institution Of Private Property Rights
D. The Existence Of A Minimum Wage
E. Private Property Rights

7. Which Of The Following Is Not A Characteristic Of A Purely Competitive Market?
A. Enough Sellers And Buyers So That No One Of Them Acting Alone Can Influence The Price Of This Product
B. The Ability Of A Single Seller To Block Potential Competitors Out Of The Market
C. Freedom Of The Price To Move Up Or Down, That Is, No Price Fixing
D. Mobility Of Buyers And Sellers
E. A Standardized Product

8. A Market With Only One Seller Of A Product That Has No Good Substitutes Is Called
A. A Pure Monopoly
B. A Pure Command Economy
C. Purely Competitive
D. Imperfectly Competitive
E. An Oligopoly

9. Which Of The Following Is Of Monopoly Firms? They
A. Can Manipulate The Price Of Their Product
B. Beat Their Competitors’ Prices
C. Must Constantly Deal With The Entry Of New Firms
D. Never Receive Government Help Blocking Entry Into The Market
E. Do All Of The Above

10. Markets That Fall Between Pure Competition And Monopoly Are Called:
A. Anti-Competitive
B. Imperfectly Competitive
C. Command Markets
D. Tweener Markets
E. Monopsonistic

11. If A Consumer Always Eats Cheese With Macaroni, Then For That Consumer Macaroni And Cheese Are Examples Of:
A. Substitutes
B. Complements
C. Normal Goods
D. Inferior Goods
E. Standardized Products

12. If An Increase In The Price Of Cookies Leads To A Decrease In The Demand For Ice Cream, Then Ice Cream And Cookies Must Be
A. Substitutes
B. Complements
C. Normal Goods
D. Inferior Goods
E. Standardized Products

13. If An Increase In The Price Of Bicycles Leads To An Increase In The Demand For Bus Transportation, The Bicycles And Bus Rides Must Be
A. Substitutes
B. Complements
C. Normal Goods
D. Inferior Goods
E. Standardized Products

14. A Student Graduates From College And Gets A High-Paying Job. As A Result Of The Increase In Income, The Student Buys More Frozen Pizzas. For The Student, Frozen Pizzas Must Be A(N)
A. Substitute
B. Complement
C. Normal Good
D. Inferior Good
E. Standardized Product

15. You Receive A Big Raise At Work. As A Result Of Your Now Higher Income, You Stop Bringing Your Lunch From Home And Start Eating Lunch At A Nearby Restaurant. Your Homemade Lunches Must Be
A. A Substitute
B. A Complement
C. Normal Goods
D. Inferior Goods
E. Standardized Products

16. The Law Of Demand States That Price And
A. Demand Are Positively Related
B. Quantity Demanded Are Positively Related
C. Demand Are Negatively Related
D. Quantity Demanded Are Negatively Related
E. None Of The Above

17. The Law Of Supply States That Price And
A. Supply Are Positively Related
B. Quantity Supplied Are Positively Related
C. Supply Are Negatively Related
D. Quantity Supplied Are Negatively Related
E. Quantity Demanded Are Negatively Related

18. An Increase In The Price Of A Good Will Cause Which Of The Following?
A. Quantity Demanded To Demand To Rise
B. Demand To Fall
C. Quantity Supplied To Fall
D. Supply To Rise
E. None Of The Above

19. Which Of The Following Will Cause Demand To Rise?
A. A Decrease In Price
B. A Decrease In The Price Of A Substitute Good
C. A Decrease In The Price Of A Complementary Good
D. An Increase In Supply
E. An Increase In The Cost Of Production

20. Given A Downward-Sloping Demand Curve And An Upward-Sloping Supply Curve, An Increase In Supply Together With An Increase In Demand Will Cause The
A. Equilibrium Quantity Purchased To Increase, But The Effect On Price Will Be Indeterminate
B. Equilibrium Quantity Purchased To Decrease, But The Effect On Price Will Be Indeterminate
C. Price To Rise, But The Effect On The Equilibrium Quantity Purchased Will Be Indeterminate
D. Price To Fall, But The Effect On The Quantity Bought And Sold Will Be Indeterminate
E. Equilibrium Price To Rise And The Equilibrium Quantity Purchased Will Rise

21. A Situation In Which The Demand For A Product Is Decreasing While The Price Is Simultaneously Increasing Can Be Explained By
A. A Decrease In Supply
B. An Increase In Supply
C. Unchanged Supply
D. All Of The Above
E. None Of The Above

Questions 22 – 24 Refer To The Graph Below.

22. At Price P1 There Is A
A. Surplus Of X1x2
B. Shortage Of X1x2
C. Surplus Of Xx2
D. Surplus Of Ab
E. Shortage Of X1x

23. At A Price Of P1, What Quantity Will Be Sold In The Market?
A. 0
B. X
C. X1
D. X2
E. X1x2

24. If The Market Is In Equilibrium, The Price And Quantity Will Be
A. P1 And X1
B. P And X1
C. P1 And X
D. P And X
E. P And X2

Questions 25 – 30 Refer To The Graph Below.

25. The Demand Curve And Supply Curve For Beef Are Dd And Ss. The Demand Curve Shifts To D1d1 And A Price Ceiling Is Placed On Beef At Price P. The Result Will Be
A. A Surplus Equal To X1x
B. A Shift In The Supply Curve To S1s1
C. An Increase In The Quantity Placed On The Market To X1
D. Both (B) And (C) Above
E. A Shortage Equal To X1x

26. The Demand Curve And Supply Curve For Beef Are Dd And Ss. Which Of The Following Could Not Cause Demand To Shift To D1d1?
A. An Increase In The Price Of A Substitute Good
B. An Increase In The Price Of A Complementary Good
C. An Increase In Consumer Income
D. A Change In Consumer Tastes
E. A Change In Consumer Expectations

27. The Demand Curve And Supply Curve For Beef Are Dd And Ss. Which Of The Following Could Cause Supply To Shift To S1s1?
A. An Increase In The Cost Of Production
B. A Decrease In The Cost Of Production
C. An Increase In The Price Of A Substitute In Production
D. An Increase In Income
E. All Of The Above

28. Which Of The Following Statements Is Incorrect?
A. If Supply Decreases And Demand Remains Constant, Equilibrium Price Will Rise
B. If Demand Decreases And Supply Increases, Equilibrium Price Will Rise
C. If Supply Increases And Demand Decreases, Equilibrium Price Will Fall
D. If Demand Increases And Supply Decreases, Equilibrium Price Will Rise
E. If Supply Is Constant And Demand Increases, Price Will Rise

29. If Demand And Supply Shift To D1d1 And S1s1, Market Price Will Be
A. P
B. Above P
C. Below P
D. Indeterminate
E. The Price That Goes With The Quantity X

30. Which Of The Following Will Cause A Change In The Demand For Beer?
A. A Change In The Average Income In The Economy
B. A Change In The Price Of Hops (Used To Make Beer)
C. A Change In The Price Of Beer
D. All Of The Above
E. None Of The Above

31. The Law Of Demand Suggests That
A. Higher Prices Automatically Result In Higher Profits
B. Demand Determines Supply
C. The Lower The Price Of A Product, The More Consumers Will Wish To Purchase, Other Things Equal
D. Without Laws, Markets Would Not Reach Equilibrium
E. Both (A) And (C)

32. A Change In The Quantity Supplied Of A Good May Be Caused By
A. A Change In Technology
B. A Change In The Number Of Firms Selling The Good
C. A Change In The Price Of The Good
D. A Change In The Demand For The Good
E. Either (C) Or (D)

Questions 33 – 37 Refer To The Graph Below.

33. Equilibrium Price And Quantity Are
A. 20 And 100
B. 20 And 200
C. 15 And 300
D. 15 And 200
E. 10 And 200

34. A Price Of $10 Will Lead To A
A. Shortage Of 200
B. Surplus Of 200
C. Shortage Of 100
D. Surplus Of 100
E. Surplus Of 300

35. A Price Of $20 Will Lead To A
A. Shortage Of 200
B. Surplus Of 200
C. Shortage Of 100
D. Surplus Of 100
E. Surplus Of 300

36. When Price Is $10, How Much Will Be Sold In The Market?
A. 0
B. 100
C. 200
D. 300
E. It Can Not Be Determined

37. Which Of The Following Could Lead To A Price Of $20 In The Market?
A. An Increase In Demand
B. A Decrease In Supply
C. A Decrease In Demand
D. An Increase In Supply
E. An Increase In Both Supply And Demand

Questions 38 – 43 Refer To The Graph Below.

38. If The Market Starts In Equilibrium With D1 And S1, Price And Quantity Are
A. 13 And 55
B. 10 And 40
C. 10 And 65
D. 7 And 55
E. 10 And 55

39. If The Market Starts In Equilibrium With D1 And S1, And The Price Of Pepsi Increases, The New Equilibrium Price And Quantity Are
A. 13 And 55
B. 10 And 40
C. 10 And 65
D. 7 And 55
E. 10 And 55

40. If The Market Starts In Equilibrium With D1 And S1, And The Price Of Carbonated Water (The Main Ingredient In Dr. Pepper) Increases, The New Equilibrium Price And Quantity Are
A. 13 And 55
B. 10 And 40
C. 10 And 65
D. 7 And 55
E. 10 And 55

41. If The Market Starts In Equilibrium With D1 And S1, And More Consumers Develop A Preference For Dr. Pepper, The New Equilibrium Price And Quantity Are
A. 13 And 55
B. 10 And 40
C. 10 And 65
D. 7 And 55
E. 10 And 55

42. If The Market Starts In Equilibrium With D1 And S1, And Equilibrium Price And Quantity Increase To $10 And 65, Which Of The Following Could Have Caused The Change?
A. An Increase In Consumer Income
B. An Increase In Production Costs
C. The Discovery That Dr. Pepper Causes Health Problems
D. A Technological Advance In Dr. Pepper Production
E. All Of The Above

43. Which Of The Following Is Not One Of The “Other Things Equal” Underlying The Demand Curve?
A. Prices Of Resources
B. Purchasing Power Of Buyers
C. Buyers’ Tastes And Preferences
D. Numbers Of Buyers
E. Buyers’ Expectations

44. A Change In The Quantity Demanded
A. Results Whenever One Of The “Other Things Equal” Underlying The Demand Curve Changes
B. Results When The Price Of The Product Increases Or Decreases
C. Means A Shift In The Position Of The Demand Curve
D. Means Movement Along A Given Demand Curve
E. Is Both (B) And (D)

45. Suppose That All Workers Receive A Wage Reduction. What Would The Impact On The Market For Autos Be?
A. The Supply Of Autos Would Decrease
B. The Demand For Autos Would Increase
C. The Supply Of Autos Would Increase And The Demand For Autos Would Fall
D. Both A) And B)
E. It Can Not Be Determined

46. There Is An Increase In The Quantity Of Pizza Purchased But No Change In The Price Of Pizza. Which Of The Following Is Most Likely To Have Occurred?
A. Supply Increased While Demand Remained Unchanged
B. Both Supply And Demand Increased
C. Supply Increased While The Quantity Demanded Increased
D. Demand Increased While Supply Remained Unchanged
E. Both Supply And Demand Decreased

47. Two Goods Are Said To Be Substitutes In Consumption If
A. An Increase In The Price Of One Leads To A Fall In The Demand For The Other
B. An Increase In The Price Of One Leads To An Increase In The Demand For The Other
C. An Increase In The Price Of One Leads To An Increase In The Supply Of The Other
D. A Fall In The Price Of One Leads To An Increase In The Demand For The Other
E. A Decrease In The Price Of One Leads To A Decrease In The Supply Of The Other

48. Assume Lettuce And Salad Dressing Are Complements In Consumption. An Increase In The Price Of Lettuce Will
A. Lead To A Fall In The Demand For Salad Dressing
B. Lead To A Fall In The Quantity Demanded Of Salad Dressing
C. Have No Impact On The Demand For Salad Dressing
D. Lead To A Fall In The Supply Of Salad Dressing
E. Lead To A Rise In The Supply Of Salad Dressing

49. Which Of The Following Is For Inferior Goods?
A. The Law Of Demand Does Not Hold
B. They Are Of Low Quality
C. The Demand For Them Falls As Consumer Income Rises
D. All Of The Above
E. None Of The Above

50. An Increase In The Wages Of Orange Pickers Will Have What Effect In The Market For Oranges?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

51. An Increase In Consumer Income Will Have What Effect On The Equilibrium Price And Quantity Of Hot Dogs?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

52. An Increase In The Price Of Cars Will Have What Effect On The Equilibrium Price And Quantity Of Gasoline?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

53. A Technological Advance In The Production Of Computers Will Have What Effect On The Equilibrium Price And Quantity In The Computer Market?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

54. A Publicized Report That Finds Orange Juice Prevents Certain Diseases Will Have What Effect On The Equilibrium Price And Quantity Of Orange Juice?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

55. As The Baby Boom Generation Continues To Age, What Will Happen To The Equilibrium Price And Quantity Of Homes In Retirement Communities?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

56. If Consumers Expect An Increase In The Price Of Coffee Next Month, What Will Happen To The Equilibrium Price And Quantity Of Coffee This Month?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

57. The Entry Of New Firms Into A Market, All Other Things Equal, Will Have What Effect On Equilibrium Price And Quantity?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

58. An Increase In The Price Of Flashlights Will Have What Effect On The Equilibrium Price And Quantity Of Batteries?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

59. If The Price Of Film Increases At The Same Time The Cost Of Camera Production Increases, What Will Happen To The Equilibrium Price And Quantity In The Camera Market?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

60. If There Is A Technological Advance In The Production Of Paper At The Same Time Consumer Income Increases (Assume Paper Is A Normal Good), What Will Happen In The Market For Paper?
A. Price Will Increase, Quantity Will Decrease
B. Price Will Increase, Quantity Will Increase
C. Price Will Decrease, Quantity Will Decrease
D. Price Will Decrease, Quantity Will Increase
E. The New Equilibrium Price And Quantity Can Not Be Determined

61. Suppose The United Auto Workers Union Successfully Lobbies Congress To Enact An Import Quota On All Foreign Cars Imported Into The U.S. Which Of The Following Is Most Likely To Occur In The U.S.?
A. A Fall In The Price Of Imported Cars And Increase In The Price Of Domestics
B. An Increase In The Demand For Domestic Cars
C. A Decrease In American Autoworker Wages
D. Higher Unemployment Among American Autoworkers
E. A Fall In The Demand For Imports

62. As Consumer Incomes Rise, The Demand Curve For Good X Shifts To The Right. Given This, Good X Must Be
A. Produced By A Competitive Firm
B. A High Quality Product
C. A Substitute Good
D. A Normal Good
E. An Inferior Good

63. Since 1990, China’s Growth Has Been
A. Roughly Equal To That Of The United States
B. Declining
C. In The Double Digits
D. About 3% Per Year
E. None Of The Above

64. China’s Growth Has Been A Result Of
A. Increased Domestic Demand
B. Rapidly Increasing Inflation
C. Investment In Other Economies
D. Trade Deficits
E. Trade Surpluses

65. Since 1990, Foreign Investment In China Has
A. Increased Slightly
B. Increased Significantly
C. Been Unchanged
D. Decreased Slightly
E. Decreased Significantly

66. China Can Be Best Described As A
A. Market Economy
B. Mixed Economy
C. Transitional Economy
D. Competitive Economy
E. Monopoly Economy

67. From A Standpoint Of Resource Allocation, A Surplus Of Corn Implies
A. Consumers Would Prefer Some Of The Resources Used To Produce Corn Be Used To Produce Something Else
B. The Market For Agricultural Products Is Failing
C. Government Should Purchase The Surplus To Protect The Farmers
D. The Price Of Corn Is Too Low And Should Be Increased
E. The Quantity Demanded Of Corn Exceeds The Quantity Supplied

68. After Establishing The Republic Of China In 1949, Mao’s Communist Party Patterned The Chinese Economy After
A. Japan
B. Taiwan
C. The Ussr
D. The United States
E. Europe

69. Following The Establishment Of A Soviet Style Society In 1949, The State Planning Commission Was Created By
A. Chiang Kai-Shek
B. Deng Xiaoping
C. Mao Zedong
D. Joseph Stalin
E. Wen Jiabao

70. The State Planning Commission In China Has The Task Of
A. Determining What Goods And Services Should Be Produced
B. Determining What Quantities Of Goods And Services Are Produced
C. Determining The Allocation Of Resources Used In The Production Of Goods And Services
D. How The Goods And Services Are To Be Distributed
E. Performing All Of The Tasks Listed Above

71. The Economy Of The People’s Republic Of China Operated As A Command Economy
A. From 1917 Until 1949
B. From 1949 Until 1978
C. Since 1990
D. From 1949 Until 1962
E. Which Started China’s Transition To A Market Economy

72. China’s Transition To A Market-Oriented Economy
A. Was Completed By Around 2004
B. Was Abandoned In 2010 And The Country Has Returned To Command Economy
C. Has Resulted In Relatively Low Rates Of Economic Growth
D. Did Not Lead To Any Problems With Inflation Or Unemployment
E. Did Not Lead To Any Problems With Corruption
73. In A Market Economy, A Shortage Of Wheat Will Cause The
A. Price Of Bread To Rise
B. Price Of Bread To Fall
C. Price Of Wheat To Fall
D. Supply Of Bread To Increase
E. Supply Of Wheat To Fall

74. Which Of The Following Was Not A Problem For China’s Centralized Economy?
A. Informational Requirements
B. Incentives For Efficiency
C. The Emphasis On Heavy Machinery Production
D. Low Quality Products
E. None Of The Above (They Were All Problems)

75. If The Demand Curve For Bran Muffins Has Shifted Out Due To A Medical Study That Indicates That Regular Consumption Of Bran Lowers Cholesterol, Then We Can Conclude That There Has Been
A. A Response To The Increase Demand For A Complementary Good
B. A Change In Consumer Tastes
C. A Reduction In The Production Costs Of Bran
D. An Increase In Consumer Expectations
E. An Improvement In The Economy, Resulting In Higher Incomes

76. Consumer Purchases Of Hybrid Cars Have Risen Sharply In Recent Years. One Important Factor In This Increased Demand For These Vehicles Is
A. It’s Cool To Be “Green” And Drive A Hybrid
B. Decreasing Prices Of A Complementary Good
C. Change In Expectations Based Upon The Belief That Energy Prices Will Rise In The Future
D. Reduced Availability Of A Substitute
E. Government Fuel Mandates

True / False Questions

77. Mao Zedong Started China’s Transition To A Market Economy

78. Private Ownership Of An Economy’s Resources Is A Defining Feature Of The Pure Market Economy

79. The Institution Of Private Property Rights Is An Essential Feature Of The Market Economy

80. The U.S. Is Best Described As A Pure Market Economy

81. In The Pure Command Economy, Most Resource Use Decisions Are Made By Government

82. In A Market Economy, Price Fluctuations Indicate There Is A Lack Of Effective Competition

83. For A Market To Be Considered Purely Competitive, New Rivals Must Be Free To Enter If They Feel They Can Effectively Compete

84. Blocked Entry Is Essential For A Purely Competitive Market

85. Entry Is Blocked In Monopoly Markets

86. In Response To An Increase In The Price Of Beer, Bob Reduces His Consumption From 3 To 2 Beers Per Day. This Reflects A Reduction In Bob’s Demand For Beer

87. Surpluses Tend To Drive Competitive Prices Downward Toward Equilibrium, And Shortages Tend To Drive Competitive Prices Upward Toward Equilibrium

88. When The Entire Demand Curve Shifts Out To The Right, We Say There Has Been An Increase In Demand

89. A Change In Supply Occurs When One Of The Other Things Equal Changes And Is Represented As Movement Along The Supply Curve

90. A Change In The Price Of Automobiles Will Cause A Change In The Demand For Automobiles

91. Demand Is The Quantity Of A Product Per Time Period That Buyers Will Buy At The Prevailing Price, Other Things Equal

92. The Law Of Demand States That Consumers Will Buy Less At Lower Prices, But Only If A Number Of Other Things Are Held Constant

93. The Law Of Supply States That Sellers Will Sell More At High Prices Than At Low Prices

94. When An Economist Says That The Demand For A Product Has Increased, This Means That Consumers Are Now Willing To Purchase More Of The Product At Each Alternative Price

95. An Increase In The Price Of A Good Will Decrease Demand For The Good

96. An Increase In The Supply Of A Good Will Increase Demand For The Good

97. An Increase In Consumer Income Can Either Increase Or Decrease Demand For A Good

98. During December Each Year, The Number Of Christmas Trees Sold Increases, As Does The Price Of The Trees. This Clearly Violates The Law Of Demand

99. An Increase In The Demand For Gasoline Accompanied By A Decrease In The Supply Of Gasoline Will Cause The Price To Rise, But May Cause The Quantity Purchased To Increase, Decrease, Or Remain The Same

100. Fluctuating Prices Tend To Confuse Consumers, So Prices Should Be Government Controlled Whenever Possible

101. An Increase In The Price Of Gas Will Cause An Increase In The Supply Of Gas Since It Will Be More Profitable To Sell

102. The Demand Curve For An Inferior Good Is Upward Sloping, Like A Typical Supply Curve

103. When There Is An Increase In Both Supply And Demand, It Is Impossible To Determine What Happens To The Equilibrium Price Unless The Magnitudes Of The Supply And Demand Changes Are Known

104. During The 1992 Presidential Campaign, Ross Perot Recommended A 50-Cents-Per-Gallon Increase In The Tax On Gasoline. Such An Increase Would Have Little Or No Effect On The Quantity Of Gas Sold Since We Have Few Options To Driving

105. If You Buy More Of A Good As A Result Of An Increase In Income, The Good Is Known As A Consumer Good

106. Appliances And Electricity Are An Example Of Complementary Goods

107. An Increase In The Supply Of A Good Will Increase The Price Of The Good, Other Things Being Equal

108. When Both Supply And Demand Increase, Price And Quantity Will Increase

109. Shortages Of A Particular Good Can Be Expected To Lead To Rising Prices And Increased Production For That Good In A Market Economy

110. Shortages Of A Particular Good Can Be Expected To Lead To Decreasing Prices And Lower Production For That Good In A Market Economy

111. In The Short Run, An Increase In Demand For A Good Will Result In Higher Prices In A Market Economy

112. In The Short Run, An Increase In Demand For A Good Will Result In Long Lines In A Command Economy

113. In The Long Run, An Increase In The Demand For A Good Will Result In An Increase In Supply Of The Good In A Market Economy

114. In The Long Run, An Increase In The Demand For A Good Will Result In An Increase In Supply Of The Good In A Command Economy

115. If The Demand For A Good Increases In A Monopoly Market, Price Will Rise And Firms Will Enter The Industry In The Long Run

116. China’s Transition To A Market Economy Began In 1990.

117. Command Economies Introduce Incentives For Efficient Production

118. Under The Great Leap Forward, The Task Of Determining How Much To Produce Fell On The State Planning Commission

119. The Chinese Communist Party Favored Production In The Heavy Industry Sectors Of The Economy

120. In 1978, Deng Xiaoping Started The Process Of Transitioning China To A “Socialist Market Economy.”

121. While The Superiority Of The Market Orientation Seems Clear, It Is Equally Clear That The Transition From A Command To A Market Economy Is Very Difficult

122. China’s Transition To A Market Orientation Has Been Relatively Problem-Free

123. China’s Transition To A Market Orientation Began With Agricultural Reform

124. China’s Transitional Economy Is Free Of Unemployment And Inflation

125. 15 Of The 20 Cities With The Highest Levels Of Air Pollution Are In China.

Chapter 03

Government Control Of Prices In Mixed Systems: Who Are The Winners And Losers?

Multiple Choice Questions

1. In A Market Economy, If The Market Supply Of A Product Decreases Relative To Its Demand, The Product’s Price Will
A. Fall
B. Rise
C. Be Unchanged
D. Fall And Then Rise
E. Rise And Then Fall

2. In A Mixed Economy, Governments May Intervene In Markets In Which Of The Following Ways?
A. Price Ceilings
B. Minimum Wages
C. Agricultural Price Supports
D. Both A) And B)
E. All Of The Above

3. Which Of The Following Is Of How Markets React To Government Intervention? They React
A. To Provide The Intended Results
B. In Ways That Offset Intended Impacts
C. Quickly To Reverse Intended Effects
D. In Completely Unpredictable Ways
E. So Slowly That Policies Never Work As They Are Intended

4. The Consequences Of Government Intervention
A. Are Generally As Planned By Policy Makers
B. Often Involve Unintended Consequences
C. Fall On Low Income Individuals
D. Are Not Felt Until The Next Fiscal Year
E. Serve To Increase Efficiency In Markets

5. A Maximum Allowable Price For A Good Or Service Is A
A. Price Ceiling
B. Price Floor
C. Minimum Wage
D. Market Equilibrium
E. Price Support

6. To Be Effective, A Price Ceiling Must Be Set
A. By The Market
B. Above Equilibrium
C. Below Equilibrium
D. At Equilibrium
E. By Producers

7. The Purpose Of A Price Ceiling May Be To Hold Down
A. Inflation
B. Unemployment
C. Interest Rates
D. Wages
E. All Of The Above

8. Price Ceilings May Be Used On A Selective Basis To
A. Control Inflation In The Economy
B. Make A Good Cheaper To Produce
C. Boost The Income Of Firms
D. Make A Good Accessible To All Income Levels
E. Increase Workers’ Incomes

9. During The 1970’s About How Many Cities In The U.S. Had Rent Controls?
A. 1,000
B. 200
C. 50
D. 15
E. 5

10. One Of The Earliest Known Rent Control Laws Was Instituted In Which City And When?
A. New York At The Start Of Wwii
B. Washington D.C. During The Civil War
C. Paris In The 1700s
D. Rome In The 1400s
E. Chicago During The Great Depression

11. A Minimum Allowable Price For A Good Or Service Is Known As
A. A Price Floor
B. A Minimum Wage
C. A Price Support
D. All Of The Above
E. None Of The Above

12. Price Floors Are Often Instituted For Which Of The Following Purposes?
A. To Prevent Inflation
B. To Make Goods And Services Accessible To All Income Levels
C. To Increase The Income Of Sellers
D. To Increase The Wages Of Workers
E. To Do All Of The Above

13. Which Of The Following Is Of The First U.S. Minimum Wage?
A. It Was Set Under The Fair Labor Standards Act
B. It Was Instituted In 1938
C. It Set The Minimum Wage At 25 Cents Per Hour
D. It Applied Only To Certain Designated Industries
E. All Of The Above

14. In 1981, The U.S. Federal Minimum Wage Was Increased To
A. $2.00 Per Hour
B. $2.50 Per Hour
C. $3.35 Per Hour
D. $4.00 Per Hour
E. $5.15 Per Hour

15. Which Of The Following Is Of The U.S. Minimum Wage Over The 1980s And 1990s?
A. It Was Unchanged
B. It Increased Significantly Through The 1980s And Was Constant Through The 1990s
C. It Was Constant Through The 1980s And Then Increased Significantly Through The 1990s
D. It Fell During The 1990s
E. It Was Eliminated In The 1990s

16. As Of Summer 2009, The U.S. Federal Minimum Wage Is Set At What Rate Per Hour?
A. $5.15
B. $5.85
C. $6.55
D. $7.25
E. $8.00

17. Some States Also Have Their Own Minimum Wage Legislation. Generally These Laws Set The State Minimum Wage
A. Above The Federal Minimum Wage
B. Below The Federal Minimum Wage
C. Equal To The Federal Minimum Wage
D. To Either A) Or C)
E. To Any Of The Above

18. As The Price Of Rental Housing Falls, Which Of The Following Occurs?
A. The Quantity Demanded Of Housing Increases
B. People Take In Roommates To Share Costs
C. Individuals Move Back In With Their Families
D. More Rental Housing Is Constructed
E. All Of The Above

19. As The Price Of Rental Housing Increases, Which Of The Following Will Happen?
A. Property Will Be Switched From Commercial Property To Rental Housing
B. More Rental Housing Will Be Built
C. Renters Will Be Induced To Buy Housing
D. The Average Number Of Renters Per Rental Unit Will Increase
E. All Of The Above

Questions 20 – 24 Refer To The Graph Below.

20. If The Demand For Rental Housing Is Dd And The Supply Of Rental Housing Is Ss, The Equilibrium Rent And Quantity (Number Of Units In Thousands) Are
A. $800 And 25
B. $625 And 30
C. $600 And 20
D. $400 And 25
E. $600 And 25
21. If Demand And Supply Are Dd And Ss And Demand Increases To D1d1, The New Equilibrium Rent And Quantity (Number Of Units In Thousands) Are
A. $800 And 25
B. $625 And 30
C. $600 And 20
D. $400 And 25
E. $600 And 25

22. An Increase In Rent That Leads To Increased Profitability Of Producing Rental Housing Will Lead To Which Of The Following Shifts In The Long Run?
A. Dd To D1d1
B. D1d1 To Dd
C. S1s1 To Ss
D. Ss To S1s1
E. None Of The Above

23. If The Supply And Demand For Rental Housing Are Dd And Ss, What Effect Will A Rent Control Law That Sets The Maximum Allowable Rent At $400 Have On The Market? It Will Lead To
A. A Surplus Of 5 Thousand Units
B. A Shortage Of 5 Thousand Units
C. A Surplus Of 10 Thousand Units
D. A Shortage Of 10 Thousand Units
E. No Change In Equilibrium Rent Or Quantity

24. If The Supply And Demand For Rental Housing Are Dd And Ss, What Effect Will A Rent Control Law That Sets The Maximum Allowable Rent At $800 Have On The Market? It Will Lead To
A. A Surplus Of 5 Thousand Units
B. A Shortage Of 5 Thousand Units
C. A Surplus Of 10 Thousand Units
D. A Shortage Of 10 Thousand Units
E. No Change In Equilibrium Rent Or Quantity

25. If People Are Forced To Commute As A Result Of A Rent Control Law In A City, Which Of The Following Results? An Increase In
A. Rent Paid By Commuters
B. Direct Commuting Costs
C. Opportunity Costs For Commuters
D. Pollution And Traffic Congestion In Cities
E. All Of The Above

26. Rent Control Laws Will _____________ The Search Costs Of Potential Renters.
A. Increase
B. Decrease
C. Eliminate
D. Mitigate
E. Reimburse

Questions 27 – 32 Refer To The Graph Below.

27. The Equilibrium Rent And Quantity (1,000s Of Units) Are
A. $900 And 30
B. $750 And 40
C. $600 And 30
D. $900 And 50
E. $600 And 50

28. If Rent Is Controlled At $900, The Quantity Of Rental Housing Demanded Will Be
A. 0
B. 30
C. 40
D. 50
E. More Than 50

29. If Rent Is Controlled At $600, The Quantity Of Rental Housing Demanded Will Be
A. 0
B. 30
C. 40
D. 50
E. More Than 50

30. If Rent Is Controlled At $900, The Quantity Of Rental Housing Supplied Will Be
A. 0
B. 30
C. 40
D. 50
E. More Than 50

31. If Rent Is Controlled At $600, The Quantity Of Rental Housing Supplied Will Be
A. 0
B. 30
C. 40
D. 50
E. More Than 50

32. If Rent Is Controlled At $600, There Will Be A ______ Equal To ____ Thousand Units In The Market.
A. Surplus; 10
B. Surplus; 20
C. Shortage; 10
D. Shortage; 20
E. Excess Supply; 10

33. Rent Control Laws May Lead To Which Of The Following Unintended Effects?
A. Under-The-Table Payments
B. Increased Forced Commuting
C. Higher Search Costs
D. Lost Profit Incentives To Change The Supply Of Rental Housing
E. All Of The Above

34. Owners Of Rent Controlled Property May Attempt To Increase Profits By
A. Raising Rents
B. Improving The Quality Of Their Rental Units
C. Taking Under-The-Table Payments
D. Converting Commercial Properties To Rental Properties
E. All Of The Above

35. In The Short-Run, Who “Wins” From Rent Control Laws?
A. All People Who Want To Rent Housing
B. Owners Of Rent Controlled Property
C. People Who Buy Housing
D. Governments That Pay To Enforce Rent Control Laws
E. None Of The Above

36. In The Short-Run, Who “Loses” From Rent Control Laws?
A. Those Who Cannot Find Rental Housing
B. People Who Are Forced To Commute
C. Individuals Who Experience Increased Search Costs For Rental Housing
D. Those Who Must Make Under-The-Table Payments To Secure Rental Housing
E. All Of The Above

37. The Demand For Labor Is A Derived Demand Because It Is Dependent On
A. The Demand For The Product Being Produced
B. The Marginal Revenue Of The Product Being Produced
C. The Marginal Productivity Of The Workers Producing The Product
D. All Of The Above
E. None Of The Above

38. The Additional Revenue That Accrues To A Firm When An Additional Worker Is Hired Is
A. The Marginal Revenue Product Of Labor
B. The Marginal Product Of Labor
C. The Marginal Revenue Of Labor
D. The Marginal Utility Of Labor
E. None Of The Above

39. The Marginal Product Of Labor Is The Additional
A. Revenue Received When A Worker’s Output Is Sold
B. Production Cost Of Hiring An Additional Labor
C. Output Produced As A Result Of Giving Workers Additional Capital
D. Output Produced As A Result Of Hiring An Additional Worker
E. Product Developed As A Result Of Ideas Generated By Workers

40. The Additional Revenue A Firm Receives As A Result Of Selling An Additional Unit Of Output Is Called
A. Price
B. Profit
C. Total Revenue
D. Marginal Revenue
E. Marginal Revenue Product

41. A Firm Increases The Number Of Workers It Hires From 50 To 52 And, As A Result, Output Increases From 100 To 110. Each Of The Additional Units Of Output Can Be Sold For $2. What Is The Marginal Product Of The 52nd Worker?
A. 2
B. 5
C. 10
D. 20
E. 50

42. A Firm Increases The Number Of Workers It Hires From 50 To 52 And, As A Result, Output Increases From 100 To 110. Each Of The Additional Units Of Output Can Be Sold For $2. What Is Marginal Revenue For The Last 10 Units Produced?
A. 2
B. 5
C. 10
D. 20
E. 50

43. A Firm Increases The Number Of Workers It Hires From 50 To 52, And As A Result, Output Increases From 100 To 110. Each Of The Additional Units Of Output Can Be Sold For $2. What Is The Marginal Revenue Product Of The 52nd Worker?
A. 2
B. 5
C. 10
D. 20
E. 50

44. The Law Of Diminishing Returns States That, As Additional Units Of A Variable Input Are Added To A Given Amount Of A Fixed Input, Increases In Output Will
A. Increase
B. Decline
C. Stay The Same
D. Accelerate
E. Become Erratic

45. A Firm Has A Given Amount Of Capital. When It Hires 10 Workers, Output Is 30. When It Hires 11 Workers, Output Is 40. If The Law Of Diminishing Returns Applies, Which Of The Following Is The Most Likely Amount Of Output When The Firm Hires 12 Workers?
A. 70
B. 60
C. 50
D. 45
E. -10

46. Which Of The Following Represents The Demand Curve For Labor For A Firm?
A. The Mr Curve
B. The Mp Curve
C. The Mrp Curve
D. The Mc Curve
E. None Of The Above

Questions 47 – 51 Refer To The Table Below.

47. The Marginal Product Of The 4th Worker Is
A. 20
B. 40
C. 100
D. 140
E. 160
48. If Each Unit Of Output Is Sold For $5, The Marginal Revenue Of The Second Unit Of Output Sold Is
A. $5
B. $10
C. $40
D. $50
E. $200

49. The Marginal Product Of The First Worker Is
A. 0
B. 10
C. 40
D. 50
E. Unable To Be Determined

50. If Each Unit Of Output Is Sold For $5, The Marginal Revenue Product Of The 3rd Worker Is
A. 5
B. 50
C. 200
D. 250
E. 300

51. If Each Unit Of Output Is Sold For $2, The Marginal Revenue Product Of The 6th Worker Is
A. 2
B. 4
C. 10
D. 20
E. 170

52. As The Wage Increases, A Worker Will Choose To Work
A. More
B. Less
C. The Same Amount
D. Overtime
E. An Amount That Cannot Be Determined

53. A Change In The Hours Of Work That Occurs In Response To A Wage Change, Other Things Equal, Is Known As The
A. Supply Of Labor
B. Substitution Effect
C. Income Effect
D. Wage Effect
E. Opportunity Cost Of Labor

54. An Increase In The Wage From $6 Per Hour To $6.50 Per Hour Causes A Worker To Increase Her Hours Worked From 40 To 45 Hours Per Week. For This Worker, Which Effect Dominates?
A. Substitution
B. Income
C. Wage
D. Wealth
E. Leisure

55. Which Of The Following Measures The Change In The Hours Of Work That Occurs When There Is A Change In Income, Other Things Equal?
A. The Supply Of Labor Curve
B. The Substitution Effect
C. The Income Effect
D. Marginal Productivity
E. The Wage Effect

56. If An Increase In The Wage Rate From $6.00 Per Hour To $6.50 Per Hour Causes A Worker To Decrease His Hours Worked From 40 To 35 Hours Per Week, Which Effect Dominates?
A. Substitution
B. Income
C. Wage
D. Wealth
E. Leisure

57. Which Effect Dominates If A Workers Supply Curve For Labor Is Negatively Sloped?
A. Substitution
B. Income
C. Wage
D. Wealth
E. Leisure

Questions 58 – 63 Refer To The Graph Below.

58. Equilibrium Wage And Quantity In The Labor Market Are
A. $3 And 8
B. $5 And 22
C. $7 And 16
D. $10 And 8
E. $10 And 22
59. At A Wage Of $10, The Mrp Of Labor Is
A. $8
B. $10
C. $80
D. $216
E. Impossible To Determine Using This Graph

60. If The Wage Rate Is $10, What Is The Quantity Of Labor Demanded?
A. 0
B. 8
C. 16
D. 22
E. 25

61. If The Wage Rate Is $10, What Is The Quantity Of Labor Supplied?
A. 0
B. 8
C. 16
D. 22
E. 25

62. If The Wage Rate Is $3, Which Of The Following Will Occur?
A. A Shortage Of 8
B. A Surplus Of 8
C. A Shortage Of 17
D. A Surplus Of 17
E. A Surplus Of 16
63. To Be Effective, A Minimum Wage In This Market Would Have To Be Set
A. Above $7
B. Above $10
C. Below $5
D. Below $7
E. Below $10

Questions 64 – 68 Refer To The Graph Below.

64. A Minimum Wage Set At $12 Per Hour Would Result In A Surplus Of
A. 0
B. 10
C. 20
D. 35
E. None Of The Above

65. A Minimum Wage Of $12 Would Lead To A Quantity Of Labor Demanded Equal To
A. 0
B. 15
C. 25
D. 35
E. More Than 35

66. A Minimum Wage Of $12 Would Lead To A Quantity Of Labor Supplied Equal To
A. 0
B. 15
C. 25
D. 35
E. More Than 35

67. A Minimum Wage Set At $4 Would Result In A Shortage Of
A. 0
B. 10
C. 20
D. 35
E. None Of The Above

68. If A Minimum Wage Is Set At $4, The Quantity Of Labor Demanded In The Market Will Be
A. 0
B. 15
C. 25
D. 35
E. More Than 35

69. Which Of The Following Groups Most Suffers The Costs Of Minimum Wage Laws?
A. College Graduates
B. Senior Citizens
C. Teenagers
D. Manufacturing Workers
E. Agricultural Workers

70. Which Of The Following Is Of The Minimum Wage?
A. It Has Significantly Reduced Poverty In The United States
B. A Worker Earning The Minimum Wage Will Keep A Family Of Three Out Of Poverty
C. It Results In A Much More Equal Distribution Of Income In The United States
D. Unemployment Rates Are Unaffected By The Minimum Wage
E. None Of The Above Is

71. Research Suggests That As The Minimum Wage Is Increased By 10%, The Associated Increase In The Teenage Unemployment Rate Is Nearly
A. 1 Percent
B. 10 Percent
C. 20 Percent
D. 25 Percent
E. 30 Percent

72. The Alternative Analysis Of The Minimum Wage Indicates That Which Of The Following May Be ?
A. The Demand Curve Is Vertical Over The Relevant Range
B. The Supply Curve Is Vertical Over The Relevant Range
C. There Is Only A Very Slight Unemployment Effect Of A Minimum Wage
D. All Of The Above
E. None Of The Above

73. According To The Alternative Analysis Of The Minimum Wage, Which Of The Following Might Lead The Demand Curve For Labor To Be Vertical Over The Relevant Range?
A. Firms Offset Higher Wages By Allowing Longer Lines During Peak Hours
B. Higher Wages Are Offset By Increased Efficiency
C. Prices Are Increased For Goods That Are Not Price-Sensitive
D. All Of The Above
E. None Of The Above

74. Which Of The Following Individuals Lose As A Result Of An Effective Minimum Wage Law?
A. Those Who Remain Employed After The Minimum Wage Is Instituted
B. Teenagers Who Lose Their Jobs And Valuable On-The-Job Training
C. Skilled Workers Who Earn Wages Above The Minimum Wage
D. All Of The Above
E. None Of The Above

75. If There Is A Price Ceiling Set For Milk At $2.50 Per Gallon And The Current Equilibrium Price Is $2.25 Per Gallon, Then We Can Conclude
A. That The Price Ceiling Is Doing Its Job, Keeping Prices Low
B. That The Price Ceiling Is Non-Binding And Has No Effect On The Market Equilibrium
C. That Milk Imports Are Reducing The Price
D. That Grocery Stores Are Afraid To Raise The Price To The Ceiling Level, For Fear Of Prosecution By The Government
E. That Price Ceilings Set A Minimum Price

76. Given That A Firm Is Selling Its Product In A Competitive Market, Meaning That Its Marginal Revenue Is Constant, What Would The Law Of Diminishing Returns To Labor Inputs Imply About The Demand For Labor?
A. That The Demand For Labor Would Be Constant If The Market Is Stable
B. That The Firm Would Pay Increasing Wages To Attract Qualified Employees
C. The Demand Would Diminish With The Output Of New Workers
D. The Demand Curve For Labor Has A Negative Slope Resulting From Declining Marginal Product
E. The Law Of Diminishing Returns Has No Effect On Labor Demand

77. The Fact That We Observe Positively Sloped Market Labor Supply Curves Implies That
A. The Substitution Effect Is Stronger That The Income Effect For Most Workers
B. The Income Effect Is Stronger Than The Substitution Effect For Most Workers
C. Most Workers Don’t Have Income Or Substitution Effects
D. The Income Effect Plus Substitution Effect Results In The Positive Slope
E. Labor Laws Require Workers To Work At Least 40 Hours Per Week

True / False Questions

78. In A Mixed Economy, Markets Adjust Freely And All Markets Are Cleared.

79. In A Mixed Economy, Governments Intervene In Markets To Affect The Prices Of Individual Goods.

80. In A Mixed Economy, Governments Intervene In Markets To Control Inflation.

81. Approximately 20 U.S. Cities Have Rent Control Laws.

82. There Are Examples Of Rent Controls From As Early As The 1700s.

83. Many Rent Controls Were Established As A Result Of World War Ii And Were Kept Even After The War Ended.

84. Some Universities Have Rent Controlled Student Housing.

85. Price Floors Are Instituted To Increase The Income Of Sellers.

86. The 1938 Fair Labor Standards Act Created The First U.S. Rent Control Law.

87. The First U.S. Minimum Wage Was Set At 25 Cents An Hour.

88. The U.S. Minimum Wage Did Not Change Throughout The 1980s And 1990s.

89. All U.S. Workers Are Covered Under The U.S. Minimum Wage Law.

90. Some States Enact Their Own Minimum Wage Laws.

91. The Quantity Of Housing Demanded Does Not Change When Prices Increase Because People Have To Live Somewhere.

92. In The Short-Run, The Supply Of Housing Can Increase Quickly.

93. A Price Ceiling Must Be Set Above Equilibrium To Have Any Effect On The Market For Housing.

94. Rent Controls Result In Illegal Payments To Acquire Housing.

95. Rent Controls Decrease Renters’ Housing Search Costs.

96. Rent Controls Lead To Increased Commuting.

97. 6 Of The 10 Cities With The Highest Homelessness Have Rent Control Laws.

