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Chapter 2

Thinking Like an Economist


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

7. Acommonthreadbetweeneconomicsandothersciencessuchasphysicsisthat
a. experimentsaremostoftenconductedinalab.
b. realworldobservationsoftenleadtotheories.
c. aPh.D.isrequiredtotrulyunderstandanyscience.
d. bothdealprimarilywithabstractconcepts.
ANSWER:b. realworldobservationsoftenleadtotheories.
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8. Theuseoftheoryandobservationismoredifficultineconomicsthaninsciencessuchasphysicsduetothe
difficultyin
a. evaluatinganeconomicexperiment.
b. devisinganeconomicexperiment.
c. actuallyperforminganexperimentinaneconomicsystem.
d. Alloftheabovearecorrect.
ANSWER:c. actuallyperforminganexperimentinaneconomicsystem.
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9. Becauseitisdifficultforeconomiststouseexperimentstogeneratedata,theygenerallymust
a. dowithoutdata.
b. usewhateverdatatheworldgivesthem.
c. selectacommitteeofeconomiststomakeupdataforalleconomiststouse.
d. usehypothetical,computergenerateddata.
ANSWER:b. usewhateverdatatheworldgivesthem.
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10. Whentestingtheories,economists
a. mustmakedowithwhateverdatatheworldgivesthem.
b. canmanipulateeconomicconditionseasierthanotherscientificfields.
c. canenlistthegovernmentshelptomanipulateeconomicconditions.
d. canachievestatisticallyvalidresultswithmuchsmallersamplesizes.
ANSWER:a. mustmakedowithwhateverdatatheworldgivesthem.
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11. Onedifficultyeconomistsfacethatsomeotherscientistsdonotisthat
a. unlikeothersciences,economicstudiesmustincludethelargesteconomicplayer,thegovernment.
b. economistsunfortunatelyreceivelessgovernmentfundingthanotherscientists.
c. corporationsarereluctanttodisclosenecessaryinformationforeconomicresearch.
d. experimentsareoftendifficultineconomics.
ANSWER:d. experimentsareoftendifficultineconomics.
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12. Themostcommondatafortestingeconomictheoriescomefrom
a. carefullycontrolledandconductedlaboratoryexperiments.
b. traditionaleconomies.
c. historicalepisodesofeconomicchange.
d. centrallyplannedeconomies.
ANSWER:c. historicalepisodesofeconomicchange.
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13. Foreconomists,substitutesforlaboratoryexperimentsareoften
a. naturalexperimentsofferedbyhistory.
b. computergeneratedexperiments.
c. studiesconductedbyotherdisciplinessuchassociologists.
d. wellconstructedsimulations.
ANSWER:a. naturalexperimentsofferedbyhistory.
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Chapt er 2/ Thi nki ng Li ke an Economi st 29

14. Economistsmakeassumptions
a. todiminishthechanceofwronganswers.
b. tomaketheworldeasiertounderstand.
c. becauseallscientistsmakeassumptions.
d. tomakecertainthatallnecessaryvariablesareincluded.
ANSWER:b. tomaketheworldeasiertounderstand.
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15. Theartofscientificthinkingincludes
a. knowinghowthemajororgansofthehumanbodywork.
b. understandingeveryscientificfieldphysics,biologyandeconomics.
c. decidingwhichassumptionstomake.
d. beingabletomathematicallyexpressnaturalforces.
ANSWER:c. decidingwhichassumptionstomake.
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16. Ifaneconomistdevelopsatheoryaboutinternationaltradebasedontheassumptionthatthereareonlytwo
countriesandtwogoods,
a. thetheorycanbeusefulonlyinsituationsinvolvingtwocountriesandtwogoods.
b. itisatotalwasteoftime,sincetheactualworldhasmanycountriestradingmanygoods.
c. thetheorycanbeusefulinhelpingeconomistsunderstandthecomplexworldofinternationaltradeinvolving
manycountriesandmanygoods.
d. thetheorycanbeusefulintheclassroom,buthasnouseintherealworld.
ANSWER:c. thetheorycanbeusefulinhelpingeconomistsunderstandthecomplexworldofinternationaltrade
involvingmanycountriesandmanygoods.
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17. The1973warintheMiddleEastprovidedeconomistswiththeopportunitytoobservetheinverserelationship
between
a. oilpricesandlivingstandards.
b. militarybuildupsandgovernmentspending.
c. theflowofcrudeoilandoilprices.
d. theflowofcrudeoilandpoliticalpower.
ANSWER:a. oilpricesandlivingstandards.
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18. Historicalepisodesarevaluabletoeconomistsbecause
a. itallowseconomiststoseehowfarthedisciplinehasevolved.
b. hindsightisalways20/20.
c. itiseasiertoevaluateapastsituationthantopredictafuturesituation.
d. theyalloweconomiststoevaluateeconomictheoriesofthepresent.
ANSWER:d. theyalloweconomiststoevaluateeconomictheoriesofthepresent.
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19. Whatwouldbethebeststatementaboutatheorybasedonassumptionsthatarenottrue?
a. Iftheassumptionsunderlyingthetheoryarenottrue,thetheorymustbefalse.
b. Theideasmaybegoodintheory,butnotinpractice.
c. Thetheoryisagoodoneifithelpsustounderstandhowtheworldworks.
d. Thetheoryisagoodoneifnologicalmistakesweremadeindevelopingit.
ANSWER:c. Thetheoryisagoodoneifithelpsustounderstandhowtheworldworks.
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Chapt er 2/ Thi nki ng Li ke an Economi st 30