98. Rent Controls Create Profit Incentives To Increase The Supply Of Rental Housing.

99. Minimum Housing Standards Prevent Any Property Deterioration In Rent Controlled Housing.

100. Rent Controls Result In A Misallocation Of Resources.

101. The Majority Of Individuals Support The Minimum Wage.

102. The Minimum Wage Allows An Individual To Earn Enough To Keep A Family Of Three Above The Poverty Line.

103. Rent Controls Lead To Housing Shortages.

104. Rent Controls Lead To Conversion Of Rental Housing To Commercial Uses.

105. Rent Controls Make Housing More Accessible To Homeless Individuals.

106. The Demand For A Product Is A Derived Demand.

107. If 10 Workers Produce 100 Units Of Output And 11 Workers Produce 108 Units Of Output, The Marginal Product Of The 11th Worker Is 8.

108. If All Units Of A Firm’s Output Sell For $10 Each, Marginal Revenue Is Constant.

109. The Additional Revenue A Firm Receives As A Result Of Hiring An Additional Worker Is Mrp.

110. Limited Amounts Of Capital Eventually Lead To Diminishing Returns To Labor.

111. A Firm’s Marginal Revenue Curve Is Also Its Demand Curve.

112. As The Wage Increases, The Quantity Of Labor An Individual Supplies Will Increase.

113. As The Wage Increases, The Quantity Of Labor An Individual Supplies May Decrease.

114. If A Worker Works More As The Wage Increases, The Substitution Effect Is Dominating.

115. If A Worker Works More As The Wage Increases, The Income Effect Is Dominating.

116. If The Supply Of Labor Curve Is Positively Sloped, The Substitution Effect Is Dominating.

117. If The Supply Curve Of Labor Is Positively Sloped, The Income Effect Is Dominating.

118. Evidence Indicates The Supply Curve Of Labor Is Positively Sloped.

119. A Surplus Of Labor Is Unemployment.

120. Teenagers Are The Group Most Likely To Work For Minimum Wage.

121. Working For The Minimum Wage Provides Valuable On-The-Job-Training.

122. The Minimum Wage In 2008 Was Approximately 37% Of Average Earnings.

123. The Minimum Wage Is 100% Of The Poverty Level.

124. A 10% Increase In The Minimum Wage Is Estimated To Increase Teenage Unemployment By 15%.

125. Firms Can Offset Increased Wage Costs Due To An Increase In The Minimum Wage By Increasing Efficiency.

126. Evidence Indicates The Minimum Wage Has Little Effect On The Income Distribution.

127. The Supply Of Labor Is Very Responsive To Changes In The Wage.

Chapter 04

Pollution Problems: Must We Foul Our Own Nests?

Multiple Choice Questions

1. Pollution
A. Like Air And Water Pollution Became An Issue In The U.S. During The 1960’s
B. Tends To Be Worse In More Populated Than In Less Populated Areas
C. Occurs Because Large Portions Of The Environment Are Owned By Polluters
D. Increases The Cost Of Producing All Goods
E. Issues Are Represented In All Of The Above Answers

2. The Level Of Pollution Increases When
A. A Person Breathes
B. Wastes Are Dumped Into The Environment
C. Wastes Are Dumped Into The Environment At A Higher Rate Than Wastes Are Recycled
D. New Industrial Plant Opens
E. Recycling Increases

3. Which Of The Following Is A Service Provided By The Environment?
A. Use As A Habitat
B. Provision Of Amenities
C. Provision Of Raw Materials
D. Waste Disposal
E. All Of The Above

4. Which Of The Following Best Describes Why Pollution Exists In The Environment?
A. The Environment Has No Capacity To Recycle Waste
B. All Materials Take A Very Long Time To Recycle In The Environment
C. No Waste Can Be Completely Recycled
D. Recycling Processes Fail To Prevent Wastes From Accumulating In The Environment
E. The Environment’s Capacity To Recycle Exceeds The Rate Of Waste Disposal

5. Human Production Processes Do Not Include Which Of The Following Services?
A. Mineral Deposits, Such As Coal And Iron
B. Renewable Resources, Like Timber And Plant Products
C. Technological Advances In Production
D. Recycling Of Waste Materials, Such As Chemical Wastes
E. All Of The Above

6. Marginal Private Cost (Mpc) Always Includes:
A. The Price Of A Good In The Market
B. The Extra Costs Of Production Of One More Unit Of A Good
C. The Additional Benefits Received By Consumers From The Consumption Of The Good
D. The Costs Imposed On Society From Pollution
E. The Expenditures By Government To Control Negative Externalities

7. The Term “Marginal Social Benefit” Means
A. Benefits That Are Just Above The Margin Of Being Zero
B. The Entire Benefits Obtainable From The Activity
C. That Part Of The Benefits Covered By The Costs Of Carrying On The Activity
D. The Change In Total Social Benefits Per Unit Change In The Amount Of The Activity
E. The Benefits Of Minimal Quality Goods And Services

8. If All Benefits From Consuming A Good Go To Consumers, The Demand Curve Is The Same As The
A. Mpc Curve
B. Msc Curve
C. Mpb Curve
D. Supply Curve
E. Benefit Curve

9. When There Are No Externalities, Equilibrium In A Market
A. Maximizes Social Well-Being
B. Equates Quantity Supplied And Quantity Demanded
C. Equates Msb And Msc
D. Equates Mpb And Mpc
E. Does All Of The Above

10. When The Cost Of An Action Falls On Other Than The Person (Or Persons) Responsible For The Action, Which Of The Following Exists?
A. Positive Externality
B. Negative Externality
C. Externality In Consumption
D. Externality In Production
E. External Cost

11. When A Benefit Of An Action Falls On Other Than The Person (Or Persons) Responsible For The Action, Which Of The Following Exists?
A. Positive Externality
B. Negative Externality
C. Externality In Consumption
D. Externality In Production
E. External Cost

12. When The Marginal Private Benefit Of An Activity Does Not Equal The Marginal Social Benefit, Which Of The Following Exists?
A. Positive Externality
B. Negative Externality
C. Externality In Consumption
D. Externality In Production
E. External Cost

13. When The Marginal Private Cost Of An Activity Does Not Equal The Marginal Social Cost, Which Of The Following Exists?
A. Positive Externality
B. Negative Externality
C. Externality In Consumption
D. Externality In Production
E. External Cost

14. Which Of The Following Creates A Positive Externality In Consumption?
A. Polluting A River
B. Playing Loud Music
C. Vaccinations
D. Reducing The Cost Of Producing Of Another Good
E. Strip Mining

15. Which Of The Following Creates A Positive Externality In Production?
A. Polluting A River
B. Playing Loud Music
C. Vaccinations
D. Reducing The Cost Of Producing Of Another Good
E. Strip Mining

16. Which Of The Following Creates A Negative Externality In Consumption?
A. Polluting A River
B. Playing Loud Music
C. Vaccinations
D. Reducing The Cost Of Producing Of Another Good
E. Strip Mining

17. People Have An Incentive To Pollute When
A. There Is Collective Consumption Of An Environmental Service
B. No One Has Property Rights To The Environment
C. It Is Less Expensive To Pollute Than To Clean Up
D. The Mpc Of Polluting < Mpc Of Cleanup
E. All Of The Above

18. As Additional Units Of Pollution Control Are Added, At Some Point Each Additional Unit Adds
A. Less Than The Previous Unit To Total Benefits
B. More Than The Previous Unit To Total Benefits
C. Less Than The Previous Unit To Total Costs
D. More To Total Benefits Than To Total Costs
E. Less To Total Costs Than Total Benefits

19. When Mpc Is Less Than Msc,
A. Firms Will Tend To Produce More Than Is Socially Optimal
B. The Price Of The Product Will Be Higher Than The Competitive Price
C. The Firm Must Be A Monopolist
D. The Firm Will Produce Less Than Is Socially Optimal
E. There Are Positive Externalities In Production

20. Complete Elimination Of Pollution Is Economically Rational When
A. Pollution Is Associated With Illness In Humans
B. For Each Unit Of Pollution, The Cost Of Clean-Up Is Less Than The Benefit From Its Elimination
C. The Pollution Will Likely Affect Future Generations
D. Msc Of Cleanup < Msb Of Cleanup E. None Of The Above; Complete Elimination Is Never Rational 21. Pollution Should Be Completely Eliminated A. When The Marginal Social Benefit Of Control Is Greater Than Or Equal To The Marginal Social Cost Of Control For All Units Of Pollution B. When The Marginal Social Cost Of Control Is Zero C. At No Time, From An Economic Perspective D. All Of The Above E. (A) And (B) 22. The Optimal Level Of Pollution Control Occurs When A. Msb Of Control Equals Msc B. Pollution Is Zero C. Msb Of Control Just Exceeds Msc D. Msb Of Control Is Less Than Msc E. None Of The Above 23. The Market Output Level Tends To Be Socially Optimal When A. Demand Equals Supply In The Market B. All Costs And Benefits Are Private And Msb=Msc C. There Is Neither A Shortage Nor A Surplus Of The Product D. There Are Externalities In Production E. There Are Externalities In Consumption 24. Costs Incurred By The Producer For The Use Of Self-Owned Resources Are Called A. Implicit Costs B. Explicit Costs C. Accounting Costs D. Total Costs E. Marginal Costs 25. Costs Incurred By The Producer To Buy Or Hire Resources Are Called A. Implicit Costs B. Explicit Costs C. Opportunity Costs D. Total Costs E. Marginal Costs 26. Another Term For Implicit Cost Is A. Out-Of-Pocket Costs B. Explicit Costs C. Opportunity Cost D. Total Cost E. Marginal Cost 27. Payment By A Firm To Hire A Worker Is An Example Of A(N) A. Implicit Cost B. Explicit Cost C. Opportunity Cost D. Total Cost E. Marginal Cost 28. An Upstream Paper Mill Pollutes Water Used By A Downstream Water Bottling Plant, Forcing The Latter To Clean The Water It Uses. Which Of The Following Is ? A. Both Will Over-Produce B. The Paper Mill Will Under-Produce And The Bottling Plant Will Over-Produce C. The Paper Mill Will Over-Produce And The Bottling Plant Will Under-Produce D. Both Will Under-Produce E. Neither Will Over-Produce Or Under-Produce 29. Which Of The Following Is A Factor Leading To Pollution? A. People Are Inherently Dirty B. There Are Property Rights To The Environment C. The Environment Is Collectively Consumed D. The Law Of Increasing Returns E. All Of The Above Questions 30 – 34 Refer To The Graph Below. 30. Given The Ppc Tt1, The Cost Of Increasing Pollution Control From C1 To C2 Is A. A1a2 Dollars’ Worth Of Other Goods And Services B. Q1q2 Dollars’ Worth Of Other Goods And Services C. C1c2 Dollars’ Worth Of Pollution Control D. Tq1, Dollars’ Worth Of Other Goods And Services E. Unable To Be Determined Without Additional Information 31. Which Of The Following Could Explain A Shift In The Production Possibilities Curve From Tt1 To Tt2? A. Over-Utilization Of Pollution Control Activities B. Better Techniques Of Pollution Control C. Higher Prices For Other Goods And Services D. Increased Benefits From Pollution Control E. Better Technology For Producing Other Goods And Services 32. A Technological Advance That Improves Pollution Control Methods Would Cause Which Of The Following Changes On The Graph? A Movement From A. A1 To A2 B. C1 To C2 C. Q1 To Q2 D. Tt1 To Tt2 E. 0 To C2 33. Assuming That The Economy Is Operating On The Ppc Tt1, The Benefit Of Increasing Pollution Is Shown On The Graph As A Movement From A. A2 To A1 B. C2 To C1 C. Q2 To Q1 D. Tt2 To Tt1 E. C2 To 0 34. Operating At Which Point On The Ppc Tt1 Will Result In The Most Environmental Degradation? A. T B. T1 C. T2 D. A1 E. A2 Questions 35 – 39 Refer To The Graph Below. 35. Assume That The Current Market Demand And Supply Curves For Z Are D2 And S2. If There Are Negative Social Spillovers Associated With The Production Of Z, A. Government Should Levy A Per Unit Tax On Z To Shift The Supply Curve Toward S1 B. An Output Greater Than 0g Would Improve Resource Allocation C. Government Should Levy A Per Unit Tax On Z To Shift The Demand Curve Toward D1 D. An Output Smaller Than 0g Would Improve Resource Allocation E. Both (A) And (D) 36. Assume That The Current Market Demand And Supply Curves For Z Are D2 And S2. If There Are Positive Social Spillovers Associated With The Production Of Z: A. Government Should Levy A Per Unit Tax On Z To Shift The Supply Curve Toward S1 B. An Output Greater Than 0g Would Improve Resource Allocation C. Government Should Levy A Per Unit Tax On Z To Shift The Demand Curve Toward D1 D. An Output Smaller Than 0g Would Improve Resource Allocation E. Both (A) And (D) 37. Assume That The Current Market Demand And Supply Curves For Z Are D1 And S1 And There Are Positive Social Spillovers Associated With The Consumption Of Z. Which Curve Could Represent The Msb Curve For Z? A. D1 B. D2 C. S1 D. S2 E. None Of The Above 38. Assume That The Current Market Demand And Supply Curves For Z Are D1 And S1 And There Are Positive Social Spillovers Associated With The Production Of Z. Which Curve Could Represent The Msc Curve For Z? A. D1 B. D2 C. S1 D. S2 E. None Of The Above 39. If “Z” Is Pollution Control, Which Of The Following Shifts Illustrates The Effect On The Market For Pollution Control If New Technology To Control Pollution Is Developed? A. D1 To D2 B. D2 To D1 C. S1 To S2 D. S2 To S1 E. None Of The Above Questions 40 – 44 Refer To The Graph Below. 40. If The Discharge Of The Firm Is Q1 Units Per Day And A Tax Of T1 Per Unit Is Placed On Polluted Discharge, The Firm Will A. Clean All Of Its Discharge Of Wastes B. Clean None Of Its Discharge Of Wastes C. Spend A0b0 Dollars On Cleaning The Discharge D. Spend A0q0 Dollars On Cleaning The Discharge E. (A) And (D) 41. A Tax Of T1 Per Unit On Polluted Discharge Will Induce The Firm To A. Clean Its Discharge Up To Q1 Units Per Day Rather Than Pay The Tax B. Pay The Tax Rather Than Clean Discharge Up To Q1 Units Per Day C. Clean Its Discharge Exceeding Q1 Units Per Day Rather Than Pay The Tax D. Pay The Tax On All Units E. (A) And (D) 42. A Tax Of More Than T1 Per Unit On Polluted Discharge Will Induce The Firm To Clean Up A. Q1 B. More Than Q1 C. Q D. More Than Q But Less Than Q1 E. Zero 43. A Tax Of M0 Per Unit On Polluted Discharge Will Induce The Firm To Clean Up A. Q1 B. More Than Q1 C. Q D. More Than Q But Less Than Q1 E. Zero 44. Suppose The Current Tax Is T1 And The Government Wishes To Allow Less Pollution. It Should A. Raise The Tax Above T1 B. Lower The Tax Below T1 C. Shift The Mpc Curve To The Left D. Shift The Mpc Curve To The Right E. Do None Of The Above Questions 45 – 49 Are Based On The Following Information. In A Small City Located On A Lake, The Raw Sewage Of The City Is Dumped Directly Into The Lake. This Has Been A Source Of Distress For Citizens Who Like To Swim, Fish, And Water Ski. A Study Has Been Instituted To Determine What Value The Citizens Place On Pollution Control, And The Results Are Listed In The Following Table. Costs Of Pollution Control Are Also Listed. 45. The Marginal Social Benefit Of The Sixth Unit Of Pollution Control Is A. $495,000 B. $180,000 C. $80,000 D. $60,000 E. $40,000 46. The Marginal Social Cost Of The Fourth Unit Of Pollution Control Is A. Zero B. $30,000 C. $90,000 D. $100,000 E. $120,000 47. At The Economically Efficient Level Of Control, Msb A. Equals Msc B. Equals $30,000 C. Is Lower Than At One Unit Less Pollution Control D. Is Higher Than At One Unit More Pollution Control E. Is All Of The Above 48. As The Units Of Pollution Control Increase, The Msb Of Controlling Pollution Is A. Increasing B. Decreasing C. Constant D. Harder To Define E. Impossible To Determine 49. The Economically Efficient Level Of Pollution Control Is A. 10 Units B. 9 Units C. 8 Units D. 4 Units E. 2 Units Questions 50 – 54 Refer To The Graph Below. 50. Which Curve Is The Firm’s Mpb Curve? A. D B. S C. X1 D. X2 E. None Of The Above 51. Given That The Firm’s Demand And Supply Curves Are D And S, Respectively, Which Curve Is The Msc Curve For The Polluting Firm’s Product? A. D B. S C. X1 D. X2 E. None Of The Above 52. What Is The Equilibrium Quantity Of The Polluting Firm’s Product In A Market With No Pollution Regulation? A. Q1 B. Q2 C. Q3 D. 0 E. It Cannot Be Determined 53. What Is The Efficient Quantity Of The Polluting Firm’s Product? A. Q1 B. Q2 C. Q3 D. 0 E. It Cannot Be Determined 54. The Value Of Well-Being Lost Due To Over-Production Of The Polluting Firm’s Product Is Equal To Area A. Acd B. Abd C. Deg D. Dgf E. This Cannot Be Shown In The Diagram Questions 55-59 Refer To The Graph Below. 55. Which Curve Is The Msc Curve For The Water-Using Firm’s Product? A. D B. S C. X1 D. X2 E. None Of The Above 56. What Is The Quantity Of The Firm’s Product In A Market With No Pollution Regulation? A. Q1 B. Q2 C. Q3 D. 0 E. It Cannot Be Determined 57. What Is The Efficient Quantity Of The Water-Using Firm’s Product? A. Q1 B. Q2 C. Q3 D. 0 E. It Cannot Be Determined 58. The Value Of Well-Being Lost Due To Under-Production Of The Water-Using Firm’s Product Is Equal To Area A. Acd B. Abd C. Bed D. Deg E. Dgf 59. Social Well-Being Would Be Enhanced If Output Of The Water-Using Firm Were To A. Increase From The Equilibrium Output B. Decrease From The Equilibrium Output C. Be Equal To The Equilibrium Output D. Be Greater Than Q3 E. Be Less Than Q1 60. Those Who Suffer From Pollution May Find It To Their Advantage To A. Have The Government Enact Legislation Compelling The Polluters To Take Antipollution Measures B. Bribe The Polluters To Control Their Pollution C. Have The Government Tax Pollution At A Rate That Increases With The Amount Of Pollution Generated D. Do All Of The Above E. Do None Of The Above 61. The Efficient Level Of Pollution Is Zero Only If The A. Marginal Cost Of Pollution Control Is Zero B. Marginal Benefit Of Pollution Control Is Zero C. Mpb Of Pollution Control Equals Msb D. Mpc Of Pollution Control Equals Msc E. Mpc Of Pollution Control Equals Mpb 62. Requiring Automobiles To Pass Emissions Tests Before Being Allowed On The Road Is An Example Of A(N) A. Direct Pollution Control B. Indirect Pollution Control C. Pollution Tax D. Market Solution To Pollution E. Positive Externality In Consumption 63. If A Pollution Tax Is Placed On A Firm Emitting Pollution, The Firm Will Pay The Tax, Rather Than Reduce Its Emissions, As Long As The Tax Is A. Above Its Mpc Of Pollution Control B. Below Its Mpc Of Pollution Control C. Above The Msc Of Pollution Control D. Below The Msc Of Pollution Control E. Reasonable 64. If A Pollution Tax Is Placed On A Firm Emitting Pollution, The Firm Will Treat Pollution, Rather Than Pay The Tax, As Long As The Tax Is A. Above Its Mpc Of Pollution Control B. Below Its Mpc Of Pollution Control C. Above The Msc Of Pollution Control D. Below The Msc Of Pollution Control E. Reasonable 65. In A Pollution Rights Market, A. Firms Buy Licenses To Pollute B. Firms Sell Licenses To Pollute C. Environmental Groups Can Reduce Pollution By Buying Licenses To Pollute D. The Government Can Determine The Level Of Pollution By The Number Of Licenses It Issues E. All Of The Above 66. Pollution Rights Markets A. Have Been Shown To Work In Theory, But Not In Practice B. Have Never Been Used In The Real World C. Are Used Around The World, But Not In The United States D. Have Been Used To Reduce Sulfur Dioxide Emissions E. Have Not Been Effective In Controlling Sulfur Dioxide Emissions 67. Direct Or Mandatory Control Imposed By Government On Polluters Presupposes That The Regulatory Body Can A. Determine What The Desirable Limits Of Pollution Are B. Determine Where The Marginal Costs Of Pollution Are Greatest C. Enforce Standards D. B) And C) E. All Of The Above 68. An Advantage Of Direct Regulation As A Method Of Controlling Pollution Is That A. The Optimal Level Of Pollution Control Can Be Easily Determined B. Pollution Reduction Quotas Can Be Varied To Remove Pollution Where It Is Least Costly C. Emission Control Standards Can Be Enforced Readily D. Changes In The Market Are Automatically Reflected In The Regulation E. It Seems Straightforward And Fair 69. Which Of The Following Approaches Would An Economist Propose To Address Industrial Pollution Of A River? A. Ban All Dumping Of Pollutants Near Or Into The River B. Limit Each Plant To A Maximum Amount Of Pollutant Emission C. Charge Each Polluter A Fixed Amount For Each Unit Of Pollutant Dumped Into The River D. Direct Pollution Control Regulation E. Command And Control Pollution Regulation 70. With Tradable Pollution Licenses To Control Pollution, Reductions In Total Pollution A. Can Be Achieved By Having Government Buy Back Some Of The Licenses B. Can Be Achieved By Having Government Sell More Licenses C. Requires The Government To Buy Back All Existing Licenses And Re-Issue New Licenses D. Cannot Be Achieved E. Is Never Economically Optimal 71. A Market For Pollution Rights Is An Efficient Approach To Pollution Control Because A. It Is Cheap To Implement B. It Leads To The Complete Elimination Of Pollution C. It Causes The Pollution To Be Eliminated At The Lowest Cost D. It Is Easy To Enforce E. None Of The Above 72. Production And Consumption In The Cigarette Market Is Too High Because A. Producers Do Not Care About The Health Of Their Customers B. Mpc Is Greater Than The Msc C. Mpb Is Greater Than Msb D. Msb Is Greater Than Mpb E. Mpb Is Less Than Msb 73. When Pollution Is Not Regulated In The Market, Polluting Firms Will A. Under-Utilize Resources And Charge High Prices B. Under-Utilize Resources And Charge Low Prices C. Use The Appropriate Level Of Resources, But Charge High Prices D. Be Very Profitable E. Over-Utilize Resources And Charge Low Prices 74. For A Tax On Pollution To Be Effective, It Must Be A. Placed On The Firm Polluting B. Greater Than The Cost Of Cleaning-Up The Pollution C. Placed On The Consumer D. Less Than The Cost Of Cleaning Up The Pollution E. Set At A Reasonable Rate 75. Suppose The Government Imposes A Tax On Electric Companies For Each Unit Of Sulfur They Emit. Which Of The Following Would Not Occur? A. Higher Prices For Electricity B. Lower Prices For Electricity C. Electric Companies Shifting To Low Sulfur Oil D. A Decrease In The Amount Of Electricity Produced E. A Shift To Alternative Energy Resources 76. If Jim Starts A Landscape Business And Uses A Truck And A Tractor That He Owns To Perform Landscaping Projects, We Can Conclude That A. The Costs Of The Truck And The Tractor Are Low B. That The Costs Of The Truck And The Tractor Are Explicit Costs C. There Is No Cost To The Business Since He Owns Both The Truck And The Tractor D. That The Costs Associated With Both The Truck And The Tractor Are Implicit Costs E. He Should Ask His Accountant How To Handle The Costs 77. When Firms Make Decisions About Output And About The Amount Of Pollution That They Produce, Without Government Regulation A. Firms Only Consider Their Private Benefits And Costs When Making Their Choices B. Firms Choose Not To Pollute Because It’s Bad For Their Public Image C. Social Costs Are Always Reflected In The Market Prices Firms Pay For Their Inputs D. Pollution Costs Are Passed On To Consumers In The Form Of Higher Prices E. Government Regulation Is Used Only In Command Economies 78. The Use Of Pollution Rights Licenses Can Improve Efficiency And Reduce Pollution Since A. Pollution Rights Licenses Do Not Improve Efficiency Nor Reduce Pollution B. The Licenses Give Environmental Groups Pollution Reducing Permits C. The Cost To Purchase These Licenses Means That Social Costs Are Reflected In The Firm’s Costs, Giving The Firm An Incentive To Reduce Pollution When It Is Economically Beneficial D. Such Licenses Improve Efficiency By Pricing Pollution But The Licenses Do Not Reduce Pollution E. There Is No Amount Of Pollution That Is Desirable Or Efficient True / False Questions 79. Pollution Occurs When The Environment Cannot Recycle All The Waste Dumped Into It. 80. Air Pollution Did Not Cause Great Concern Until The Last Few Decades. 81. Water Pollution Is Measured In Terms Of The Amount Of Toxins In The Water. 82. The Level Of Dissolved Oxygen Is An Important Measure Of Water Quality. 83. Pollution Is Generated Because Firms Use Inefficient Production Processes. 84. Pollution Consists Of Loading The Environment With Wastes That Are Not Completely Recycled, Are Not Recycled Fast Enough, Or Are Not Recycled At All. 85. Pollution Results In Resource Misallocation. 86. The “Marginal Social Benefit” Of An Economic Activity Is The Benefit That Is Just Above The Margin Of Being Zero. 87. If The Marginal Social Cost Of Attaining A Certain Level Of Water Purity Exceeds The Marginal Social Benefit, The Level Of Water Purity Should Be Decreased. 88. Net Social Benefits Will Always Be Increased By Increasing Pollution Control If The Marginal Social Benefit Of The Increase In Pollution Control Is Greater Than The Marginal Social Cost Of Additional Control Efforts. 89. Pollution Did Not Exist In Any Appreciable Amounts Prior To The Industrial Revolution. 90. The Optimum Level Of Pollution Is Zero. 91. The Costs Of Pollution Control To A Society Are Measured By The Value Of The Goods And Services That Must Be Given Up To Have The Control. 92. Complete Elimination Of Pollution Would Only Make Economic Sense If The Cost To Eliminate The Last Unit Of Pollution Is Less Than The Benefit From Its Elimination. 93. The Socially Optimal Level Of Production For Any Good Or Service Is Found Where Mpb=Mpc. 94. Deodorant May Be An Example Of A Good For Which Msb > Mpb.

95. If The Mpc Of Production Is Less Than The Msc, The Market Will Produce Too Much Of The Product.

96. Enjoying The Smell Of Bread Baking From Your Neighbor’s House Is An Example Of A Negative Externality.

97. If Your Snoring Keeps Your Roommate From Sleeping, You Roommate Is Experiencing A Negative Externality.

98. Pollution Is An Example Of A Negative Externality In Consumption.

99. Implicit Costs Are Opportunity Costs.

100. Explicit Costs Are Equal To The Value Of Self-Owned Resources.

101. Implicit Costs Are Also Known As Accounting Costs.

102. Direct Controls, Such As Setting Emission Standards For Automobiles, Will Achieve A Pollution Free Environment.

103. When A Firm Pollutes, Its Product Will Be Under-Priced And Over-Produced.

104. An Increase In A Tax Per Unit Of Polluted Discharge Will Decrease The Amount Of Pollution.

105. If Polluters Were Forced To Pay The Full Cost Of Their Activities, The Price Of Goods Produced By Polluting Firms Would Rise.

106. Direct Prohibition Of Pollution Has The Disadvantage Of Providing Economic Incentives For Polluters Not To Pollute.

107. In The Case Of An Upstream Paper Mill That Pollutes Water Used By A Downstream Power Plant Forcing The Latter To Clean The Water It Uses, The Costs Of Pollution By The Paper Industry Are Borne By Both The Consumers And Producers Of Electricity.

108. Whenever Consumers Are Willing To Pay More For An Item Than It Costs To Produce It, It Is Efficient To Expand Output.

109. Governmental Regulations Requiring Anti-Pollution Devices On Automobiles Result In A Decrease In The Demand For Automobiles And An Increase In Price.

110. Federal Grants Made To State And Local Governments For The Construction Of Sewage Treatment Facilities Encourage Private Industries To Develop Low Pollution Methods Of Production.

111. The Optimum Level Of Pollution Control Is Where Marginal Social Benefit Equals Marginal Social Cost.

112. Incentives To Pollute Stem From An Absence Of Property Rights In The Environment And From The Collectively Consumed Nature Of Whatever Is Being Polluted.

113. A Major Advantage Of Using Taxes To Control Pollution Is That They Provide An Incentive To The Polluter To Seek Improved Ways To Clean Up Discharge.

114. The Most Efficient Way To Control Pollution Is Direct Prohibition Of Polluting Activities By The Government.

115. Under The Private Property Rights Approach To Pollution Control, The Industry Or Firm That Most “Values” The Right To The Environment Will Control Environmental Services.

116. It Is Efficient For Regulatory Bodies To Induce Reduction In Pollution When The Marginal Social Cost Is Lowest, Regardless Of Which Firms Are The Worst Polluters.

117. A Pollution Rights Market Can Be An Efficient Method Of Pollution Control.

118. When Pollution Rights Markets Are Created, Those Firms Who Can Reduce Pollution Most Cheaply Will Do So.

119. When Pollution Rights Markets Are Used, The Overall Level Of Pollution Is Reduced If The Government Sells Additional Licenses.

120. The Establishment Of Clearly Defined Property Rights To The Environment Would Lead To An Elimination Of Pollution.

121. The Establishment Of Property Rights To The Environment Would Not, On Its Own, Lead To The Optimal Level Of Pollution Control.

122. Deodorant Is An Example Of A Collectively Consumed Good.

123. Polluting Firms Charge Prices Below What Would Exist Without Pollution.

124. The Creation Of A Market For Pollution Rights Eliminates Pollution Where It Is Cheapest To Do So.

125. When A Firm Has To Clean Environmental Resources Prior To Using Them, The Consumers Of That Firm’s Products Are Charged Higher Prices Than Would Exist In The Absence Of Pollution.

126. To Date, There Has Been No Formal Use Of Pollution Rights Markets.

127. Enforcement Is A Problem With All Methods Of Pollution Regulation.

128. Pollution Regulation Works Well Because Economists, Not Politicians, Are In Charge Of Regulatory Bodies.

Chapter 05

Economics Of Crime And Its Prevention: How Much Is Too Much?

Multiple Choice Questions

1. An Immoral Act Is
A. Easy To Define
B. Always Illegal
C. Different In Different Societies
D. Defined Consistently Across The United States
E. All Of The Above

2. Illegal Acts Are
A. Also Immoral
B. Ones That Society Has Determined That It Is Better Off Allowing
C. Designated As Such By The Criminal Justice System
D. Prevented Once A Law Is Passed
E. All Of The Above

3. Aggravated Assault Is An Example Of A(N)
A. Violent Crime
B. Crime Against Property
C. Illegal Trafficking Of Goods And Services
D. “Other” Crime
E. None Of The Above

4. Arson Is An Example Of A(N)
A. Violent Crime
B. Crime Against Property
C. Illegal Trafficking Of Goods And Services
D. “Other” Crime
E. None Of The Above

5. Prostitution Is An Example Of A(N)
A. Violent Crime
B. Crime Against Property
C. Illegal Trafficking Of Goods And Services
D. “Other” Crime
E. None Of The Above

6. Which Of The Following Statements Is Correct?
A. Criminal Acts Are Illegal Acts Whether Or Not Those Acts Are Immoral
B. Some Immoral Acts Are Criminal Acts And Some Are Not
C. Some Acts Are Criminal Because They Lead To Consequences The Criminal Is Unaware Of
D. Some Acts That Might Result In Chaotic Conditions Are Made Criminal By Legislative Bodies
E. All Of The Above

7. Which Of The Following Exists When An Individual Consumes Benefits From A Public Good But Does Not Pay For Its Cost?
A. Free-Riding
B. A Negative Externality In Consumption
C. A Negative Externality In Production
D. Implicit Costs
E. Psychic Costs

8. The Free-Rider Problem Refers To
A. Those Who Receive The Benefits Of A Public Good Without Paying A Part Of Its Cost
B. Those Who Ride Public Transportation Without Paying Their Fares
C. Those Who Ride In Rodeos And Do Not Win Prizes
D. Jockeys Who Are Not Paid
E. None Of The Above

9. Which Of The Following Goods Or Services Is A Public Good?
A. Polio Immunization
B. Stamp Collection
C. A Smoke Detector
D. National Defense
E. A Burglar Alarm

10. Government Can Effectively Remedy The Free-Rider Problem By
A. Requiring All Who Receive The Benefits Of A Public Good Or Service To Pay Appropriate Taxes For It
B. Imposing A Tax On Automobiles And All Other Forms Of Transportation
C. Eliminating All Forms Of Transportation
D. Banning Private Crime Prevention Activities
E. None Of The Above

11. A Characteristic Of A Public Good Or Service Is
A. That No Individual Can Identify Specifically The Part Of It That He Or She Consumes
B. Once The Good Is Provided, It Is Difficult Or Impossible To Exclude Anyone From Using It
C. If It Is Provided Privately, It Generates A “Free-Rider” Problem
D. One Person’s Use Does Not Decrease The Quantity Available For Others
E. All Of The Above

12. Which Of The Following Is Most Likely A Public Good?
A. A College Education
B. A Smoke Detector
C. Smallpox Immunization
D. Elementary Education
E. Space Exploration

13. A Group Project Has Been Assigned And Most Of The Work Ends Up Being Produced By Only One Or Two Of The Group’s Members. This Is An Example Of
A. The Free-Rider Problem
B. Diminishing Marginal Returns
C. The Opportunity Cost Principle
D. Equimarginal Principle
E. An Immoral Act

14. Immunization For Polio Is An Example Of A(N)
A. Semi Private Good
B. Public Good
C. Private Good
D. Good Which The Market Will Efficiently Produce
E. Externality In Production

15. Which Of The Following Statements Is ?
A. The Government In A Private Enterprise Economy Confines Its Production Of Goods And Services To Public Goods
B. A Major Difference Between Private Enterprise Economic System And A Socialistic Economic System Is That The Government Of The Latter Is Responsible For The Production Of Most Private, As Well As Public And Semi-Private, Goods
C. Governments Of Private Enterprise Systems Leave The Bulk Of Private Goods To Be Produced By Private Businesses
D. Governments Of Private Enterprise Economies Play A Relatively Important Role In The Provision Of Semi-Private Goods
E. None Of The Above

16. The Costs Of Resources Used In Crime Prevention
A. Are Equal To The Value Those Resources Would Have Provided In Their Best Alternative Use
B. Are Equal To The Value Of These Resources In Reducing Crime
C. Can Be Approximated By The Expenditures On Criminal Activities
D. Both (A) And (C)
E. All Of The Above

17. From An Economic Point Of View, Crime Prevention Activities Should Be Expanded To The Point At Which
A. Their Marginal Social Benefit No Longer Exceeds Their Marginal Social Cost
B. All Crime Is Stamped Out
C. All Crimes Against Persons Are Eliminated
D. Their Total Gross Benefits Are Maximum
E. None Of The Above

18. The Marginal Cost Of A Good Is
A. The Change In Total Product Associated With The Change In Resource Inputs
B. The Average Cost Of The Product
C. The Total Cost Of The Good Divided By Output
D. The Change In Total Cost Per Unit Change In Output
E. None Of The Above

19. According To The Equimarginal Principle, A City’s Crime Prevention Budget Should Be Allocated Such That
A. The Last Dollar Spent On Detection And Apprehension Of Criminals Should Yield The Same Addition To People’s Benefits As The Last Dollar Spent Determining Guilt Or Innocence And The Last Dollar Spent On Corrections And Punishment
B. Total Benefits Of Crime Prevention Are Equal To Total Costs
C. Expenditure On Court Services Proceeds Exceed Those On The Police Force Because Services Of A Lawyer Are More Expensive Than Those Of A Policeman Or Policewoman
D. The Same Number Of Police Officers Patrol Each Square Block At The Margins Of The City’s Residential Area
E. The Same Number Of Police Officers Are Used Per Square Block In The City’s Suburbs As In Its Downtown Area

20. Suppose An Auto Worth $25,000 Is Stolen. The Economic Cost Of This Theft, From Society’s Point Of View, Does Not Include
A. The $25,000 The Auto Is Worth
B. The Value Of The Resources Expended By Society Attempting To Capture The Thief
C. The Value Of The Inconvenience Caused To The Owner
D. The Cost Of Resources Used To Reduce Car Theft
E. All Of The Above

21. Suppose The Total Social Benefits Of Crime Protection Increase From $800,000 To $900,000 And Total Social Costs Increase From $650,000 To $800,000, With The Addition Of Another Unit Of Crime Prevention Services.
A. The Msb>Msc And Crime Prevention Activities Should Be Expanded
B. The Msb=Msc And The Level Of Crime Prevention Is Optional
C. The MsbTsc And Crime Prevention Should Be Expanded
E. None Of The Above

22. Police Officers Should Be Hired Up To The Point Where
A. The Public Feels Safe In Their Homes
B. The Crime Rate Falls To Zero
C. The Benefit Of The Last Officer Hired Is Just Equal To What Its Cost To Hire Her
D. The Benefit Of The Last Officer Hired Exceeds The Cost
E. It Is Not Possible To Tell Without Further Information

23. Which Of The Following Is Not An Economic Cost Of Crime? The
A. Lost Earnings Of Victims Of Crime
B. Value Of Property Destroyed By Criminal Activities
C. Dollars Spent On Illegal Drugs
D. Tax Dollars Spent On Crime Prevention
E. Suffering Experienced By Crime Victims

24. Economic Analysis Of Crime Can
A. Determine What Activities Should Be Considered Illegal
B. Determine What The Economic Impact Will Be Of Making Certain Activities Illegal
C. Tell Us Which Activities Should Be Punishable
D. Tell Us How Much It Will Cost To Eliminate Crime
E. Do All Of The Above

25. Marginal Social Benefits Of Crime Prevention Activities
A. Are The Increase In The Value Of Such Activities To The Community Resulting From A One-Unit Increase In Such Activities
B. Are Difficult To Calculate
C. Usually Decrease With Additional Units Of Those Activities
D. Include A Decrease In The Suffering Of Crime Victims
E. All Of The Above

26. If Society Receives No Additional Benefit From Increasing Crime Prevention Activities, The Msb Of Crime Prevention
A. Equals 0
B. Is Increasing
C. Is Decreasing
D. Is Equal To The Msc Of Crime Prevention
E. Must Rise In The Long Run.

27. If Increasing Police Patrols In A Neighborhood Requires Paying Officers Overtime, Then The Marginal Cost Of Additional Police Patrols
A. Increases
B. Decreases
C. Equals Msb
D. Must Fall Before It Is Efficient To Have More Patrols
E. Are Too High

28. Assume Police Officers And Prison Guards Earn $30,000. Hiring A Police Officer Changes The Total Benefits Of Crime Prevention From 100 To 120, While Hiring A Prison Guard Increases Total Benefits From 100 To 115. If The Crime Prevention Budget Is Increased By $30,000, Which Of The Following Is The Most Efficient Way To Spend The Money?
A. Hire A Guard
B. Hire A Police Officer
C. Hire One Guard And One Police Officer
D. Hire A Half Time Guard And A Half Time Police Officer
E. Do Not Spend The Additional Money

29. If The Private Benefit Of Buying A Car Alarm Is $250 And The Social Benefit Of The Car Alarm Is $350, Is It Optimal For You To Buy A Car Alarm If It Costs $300?
A. Yes, Because Benefits Exceed The Cost
B. Yes, Because Msb > Msc
C. No, Because Private Benefits Are Less Than Private Cost
D. No, Because Mpb < Msc
E. The Outcome Is The Same Whether You Buy The Alarm Or Not

30. Additional Expenditures Should Not Be Made On Police Protection If The Additional Cost Of Police Protection
A. Is Less Than The Additional Benefit
B. Would Increase The Msb Of Fire Protection By More
C. Is More Than The Change Total Social Benefits As A Result Of The Additional Police Protection
D. Would Cause A Larger Increase In Total Social Benefits If Spent Elsewhere
E. Is All Of The Above

31. An Additional Expenditure On Crime Prevention Should Be Allocated To The Activity Where
A. Msb Is Greatest
B. Msc Is Lowest
C. Tsb Is Greatest
D. Tsc Is Lowest
E. Tsc Is Highest

Questions 32 – 36 Refer To The Table Below.

32. The Marginal Social Benefit Of The Third Unit Of Crime Prevention Is
A. 200
B. 180
C. 160
D. 140
E. 90

33. The Marginal Social Cost Of The Fourth Unit Of Crime Prevention Is
A. 270
B. 180
C. 160
D. 90
E. 60

34. The Efficient Number Of Units Of Crime Prevention Is
A. 1
B. 2
C. 3
D. 4
E. 5

35. As More Crime Prevention Is Added, The Msb Of Crime Prevention
A. Increases
B. Decreases
C. Becomes Higher Than Mcs
D. Does Not Change
E. Is More Difficult To Determine

36. The Net Benefit Of An Additional Unit Of Crime Prevention To Society Is Highest With How Many Units Of Crime Prevention?
A. 0
B. 1
C. 3
D. 5
E. 6

Questions 37 – 41 Refer To The Table Below.

The Cost Of Each Police Officer Is $20,000; The Cost Of Each Patrol Car Is $10,000.

37. If The Total Budget Is $100,000, What Is The Most Efficient Allocation Of The Crime Prevention Budget?
A. 1 Police Officer; 8 Patrol Cars
B. 2 Police Officers; 6 Patrol Cars
C. 3 Police Officers; 4 Patrol Cars
D. 4 Police Officers; 2 Patrol Cars
E. 5 Police Officers; 0 Patrol Cars

38. If The Police Department Gets An Additional Allocation Of $40,000, How Should The Money Be Allocated Between Police Officers And Patrol Cars?
A. 2 Police Officers; 0 Patrol Cars
B. 2 Police Officers; 1 Patrol Car
C. 1 Police Officer; 1 Patrol Car
D. 1 Police Officer; 2 Patrol Cars
E. 0 Police Officers; 4 Patrol Cars

39. The Net Social Benefit Of The Third Patrol Car Is
A. $11,000
B. $15,000
C. $20,000
D. $36,000
E. $45,000

40. The Total Benefit Of Hiring Three Police Officers Is
A. $18,000
B. $48,000
C. $60,000
D. $148,000
E. $249,000

41. The Net Social Benefit Of Hiring One Police Officer And Buying One Patrol Car Is
A. $40,000
B. $41,000
C. $80,000
D. $120,000
E. $150,000

42. If Abortion Were Made Illegal Throughout The United States,
A. The Cost Of Abortion Services Would Rise
B. The Quality Of Abortion Services Would Fall And Become Less Standardized
C. The Supply Of Abortion Services Would Decrease
D. The Demand For Abortion Services Would Decrease
E. All Of The Above

43. The More Abortions A Doctor Performs, The Fewer The Appendectomies He Can Perform. Measuring The Cost Of An Abortion In Terms Of The Number Of Appendectomies He Must Forego Performing Is An Illustration Of The
A. Economies Of Mass Production
B. Law Of Diminishing Returns
C. Opportunity Cost Principle
D. Law Of Comparative Advantage
E. Law Of Demand

44. In Any City With A Given Crime Prevention Budget, Additional Suppression Of Prostitution
A. Will Necessarily Result In Unemployment
B. Is Always Economically And Morally Defensible
C. Is Never Defensible Economically Or Morally
D. Will Usually Be Achieved At The Expense Of An Increase In Other Kinds Of Crime
E. All Of The Above

45. Which Of The Following Is An Economic Effect Of Prohibition Of Alcohol?
A. A Reduction In The Supply, A Decrease In Price, And A Decrease In The Quality Of Liquor
B. An Increase In Supply, A Decrease In Price, And An Increase In The Quality Of Liquor
C. A Decrease In Supply, An Increase In Price, And No Change In The Quality
D. A Decrease In Supply, An Increase In Price, And A Decrease In Quality
E. None Of The Above

46. If A Law Is Passed Making It Illegal For Unlicensed Barbers To Cut Hair, Which Of The Following Will Result?
A. Higher Quality Haircuts
B. Higher Priced Haircuts
C. Cleaner, More Sanitary Barber Shops
D. Lower Priced Haircuts
E. More Barbers In The Trade

47. Suppose A Poor Person Steals $10,000 From A Middle Income Person. Economic Analysis Tells Us That
A. There Is An Economic Loss For The Society As A Whole
B. There Is An Economic Gain For The Society As A Whole
C. A Public Good Will Usually Be Purchased With The Money
D. We Cannot Be Sure Whether There Is Economic Gain Or Loss For The Society As A Whole
E. The Benefit To The Poor Person Exceeds The Cost To The Middle Income Person

48. The Most Likely Economic Effects Of The Legalization Of Marijuana Are
A. An Increase In Both Supply And Demand
B. A Fall In The Price Of Marijuana
C. An Increase In Marijuana Use
D. An Increase In The Quality Of Marijuana
E. All Of The Above

Questions 49 – 53 Refer To The Graph Below.

49. Which Of The Following Shifts Best Represents The Likely Effect Of Legalizing Marijuana?
A. D1 To D2
B. D2 To D1
C. S2 To S1
D. D1 To D2 And S1 To S2
E. D2 To D1 And S1 To S2

50. If The Market For Marijuana Changes From Illegal To Legal, Supply Will
A. Increase
B. Decrease
C. Shift To The Left
D. Not Be Affected
E. Become Steeper

51. Curves D1 And S1 Represent The Market For Marijuana If It Is Illegal. Legalization Of Marijuana Will Cause Equilibrium Price And Quantity To Change To
A. P1 And Q2
B. P2 And Q1
C. P3 And Q4
D. P4 And Q3
E. None Of The Above

52. If The Market For Marijuana Changes From Legal To Illegal, Demand Will
A. Increase
B. Decrease
C. Shift To The Right
D. Not Be Affected
E. Become Steeper

53. In Addition To The Change In Supply, Demand, Price, And Quantity, Legalization Of Marijuana Would Have Which Of The Following Effects?
A. Improved Quality
B. Less Criminal Activity
C. A Decrease In Resources Needed For Crime Prevention
D. All Of The Above
E. None Of The Above

Questions 54 – 58 Refer To The Graph Below.

54. Which Of The Following Shifts Best Represents The Likely Effect Of Prohibition On The Market For Beer?
A. D1 To D2
B. D2 To D1
C. S2 To S1
D. D1 To D2 And S1 To S2
E. D2 To D1 And S2 To S1

55. With Prohibition, Supply In The Market For Beer Will
A. Increase
B. Decrease
C. Shift To The Right
D. Not Be Affected
E. Become Flatter

56. With Prohibition, Demand In The Market For Beer Will
A. Increase
B. Decrease
C. Shift To The Right
D. Not Be Affected
E. Become Flatter

57. Curves D2 And S2 Represent The Market For Beer If It Is Legal. Prohibition Will Cause Equilibrium Price And Quantity To Change To
A. P1 And Q2
B. P2 And Q1
C. P3 And Q4
D. P4 And Q3
E. None Of The Above

58. In Addition To The Change In Supply, Demand, Price, And Quantity Of Beer, Prohibition Would Have Which Of The Following Effects?
A. Improved Quality
B. Less Criminal Activity
C. A Decrease In Resources Needed For Crime Prevention
D. All Of The Above
E. None Of The Above

59. Which Of The Following Would Not Result From The Legalization Of Marijuana?
A. A Fall In The Price Of Marijuana
B. An Increase In The Quality Of Marijuana
C. A Significant Increase In The Supply Of Marijuana
D. A Significant Increase In The Demand For Marijuana
E. A Decrease In The Supply Of Marijuana

60. People Choose To Participate In Criminal Activities Because
A. Their Implicit Costs Are Low
B. They Have A Strong, Unrestrained Emotion
C. The Probability Of Getting Caught Is Low
D. The Potential Return Is High
E. All Of The Above

61. Economics Explains The Decision To Participate In Criminal Activities Most Often In The Case Of
A. Violent Crimes
B. Crimes Of Passion
C. Murder
D. Trafficking In Illegal Substances
E. Vandalism

62. If You Are Willing To Take A Pay Cut To Live Near A Ski Resort, The Ski Resort Provides You With
A. Free Ski Lessons
B. Psychic Benefits
C. Opportunities For Advancement
D. Marginal Social Benefits
E. Marginal Social Costs

63. If Income From The Sale Of Illegal Goods Exceeds The Production Costs Of The Goods, Which Of The Following Is ?
A. The Criminal Earns A Profit
B. Crime “Pays”
C. Revenue Plus Psychic Income Exceeds All Costs
D. Income More Than Covers Explicit, Implicit, And Psychic Costs
E. All Of The Above

64. Which Of The Following Is An Explicit Cost Of An Illegal Marijuana Growing Operation? The Cost Of
A. Land
B. Electricity
C. Fertilizer And Pesticides
D. Labor
E. All Of The Above

65. Which Of The Following Is An Implicit Cost Of An Illegal Marijuana Growing Operation?
A. Foregone Income Due To Time Spent Managing The Operation
B. Lost Time If The Manager Is Caught
C. Lost Liberty If The Manager Is Jailed
D. The Value Of The Time Spent Avoiding Detection
E. All Of The Above

66. Which Of The Following Does Not Go Into The Calculation Of The Implicit Cost Of A Marijuana Growing Operation?
A. The Probability Of Getting Caught
B. The Severity Of Potential Jail Sentences
C. The Time It Takes To Tend The Crop
D. Payments For Fertilizer And Pesticides
E. None Of The Above (They All Go Into The Calculation Of Implicit Costs)

67. Which Of The Following Decreases A Person’s Implicit Cost Of Engaging In The Illegal Production Of Marijuana?
A. Concern About Social Standing
B. Unemployment
C. An Intense Fear Of Incarceration
D. A High Probability Of Getting Caught
E. All Of The Above

68. When An Individual Incurs Costs In The Form Of Negative Personal Satisfaction, The Costs Are
A. Opportunity Costs
B. Implicit Costs
C. Psychic Costs
D. Psychic Income
E. Externalities

69. Which Of The Following Increases The Chances That A Person Will Engage In Criminal Activity?
A. A High Perceived Probability Of Getting Caught
B. A Low Potential Pay-Off From The Crime
C. The Ability To Restrain Emotions
D. A Low Opportunity Cost
E. None Of The Above

70. When An Individual Receives Benefits From A Business Endeavor In The Form Of Personal Satisfaction, The Benefits Are Known As
A. Opportunity Costs
B. Implicit Costs
C. Psychic Costs
D. Psychic Income
E. Externalities

71. Which Of The Following Will Increase The Implicit Costs Of Committing A Crime?
A. Decreased Crime Prevention Expenditures
B. Decreased Probability Of Getting Caught
C. Improved Job Opportunities
D. More Lenient Sentencing
E. Less Severe Penalties

72. Which Of The Following Could Explain Why Criminals Commit Crimes That Are Punished By The Death Penalty?
A. They Perceive That The Probability Of Getting Caught Is Zero
B. The Crime Is A “Crime Of Passion.”
C. Their Opportunity Cost Is Zero
D. The Benefit Of The Crime Is Infinite
E. All Of The Above

73. Which Of The Following Policies Could Increase The Cost Of Committing Crimes?
A. Job Training Programs
B. Increased Employment Opportunities
C. Higher Crime Prevention Budgets
D. More Severe Penalties
E. All Of The Above

74. Some People Give Up High-Paying City Jobs To Live Much Simpler, Rural Lives. Which Of The Following Is A Sound Economic Explanation For This?
A. The Very High Psychic Income They Receive From The Simple Way Of Life
B. The Lower Cost Of Living In The Country
C. The Fear Of Crime In The City
D. The Fact That Rural Jobs Are Easier
E. None Of The Above

75. Job Training Programs, Remedial Education Courses, And Recreational Activities Might Lead To Reduced Crime Rates In Depressed Areas By
A. Providing Jobs To Instructors And Counselors
B. Increasing The Opportunity Costs Of Committing Crimes
C. Improving The Public’s View Of Their Community
D. Providing Psychic Income To Organizers
E. None Of The Above

76. An Example Of A Semi-Private Good Would Be
A. Measles Inoculation Programs
B. A Neighborhood Crime Watch Group
C. Talking On A Cell Phone During The Screening Of A Movie
D. All Of The Above Are Semi-Private Goods
E. None Of The Choices Are Semi-Private Goods

77. Consumer Ratings Of Products Online, Like The Zagat’s Restaurant Guide And Epinions Can Be Considered Examples Of
A. Private Goods
B. Public Goods
C. Semi-Private Goods
D. Experience Goods
E. Worthless, Since You Don’t Know Who Is Doing The Reviewing

78. Economists Think That You Can Analyze Why Individuals Commit Crimes Because
A. Criminals Are Always Trying To Obtain Monetary Gains
B. Criminals Weigh The Costs And Benefits Associated With The Costs Of Committing A Crime
C. Crime Has Costs To Society
D. All Of The Above
E. It Is Not Possible To Analyze The Commission Of Crimes Using Economic Analysis

True / False Questions

79. Murder Is Both Illegal And Immoral.

80. Current Reports On Crime Are Concerned Solely With The Number Of Crimes Committed And Not With Dollar Estimates Of Their Cost.

81. The Criminality Of Specific Acts Can Be Ascertained By Evaluating Their Morality Or Immorality.

82. Vandalism Is A Violent Crime.

83. Violent Crimes Are Crimes Against Persons.

84. Crime Prevention Is A Public Good And Is Subject To The Free-Rider Problem.

85. The Free-Rider Problem Occurs When People Cannot Be Excluded From The Benefits Of A Public Good Even Though They Do Not Help Pay For Production Of It.

86. Government Can Effectively Remedy The Free-Rider Problem By Taxing All Who Receive Benefits Of A Public Good.

87. Automobiles Can Be Considered Semiprivate Goods, Since They Produce Positive Externalities.

88. Semi-Private Goods And Services Yield Identifiable Benefits To The One Who Consumes Them, But Their Consumption By One Person Yields Spillover Benefits To Other Persons.

89. Thanks To The Data-Collecting Activities Of The U.S. Department Of Justice, We Now Have Very Good Estimates Of The Costs Of Crime.

90. Society’s Standards Of Social Values Are An Important Determinant Of The Level Of Criminal Activity.

91. Laws Prohibiting Abortions Rest On Moral Grounds Rather Than Economic Grounds.

92. Group Projects Can Suffer From A Free-Rider Problem.

93. A Polio Vaccine Is An Example Of A Good That Is Semi-Private.

94. Public Goods Include Things Like Concerts And Theater Performances.

95. Free-Riders Can Be Useful In Group Work Situations Because They Cause The Work To Be Completed By Those Members Of The Group Who Are Best At The Assigned Tasks.

96. From The Viewpoint Of A Society As A Whole, Theft Represents A Transfer Of Income To Thieves From Victims Of Theft.

97. If The Correct Amount Has Been Budgeted For Crime Prevention Activities, The Last Dollar Spent Should Yield Approximately One Dollar’s Worth Of Additional Benefits.

98. Crime Prevention Activities Should, If Effective, Raise Gdp Above The Level That It Would Be In Their Absence.

99. The Economic Cost Of Crime Prevention Is The Value Of The Goods And Services That Could Have Been Produced Using Resources Put Into Crime Prevention.

100. Marginal Social Benefits Are The Positive Social Spillovers In Consumption That Result From The Consumption Of Public Goods.

101. The Costs Of Being Apprehended And Convicted Of A Crime Are Less For Those Living In Poverty Than For Those From Middle And Upper Income Groups.

102. The Ultimate Economic Goal Of Crime Prevention Is Complete Suppression Of Crime.

103. More Criminal Justice Expenditures Should Be Made For Detection And Apprehension Of Criminals.

104. Crime Prevention Activities Should Be Expanded To The Point At Which Their Marginal Social Benefit Is Equal To Their Marginal Social Costs.

105. In The United States, The Federal Government Spends More For Corrections Than State And Local Governments.

106. Crime Prevention Is An Example Of A “Free” Good Since It Raises Gdp Above The Level That It Would Be In The Absence Of Prevention.

107. The Equimarginal Principle May Be Applied Effectively Any Time A Fixed Budget Must Be Allocated Among Competing Uses.

108. The Equimarginal Principle Is Satisfied When We Spend The Same Amount Of Money On The Police, Courts, And Prisons.

109. Trafficking In Illegal Goods And Services Adds To The Well-Being Of Consumers.

110. If Abortion Is Made Illegal, Demand And Supply Will Fall.

111. The Economic Effects Of Prohibition Of Alcoholic Beverages Include A Decrease In Supply, An Increase In Price, And A Decrease In Quality.

112. The Legalization Of Marijuana Would Be Unlikely To Greatly Increase The Demand For The Good.

113. Trafficking In Illegal Goods And Services Necessarily Reduces The Economic Welfare Of A Society.

114. A Budget Is Allocated Efficiently When All Functions Within The Budget Receive The Same Amount Of Funding.

115. The Demand For Abortions Would Fall Significantly If The Service Were Made Illegal.

116. Psychic Income Refers To The Satisfaction Received From Attending Cultural Events Like Special Showings At An Art Gallery.

117. The Total Revenue From A Business Includes The Money Income The Business Takes In And Any Psychic Income The Owners Receive.

118. If The Likelihood Of Being Caught Committing A Crime Is Low, The Severity Of The Penalty Is Of Little Importance To Potential Criminals.

119. The Legalization Of Marijuana Would Cause A Big Increase In The Demand For The Drug.

120. The Legalization Of Marijuana Would Lead To A Significant Increase In The Quality Of The Drug Available On The Streets.

121. Making Abortion Services Illegal Would Lead To A Large Decrease In The Demand For The Service.

122. Recreational Activities For Youths In Depressed Areas Might Help Reduce Criminal Activities By Increasing The Opportunity Cost Of Committing Crimes.

123. The Value Of Property Damage From A Crime Is An Implicit Cost Of The Crime.

124. The Negative Personal Satisfaction Received Because You Have To Drive A Different Car Than You Would Otherwise Choose Because It Is Harder To Steal Is An Example Of A Psychic Cost Of Crime.

125. If You Love Your Job, You Are Receiving Psychic Income.

126. The Opportunity Cost Of A Doctor Who Spends One-Half Hour Performing An Abortion Might Be The $2,000 He Could Earn During The Same Amount Of Time Performing An Appendectomy.

127. People Are More Likely To Commit Crimes If They Perceive The Probability Of Getting Caught Is Low.

128. The Opportunity Cost Of Jail Time Is What You Could Have Done Had You Not Been In Jail.

Chapter 06

The Economics Of Education: Crisis And Reform

Multiple Choice Questions

1. According To The Census Bureau, High School Graduates Can Expect To Earn How Much During Their Working Years?
A. $45,000
B. $1.2 M
C. $2.1 M
D. $2.5 M
E. $4.4 M

2. According To The Census Bureau, A College Education Adds How Much To Earnings Over A Person’s Work-Life?
A. Nearly $1m
B. $2.1 M
C. $2.5m
D. $4.4 M
E. Over $5 M

3. According To The Census Bureau, Someone With A Professional Degree Can Earn Approximately How Much During A Typical Work-Life?
A. $1 M
B. $1.2 M
C. $2.5 M
D. $4.4 M
E. Over $5m

4. Where Did U.S. Eighth Grade Students Rank Internationally In Terms Of Average Math Scores In 2007?
A. At The Top
B. Second
C. Near The Middle
D. Next To The Bottom
E. At The Bottom

5. Where Did U.S. Eighth Grade Students Rank Internationally In Terms Of Average Science Scores In 2007?
A. At The Top
B. Second
C. In The Middle
D. In The Bottom Half
E. At Bottom

6. Which Of The Following Is An Important Difference Between The United States And Other Countries In Terms Of Their K-12 Education System?
A. The United States Spends Less On Education Per Pupil Than Most Other Countries
B. The United States Spends A Higher Percentage Of Its Gdp On Education Than Other Countries
C. The United States Has A Shorter School Year Than Most Other Countries
D. The United States Has A Purely Private Market For Education
E. All Of The Above

7. About How Much Does The United States Spend On Education, Per Pupil?
A. $6,000
B. $7,000
C. $8,000
D. $9,000
E. $10,000

8. Approximately What Percent Of Its Gdp Does The United States Spend On Education?
A. 2.0
B. 3.0
C. 3.9
D. 4.2
E. 5.3

9. Which Of The Following Best Describes The U.S. K-12 Educational System?
A. It Is Largely Private
B. It Is Mainly Private With Some Public Education
C. It Is About Half Public And Half Private
D. It Is Predominantly Public
E. It Is Exclusively Public

10. Which Of The Following Is Of The U.S. K-12 Education System Relative To The K-12 Education System Of Other Developed Countries?
A. It Has Lower Expenditures Per Pupil And Lower Achievement
B. It Has Lower Expenditures Per Pupil And Higher Achievement
C. It Has Higher Expenditures Per Pupil And Lower Achievement
D. It Has Higher Expenditures Per Pupil And Higher Achievement
E. It Has Equivalent Expenditures Per Pupil And Achievement

11. In 2003, Approximately What Percent Of School Aged Children Attended Public Schools?
A. 90%
B. 75%
C. 50%
D. 25%
E. 10%

Questions 12 – 17 Refer To The Graph Below.

12. What Assumption Is Shown By The Fact That Mpc = Msc On The Graph?
A. This Graph Is For Public Education
B. There Are No Positive Externalities Associated With Education
C. Education Has Positive Spillover Benefits For Society
D. The Market Will Produce The Socially Optimal Quantity Of Education
E. This Graph Illustrates A Private Market For Education

13. What Is This Family’s Willingness To Pay For A First Year Of Education?
A. $0
B. $4,000
C. $6,000
D. $8,000
E. $10,000

14. What Is The Equilibrium Level Of Education In This Market?
A. 0 Years
B. 1 Year
C. 12 Years
D. 16 Years
E. Between 12 And 16 Years

15. What Tuition Would Result In The Family Demanding 16 Years Of Education?
A. $0
B. Less Than $4,000
C. $4,000
D. $6,000
E. $10,000

16. Which Of The Following Is For The First Years Of Education?
A. Mpb < Mpc B. Mpb > Mpc
C. Msb > Msc
D. Msb < Msc
E. Mpb = Msb

17. Which Of The Following Is For The 16th Year Of Education?
A. Mpb < Mpc B. Mpb > Mpc
C. Msb > Msc
D. Msb < Msc E. Mpb = Msb Questions 18 – 23 Refer To The Graph Below. 18. For Which Level Of Education Is The Family’s Mpb > Mpc?
A. 1 Year
B. Between 0 And E1 Years
C. Between E1 And E* Years
D. Exactly E1 Years
E. Exactly E* Years

19. The Negative Slope Of The Demand Curve Shows That
A. The Marginal Cost Of Education Increases As More Is Purchased
B. The Marginal Benefit Of Education Increases As More Is Purchased
C. The Marginal Benefit Of Each Additional Year Of Education Decreases
D. There Are Positive Spillover Benefits Of Education
E. Tuition Can Be Raised Above T1 Dollars

20. The Socially Optimal Level Of Education
A. Is 0 Years
B. Is 1 Year
C. Is E1 Years
D. Is E* Years.
E. Cannot Be Determined From The Diagram.

21. For Which Year Of Education Is The Family’s Mpb < Mpc? A. 0 Years B. 1 Year C. E1 Years D. E* Years E. None Of The Above 22. The Slope Of The Supply Curve Indicates That The A. Marginal Cost Of A Year Of Education Is Constant B. Marginal Benefit Of An Additional Year Of Education Increases C. Marginal Benefit Of An Additional Year Of Education Is Constant D. Marginal Benefit Of An Additional Year Of Education Increases E. Cost Of Education Is Subsidized By The Public 23. In The Diagram, The Equilibrium Level Of Education Is A. 0 Years B. 1 Year C. E1 Years D. E* Years E. Between E1 And E* Years 24. What Happens To The Marginal Benefit Of Education As A Child Gets More Schooling? It Will A. Increase B. Decrease C. Stay The Same D. Become Infinite E. Become Negative 25. Which Of The Following Is A Benefit Of Increased Education? A. Improved Literacy B. Increased Earnings C. Improved Health D. Greater Satisfaction E. All Of The Above 26. A Family’s Demand For Education For A Child Reflects The Family’s A. Income B. Preferences For Education C. Mpb Received From The Education D. Opportunity Cost Of Tuition E. All Of The Above 27. Which Of The Following Happens As Tuition Increases? A. The Demand For Education Increases B. The Demand For Education Decreases C. The Supply Of Education Increases D. The Years Of Education Demanded Fall E. The Cost Of Education Increases 28. The Supply Of Private Education Is Represented By A. The Mpb Curve B. The Mpc Curve C. The Msc Curve D. The Msb Curve E. None Of The Above 29. An Increase In The Demand For Education Will A. Increase The Supply Of Education B. Decrease The Equilibrium Tuition C. Decrease The Equilibrium Quantity Of Education D. Increase The Equilibrium Quantity Of Education E. Shift The Demand Curve For Education To The Left 30. A Decrease In The Cost Of Education Will A. Increase The Supply Of Education B. Increase The Equilibrium Tuition C. Decrease The Equilibrium Quantity Of Education D. Increase The Equilibrium Quantity Of Education E. Shift The Demand Curve For Education To The Left 31. Which Of The Following Will Decrease The Equilibrium Quantity Of Education In A Market? A. An Increase In The Demand For Education B. A Decrease In The Demand For Education C. A Decrease In Production Costs D. An Increase In The Supply Of Education E. None Of The Above 32. An Increase In Family Income Will A. Increase The Demand For Education B. Decrease The Demand For Education C. Increase The Quantity Of Education Supplied D. Increase The Quantity Of Education Demanded E. Decrease The Equilibrium Level Of Tuition 33. An Increase In The Marginal Benefit Of Education Will Cause Which Of The Following? A. The Demand Curve For Education Shifts Right B. The Demand Curve For Education Shifts Left C. The Supply Curve For Education Shifts Right D. The Supply Curve For Education Shifts Left E. The Equilibrium Number Of Years Of Education Will Decrease 34. The Creation Of New Learning Technologies Will Cause Which Of The Following To Decrease? A. The Demand For Education B. The Supply Of Education C. The Cost Of Education D. The Equilibrium Quantity Of Education E. The Number Of Children In School   35. If The Earnings Expected From A College Education Increase, It Will Lead To An Increase In A. The Demand For K-12 Education B. The Supply Of K-12 Education C. The Cost Of Education D. The Teacher Salaries E. All Of The Above 36. Education Is Said To Be Which Of The Following? A. Individually Consumed B. Individually Produced C. A Semi-Private Good D. A Private Good E. A Public Good 37. I Benefit Because You Become More Educated. This Is An Example Of A A. Negative Externality In Consumption B. Spillover Cost C. Positive Externality In Production D. Positive Externality In Consumption E. Negative Externality In Production 38. As The Number Of Years Of Education Increases, The Spillover Benefits Will A. Increase B. Decrease C. Stay The Same D. Become Negative E. None Of The Above 39. Which Of The Following Is An Example Of A Possible Spillover Benefit From Education? A. An Improved Democratic Process B. Improved Health C. Improved Public Safety D. More Charitable Giving E. All Of The Above 40. Students Learn About Health And Nutrition In School. This Provides A A. Positive Externality In Production B. Positive Externality In Consumption C. Negative Externality In Production D. Negative Externality In Consumption E. Cost To Society 41. Marginal Social Benefits Equal A. Mpb + Spillover Benefits B. Mpb – Spillover Benefits C. Mpcs D. Total Benefits + Positive Externalities In Consumption E. None Of The Above 42. With Positive Externalities In Consumption, The Market Equilibrium Quantity Will Be A. Greater Than Socially Optimal B. Less Than Socially Optimal C. Equal To The Socially Optimal Level D. Higher Than Otherwise E. None Of The Above 43. Educated Citizens Are More Likely To Be Informed Voters. This Is An Example Of A A. Positive Externality In Production B. Positive Externality In Consumption C. Negative Externality In Production D. Negative Externality In Consumption E. Cost To Society. 44. To Be Socially Optimal, Education Should Be Provided To The Point Where A. Mpb = Mpc B. Mpb = Msc C. Msb = Mpc D. Msb = Msc E. Mpb = Msb   45. The Existence Of Spillover Benefits Results In An Equilibrium Quantity In The Market That Is Socially Optimal. A. Higher Than B. Lower Than C. Equal To D. Better Than E. More Expansive Than 46. The Argument For Government Provision Of Education Hinges On The Existence Of A. Spillover Costs. B. Spillover Benefits. C. Voucher Programs. D. Negative Externalities In Production. E. Negative Externalities In Consumption Questions 47 – 50 Refer To The Graph Below. 47. The Socially Optimal Years Of Education Is A. 1 B. Between 1 And 11 C. 11 D. 12 E. 16 48. What Is The Equilibrium Number Of Years Of Education The Market Will Provide? A. 0 B. 1 C. 11 D. 12 E. 16 49. Which Of The Following Government Actions Will Move The Market Equilibrium To The Socially Optimal Number Of Years Of Education? A. A Tax On Education Equal To $1,000 B. A Tax On Education Equal To $3,000 C. A Tuition Subsidy Equal To $1,000 D. A Tuition Subsidy Equal To $3,000 E. Government Provision Of All Education 50. A Tuition Subsidy Of $6,000 Would Lead To A. The Socially Optimal Quantity Of Education B. Greater Than The Socially Optimal Quantity Of Education C. Less Than The Socially Optimal Quantity Of Education D. More Public Education E. A Budget Surplus Questions 51 – 54 Refer To The Graph Below. 51. The Socially Optimal Level Of Education Is A. 0 B. Between 0 And E1 C. E1 D. E2 E. E3 52. The Market Equilibrium Level Of Education Is A. 0 B. Between 0 And E1 C. E1 D. E2 E. E3 53. A Tuition Subsidy Equal To How Much Will Move The Market To The Socially Optimal Level Of Education? A. T3 – T2 B. T2 – T1 C. T3 – T1 D. T1 E. T2 54. A Tuition Subsidy Equal To T3 Would Result In Which Of The Following? A. The Socially Optimal Quantity Of Education B. Greater Than The Socially Optimal Quantity Of Education C. Less Than The Socially Optimal Quantity Of Education D. More Public Education E. A Budget Surplus 55. Greater Segregation Along Racial Lines Is A Likely Result Of A. Purely Private K-12 Education B. No Public K-12 Education C. Voucher Programs D. Tuition Subsidies E. All Of The Above 56. A Purely Private K-12 System Will Lead To A. Lower Private Costs B. Increased Public Costs C. Decreased Racial Segregation D. Increased Inequality E. Greater Social Benefits 57. In A Purely Private K-12 Education System, Spaces Would Be Allocated Based On A. Ability B. Equity C. Income D. Geographic Boundaries E. None Of The Above 58. In The Existing Public K-12 Education System, Spaces Are Allocated Based On A. Ability B. Equity C. Income D. Geographic Boundaries E. None Of The Above 59. A Program To Provide Public Funding For Students In Poor Performing Public Schools To Attend Other Schools Is Known As A. A Voucher Program B. A Charter School C. A Tuition Tax D. A Welfare Program E. Privatization 60. The Current K-12 Education System Can Be Described As A. Private B. Centralized C. Decentralized D. State Owned E. None Of The Above 61. Centralized Planning Leads To Which Of The Following? A. Limited Consumer Choice B. Decreased Quality C. Increased Prices D. Lack Of Responsiveness E. All Of The Above 62. Schools In Which Parents Or Other Groups Were Permitted To Create A New School With State Funding And Were Given Control Over Operations Are Known As A. Private Schools B. Voucher Schools C. Magnet Schools D. Experimental Schools E. Charter Schools 63. The Empirical Evidence Of The Effectiveness Of Voucher Programs Is Best Described As A. Positive B. Negative C. Inconsistent D. Substantial E. Nonexistent 64. Which Of The Following Is An Argument Against Voucher Programs? A. Cream Skimming B. Reduced Social Segregation C. Decreased Efficiency D. Increased Special Education E. All Of The Above 65. The Cream Skimming Argument Says That The Students Who Choose A Voucher Program Will Be A. Higher Income B. Lower Income C. Higher Achieving D. Non-Minority E. None Of The Above 66. Poor Students Are Less Likely To Participate In Voucher Programs Because Of A. Less Information B. Higher Transportation Costs C. Fewer Financial Resources D. A Weaker Tradition Of Education E. All Of The Above 67. Private School Cost Per Pupil Is Lower Because Of A. Fund Raising B. Private Contributions C. Student Fees D. Volunteer Labor E. All Of The Above 68. What Is The Relationship Between School Funding And Student Achievement? A. Positive B. Negative C. Mixed D. Unrelated E. Inverse 69. What Is The Relationship Between Student Achievement And Teacher Pay? A. Positive B. Negative C. Mixed D. Unrelated E. Inverse 70. What Is The Relationship Between Teacher Pay And A Shortage Of Teachers? A. Positive B. Negative C. Mixed D. Unrelated E. Direct 71. Public Schools Must Pay For Which Of The Following Expenses That Private Schools Do Not? A. Transportation B. Food C. Special Education D. All Of The Above E. None Of The Above 72. A Reduction In Class Size Should Be Undertaken As Long As The Marginal Benefit Of The Decrease Is A. Positive B. Negative C. Greater Than The Marginal Cost D. Less Than The Marginal Cost E. Increasing 73. Decreasing Average Class Size Without Changing Teacher Pay Leads To A. Lower Quality Teachers B. A Surplus Of Teachers C. Lower Costs Per Pupil D. Increased Segregation E. All Of The Above 74. Which Of The Following Statements Does Not Enjoy Widespread Agreement? A. Achievement Per Dollar In U.S. Education Is Too Low B. Reform Of The U.S. Education System Is Necessary To Maintain High Level Human Capital C. Smaller Class Sizes Can Improve Student Performance D. Voucher Programs Are The Most Effective Way To Improve The U.S. Education System E. Increased Teacher Pay Increases Teacher Quality 75. Education Could Be Considered A Semi-Private Good, Since A. There Are Spillover Benefits To Other Members Of Society Resulting From The Education Of A Child B. Education Of The Population Improves Everyone’s Lives Since It Results In Greater Productivity And Income For All Members Of Society C. There Are Benefits To Society From Education, Since It Reduces The Crime Rate D. Education Produces Positive Externalities To Society E. All Of The Above 76. If Government Wishes To Increase The Quantity Of Higher Education Consumed, What Can Be Done To Accomplish This? A. Charge Tuition That Is Below The Full Costs Of Providing The Educational Services B. Operate Public Colleges C. Provide Reduced Tuition To Students D. Any Of The Above Alternatives Would Increase The Consumption Of Education E. The Government Should Not Attempt To Increase Education, Since It Is A Private Good 77. Studies Of Voucher Programs Indicate That The Effects Of Vouchers On Student Achievement A. Are Small But Have Negative Impact On Student Performance B. Are Received Primarily By African-American And Economically Disadvantaged Children C. Have Yet To Be Examined In Large-Scale Programs D. Both B And C E. None Of The Above 78. Research On The Effects Of Charter Schools Show A. There Are Significantly Positive Impacts On Student Performance B. There Are Significantly Negative Impacts On Student Performance C. There Are Mixed Results, With Positive Impacts In Some Schools And Negative In Others D. Research Has Yet To Be Undertaken On These New Types Of Schools E. None Of The Above True / False Questions 79. A College Education Does Not Improve Earnings Over A High School Degree. 80. A Master’s Degree Increases Lifetime Earnings Over A Bachelor’s Degree By $2.5m Over High School Graduates. 81. More Education Will Increase The Revenue A Worker Adds To A Firm. 82. Improved Education Will Lead To Higher Economic Growth In A Country. 83. American High School Graduates Outperform All Other Countries On Math And Science Exams. 84. The Length Of The School Year In The United States Is Longer Than In Most Other Developed Countries. 85. The United States Spends Over $8,000 Per Pupil On Secondary Education. 86. The United States Is Toward The Middle Of Countries In Rankings Of Percent Of Gdp Per Capita Spent On Education. 87. Ninety Percent Of School-Aged Children Attend Public Schools In The United States. 88. There Are Approximately 50 Million School-Aged Children In The United States. 89. The Marginal Benefit Of Education Increases As A Student Completes More Years Of Education. 90. More Education Leads To Improved Decision-Making In Families. 91. The Move From Illiteracy To Literacy Has High Marginal Benefits. 92. A Family’s Demand For Education Comes From Its Marginal Private Benefits. 93. The Demand Curve For Education Has A Positive Slope. 94. Lower Tuition Rates Lead To Less Education. 95. Without Public Schools, There Would Be No K-12 Education. 96. Without Market Provision Of Education, There Is No Mechanism For Quality Control. 97. A Family Will Purchase Private Education As Long As The Mpb > Mpc.

98. Increased Income Will Increase The Demand For Education.

99. New Learning Technologies Will Increase The Cost Of Providing K-12 Education.

100. Everyone Agrees That Education Provides Significant Positive Spillover Benefits.

101. Years Of Education Completed Are Negatively Related To Criminal Activities.

102. The Greatest Positive Externalities Accrue In The Early Years Of K-12 Education.

103. Msb Of Education = Mpb + Positive Externalities.

104. If There Are Positive Externalities From Education, The Market Will Not Produce The Socially Optimal Level Of Education.

105. The Government Can Increase The Equilibrium Quantity Of Education In A Market Through Tuition Subsidies.

106. A Significant Positive Externality Of Education Would Support The Argument Against Public Education.

107. Public K-12 Education Facilitates Equal Opportunity.

108. A Purely Private K-12 Education System Would Increase Existing Segregation.

109. Markets Ration Education Based On A Price/Quality Trade-Off.

110. Public Schools Ration Education Based On A Price/Quality Tradeoff.

111. Voucher Programs Fund Students To Attend Poor Performing Schools.

112. Charter Schools Are Privately Funded And Community Controlled.

113. High-Income Students And Their Families Are More Likely To Benefit From Voucher Programs.

114. Voucher Programs Have Been Accused Of “Cream Skimming.”

115. The Costs Of Private Schools Are Greater Than Their Tuition.

116. Private Schools Must Pay Some Types Of Costs That Public Schools Do Not.

117. Economists Agree That Voucher Programs Improve K-12 Education.

118. Smaller Class Size Increases Student Achievement.

119. Higher Teacher Salaries Do Not Change Student Achievement.

120. The Achievement Of Low-Income Students Improves More With Smaller Class Sizes, Relative To Higher Income Students.

121. Smaller Class Size Is Always Cost-Effective.

122. Increased School Funding Increases Student Achievement.

123. Increasing Teachers’ Salaries Does Not Affect Student Achievement.

124. The Opportunity Cost Of Becoming A Teacher Is The Salary Of Similarly Trained Professionals.

125. Increased Spending On K-12 Education Is Certain To Be Cost-Effective.

126. The United States’ K-12 Education System Has An Efficient Level Of Achievement Per Dollar Spent.

127. Increased Competition In K-12 Education Can Lead To An Improved Education System.

128. Targeting Increased Funding To Programs For Disadvantaged Children Is The Most Cost-Effective.

Chapter 07

Poverty And Discrimination: Why Are So Many Still So Poor?

Multiple Choice Questions

1. The Government’s Method Of Calculating The Official Poverty Rate
A. Does Not Take Into Account Differences In The Cost Of Living In Different Parts Of The Country
B. Does Not Account For The Value Of In-Kind Benefits Received By Poor Families
C. Is Based On Pre-Tax Household Income
D. Does All Of The Above
E. Does None Of The Above

2. The Incidence Of Poverty Is Highest Among
A. Black Families
B. Families Headed By A Female
C. Young Families
D. White Families
E. Small Families

3. The Percentage Of The U.S. Population Living In Poverty
A. Shows A Long-Term Increase
B. Is Holding Steady Over The Long Run
C. Is Not A Serious Economic Problem
D. Decreased Significantly In The Past Decade
E. Fluctuates Dramatically From Year To Year

4. The Official U.S. Poverty Definition Is An Income Sufficient To Provide
A. Minimum Biological Needs
B. Three Times The Cost Of An Economy Food Budget
C. The Income Of The Poorest 8% Of The Families
D. The Average U.S. Welfare Allowance
E. None Of The Above

5. How Is The Official “Poverty Threshold” Calculated?
A. Determine The Minimum Income Necessary For A Family To Purchase Clothing And Shelter, And Then Multiply By Three
B. Determine The Minimum Income Necessary For A Family To Live At A “Subsistence Level” In A Rural Community
C. Determine The Amount Of Income Necessary For A Family To Live On Without Becoming Eligible For Food Stamps
D. Determine The Minimum Income Necessary For A Family To Purchase An Adequate Diet, And Then Multiply By Three
E. None Of The Above

6. Which Of The Following Demographic Groups Historically Has The Highest Incidence Of Poverty?
A. White, Married Couples With No Children Living At Home
B. Black Families, Headed By A Male Income Earner, With Children Living At Home
C. Female Headed Black Families With Children Living At Home
D. Hispanic Families In Rural Areas With Children Living At Home
E. White, Female Headed Families In Urban Areas With No Children Living At Home

7. Critics Have Argued That The Official Definition Of Poverty Should
A. Account For Differences In The Cost Of Living In Different Regions Of The Country
B. Be Revised To Reflect The Fact That The Average Family Now Spends Less Than A Third Of Its Income On Food
C. Make Allowances For In-Kind Benefits Received By Poor Families
D. Be Based On A Family’s After-Tax Income
E. All Of The Above

8. The Incidence Of Poverty Falls Most Heavily On
A. Families With A Young Person As Head
B. Families With A Female As Head
C. Minority Groups
D. Children
E. All Of The Above

9. Most Poor People Are Poor Because They
A. Are Lazy
B. Are Exploited
C. Own Resources That Are Not Worth Much
D. Are Old
E. Are All Of The Above

10. Poverty In The Us Occurs As A Result Of
A. Inadequate Gdp
B. A Shortage Of Resources
C. The Occurrence Of Wars And Natural Disasters
D. Unequal Distribution Of Income
E. None Of The Above

11. Since 1960, Income Inequality Has
A. Stayed The Same
B. Fallen, Then Risen
C. Steadily Declined
D. Steadily Increased
E. Decreased Rapidly

12. The Distribution Of Income Among Persons Is Determined By
A. The Distribution Of Resource Ownership
B. The Prices Paid For Resources Of Different Kinds In Different Employments
C. Government Income-Support Programs
D. Both (A) And (B).
E. All Of The Above

13. Which Of The Following Statements Is Concerning Income Equality?
A. The Share Of Income Received By The Top 5% Remained Declined Between 1960 And 2000
B. The Share Of Income Received By The Top 5% Increased By About 20% Between 1960 And 2000
C. The Share Of Income Received By The Lower 20% Of Families Increased Significantly Between 1960 And 2000
D. The United States Has Achieved Income Inequality
E. None Of The Above

14. The Official “Poverty Threshold” Used By The U.S. Government Is Based On A(N) ______________ Definition Of Poverty.
A. Relative
B. Comparative
C. Absolute
D. Abstract
E. Economic

15. A Number Of Reasons Have Been Given To Explain Increasing Income Inequality In The Us Over The Last Few Decades. One Of These Is
A. The Decline Of The Us Manufacturing Sector
B. The Growth Of Unionization Through The Us
C. Increases In Tax Rates On The Wealthy
D. Improvements In Productivity
E. The Use Of Computers In The Workplace

16. The Ownership Of Capital Resources Varies Widely Among Individuals. Which Of The Following Is Not A Reason For This Variation?
A. Ethnic Background
B. Inheritance
C. Motivation To Accumulate
D. Luck
E. All Of The Above

17. Which Of The Following Best Describes The Trend In The Share Of Income Received By The Lowest 20% Of Families In The United States? The Lowest 20% Of Families Receive
A. 15% Of The Income, And Their Share Has Been Rising Since Wwii
B. 25% Of The Income, And Their Share Has Been Falling Since The 1960s
C. Less Than 5% Of The Income, And Their Share Has Been Slowly Declining Since The 1970s
D. A Share Of Income Approximately Equal To That Received By The Top 20% Of Families, And Their Share Has Remained Stable Since The 1960s
E. 10% Of The Income, But Their Share Has Been Falling Since Wwii

18. Skill Levels Vary Among Individuals Because Of
A. Differences In Location
B. Differences In Education And Training
C. The Industry The Person Works In
D. The Capital Labor Ratio In The Economy
E. All Of The Above

19. Why Might An Individual’s Labor Resource Holdings Differ?
A. Mental Talents Are Not Equally Distributed Among People
B. Physical Talents Are Not Equally Distributed Among People
C. People Have Different Preferences For Income And Leisure
D. Skill Levels Vary Among Individuals
E. All Of The Above

20. The Income Of A Person Depends On
A. The Price Of Labor Owned
B. The Quantity Of Labor Owned
C. The Quantity Of Capital Owned
D. All Of The Above
E. None Of The Above

21. Which Of The Following Results In Differences In Labor Resource Ownership?
A. Preferences For Work And Leisure
B. Propensities To Accumulate
C. Skill Levels
D. Both (A) And (C)
E. All Of The Above

22. Which Of The Following Factors Contribute To Differences In Labor Resource Ownership Between People?
A. Unequal Mental And Physical Genetic Inheritances
B. Differences In Skills Due To Human Capital Investments
C. Differences In Attitudes Toward Working
D. All Of The Above
E. None Of The Above

23. Which Of The Following Could Reduce Poverty?
A. Eliminating Discrimination In Educational Policies
B. Increasing The Productivity Of Poor Workers
C. A Negative Income Tax Structure
D. Education And Training Programs For The Poor
E. All Of The Above

24. A Government Transfer Payment Is A Payment
A. Made To Transfer Workers Form One Area To Another
B. To A Person Not In Return For Goods Or Services
C. Made To A Person Who Works For The Government
D. For Roads Built By The Government
E. Made To Move Troops From One Combat Area To Another