20. Whatisthegoaloftheories?
a. toprovideaninteresting,butnotuseful,frameworkofanalysis
b. toprovokestimulatingdebateinscientificjournals
c. todemonstratethatthedeveloperofthetheoryiscapableoflogicalthinking
d. tohelpscientistsunderstandhowtheworldworks
ANSWER:d. tohelpscientistsunderstandhowtheworldworks
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21. Wheneconomistsattempttosimplifytherealworldandmakeiteasiertounderstandtheymake
a. assumptions.
b. mistakesinjudgment.
c. predictions.
d. evaluations.
ANSWER:a. assumptions.
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22. Goodassumptionscan
a. causeeconomiststoleaveoutimportantvariableswhichmaketheirtheoriesworthless.
b. simplifythecomplexworldandmakeiteasiertounderstand.
c. furthercomplicateanalreadydifficulttopic.
d. alloweconomiststoseethebigpictureinsteadofonlysmallsegments.
ANSWER:b. simplifythecomplexworldandmakeiteasiertounderstand.
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23. Forascientist,thedecisionofwhichassumptiontomakeis
a. theeasiestpartofthescientificmethod.
b. theflipofacoin.
c. almostimpossible.
d. partart.
ANSWER:d. partart.
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24. Theartofscientificthinkingis
a. easierwithasolidmathematicalbackground.
b. theabilitytomakeanabstractsubjecteasytounderstand.
c. decidingwhichassumptionstomake.
d. notnecessarytobeaneconomist.
ANSWER:c. decidingwhichassumptionstomake.
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25. Whenscientistsmakegoodassumptions,they
a. greatlysimplifytheproblemwithoutsubstantiallyaffectingtheanswer.
b. furthercomplicateanalreadycomplicatedsubject.
c. canleaveoutnecessaryvariablesthatmayresultinincorrectanswers.
d. maynotbeabletoreachanappropriateconclusion.
ANSWER:a. greatlysimplifytheproblemwithoutsubstantiallyaffectingtheanswer.
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26. Anexampleofaproductthatexperiencesinfrequentpricechangeswouldbe
a. stocksontheNewYorkStockExchange.
b. gasolineprices.
c. thenewsstandpriceofmagazines.
d. electricity.
ANSWER:c. thenewsstandpriceofmagazines.
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Chapt er 2/ Thi nki ng Li ke an Economi st 31

27. Whenstudyingtheeffectsofpublicpolicychanges,economistshaveoftenobservedthat
a. thereisadifferencebetweenthelongrunandshortrun.
b. unemploymentandinflationaredirectlyrelatedintheshortrun.
c. withstockprices,whatgoesup,mustcomedown.
d. ifthepolicyiswelldesigned,itwillalwaysbeeffective.
ANSWER:a. thereisadifferencebetweenthelongrunandshortrun.
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28. Whenstudyingtheeffectsofpublicpolicychanges,economists
a. oftenfalsifyresultsifthedesiredeffectisnotreached.
b. maymakedifferentassumptionsforthelongrunandtheshortrun.
c. attempttoconsideronlythedirecteffectsandnotindirecteffects.
d. canimmediatelychangepoliciesiftheyareineffective.
ANSWER:b. maymakedifferentassumptionsforthelongrunandtheshortrun.
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29. Goodeconomicmodels
a. oftenleaveoutimportantvariables,causingseriouserrors.
b. omitmanydetailstoallowustoseewhatistrulyimportant.
c. aredesignedtogiveacompletepictureofagivenrelationship.
d. causeeconomicstobemisunderstoodbythegeneralpublic.
ANSWER:b. omitmanydetailstoallowustoseewhatittrulyimportant.
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30. Economistsusemodelsinorderto
a. learnhowtheeconomyworks.
b. maketheirprofessionappearmoreprecise.
c. makeeconomicsdifficultforstudents.
d. makesurethatallofthedetailsoftheeconomyareincludedintheiranalysis.
ANSWER:a. learnhowtheeconomyworks.
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31. Modelsusedbyeconomists
a. cannotbeusefultoeconomistsiftheyarebasedonfalseassumptions.
b. maketheeconomicsprofessionmoredifficultthannecessary.
c. alloweconomiststolearnhowtheeconomyworks.
d. mustincludeeverypossiblevariableintheeconomytobeusefultoeconomists.
ANSWER:c. alloweconomiststolearnhowtheeconomyworks.
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32. Economistsbeginbuildinganeconomicmodelby
a. writinggrantsforgovernmentfunding.
b. conductingcontrolledexperimentsinalab.
c. makingassumptions.
d. reviewingstatisticalforecasts.
ANSWER:c. makingassumptions.
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33. Amodelis
a. atheoreticalabstractionwithverylittlevalue.
b. usefultoonlytheoneswhoconstructedit.
c. arealisticandcarefullyconstructedtheory.
d. asimplificationofreallife.
ANSWER:d.asimplificationofreallife.
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Chapt er 2/ Thi nki ng Li ke an Economi st 32

34. WhichofthefollowingisNOTtrueconcerningmodels?
a. Modelssimplifyreality.
b. Modelscanexplainhowtheeconomyisorganized.
c. Modelsassumeawayirrelevantdetails.
d. Modelscannotbeusedtomakepredictions.
ANSWER:d. Modelscannotbeusedtomakepredictions.
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35. WhichofthefollowingisNOTtrueaboutmosteconomicmodels?
a. Theyarebuiltusingthetoolsofmathematics.
b. Theyareusefultoeconomists,butnottopolicymakers.
c. Theydonotincludeeveryfeatureoftheeconomy.
d. Theyarebuiltusingassumptions.
ANSWER:b. Theyareusefultoeconomists,butnottopolicymakers.
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36. Whichofthefollowingisthemostaccuratestatementabouteconomicmodels?
a. Economicmodelsattempttomirrorrealityexactly.
b. Economicmodelsareuseful,butshouldnotbeusedforpolicymaking.
c. Economicmodelsomitmanydetailstoallowustoseewhatistrulyimportant.
d. Economicmodelscannotbeusedintherealworldbecausetheyomitdetails.
ANSWER:c. Economicmodelsomitmanydetailstoallowustoseewhatistrulyimportant.
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37. Thefoundationstonesfromwhicheconomicmodelsarebuiltare
a. economicpolicies.
b. thelegalsystem.
c. assumptions.
d. statisticalforecasts.
ANSWER:c. assumptions.
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38. Thecircularflowdiagramisa
a. visualmodelofhowtheeconomyisorganized.
b. mathematicalmodelofhowtheeconomyworks.
c. modelthatshowstheeffectsofgovernmentontheeconomy.
d. visualmodeloftherelationshipamongmoney,prices,andbusinesses.
ANSWER:a. visualmodelofhowtheeconomyisorganized.
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39. Acircularflowdiagramisamodelthat
a. illustratescostbenefitanalysis.
b. explainshowtheeconomyisorganized.
c. showstheflowoftrafficinaneconomicregion.
d. explainshowbankscirculatemoneyintheeconomy.
ANSWER:b. amodelthatexplainshowtheeconomyisorganized.
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40. Factorsofproductionare
a. themathematicalcalculationsfirmsmaketodetermineproduction.
b. weatherandsocialandpoliticalconditionsthataffectproduction.
c. thephysicalrelationshipsbetweeneconomicinputsandoutputs.
d. inputsintotheproductionprocess.
ANSWER:d. inputsintotheproductionprocess.
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Chapt er 2/ Thi nki ng Li ke an Economi st 33