25. An Advantage Of The Negative Income Tax Proposal Is That
A. It Would Allow For The Free Exercise Of Consumer Choice
B. A Family’s Size Would Be The Fundamental Criterion Of Eligibility
C. It Would Be Favored By Middle-Income Groups
D. Inequalities In Present Antipoverty Programs Would Be Eliminated By Concentrating Transfer Payments On The Poor
E. None Of The Above

26. Under A Negative Income Tax, Government Payments To A Family
A. Are Positive At All Levels Of Income
B. Increase As Income Increases
C. Decrease To Zero As Income Decreases
D. Eventually Become Zero As Income Increases
E. Do None Of The Above

27. One Of The Problems In Paying Subsidies To The Poor Is That
A. It May Reduce Incentives To Work
B. The Poor Will Not Spend It On The Right Things
C. It Will Cause Inflation
D. It Will Require A Cutback In The Farm Price Support Programs
E. It Will Do None Of The Above

28. An Advantage Of Replacing All Income-Support Programs With A Negative Income Tax Is That
A. It Discourages Low-Income Workers From Working More
B. Households With Income Above The Poverty Threshold Pay Positive Taxes
C. It Is More Difficult To Administer Than Other Antipoverty Programs
D. Households Lose Benefits When They Choose To Work
E. All Of The Above

29. Under A Negative Income Tax,
A. Only The Poor Would Receive Negative Taxes
B. We Would Experience A Loss In Efficiency Relative To The Current Public Assistance Programs
C. The Recipients Of Government Subsidies Are Encouraged To Earn Income
D. Both (A) And (C)
E. All Of The Above

30. Families Are Not Eligible For The Earned Income Tax Credit (Eitc) Program When
A. Household Income Is Greater Than $34,700
B. No One In The Household Works
C. The Household Has No Children
D. The Household Receives Food Stamps
E. The Household Owns Its Own Home

31. The Supplemental Social Insurance (Ssi) Program Is Not Available To
A. Households With Children
B. Elderly Households
C. The Blind And Other Disabled Individuals
D. Households Comprised Of Illegal Residents
E. It Is Available To All Of The Households Listed Above

32. Which Of The Following Statements Is Concerning The Earned Income Tax Credit (Eitc)?
A. The Eitc Is A Non-Refundable Credit That Can Be Claimed By Poor Families With Children
B. The Eitc Lifts Many People Out Of Poverty, But It Does Not Change Official Poverty Rates
C. The Eitc Is A Negative Income Tax Scheme
D. The Eitc Was Introduced As Part Of The Welfare Reform Measures Enacted During The Mid-1990s
E. None Of The Above

33. Medicare, Medicaid, And Food Stamps Are Examples Of Programs That Provide
A. “In-Kind” Assistance To The Poor
B. Guaranteed Levels Of Income For The Poor
C. Training And Job Experience For The Poor
D. Income Transfers From The Poor To Business Firms
E. Non-Economic Support Of The Poor

34. Most Federal Assistance To The Poor Is In The Form Of
A. Cash Payments
B. Provision Of Health Services
C. Personnel Programs
D. Training Programs
E. Housing Programs

35. Under The Jtpa, The Federal Government Gave Money To States For Programs That Provided
A. Guaranteed Income Support For The Poor
B. Employment Training For Disadvantaged Workers
C. “In-Kind” Assistance Such As Food Stamps And Health Care For The Poor
D. Guaranteed Child Care Facilities For Poor Working Mothers
E. College Scholarships For Children From Impoverished Households

36. In 1996, The Personal Responsibility And Work Opportunity Act Established Which Of The Following Programs?
A. Food Stamps
B. Medicaid And Medicare
C. Aid To Families With Dependent Children (Afdc)
D. Temporary Assistance For Needy Families (Tanf)
E. Supplemental Security Income (Ssi)

37. Which Of The Following Effects Creates An Incentive For Poor Workers To Reduce Their Hours Of Work When They Receive Cash Assistance?
A. Income
B. Substitution
C. Lorenz
D. Supply
E. Welfare

38. The Record-Breaking Economic Expansion In The 1990s
A. Reduced Significantly The Incidence Of Poverty
B. Increased Incidence Of Poverty
C. Did Not Alter Significantly The Incidence Of Poverty
D. Led To A Change In How Poverty Is Calculated
E. Did None Of The Above

39. Income Support Programs Have
A. Had No Effect In Alleviating The Problem Of Poverty
B. Provided A Minimum Level Of Income To Millions Of People
C. Been Completely Unsuccessful
D. Actually Led To Increased Poverty
E. Done None Of The Above

40. Which Of The Following Statements Concerning The Earned Income Tax Credit (Eitc) Is ?
A. The Eitc Has Significantly Reduced Official Poverty Rates In The U.S. Since Enacted In 1975
B. If A Family’s Tax Liability Is Less Than Its Eitc, The Family Will Receive A Check For The Difference From The Irs
C. The Eitc Is Eventually Phased Out As Family Income Increases
D. More Than 20 Million American Households Now Claim The Eitc On Tax Returns Each Year
E. None Of The Above

41. Critics Have Claimed That The Eitc
A. Creates An Incentive For Families To Have Fewer Children
B. Causes Poor Families With Children To Pay More In Taxes Than Poor Families Without Children
C. Creates A Disincentive To Work For Those Who Find Themselves In The Phase-Out Range Of Income Eligibility
D. Distorts The Economic Incentives For Poor Families To Work Their Way Out Of Poverty
E. Does None Of The Above

42. Unlike The Old Afdc Program Of Income Support, Tanf Requires Recipients To
A. Be Physically Unable To Work Or Go To School
B. Be Retired
C. Be Women With Children Living At Home
D. Work
E. Be Blind Or Disabled

43. Which Of The Following Statements About The New Welfare System Is ?
A. Recipients Have No Time Limits On How Long They Can Receive Income Support
B. In General, Non-Citizens Do Not Qualify For Most Public Support Programs
C. Single Mothers Must Help Officials Identify The Fathers Of Their Dependent Children
D. Time Limits Are Imposed On The Receipt Of Food Stamps
E. States Determine If Tanf Recipients Qualify For Medicaid Assistance

44. According To Recent Studies, Which Of The Following Programs Is Most Likely To Pull The Average Poor Family Above The Official Poverty Threshold?
A. Earned Income Tax Credit (Eitc)
B. Temporary Assistance For Needy Families (Tanf)
C. Supplemental Security Income
D. Aid To Families With Dependent Children (Afdc)
E. The Job Training Partnership Act (Jtpa)

45. Which Of The Following Describes The Earned Income Tax Credit (Eitc)?
A. All Poor Families With Children Are Eligible For A Non-Refundable Tax Credit Based On The Number Of Children Living At Home
B. Poor Families With Two Or More Children Are Eligible For A Refundable Tax Credit If Household Income Is Less Than Some Predetermined Threshold. Beyond The Threshold, The Credit Is Gradually Phased Out
C. Poor Families Without Children Receive A Non-Refundable Tax Credit If Household Income Is Less Than Some Predetermined Threshold. Beyond The Threshold, The Credit Is Gradually Phased Out
D. Poor Families With Household Income Below A Predetermined Threshold Receive A Refundable Tax Credit Equal To A Guaranteed Minimum Income. Above That Threshold, All Households Must Pay Taxes
E. None Of The Above

46. Which Of The Following Problems Arise From The Earned Income Tax Credit (Eitc)?
A. In The Phase-Out Range Of Income, Workers May Experience A Disincentive To Work
B. The Eitc May Cause Some Households To Falsely Claim The Refundable Credit
C. It Is Too Complicated And Cumbersome
D. All Of The Above
E. None Of The Above

47. Suppose A Male And Female Teacher Have The Same Education And Experience, But The Female Is Paid More For Teaching The Same Course. This Would Indicate That
A. The Female Must Be More Productive
B. The Female Works Harder Than The Male
C. The Employer Is Male
D. The Employer Is Female
E. Discrimination May Exist

48. Ending Discrimination Against Minority Groups In Educational Processes And In Employment Situations Would Cause Gdp To
A. Fall Because Of The Increased Costs Of Training
B. Fall Since Trained Minority Workers Would Knock Some Of The Present Workers Out Of Their Jobs
C. Rise Because Of An Increase In The Quality And Productivity Of The Labor Force
D. Rise Because Minority Groups Would Consume More Goods And Services
E. Do None Of The Above

49. Discrimination Occurs
A. When Everyone Is Treated Arbitrarily
B. When Equals Are Treated Equally And When Unequals Are Treated Unequally
C. When Equals Are Treated Unequally And When Unequals Are Treated Equally
D. Whenever Two Workers In The Same Occupation Are Paid Different Wages
E. Only In Social Situations, Not In Economic Markets

50. Median Earnings Of Year-Round, Full-Time Women Workers Are Considerably Less Than Those For Men Because Women Have
A. Lower Productivity In Jobs
B. Higher Absence Rates
C. Less Permanent Attachment To Jobs
D. A Different Distribution Among Various Occupations
E. None Of The Above

51. From The Point Of View Of Economics, Discrimination
A. Results In An Actual Gdp That Is Below Potential Gdp
B. Results In An Actual Gdp That Is No Different From Potential Gdp Provided Resources Are Fully Employed
C. No Longer Exists In The U.S. Economy
D. Provides Incentives For Minority Groups To Work Harder At Their Jobs
E. Does None Of The Above

52. In The Past, Women Were Usually Taught Early In Life To Believe Their Economic Role Was Unimportant. The Effect Of This Was To
A. Freeze The Wages Of Women
B. Reduce The Mobility Of Women
C. Segregate Women To Certain Occupations
D. Enhance The Productivity Of Males
E. Do All Of The Above

53. Discrimination Is Indicated When
A. Whites Are Paid More Than Blacks
B. People Having Equal Productivity Receive Unequal Pay
C. Incomes Differ Between Males And Females
D. People Are Treated Differently On The Basis Of Individual Merit
E. Older Workers Are Paid More Than Younger Workers

54. Discrimination Occurs Because
A. Some People Have The Power To Discriminate
B. People Are Just Not Aware Of It
C. People Have The Desire To Discriminate
D. All Of The Above
E. Only (A) And (C)

55. Which Of The Following Does Not Exhibit A High Degree Of Occupational Segregation?
A. Professional Tennis Players
B. Plumbers
C. Secretaries
D. Teachers
E. Nurses

56. Spending On Education, Training, And Health Are Examples Of
A. Nonmarket Discrimination
B. Investments In Human Capital
C. Welfare
D. Transfer Payments
E. None Of The Above

57. Discrimination Means That
A. Equals Are Treated Unequally
B. Unequals Are Treated Unequally
C. Equals Are Treated Equally
D. Individuals Are Treated Differently
E. All Of The Above

58. Major Sources Of Discrimination Include
A. Competitive Markets
B. Low Wages
C. Labor Mobility
D. Scarce Labor Market Information
E. All Of The Above

59. Discrimination May Be Reduced By
A. Government Subsidies
B. Investment In Human Capital
C. Vigorous Enforcement Of Antimonopoly Laws
D. Education Related To Tastes For Discrimination
E. All Of The Above

60. Suppose That Group Z Workers Earn Only 75% Of What Group A Workers Earn. Discrimination Is
A. Equal To 25%
B. Equal To The Portion Of The Gap Created By Differences In Personal Characteristics
C. Equal To The Portion Of The Gap That Cannot Be Explained By Productivity Differences Between The Groups
D. Readily Apparent Between The Two Groups
E. Subject To A Variety Of Different Economic Measurements

61. The Major Piece Of Legislation That Makes It Illegal To Discriminate In The Labor Market On The Basis Of Race, Gender, Or Religion Is The
A. Anti-Discrimination In Employment Act (Adea)
B. Civil Rights Act Of 1964
C. Affirmative Action Act
D. Sherman Anti-Trust Act
E. Equal Employment Opportunity Act

62. What Is The Primary Source Of An Individual’s Taste For Discrimination?
A. Monopoly Power
B. The Law Of Diminishing Returns
C. Personal Prejudice
D. Market Imperfections
E. None Of The Above

63. Which Of The Following Is Charged With Enforcing The Federal Government’s Anti-Discrimination Laws?
A. The Ofcc
B. The Bureau Of Labor Statistics
C. The U.S. Department Of Justice
D. The Eeoc
E. The U.S. Senate

64. The Civil Rights Act Of 1964 Protects Workers From Discrimination Based On All The Following Characteristics Except One? Which One?
A. Race
B. Color
C. Gender
D. Religion
E. Age

65. Which Of The Following Minority Groups Is Not Covered By The Civil Rights Act Of 1964?
A. Black Workers
B. Female Workers
C. Older Workers
D. Jewish Workers
E. None Of The Above – All Of These Groups Are Covered

66. Which Of The Following Factors Contributes To Wage Differentials In Our Economy?
A. Workers Exhibit Different Degrees Of Experience And Skill
B. Some Workers Are More Productive Than Others
C. The Level Of Demand Varies Across Markets For Different Products
D. Prices Of Different Products Vary Tremendously In A Market Economy
E. All Of The Above

Questions 67- 71 Refer To The Information Given Below.
Suppose The Government Implements A Negative Income Tax Plan To Deal With The Poverty Problem. The Negative Income Tax Rate Is Set At 50%, And The Break-Even Level Of Income Is Set At $5,000.

67. The Guaranteed Annual Income Level Assured Each Family, Regardless Of The Amount Of Income Earned By The Family Is
A. $0
B. $1,500
C. $2,500
D. $5,000
E. $7,500

68. If A Family Earns $2,000 Income, Their Negative Income Tax Subsidy Will Be
A. $0
B. $1,500
C. $2,500
D. $5,000
E. $7,500

69. If The Negative Income Tax Rate Were Reduced From 50% To 40% While The Guaranteed Income Level Is Held Constant, The Cost Of The Plan Would
A. Increase
B. Decrease By More Than 10%
C. Decrease By 10%
D. Not Change
E. Not Be Able To Be Determined

70. If A Family Earns $5,000 Income, Their Negative Income Tax Subsidy Will Be
A. $0
B. $1,500
C. $2,500
D. $5,000
E. $7,500

71. If A Family Earns $3,000 Income, Their Disposable Income Is
A. $3,000
B. $4,000
C. $5,000
D. $6,000
E. $8,000

True / False Questions

72. The Incidence Of Poverty As It Is Officially Defined In The United States Is High Among Rural People And Southern People.

73. A Problem Arising From Transferring Income To The Poor Is That It May Reduce Their Incentive To Work.

74. Within The Next Three Years, The Elimination Of Poverty, As Currently Defined By The U.S. Department Of Labor, Is Possible In All Countries If The Rich Countries Help Out The Poor Ones.

75. The Earned Income Tax Credit (Eitc) Lifts Millions Of People Out Of Poverty Each Year.

76. The Earned Income Tax Credit (Eitc) Results In A Reduction In The Official Number Of People Living Below The Poverty Threshold.

77. The Social Security System Makes Payments To Individuals Over 65 Years Of Age, On The Basis Of Need.

78. The Unequal Distribution Of Income In The United States Is Due To An Unequal Distribution Of Resource Ownership.

79. In A Private Enterprise System A Sound Comprehensive Antipoverty Program Must Include Measures To Increase The Productivity Of The Poor.

80. Transfers Of Income To The Poor Sufficient To Eliminate Poverty Are Not Possible In The United States Without Substantially Decreasing The Well-Being Of All Taxpayers.

81. A Government Transfer Payment Is A Payment For Which No Goods Or Services Are Rendered By The Person Receiving It.

82. Poverty Is More Widespread Among Black Families Than Among White Families.

83. The Poverty Problem In The United States Is Essentially An Income Distribution Problem.

84. An Individual’s Income Depends Upon The Prices And Quantities Of Resources Owned.

85. Most Government Transfer Payments Go To Families That Live In Poverty.

86. Costs To Taxpayers Of A Negative Income Tax Plan Vary Inversely With The Guaranteed Level Of Income And Directly With The Income Tax Rate On Earned Income.

87. The Incidence Of Poverty Is Highest Among Minority Groups, The Young, The Aged, And The Uneducated.

88. Family Income In The United States Has Become More Equal Over The Last Forty Years.

89. The Negative Income Tax Proposal Calls For Families With Earned Incomes Below A Certain Minimum To Receive Payments From The Government, While Families With Earned Income Above The Minimum Make Payments To The Government.

90. Income Support Programs Designed To Alleviate Poverty Have Mitigated The Economic Hardship Of Low-Income Families And Individuals.

91. The Official Poverty Level For A Family Of Four Is Defined As The Cost Of The Family’s Food Budget Times Three.

92. The Poverty Problem In This Country Is Mainly One Of Low Production.

93. The Distribution Of Income Depends Upon The Distribution Of Resource Ownership And The Prices Paid For Resources In Different Kinds Of Employment.

94. Income Tax Cuts In The 1980’s And In The Early 2000’s Had No Impact On The Distribution Of Income.

95. The Aim Of Job Creation Programs Is To Increase The Number Of Jobs For The Poor And Disadvantaged In Private Industry And Government.

96. Jtpa Stands For The Job Training Partnership Act.

97. The Primary Objectives Of The Food Stamp Program Are To Improve The Diets Of Low-Income Families And To Increase The Demand For Food Products.

98. The Poverty Level Of Income Is Defined As Being Five Times The Minimum Food Budget For An Urban Family Of Four.

99. Some Workers Receive Higher Incomes Because They Have Greater Physical Strength, Have Greater Training Or Are Working In Industries Where The Value Of The Product Produced Is Greater.

100. The Poverty Problem In The United States Is Essentially A Problem Of Laziness.

101. The Eitc Is A Refundable Tax Credit Administered By The Irs.

102. During The Last Few Decades, The Income Shares Of The Low, Middle, And High Income Groups Have Changed Significantly.

103. In 1996, The Personal Responsibility And Work Opportunity Act Replaced The Old Afdc Program With The Tanf Program.

104. Through The Income Effect, Any Form Of Cash Assistance Will Generate Negative Incentives To Work.

105. No Work Requirement Is Placed On Those Who Receive Tanf Income Support Payments.

106. The Welfare Reform Measures Of The Mid-1990s Eliminated The Time Limits For Receipt Of Food Stamps By Poor Families.

107. Under The Tanf Program, Most Welfare Recipients Are Required To Work After Two Years Of Assistance.

108. The Income Effect Creates An Incentive For Welfare Recipients To Increase Their Earnings Through Extra Work.

109. In Most Cases, New Immigrants And Illegal Aliens Are No Longer Eligible To Receive Welfare Benefits.

110. The Welfare Reform Measures Of The Mid-1990s Created A Negative Income Tax Structure In The U.S. To Assist The Poor.

111. The Welfare Reforms Enacted In 1996 Places A Maximum Time Limit On The Number Of Years That A Welfare Recipient May Receive Income Support.

112. Relative Poverty Will Always Exist In A Market-Based Economy.

113. Even Though The Earned Income Tax Credit (Eitc) Incorporates Some Of The Features Of A Negative Tax Structure, It Is Not A Pure Negative Income Tax.

114. The Official Poverty Statistics For The U.S. Do Not Take Into Account The Differences In The Cost Of Living In Different Regions Of The Country.

115. The Primary Source Of An Individual’s Desire To Discriminate Is Personal Prejudice.

116. Discrimination Means That Equals Are Treated Unequally Or That Unequals Are Treated Equally.

117. Discrimination Exists In A Labor Market When Persons With Different Productivity Levels Are Paid Different Wages.

118. Differences In The Wages And Incomes Received By Males And Females Are Sufficient Evidence That Discrimination Exists.

119. Discrimination Is Present In The Cases Of Southern Textile Workers Being Paid Less Than Their Northern Counterparts.

120. Discrimination Exists When Two People Perform A Job Equally Well In A Factory And Receive Different Hourly Pay Because Of Seniority Considerations.

121. Employment Discrimination Means That Some Persons Are Not Hired Because Of Non-Economic Considerations Such As Race And Sex.

Chapter 08

The Economics Of Monopoly Power: Can Markets Be Controlled?

Multiple Choice Questions

1. Imperfect Competition Can Best Be Described As A Situation In Which
A. A Few Large Firms Produce And Sell A Particular Product
B. Many Firms Produce And Sell A Product
C. Only One Firm Produces And Sells A Product
D. Firms Exercise Some Monopoly Power
E. Both (A) And (D)

2. The Monopoly Power Of A Firm Can Be Measured By The Firm’s
A. Profits Relative To Other Firms In The Industry
B. Control Over The Demand For Its Product
C. Revenues As A Percent Of Industry Revenues
D. Prices Compared To Average Prices In The Industry
E. Control Over The Market Supply Of Its Product

3. Which Of The Following Is Likely To Have The Most Monopoly Power?
A. Ford Motor Corporation
B. Your Local Water Company
C. Mobil Oil Corporation
D. Avon Products (Cosmetics)
E. A Fast Food Restaurant

4. Concentration Ratios Are Used To Measure The
A. Potential Monopoly Power Within An Industry
B. Strength Of The Demand For An Industry’s Product
C. Potential Monopoly Power Of A Firm
D. Degree Of Competition Between Firms In Different Markets
E. Level Of Perfection In A Competitive Market

5. Suppose The U.S. Auto Industry Sells 1,000 Autos Per Year. Of This, Gm Sells 400, Ford 300, And Dodge 250. Given This Information, The Four-Firm Concentration Ratio Of The Industry Must Be At Least
A. 95%
B. 5%
C. 50%
D. 100%
E. Cannot Tell Without Further Information

Questions 06 – 08 Refer To The Table Below.

6. The 4-Firm Concentration Ratio In This Industry Is
A. 0.5
B. 0.6
C. 0.7
D. 0.8
E. 0.9

7. The 6-Firm Concentration Ratio In This Industry Is
A. 0.6
B. 0.7
C. 0.8
D. 0.9
E. 1.0

8. Assume That No Firm In This Industry Accounts For Less Than 5% Of Industry Sales. What Is The Largest Number Of Firms That Could Be In This Industry?
A. 6
B. 7
C. 8
D. 9
E. 10

9. Which Of The Following Would Cause An Industry’s Concentration Ratio To Make It Appear Less Competitive Than It Really Is?
A. Firms In The Industry Are Located In One Area Of The Country
B. Transporting The Industry’s Output Is Very Easy
C. Foreign Firms Export The Industry’s Product To The United States
D. High Barriers To Entry
E. All Of The Above

10. A Pure Monopoly Industry Has A 4-Firm Concentration Ratio Equal To
A. 0
B. 0.25
C. 050
D. 0.9
E. 1.0

11. To Maximize Profits, A Monopolist Produces The Output Level At Which
A. Its Total Receipts Are Greatest
B. Its Total Costs Are Minimum
C. Its Marginal Cost Equals Its Marginal Revenue
D. Its Total Costs Equal Its Total Receipts
E. None Of The Above

12. To Maximize Profits, A Competitive Firm Produces The Output Level At Which
A. Its Total Receipts Are Greatest
B. Its Total Costs Are Minimum
C. Its Marginal Cost Equals Its Marginal Revenue
D. Its Total Costs Equal Its Total Receipts
E. None Of The Above

13. One Difference Between A Competitive Seller And A Monopolistic Seller Is That The
A. Competitive Firm Faces A Horizontal Supply Curve
B. Monopolist Tries To Maximize Profit
C. Monopolist Has Some Price Setting Ability
D. Competitive Firm Is Free To Vary Output
E. Market Demand Curve Is Positively Sloped For A Monopoly

14. Monopoly Refers To
A. A Large Firm
B. A Firm That Is One Of A Few Firms In An Industry
C. A Single Seller Of A Product For Which There Are No Good Substitutes
D. A Firm That Refuses To Lower Its Price
E. All Of The Above

15. In A Competitive Market, The Single Firm
A. Competes With Other Firms For Its Share Of The Market
B. Is Unable To Raise The Price Of The Product
C. Can Increase Its Sales By Advertising
D. Can Increase Its Sales By Lowering Its Price
E. Is All Of The Above

16. A Major Objective Of Firms In All Types Of Market Structures Is
A. Output Restriction
B. Output Maximization
C. To Raise Prices
D. Profit Maximization
E. To Maximize Revenues

17. A Firm’s Total Revenue Equals Its
A. Income Minus Expenses
B. Pre-Tax Net Income
C. Income For Tax Purposes
D. Quantity Times Price
E. Quantity Times Costs

18. Profit Equals
A. Total Revenue Minus Total Cost
B. Marginal Revenue Minus Marginal Cost
C. Quantity Times Price
D. Marginal Cost Minus Marginal Revenue
E. Income Minus Opportunity Cost

19. Profits And Losses In A Private Enterprise Economic System
A. Contribute Toward A Breakdown Of The System
B. Lead To A Monopolization Of The Industries In Which They Occur
C. Show Where Productive Capacity Should Be Expanded And Where It Should Be Contracted
D. Do All Of The Above
E. Do Both (A) And (B)

20. For A Firm, At The Output Level At Which Marginal Revenue Equals Marginal Cost,
A. Profits Are Highest
B. There Is Neither Unemployment Nor Inflation
C. Output Is Maximized
D. Revenues Are Maximized
E. Costs Are Minimized

21. The Most Common Forms Of Nonprice Competition Are
A. Profit Maximization And Loss Minimization
B. Monopolization And Output Restriction
C. Advertising And Changes In Product Quality And Design
D. Inflation And Unemployment
E. None Of The Above

Questions 22-26 Refer To The Following Graph. For Each Question, Disregard Any Irrelevant Lines.

22. Suppose The Market Is Competitive. Equilibrium Market Price And Output Will Be
A. P1, X2
B. P2, X3
C. P3, X1
D. P1, X4
E. P3, X2

23. Now Suppose The Same Market Is Monopolized. Equilibrium Market Price And Output Would Be
A. P3, X1
B. P3, X2
C. P2, X3
D. P1, X2
E. P1, X4

24. The Area Of The Triangle Abc Reflects The
A. Dead-Weight Welfare Loss Due To Monopoly
B. Increase In Production Costs Due To Monopoly
C. Increase Price To The Consumer Due To Monopoly
D. Impact Of Barriers To Entry On The Market
E. Effect Of Monopoly On Income Distribution

25. If This Industry Changes From Pure Competition To Monopoly, Output Changes From
A. X4 To X1
B. X4 To X2
C. X2 To X4
D. X3 To X2
E. X2 To X3

26. If This Industry Changes From Pure Competition To Monopoly, Price Changes From
A. P3 To P2
B. B. P3 To P1
C. C. P2 To P1
D. D. P1 To P3
E. E. P2 To P3

27. If The Demand Curve Faced By A Firm Is Downward Sloping And The Market Price Of The Product Is Above Marginal Cost Of Production, Which Of The Following Is Correct?
A. Not Enough Of The Economy’s Resources Are Being Allocated To Producing The Good
B. Too Much Of The Economy’s Resources Are Being Allocated To Producing The Good
C. The Firm Is In A Competitive Market
D. The Firm Is Making Profits
E. The Firm Is Losing Money

28. A Monopoly Is Not Efficient Because
A. Price Exceeds Marginal Cost
B. Entry Into The Market Is Blocked
C. Output Is Too Large
D. Monopoly Is Illegal
E. Price Is Too Low

29. The Dead-Weight Welfare Loss Due To Monopoly Is
A. Too Small To Be Important
B. About 10% Of Gdp Per Year
C. Unable To Be Determined In A Complex Economy Such As Our Own
D. About 1% Of Gdp Per Year
E. About .01% Of Gdp Per Year

30. The Dead-Weight Welfare Loss Due To Monopoly
A. Results From The Monopolist’s Tendency To Reduce Output Below The Competitive Level
B. Is A Measure Of The Cost To Society From The Monopolistic Misallocation Of Resources
C. Is Estimated To Be About 1% Of Gdp Per Year
D. Is A Loss To Consumers Not Offset By Anyone Else’s Gain
E. All Of The Above

31. Monopolization Of A Previously Competitive Market Leads To
A. Reduced Production And Product Quality And Increased Costs And Prices
B. Increased Production And Higher Prices
C. Increased Production, Product Quality And Prices
D. Government Regulation
E. None Of The Above

32. Patents And Copyright Laws
A. Are Governmental Barriers To Market Entry
B. Encourage Orderly Market Entry
C. Discourage Research And Development
D. Reduce Monopoly Power
E. Do All Of The Above

33. When Firms Earn Profits,
A. They Will Likely Expand
B. New Firms Will Have An Incentive To Enter The Market
C. They Are Providing A Good Or Service That Consumers Want More Of
D. The Market Is Signaling More Firms To Enter
E. All Of The Above

34. In A Competitive Market In The Short Run, Firms
A. May Earn Profits Or Losses
B. Always Break Even
C. Earn Neither Profits Nor Losses
D. Must Be Free To Enter Or Exit The Market
E. Charge A High Price And Produce A Low Quantity

Questions 35 – 39 Refer To The Graph Below, Which Is For A Firm In A Competitive Market.

35. Since This Is A Competitive Market, The Firm’s Marginal Revenue Is
A. $5
B. $7
C. $20
D. $100
E. $150

36. The Profit-Maximizing Price And Quantity For This Competitive Firm Are
A. $5 And 100
B. $5 And 150
C. $7 And 100
D. $7 And 150
E. $7 And More Than 150

37. Equilibrium Price And Quantity In The Market Are
A. $5 And 100
B. $5 And 150
C. $7 And 150
D. $7 And More Than 150
E. None Of The Above

38. The Firm’s Total Revenue Is
A. $5
B. $7
C. $100
D. $150
E. $500

39. If The Firm Has A Total Cost Of $400, It Is Earning A
A. Profit Of $0
B. Profit Of $100
C. Loss Of $100
D. Loss Of $200
E. Loss Of $500

Questions 40 – 44 Refer To The Graph Below, Showing A Monopoly Market.

40. For The Firm Shown On The Graph, Profit Maximization Occurs At What Price And Quantity?
A. $20 And 50
B. $15 And 70
C. $15 And 50
D. $10 And 50
E. $10 And 70

41. At The Profit Maximizing Quantity, The Firm’s Total Revenue Equals
A. $10
B. $15
C. $20
D. $1,000
E. $1,400

42. If The Firm Has Total Costs Of $1,200 At The Profit Maximizing Output, Then It Is Earning A
A. Profit Of $0
B. Profit Of $100
C. Profit Of $200
D. Loss Of $100
E. Loss Of $200

43. If This Were A Perfectly Competitive Market, Equilibrium Price And Quantity Would Be
A. $20 And 50
B. $15 And 70
C. $15 And 50
D. $10 And 50
E. $10 And 70

44. Monopolization Of This Market Leads To A Deadweight Loss Equal To
A. $0
B. $50
C. $100
D. $150
E. Cannot Be Determined

45. If A Firm Sells 100 Units Of Output At A Price Of $5 And Each Unit Costs $3 To Produce, The Firm Is Earning A
A. Profit Of $200
B. Loss Of $2 Per Unit
C. Loss Of $200
D. Profit Of $500
E. Loss Of $300

46. Which Of The Following Is Of A Firm’s Total Costs? They
A. Do Not Include Opportunity Costs
B. Become Lower As More Is Produced
C. Are Greater Than Total Revenue When The Firm Is Earning A Profit
D. Are Equal To The Cost Per Unit Times The Number Of Units Produced
E. All Of The Above

47. If A Firm Sells 100 Units Of Output At A Price Of $5 And Each Unit Costs $3 To Produce, The Firm’s Total Revenue Equals
A. $3
B. $5
C. $200
D. $300
E. $500

48. A Perfectly Competitive Firm’s Supply Curve Is Its
A. Demand Curve
B. Marginal Revenue Curve
C. Total Revenue Curve
D. Marginal Cost Curve
E. Total Cost Curve

49. The Supply Curve For A Monopoly
A. Is Its Marginal Revenue Curve
B. Is Its Total Revenue Curve
C. Is Its Marginal Cost Curve
D. Is Its Total Cost Curve
E. Does Not Exist

50. The Demand Curve For A
A. Monopoly Firm Is Downward Sloping
B. Monopoly Industry Is Downward Sloping
C. Perfectly Competitive Firm Is Horizontal
D. Perfectly Competitive Industry Is Downward Sloping
E. All Of The Above

51. If A Firm Sells 100 Units At A Price Of $5 And Each Unit Costs $3 To Produce, Its Total Cost Equals
A. $3
B. $5
C. $200
D. $300
E. $500

Questions 52 – 56 Refer To The Graph Below.

52. If This Industry Is Perfectly Competitive, Equilibrium Price And Output In The Market Will Be
A. $16 And 10
B. $12 And 10
C. $12 And 14
D. $8 And 14
E. $8 And 10

53. If This Industry Is A Monopoly, Equilibrium Price And Output In The Market Will Be
A. $16 And 10
B. $12 And 10
C. $12 And 14
D. $8 And 14
E. $8 And 10

54. If This Industry Starts As Perfectly Competitive And Then Becomes A Monopoly, Market Price Will Change From
A. $16 To $12
B. $16 To $8
C. $12 To $8
D. $8 To $16
E. $12 To $16

55. If This Industry Starts As Perfectly Competitive And Then Becomes A Monopoly, The Deadweight Loss To Society Is Equal To Area
A. Abc
B. Adc
C. Bdec
D. Adec
E. None Of The Above

56. Society’s Net Benefits Are Maximized When Price And Quantity In The Market Are
A. $16 And 10
B. $12 And 10
C. $12 And 14
D. $8 And 14
E. $8 And 10

57. Which Of The Following Is A Private Barrier To Entry?
A. An Occupational License
B. A Patent
C. Ownership Of Raw Materials
D. A Regulatory Commission
E. All Of The Above

58. Which Of The Following Is A Government Barrier To Entry?
A. An Occupational License
B. Ownership Of Raw Materials
C. Product Differentiation
D. Advertising
E. All Of The Above

59. Which Of The Following Is A Barrier To Entry?
A. Import Restrictions
B. Copyright Laws
C. Exclusive Franchises
D. Zoning Ordinances
E. All Of The Above

60. Firms May Advertise Their Products In Order To
A. Create A Barrier To Entry
B. Provide Consumers With Information
C. Increase Demand For Their Product
D. Differentiate Their Product
E. Do All Of The Above

61. A Telephone Is Much More Useful To A Consumer When Other People Also Have Telephones. This Illustrates Which Of The Following Concepts?
A. Economies Of Scale
B. Diseconomies Of Scale
C. Natural Monopoly
D. Network Economies
E. Constant Returns To Scale

62. Which Of The Following Is An Example Of Nonprice Competition?
A. Advertising
B. Changing The Design Of A Product
C. Incorporating New Technology In A Product
D. Improving The Quality Of A Product
E. All Of The Above

63. The Loss To Society Caused By Monopoly Power May Be Greater Than Simply The Losses Associated With Deadweight Losses Because It Also Includes Losses Due To
A. Private Barriers To Entry
B. Government Barriers To Entry
C. Extensive Product Differentiation
D. Occupational Licensing
E. All Of The Above

64. With A Natural Monopoly,
A. The Long-Run Average Cost Curve Of The Firm Declines Over The Range Of Production
B. Government Regulation Ensures That Consumer’s Interests Will Be Served
C. Government Regulation Will Fail
D. There Are No Significant Economies Of Scale In Producing The Good
E. None Of The Above

65. The Government’s Regulation Of Pollution
A. Is Justified Because Of Natural Monopoly
B. Is Justified By Poorly Defined Property Rights
C. Is Justified By Concentration Ratios
D. Is Not Likely To Improve On The Market Outcome
E. Cannot Be Defended On Economic Grounds

66. The Capture Theory Of Regulation Suggests
A. In The Absence Of Regulation, Consumer Welfare Is Often Captured By Firms In The Market
B. The Lost Consumer Welfare Due To Unfair Business Practices Can Be Offset Through Government Regulation
C. When Market Failure Exists, Regulation Is Appropriate
D. The Regulators Of An Industry Are Often “Captured” By The Firms In The Market
E. None Of The Above

67. Which Of The Following Is Likely To Reduce Monopoly Power In The United States The Most?
A. Placing An Absolute Limit On The Total Assets That Any One Company Can Have
B. Removing All Government-Imposed Entry Barriers To Industries And Occupations
C. Placing A Government Ban On Television Advertising
D. Placing A Special Tax On Monopolists’ Outputs
E. None Of The Above

68. Which Of The Following Provides The Strongest Economic Justification For Regulation?
A. Natural Monopoly
B. Excess Consumer Information
C. Shortages And High Prices
D. All Of The Above
E. None Of The Above

69. The Best Estimate Of The Dead-Weight Welfare Loss Due To Monopoly Is Biased Downward Because It Does Not Take Into Account
A. Reductions In Product Quality
B. Higher Costs Of Production
C. Decreases In Product Variety
D. All Of The Above
E. None Of The Above

Questions 70 – 73 Refer To The Graph Below.

70. At What Level Of Output Does The Firm Experience Economies Of Scale?
A. 0
B. 0 – Q0
C. Q0
D. Above Q0
E. This Firm Does Not Experience Economies Of Scale

71. Increasing Output Beyond Q0 Will Cause The Firm To Experience
A. Economies Of Scale
B. Diseconomies Of Scale
C. Constant Returns To Scale
D. Network Economies
E. Decreasing Total Costs

72. At What Level(S) Of Output Do Reductions In The Average Costs Of Production Cease?
A. 0
B. 0 – Q0
C. Q0
D. Above Q0
E. There Are No Reductions In The Average Costs Of Production

73. It Is Cheaper Per Unit To Produce Higher Quantities When Output Is
A. High
B. Between 0 And Q0
C. Q0
D. Above Q0
E. Decreasing

74. Which Of The Following Is A Negative Consequence Of Allowing Competition In An Industry That Is A Natural Monopoly?
A. Deadweight Welfare Loss
B. Lower Prices
C. Restricted Output
D. Higher Average Costs
E. All Of The Above

75. Which Of The Following Is A Negative Consequence Of Allowing An Unregulated Natural Monopoly?
A. Deadweight Welfare Loss
B. Higher Prices
C. Restricted Output
D. All Of The Above
E. None Of The Above

76. Corporations
A. Are Legal Entities Separate From Their Owners
B. Are Owned By Stockholders
C. Finance Their Operations Through Many Small Investors
D. Account For 20% Of All Businesses In The United States
E. All Of The Above

77. Approximately What Percent Of Sales In The United States Are Made By Corporations?
A. 40
B. 50
C. 60
D. 70
E. 90

78. The “Agency Problem” Is Caused By
A. Corporate Managers Pursuing Goals Different From Stockholder’s Goals
B. Stockholders Attempting To Micromanage Corporations
C. Regulatory Agencies Interfering With Corporate Operations
D. Sudden Declines In Stock Prices
E. Over-Investment In New Capital

79. A Guarantee That Allows The Purchase Of Shares Of Stock At A Fixed Price Is A(N)
A. Non-Pecuniary Benefit Of Employment
B. Stock Option
C. Disincentive To Expand A Corporation
D. Illegal Means To Compensate Ceos
E. Stock Split

80. Some Would Argue That One Of The Primary Benefits Of Possessing A Monopoly Is
A. The Chance To Erect Entry Barriers
B. The Opportunity To Live The Quiet Life
C. The Ability To Restrict Output
D. The Chance To Create Deadweight Losses
E. The Ability To Jack Up Prices To Consumers

81. There Is The Possibility That The Sheer Size Of Some Firms—Their “Bigness”—Is A Problem For An Economy Because
A. Big Firms Possess Larger Entry Barriers
B. Bigness Implies That The People Who Run Such Firms Are Unethical
C. Bigger Firms Are More Inefficient
D. The Effects That The Failure Of Large Firms Can Have On The Us Economy
E. The Number Of Shares Of Stock That Are Traded In Large Firms

82. The Us Government In 2008 Did Not Step Into The Market To Bail Out Which Firm?
A. Chrysler
B. General Motors
C. Ford
D. Aig
E. The Government Stepped In To Bail Out All Of These Firms

True / False Questions

83. Firms With Monopoly Power Yield Higher Than Average Returns To Investors.

84. The Monopoly Power Of A Firm In An Imperfectly Competitive Market Is Greater The Larger The Firm’s Output Relative To The Industry Output.

85. The More Sellers There Are In, The Less Control Any One Seller Has Over The Price It Can Charge.

86. Shortages Are Important Evidence That Firms Are Exercising Monopoly Power.

87. A Four-Firm Concentration Ratio Of 0.9 Indicates That The Four Largest Firms In The Industry Control 90% Of The Industry’s Sales.

88. In A Perfectly Competitive Industry The Four-Firm Concentration Ratio Is Close To Zero.

89. Concentration Ratios Provide A Good Measure Of A Firm’s Potential For Exercising Monopoly Power.

90. Ford Motors More Closely Resembles A Monopoly Than Does Your Local Electric Company.

91. Concentration Ratios Tend To Be Biased Downward Because They Do Not Account For International Competition.

92. Profit Maximization As An Objective Of A Firm Is A Logical Extension Of The General Principle That People Prefer More To Less.

93. Sellers In A Competitive Market Must Take Into Account What Buyers Will Do And Those In The Monopolized Market Do Not.

94. Generally Monopolists Will Be More Concerned With Profit Maximization And Competitive Firms Will Be More Concerned With Earning A Fair Rate Of Return On Investment.

95. To Maximize Profits A Firm Tends To Produce An Output Level At Which Its Marginal Revenue Equals Its Marginal Costs.

96. Marginal Revenue For A Monopolist Is Less Than The Price It Charges For Its Product.

97. Marginal Revenue For A Competitive Firm Is Equal To The Price It Charges For Its Product.

98. If Its Marginal Revenue Is Less Than Its Marginal Cost, A Firm Should Reduce Its Output Product.

99. Like Other Demand Curves, The Demand Curve Facing A Competitive Firm Slopes Downward.

100. A Firm That Sells In A Competitive Market Restricts Output And Charges Higher Prices Than It Would If It Were A Monopolist.

101. Profits Serve No Useful Purpose In A Private Enterprise Economy And Should Be Taxed Away By The Government.

102. A Firm In A Competitive Market Has No Price Setting Capability.

103. Some Monopolists Block Entry Into Their Markets Through Their Control Of The Raw Materials Needed To Produce The Product.

104. Licensing Of Barbers Insures That We Will Get Better Haircuts At The Same Prices Or The Same Quality Of Haircuts At Lower Prices.

105. Licensing Of M.D.’S Has Nothing To Do With The Fact That They Are Among The Economy’s Highest Paid Professionals.

106. Changes In The Design And Quality Of A Product Often Results In Greater Consumer Satisfaction From The Product.

107. Monopoly Power In The U.S. Does Not Pose A Significant Economic Problem.

108. Unlike In Competition, The Monopolist Is Driven By A Desire To Maximize Profit.

109. Any Firm, Whether Monopolistic Or Competitive, Must Produce Where Marginal Cost Equals Marginal Revenue In Order To Maximize Profit.

110. The Monopolization Of A Previously Competitive Industry Will Lead To Restricted Production And Higher Prices.

111. Without Barriers To Entry, A High-Profit Monopoly Is Unlikely To Be Able To Maintain Its Monopoly Status.

112. Monopoly Firms Typically Have Lower Costs Than Competitive Firms Because They Receive Bulk-Buying Discounts For Their Inputs.

113. In Addition To Reducing Production And Raising Prices, Monopoly Decreases Product Quality.

114. Monopolies Will Have Higher Production Costs Than Competitive Firms.

115. Monopoly Can Lead To A Perverse Redistribution Of Income If The Owners Of The Monopoly Are Wealthier Than Buyers.

116. Severe Competition In A Market Leads To A Dead Weight Welfare Loss To Society.

117. Extremely Large Firms Cause Dead Weight Loss To Increase.

118. Monopolies In The U.S. Economy Are Estimated To Reduce Gdp By About 1% Per Year.

119. With Natural Monopolies, Consumers May Be Better Off With A Monopoly Than Competition.

120. Market Failure, By Itself, Is Enough To Justify Government Regulation Of Business.

121. Government Regulation Is Appropriate When There Is Market Failure And Regulation Is Cost-Effective.

122. Consumers Rarely Have Complete Information About Products And This Lack Of Information Doesn’t Keep The Market From Maximizing Welfare.

123. The Capture Theory Suggests That Regulators May End Up Working For The Interests Of The Firms Being Regulated Rather Than The Consuming Public.

124. Barriers To Entry Are Often Created By Governments.

125. A Benefit Of Monopoly Is That Costs Are Lower.

126. The Capture Theory Of Regulation Suggests That Government Regulation Of Business Represents An Unfair Attack On Private Firms By Government.

127. Natural Monopolies Are Common In The Modern World Economy.

128. In Their Desire To Achieve The Quiet Life, Monopolists Tend To Allow Costs To Rise Above Competitive Levels.

129. When A Firm’s Average Costs Fall As Output Is Increased, The Firm Is Experiencing Economies Of Scale.

130. When The Value Of A Product To A Consumer Is Enhanced When Others Also Consume The Good, Economies Of Scale Exist.

Chapter 09

The Economics Of Professional Sports: What Is The Real Score?

Multiple Choice Questions

1. Professional Sports Clubs Differ From Most Other Business Firms In Their
A. Organizational Structure And Relationship With Employees
B. Location And Emphasis On The Competitive Spirit
C. Ownership And Profitability
D. Legal Status As Corporations And Limited Tax Liability
E. Ability To Operate In Both The Product And Resource Market

2. In A Product Market,
A. Producers Sell Goods And Services
B. Consumers Buy Goods And Services
C. Final Goods And Services Are Exchanged
D. All Of The Above
E. None Of The Above

3. In A Resource Market,
A. Buyers And Sellers Exchange Goods And Services
B. Resourceful Buyers Find Goods That Are Otherwise Unavailable
C. Buyers And Sellers Exchange Factors Of Production
D. Firm Managers Exchange Production Techniques And Ideas
E. Workers Exchange Their Labor For The Firm’s Output

4. Firms That Coordinate Their Actions To Maximize Joint Profits Are Said To Have Formed A(N)
A. Monopsony
B. Cartel
C. Product Market
D. Oligopoly
E. Economic Treaty

5. Which Of The Following Sports Leagues Can Be Considered A Cartel?
A. The National Football League (Nfl)
B. The National Hockey League (Nhl)
C. The National Basketball Association (Nba)
D. (A) And (B)
E. All Of The Above

6. Which Of The Following Is Not Necessary For A Successful Cartel? Members Must
A. Produce Most Of The Industry’s Output
B. Produce A Homogeneous Output
C. Produce Heterogeneous Outputs
D. Be Able To Divide The Market
E. Have A Way To Prevent Cheating

7. Which Of The Following Best Characterizes A Cartel Arrangement?
A. Open Competition
B. Shared Competition
C. Monopsony
D. Shared Monopoly
E. Oligopoly

8. To Maximize Joint Profits, A Cartel Will Set The Market Price And Output Such That
A. Each Firm’s Marginal Revenue Equals Its Marginal Cost
B. The Market’s Marginal Revenue Equals The Market’s Marginal Cost
C. Each Firm’s Demand Schedule Is Equal To The Market Marginal Cost
D. The Market’s Marginal Revenue Is Equal To Each Firm’s Marginal Cost
E. None Of The Above

9. In A Product Market With A Cartel, Prices Will Be _____ And Output Will Be _____ Than In A Competitive Market.
A. Higher; Lower
B. Lower; Higher
C. Higher; Higher
D. Lower; Lower
E. Both Price And Quantity Will Be The Same

10. Which Of The Following Statements Is ?
A. Anti-Trust Laws Make Most Cartels Illegal In The U.S
B. Formation Of A Cartel Ensures That Each Firm Will Earn Greater Profits Than Without A Cartel
C. Cartels Maximize Joint Profits Not Individual Firm Profits
D. Professional Sports Leagues Insure The Stability Of Teams By Cooperating Through Cartel Arrangements
E. Cartels Are Difficult To Maintain When Cheating Is Possible

11. A Resource Market With Only One Buyer Of A Factor Of Production Is Called A(N)
A. Imperfect Monopoly
B. Monopoly
C. Competitive Market
D. Monopsony
E. Cartel

12. A Monopsony Is A Market With Only One
A. Buyer
B. Employer
C. Product
D. All Of The Above
E. A) And B)

13. The Additional Cost Incurred As A Result Of Hiring An Additional Worker Is The Firm’s
A. Total Cost Of Labor
B. Marginal Cost Of Labor
C. Average Cost Of Labor
D. Labor Cost
E. Human Capital Cost Of Labor

14. Which Of The Following Conditions Can Give Rise To A Monopsony Employer?
A. Mobile Workers With Limited Skills
B. Legal Protection From Anti-Trust Laws And A Mobile Workforce
C. Immobile Workers With Highly Specialized Skills
D. A Cartel Agreement That Results In Raising Joint Profits
E. A Merger Between Two Unrelated Firms

15. Why Does A Monopsony’s Marginal Cost Of Labor (Mcl) Curve Lie Above The Market Supply Of Labor Curve? Because The Monopsony
A. Must Raise The Wage It Pays All Employees In Order To Attract And Hire Additional Workers
B. Must Pay Higher Wages To Only The Last Workers Hired In Order To Attract And Hire Additional Workers
C. Faces The Market Demand And Marginal Revenue Curves
D. Must Lower The Wage It Pays All Employees In Order To Maintain Profitability
E. Has Such High Labor Costs Relative To The Supply Of Labor

16. If A Firm’s Workers Add $1,000 To The Firm’s Receipts And Total Wages Equal $500, Then Monopsonistic Profit Equals
A. $500
B. $1,000
C. $1,500
D. $500,000
E. A Number Unable To Be Determined With The Information Given

17. Under Which Of The Following Conditions Will A Monopsony Hire An Additional Worker? When
A. Mcl > Mrp
B. Mcl < Mrp C. Mrp = D D. Mc = Mr E. D > S

18. To Maximize Profit, A Monopsony Will Hire Workers Up To The Point Where
A. Mc = Mr
B. D = S
C. Mcl = Mrp
D. Mcl = P
E. Mr = P

19. A Monopsony Will Hire ______ Workers At A _____ Wage Than An Employer In A Competitive Labor Market.
A. More; Lower
B. More; Higher
C. Fewer; Higher
D. Fewer; Lower
E. The Same Number Of; Higher

20. The Difference Between A Worker’s Contribution To The Firm’s Receipts And The Wage Is
A. Monopsony Profit
B. Monopoly Profit
C. Cartel Profit
D. Economic Profit
E. Marginal Revenue Profit

21. Which Of The Following Releases Professional Athletes From Some Of The Monopsony Powers Of The Sports Leagues?
A. Player Drafts
B. Long-Term Contracts
C. Free Agency
D. Expanded Playing Seasons
E. Minimum Wage Laws

22. Why Does The Average Professional Baseball Player Earn More Than The Average Doctor?
A. The Baseball Player Has A Lower Mcl
B. The Doctor Has A Higher Mrp
C. The Baseball Player Has A Higher Mrp
D. There Are More Professional Baseball Players Than Doctors
E. The Demand For Baseball Is Higher Than The Demand For Medical Care

Questions 23 – 27 Refer To The Graph Below.

23. This Graph Represents The Labor Market For A(N)
A. Monopolist
B. Competitive Firm
C. Product Market Cartel
D. Monopsonist
E. Oligopoly

24. What Wage Will Maximize This Firm’s Economic Profit?
A. W1
B. W2
C. W3
D. W4
E. A Wage Above W4

25. How Many Workers Will This Firm Hire?
A. 0
B. L1
C. L2
D. L3
E. More Than L3

26. If This Labor Market Is Competitive, How Many Workers Will Be Hired?
A. 0
B. L1
C. L2
D. L3
E. More Than L3

27. If This Labor Market Is Competitive, What Wage Will Workers Be Paid?
A. W1
B. W2
C. W3
D. W4
E. A Wage Above W4

Questions 28 – 32 Refer To The Graph Below.

28. This Graph Represents The Labor Market For A(N)
A. Monopolist
B. Competitive Firm
C. Product Market Cartel
D. Monopsonist
E. Oligopoly

29. What Wage Will Maximize This Firm’s Economic Profit?
A. $500
B. $800
C. $1,000
D. Less Than $1,000 But Greater Than $0
E. $0

30. How Many Workers Will This Firm Hire?
A. 0
B. 10
C. 12
D. 15
E. More Than 15

31. If This Labor Market Is Competitive, How Many Workers Will Be Hired?
A. 0
B. 10
C. 12
D. 15
E. More Than 15

32. If This Labor Market Is Competitive, What Wage Will Workers Be Paid?
A. $0
B. $500
C. $800
D. $1,000
E. More Than $1,000

33. A Labor Union
A. Bargains On Behalf Of All Workers
B. Conducts Lock-Outs As A Bargaining Tool
C. Is Concerned With Salaries Rather Than Work Conditions
D. Does All Of The Above
E. Does None Of The Above

34. Which Of The Following Is A Work Stoppage Initiated By Workers?
A. Lockout
B. Strike
C. Mediation
D. Arbitration
E. Monopsony

35. Which Of The Following Is A Work Stoppage Initiated By Management?
A. Lockout
B. Strike
C. Mediation
D. Arbitration
E. Monopsony

36. One Way In Which Professional Sports Leagues Enforce The Monopsonistic Employment Of Players Is Through
A. Free Agency
B. Open Arbitration
C. League Expansion
D. Salary Caps
E. A Talent Agency

37. The Relatively High Salaries Paid To Professional Athletes Reflect
A. Their Contribution To Team Revenue
B. The Exploitation Of Fans
C. Their Contribution To Society’s General Well-Being
D. The Success Of Labor Union Representation
E. The Social Value Of Professional Sports

38. The Average Baseball Player Earns A Salary Greater Than The Average College Professor Because
A. Baseball Players Contribute More To Society’s General Well-Being
B. College Professors Contribute Less To Their Employer’s Revenues Than Baseball Players
C. Colleges Are Better Able To Enforce Their Monopsonistic Market Positions
D. The Market For Baseball Players Is More Competitive
E. Colleges Are Owned By The State

39. If A Worker Adds 20 Units To A Firm’s Total Output, The Output Is Sold For $2 Per Unit, And The Worker Is Paid $100, Then The Worker’s Marginal Revenue Product Is
A. 20
B. 40
C. 60
D. 100
E. 200

40. Which Of The Following Statements Is Not ?
A. Even Though The Essence Of Sports Is Competition, Professional Sports Clubs Cooperate With Each Other In The Marketplace
B. Professional Sports Leagues Are Economic Cartels
C. From An Economic Perspective, The Nfl, Nhl, Nba And Mlb Are Competitive Markets
D. Professional Sports Leagues Have Monopsony Power In The Resource Market
E. Owners Of Professional Sports Clubs Attempt To Maximize Their Joint Profits By Joining Leagues

41. Professional Baseball Enjoys An Exemption From ________ Laws That Make Cartels Illegal In Most Other Industries.
A. Minimum Wage
B. Antitrust
C. Common
D. Labor
E. Anti-Competition

42. A Cartel Is More Likely To Be Successful If
A. Cartel Members Produce Most Of The Output In The Market
B. Market Output Is Heterogeneous
C. Members Overlap In Their Control Of Market Territories
D. All Of The Above
E. None Of The Above

43. Which Of The Following Factors Is Not Necessary To Form A Successful Cartel?
A. Members Must Be Responsible For Most Of The Industry’s Output
B. Member Firms Should Produce Homogeneous Output
C. Members Must Be Located In Close Proximity To Each Other
D. The Cartel Must Be Able To Divide The Marketplace Between Member Firms
E. There Must Be A Mechanism To Prevent Cheating By Member Firms

44. Today, The Primary Source Of Revenue For Most Major League Clubs Is
A. Ticket Sales
B. Concession Sales
C. Merchandising
D. Broadcast Rights
E. Parking

45. To Maximize Joint Profits, A Cartel Will Produce Output Up To The Point Where
A. Mr = Mc
B. Tr = Tc
C. Mr = Tc
D. Tr = Mc
E. P = Mr

46. When A Professional Sports League Sells Broadcast Rights For The Entire League,
A. The Selling Price Will Be Higher Than The Price That Would Be Charged If Each Team Individually Sold Broadcast Rights
B. Fewer Games Will Be Broadcast Than Would Be If Each Team Individually Sold Broadcast Rights
C. Joint Profits Among All Teams In The League Can Be Maximized
D. (A) And (B)
E. All Of The Above

47. For A Cartel, The
A. Demand Curve Is Also The Marginal Revenue Curve
B. Marginal Revenue Curve Lies Above The Demand Curve
C. Marginal Revenue Curve Lies Below The Demand Curve
D. Marginal Cost Curve Lies Below The Demand Curve At All Points
E. Supply Curve Lies Above The Demand Curve At All Points

48. A Monopsony Exists Whenever There
A. Are Many Buyers In A Market
B. Is Only One Buyer In A Market
C. Is Only One Seller In A Market
D. Are Many Sellers In A Market
E. Are No Barriers To Enter Or Leave A Market

49. In The Resource Market, Professional Sports Clubs Must Face The
A. Upward Sloping Market Supply Of Labor Curve
B. Downward Sloping Market Supply Of Labor Curve
C. Horizontal Marginal Cost Of Labor Curve
D. Industry-Level Demand For Labor Curve
E. Upward Sloping Marginal Revenue Product Of Labor Curve

50. A Profit Maximizing Sports Club Will Hire Players Up To The Point Where The
A. Demand Of Labor Equals Marginal Revenue Product Of Labor
B. Supply Of Labor Equals The Marginal Cost Of Labor
C. Marginal Revenue Product Of Labor Equals The Marginal Cost Of Labor
D. Marginal Cost Of Labor Equals The Wage Rate
E. Wage Equals The Quantity Of Labor Available

51. In A Monopsony, The Difference Between The Marginal Revenue Product Of Labor And The Wage Rate Is Known As
A. Joint Profit
B. Monopsonistic Profit
C. Monopsonistic Cost
D. Cartel Profit
E. Competitive Returns

52. The Additional Revenue That A Player Generates For His Employing Team Is Called
A. Total Player Revenue
B. Marginal Revenue Product
C. Marginal Product
D. Marginal Revenue
E. Monopsonistic Revenue Product

53. Over The Past Twenty Years, Free Agency In Professional Sports Has
A. Increased The Monopsonistic Power Of Leagues And Caused Salaries To Stagnate
B. Reduced The Bargaining Power Of Players And Raised Owner Profits
C. Reduced The Monopsonistic Power Of Leagues And Caused Salaries To Rise
D. Improved The Economic Position Of Owners By Increasing The Competition For Good Players
E. Had Little Effect On The Sports Industry

54. Which Of The Following Statements Is ?
A. From An Economic Perspective, Most Professional Athletes Do Not Earn Their Pay
B. Salaries In Any Industry Reflect Labor’s Contribution To The Overall Health And Well-Being Of Society
C. Professional Sports Clubs Operate In Highly Competitive Product And Resource Markets
D. The Cartel Behavior Of Professional Sports Leagues Keeps Ticket Prices Low
E. The Salary Of A Professional Athlete Reflects His Contribution To His Employing Club’s Revenue

55. From An Economic Perspective, Which Of The Following Is The Best Reason For A City To Attract A Professional Sports Team?
A. A Professional Sports Team Generates Publicity And Creates Public Relations Opportunities For Businesses Located In The City
B. A Professional Sports Team Generates A Significant Number Of New Jobs For The Community
C. Professional Sports Teams Pay Large Sums Of Money In City Taxes
D. A New Team Will Increase The Demand For Other Entertainment Related Activities Within The Local Community
E. Sports Enhance The Tax Base Of Large Cities By Generating Significant Numbers Of New Professional Jobs

56. Which Of The Following Statements Is ?
A. Even Though Professional Athletes May Earn Millions Of Dollars Each Year, It Is Possible For Them To Be Exploited By Their Employers
B. From An Economic Perspective, Professional Athletes Do Not Earn Their Pay
C. The Economic Impact Of A Professional Sports Team On Their Home Community Is Relatively Small
D. Free Agency Has Caused The Salaries Of Professional Athletes To Rise Over Time
E. By Limiting Expansion, Professional Sports Leagues Ensure Greater Profits For The Existing Teams

57. A Monopsony Will Continue To Hire Workers Up To The Point Where The
A. Marginal Cost Of Labor Is Equal To Total Revenue
B. Total Cost Of Labor Is Equal To The Marginal Revenue Product Of Labor
C. Marginal Cost Of Labor Is Equal To The Marginal Revenue Product Of Labor
D. Marginal Profit Of Production Equals The Total Cost Of Production
E. Marginal Revenue Product Of Labor Is Maximized

58. Which Of The Following Factors Helps Professional Sports Teams To Exercise Monopsony Power Over The Players That They Hire?
A. Player Drafts
B. Exclusive Contracts That Limit Free Agency
C. The Specialized Skills Of Players
D. All Of The Above
E. None Of The Above

59. Which Of The Following Factors Reduces The Monopsony Power Of Professional Sports Teams In The Employment Of Players?
A. Player Drafts
B. The Reserve Clause
C. The Long-Term Employment Contracts
D. Cartel Agreements Between Teams
E. Free Agency

60. A Professional Sports League Can Maximize The Revenue It Generates From Selling Broadcast Rights By Playing Enough Games Such That
A. Demand Equals Supply
B. Total Revenue Equals Total Costs
C. Marginal Revenue Equals Marginal Costs
D. Marginal Revenue Equals Total Costs
E. Total Revenue Equals Marginal Costs

61. If A Cartel Discovers That Its Marginal Revenue Is Greater Than Its Marginal Cost Of Production, The Cartel Should
A. Increase Production
B. Shut Down
C. Reduce Production
D. Hire Fewer Workers
E. Increase The Number Of Cartel Members

62. If A Cartel Discovers That Its Marginal Cost Is Greater Than Marginal Revenue, The Cartel Should
A. Increase Production
B. Shut Down
C. Reduce Production
D. Hire Fewer Workers
E. Increase The Number Of Cartel Members

63. Teams That Belong To Professional Sports Leagues Are
A. Cartel Members
B. In Business To Make A Profit
C. Monopsony Employers
D. All Of The Above
E. None Of The Above

64. Approximately What Percent Of Funding For Stadium Construction And Renovation Has Come From Public Sources In Recent Years?
A. 1
B. About 10
C. Less Than 20
D. Over 50
E. Nearly 100

65. According To Economist Andrew Zimbalist, The Jacksonville Jaguars Expansion Football Team Has An Economic Impact On The Local Area Comparable To A
A. New Department Store
B. Major Hurricane
C. Large Military Installation
D. State University
E. City Park

66. The Primary Benefits Of A Professional Sports Team Are
A. Massive Economic Development
B. Privately Funded
C. Salaries And Wages
D. Intangible
E. All Of The Above

67. When Professional Sports Leagues Seek To Achieve Parity, They Are Seeking
A. Fair Wages
B. Competitive Balance
C. Teams With An Athletic Advantage
D. Equal Marginal Revenue Product Across Teams
E. Homogeneous Views On League Policies

68. Which Of The Following Contributes To Monopsony Power In Professional Sports?
A. Player Mobility
B. Free Agency
C. Player Drafts
D. All Of The Above
E. None Of The Above

69. Which Of The Following Is The Best Economic Reason For Taxpayers To Support The Development Of Facilities For Professional Sports Teams?
A. The Intangible Spillover Benefits Of The Team, Such As Civic Pride
B. The Number Of Jobs That Will Be Created By The Team
C. The Economic Impact On The City Due To Ticket Sales
D. The New Taxes That Will Be Paid By The Players And Coaches
E. The Tourists That Will Visit Town While Attending Home Games

70. When Does A Firm Experience Monopsony Profits?
A. Only When The Marginal Cost Of Labor Is Greater Than The Marginal Revenue Product Of Labor
B. When The Total Revenue Exceeds The Marginal Cost Of Production
C. Only When The Marginal Revenue Product Of Labor Exceeds The Marginal Cost Of Labor
D. Only When The Firm Is A Member Of A Cartel
E. When The Firm Is A Monopoly In Its Product Market

True / False Questions

71. Professional Sports Clubs Are Businesses Operated For Profit.

72. Professional Sports Leagues, Like The Nfl, Were Formed By Teams In An Effort To Earn Greater Profits And To Ensure Survival.

73. All Professional Sports Clubs Must Operate Independently To Guarantee A Competitive Economic Environment.

74. Unlike Other Workers, It Is Difficult To Measure The Productivity Of A Professional Athlete.

75. When A Player Is Drafted By A Team, That Team Acquires The “Property Rights” To The Player’s Employment Contract.

76. In Football, New Players Can Sell Their Services To The Highest Bidding Nfl Team.

77. Tickets And Broadcast Rights To Baseball Games Are Bought And Sold In The Product Market.

78. A Cartel Exists When Firms Coordinate Their Actions In A Manner To Maximize Joint Profits.

79. Antitrust Laws Make Most Cartels Legal Forms Of Business In The United States.

80. The National Basketball Association Is A Cartel.

81. A Cartel Is A “Shared Monopoly.”

82. Prices And Output Are Greater With A Cartel Than Under Competition.

83. Profits Are More Equally Distributed In A Competitive Industry Than In An Industry Dominated By A Cartel.

84. Professional Sports Leagues Do Not Regulate The Employment Of Players By Member Teams.

85. A Monopsony Is A Single Buyer In A Resource Market.

86. The Immobility Of Players Between Teams And The Athletes’ Highly Specialized Skills Generate Monopsony Power For Professional Sports Clubs.

87. The Marginal Cost Of Labor Curve (Mcl) Represents The Change In A Firm’s Total Labor Cost Due To Selling An Additional Unit Of Output.

88. If A Player’s Mrp> Mcl, The Player Should Be Hired By The Team.

89. The Mcl Curve Lies Above The Supply Of Labor Curve And Is More Steeply Sloped.

90. A Monopsony Must Face The Market Supply Of Labor Schedule Because It Is The Only Employer In The Market.

91. A Firm Can Maximize Its Economic Position By Hiring Workers Up To The Point Where Mcl = Mrp.

92. A Monopoly Must Face The Market Supply Of Labor Schedule Because It Is The Only Employer In The Market.

93. Monopsony Profit Is The Difference Between A Worker’s Mrp And The Mcl.

94. Economic Analysis Suggests That A Free Agent Baseball Player Will Earn Less Than An Equally Talented Player Who Is Not A Free Agent.

95. Professional Athletes Do Not Earn Their Pay From An Economic Perspective.

96. A Strike Is A Work Stoppage Initiated By Management.

97. A Labor Union Bargains On Behalf Of Workers For Better Wages And Working Conditions.

98. Salary Caps Enforce Monopsonistic Employment Of Players Across Teams In A Professional Sports League.

99. A Recently Drafted Player Will Most Likely Command A Higher Salary Than A Free Agent.

100. Labor Disputes Are Rare In Professional Sports And Are Likely To Become Even Less Common.

101. Most Economists Argue That Professional Sports Teams Should Be Used As An Economic Development Tool For Local Communities.

102. The Public Relations Benefit Of A City’s Professional Sports Team Is Generally More Valuable Than The Number Of Jobs It Creates.

103. The Economic Impact Of A New Professional Sports Team On A City Is About The Same As A New Department Store.

104. Most New Stadiums And Arenas For Professional Sports Teams Are Privately Built, Without Support From Local Taxpayers.

105. Professional Sports Teams Tend To Relocate When There Is A Surplus Of Teams In Their League.

106. The Shortage Of Teams In Professional Sports Is The Primary Reason That Teams Relocate.

107. Economic Factors Cannot Explain Why Teams Relocate Between Cities.

108. As It Becomes Easier For Professional Football Players To Become Free Agents, Nfl Salaries Are Likely To Increase Over Time.

109. The Economic Factors That Cause Professional Sports Leagues To Expand Also Cause Some Existing Teams To Relocate.

110. The “Civic Pride” Enjoyed By A Major League City Has No Economic Value.

111. Free Agency Increases The Monopsony Power That Professional Sports Teams Exert Over The Players That They Hire.

112. If A Cartel’s Marginal Revenue Is Greater Than Its Marginal Cost, It Should Produce More.

113. By Belonging To A Cartel, A Firm Can Guarantee That Its Individual Profit Will Be Greater Than If It Engaged In Competition.

114. The Reserve Clause Helped To Raise The Salaries Of Professional Baseball Players.

115. For A Cartel, Joint Profit Is Maximized Where Marginal Revenue Equals Marginal Costs.

116. Professional Sports Leagues Are Both Cartels And Monopsonies.

117. College Athletes Who Enter The Major Leagues Are Always Hired By The Team That Is Willing To Pay The Highest Salary.

118. A Work Stoppage Initiated By Management Is Called A Lock-Out.

119. By Adding New Teams, Professional Sports Leagues Guarantee That Existing Member Teams Earn Greater Profits.

120. From An Economic Perspective, All Professional Athletes Are Overpaid.

Chapter 10

Competition In The Global Marketplace: Should We Protect Ourselves From International Trade?

Multiple Choice Questions

1. Which Of The Following Statements Is Most Accurate?
A. Historically, There Has Been Conflict Between Groups Wanting To Suppress Trade And Groups Wanting To Peg Exchange Rates
B. Since The Late 1940s, Import Restrictions Have Fallen
C. Resentment Of Imports Always Increases During Economic Expansions
D. The U.S. Government Engaged In A Free Trade Campaign Up To The End Of World War Ii
E. None Of The Above

2. Which Of The Following Is Part Of The “Protectionist” Perspective On International Trade?
A. Imports Are Responsible For Crowding Out Domestic Goods From The Market And Thereby Reduce American Jobs
B. Trade Restrictions Are Needed To Protect Key Industries Vital To National Security
C. Imports Should Be Restricted To Remedy The Balance Of Trade Deficit
D. Both (A) And (C)
E. All Of The Above

3. In A Free Market, Who Benefits From Voluntary Exchange?
A. Buyers
B. Sellers
C. Both Buyers And Sellers
D. The Government Only
E. Nobody

4. Why Is International Trade Important? International Trade
A. Increases The Variety And Availability Of Consumer Goods In An Economy
B. Expands The Production Possibilities Of A Nation’s Economy
C. Increases An Economy’s Gdp
D. Allows Nations To Specialize In The Production Of Goods According To Comparative Advantage
E. Does All Of The Above

5. Which Of The Following Is Not Used As A Protectionist Argument?
A. Imports Crowd U.S. Goods Out Of The Market
B. Imports Reduce The Demand For Domestic Labor Leading To Higher Unemployment
C. Our Industries Cannot Compete Successfully Against Those In Other Countries That Pay Much Lower Wages
D. Imports Raise Living Standards Above What They Would Otherwise Be
E. All Of The Above Are Used As Protectionist Arguments

6. The Fundamental Reason Countries Engage In Trade Is That
A. It Enables Each Country To Improve Its Standard Of Living
B. Domestic Markets Are Continually Shrinking
C. Powerful Special Interest Groups Benefit From Exchange
D. Trade Allows Countries To Save Some Of Their Resources For The Future
E. All Of The Above

7. Omega Can Produce Either Two Microcomputers Or Ten Tv Sets. Alpha Can Produce One Microcomputer Or Five Tv Sets. Which Of The Following Statements Is Correct?
A. Alpha Has A Comparative Disadvantage In Producing Both Products
B. Both Countries Have A Comparative Advantage In Producing Microcomputers
C. The Countries Are Unlikely To Engage In Trade In These Two Items
D. Labor Costs Are Obviously Too High In Alpha
E. All Of The Above

8. Which Of The Following Will Give Rise To U.S. Demand For Foreign Exchange?
A. U.S. Sales Of Airplanes To Japanese Buyers
B. U.S. Investments Abroad
C. U.S. Purchases Of French Perfume
D. Both (B) And (C)
E. All Of The Above

9. A Country Has A Comparative Advantage In The Production Of Any Good That It Can Produce
A. At A Lower Absolute Cost Than Can Other Countries
B. With Less Labor Than Can Other Countries
C. With A Smaller Sacrifice Of Some Alternative Good Or Service Than Can Other Countries
D. For Export
E. All Of The Above

10. Which Of The Following Is Not A Reason That Countries Have Comparative Advantages In The Production Of Some Goods And Comparative Disadvantages In The Production Of Other Goods? Differences In
A. Technological “Know-How.”
B. Exchange Rates
C. Literacy Rates
D. Natural Resources
E. Labor Force Quality

Questions 11 – 15 Refer To The Graph Below.

11. Assuming An Initial Combination Of 75 Million Loaves Of Bread And 150 Million Gallons Of Milk, The Country Represented Would Refuse To Enter Into Any Trade Relationships In Which The Cost Of Importing
A. Bread Exceeds Two Gallons Of Milk Per Loaf
B. Milk Exceeds One Loaf Of Bread Per Gallon
C. Milk Exceeds Two Loaves Of Bread Per Gallon
D. Both (A) And (B)
E. None Of The Above

12. The Opportunity Cost Of A Million Gallons Of Milk Is How Many Millions Of Loaves Of Bread For This Country?
A. 0.5
B. 1
C. 2
D. 150
E. 300

13. The Opportunity Cost Of A Million Loaves Of Bread Is How Many Millions Of Gallons Of Milk For This Country?
A. .5
B. 1
C. 2
D. 150
E. 300

14. If This Country Has A Comparative Advantage In The Production Of Bread And Produces Only Bread While Trading With Another Country For Milk, Which Of The Following Is Of Its Consumption Possibilities Curve?
A. It Shifts Out Parallel To The Ppc
B. Its Vertical Intercept Increases
C. Its Horizontal Intercept Increases
D. All Of The Above
E. None Of The Above

15. If This Country Has A Comparative Advantage In The Production Of Milk And Produces Only Milk While Trading With Another Country For Bread, Which Of The Following Is Of Its Consumption Possibilities Curve?
A. It Shifts Out Parallel To The Ppc
B. Its Vertical Intercept Increases
C. Its Horizontal Intercept Increases
D. All Of The Above
E. None Of The Above

Questions 16 – 20 Refer To The Graph Below.

16. Without Trade, The Republic Of Alpha’s Production Possibilities Curve Is Ab. If Consumption Along The Curve A1b Is Possible With Trade, Alpha Must Have A Comparative Advantage In The Production Of
A. Bread
B. Milk
C. Both Bread And Milk
D. Neither Bread Nor Milk
E. It Cannot Be Determined With The Information Given

17. Without Trade, The Republic Of Alpha’s Production Possibilities Curve Is Ab. With No Trade, Alpha’s Consumption Possibilities Curve Is
A. Ab
B. A1b
C. Cb
D. C1b
E. Cc1

18. Without Trade, The Republic Of Alpha’s Production Possibilities Curve Is Ab. The Cost Of Producing Bread In Alpha (In Terms Of Millions Of Gallons Of
Milk) Is
A. .5
B. 1
C. 2
D. 100
E. 200

19. Without Trade, The Republic Of Alpha’s Production Possibilities Curve Is Ab. For Alpha To Be Willing To Trade Milk For Bread, A Million Loaves Of Bread Would Have To Cost Less Than
A. 0.5 Million Gallons Of Milk
B. 1 Million Gallons Of Milk
C. 2 Million Gallons Of Milk
D. 0.5 Million Loaves Of Bread
E. Alpha Would Not Trade Milk For Bread

20. If Alpha Produces 100 Million Loaves Of Bread, With Trade (And Consumption Possibilities Curve A1b) It Can Consume How Many Gallons Of Milk?
A. 0
B. 100
C. 200
D. 300
E. 400

21. An Exchange Rate Is
A. The Price Of One Country’s Currency In Terms Of The Monetary Units Of Another Country
B. The Rate At Which One Good Exchanges For Another
C. The Price Of Gold In Terms Of The U.S. Dollar
D. The Fee Charged For Exchanging One Currency For Another
E. None Of The Above

22. Which Of The Following Demands Kenyan Shillings?
A. U.S. Importers Of Kenyan Goods
B. U.S. Investors In Kenya
C. U.S. Tourists Visiting Kenya
D. All Of The Above
E. None Of The Above

23. Which Of The Following Supplies Kenyan Shillings?
A. U.S. Exporters To Kenya
B. Kenyan Tourists Returning Home
C. U.S. Importers Of Kenyan Goods
D. All Of The Above
E. None Of The Above

24. The Largest Part Of U.S. Demand For Foreign Currencies Arises From
A. Increases In Investments Abroad
B. Imports Of Merchandise
C. Gifts That Persons In The U.S. Sent Abroad
D. Foreign Aid Transfers From The U.S. To Developing Countries
E. None Of The Above

25. The Largest Part Of The U.S. Supply Of Foreign Currency Arises From
A. Investments Made By Foreigners In The U.S
B. Exports Of Merchandise
C. Net Investment Income
D. Gifts That Persons Abroad Send Persons In The U.S
E. None Of The Above

Questions 26 – 30 Refer To The Graph Below.

26. In Equilibrium, The Price Of A British Pound, In Terms Of U.S. Dollars, Is
A. $1.50
B. $1.25
C. $.8
D. $.67
E. None Of The Above

27. In Equilibrium, The Price Of A U.S. Dollar, In Terms Of British Pounds, Is
A. $1.50
B. $1.25
C. $.8
D. $.67
E. None Of The Above

28. Which Of The Following Could Cause An Increase In The Equilibrium Exchange Rate?
A. An Increase In U.S. Investment In Britain
B. An Increase In U.S. Imports From Britain
C. An Increase In The Number Of U.S. Tourists Traveling To Britain
D. All Of The Above
E. None Of The Above

29. Pegging The Exchange Rate At $1.25
A. Imposes A Price Floor
B. Results In A Balance Of Payments Problem
C. Will Increase British Demand For U.S. Exports
D. Will Increase U.S. Demand For British Imports
E. Will Do Of The Above

30. Pegging The Exchange Rate At $1.25 Will Result In
A. A Shortage Of ≤20 Million Pounds Per Month
B. A Surplus Of ≤20 Million Pounds Per Month
C. A Shortage Of ≤40 Million Pounds Per Month
D. A Surplus Of ≤40 Million Pounds Per Month
E. None Of The Above

Questions 31 – 35 Refer To The Graph Below.

31. If D And S Are The Relevant Supply And Demand Curves, An Increase In Nigerian Travelers To The U.S. Would Result In Which Of The Following Changes In The Graph? A Movement From
A. S To S1
B. S1 To S
C. R1 To R
D. Q2 To Q1
E. Q To Q

32. Which Of The Following Could Cause A Shift In The Supply Curve From S To S1? An Increase In
A. U.S. Exports To Nigeria
B. Nigerian Exports To The U.S
C. U.S. Travelers To Nigeria
D. All Of The Above
E. None Of The Above

33. An Increase In U.S. Investment In Nigeria Will Have Which Effect On R? It Will
A. Increase
B. Decrease
C. Remain The Same
D. Be Pegged At R1
E. Not Be Able To Be Determined

34. If D And S Are The Relevant Demand And Supply Curves, Pegging The Exchange Rate At R1. Will Result In
A. A Shortage Of Q2q Niara Per Month
B. A Surplus Of Q2q Niara Month
C. A Shortage Of Q2q1 Niara Per Month
D. A Surplus Of Q2q1niara Pounds Per Month
E. None Of The Above

35. If D And S Are The Relevant Demand And Supply Curves, Pegging The Exchange Rate At R1
A. Imposes A Price Floor
B. Results In A Balance Of Payments Problem
C. Will Increase British Demand For U.S. Exports
D. Will Increase U.S. Demand For British Imports
E. Will Do All Of The Above

36. Import Restrictions, Like Tariffs And Quotas, Can Protect Domestic Jobs
A. At A Low Price
B. By Changing The Consumption Tastes Of Domestic Buyers
C. At A High Price
D. Without Any Effect On An Economy
E. By Changing The Structure Of The Economy

37. Free Trade Can Result In What Impact On An Economy?
A. A Net Increase Or Decrease In Overall Employment
B. A Reduction In The Efficiency Of An Economy
C. Free Trade Always Harms An Economy
D. Free Trade Always Increases Total Employment
E. No Impact At All

38. The Exchange Rate Ceiling On The Dollar Price Of The Pound Will Result In
A. A Surplus Of Pounds
B. A Balance Of Payments Deficit
C. A Balance Of Payments Surplus
D. An Increase In U.S. Exports To Great Britain
E. Undervaluation Of The Dollar Relative To The Pound

39. Which Of The Following Curves Represents The Maximum Combination Of Goods And Services That Can Be Consumed In An Economy When All Its Resources Are Efficiently Used?
A. Market Demand Curve
B. Production Possibilities Curve
C. Market Supply Curve
D. Consumption Possibilities Curve
E. Resource Possibilities Curve

40. With International Trade, Which Of The Following Curves For An Economy Will Shift Outward?
A. Consumption Possibilities
B. Production Possibilities
C. Demand
D. Supply
E. Marginal Revenue

41. A Nation That Enjoys A Lower Opportunity Cost In The Production Of Goods, Relative To Another Nation, Is Said To Have A(N)
A. Market Advantage
B. Absolute Advantage
C. Comparative Advantage
D. Relative Cost Advantage
E. Production Advantage

42. Suppose That On Mars, Martians Must Give Up 2 Widgets To Produce 1 Gadget. On Venus, Venusians Must Give Up ½ Widget To Produce 1 Gadget. Which Of The Following Is ?
A. Venus Has A Comparative Advantage In Gadgets
B. Mars Has A Comparative Disadvantage In Gadgets
C. Venus Should Specialize In Gadgets And Trade With Mars For Widgets
D. Mars Should Specialize In Widgets And Trade With Venus For Gadgets
E. All Of The Above

43. The Price Of One Nation’s Currency In Terms Of Another Is Called
A. The Exchange Rate
B. The International Trade Rate
C. A Tariff
D. A Balance Of Trade Account
E. The Capital Account

44. Assuming Everything Else Constant, An Increase In The Demand For Russian Rubles Will
A. Reduce The Price Of Rubles
B. Increase The Exchange Rate For Rubles
C. Cause A Surplus Of Rubles
D. Reduce Exports To Russia
E. All Of The Above

45. Economists Generally Agree That International Trade Restrictions
A. Improve Economic Well-Being And The General Standard Of Living
B. Generate Significant Costs To Consumers In The Form Of Higher Prices And Reduced Quantity Of Goods
C. Increase Gross Domestic Product And Lower The Rate Of Unemployment In The Long Run
D. Are Important To The Overall Health Of The Economy
E. Reduce The Severity Of Business Cycles By Limiting Recessions

46. The Primary Factor Affecting The Demand For Any Nation’s Currency Is
A. The Nation’s Current Standing With The United Nations
B. The Demand For The Products Produced By That Nation
C. The Size Of The Nation’s Domestic Economy
D. The Amount Of Gold Reserves Held By That Nation
E. None Of The Above

47. Which Of The Following Are Forms Of International Trade Restrictions?
A. Tariffs
B. Quotas
C. Voluntary Restraint Agreements
D. All Of The Above
E. None Of The Above

48. What Do You Call Taxes Placed On Imports?
A. Tariffs
B. Quotas
C. Voluntary Restraint Agreements
D. Exchange Rates
E. Dumping Taxes

49. Which Of The Following Will Occur When A Tariff Is Placed On Imported Sugar?
A. The Price Of Imported Sugar Will Rise
B. The Price Of Domestic Sugar Will Rise
C. The Price Of Imported And Domestic Sugar Will Rise
D. The Price Of Sugar Will Fall
E. More Sugar Will Become Available In The Marketplace

50. Which Of The Following Is A Statement?
A. Quotas Increase The Availability Of Imported Goods
B. Tariffs Reduce The Price Of Domestically Produced Goods
C. Unlike Tariffs, Quotas Will Reduce The Price Of Imports
D. Quotas Result In Greater Profits For Foreign Producers
E. A $1,000 Tariff On Japanese Cars Will Result In A $1,000 Increase In Their Price

51. A Tariff Leads To A Leftward Shift Of The _______Curve, Resulting In ______ Prices And __________ Imports.
A. Demand; Lower; Greater
B. Supply; Lower; Lower
C. Supply; Higher; Lower
D. Demand; Higher; Lower
E. Consumption Possibilities; Higher; Lower

52. Which Of The Following Will Not Result From A Tariff?
A. Higher Import Prices
B. Higher Prices Of Goods For Consumers
C. Less Availability Of Goods For Consumers
D. Price Increases For Exported Goods
E. Import Duty Revenue For The Government

53. When A Quota Is Enforced On An Imported Good, The Supply Curve For That Good
A. Shifts To The Left
B. Becomes Horizontal At The Import’s Price
C. Becomes Vertical At The Quota Limit
D. Shifts To The Right
E. Becomes Non-Existent

54. Which Of The Following Statements About Quotas Is ? Quotas
A. Reduce The Availability Of Imported Goods For Consumers
B. Reduce The Profits Of Foreign Producers
C. Increase The Price Of Imports
D. Increase The Price Of Domestically Produced Substitutes
E. Are Used As A Means To Restrict International Trade

55. Which Of The Following Is A Likely Result Of A Country Engaging In Free Trade?
A. Jobs Are Lost In The Export Sector
B. Jobs Are Gained In The Import Sector
C. The Price Of Imports Falls
D. Product Variety Decreases
E. All Of The Above

56. Protecting An Industry That Is Vital To National Security From International Competition Is
A. The Infant Industry Argument
B. An Economic, Rather Than Political, Argument
C. The Key Industry Argument
D. An Argument Against Protectionism
E. None Of The Above

57. A New Industry Producing Cutting-Edge Products Should
A. Be Protected From International Competition, According To The Key Industry Argument
B. Be Protected From International Competition, According To The Infant Industry Argument
C. Not Be Protected Until Later Stages, When The Market Is Fully Developed
D. Not Be Protected, According To The Infant Industry Argument
E. None Of The Above

58. Environmental Damage Must Be Addressed In International Trade Agreements When A Country’s Actions Create
A. Property Rights
B. Negative Externalities
C. Positive Externalities
D. Private Goods
E. Military Output

59. Which Of The Following Is Used As An Argument Against Free Trade By Protectionists?
A. Environmental Quality
B. Human Rights
C. Infant Industries
D. Key Industries
E. All Of The Above

60. Which Of The Following Statements Regarding Human Rights And International Trade Is Correct?
A. Protectionists Believe Free Trade Leads To Exploitation Of Workers In Ldcs
B. Free Trade Advocates Believe It Is Efficient To Exploit Workers In Ldcs
C. Protectionists Believe Free Trade Leads To Increased Opportunity For Poor Workers
D. Free Trade Advocates Believe Trade Decreases Job Growth In Ldcs
E. The Wto Estimates That Free Trade Has Led To An Increase In Poverty Rates In Ldcs

61. What Do You Call It When Producers Sell Abroad At A Price Below Their Cost Of Production Or Their Domestic Price?
A. Limit Pricing
B. Voluntary Restraint Of Trade
C. Price Discrimination
D. Dumping
E. Gouging

62. Which Organization Is Charged With Settlement Of International Trade Disputes?
A. The Wto
B. The Eu
C. Nafta
D. Gatt
E. The Un

63. What Do You Call An Alliance Of Nations That Share Common External Tariffs? A(N)
A. Free Trade Area
B. International Trade Consortium
C. Customs Union
D. Trade Pact Area
E. Cartel Of Nations

64. Which Of The Following Best Describes Nafta? It Is A(N)
A. Free Trade Area
B. International Trade Consortium
C. Customs Union
D. Trade Pact Area
E. Cartel Of Nations

65. Most __________ Have Been Banned Under The World Trade Organization.
A. Tariffs
B. Voluntary Restraint Agreements
C. Quotas
D. Import Duties
E. Customs Unions

66. The European Union Is An Example Of A(N)
A. Free Trade Area
B. International Trade Consortium
C. Customs Union
D. Trade Pact Area
E. Cartel Of Nations

67. The Multi-National Currency Adopted By Members Of The European Union Is Called The
A. Euro
B. Dollar
C. Ruble
D. Franc
E. Peso

68. Which Of The Following Statements Is ?
A. The Euro Increases The Cost Of International Trade Between Members Of The European Union
B. The European Union Is A Free Trade Zone And Not A Customs Union
C. The Euro Reduces The Cost Of Trade Between Members Of The European Union
D. Common Market Treaties Are Becoming Less Popular Around The World
E. All Of The Above Statements Are

69. In Which Part Of The Globe Are You Most Likely To Find Nations Belonging To A Common Market Treaty?
A. North America
B. Asia
C. Europe
D. Africa
E. Everywhere

70. Which Of The Following Statements About Nafta Is ?
A. Nafta Is A Free Trade Zone And Not A Customs Union
B. Canada, Mexico, And The U.S. Are The Only Three Members Of Nafta
C. It Is Difficult To Empirically Measure The Economic Effects Of Nafta On The U.S. Economy
D. In The Long Run, Nafta Will Increase The Number Of Low-Paid Jobs In The U.S
E. Nafta Is Based On The Belief That Nations, In The Aggregate, Gain Economically From Free International Trade

71. What Have Researchers Concluded About The Net Effect Of Nafta On The Number Of Jobs In The U.S. Economy?
A. Nafta Has Increased The Number Of U.S. Jobs
B. Nafta Has Had No Effect On The Number Of U.S. Jobs
C. Nafta Has Significantly Reduced The Number Of U.S. Jobs
D. The Number Of U.S. Jobs Has Increased In Some Sectors Of The Economy, While In Other Sectors It Has Reduced The Number Of Jobs
E. No One Has Examined This Issue Yet

72. What Should Happen Once The Euro Has Been Completely Integrated Into The Economies Of The European Union (Eu)?
A. International Trade Between Eu Members Will Increase Due To Lower Transaction Costs Of Trade
B. Consumer Prices Will Increase And Income Will Fall
C. Trade Between Eu Members Will Decrease Due To The Increased Costs Of Using A Multi-National Currency
D. Eu Members Will Only Trade With Other Members And Stop Trading With The Rest Of The World
E. None Of The Above

73. Which Of The Following Is A Customs Union Of Nations?
A. Nafta
B. Wto
C. Eu
D. Gatt
E. Un

74. Which Of The Following Established A Free Trade Zone?
A. Eu
B. Gatt
C. Un
D. Wto
E. Nafta

75. Since The Introduction Of The General Agreement On Tariffs And Trade (Gatt) In The 1940s,
A. Tariffs And Import Quotas Have Increased Dramatically
B. Tariffs Around The World Have Fallen From An Average Of 40% To About 4%
C. Common Market Treaties Have Become More Difficult To Negotiate And Enforce
D. The Imposition Of Tariffs Has Been Declared To Be “Unfair” In Most Situations
E. Dumping Has Become A Widespread Practice Between Member Nations

76. The United States Currently Enforces An Embargo Against
A. Cuba
B. Saudia Arabia
C. The European Union
D. A) And B) Only
E. All Of The Above

77. Embargos
A. Are Import Quotas Set To 0
B. Are Export Quotas Set To 0
C. May Be Imposed For Political Reasons
D. May Be Imposed For Economic Reasons
E. All Of The Above

78. Outsourcing Is The Practice Of
A. Obtaining Raw Materials From Suppliers In Other Countries
B. Manufacturing Product In Another Country By Opening A Factory In That Nation
C. Purchasing Customer Services From Suppliers In Another Country Where The Costs Of These Services Are Lower Than Domestic Suppliers
D. Selling Goods To Another Country
E. Answers B And C Are Both Examples Of Outsourcing

79. The World Trade Organization, Or Wto, Has Been Unpopular With Many Environmentalists Because
A. It Produces A Great Deal Of Pollution
B. It Does Not Do Enough In Its Activities To Enforce Pollution Regulations
C. It Is Allowing Pollution Rights Licenses To Be Sold By Nations To One Another
D. It Encourages Developing Nations To Emphasize Jobs At The Expense Of Environment
E. The Wto Does Not Have A Pollution Control Agency

True / False Questions

80. Protectionists Want To Reduce Foreign Competition With U.S. Goods And Services.

81. Support For Protectionism Increases During Economic Expansions.

82. Free Traders Maintain That World Output Is Greatest If All Countries Are Free To Engage In Voluntary Exchanges.

83. A Country Should Strive To Export More Than It Imports Over Time.

84. Engaging In Exchange Enables A Country To Shift Its Production Possibilities Curve Outward.

85. Countries Should Trade For Goods In Which They Have A Comparative Advantage.

86. If A Country Has A Comparative Advantage In The Production Of One Good, It Must Have A Comparative Disadvantage In The Production Of Some Other Good.