41. Inthesimplecircularflowdiagram,thedecisionmakersconsistof
a. firmsandgovernment.
b. householdsandfirms.
c. householdsandgovernment.
d. households,firms,andgovernment.
ANSWER:b. householdsandfirms.
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42. Thetwoloopsinthecircularflowdiagramrepresenttheflowof
a. goodsandtheflowofservices.
b. dollarsandtheflowoffinancialassets.
c. inputsandoutputsandtheflowofdollars.
d. capitalgoodsandtheflowofconsumergoods.
ANSWER:c. inputsandoutputsandtheflowofdollars.
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43. Inacircularflowdiagram,
a. taxesflowfromhouseholdstofirms,andtransferpaymentsflowfromfirmstohouseholds.
b. incomepaymentsflowfromfirmstohouseholds,andsalesrevenueflowsfromhouseholdstofirms.
c. resourcesflowfromfirmstohouseholds,andgoodsandservicesflowfromhouseholdstofirms.
d. inputsandoutputsflowinthesamedirectionastheflowofdollars,fromfirmstohouseholds.
ANSWER:b. incomepaymentsflowfromfirmstohouseholds,andsalesrevenueflowsfromhouseholdstofirms.
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44. Inthecircularflowdiagram,
a. firmsaresellersintheresourcemarketandtheproductmarket.
b. firmsarebuyersintheproductmarket.
c. householdsaresellersintheresourcemarket.
d. spendingongoodsandservicesflowsfromfirmstohouseholds.
ANSWER:c. householdsaresellersintheresourcemarket.
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45. Inthecircularflowdiagram,
a. incomefromfactorsofproductionflowsfromfirmstohouseholds.
b. goodsandservicesflowfromhouseholdstofirms.
c. factorsofproductionflowfromfirmstohouseholds.
d. spendingongoodsandservicesflowfromfirmstohouseholds.
ANSWER:a. incomefromfactorsofproductionflowsfromfirmstohouseholds.
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46. WhichofthefollowingwouldNOTbeconsideredafactorofproduction?
a. labor
b. land
c. capital
d. money
ANSWER:d. money
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47. Anothernameforgoodsandservicesproducedbyfirmsis
a. factorsofproduction.
b. output.
c. inputs.
d. resources.
ANSWER:b. output.
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Chapt er 2/ Thi nki ng Li ke an Economi st 34
48. Factorsofproductionare
a. usedtoproducegoodsandservices.
b. ownedbyfirms.
c. abundantinmosteconomies.
d. usedbybothfirmsandhouseholds.
ANSWER:a. usedtoproducegoodsandservices.
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49. Anothertermforfactorsofproductionis
a. inputs.
b. output.
c. goods.
d. services.
ANSWER:a. inputs.
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50. Accordingtoasimplecircularflowdiagram,householdsandfirmsinteractin
a. onlyonetypeofmarket.
b. twotypesofmarkets.
c. threetypesofmarkets.
d. Householdsandfirmsdonotinteract.
ANSWER:b. twotypesofmarkets.
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51. Inthesimplecircularflowdiagram,marketsconsistof
a. themarketforgoodsandservices,thefinancialmarket,andthemarketforthefactorsofproduction.
b. factorsofproductionandthefinancialmarket.
c. themarketforgoodsandservicesandthefinancialmarket.
d. themarketforgoodsandservicesandthemarketforfactorsofproduction.
ANSWER:d. themarketforgoodsandservicesandthemarketforfactorsofproduction.
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52. Inthegoodsandservicesmarket,households
a. andfirmsarebothbuyers.
b. aresellersandfirmsarebuyers.
c arebuyersandfirmsaresellers.
d andfirmsarebothsellers.
ANSWER:c arebuyersandfirmsare
sellers.
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53. Inthefactorsofproductionmarket,
households
a. aresellersandfirmsarebuyers.
b. arebuyersandfirmsaresellers.
c andfirmsarebothbuyers.
d andfirmsarebothsellers.
ANSWER:a. aresellersandfirmsare
buyers.
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Chapt er 2/ Thi nki ng Li ke an Economi st 35
54. Inthecircularflowdiagramshown,whicharrowshowstheflowofgoodsandservices?
a. A
b. B
c. C
d. D
ANSWER:b. B
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55. Inthecircularflowdiagramshown,whicharrowshowstheflowofspendingbyhouseholds?
a. A
b. B
c. C
d. D
ANSWER:a. A
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56. Inthecircularflowdiagramshown,whicharrowshowstheflowofthefactorsofproduction?
a. A
b. B
c. C
d. D
ANSWER:c. C
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57. Inthecircularflowdiagramshown,whicharrowshowstheflowofincomepayments?
a. A
b. B
c. C
d. D
ANSWER:d. D
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58. Inthecircularflowdiagramshown,boxesAandBrepresent
a. firmsandhouseholds.
b. governmentandtheforeignsector.
c. thegoodsandservicesmarketandthefactorsofproductionmarket.
d. householdsandgovernment.
ANSWER:a. firmsandhouseholds.
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Chapt er 2/ Thi nki ng Li ke an Economi st 36