87. It Is Efficient For An Economy To Save Service Jobs By Preventing Outsourcing.

88. An Exchange Rate Is The Price Of One Country’s Currency In Terms Of The Currency Of Another.

89. A Country’s Population As A Whole Will Benefit From Import Restrictions.

90. Everyone In The Economy Benefits From Free Trade.

91. For Many Years, U.S. Citizens Have Earned More Investment Income Abroad Than Foreigners Have Earned In The U.S.

92. Foreign Investment In The U.S. Provides Foreign Currencies To Import Goods.

93. Trade Deficits Are Important Only To The Extent That They Lead To Overall Balance Of Payments Problems.

94. To Preserve Jobs In The U.S., The U.S. Should Enact Legislation Lowering The Quantities Of Japanese Autos That It Imports.

95. Engaging In Trade Allows A Country To Shift Its Consumption Possibilities Curve Outward But Leaves Its Production Possibilities Curve Unchanged.

96. In Terms Of The Value Of Jobs Saved, The Voluntary Restrictions On Japanese Cars Imported To The U.S. In The Early 1980s Were Efficient.

97. Free Trade Would Reduce U.S. Well-Being Because We Could Not Compete With The Low-Wage Countries Of The World.

98. International Trade Makes It Possible For An Economy To Shift Its Production Possibilities Curve Outward.

99. As With Trade Between Regions Of One Country, Trade Between Countries Benefits Both.

100. Since Resources Are Sent Out Of The Country, International Trade Generally Results In A Reduction In An Economy’s Gdp.

101. International Trade Increases The Variety And Availability Of Consumer Goods In An Economy.

102. Free Trade Arguments Are Sound Only If Trade Is Between Countries Whose Workers Earn Roughly The Same.

103. Trade Between Individuals In Two Different Countries Would Not Occur Unless Both Parties Believed That It Made Them Better Off.

104. Tariffs Increase Both The Price Of Imports And Domestically Produced Goods.

105. A $100 Per Unit Tariff On South African Diamonds Will Increase The Price By $100.

106. Both Tariffs And Quotas Result In Higher Prices And Lower Quantities For Consumers.

107. Foreign Producers Who Hold Quota Rights May Earn Greater Profits With The Imposition Of A Quota.

108. A Voluntary Restraint Agreement Is A Quota Without The Force Of Law.

109. Quotas Result In Lower Prices Of Both Imported And Domestically Produced Goods.

110. All Forms Of International Trade Restrictions Result In Higher Prices And Lower Quantities Of Goods For Domestic Consumers.

111. Pegging The Exchange Rate Will Eliminate Balance Of Payment Deficits.

112. Pegging The Exchange For French Francs Below Its Equilibrium Level Will Generate A Shortage Of Francs.

113. Nafta Is A Customs Union Between The U.S., Canada, And Mexico.

114. The European Union Is A Free Trade Area.

115. International Trade Disputes Between Nations Are Settled Through The Actions Of The World Trade Organization.

116. Dumping Occurs When Producers Sell Abroad At A Price Below The Cost Of Production.

117. Dumping Is Not Considered An Unfair Trade Practice In Most Parts Of The World.

118. Members Of The Wto Must Agree To Treat All Other Members As Equals And Provide Them With “Most Favored Nation” Status.

119. The Wto Prohibits Member Nations From Imposing Tariffs On Other Members.

120. There Is More International Trade Today Than At Any Time In The Past.

121. Since The 1940s, Tariffs Around The World Have Fallen From An Average Of 40 Percent.

122. The Euro Will Increase The Transaction Costs Of Trade Between Nations Who Are Members Of The European Union (Eu).

123. The Euro Will Be Integrated Into The Economies Of Western Europe With Very Few Costs.

124. Common Market Treaties Are Decreasing In Popularity And Importance Around The World.

125. Most Tariffs Have Been Outlawed By The World Trade Organization (Wto).

126. Very Few Members Of The World Trade Organization (Wto) Are Also Members Of A Common Market Treaty.

127. Today, Custom Unions Or Free Trade Zones Can Be Found On Every Populated Continent Of The World.

128. In The Short-Run, Common Market Treaties Such As Nafta Both Create And Destroy Jobs In Member Nations.

129. In Recent Years, “Protectionists” Have Won The Battle With “Free Traders.”

130. An Embargo Occurs When One Nation Volunteers To Restrict Its Exports Of A Product.

131. The Intent Of An Embargo Is To Raise The Price Of A Country’s Exports.

Chapter 11

Economic Growth: Why Is The Economic Road So Bumpy?

Multiple Choice Questions

1. Which Of The Following Is Consistent With Economic Growth?
A. Lower Unemployment
B. Increased Gdp
C. Increased Aggregate Demand
D. Increased Sales
E. All Of The Above

2. Why Is Economic Growth An Important Economic And Social Issue?
A. Economic Growth Leads To Improvements In Our Standard Of Living
B. Lower Levels Of Unemployment And Poverty Can Be Achieved Through Economic Growth
C. A Growing Economy Provides Consumers With More Choices And Opportunities
D. All Of The Above
E. Economic Growth Is Not An Important Economic Issue

3. Which Of The Following Statements Is About Economic Growth?
A. Economic Growth Is A Short-Run Process
B. Growth Of An Economy Is Generally A Smooth Process That Occurs Over Time
C. Economic Growth Is A Long-Run Process Resulting From The Compounding Of Many Events
D. To Measure Economic Growth, Economists Analyze Changes In The National Debt
E. The U.S. Economy Has Never Experienced A Year Of Negative Economic Growth

4. Which Of The Following Is The Most Commonly Used Measurement Of Economic Growth? Changes In
A. Real Gdp
B. The Money Supply
C. Nominal Gdp
D. The Federal Government Debt
E. The Level Of International Trade

5. Why Do Small Differences In Economic Growth Rates Today Result In Significant Differences In The Level Of Economic Activity In The Future?
A. Growth Rates Discount Over Time
B. Economic Growth Compounds Year After Year
C. Economics Grow In An Arithmetic Fashion
D. Business Cycles Are Less Likely At Higher Rates Of Growth
E. All Of The Above

6. Countries A And B Start Out With Real Gdp Equal To $1,000. If Country A Grows At A Rate Of 5% While Country B Grows At A Rate Of 10%, What Is Country A’s Level Of Real Gdp After 3 Years?
A. $1,000
B. $1,050
C. $1,158
D. $1,500
E. $2,500

7. Countries A And B Start Out With Real Gdp Equal To $1,000. If Country A Grows At A Rate Of 5% While Country B Grows At A Rate Of 10%, What Is Country B’s Level Of Real Gdp After 3 Years?
A. $1,000
B. $1,100
C. $1,210
D. $1,300
E. $1,331

8. Of The Following, Which Of The Following Values Most Closely Approximates The Average Annual Rate Of Growth For The U.S. Economy Since 1960?
A. 1.65%
B. 10.22%
C. 5.35%
D. 4.02%
E. 3.26%

9. Which Decade Resulted In The Lowest Average Annual Rate Of Economic Growth In The U.S.?
A. 1950s
B. 1960s
C. 1970s
D. 1980s
E. Unknown

10. Which Of The Following Decades Had The Highest Average Annual Rate Of Economic Growth In The U.S.?
A. 1930s
B. 1960s
C. 1970s
D. 1980s
E. 1990s

11. What Term Is Used To Describe An Erratic Short-Run Fluctuation In Economic Activity Around The Long-Run Trend?
A. Economic Depression
B. Economic Boom
C. Business Cycle
D. Recession
E. Diminishing Returns

12. Which Of The Following Is Not A Phase Of Every Business Cycle?
A. Trough
B. Expansion
C. Contraction
D. Depressions
E. Peak

13. Which Of The Following Lists The Four Phases Of The Business Cycle In The Correct Sequence?
A. Expansion, Peak, Contraction, Trough
B. Expansion, Contraction, Peak, Trough
C. Expansion, Peak, Contraction, Depression
D. Expansion, Peak, Depression, Trough
E. Peak, Recession, Trough, Depression

14. Which Phase Of The Business Cycle Best Describes An Economy That Is Experiencing A Positive Rate Of Economic Growth?
A. Expansion
B. Peak
C. Contraction
D. Trough
E. Depression

15. When The Economy Ends An Expansion, It Enters Which Phase Of The Business Cycle?
A. Expansion
B. Peak
C. Contraction
D. Trough
E. Depression

16. A Decline In The Level Of Economic Activity Occurs During Which Phase Of The Business Cycle?
A. Expansion
B. Peak
C. Contraction
D. Trough
E. Depression

17. When Economic Output Hits A Short-Run Economic Low, The Economy Is In Which Phase Of The Business Cycle?
A. Expansion
B. Peak
C. Contraction
D. Trough
E. Depression

18. An Exceptionally Strong And Prolonged Contraction Is Known As
A. A Trough
B. A Recession
C. An Economic Bust
D. A Super Contraction
E. A Business Cycle

19. The Last Depression Experienced By The U.S. Economy Occurred
A. During The 1970s
B. In 1982
C. During The 1930s
D. Between 1974-1975
E. In 1990

20. What Is The Average Length Of A Typical Business Cycle In The Modern U.S. Economy?
A. 12 Months
B. 36 Months
C. 60 Months
D. 95 Months
E. 120 Months

21. Which Group Is Responsible For Announcing The Dates For Each Phase Of A U.S. Business Cycle?
A. The Federal Reserve
B. The National Bureau Of Economic Research
C. The Department Of Commerce
D. The Bureau Of Labor Statistics
E. The Federal Business Cycle Committee

22. The Most Commonly Used Tool To Forecast Future Changes In Economic Activity Is The
A. Leading Economic Indicators Index
B. Supply Of Money
C. Unemployment Rate
D. Lagging Economic Indicators Index
E. Federal Budget Deficit

23. The Economic Variables That Make Up The Leading Economic Indicators Index Tend To Move In The ______ Direction As Overall Economic Output And Do So _____ Changes In Real Gdp.
A. Opposite; Prior To
B. Same; After
C. Opposite; After
D. Same; Prior To
E. Same; Simultaneously As

24. Which Of The Following Is Not About Business Cycles?
A. All Business Cycles Have Four Distinct Phases
B. The Average Length Of A U.S. Business Cycle Is About 60 Months
C. Since 1960, The U.S. Has Experienced Six Complete Business Cycles
D. The Last Economic Depression In The U.S. Occurred In The 1930s
E. The Turning Points Of A Business Cycle Can Be Easily Predicted

25. What Do You Call Business Cycle Theories Based On The Belief That Economic Activity Follows General Trends Of Optimism And Pessimism?
A. Theories Of Expectations
B. Real Business Cycle Theories
C. Theories Of Innovation
D. Theories Of Externalities
E. Sunspot Theories

26. Which Of The Following Economists Is Associated With The Business Cycle Theory Of Innovations?
A. John Maynard Keynes
B. William Stanley Jones
C. Joseph Schumpeter
D. Ansel Sharp
E. Adam Smith

27. Monetary Theories Of The Business Cycle Postulate That Cycles Are Strongly Influenced By The Policy Actions Of The
A. U.S. Congress
B. Federal Reserve
C. World Trade Organization
D. National Bureau Of Economic Research
E. U.S. Department Of Commerce

28. Which Of The Following Focuses Primarily On Aggregate Supply Variables?
A. Theory Of Expectations
B. Exogenous Theories
C. Monetary Theories
D. Real Business Cycle Theories
E. Jevons’ Sunspot Theory

29. What Was The First Theory Put Forth By An Economist To Explain The Phenomena Of Business Cycles?
A. Inventory Theory
B. Schumpeter’s Theory Of Innovation
C. Real Business Cycle Theories
D. Theory Of Expectations
E. Jevons’ Sunspot Theory

30. What Are The Two Primary Determinants Of Economic Growth?
A. The Availability Of Resources And Productivity Factors
B. Technology And Money
C. The Quantity Of Capital And The Quantity Of Money
D. The Ability To Trade And The Size Of The Labor Force
E. Comparative Advantage And The Law Of Diminishing Returns

31. What Is The Result Of A Growing Labor Force?
A. Lower Rates Of Interest In The Capital Market
B. Higher Rates Of Unemployment
C. The Economy’s Production Possibilities Curve Shifts Outward
D. The Economy’s Production Possibilities Curve Shifts Inward
E. The Economy’s Rate Of Growth Must Slow To Accommodate More People

32. Which Of The Following Terms Is Used To Describe The Purchase Of Capital?
A. Savings
B. Consumption
C. Technology
D. Investment
E. Production

33. Why Does Spending On Capital Tend To Increase Economic Growth More Than Spending Of Consumption Goods? Because
A. Capital Lasts Longer Than Consumer Goods
B. Capital Can Be Used To Produce Future Goods And Services
C. Capital Puts Technology To Use
D. People Prefer To Invest In Capital In Order To Generate Income
E. Capital Purchases Are Taxed At A Lower Rate Than Consumption Purchases

34. What Was The Primary Opportunity Cost Of The Former Soviet Union’s Policy To Heavily Invest In Capital For Economic Growth?
A. An Inability To Trade With Other Nations
B. Democracy
C. Foregone Consumer Goods
D. Technological Innovations
E. Foregone Military Goods

35. Initially 10 Workers Produce 100 Units Of Output In An Economy. The Next Year, 20 Workers Produce 250 Units Of Output In The Same Economy. Productivity In The Economy Has
A. Doubled
B. More Than Doubled
C. Increased
D. Decreased
E. Not Changed

36. Which Of The Following Is The Best Definition Of “Productivity”?
A. A Measurement Of How Efficiently Resources Are Converted Into Goods And Services Through A Production Process
B. A Measurement Of How Technology Increases The Ability Of An Economy To Produce Goods And Services
C. The Ratio Of Inputs To Output
D. The Quantity Of Goods And Services Produced During A Given Period Of Time By Labor
E. The Total Output Produced In An Economy Given Its Set Of Resources And The Current State Of Technology

37. How Do You Calculate The Average Product Of Labor?
A. Total Quantity Of Inputs Divided By Total Output
B. The Average Number Of Workers Times The Average Level Of Output Produced
C. Total Output Produced Divided By Total Units Of Labor Employed
D. Total Units Of Labor Employed Divided By The Total Output Produced
E. The Average Number Of Labor Units Employed Times The Quantity Of Capital Employed

38. In An Economy, 100 Workers Can Produce 500 Units Of Output And 110 Workers Produce 600 Units Of Output. Which Of The Following Is ? The Average Product With
A. 100 Workers Is 500
B. 100 Workers Is 5
C. 110 Workers Is 600
D. 10 Workers Is 100
E. Both A) And C)

39. In An Economy, 10 Workers Can Produce 500 Units Of Output And 20 Workers Produce 800 Units Of Output. Which Of The Following Is ? The Average Product With
A. 10 Workers Is 500
B. 10 Workers Is 5
C. 20 Workers Is 800
D. 20 Workers Is 300
E. 20 Workers Is 40.

40. What Is Technology?
A. The Tools Of Production
B. The Human Input Of Production
C. Computers, Robots, And Factories
D. The Means And Methods Of Production
E. The Mix Of Labor And Capital Used In Production

41. Which Of The Following Is Cited As Contributing To The Recent Slowdown In Economic Growth?
A. Slower Rates Of Technological Advancement
B. Changes In Composition Of The Labor Force
C. Low Rates Of Saving And Investment
D. Government Regulation And Public Debt
E. All Of The Above

42. How Has The Increasing Importance Of The U.S. Service Sector Contributed To The Slowdown In Economic Growth?
A. Services Are Less Important To The Economy Than Goods
B. The Productivity Of The Service Sector Is Hard To Accurately Measure
C. Most Investment Takes Place In The Goods Producing Sector Of The Economy
D. Services Cannot Be Easily Exported To Foreign Nations
E. Technological Advances Have Had A Smaller Impact On The Service Sector

43. What Is The “Crowding Out” Effect?
A. Consumption Spending Is Reduced Because Of Spending On Capital
B. Capital Spending Is Reduced Because People Purchase Great Quantities Of Consumer Goods
C. Private Investment Is Reduced Because Government Borrowing Diverts Dollars Away
D. Government Spending Creates A Larger Demand For Capital Goods
E. Savings Is Insufficient To Support The Level Of Capital Investment In The Economy

44. Which Of The Following Is A “Pro-Growth” Economic Policy?
A. Raising The Tax On Capital Gains
B. Encouraging People To Save Less
C. Reducing Public Dollars Available For Education
D. Investing In Human Capital
E. None Of The Above

45. How Much Does The Federal Government Spend Annually On Research And Development?
A. Less Than 1% Of Gdp
B. About 10% Of Gdp
C. More Than 25% Of Its Budget
D. Zero
E. Exactly 5% Of Its Budget

46. Which Theories Concerning The Business Cycle Focus On Factors Outside Of The Economy?
A. Expectations Theories
B. Inventory Theories
C. Exogenous Theories
D. Monetary Theories
E. Theories Of Innovation

47. The Economic Growth Of An Economy Is Generally Measured By Examining Changes In
A. Employment
B. Real Gdp
C. Income
D. Government Revenues
E. Current Gdp

48. Which Of The Following Statements Is ?
A. The U.S. Economy Grew At A Higher Rate In The 1980s Than It Did In The 1960s
B. The Leading Economic Indicators Index Is Useful For Predicting Economic Recessions, But Not Economic Expansions
C. The Economist Most Often Associated With Theories Of Innovation Used To Explain Business Cycles Is Milton Friedman
D. A Small Reduction In Economic Growth Can Have Large Long-Run Effects On Real Gdp
E. All Of The Above Statements Are

49. How Many Complete Business Cycles Has The U.S. Experienced Since 1960?
A. 7
B. 1
C. 12
D. 2
E. 23

50. Relative To The Past, Business Cycles In The U.S. Are Becoming
A. Shorter In Duration
B. More Severe
C. Longer In Duration
D. (A) And (B)
E. Non-Existent

51. Which Of The Following Is Responsible For Officially Tracking The Index Of Leading Economic Indicators?
A. The U.S. Department Of Commerce
B. The Conference Board
C. The Bureau Of Labor Statistics
D. The Council Of Economic Advisors
E. The Federal Reserve Board Of Governors

52. Which Of The Following Is Not A Component Of The Index Of Leading Economic Indicators?
A. Stock Market Prices
B. An Index Of Consumer Expectations
C. New Building Permits Granted
D. Real Money Supply
E. None Of The Above. All Are Part Of The Index

53. In Response To An Economic Recession, Monetary Theories Of The Business Cycle Predict That The Federal Reserve Would
A. Increase The Supply Of Money To Create An Expansion
B. Reduce The Supply Of Money To Create An Expansion
C. Raise Interest Rates To Increase Real Economic Growth
D. Increase The Demand For Money To Bring About Economic Growth
E. Lower Taxes To Avoid A Full Depression

54. Which Famous Economist Is Associated With The Sunspot Theory Of Business Cycles?
A. Joseph Schumpeter
B. Milton Friedman
C. William Stanley Jevons
D. John Maynard Keynes
E. Charles Alan Register

55. Which Set Of Theories Can Be Used To Explain All Business Cycles?
A. Exogenous Theories
B. Theories Of Innovation
C. Inventory Theories
D. Monetary Theories
E. None Of The Above. No One Theory Can Explain Every Business Cycle

56. For An Economy To Expand Its Investment In The Production Of Capital Goods, It Must
A. Enhance Its Current Level Of Technology
B. Forego Some Production Of Consumer Goods And Services
C. Expand Its Geographic Territory
D. Increase Its Real Supply Of Money
E. Reduce The Level Of Savings By Consumers

57. The Quantity Of Capital In The U.S. Economy Has Grown At A Rate ________ The Growth In The Labor Force.
A. Slower Than
B. About The Same As
C. Faster Than
D. Only Half As Much As
E. Unknown

58. Human Capital Refers To
A. Foregone Earnings Of Students Enrolled In College
B. Money Required To Enroll In Educational Programs
C. Slaves Owned By Capitalists
D. Skills And Training That Increase A Worker’s Productivity
E. Factories And Equipment Owned By Workers

59. The First Decade Of The 21st Century Has Been Characterized By ______.
A. A Booming Economy Through The Period
B. A Recession At The Start Of The Decade, Followed By A Slow Recovery And Then A Second Recession
C. Stagflation
D. One Recession Followed By An Unprecedented Economic Boom
E. None Of The Above

60. Which Of The Following Statements Is ?
A. In The Foreseeable Future, Real Gdp Will Grow Slower Than The U.S. Population
B. Based On Past Economic Performance, It Is Likely That Standards Of Living In The U.S. Will Fall During The Early Part Of The 21st Century
C. Real Per Capita Gdp Will Likely Increase In The Near Future Due In Part To The Slowdown In The Rate Of Population Growth
D. In Economics, The Past Is A Very Poor Predictor Of The Future
E. The Rate Of Economic Growth Does Not Affect Individual People

Questions 61 – 65 Refer To The Graph Below.

61. An Economy’s Production Possibilities Curve Will Shift Out The Farthest In 2017 If It Chooses To Operate At Which Point In 2012?
A. A
B. B
C. C
D. F
E. E

62. An Increase In Labor Resources Will Cause Which Of The Following Shifts On The Graph?
A. Bf To Ag
B. Ag To Bf
C. D To C
D. C To D
E. D To E

63. Economic Growth Is Represented On The Graph As A Movement From
A. Bf To Ag
B. Ag To Bf
C. D To C
D. C To D
E. D To E

64. An Increase In Productivity Is Consistent With Which Of The Following Movements?
A. Bf To Ag
B. Ag To Bf
C. D To C
D. C To D
E. D To E

65. A Movement From Point D To Point C Is Consistent With
A. An Increase In Capital Goods Without A Decrease In Consumer Goods
B. Technological Change Between 2012 And 2017
C. An Increase In Productivity Between 2012 And 2017
D. All Of The Above
E. None Of The Above

Questions 66 – 70 Refer To The Graph Below.

66. An Economic Expansion Is Illustrated On The Graph
A. At Point T2
B. At Point T3
C. Between T1 And T2
D. Between T2 And T3
E. Along The Straight Line

67. An Economic Contraction Is Illustrated On The Graph
A. At Point T2
B. At Point T3
C. Between T1 And T2
D. Between T2 And T3
E. Along The Straight Line

68. A Peak In The Business Cycle Is Illustrated On The Graph
A. At Point T2
B. At Point T3
C. Between T1 And T2
D. Between T2 And T3
E. Along The Straight Line

69. A Trough In The Business Cycle Is Illustrated On The Graph
A. At Point T2
B. At Point T3
C. Between T1 And T2
D. Between T2 And T3
E. Along The Straight Line

70. The Straight Line On The Graph Represents
A. An Economic Expansion
B. An Economic Contraction
C. A Business Cycle
D. A Long-Run Growth Trend
E. A Boom Period

71. The Longest Sustained Period Of Economic Growth In Modern U.S. History Occurred During The
A. 1920s
B. 1950s
C. 1960s
D. 1980s
E. 1990s

72. Which Of The Following Factors Was Not One Of The Reasons Why A Recession Started In 2008?
A. The Collapse Of A Speculative Bubble In The Real Estate Market
B. A Spike In Interest Rates
C. A Significant Rise In The World Price Of Oil
D. A Series Of Financial Fraud Schemes In The Financial Industry
E. All Of The Above

73. The Decline That Occurred In Real Gdp In The Fourth Quarter Of 2008 Was ________ .
A. The Smallest Decrease On Record
B. The Average Reduction
C. Smaller Than The Decrease In The Third Quarter
D. The Largest In Over 50 Years
E. There Was No Decline In Real Gdp During 2008
74. Which Of The Following Contributed To The Inflation-Free Economic Expansion Of The 1990s And Early 2000s?
A. Fed Policies To Raise Interest Rates
B. An Increase In Aggregate Supply
C. Improvements In Productivity
D. Improvements In Technology
E. All Of The Above

75. Productivity Gains In The 1990s Were A Result Of Which Of The Following?
A. Capital Investment
B. Improved Labor Quality
C. Technological Progress
D. Increased Use Of Computers
E. All Of The Above

76. Saving In An Economy Is Important For Economic Growth Because
A. If Households Don’t Save, They Cannot Consume In The Future
B. Without Saving, Aggregate Demand Increases
C. One Person’s Saving Is Another Person’s Consumption
D. It Is The Source Of Funds For Investment
E. Of None Of The Above; Saving Is Not Important For Economic Growth

77. Which Of The Following Is Not Something That Will Increase Economic Growth?
A. Expenditures On Research And Development
B. Increased Education
C. Using Resources To Develop Additional Capital
D. Replacing Old Machinery
E. All Of The Above Will Increase Economic Growth

78. According To Real Business Cycle Theory, The Primary Factor That Increases Aggregate Supply Is
A. Savings
B. Increases In The Size Of The Labor Force
C. Technological Improvements
D. Government Spending
E. Reductions In Regulation

True / False Questions

79. Economic Growth Is Necessary To Create New Jobs, Increase Incomes, And Raise Standards Of Living.

80. Economic Growth Is An Important Social Issue, But It Is Not Related To Other Problems Such As Unemployment And Poverty.

81. Economists Consider Economic Growth As A Short-Run Process.

82. Between 1960 And The Mid-1990s, The American Economy More Than Tripled Its Level Of Real Gdp.

83. During The Past Three Decades, The U.S. Economy Experienced Significant Periods Of Growth Without Interruption.

84. Even Small Differences In Growth Rates Can Result In Significant Gaps In Gdp Between Two Countries Over The Long Run.

85. Economic Growth Compounds Over Time.

86. The U.S. Economy Has Never Experienced A Year Of Negative Economic Growth.

87. U.S. Economic Growth Rates In The 1990s Have Been Higher Than Those Experienced In The 1960s.

88. An Erratic Short-Run Fluctuation In Economic Activity Around The Long-Run Trend Is Called A Business Cycle.

89. Every Business Cycle Has Four Distinct Phases; Expansion, Peak, Contraction, And Trough.

90. Strong Economic Expansions Are Sometimes Referred To As Economic Booms.

91. Another Name For The Trough Of A Business Cycle Is Recession.

92. Each Phase Of A Business Cycle Has Approximately The Same Duration.

93. Since Wwii, The Average Length Of A Typical U.S. Business Cycle Is Approximately 60 Months.

94. Given Modern Data Collection Techniques, It Is Very Easy To Identify When The Economy Is About To Move Into The Next Phase Of A Business Cycle.

95. In The U.S., The Official Dates For Each Phase Of A Business Cycle Are Determined After The Fact By The National Bureau Of Economic Research (Nber).

96. The Index Of Leading Economic Indicators Is Used By Economists To Forecast Changes In Economic Performance Over Time.

97. The Components Of The Index Of Leading Economic Indicators Tend To Change Prior To Changes In The Economy As A Whole.

98. The Components Of The Index Of Leading Economic Indicators Lead Changes In The Aggregate Economy, But Move In An Opposite Direction.

99. Economists Have Agreed Upon One Widely Accepted Theory To Explain Business Cycle Behavior.

100. Expectations About The Future Influence The Economic Decisions That People Make Today.

101. Joseph Schumpeter Theorized That Business Cycles Were Determined Primarily By Long-Run Waves Of Innovation.

102. Monetary Theories Of Business Cycles Are Based On How The Federal Reserve Manages The Money Supply In Response To Changing Economic Conditions.

103. Real Business Cycle Theorists Postulate That Economic Fluctuations Are Primarily Due To Changes In Aggregate Demand.

104. Jevons’ Sunspot Theory Of The Business Cycle Is Widely Used By Economists Today To Forecast Future Levels Of Economic Activity.

105. The Primary Determinants Of Economic Growth Include The Availability Of Resources And Productivity Factors.

106. As An Economy’s Labor Force Increases In Size, Its Production Possibilities Frontier Shifts Outward.

107. The U.S. Labor Force Has Not Grown Substantially During The Past Four Decades.

108. The Term Investment Is Used To Describe The Purchase Of Consumer Goods By Households In The Economy.

109. Investments In Capital Goods Increase An Economy’s Ability To Produce Consumer Goods In The Future.

110. In Recent Years, Capital Has Grown At A Slower Rate Than The Labor Force Within The U.S. Economy.

111. Productivity Is A Measure Of How Efficiently Resources Are Converted Into Goods And Services Through A Production Process.

112. The Total Output Produced Divided By The Total Units Of Labor Employed Is Called The Average Product Of Labor.

113. Productivity Is Not Influenced By The Law Of Diminishing Returns.

114. The Average Level Of Educational Attainment In The U.S. Has Been Gradually Declining Since The Mid-1970s.

115. Technology Refers To The Means And Methods Of Production.

116. On Average, The U.S. Economy Has Grown About 3.12% Annually Since 1960.

117. The U.S. Economy Grew At A Faster Rate In The 1980s Relative To The 1960s.

118. In The 1990s, The U.S. Economy Grew At An Average Annual Rate Of Only 2.1%.

119. The Rate Of Technological Growth In The U.S. Economy Is Higher Today Than It Was In The 1960s.

120. Capital Accumulation In An Economy Is Dependent Upon Savers To Provide Funds For Investors.

121. The Increasing Importance Of The Service Sector In The American Economy May Lead To An Overestimation Of Economic Growth.

122. Some Forms Of Government Regulation Of Business May Reduce Productivity And Therefore Contribute To The Slowdown Of Economic Growth.

123. “Crowding Out” Occurs When Government Borrowing To Finance Its Debt Diverts Funds Away From The Private Sector.

123. The Size Of The American Economy Will Double Within The Next Ten Years.

125. Currently, The Population Of The U.S. Is Growing At A Faster Rate Than Real Gdp Is Growing.

126. To Stimulate Additional Economic Investment, Some Policy Makers Favor Increasing The Tax Rate On Capital Gains.

127. Government Policies That Subsidize Higher Education Should Stimulate Labor Productivity And Enhance Long-Run Economic Growth.

128. The U.S. Government Spends Less Than 1% Of Gdp On Research And Development Each Year.

129. In Economics, The Past Is A Very Poor Predictor Of The Future.

130. The Slowdown In The Rate Of Population Growth Has Increased The Growth Rate In The Real Per Capita Gdp For The U.S.

131. The Rate Of Economic Growth Affects Everyone Living In An Economy.

132. Most Economic Forecasts Of The Near Future Predict That The Standard Of Living In The United States Will Fall.

133. One Strategy To Promote Economic Growth Is To Encourage People To Save More.

134. Savings Can Only Occur When The Economy Is In The Expansion Phase Of A Business Cycle.

135. A Reduction In Savings Will Lead To A Reduction In The Level Of Investment.

136. The Average Annual Rate Of Growth For The U.S. Economy During The Twentieth Century Was Between 3% And 3.5%.

137. The Most Important Determinants Of Economic Growth Are The Availability Of Resources And Productivity Factors.

138. Close Examination Of The Recent History Of Real Gdp In The U.S. Reveals That The Rate Of Economic Growth Has Been Diminishing Over Time.

Chapter 12

Money, Banking, And The Financial System: Old Problems With New Twists

Multiple Choice Questions

1. Commercial Banks Operate
A. By Attracting Deposits And Making Loans
B. Both Pay And Charge Interest
C. By Engaging In Financial Intermediation
D. All Of The Above
E. Under The Control Of State Governments

2. Commercial Banks
A. Attract Deposits By Offering To Pay Interest
B. Sell New Issues Of Stocks And Bond
C. Operate On A Non-Profit Basis
D. Attract Deposits By Offering Free Toasters
E. None Of The Above

3. Commercial Banks
A. Started By Offering Credit To Wealthy Landowners
B. Began As Goldsmiths That Provided Receipts To Customers Who Stored Their Gold With The Goldsmith
C. Operate In Both The Primary And Secondary Financial Markets
D. Operate Only In Cities With Major Financial Markets
E. Began In Germany

4. A Financial Intermediary
A. Seeks Deposits
B. Makes Loans
C. Matches Up Savers And Borrowers
D. All Of The Above
E. Operates In Between Two Banks

5. Investment Banks
A. Make Loans To Individual Households To Buy Houses And Cars
B. Work With Corporations To Finance Their Operations Through Primary Financial Markets
C. Work With Corporations To Finance Their Operations Through Secondary Financial Markets
D. Work With Investments From Private Individuals
E. None Of The Above

6. A Stock Is
A. A Financial Instrument That Provides Ownership Rights To Shareholders
B. A Financial Instrument That Provides Annual Payments Of Interest
C. A Financial Instrument That Is Traded Only In Primary Financial Markets
D. A Financial Instrument That Is Bought And Sold By Commercial Banks
E. All Of The Above

7. A Dividend
A. Must Be Paid By A Commercial Banks
B. Must Be Paid By Corporations To Owners Of The Company’s Stock
C. Is A Distribution Of A Corporation’s Profits To Stockholders
D. Is A Financial Instrument That Is Bought And Sold By Commercial Banks
E. None Of The Above

8. Corporations Raise Funds In
A. The Money Market
B. The Primary Financial Market
C. The Secondary Financial Market
D. Both The Primary And Secondary Financial Markets
E. None Of The Above

9. When A Person Buys A Stock On A Stock Exchange They Are Participating In
A. The Money Market
B. The Primary Financial Market
C. The Secondary Financial Market
D. Both The Primary And Secondary Financial Markets
E. None Of The Above

10. Insurance Policies
A. Require An Initial, One-Time Payment By Policy Holders But No Further Outlay
B. Make Payments To Policy Holders On A Monthly Basis
C. Require A Regular Payment Of Insurance Premiums By Policy Holders
D. Require An Initial Payment And Regular Payments Of Insurance Premiums By Policy Holders
E. None Of The Above

11. The Financial Crisis Of 2008 Affected
A. Only Commercial Banks
B. Only Investment Banks
C. Only Insurance Companies
D. All Of The Above
E. The Revenues Of Only State Governments

12. In The Early Years Of The American Republic, The First Bank Of The United States Was Established Through The Efforts Of
A. Thomas Jefferson
B. George Washington
C. James Madison
D. Alexander Hamilton
E. Aaron Burr

13. During Most Of The 1800s, The Federal Monetary Authority Was Called
A. The Bank Of America
B. The Bank Of Washington
C. The First National Bank
D. The Third Bank Of The United States
E. None Of The Above

14. Throughout The History Of The U.S., Until The Creation Of The Federal Reserve System In 1913, The Monetary System Was
A. Characterized By A Series Of Panics And Periods Of Instability
B. Under The Control Of The Second Bank Of The United States
C. The Product Of The Work Of President Andrew Jackson
D. Based Upon The English System
E. Under The Supervision Of The Us Mint

15. Prior To The Creation Of The Federal Reserve System, The Money Supply
A. Was Very Stable And Highly Valued
B. Was Comprised Of Currency Printed By The Department Of The Treasury
C. Was Produced By Local Banks And Often Traded At A Discount
D. Was Available Only To Bank Depositors
E. Was Comprised Of Gold

16. Money Serves As
A. A Unit Of Account
B. A Store Of Value
C. A Medium Of Exchange
D. All Of The Above
E. An Emblem Of Personal Wealth

17. When You Use Dollar Bills To Pay For A Purchase At A Store, Money Is Serving Which Function?
A. A Medium Of Exchange
B. A Measure Of Value
C. A Store Of Value
D. A Barter Facilitator
E. All Of The Above

18. When You Compare A Dollar’s Worth Of Apples To A Dollar’s Worth Of Oranges, Money Is Serving Which Function?
A. A Medium Of Exchange
B. A Measure Of Value
C. A Store Of Value
D. A Barter Facilitator
E. A Measure Of Wealth

19. If You Keep Some Cash In A Safe Place So That You Have It To Use Later, Money Is Serving Which Function?
A. A Medium Of Exchange
B. A Measure Of Value
C. A Store Of Value
D. A Barter Facilitator
E. All Of The Above

20. Banking Regulation Is Intended To Prevent
A. Bank Failures
B. Excess Bank Profits
C. Bank Losses
D. Banks From Selling Securities
E. Banking Monopolies

21. The Gramm-Leach-Bliley Act Allows Banks To
A. Sell Insurance
B. Underwrite Insurance
C. Sell Securities
D. Invest In Real Estate
E. Do All Of The Above

22. Money Is “Liquid” Because
A. It Loses Value With Inflation
B. Coins Can Be Melted To Use Their Metal To Make Goods
C. It Serves As A Measure Of Value
D. It Does Not Have To Be Sold To Buy Goods And Services
E. It Is A Valuable Asset

23. Which Of The Following Is Of A Fractional Reserve Banking System?
A. Banks Must Hold All Of Depositors’ Deposits In Their Vaults
B. Banking Is Only A Fraction Of The Services Banks Provide To Their Customers
C. Banks Lend Out Part Of Their Depositors’ Deposits
D. The Reserve Ratio Is 100%
E. Banks May Not Hold Excess Reserves

24. If The Reserve Ratio Is 10% And A New Demand Deposit Of $10,000 Is Made, What Is The Maximum Deposit Creation Possible?
A. $1,000
B. $9,000
C. $10,000
D. $90,000
E. $100,000

25. If The Reserve Ratio Is 10% And A New Demand Deposit Of $5,000 Is Made, What Is The Maximum Deposit Creation Possible?
A. $500
B. $4,500
C. $5,000
D. $45,000
E. $50,000

26. If The Reserve Ratio Is 20% And A New Demand Deposit Of $10,000 Is Made, What Is The Maximum Deposit Creation Possible?
A. $1,500
B. $10,000
C. $15,000
D. $40,000
E. $50,000

27. Money Does Not Serve As A
A. Medium Of Exchange
B. Store Of Value
C. Measure Of Value
D. Price Index
E. It Serves As All Of The Above

28. M1 Includes
A. Currency And Coins In Circulation, Traveler’s Checks, Demand Deposits At Commercial Banks, And Other Checkable Deposits
B. Currency And Coins In Circulation, All Demand Deposits, And All Time Deposits
C. All Demand Deposits And All Time Deposits
D. Just Currency And Coins In Circulation
E. None Of The Above

29. Banks Make Loans From Their
A. Required Reserves
B. Excess Reserves
C. Net Worth
D. U.S. Government Securities
E. None Of The Above

30. Which Of The Following Is Among The Assets Of A Commercial Bank?
A. Demand Deposits
B. Net Worth
C. Any Liability
D. Loans And Investments
E. Time Deposits

31. M2 Includes
A. M1, Plus Savings And Time Deposits Of Small Denomination, And Money Market Mutual Funds
B. M1 Plus Savings And Time Deposits Of Large Denomination (Over $100,000)
C. M1 Plus Banks Acceptances And Treasury Bills
D. M1 Plus Currency And Demand Deposits
E. None Of The Above

32. The Basic Money Supply Is
A. Composed Of Small Denomination Time Deposits Plus Coin And Currency Held By The Nonbank Public
B. Composed Of Assets That Are Completely Liquid And Easily Accessible
C. Our Broadest Measure Of Money
D. Simply The Coins And Currency Held By The Nonbank Public
E. None Of The Above

33. Excess Reserves Refer To
A. Reserves That Banks Are Required By Law To Hold
B. The Major Assets Of The Bank
C. Reserves A Bank Holds In Case Of Unexpected Case Needs
D. Reserves Over And Above The Bank’s Required Reserves
E. None Of The Above

34. The Money Multiplier Is
A. 1/R
B. Er
C. R/E
D. E/R
E. 1+1/Er

35. Suppose The Legal Reserve Requirement Is 0.20, And A Bank Has Excess Reserves Of $1,000,000. The Ultimate Increase In The Money Supply Will Be
A. $2,000,000
B. $200,000
C. $800,000
D. $5,000,000
E. $500,000

36. The Inflation Rate And The Growth In The Money Supply Are
A. Usually Inversely Related
B. Usually Directly Related
C. Never Directly Related
D. Not Related To One Another
E. Negatively Related

37. Who Controls The Aggregate Volume Of Demand Deposits In The Banking System?
A. The U.S. Treasury
B. The Federal Reserve Board Of Governors
C. Congress
D. Bankers
E. The President Of The United States

38. To Reduce Inflationary Pressures, The Federal Reserve Authorities Should
A. Sell Government Securities, Raise Reserve Requirements, And Lower The Discount Rate
B. Sell Government Securities, Lower Reserve Requirements, And Lower The Discount Rate
C. Buy The Government Securities, Raise Reserve Requirements, And Raise The Discount Rate
D. Sell Government Securities, Raise Reserve Requirements, And Raise The Discount Rate
E. Buy Government Securities, Decrease Reserve Requirements, Decrease The Discount Rate

39. If The Open Market Committee Of The Federal Reserve Sells Securities, This Action Will
A. Decrease The Money Supply
B. Increase The Money Supply
C. Reduce The Reserve Requirement
D. Decrease The Discount Rate
E. Do None Of The Above

40. When A Central Bank Wants To Increase The Money Supply, It
A. Sells Bonds
B. Buys Bonds
C. Sells Good And Services
D. Buys Goods And Services
E. Does None Of The Above

41. The Federal Reserve Can Decrease The Supply Of Money By
A. Selling U.S. Government Securities
B. Buying U.S. Government Securities
C. Selling Goods And Services
D. Buying Goods And Services
E. Decreasing The Reserve Requirement

42. The Federal Open Market Committee (Fomc) Is Highly Concerned With
A. The National Unemployment Rate
B. The Growth Of Real Gdp
C. Interest Rates
D. The Level Of The Stock Market
E. All Of The Above

43. When The Open Market Committee (Fomc) Purchases Government Securities, Their Actions Are An Attempt To
A. Raise Interest Rates
B. Lower Interest Rates
C. Reduce Borrowing
D. Raise The Inflation Rate
E. Influence Voters In The Next Presidential Election

44. When The Fed Increases The Money Supply, It Generally Has The Effect Of
A. Making Banks More Profitable
B. Increasing The Value Of Stocks
C. Lowering Interest Rates
D. Lowering The Inflation Rate
E. Increasing The Size Of Bank Deposits

45. When The Fed Wishes To Increase The Money Supply, It Can Do So By
A. Purchasing Government Securities Through Open Market Operations
B. Lowering The Discount Rate
C. Reducing The Reserve Requirement
D. All Of The Above
E. Increasing The Size Of Bank Deposits

Questions 46 – 49 Refer To The Graph Below.