59. Inthecircularflowdiagramshown,boxesCandDrepresent
a. householdsandfirms.
b. thegoodsandservicesmarketandthefactorsofproductionmarket.
c. thegoodsandservicesmarketandthefinancialmarket.
d. householdsandgovernment.
ANSWER:b. thegoodsandservicesmarketandthefactorsofproductionmarket.
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60. Inthecircularflowdiagram,householdsaresellersin
a. thefactorsofproductionmarket.
b. thegoodsandservicesmarket.
c. bothmarkets.
d. neithermarket.
ANSWER:a. thefactorsofproductionmarket.
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61. Inthecircularflowdiagram,firmsaresellersin
a. thegoodsandservicesmarket.
b. thefactorsofproductionmarket.
c. bothmarkets.
d. neithermarket.
ANSWER:a. thegoodsandservicesmarket.
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62. Accordingtothecircularflowdiagram,factorsofproductionareownedby
a. thegovernment.
b. firms.
c. households.
d. Alloftheabovearecorrect.
ANSWER:c. households.
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63. Inthecircularflowdiagram,theinnerlooprepresentstheflowof
a. inputstofirmsandoutputtohouseholds.
b. outputtofirmsandinputstohouseholds.
c. spendingtofirmsandfactorpaymentstohouseholds.
d. spendingtohouseholdsandfactorpaymentstofirms.
ANSWER:a. inputstofirmsandoutputtohouseholds.
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64. Inthecircularflowdiagram,theouterlooprepresentstheflowof
a. goodsandservices.
b. spending.
c. factorsofproduction.
d. Alloftheabovearecorrect.
ANSWER:b. spending.
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65. Inthecircularflowdiagram,moneyspentbyhouseholds
a. isearnedfromthesaleoffactorsofproduction.
b. becomesprofittofirms.
c. cannotbetrackedinthediagram.
d. isusedtopurchasefactorsofproduction.
ANSWER:a. isearnedfromthesaleoffactorsofproduction.
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Chapt er 2/ Thi nki ng Li ke an Economi st 37

66. Inthemarketsforfactorsofproduction,
a. householdsprovidefirmswithlabor,land,andcapital.
b. householdsprovidefirmswithsavingsforinvestment.
c. firmsprovidehouseholdswithgoodsandservices.
d. thegovernmentprovidesfirmswithinputsfortheproductionprocess.
ANSWER:a. householdsprovidefirmswithlabor,land,andcapital.
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67. Inthemarketsforgoodsandservices,
a. householdsprovidefirmswithsavingsforinvestment.
b. householdsprovidefirmswithlabor,land,andcapital.
c. firmsprovidehouseholdswiththeoutputtheyproduced.
d. thegovernmentprovidesfirmswithinputsfortheproductionprocess.
ANSWER:c. firmsprovidehouseholdswiththeoutputtheyproduced.
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68. Thefoursectorsinamorecomplexcircularflowdiagraminclude
a. households,government,financialmarkets,andinternationaltrade.
b. households,firms,government,andfinancialmarkets.
c. households,firms,financialmarkets,andinternationaltrade.
d. households,firms,government,andinternationaltrade.
ANSWER:d. households,firms,government,andinternationaltrade.
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69. Ineconomics,capitalrefersto
a. thefinancesnecessaryforfirmstoproducetheirproducts.
b. buildingsandmachinesusedintheproductionprocess.
c. themoneyhouseholdsusetopurchasefirmsoutput.
d. thecitywherefirmsmustapplyforthebusinesslicenseintheirstate.
ANSWER:b. buildingsandmachinesusedintheproductionprocess.
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70. Revenuereceivedbyfirmsfromsaleswhichisnotusedtopayforfactorsofproductioniscalled
a. rent.
b. wages.
c. profit.
d. interest.
ANSWER:c. profit.
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71. Anypointonacountrysproductionpossibilitiesfrontierrepresentsacombinationoftwogoodsthataneconomy
a. willneverbeabletoproduce.
b. canproduceusingallavailableresourcesandtechnology.
c. canproduceusingsomeofitsresourcesandtechnology.
d. maybeabletoproducesometimeinthefuturewithadditionalresourcesandtechnology.
ANSWER:b. canproduceusingallavailableresourcesandtechnology.
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Chapt er 2/ Thi nki ng Li ke an Economi st 38

72. Theproductionpossibilitiesfrontierisa
a. mapwhichshowsthefrontierbeyondwhichagricultureisunprofitable.
b. mapwhichshowsareasoftheworldinwhichcapitalistproductionisnowpossible.
c. graphwhichshowsthevariouscombinationsofresourcesthatcanbeusedtoproduceagivenlevelofoutput.
d. graphthatshowsthevariouscombinationsofoutputtheeconomycanpossiblyproducegiventheavailable
resourcesandtechnology.
ANSWER:d. graphthatshowsthevariouscombinationsofoutputtheeconomycanpossiblyproducegiventhe
availableresourcesandtechnology.
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73. Whichofthefollowingisthemostaccuratestatementaboutproductionpossibilities?
a. Aneconomycanproduceonlyontheproductionpossibilitiesfrontier.
b. Aneconomycanproduceatanypointinsideoroutsideaproductionpossibilitiesfrontier.
c. Aneconomycanproduceatanypointonorinsidetheproductionpossibilitiesfrontier,butnotoutsidethe
frontier.
d. Aneconomycanproduceatanypointinsidetheproductionpossibilitiesfrontier,butnotonoroutsidethe
frontier.
ANSWER:c. Aneconomycanproduceatanypointonorinsidetheproductionpossibilitiesfrontier,butnotoutside
thefrontier.
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74. Aneconomicoutcomeissaidtobeefficientiftheeconomyis
a. usingalloftheresourcesithasavailable.
b. conservingonresourcesandnotusingallithas.
c. gettingallitcanfromthescarceresourcesithasavailable.
d. abletoproducemorethanitscurrentproductionwithoutadditionalresources.
ANSWER:c. gettingallitcanfromthescarceresourcesithasavailable.
TYPE:MSECTION:1DIFFICULTY:2
75. Whenconstructingaproductionpossibilitiesfrontier,allofthefollowingareassumptionsEXCEPT
a. theeconomyproducesonly2goods.
b. alltheeconomysfactorsofproductionarebeingused.
c. theeconomyhasafixedleveloftechnology.
d. theeconomymayincreaseitsavailablefactorsofproduction.
ANSWER:d. theeconomymayincreaseitsavailablefactorsofproduction.
TYPE:MSECTION:1DIFFICULTY:2
76. Onaproductionpossibilitiesfrontier,productionisefficientiftheproductionpointis
a. onthefrontier.
b. outsidethefrontier.
c. onorinsidethefrontier.
d. insidethefrontier.
ANSWER:a. onthefrontier.
TYPE:MSECTION:1DIFFICULTY:2
77. Ifaneconomyisproducingefficiently
a. thereisnowaytoproducemoreofonegoodwithoutproducinglessoftheother.
b. itispossibletoproducemoreofbothgoods.
c. itispossibletoproducemoreofonegoodwithoutproducinglessoftheother.
d. itisnotpossibletoproducemoreofonegoodatanycost.
ANSWER:a. thereisnowaytoproducemoreofonegoodwithoutproducinglessoftheother.
TYPE:MSECTION:1DIFFICULTY:2
Chapt er 2/ Thi nki ng Li ke an Economi st 39
78. WhichofthefollowingconceptsisNOTillustratedbytheproductionpossibilitiesfrontier?
a. efficiency
b. opportunitycost
c. equity
d. tradeoffs
ANSWER:c. equity
TYPE:MSECTION:1DIFFICULTY:2
79. Thecurvedshapeoftheproductionpossibilitiesfrontiercanbeexplainedby
a. increasingcostofproduction.
b. constantcostofproduction.
c. scarcity.
d. economicgrowth.
ANSWER:a. increasingcostofproduction.
TYPE:MSECTION:1DIFFICULTY:1
80. Whenaproductionpossibilitiesfrontierislinearitshows
a. atruerpictureofreallifethanabowedoutproductionpossibilitiesfrontier.
b. thatresourcesareperfectlyshiftablefromtheproductionofonegoodtoanother.
c. anexampleofincreasingopportunitycost.
d. Alloftheabovearecorrect.
ANSWER:b. thatresourcesareperfectlyshiftablefromtheproductionofonegoodtoanother.
TYPE:MSECTION:1DIFFICULTY:2
81. Supposeanationiscurrentlyproducingatapointinsideitsproductionpossibilitiesfrontier.Weknowthat
a. thenationisproducingbeyonditscapacity,andinflationwilloccur.
b. thenationisnotusingallavailableresourcesorhasinefficiencies.
c. thenationisproducinganefficientcombinationofgoods.
d. therewillbealargeopportunitycostifthenationtriestoincreaseproduction.
ANSWER:b. thenationisnotusingallavailableresourcesorhasinefficiencies.
TYPE:MSECTION:1DIFFICULTY:2