46. Suppose That The Fed Has Increased The Money Supply. This Is Shown In The Diagram By
A. Q1 To Q0
B. Q0 To Q1
C. Ms1
D. Ms2
E. None Of The Above

47. Based On The Diagram, The Opportunity Cost Of Money Is Higher If
A. The Interest Rate Is I0
B. The Interest Rate Is I1
C. The Money Supply Is Curve Ms1
D. The Money Supply Is Curve Ms2
E. The Opportunity Cost Of Money Is Not Shown In The Diagram

48. A Shift From Ms1 To Ms2 Would Be The Result Of
A. An Increase In Aggregate Demand
B. An Increase In Aggregate Supply
C. A Decision By The Fed To Purchase Government Securities By The Fomc
D. A Decision By The Fed To Sell Government Securities By The Fomc
E. A Change In The Stock Market

49. If The Fed Wanted To Stimulate Business Investment, It Could Do So By
A. Increasing Interest Rates From I1 To I0
B. Decreasing The Money Supply From Ms2 To Ms1
C. Increasing The Money Supply From Ms1 To Ms2
D. Raising The Reserve Requirement
E. Increasing The Discount Rate

50. The Equation Of Exchange Is
A. Mp = Qv
B. Mv = Pq
C. M = V/Pq
D. P = Q/Mv
E. Pv = Qm

51. The Value Of Money Varies
A. Directly With The Interest Rate
B. Directly With The Price Level
C. Directly With The Volume Of Employment
D. Inversely With The Price Level
E. With None Of The Above

52. According To The Equation Of Exchange,
A. The Right-Hand Side Will Equal The Left-Hand Side Only If Velocity Does Not Change From Year To Year
B. Velocity Must Be Constant
C. An Increase In The Quantity Of Money Will Lead To An Increase In The Price Level, Other Things Constant
D. Prices Cannot Change
E. All Of The Above

53. The Quantity Theory Of Money Emphasizes
A. Government Taxation Policies
B. Government Spending Policies
C. Labor Productivity
D. Changes In The Money Supply
E. None Of The Above

54. A Key Assumption In The Quantity Theory Of Money Is That
A. The Supply Of Money Is Increasing At A Constant Rate
B The Price Level Is Stable Over Long Periods Of Time
C. The Level Of Output Of Goods And Services Changes Frequently In Response To Changes In Velocity
D. The Velocity Of Money Is Constant
E. None Of The Above

55. The Residential Housing Market Saw Remarkable Increases In
A. Housing Prices At The End Of The 1990’s And Through The First Half Of The 2000’s
B. Housing Prices At The End Of The 1980’s And Beginning Of The 1990’s
C. Foreclosure Rates At The End Of The 1990’s And Through The First Half Of The 2000’s
D. Foreclosure Rates At The End Of The 1980’s And Beginning Of The 1990’s
E. Both A And C

56. The Growth In The Residential Real Estate Market Is Largely A Product Of
A. A Large Increase In The Demand For Housing
B. An Unexpected Growth In Us Population
C. A Decline In Housing Prices
D. A Tightening Of Government Policies That Restrict Homeownership
E. A Decrease In Mortgage Availability

57. The Federal National Mortgage Association (Or Fannie Mae) Was Created To
A. Make Mortgages Hard To Obtain
B. Make Mortgages Less Likely To Go Into Foreclosure
C. Make A Larger Market In Mortgages By Establishing A Secondary Financial Market In Mortgages
D. Make Mortgages Available To New Immigrants To The Us
E. None Of The Above

58. A Mortgage Backed Security Is
A. A Share Of Common Stock Based Upon Home Mortgages
B. A Financial Instrument That Reduces Risk By Pooling Together A Large Number Of Mortgages Into One Asset
C. A Financial Instrument Developed To Reduce Liquidity In The Housing Market
D. A Financial Instrument That Is The Combination Of Only Subprime Mortgages
E. All Of The Above

59. A Subprime Mortgage
A. Made Obtaining A Mortgage Easier For Low Income Households
B. Is A Mortgage That Does Not Meet The Requirements For A Conventional Mortgage
C. Is Usually Structured As An Adjustable Rate Mortgage
D. All Of The Above
E. Is No Different From A Conventional Mortgage

60. A Collateralized Debt Obligation (Or Cdo)
A. Is Generally Riskier Than A Single Debt Of An Equal Value
B. Sells For A Lower Price Than Re-Sales Of Individual Mortgages That Comprise Them
C. Is Sold In The Primary Financial Market
D. Is A Financial Instrument That Obscures The Underlying Risks Of The Mortgages That Comprise Them
E. Is Always A Bad Financial Investment

61. The Interest Rate On An Adjustable Rate Mortgage (Arm) Is
A. Set To Equal The Fed Funds Rate
B. Adjusted On A Daily Basis
C. Set To Rise At The End Of Every Year For The Life Of The Mortgage
D. Adjusted Periodically Based Upon Current Market Conditions
E. Adjusted Based Upon The Value Of The House Purchase

62. Home Equity Loans
A. Allow A Home Owner To Recapture Some Of The Increase In The Value Of Their Home Without Selling The Home
B. A Way For Homeowners To Issue Stock, Or Equity, In Their Home
C. Only Used When Home Prices Are Increasing
D. A Way For The Market To Eliminate Paper Profits
E. None Of The Above

63. Besides Homeowners, Who Attempted To Profit From Increasing Home Prices During The Housing Bubble In The Early Part Of The 2000s?
A. Large Corporations
B. Speculators
C. Foreign Investors
D. Individuals Who Had Low Incomes
E. All Of The Above

64. A Credit Default Swap
A. Is What Happens When Homeowners Swap Their Mortgages With Their Neighbors
B. Is A Way For Investors In Collateralized Debt Obligations (Or Cdo’s) To Make Even More Money
C. Is A Way For Investors In Collateralized Debt Obligations (Or Cdo’s) To Reduce The Risk Of An Increase In Mortgage Foreclosures
D. Is A Way For Investors To Increase The Risks To Homeowners
E. Exists Only In Markets With Subprime Mortgages

65. Assets That Are “Marked To Market” Will Be Priced At
A. Their Original Purchase Price
B. Their Original Purchase Price Less The Depreciation Of The Asset
C. A Price That Is Equal To The Original Purchase Price Plus The Rate Of Inflation
D. A Price That Is Based Upon The Asset’s Current Market Value
E. A Price Determined In The Stock Market

66. Many Large Banks And Wall Street Investment Firms Got Into Financial Problems Due To
A. Investments In Subprime Mortgages
B. Required Payments On Credit Default Swaps
C. Failures Of Collateralized Debt Obligations Resulting From Home Foreclosures
D. Having To Mark Down A Significant Number Of Their Assets Due To The “Mark To Market” Accounting Requirement
E. All Of The Above

67. The Federal Government Stepped In During 2008 To Prevent Several Commercial Banks And Investment Banks From Failing Based Upon The Idea That
A. They Were “Too Big To Fail”
B. Any Business Failure Would Hurt Shareholders
C. These Banks Made Large Political Contributions And This Was A Way For Politicians To Pay Them Back
D. Government Would Make Large Profits By Doing So
E. None Of The Above

68. In Late 2008, The Us Treasury Department Began
A. Closing Banks That Were Not Following Regulations
B. To Implement The Troubled Asset Relief Program (Tarp)
C. Raising Interest Rates To Stimulate The Economy
D. Engaging In Open Market Operations
E. To Implement The Opening Of A New Bank Of The United States

69. Each Of The Following Is A Financial Intermediary Except
A. Commercial Banks
B. Investment Banks
C. Insurance Companies
D. Credit Unions
E. All Of The Above Are Financial Intermediaries

70. A Capital Gain Exists
A. When One Political Party Increases The Number Of Its Members In Congress
B. When An Interest Payment Is Made
C. When The Price Of An Asset Goes Up
D. When The Price Of An Asset Exceeds The Price Paid For It
E. When Taxes Are Paid On The Asset

71. Liquidity Of An Asset Increases When
A. It Is Easier To Convert The Asset Into Cash
B. The Asset’s Value Is Below Its Original Price
C. The Asset Is Purchased
D. The Asset Depreciates
E. The Asset Is Put On The Market

72. When A Share Of Stock Is Sold On The New York Stock Exchange, It Is Traded
A. In A Prime Financial Market
B. In A Primary Financial Market
C. For A Promise To Pay A Fixed Return
D. To Another Stock Exchange
E. In A Secondary Financial Market

73. The Financial Crisis That Began In 2008 Is A Result Of All Of The Following Except
A. The Bursting Of The Dot.Com Bubble
B. Problems In The Residential Real Estate Market
C. Changes In Accounting Rules About Asset Valuation
D. Large Firms Taking On Assets Whose Value Was Not Well Determined
E. Policies That Allowed Many Unqualified Homebuyers To Receive Mortgages That They Could Not Pay

74. Historically, Many Commercial Banks Began As
A. Coffee Houses And Taverns Where Stocks Were Traded
B. Jewelry Stores That Specialized In The Sale Of Precious Stones
C. Businesses That Engaged In Small Loans
D. Goldsmiths That Held Stores Of Gold For Their Customers
E. None Of The Above

75. An Increase In The Reserve Requirement Can
A. Decrease Interest Rates
B. Increase Liquidity
C. Decrease The Money Supply
D. Increase The Money Supply
E. Decrease The Profits Of Banks

True / False Questions

76. Commercial Banks Are Financial Intermediaries But Insurance Companies Are Not.

77. Investment Banks Assist Corporations In Issuing Stocks And Bonds In The Primary Financial Market.

78. Silversmiths Became Banks When They Started Lending Out Money Based Upon The Excess Silver That They Held For Their Customers.

79. Residential Real Estate Is Generally Considered To Be More Liquid Than A Savings Account.

80. The Us Has, Over Its History, Had Only One National Bank, That Is, A Bank Of The United States.

81. The Most Important Function Of Money Is As A Medium Of Exchange.

82. If The Supply Of Money Decreases, The Value Of A Dollar Increases.

83. The Key To The Federal Reserve’s Control Over The Money Supply Is Its Ability To Create Money By Making Loans.

84. A Commercial Banking System With Excess Reserves Has The Ability To Create Money In The By Making Loans.

85. A Credit Union, Unlike A Bank, Is Not A Financial Intermediary, Since It Is A Cooperative Banking Venture.

86. In The U.S. Banking System, The Ratio Of A Bank’s Reserves And Its Outstanding Deposits Is Usually Less Than One.

87. During Inflationary Periods, The Federal Reserve Should Lower The Discount Rate So That Member Banks May More Easily Obtain Needed Reserves To Enable Them To Increase Their Loans.

88. The Money Supply Consists Primarily Of Gold, Silver, And Other Metals Held By The Government.

89. Monetary Policy Refers To Control Of The Money Supply By The Federal Reserve Authorities.

90. Appropriate Federal Reserve Actions To Combat Inflation Are An Increase In The Discount Rate, An Increase In The Reserve Ratio And The Sale Of Government Securities.

91. The Reserve Ratio Is The Rate Of Interest Charged Commercial Banks When They Borrow From The Federal Reserve.

92. During Inflationary Periods, The Federal Reserve Should Buy Securities So That Commercial Banks Will Have More Reserves To Loan Out.

93. One Of The Main Functions Of Banks Is To Create Money.

94. When A Bank Makes A Loan To One Of Its Customers, It Increases Its Liabilities.

95. The Maximum Demand Deposit Creation Possible From A New Deposit Is Derived From The Equation D = E X 1/R.

96. The Discount Rate Is The Ratio Of Demand Deposits To Reserves That Banks Have To Maintain.

97. Policy Actions That Affect Changes In The Growth Rate Of The Money Supply To Keep Interest Rates At Levels That Promote Economic Stability And Growth Are Called “Fine Tuning” Policies.

98. The Issue Of The Appropriate Monetary Policy Target Has Been Resolved To The Satisfaction Of All Policy Makers.

99. The Quantity Theory Of Money States That Increases In The Money Supply Cause Increases In Both The Price Level And Output.

100. A Credit Union Is A Cooperative Banking Venture Where The Members Or Owners Of The Organization Have A Common Employer Or Union.

101. The Main Purpose Of The Fed Is To Control The Rate Of Interest.

102. The Annual Growth Rate In The Money Supply Has Been Held Constant By The Federal Reserve.

103. The Quantity Theory Of Money Stresses The Importance Of The Velocity Of Money.

104. The Money Multiplier Is Derived From The Legal Reserve Requirement.

105. An Increase In The Supply Of Money Will Decrease Interest Rates.

106. The Federal Reserve Open Market Committee’s Primary Function Is To Open New Banks.

107. The Discount Rate Charged By The Federal Reserve, Is Lower For More Creditworthy Banks.

108. Any Time The Discount Rate Increases, The Money Supply Also Increases.

109. If The Required Reserve Ratio Is Increased By The Fed, One Could Assume That The Fed Is Attempting To Control Inflation.

110. Prior To The Enactment Of The Monetary Control Act Of 1980, State-Chartered Banks Had The Option Of Whether Or Not They Wanted To Be A Member Of The Federal Reserve System.

111. Interest Rates Increase Or Decrease So That An Equilibrium Exists In The Money Market.

112. The Federal Government, Through The Work Of Agencies Like The Federal National Mortgage Association, Has Worked To Increase The Supply Of Funds Available To Mortgage Lenders.

113. A Policy Implemented By The Clinton Administration Resulted In Tighter Financial Requirements For Less Creditworthy Borrowers, So That Financial Markets Were Less Risky.

114. A Subprime Mortgage Is A Mortgage Issued To A Highly Qualified Borrower At Reduced Interest Rates.

115. Subprime Mortgages And Home Equity Loans Contributed Little To The Increase In The Demand For Residential Real Estate, Increasing Prices Dramatically.

116. A Homeowner Whose House Is Worth $500,000 But Who Owes $600,000 On Their Mortgage Is A Good Candidate For A Home Equity Loan, So That The Homeowner Can Build Their Equity.

117. Collateralized Debt Obligations Are A Way That Lenders Can Reduce The Risk Of Individual Mortgage Lending.

118. Collateralized Debt Obligations Always Exclude Subprime Mortgages, Because These Are Too Risky For Most Investors.

119. A Credit Default Swap Is One Way That Lenders Can Offset Some Of The Risks Associated With Investing In Subprime Mortgages.

120. A Number Of Banks Encountered Problems Because A Change In Accounting Rules Required Firms To Mark Assets At Their Original Purchase Price.

121. Borrowers Who Obtain A Mortgage Will Always Find That Their Mortgage Payments Rise Over Time.

122. The Definition Of The Money Supply Called M1 Includes All Of The Assets Included In The Definition Of M2.

123. An Increase In The Required Reserve Ratio Will Allow Banks To Create Less Money.

124. The Open Market Committee Of The Federal Reserve System Meets Regularly To Determine The Required Reserve Ratio.

125. Because Of Recent Changes In The Regulatory System, Commercial Banks Are Able To Offer A Smaller Variety Of Financial Products And Services Than In The Past.

126. The Distinctions Between Commercial Banks And Other Financial Institutions Has Blurred In Recent Years.

127. Large Corporations Enter The Secondary Financial Market To Provide Themselves Adequate Liquidity To Conduct Their Day To Day Operations.

128. Stockholders Can Receive A Capital Gain When They Purchase A Financial Asset.

129. Stocks And Bonds Are Essentially Interchangeable Financial Assets, Since Owners Of Both Of These Instruments Receive Regular Interest Payments.

130. When Ben Bernanke Became Fed Chairman, The Federal Reserve Began Explicitly Announcing Money Supply Targets.

Chapter 13

Unemployment And Inflation: Can We Find A Balance?

Multiple Choice Questions

1. A Person Is Considered Unemployed If The Person Is
A. Seeking A Job Requiring Greater Qualifications Than The Person Possesses And No One Is Willing To Hire The Person For Such A Job
B. Offered A Job For Which The Person Is Qualified But Prefers Not To Work
C. Qualified For A Job, Willing To Work, But Unable To Find Work For Over 30 Days
D. Out Of School During Christmas Vacation And Cannot Find Work During That Period
E. All Of The Above

2. Which Of The Following People Is Considered Unemployed?
A. A Truck Driver With A High School Education Who Has Been Laid Off His Job And Is Now Training To Be A Computer Programmer
B. An Individual Who Is Currently Not Working Nor Actively Seeking Employment
C. A Secretary Who Is Currently Not Working And Who Seeks Employment Using Secretarial Skills
D. All Of The Above
E. None Of The Above

3. An Auto Factory Worker Who Is Unemployed Because A Robot Now Has His Job Is A Victim Of
A. Structural Unemployment
B. Cyclical Unemployment
C. Underemployment
D. Frictional Unemployment
E. Seasonal Unemployment

4. Which Of The Following Individuals Is Considered Part Of The Labor Force?
A. An Unemployed Farmer
B. A College Graduate Looking For His First Job
C. A Retired Teacher Working As A Sales Clerk
D. A Department Store Santa During December
E. All Of The Above

5. When Individuals Want To Work, But Give Up Looking For A Job Because They Feel There Will Never Be One Available, They Are Considered
A. Pessimistic
B. Lazy
C. Discouraged
D. Part Of The Labor Force
E. Unemployed

6. Which Of The Following Individuals Is Part Of The Labor Force?
A. A 15-Year-Old Worker At A Fast Food Restaurant
B. A Paid Prison Worker At The Prison Carpentry Shop
C. A College Student Attending School Full-Time
D. A Stay-At-Home Dad
E. None Of The Above

7. The Unemployment Rate
A. For Blacks Is Roughly Twice The Rate For Whites
B. For Women Is Lower Than That Of Men
C. For Teenagers Is Below The Rate For The Labor Force As A Whole
D. Is Equal For Males And Females, Blacks And Whites, And Young And Old Workers
E. Is None Of The Above

8. Technological Change In An Industry That Historically Required Specific Labor Skills Will Lead To
A. Frictional Unemployment
B. Structural Unemployment
C. Cyclical Unemployment
D. Seasonal Unemployment
E. No Changes In Unemployment

9. People Who Are In The Process Of Changing Jobs Are Classified In The Category Of
A. Frictional Unemployment
B. Involuntary Unemployment
C. Structural Unemployment
D. Cyclical Unemployment
E. Seasonal Unemployment

10. A College Graduate Looking For Her First Job Is Considered
A. Frictionally Unemployed
B. Involuntarily Unemployed
C. Structurally Unemployed
D. Cyclically Unemployed
E. Seasonally Unemployed

11. A Farmer Who Has Lost His Farm Due To Increased Agricultural Productivity Is Considered
A. Frictionally Unemployed
B. Involuntarily Unemployed
C. Structurally Unemployed
D. Cyclically Unemployed
E. Seasonally Unemployed

12. A Factory Worker Who Loses A Job Because Of A Decrease In Aggregate Demand Is
A. Frictionally Unemployed
B. Involuntarily Unemployed
C. Structurally Unemployed
D. Cyclically Unemployed
E. Seasonally Unemployed

13. The Full-Employment Unemployment Rate Is
A. 0
B. Inconsistent With Price Stability
C. The Rate That Reflects Cyclical Unemployment
D. 10%
E. None Of The Above

14. Between 1960 And 2011, The Unemployment Rate Has
A. Steadily Increased
B. Steadily Fallen
C. Been Below 6% Over The Entire Period
D. Ranged From 1% To 12%
E. None Of The Above

15. Unemployment Rates Tend To Rise When
A. Inflation Rates Rise
B. Aggregate Demand Is High
C. The Economy Goes Through An Expansion
D. There Is A Recession
E. Interest Rates Are Low

16. A Major Cause Of Involuntary Unemployment Is
A. A Wage Rate Below Equilibrium
B. Not Enough Demand For Labor
C. Too Much Supply Of Labor
D. Laziness
E. A Wage Rate Above Equilibrium

17. The Unemployment Rate Will Not Fall To Zero Because Of
A. Cyclical Unemployment
B. Frictional Unemployment
C. Welfare
D. Voluntary Unemployment
E. All Of The Above

18. Which Of The Following Types Of Unemployment Is Considered Long-Term, Hardcore Unemployment?
A. Cyclical
B. Structural
C. Frictional
D. Seasonal
E. None Of The Above

19. A Poorly Educated, Unskilled Teenager Currently Unemployed Is An Example Of
A. Frictional Unemployment
B. Cyclical Unemployment
C. Structural Unemployment
D. Seasonal Unemployment
E. None Of The Above

20. People Who Are Unemployed Due To A Downturn In Economic Activity Are Classified In The Category Of
A. Frictional Unemployment
B. Structural Unemployment
C. Seasonal Unemployment
D. Cyclical Unemployment
E. Voluntary Unemployment

21. When General Motors Lays Workers Off Because Of A Decrease In Aggregate Demand, It Causes
A. Cyclical Unemployment
B. Frictional Unemployment
C. Seasonal Unemployment
D. Structural Unemployment
E. None Of The Above

22. Unemployment Below The Full Employment Rate Is A Measure Of
A. Underemployment
B. Structural Unemployment
C. Cyclical Unemployment
D. Seasonal Unemployment
E. None Of The Above

23. The Highest Unemployment Rate Is Found Among
A. People Between The Ages Of 16 And 19
B. Females
C. Ethnic Groups
D. The Elderly
E. Children

24. Which Of The Following Best Describes When The Economy Is Experiencing Inflation? When
A. The Price Of An Essential Good Increases Dramatically
B. The Prices Of Many Goods Go Up
C. There Is A Rise In The General Level Of Prices
D. All Prices Remain The Same Or Increase; No Prices Fall
E. The Value Of The Dollar Increases

25. Which Price Index Is Also Known As The Cost-Of-Living Index?
A. Consumer Price Index
B. Wholesale Price Index
C. Implicit Price Deflator
D. Gdp Deflator
E. All Of The Above

26. If Inflation Is Not Observable In The Form Of Rising Prices, It Is Called
A. Suppressed
B. Repressed
C. Deflation
D. Dynamic
E. None Of The Above

27. Price Index Numbers For A Series Of Years Show
A. If Money Gdp Is Growing
B. If Real Gdp Is Growing
C. If All Prices Are Rising
D. The Average Price Level For Each Year As A Percentage Of The Base Year
E. None Of The Above
28. If The Consumer Price Index Is 100 In 2010 And Is 120 In 2012, Then The Rate Of Inflation Between 2010 And 2012 Is
A. 10%
B. 20%
C. 15%
D. 5%
E. Unable To Be Calculated Without Further Information

29. The Best Description Of The Growth Of The Money Supply Since 1960 Is That It Has
A. Increased Steadily
B. Increased Rapidly During The 1980’s
C. Decreased Steadily
D. Decreased Rapidly During The 1960’s
E. Shown Patterns Of Both Fast And Slow Growth Over The Decades

30. When Inflation Redistributes Income From One Group In The Economy To Another, It Is An Example Of Which Effect?
A. Equity
B. Efficiency
C. Output
D. Input
E. None Of The Above

31. If Inflation Causes The Demand For Houses To Increase More Rapidly Than The Demand For Other Goods, The Economy Has Experienced Which Effect
Of Inflation?
A. Equity
B. Efficiency
C. Output
D. Input
E. None Of The Above

32. If Inflation Stimulates Production And Employment, The Economy Experiences Which Of The Following Effects Of Inflation?
A. Equity
B. Efficiency
C. Output
D. Input
E. None Of The Above

33. Which Of The Following Is Most Likely Be Hurt By Inflation?
A. People On Fixed Incomes
B. People Whose Wages Rise Faster Than Prices
C. Landholders
D. Borrowers
E. None Of The Above

34. Suppose A Family Spends $20,000 On A Basket Of Goods In 2011. Suppose The Same Basket Costs $22,000 In 2012. Using 2011 As The Base Year, The Price Index For 2012 Is
A. 105
B. 102
C. 111
D. 110
E. None Of The Above

35. The Effect Of Inflation On Production And Employment Is Known As
A. An Incomes Policy
B. The Equity Effects Of Inflation
C. The Efficiency Effects Of Inflation
D. The Output Effects Of Inflation
E. Fiscal Policy

36. Federal Income Taxes Are Levied On The Basis Of Nominally Stated Tax Brackets, And There Is A Nominal Upward Adjustment In Salaries And Wages During Inflation. Therefore, What Is Of Federal Tax Collections During Inflation? They Will
A. Decrease In Both Real And Nominal Terms
B. Increase In Both Real And Nominal Terms
C. Increase In Real Terms
D. Increase In Nominal Terms
E. Stay The Same

37. Which Of The Following Statements Is Correct? Inflation
A. Benefits Creditors At The Expense Of Debtors
B. Increases The Purchasing Power Of The Dollar
C. Increases The Real Value Of Savings
D. Arbitrarily “Taxes” Fixed Income Groups
E. Increases Real Wages

38. The Effects Of Inflation On The Distribution Of Income Are Called
A. An Incomes Policy
B. The Equity Effects Of Inflation
C. The Efficiency Effects Of Inflation
D. The Output Effects Of Inflation
E. None Of The Above
39. The Effect That Inflation Has On The Allocation Of Resources Is Known As
A. An Incomes Policy
B. The Equity Effects Of Inflation
C. The Efficiency Effects Of Inflation
D. The Output Effects Of Inflation
E. None Of The Above
40. In The Circular Flow Diagram, Economic Units Are Classified As
A. Imports And Exports
B. Households And Producers
C. Taxpayers And Governments
D. Subsidy Receivers And Taxpayers
E. Producers And Sellers
41. The Circular Flow Of Economic Activity Developed In The Text Is A Model Of The
A. Flow Of Goods, Resources, Payments And Expenditures Between The Sectors Of The Economy
B. Influence Of Government On Business Behavior
C. Influence Of Business On Consumers
D. Role Of Unions And Government In The Economy
E. Interaction Among Taxes, Prices, And Profits
42. Which Of The Following Statements Concerning The Circular Flow Is ?
A. The Circular Flow Of Economic Activity Shows How The Overall Economy Operates
B. The Circular Flow Emphasizes The Independence Of Economic Variables
C. There Are Two Circular Flows Involved In The Economy
D. The Circular Flow Shows That Real Income Is Determined By Physical Goods And Services Produced In The Economy
E. None Of The Above
43. Aggregate Demand
A. Represents The Sum Of The Demands By All Purchasers Of Goods And Services In An Economy
B. Is Comprised Of The Purchases Of Goods And Services Only By Consumers
C. Excludes Imports And Exports
D. Assumes That Governments Do Not Purchase Goods And Services
E. None Of The Above
44. The Aggregate Demand Curve Will Shift To The Right
A. When The Government Raises Taxes
B. If Investors Reduce Their Purchases Of Plant And Equipment
C. If Consumer Confidence Increases
D. If Prices Fall
E. None Of The Above

45. The Marginal Propensity To Consume Is
A. Consumption Divided By Income
B. The Change In Consumption
C. The Change In Consumption Divided By The Change In Income
D. Unaffected By Changes In Income
E. All Of The Above

46. The Marginal Propensity To Consume Plus The Marginal Propensity To Save
A. Represents What Happens As A Result Of Income Changes
B. Must Always Sum To 1
C. Must Always Sum To 0
D. A And B
E. None Of The Above

47. Investment Spending Is Sensitive To
A. Interest Rates
B. Expectations By Producers About The Return On Investment
C. The Confidence Of Investors
D. All Of The Above
E. None Of The Above

48. A Trade Deficit Will Occur In An Economy
A. When Spending Exceeds Income
B. When The Value Of Exports Exceeds The Value Of Imports
C. When The Value Of Exports Is Less Than The Value Of Imports
D. When An Economy Is Expanding
E. When An Economy Is In Recession
49. Assuming A Marginal Propensity To Consume Three-Fourths, The Spending Multiplier Is
A. 1
B. 2
C. 3
D. 4
E. None Of The Above
50. Assume That The Spending Multiplier Is 3. The Government Has Decided To Purchase New Computers To Improve Productivity And Will Spend $50 Billion On The Computer Equipment. The Resulting Increase In National Income Will Be
A. Zero
B. $200 Billion
C. $100 Billion
D. $150 Billion
E. It Cannot Be Determined

51. The Determinants Of Aggregate Supply Are
A. Resources, Prices, And Technology
B. Interest Rates
C. Consumer Wealth
D. Real Income
E. All Of The Above
52. Ameeta Spends $400 When Her Income Is $500. When She Receives A $100 Raise (Bringing Her Total Income To $600), She Spends $480. Her Mpc Is
A. 0.4
B. 0.5
C. 0.6
D. 0.8
E. 1.0

53. The Psychological Law Of Consumption Tells Us The Marginal Propensity To Consume Will Be
A. Less Than 0
B. Greater Than 0 But Less Than 1
C. Equal To 1
D. Greater Than 1 But Less Than 10
E. Greater Than 10

54. If The Mpc Is 0.8, The Spending Multiplier Equals
A. 0.2
B. 0.8
C. 1.25
D. 5.0
E. 8.0
55. If The Mps Is .4, The Spending Multiplier Equals
A. 0.4
B. 0.6
C. 1.67
D. 2.5
E. 4.0
56. Which Of The Following Is A Component Of Aggregate Demand?
A. Consumption
B. Investment
C. Government Spending
D. Exports And Imports
E. All Of The Above

Questions 57 – 62 Refer To The Graph Below.

57. Given Short Run Aggregate Supply S0, What Level Of Aggregate Demand Is Necessary For The Economy To Reach Full Employment?
A. Lower Than D1
B. D0
C. D1
D. D2
E. Higher Than D2

58. Given D0 And S0, An Increase In Aggregate Demand Would Lead To Which Of The Following?
A. Higher Unemployment
B. Lower Unemployment
C. Inflation
D. Deflation
E. Recession

59. Given S1 And D1, Which Of The Following Changes Reduces Unemployment? A Shift To
A. D0
B. D2
C. S0
D. All Of The Above
E. None Of The Above

60. Which Of The Following Would Cause A Shift From D1 To D2?
A. An Increase In Investment
B. A Decrease In Consumption
C. An Increase In Imports
D. An Increase In Saving
E. All Of The Above

61. Which Of The Following Would Cause A Shift From S1 To S0?
A. A Decrease In Resource Prices
B. An Decrease In Unemployment
C. An Increase In The Price Of Labor
D. An Increase In Consumption
E. All Of The Above

62. Demand-Pull Inflation Is Illustrated By A Movement From
A. S0 To S1
B. S1 To S0
C. D0 To D2
D. D1 To D0
E. Q1 To Q0
63. If The Economy Is Initially At Full Employment, An Increase In Aggregate Demand Will Result In
A. Demand-Pull Inflation
B. Profit-Push Inflation
C. Cost-Push Inflation
D. Unemployment
E. Underemployment

64. To Expand The Level Of Economic Activity, It Is Necessary That
A. Total Leakages Exceed Total Injections
B. Government Expenditures Exceed Tax Collections
C. Total Injections Exceed Total Leakages
D. Imports Exceed Exports
E. (C) And (D) Above

65. Leakages In The Circular Flow Consist Of
A. Savings, Taxes, And Exports
B. Savings, Investment, And Exports
C. Government Spending, Investment, And Exports
D. Savings, Taxes, And Imports
E. Investment, Taxes, And Imports

66. Injections In The Circular Flow Consist Of
A. Savings, Exports, And Investments
B. Savings, Exports, And Taxes
C. Government Spending, Savings, And Exports
D. Government Spending, Investment, And Exports
E. None Of The Above

67. Aggregate Supply Can Be Increased By
A. Reduced Incentives To Save
B. Higher Taxes
C. Increases In Government Spending
D. Policies To Induce More Saving
E. None Of The Above

68. The Phillips Curve Depicts The Relationship Between
A. Output And Inflation
B. Savings And Investment
C. Unemployment And Inflation
D. Imports And Exports
E. None Of The Above

69. Economists In The 1960s Believed That The Phillips Curve Relationship Would
A. Allow Governments To End Inflation
B. Provide Governments A Means To Control Recessions
C. Discourage Imports
D. Provide Policies That Would Trade Off Unemployment For Inflation
E. None Of The Above

70. Economic Policy Makers In The 1960s Held That Governments Could
A. Engage In Expansionary And Contractionary Policies To Manage The Economy
B. Spend Their Way Out Of Business Cycles
C. Eliminate Unemployment
D. Choose How Much To Produce
E. None Of The Above

71. After The Events Of The 1970s, Economists Learned That
A. Attempts To Trade Off Unemployment And Inflation Would Only Work For A Short Period Of Time
B. Shocks To The Aggregate Supply Could Alter The Relationships Between Unemployment And Inflation
C. The Phillips Curve Relationship Was Not Stable
D. The Phillips Curve Shifted Over Time
E. All Of The Above

72. By How Much Must Investment Spending Increase To Increase Output By $500 If The Mpc Is 0.8?
A. $100
B. $300
C. $400
D. $500
E. More Than $500

73. A Useful Measure Of The Size Of The Workforce, That Is, The Number Of Individuals Who Are Willing And Able To Work, Is
A. The Current Population Survey
B. The Unemployment Rate
C. The Rate Of Job Growth
D. The Labor Force Participation Rate
E. There Are No Useful Measures Of This Information, Due To The Difficulties Of Gathering The Sample

74. In An Economy Like That Of The Us, Due To A Variety Of Institutional And Social Factors, Wages Tend To Be
A. Very Flexible
B. Flexible During Recessions
C. Highly Rigid
D. Affected Only By Congressional Legislation
E. Sticky

75. Which Of The Following Factors In An Economy Contribute To “Sticky” Wages?
A. Flexible Working Conditions
B. Competitive Labor Markets
C. Collective Bargaining Agreements
D. Highly Mobile Capital Equipment
E. Investment Flexibility

True / False Questions

76. Unemployment Affects Both The Current And Future Production Of Goods And Services.

77. If Leakages Exceed Injections, Unemployment Will Result.

78. Involuntary Unemployment Occurs When Wage Rates Are Too Low, I.E., Below Competitive Levels.

79. Cyclical Unemployment Is Due Primarily To A Decline In Aggregate Supply.

80. Structural Unemployment Results From People Changing Jobs.

81. Frictional Unemployment Refers To Persons Who Are Unemployed Because The Economy Is In A Recession.

82. As An Economy Approaches Full Employment, Real Output Declines.

83. Frictional Unemployment Is A Long-Run Event For Particular Individuals.

84. The Unemployment Rate Is The Same For All Demographic Groups.

85. Full Employment Means That Everyone In The Labor Force Has A Job.

86. An Equilibrium Level Of National Income Implies The Economy Is Operating At Full Employment.

87. Frictional Unemployment Is Involuntary.

88. Structural Unemployment Results From The Economy Experiencing A Recession.

89. Cyclical Unemployment Occurs Because Workers Have No Marketable Job Skills.

90. A Certain Amount Of Frictional And Structural Unemployment Occurs Even At Full Employment.

91. Frictional Unemployment Can Be Reduced By Education And Training.

92. An Economy Reaches Full Employment When There Is No Cyclical Unemployment.

93. Full Employment May Be Reached Even Though There Is Frictional And Structural Unemployment.

94. Structural Unemployment Is A Long Run Event For Particular Individuals.

95. Frictional Unemployment Could Be Reduced By Decreasing The Minimum Wage.

96. All Unemployed Workers Are Unemployed For The Same Reason.

97. Cyclical Unemployment Is Involuntary.

98. When Frictional Unemployment Exists, Labor Services Are Voluntarily Unemployed.

99. As A Group, Women Suffer From The Highest Unemployment Rate.

100. The Lowest Unemployment Rate Is Found For Those Between The Ages Of 16 And 19.

101. Economic Growth Or Improved Technology Would Be Shown On An Aggregate Demand – Aggregate Supply Diagram As An Increase In Ad, As Remaining Constant.

102. An Increase In Government Purchases Financed By An Equal Increase In Tax Collections Will Increase National Income.

103. An Increase In The Marginal Propensity To Consume Will Increase The Size Of The Multiplier.

104. The Marginal Propensity To Consume Is Usually Greater Than One.

105. An Increase In Trade Deficit Will Increase Unemployment In The U.S.

106. An Increase In The Federal Budget Deficit Will Increase Unemployment.

107. An Increase In Imports Would Expand The Level Of Employment.

108. The Ad-As Relationship Is Not Affected By Circular Flow Relationships.

109. Inflation Means That Prices Are Too High.

110. A Price Index Shows The Absolute Changes In Price That Occur Over Time In A List Of Different Products And Services.

111. If The Economy Is Operating At A Less-Than-Full Employment Level, An Increase In Aggregate Demand May Result In An Increase In The Price Level As Well As An Increase In The Level Of Employment.

112. Inflation May Affect The Distribution Of Income In The Economy And May Increase National Output.

113. Inflation Is Not Equitable Because It Arbitrarily Changes The Pattern Of Income Distribution.

114. The Consumer Price Index Is A Cost-Of-Living Index.

115. Demand-Pull Inflation Ends Once Full Employment Is Reached.

116. During Inflation, Some Prices May Be Rising And Some May Be Falling.

117. The Effects Of Inflation On Resource Allocation Are The Equity Effects Of Inflation.

118. Inflation May Have A Stimulating Effect On Production And Employment.

119. The Labor Force Participation Rate Has Been Steadily Increasing In Recent Years.

120. Unemployment Rates Since 2007 Have Increased Due To Rising Structural Unemployment.

121. Since 1960, Inflation Rates Were Highest During The 1970s.

122. When A Phillips Curve Is Drawn, It Shows An Inverse Relationship Between Inflation And Unemployment Rates.

123. The Phillips Curve Is Another Name For A Production Possibilities Curve.

124. The Phillips Curve Has Displayed A Stable Relationship Between Inflation And Unemployment Since The 1960s.

125. Expansionary And Contractionary Policies Have Not Proved To Be Effective Tools To Control Unemployment And Inflation In The American Economy.

126. The Oil Embargo During The Early 1970s Showed How Stable The Relationship Is Between Unemployment And Inflation Rates.

127. Shifts In The Aggregate Supply Function Can Cause Shifts In The Phillips Curve.

128. The Relationship Shown By The Phillips Curve, Which Implies A Tradeoff Between Inflation And Unemployment Rates, Is A Long-Run Phenomenon.

Chapter 14

Government Spending, Taxation, And The National Debt: Who Wins And Who Loses?