82. Ontheproductionpossibilitiesfrontiershown,theeconomycanproduceatwhichpointorpoints?
a. B,D,E

NSW D,E
YPE 1DIFFICULTY:2
ro ibilitiesfrontiershown,
possible
productionoftubas?

NSW . E.
YPE TION:1DIFFICULTY:2
b. A,B,D,E
c. D,C
d. D
A ER:a. B,
T :M SECTION:
83. Onthep ductionposs
whichpointrepresentsthemaximum
a. A
b. B
c. D
d. E
A ER:d
T :M SEC
Chapt er 2/ Thi nki ng Li ke an Economi st 40
84. Ontheproductionpossibilitiesfrontiershown,theeconomyCANNOTproduceatwhichpointorpoints?
a. A
b. C
c. A,C
d. A,C,D,
ANSWER:c. A,C
TYPE:MSECTION:1DIFFICULTY:3
85. Ontheproductionpossibilitiesfrontiershown,whichpointorpointsareefficient?
a. B,E
b. A,B,E
c. D
d. C
ANSWER:a. B,E
TYPE:MSECTION:1DIFFICULTY:3
86. Ontheproductionpossibilitiesfrontiershown,which
pointorpointsareinefficient?
a. A,C
b. D,C
c. C
d. D
ANSWER:d. D
TYPE:MSECTION:1DIFFICULTY:2
87. Theopportunitycostofobtainingmoreofonegoodis
shownontheproductionpossibilitiesfrontierasthe
a. amountoftheothergoodthatmustbegivenup.
b. marketpriceoftheadditionalamountproduced.
c. sourcesthatmustbedevotedtoitsproduction. amountofre
d. numberofdollarsthatmustbespenttoproduceit.
ANSWER:a. amountoftheothergoodthatmustbegivenup.
TYPE:MSECTION:1DIFFICULTY:2
88. Ontheproductionpossibilitiesfrontiershown,theopportunitycosttotheeconomyofgetting30additional
toothbrushesbymovingfrompointAtopointDis
a. 10toasters.
b. 15toasters.
c. 20toasters.
d. 25toasters.
ANSWER:c. 20toasters.
TYPE:MSECTION:1DIFFICULTY:2
89. Ontheproductionpossibilitiesfrontiershown,theopportunitycostofgetting15additionaltoastersbymoving
frompointDtopointCis
a. 10toothbrushes.
b. 20toothbrushes.
c. 30toothbrushes.
d. ItisimpossiblefortheeconomytomovefrompointDtopointC.
ANSWER:d. ItisimpossiblefortheeconomytomovefrompointDtopointC.
TYPE:MSECTION:1DIFFICULTY:3

Chapt er 2/ Thi nki ng Li ke an Economi st 41
90. Ontheproductionpossibilitiesfrontiershown,theopportunitycostintermsoftoothbrushesofgetting10additional
toastersbymovingfrompointBtopointAis
a. 20toothbrushes.
b. 10toothbrushes.
c. 5toothbrushes.
d. zero,sincetheeconomyhastheadditional
resourcestoproduce10additionaltoasters.
ANSWER:d. zero,sincetheeconomyhasthe
additionalresourcestoproduce10
additionaltoasters.
TYPE:MSECTION:1DIFFICULTY:3
91. Intheproductionpossibilitiesfrontiershown,
theshiftofthefrontierfromAtoBwasmost
likelycausedbywhichofthefollowing?
a. technologicalimprovementinthe
productionofbatteries
b. morelaboravailableintheeconomy
c. ageneraltechnologicalbreakthrough
d. morecapitalavailableintheeconomy
ANSWER:a. technologicalimprovementintheproductionofbatteries
TYPE:MSECTION:1DIFFICULTY:2