Multiple Choice Questions

1. The Fears Of People Concerning The Size Of Government Are
A. Always Without Any Foundation
B. Well-Founded In Some Instances And Not Well-Founded In Some Instances
C. Difficult To Appreciate
D. Due To Low Income And Low Educational Levels Of Many People
E. Based Solely On Economic Efficiency

2. The Fears Of People Concerning Distribution Of Taxes Are Related To
A. Equity Or Justice In Taxation
B. Ample Evidence That There Are Tax Inequities In The Tax System At All Levels Of Government
C. The Complete Lack Of Understanding That People Have About The Purpose Of Taxes
D. Both (A) And (B)
E. All Of The Above

3. Total Government Expenditures Currently Represent Approximately What Percentage Of Gdp?
A. 20%
B. 30%
C. 40%
D. 50%
E. 10%

4. A Cash Payment From The Government To An Individual, Based On Need, Is An Example Of A
A. Transfer Payment
B. Government Purchase Of A Service
C. Government Purchase Of A Good
D. Transaction Payment
E. Government Receipt

5. A Payment From The Government To A Federal Employee Is A
A. Transfer Payment
B. Government Purchase Of A Service
C. Government Purchase Of A Good
D. Transaction Payment
E. Government Receipt

6. An Efficient Level Of Government Expenditures Is That Level Where
A. Total Costs Are Minimized
B. Total Benefits Are Maximized
C. Marginal Benefits Are Equal To Marginal Costs
D. Marginal Benefits Are Greater Than Marginal Costs
E. Marginal Benefits Are Less Than Marginal Costs

7. Public Goods And Services Have Characteristics That Make Them
A. Possible To Exclude People From Consuming Them
B. Less Available For One Person When Another Consumes Them
C. Easy To Provide Through Private Markets
D. All Of The Above
E. None Of The Above

8. The Size Of Government Is Growing At
A. A Slower Rate Than The Rest Of The Economy
B. Approximately The Same Rate As The Rest Of The Economy
C. A Faster Rate Than The Rest Of The Economy
D. Twice The Rate Of The Rest Of The Economy
E. A Negative Rate

9. Assuming Negative Externalities In Production, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be
A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs
B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs
C. A Subsidy To Consumers Equal To Marginal External Benefits
D. A Subsidy To Consumers Greater Than Marginal External Benefits
E. None Of The Above

10. Assuming Positive Externalities In Consumption, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be
A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs
B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs
C. A Subsidy On Each Unit Consumed Equal To Marginal External Benefits
D. A Subsidy On Each Unit Consumed Greater Than Marginal External Benefits
E. None Of The Above

11. Shifting Income From Those Who Are Relatively Productive To Those Who Are Relatively Unproductive, Say Through Taxes And Subsidies, Must Be Based On
A. Sound Economic Principles
B. The Laws Of Demand And Supply
C. The Values Of People As To What Constitutes A “Fair” Distribution Of Income
D. Marginal Cost And Marginal Benefit
E. Both (A) And (D)

12. A National Crime Lab Used To Prevent Criminal Activity Nationwide Is An Example Of A
A. Negative Externality
B. Positive Externality
C. Transfer Payment
D. Public Good
E. Private Good

13. Tax Equity Means That
A. All People Should Pay Equal Taxes
B. Only The “Rich” Should Pay Taxes
C. People In The Same Economic Circumstances Should Pay Equal Taxes, And People In Different Economic Circumstances Should Pay Unequal Taxes
D. The Distribution Of Income After Taxes Should Be Equal
E. None Of The Above

14. An Efficient Tax Would Be A Tax For Which
A. The Excess Burden” From Taxes Is Zero
B. Taxes Should Have A Neutral Effect On The Operation Of The Economy
C. Taxes Should Be Levied At Progressive Rates
D. (A) And (B)
E. All Of The Above

15. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Government Purchase Is
A. Greater Than The Benefit Of The Last Dollar Spent In The Private Sector
B. Less Than The Benefit Of The Last Dollar Spent In The Private Sector
C. Equal To The Benefit Of The Last Dollar Spent In The Private Sector
D. Paid For Out Of Current Tax Collections
E. None Of The Above

16. An Efficient Level Of Government Expenditures Is That Level At Which
A. Marginal Benefits Exceed Marginal Costs
B. Total Benefits Equal Total Costs
C. The Net Benefits To Society Are Maximized
D. The Total Costs Are Minimized
E. None Of The Above

17. Where Marginal Benefits Are Greater Than The Marginal Costs, Government Expenditures Should
A. Be Increased
B. Remain The Same
C. Be Decreased Then Increased To Their Original Level
D. Be Increased Then Decreased To Their Original Level
E. Do None Of The Above

18. Characteristics Of Public Goods And Services Include Which Of The Following?
A. The Demand For These Goods And Services Is Divisible On The Basis Of Individual Quantity Demanded
B. The Supply Of These Goods And Services Is Generally Not Divisible Into Small Units
C. These Goods And Services Are Easily Provided By The Market System
D. The Costs Of These Goods Fall On Other Than The Buyer
E. None Of The Above

19. Which Of The Following Is An Example Of A Public Good Or Service?
A. A Public Highway
B. Free Cheese Offered By The Government
C. Food Stamps
D. Social Security
E. Automobiles

Questions 20 – 24 Refer To The Graph Below.

20. Assuming No External Benefits Or Costs, The Efficient Price And Quantity Would Be
A. P2, Q2
B. P2, Q1
C. P1, Q1
D. P0, Q0
E. P0, Q2

21. Suppose There Are External Benefits Associated With The Production Of The Good. The Efficient Price And Quantity Are
A. P2, Q2
B. P2, Q1
C. P1, Q1
D. P0, Q0
E. P0, Q2

22. If External Benefits Are Associated With The Consumption Of The Good, Consumers Could Be Induced To Purchase The Efficient Quantity If The Price Were Set At
A. P2
B. P1
C. P0
D. 0
E. None Of The Above

23. To Assure Consumers Purchase The Efficient Quantity When There Are Positive External Benefits, The Government Would Lower Price To
A. P2
B. P1
C. P2- P1
D. P0- P1
E. P0

24. Marginal External Benefits Are Represented On The Graph As The Distance
A. Ab
B. Q2a
C. Ea
D. Cf
E. Af

25. Which Of The Following Is The Major Tax Source Of The Federal Government?
A. Income Taxes
B. Excise Taxes
C. Property Taxes
D. Wealth Taxes
E. Sales Taxes

26. A Progressive Tax Rate Means That The Ratio Of Tax Collections To Income
A. Falls As Income Rises
B. Rises As Income Rises
C. Remains The Same As Income Rises
D. Either (A) And (B)
E. May Fall, Rise, Or Remain The Same As Income Rises

27. In The Us, Major Sources Of Tax Revenues Are:
A. Income Taxes At The Federal Level, Property Taxes At The State Level
B. Sales Taxes At The Federal Level And Income Taxes And Property Taxes At The State Level
C. Income Taxes At The Federal Level And Income And Sales Taxes At The State Level
D. Income Taxes At The Federal Level And Payroll Taxes At The State Level

28. The Ability To Pay The Principle Of Taxation Suggests That People With More Income Should Pay More Taxes. This Means That
A. Progressive Income Rates Are Consistent With The Ability To Pay Principle
B. Proportional Income Rates Are Consistent With The Ability To Pay Principle
C. Regressive Income Rates May Or May Not Be Consistent With The Ability To Pay Principle Depending On The Rate Of Regression
D. Sales Taxes Are Consistent With The Ability To Pay Principle
E. None Of The Above

Questions 29 – 33 Refer To The Graph Below.

29. The Demand Curve For This Product Can Be Described As
A. Perfectly Elastic
B. Perfectly Inelastic
C. Unitary Elastic
D. Hyper Elastic
E. Price Elastic

30. Given Demand Curve D, If An Output Tax Per Unit Of P- P2 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. It Can Not Be Determined

31. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

32. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

33. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

Questions 34 – 38 Refer To The Graph Below.

34. The Demand Curve For This Product Can Be Described As
A. Perfectly Elastic
B. Perfectly Inelastic
C. Unitary Elastic
D. Hyper Elastic
E. Price Elastic

35. Given Demand Curve D, If An Output Tax Per Unit Of P- P1 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

36. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

37. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

38. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

39. An Output Tax Will Be Shifted Completely
A. Backward If Demand Is Price Inelastic
B. Forward If Demand Is Perfectly Price Inelastic
C. Forward If Demand Is Price Elastic
D. Backward, Regardless Of Elasticity
E. All Of The Above

40. A Tax Levied Independent Of Output, Such As A Tax Levied On Net Income Of Corporations, Will
A. Be Shifted If Demand Is More Elastic Than Supply
B. Be Shifted If Supply Is More Elastic Than Demand
C. Not Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax
D. Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax
E. Do None Of The Above

41. Government Borrowing Is Argued To Have The Effect Of Raising Interest Rates—The “Crowding-Out Effect.” In Conjunction With Government Spending, Does Government Spending And Borrowing Have A Positive Or Negative Impact On The Economy?
A. Negative, Since Borrowing Exceeds Spending
B. A Positive Impact, Since Expenditures Often Exceed Borrowing
C. A Neutral Effect, Since The Budget Is Always In Balance
D. Government Spending And Borrowing Have A Minimal Effect On The Economy
E. Government Spending And Borrowing Must Be Considered Separately

42. The Gasoline Tax Is Often Used To Illustrate The Benefits Received Principle Of Taxation Because
A. Everyone Benefits From The Gasoline Tax
B. Those Who Pay The Tax Receive Benefits, Since The Revenues Are Used For Road And Highway Construction And Maintenance
C. The Amount We Pay Is Consistent With Our Incomes
D. Everyone Knows When They Pay The Tax
E. The Gasoline Tax Is A Poor Example Of The Benefits Received Principle

43. Vertical Equity Implies That
A. People In Different States Should Pay The Same Taxes
B. People With Comparable Incomes Should Pay The Same Taxes
C. People In Different Economic Circumstances Should Pay Different Amounts
D. Taxes Should Rise As The Size Of Your Family Increases
E. Taxes Should Be Based Upon How Tall The Taxpayer Is

44. Proportional Tax Rates Mean That The Ratio Of Tax Collection To Income
A. Falls As Income Rises
B. Rises, As Income Rises
C. Remains The Same As Income Rises
D. Rises As Income Falls
E. Falls As Income Falls

45. Regressive Tax Rates Mean That The Ratio Of Tax Collections To Income
A. Falls As Income Rises
B. Rises As Income Rises
C. Remains The Same As Income Rises
D. Remains The Same As Income Falls
E. Falls As Income Falls

46. The Us Federal Personal Income Tax Is An Example Of A(N)
A. Regressive Tax Rate Structure
B. Proportional Tax Rate Structure
C. Progressive Tax Rate Structure
D. More Regressive Than Proportional Tax Rate Structure
E. Equitable Tax Rate Structure

47. If Demand For A Product Is Perfectly Inelastic, An Output Tax Will Be Shifted
A. Completely Backward
B. Completely Forward
C. Completely To The Poor
D. Completely To The Rich
E. Completely To The Producer

48. A Tax That Is Shifted Forward Is A Tax That Falls On
A. The Consumer In The Form Of Higher Prices
B. The Producer Through Lower Sales
C. The Government
D. Foreign Investors
E. None Of The Above

49. A Tax That Is Shifted Backward Is A Tax That Falls On
A. The Consumer In The Form Of Higher Prices
B. The Owners Of Resources In The Form Of Lower Resource Prices
C. The Government
D. Foreign Investors
E. None Of The Above

50. At The Federal Level, The Largest Revenue Generating Tax Is The
A. Corporate Income Tax
B. Personal Income Tax
C. Property Tax
D. Sales Tax
E. Customs Duty

51. If The Ratio Of Tax Collections To Income Rises As Income Rises, Then The Tax Rate Is
A. Regressive
B. Proportional
C. Progressive
D. Regressive Then Proportional
E. None Of The Above

52. The Federal Government Lowered Tax Rates In
A. 1986 And 2001
B. 1986
C. 2001
D. Neither Year
E. 1909 And Has Raised Them Ever Since

53. Suppose There Are Two Individuals Who Each Earn $25,000 Per Year. One Individual Pays $2,500 In Taxes And The Other Pays $2,000. This Is A Violation Of
A. The Benefits Received Principle
B. The Ability To Pay Principle
C. Vertical Equity
D. Horizontal Equity
E. None Of The Above

54. Suppose One Individual Earns $25,000 Per Year And Another Individual Earns $15,000 Per Year. If The Individual Earning $25,000 Per Year Pays $750 More Per Year In Taxes Than The Person Earning $15,000, This Is An Illustration Of
A. The Benefits Received Principle
B. The Ability To Pay Principle
C. The Equal Tax Treatment Principle
D. The Equitable Payment Doctrine
E. None Of The Above

55. If We Levy A Tax On Profits That Is Neither Shifted Neither Forward Nor Backward, It Is
A. An Output Tax
B. An Input Tax
C. A Tax Independent Of Output
D. A Tax Dependent On Output
E. None Of The Above

56. The Federal Tax System In The United States Can Be Described As
A. Regressive
B. Highly Progressive
C. Slightly Progressive
D. Proportional
E. None Of The Above

57. A Tax System That Will Not Alter The Distribution Of Income Is
A. Proportional
B. Regressive
C. Slightly Progressive
D. Very Progressive
E. None Of The Above
58. Which Of The Following Countries Has The Lowest Taxes Collected (As A Percent Of Gdp)?
A. The United States
B. Germany
C. Italy
D. France
E. The United Kingdom

59. The Highest Effective Federal Tax Rate In The United States Is Approximately
A. 10%
B. 15%
C. 20%
D. 24%
E. 34%
60. The Highest Effective Federal Tax Rate In The United States Falls On Which Income Category?
A. The Lowest Quintile
B. The Middle Quintile
C. The Top 10%
D. The Top 5%
E. The Top 1%

61. The Single Most Important Source Of Tax Revenue For The Local Governments In The United States Is The
A. Real Property Tax
B. Personal Income Tax
C. National Sales Tax
D. Cigarette Tax
E. Inheritance Tax

62. Enforcement And Collection Of Personal Income Taxes Is The Responsibility Of The
A. Treasury Department
B. Individual State Governments
C. Federal Reserve System
D. Internal Revenue Service
E. Department Of Labor

63. The Federal Government Uses Taxes To
A. Generate Revenue
B. Encourage Saving For Education And Retirement
C. Discourage Certain Behaviors
D. Promote The Purchase Of Houses
E. Do All Of The Above

64. The 1986 Tax Reform Act ________ The Number Of Tax Brackets And _______ The Highest Tax Bracket.
A. Increased; Increased
B. Increased; Decreased
C. Decreased; Increased
D. Decreased; Decreased
E. Decreased; Did Not Change

65. Since 2004, The Highest Personal Income Tax Bracket Has Been
A. 10%
B. 15%
C. 25%
D. 28%
E. 35%

66. The Economic Growth And Taxpayer Relief Reconciliation Act Passed By Congress And Signed By President George W. Bush Did Which Of The Following?
A. Immediately Cut Federal Tax Rates By One-Third
B. Gave A $300 Check To Each Taxpayer
C. Decreased The Tax On Income From Financial Investments
D. Decreased The Federal Budget Deficit
E. Increased The Number Of Personal Income Tax Brackets

67. The First Budget Surplus Since 1969 Occurred In
A. 1993
B. 1995
C. 1998
D. 1999
E. 2000

68. The Budget Surpluses Of The Late 1990’s And The Early 2000’s Could Be Attributed To Which Of The Following Government Policies?
A. The Value Added Tax Act
B. The Tax Reform Act Of 1986
C. The Economic Growth And Taxpayer Relief Reconciliation Act
D. Increased Government Debt
E. All Of The Above

69. If A Government Bond With A Maturity Value Of $10,000 Sells For $9,000 And Pays Annual Interest Of $1,000, What Is The Rate Of Interest On The Bond?
A. 1%
B. 10%
C. 11.1%
D. 88.9%
E. 90%

70. An Increase In Government Borrowing Will Cause Which Of The Following?
A. A Decrease In The Demand For Loanable Funds
B. A Decrease In The Supply Of Bonds
C. An Increase In The Interest Rate
D. An Increase In The Price Of Bonds
E. All Of The Above

71. Federal Debt Reduction Will Cause Which Of The Following?
A. A Decrease In The Interest Rate
B. An Increase In Private Investment
C. A Decrease In The Supply Of Bonds
D. An Increase In The Price Of Bonds
E. All Of The Above

72. The Federal Government Ended Its Most Recent Period Of Budget Surpluses And Returned To Deficits In
A. 1999
B. 2000
C. 2001
D. 2002
E. 2003

73. The Federal Deficit Was Increased In 2002 As A Result Of
A. The 2001 Recession
B. The War On Terrorism
C. The 2001 Tax Cut
D. Increased Defense Spending
E. All Of The Above

74. Retiring The Federal Debt Will
A. Decrease The Supply Of Government Bonds
B. Increase Government Bond Prices
C. Lower The Interest Rate On Government Bonds
D. Decrease The Demand For Money
E. Do All Of The Above

True / False Questions

75. The Fears That People Have Concerning Government Are Related To The Size Of Government And The Distribution Of Taxes.

76. Some Of The Fears That People Have Concerning Government Are Well-Founded And Some Are Not.

77. Government Expenditures Have Grown Faster Than The Gdp Since 1958, Representing About Fifty Percent Of Gdp Today.

78. Government Transfer Payments, Such As Public Assistance Payments And Social Security Payments, Have Been A Constant Percentage Of The Gdp Since 1960.

79. Government Purchases Of Goods And Services Have Remained A Constant Percentage Of The Gdp For The Last Two Decades.

80. Before An Intelligent Decision Can Be Made About Whether Government Is Too Large Or Small, The Benefits And Costs Must Be Weighed.

81. An Efficient Level Of Government Expenditures Is That Level Where Net Benefits To Society Are Maximized.

82. Public Goods And Services Can Be Supplied In The Market Because They Are Easily Divisible Into Small Units And Can Be Priced To The Individual Demander.

83. The Existence Of Externalities In Production Or Consumption Does Not Negate The Possibility That These Goods And Services Can Be Supplied Efficiently In The Market.

84. A Great Deal Of Government Activity Is Based On The Idea That People In Society Should Determine The Extent To Which The Distribution Of Income Should Be Altered.

85. The Major Tax Source Of The Federal Government Is The Highly Regressive Sales Tax.

86. The Federal Income Tax System Results In A Mildly Progressive Tax Structure.

87. The Major Tax Source Of State Governments Is The Property Tax.

88. Progressive Income Tax Rates Are Consistent With The Ability To Pay Principle Of Taxation But Are Inconsistent With The Tax Criterion Of Economic Efficiency.

89. The Relative Tax Treatment Doctrine Would Call For All Taxpayers To Pay Equal Taxes.

90. Since Gasoline Taxes Are Used Primarily To Finance Highways, Gasoline Taxes Can Be Defended On The Benefits Received Principle Of Taxation.

91. The Excess Tax Burden Is In The Form Of The Loss In Private Production That May Take Place If Incentives To Work And To Produce Are Discouraged.

92. A Tax Levied On Each Unit Produced Will Likely Be Shifted Forward And Backward Depending Upon The Elasticities Of Demand And Supply.

93. If An Output Tax Is Levied On A Product That Has A Perfectly Elastic Demand, The Tax Will Be Shifted Completely To The Consumer In The Form Of Higher Prices.

94. Federal Budget Deficits Occurred Throughout The 1970’s And 1980’s But In The Late 1990’s Deficits Turned Into Budget Surpluses.

95. The Tax Reform Act Of 1986 Increased The Highest Marginal Tax Rate To 50% From 38%.

96. In General, A Tax Levied On Net Income Of A Corporation Would Be Shifted To Consumers In The Short Run.

97. Tax Equity Would Probably Be Reduced If Federal Tax Exclusions, Such As Interest On State And Local Government Securities, Were Eliminated.

98. Demand For Public Goods And Services Is Not Generally Divisible On The Basis Of Individual Quantity Demanded.

99. The Tax Base Is What A Tax Is Levied On, Such As Income, Sales, Or The Value Of Property.

100. Regressive Tax Rates Mean That The Ratio Of Tax Collection To Income Rises As Income Rises.

101. Tax Equity Means That All People Should Pay Equal Taxes.

102. An Output Tax Will Be Shifted Completely Forward If Demand Is Price Elastic.

103. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Purchase Is Greater Than The Last Dollar Of Cost.

104. When Marginal Benefits Equal Marginal Costs Then Net Benefits Are Maximized.

105. Horizontal Equity Means That People In Identical Economic Positions Should Pay Equal Taxes.

106. Transfer Payments Are Government Expenditures For Currently Produced Goods And Services.

107. In The Absence Of Externalities, Government Actions Are Needed To Ensure The Efficiency Of The Market System.

108. According To The Equal Tax Treatment Doctrine, People In Identical Economic Circumstances Should Pay Equal Taxes.

109. The Equal Tax Treatment Doctrine Pertains To Vertical Equity.

110. The Federal Tax System Is Much More Progressive Than Is Generally Believed.

111. The Economic Growth And Taxpayer Relief Reconciliation Act, The Job Creation And Worker Assistance Act, And The Jobs And Growth Tax Relief Act Each Reduced Effective Tax Rates On Income.

112. The United States Has Not Had A Federal Budget Surplus Since The 1960s.

113. The Personal Income Tax Is The Single Most Important Source Of Tax Revenue For The Federal Government Of The United States.

114. The Enforcement And Collection Of The Personal Income Tax Is The Responsibility Of The Internal Revenue Service.

115. There Are Currently 14 Tax Brackets Ranging From 11% To 50%.

116. The Federal Government Uses The Tax Code To Encourage Certain Behaviors.

117. Bond Prices And Interest Rates Are Inversely Related.

118. The First Budget Surplus Since 1969 Occurred In 1998.

119. A Budget Deficit Occurs When Tax Revenues Exceed Government Spending.

120. A Lower Interest Rate Encourages Private Investment Spending.

121. The National Debt Is The Sum Of Past Budget Deficits.

122. The Government Owes Almost One Third Of The National Debt To Itself.

123. An Increase In Government Borrowing Increases The Demand For Loanable Funds.

124. An Increase In Government Borrowing Increases The Supply Of Loanable Funds.

125. The Federal Budget Has Been In Deficit Each Year Since The Beginning Of The 1970s.

Chapter 15

Social Security And Medicare: How Secure Is Our Safety Net For The Elderly?

Multiple Choice Questions

1. Government Programs That Guarantee Citizens Financial Benefits For Events Beyond Their Personal Control And That Are Financed Through Tax Revenues Are Called
A. Social Insurance Programs
B. Entitlement Programs
C. Private Insurance Programs
D. Welfare Programs
E. Transfer Programs

2. The Largest Social Insurance Program In The United States Is
A. Temporary Assistance For Needy Families
B. Social Security
C. Medicaid
D. Federal Flood Insurance
E. Job Corps

3. The Most Significant Factor That Threatens The Financial Stability Of The Social Security System Is The
A. Increasing Number Of Young Workers
B. Relatively High Rates Of Social Security Taxes
C. Population Bulge Created By The “Baby Boom” Generation
D. Generosity Of Current Social Security Benefits
E. Threat Of Foreign Workers Entering The U.S. Due To Nafta

4. Which Of The Following Nations Was The First To Offer Its Citizens A Modern Social Insurance Program?
A. United States
B. Great Britain
C. Russia
D. Germany
E. Japan

5. In The United States, Social Security Was Established In When President Signed The Social Security Act Into Law.
A. 1903; Theodore Roosevelt
B. 1929; Herbert Hoover
C. 1965; Lyndon Johnson
D. 1865; Abraham Lincoln
E. 1935; Franklin Roosevelt

6. Which Of The Following Statements Is Concerning The Scope Of The Social Security Program?
A. Social Security Has Narrowed Its Scope Over Time To Focus On The Economic Stability Of The Individual
B. The Scope Of Social Security Has Remained Constant Throughout Its History
C. Social Security Has Broadened Its Scope Over Time To Focus On The Economic Stability Of The Family
D. The Scope Of Social Security Has Always Focused On The Family Unit
E. None Of The Above

7. How Many Americans Receive A Monthly Check From The Social Security Administration?
A. Fewer Than 10 Million
B. More Than 50 Million
C. About 27 Million
D. Roughly 38 Million
E. More Than 100 Million

8. As Originally Designed, Social Security Was To Be Financed As A
A. Private Insurance Program
B. Pure Income Transfer Program
C. Pay-As-You-Go Insurance Program
D. Fully-Funded Insurance Program
E. Means-Tested Benefits Program

9. How Are Social Security Tax Revenues Allocated Today?
A. They Are Used To Pay Today’s Social Security Beneficiaries, And Any Extra Is Placed Into The Social Security Trust Fund
B. All Of Today’s Revenues Are Placed In The Social Security Trust Fund To Pay For Tomorrow’s Beneficiaries
C. Tax Revenues Are Placed Into Accounts For Each Worker Who Will Draw Upon The Balance When They Retire
D. The Revenues Are Invested In Government Securities And In The Stock Market
E. No One Really Knows

10. Current Projections Estimate That The Social Security Trust Fund Will Be Completely Depleted
A. In Late 2003
B. During 2010-2020
C. In About 100 Years
D. Around 2100
E. Before 2040

11. Given The Way Social Security Is Financed, Which Of The Following Is ?
A. Social Security Results In A Transfer Of Income From The Old To The Young
B. Social Security Results In A Transfer Of Income From The Young To The Old
C. Social Security Has A Neutral Effect On The Nation’s Income Distribution
D. The Purchasing Power Of The Elderly Has Been Diminished By Social Security Taxes
E. (A) And (D)

12. Social Security Taxes Are
A. Paid Only By Workers
B. Levied On Salaries And Wages
C. Paid Only By Employers
D. Paid By Both Workers And Employers
E. (B) And (D)

13. Currently, The Total Combined Tax Rate Collected By Social Security Is
A. 21.6% Of Earnings
B. 15.3% Of Earnings
C. 7.65% Of Earnings
D. 6.20% Of Earnings
E. 1.45% Of Earnings

14. Which Of The Following Is Concerning Social Security’s Retirement Benefit Structure?
A. All Eligible Retired Workers Are Entitled To The Same Benefits
B. High Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Low Wage Workers
C. Retired Female Workers Are Entitled To Higher Benefits Than Retired Male Workers
D. Low Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Do High Wage Workers
E. Retired Workers Living In Cities Receive Larger Benefits Than Those Living In Rural Areas

15. Most Of Today’s College Student Population Will Be Eligible To Receive Full Social Security Retirement Benefits When They Reach The Age Of
A. 62
B. 65
C. 67
D. 70
E. 72

16. The Cost Of Living Adjustment (Cola) Employed By Social Security Is Based On The
A. Current Level Of Gdp
B. Local Rate Of Inflation
C. Consumer Price Index
D. Producer Price Index
E. Annual Poverty Threshold

17. How Many Elderly Households Receive Social Security Benefits?
A. More Than 90%
B. Less Than 50%
C. About 75%
D. Only About 15%
E. None Of The Above

18. Which Of The Following Statements Is ?
A. 20% Of Elderly Households Receive Social Security As Their Only Source Of Income
B. Approximately 90% Of Elderly Households Receive Social Security Benefits
C. Just Under 30% Of Elderly Households Receive Private Pension Benefits
D. For Nearly Two Thirds Of Elderly Households, Social Security Represents More Than 50% Of Total Income
E. None Of The Above. All Are

19. If People Choose To Work Fewer Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The
A. Substitution Effect
B. Bequest Effect
C. Income Effect
D. Wealth Effect
E. Real Wage Effect

20. If People Choose To Work More Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The
A. Substitution Effect
B. Bequest Effect
C. Income Effect
D. Wealth Effect
E. Real Wage Effect

21. Empirical Evidence Suggests That Social Security Has _______ The Overall Supply Of Labor.
A. Had No Effect On
B. Reduced
C. Increased
D. Stimulated
E. Done None Of The Above To

22. Social Security May Increase The Level Of Personal Saving Due To
A. The Retirement Effect
B. The Bequest Effect
C. The Wealth Substitution Effect
D. (A) And (B)
E. (B) And (C)

23. Empirical Studies Indicate That Social Security Has
A. Increased The Level Of Personal Savings
B. Had A Neutral Effect On The Level Of Personal Savings
C. Reduced The Level Of Personal Savings
D. Increased The Number Of Older Workers
E. Raised The Average Age At Which Workers Choose To Retire

24. The Effect Of Social Security On Personal Savings Is Important Because
A. The Level Of Savings Determines The Pool Of Investment Funds
B. Savings Are Necessary To Finance The Social Security Trust Fund
C. Personal Savings Are Negatively Related To Economic Growth
D. Savings Are A Major Source Of Income For All Elderly Households
E. The Level Of Savings Reflects The Magnitude Of Future Consumption

25. Why Can’t Social Security Rely On A Strict Pay-As-You-Go Financial Structure?
A. The Current Generation Of Workers Is Too Small To Support Future Retirees
B. A Pay-As-You-Go Financial Structure Is Inherently Unstable
C. The Current Generation Of Retirees Will Bankrupt The System Before The “Baby Boom” Retires
D. Inflation Erodes The Value Of Contributions That Must Be Saved To Pay Future Retirees
E. None Of The Above

26. The Most Simple And Direct Way To Postpone The Looming Social Security Financial Crisis Is To
A. Invest Social Security Taxes In The Stock Market
B. Raise Social Security Taxes And/Or Lower Benefits
C. Privatize The Social Security Administration
D. Eliminate The Social Security System And Force Everyone To Buy Private Insurance
E. Subsidize Social Security With General Tax Revenues

27. The Most Significant Argument Against Privatizing Social Security Is That
A. Benefits Would Have To Be Cut
B. It Has Not Worked In Other Countries
C. Future Benefits Levels Cannot Be Guaranteed
D. It Is Too Complicated To Be Practical
E. Taxes Would Have To Be Raised

28. Why Do Some People Favor Investing The Social Security Trust Fund In The Stock Market?
A. Because For Most Beneficiaries The Historic Return On Their Social Security Taxes Has Been Less Than What Would Have Been Earned If Those Dollars Were Invested In The Stock Market
B. Because Investment In The Stock Market Will Guarantee Higher Rates Of Return Over The Long Run For All Retirees
C. Because Investments In The Stock Market Carry Very Little Risk And Offer The Potential For Excessive Short-Run Gains With Little Or No Potential For Loss
D. Because The Stock Market Offers The Safest Form Of Investment
E. All Of The Above

Questions 29 – 33 Refer To The Graph Below.

29. The Results Of The Retirement Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

30. The Results Of The Bequest Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

31. The Results Of The Wealth Substitution Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

32. A Change In Consumption From Ce To Cf Could Be Caused By Which Of The Following?
A. The Bequest Effect
B. The Retirement Effect
C. The Wealth Substitution Effect
D. All Of The Above
E. None Of The Above

33. A Movement From Point E To Point F As A Result Of Social Security Would Result In Which Of The Following Costs To Society? A Long-Run Movement To
A. Ppc Cd Rather Than Gh
B. Ppc Gh Rather Than Cd
C. Point B Rather Than Point A
D. Point A Rather Than Point B
E. If To Cf

34. If I Start Saving More During My Working Life Because I Anticipate Retiring Earlier Thanks To Social Security, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

35. If I Spend More Each Year Because I Know That I Will Receive Social Security Payments When I Retire, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

36. If I Put Extra Into A Savings Account So That I Can Leave Assets To My Children To Compensate Them For Their Payments Into The Social Security System, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

37. If Inflation Increases, What Will Happen To The Social Security Cola? It Will
A. Expire
B. Increase
C. Decrease
D. Be Divided Among Social Security Recipients
E. Be Added To The Social Security Trust Fund

38. “An Agreement To Pay A Premium To A Company In Return For A Guarantee Of Financial Benefits In The Event Of An Undesired Circumstance” Defines
A. Social Insurance
B. Private Insurance
C. Private Investment
D. Asset Management
E. Retirement Savings

39. Social Insurance Uses Tax Revenues To Guarantee Citizens Financial Benefits For Events Including
A. Old Age
B. Disability
C. Poor Health
D. Death Of A Spouse
E. All Of The Above

40. If A Program’s Benefits Are Funded By Interest Earned On Accumulated Payments, It Is Which Type Of System?
A. An Investment System
B. A Fully Funded Scheme
C. An Interest Scheme
D. A Pay-As-You-Go System
E. An Endowed System

41. If A Program’s Benefits Are Funded Out Of Current Payments, It Is Which Type Of System?
A. An Investment System
B. A Fully Funded Scheme
C. A Pyramid Scheme
D. A Pay-As-You-Go System
E. An Endowed System

42. When Was The Medicare Program Established?
A. 1935
B. 1945
C. 1955
D. 1965
E. 1975

43. Today, The Health Care Sector Of The U.S. Economy Accounts For About Percent Of National Income.
A. 3
B. 5
C. 8
D. 12
E. 18

44. A Person With Health Insurance Will Tend To
A. Have A Lower Demand For Health Care Services
B. Have A Much Greater Concern For Preventive Care
C. Buy A Lower Quantity Of Health Care At A Higher Price
D. Demand More Health Care Services Than A Person Without Insurance
E. Do None Of The Above

45. The Payment And Delivery Of Health Care Service Under A Managed Care System Is Based On
A. A Fee-For-Service Market Principle
B. A Prearranged Schedule Of Fixed Prices
C. The Ability To Pay Principle
D. Price Negotiation Between The Consumer And Provider
E. None Of The Above

46. The Medicare Program
A. Was Established As A Socialistic Takeover Of Health Care Providers
B. Has Reduced The Demand For Health Care Services
C. Affects Persons 65 And Older, Regardless Of Income
D. Enrolls All Poor People Regardless Of Age
E. Does None Of The Above

47. Part C Of The Medicare Program (Medicare + Choice)
A. Provides Health Care Plan Choices To The Beneficiaries Of Medicare
B. Restricts Medicare Beneficiaries To A Simple Fee-For-Service Health Care Plan
C. Provides Comprehensive Health Insurance Coverage For All Poor People
D. Is Only Available To Disabled Retirees Receiving Social Security
E. Does None Of The Above

48. A Potential Benefit Of Managed Care Plans To Medicare Enrollees Is That These Plans
A. Typically Require Less Cost Sharing
B. Provide A Higher Quality Of Health Care
C. Provide A Greater Quantity Of Health Care
D. Require Less Paper Work
E. Do All Of The Above

49. Part A Of The Medicare Program (Hospital Insurance) Is Financed Primarily By
A. A Monthly Premium
B. A 2.9% Tax Levied On Wages And Salaries
C. An Allocation From General Tax Revenues
D. User Fees Paid By Patients
E. Insurance Deductibles

50. What Percent Of The Average Health Care Dollar Spent In The United States Comes Directly From The Consumer?
A. 100
B. 83
C. 50
D. 34
E. 12

51. Which Of The Following Factors Has Contributed Most To The Tremendous Increase In Health Care Expenditures Experience In The U.S. During The Past Fifty Years?
A. Health Care Inflation
B. The Aging Of The Population
C. Increased Public Support For Health Care
D. Private Health Insurance
E. Growth In Medicaid

52. Which Of The Following Receives The Largest Share Of Expenditures Made On Health Care In The United States?
A. Physicians
B. Nursing Homes
C. Hospitals
D. Personal Health Care Product And Service Providers
E. Pharmacies

53. In A Fee-For-Service Health Care System, Consumers Pay The
A. Insurance Company A Fee Every Time They Use A Service
B. Full Cost Of The Services They Receive
C. Hmo When They Receive Care
D. Doctor A Small Payment Called A “Co-Pay.”
E. Prearranged, Fixed Fee For Services They Receive

54. How Are Payments To Health Care Providers Determined Under A Managed Care System? By The
A. Government
B. Market
C. Insurance Company And The Provider
D. Provider And The Consumer
E. Ama (American Medical Association)

55. Which Of The Following Is An Example Of A Managed Health Plan?
A. Hmo
B. Ppo
C. Pos
D. Physicians Network
E. All Of The Above

Questions 56 – 59 Refer To The Graph Below.

56. With A Market Allocation Of Medical Services, Equilibrium Quantity Will Be
A. 0
B. 50
C. 2,000
D. 2,800
E. 4,000

57. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Demanded?
A. 0
B. 2,000
C. 2,800
D. 4,000
E. An Infinite Amount

58. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Supplied?
A. 0
B. 50
C. 2,000
D. 2,800
E. 4,000

59. The Supply Of Medical Services In This Market Is
A. Elastic
B. Inelastic
C. Unit Elastic
D. Price Elastic
E. Infinite

60. Under Most Insurance Systems, Patients Are Responsible For Which Of The Following Payments For Health Care Services?
A. Deductible
B. Co-Insurance
C. Fee-For-Service Charges
D. All Of The Above
E. None Of The Above

61. A Patient May Be Required To Pay A Percentage Of The Cost Of Their Health Care Above The Fixed Fee They Pay. This Is Known As
A. The Deductible
B. Co-Insurance
C. Fee-For-Service
D. The Health Care Tax
E. Medicare Tax

62. If Your Insurance Company Agrees To Pay A Fixed Fee For You To Receive A Given Treatment (For Example, $5,000 For An Appendectomy), The Company Is Using Which Of The Following?
A. A Fee-For-Service System
B. A Managed Care System
C. A Co-Insurance System
D. A Prospective Payment System
E. A Social Insurance System

63. If Your Deductible Is $200 And You Pay Co-Insurance Of 20%, How Much Will You Have To Pay For A $3,000 Hospital Stay?
A. $200
B. $560
C. $600
D. $760
E. $800

64. If Your Deductible Is $400 And You Have Co-Insurance Of 25%, How Much Will You Have To Pay For A $5,000 Hospital Stay?
A. $400
B. $1,150
C. $1,250
D. $1,550
E. $1,650

Questions 65 – 69 Refer To The Graph Below.

65. If Patients Pay The Full Price For Office Visits, What Price Will Be Charged In The Market?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

66. If Patients Pay The Full Price For Of Office Visits, How Many Office Visits Will They Make?
A. 0
B. 30
C. 50
D. 70
E. More Than 70

67. If A Third Party Guarantees A Maximum Patient Price Of $25, What Quantity Of Office Visits Will Patients Demand?
A. 0
B. 30
C. 50
D. 70
E. More Than 70

68. If A Third Party Guarantees A Maximum Patient Price Of $25, What Total Price Must Be Paid Per Office Visit To Assure The Quantity Of Office Visits Demanded Will Be Provided?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

69. If A Third Party Guarantees A Maximum Patient Price Of $25, How Much Must The Third Party Pay Per Office Visit?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

70. Health Insurance Results In
A. An Increase In The Quantity Of Health Care Demanded
B. An Increase In The Quantity Of Health Care Provided
C. An Increase In The Total Cost Of Providing Health Care
D. All Of The Above
E. None Of The Above

71. The Medicare Modernization Act, Passed In 2003, Established
A. The First Long Term Care Coverage For Medicare Recipients
B. Lowered Deductibles For Most Medicare Recipients
C. Added A Prescription Drug Benefit To The Medicare Program
D. Instituted Stringent Price Controls On The Fees Doctors And Hospitals Can Charge
E. Restricted The Benefits That High Income Medicare Recipients Can Receive

72. The Prescription Drug Benefit That Is Part Of The Medicare Modernization Act Of 2003 Requires That Recipients Pay:
A. A Monthly Premium
B. A Co-Pay
C. A Deductible
D. All Of The Above
E. None Of The Above, These Benefits Are Provided To Recipients At No Charge

True / False Questions

73. Social Insurance Is Private Insurance Purchased By The Government.

74. Programs That Provide Citizens With Benefits For Events That Are Beyond An Individual Person’s Control Are Called Social Insurance Programs.

75. Both Social Security And Medicare Are Social Insurance Programs.

76. The Major Underlying Factor That Endangers Social Security’s Financial Stability Is The Population Bulge Created By The “Baby Boom” Generation.

77. The United States Was The First Nation To Provide Social Insurance Programs For Its Citizens.

78. The Original Design Of The Social Security System Called For A Pay-As-You-Go Financing Scheme.

79. The Social Security Act Was Signed Into Law By President Franklin Roosevelt In 1935.

80. Over Time, Social Security Has Evolved To Focus More On The Family And Less On The Individual.

81. Currently, About 20 Million Americans Receive Social Security Benefits.

82. All American Citizens Are Entitled To Receive Social Security And Medicare Benefits When They Retire.

83. Today, Social Security Is Financed Under A Pay-As-You-Go Financial System.

84. All Current Social Security Taxes Collected By The Government Are Used To Pay Current Beneficiaries, With Nothing Left Over.

85. Social Security And Medicare Are Financed Through A Flat Tax On Wages Paid Up To A Predetermined Limit.

86. Workers And Their Employers Share The Burden Of Social Security Taxes.

87. The Social Security Trust Fund Currently Has A Negative Balance.

88. Social Security Benefits Are Adjusted Each Year For Inflation Using The Consumer Price Index (Cpi).

89. About 50% Of All Elderly Households Receive Some Form Of Social Security Benefits.

90. Today, In The Aggregate, Social Security Accounts For Over 35% Of Senior Citizens’ Income.

91. Without Social Security, Nearly 50 Percent Of Elderly Households Would Live Below The Poverty Threshold.

92. The Substitution Effect Of Social Security Taxes Causes Some People To Work More Hours.

93. The Income Effect Of Social Security Taxes Causes Some People To Work Less Hours.

94. Studies Show That Social Security Has Caused Some Workers To Retire Earlier Than They Would If Social Security Did Not Exist.

95. The Bequest Effect Of Social Security Causes Some People To Save Less During Their Lifetimes.

96. The Empirical Evidence Suggests That, Overall; Social Security Causes People To Increase Their Personal Savings.

97. Because Social Security Increases Savings, More Funds Are Available For Investment In The Overall Economy.

98. Current Estimates Indicate That The Social Security Trust Fund Will Be Depleted Before 2040.

99. A Modest Increase In Taxes Could Postpone Social Security’s Financial Crisis For Decades.

100. Privatization Of The Social Security System Would Reduce The Financial Risks Faced By Retiring Workers.

101. Chile And Other Nations Have Successfully Privatized All Or Part Of Their Social Insurance Programs.

102. Oasdi Is Social Security’s Medical Insurance Program.

103. The Most Important Factor Explaining The Growth In Personal Health Care Expenditures On Hospital And Physician Services Is Higher Prices For These Services.

104. Third-Party Payments Increase The Efficiency Of Medical Markets.

105. A Dominant Feature Of The U.S. Health Care Industry Is Price Competition Among Providers.

106. Medicare And Medicaid Have Reduced The Demand For Health Care Services.

107. The Purpose Of A Prearranged Payment And Delivery System, Such As A Managed Care Plan, Is To Take Away Any Incentive For The Provider To Supply Unnecessary Care.

108. The Demand For Health Services Is Characterized By Well-Informed Consumers.

109. The Medicare Program Affects Persons Aged 65 And Older, Regardless Of Their Income Level.

110. A Consumer With Health Insurance Is Likely To Buy More Health Services Than One Who Is Not Insured.

111. A Reduction In The Price Of Medical Services Will Cause The Demand Curve To Shift To The Right.

112. Health Care Providers Are Paid The Amount Of A Patient’s Deductible By The Health Insurance Company.

113. The Amount A Patient Must Pay Above The Deductible Is Known As Co-Insurance.

114. Projections Indicate That The Medicare Hi Program Will Be Depleted Of Funds By 2025.

115. More Than 70% Of All Privately Insured Employees Are Covered By Managed Care Plans.

116. The Medicare Program Could Be Secured By An Increase In The Payroll Tax That Supports The Program.

117. The Medicare Program Could Be Secured By Increasing Premiums, Deductibles And Co Payments.

118. Medicare’s Fee-For-Service Plan Provides Incentives For Supplying Excessive Services.

119. Managed Care Plans Provide Incentives For Supplying Excessive Services.

120. Third-Party Payments For Health Care Increase The Quantity Of Services Demanded.

121. Third-Party Payments For Health Care Decrease The Price Consumers Pay For Services.

122. The Fee-For-Service Delivery And Payment System Is The Primary Means By Which Most Elderly Americans Receive Their Health Care.

123. Third-Party Payments For Health Care Result In Less Usage Of The Health Care System.

124. Managed Care Leads To Higher Costs Of Providing Health Care Services.

125. Investments Of Social Security Tax Payments Result In High Returns On The Contributions Made By Taxpayers.