92. Intheproductionpossibilitiesfrontiershown,whatistheopportunitycosttosocietyofthemovementfrompointA
topointC?
a. 50baseballs
b. 100baseballs
c. 100bananas
d. 300bananas
ANSWER:b. 100baseballs
TYPE:MSECTION:1DIFFICULTY:2
93. Intheproductionpossibilitiesfrontiershown,whatistheopportunitycosttosocietyofmovingfrompointBto
pointD?
a. 100bananas
b. 50baseballs
c. both100bananasand50baseballs
d. Nothing,sincethiseconomywouldhaveunused
resources.
ANSWER:c. both100bananasand50baseballs.
TYPE:MSECTION:1DIFFICULTY:2
94. Intheproductionpossibilitiesfrontiershown,the
movementfrompointCtopointDwasmostlikely
causedby
a. unemployment.
b. adecreaseinsocietyspreferenceforbananas.
c. fewerresourcesavailableforproduction.
d. Alloftheabovearecorrect.
ANSWER:a. unemployment.
TYPE:MSECTION:1DIFFICULTY:2

Chapt er 2/ Thi nki ng Li ke an Economi st 42
95. Accordingtothegraph,ifthiseconomyputallavailableresourcesintotheproductionofbananas,itcouldproduce
a. 200bananasandalso150baseballs.
b. 300bananasandalso100baseballs.
c. 400bananasandnobaseballs.
d. Itisimpossibletoknowunlessweknowthequantityofresourcesavailable.
ANSWER:c. 400bananasandnobaseballs.
TYPE:MSECTION:1DIFFICULTY:2
96. Productionpossibilitiesfrontierscanshiftoutwardif
a. governmentincreasestheamountofmoneyinthe
economy.
b. thereisanincreaseintechnology.
c. resourcescanbemovedfromtheproductionofone
goodtoanother.
d. Bothbandcarecorrect.
ANSWER:b.thereisanincreaseintechnology.
TYPE:MSECTION:1DIFFICULTY:2
97. Theproductionpossibilitiesfrontierisbowedoutwardif
a. resourcesarenotperfectlyshiftable.
b. theamountofresourcesincreases.
c. theleveloftechnologyincreases.
d. Bothbandcarecorrect
ANSWER:a. resourcesarenotperfectlyshiftable.
TYPE:MSECTION:1DIFFICULTY:2
98. Whenaproductionpossibilitiesfrontiershiftsoutward,itisdemonstratingtheconceptof
a. tradeoffs.
b. efficiency.
c. economicgrowth.
d. opportunitycost.
ANSWER:c.economicgrowth.
TYPE:MSECTION:1DIFFICULTY:2
99. Whenaneconomyisoperatinginsideitsproductionpossibilitiesfrontierweknowthat
a. thereareunusedresourcesorinefficienciesintheeconomy.
b. theeconomyisoperatingwithefficiency.
c. movingtoapointonitsproductionpossibilitiesfrontierwouldbeeconomicgrowth.
d. toproducedmoreofonegood,theeconomywouldhavetogiveupsomeoftheothergood.
ANSWER:a.thereareunusedresourcesorinefficienciesintheeconomy.
TYPE:MSECTION:1DIFFICULTY:2
100. WhichofthefollowingwouldmostlikelyhavecausedtheproductionpossibilitiesfrontiertoshiftoutwardfromA
toBinthegraphshown?
a. anincreaseinresourcesnecessarytoproducecapitalgoods
b. animprovementinthetechnologyofproducingconsumergoods
c. anincreaseintheoverallleveloftechnologyintheeconomy
d. anincreaseinunemployment
ANSWER:c. anincreaseintheoverallleveloftechnologyintheeconomy
TYPE:MSECTION:1DIFFICULTY:2

Chapt er 2/ Thi nki ng Li ke an Economi st 43

101. Inthegraphshown,themovementfromfrontierAtoBcanbestbedescribedas
a. adownturnintheeconomy.
b. economicgrowth.
c. amoreequitabledistributionofincome.
d. animprovementintheallocationofresources.
ANSWER:b. economicgrowth.
TYPE:MSECTION:1DIFFICULTY:2
102. Unemploymentwouldcauseaneconomyto
a. produceinsideitsproductionpossibilitiesfrontier.
b. produceonitsproductionpossibilitiesfrontier.
c. produceoutsideitsproductionpossibilitiesfrontier.
d. unemploymentcouldactuallycausea,b,orc,dependingonhowsevereitis.
ANSWER:a. produceinsideitsproductionpossibilitiesfrontier.
TYPE:MSECTION:1DIFFICULTY:2

ProductionPossibilitiesforToyland

Dolls FireTrucks
400 0
300 200
200 350
100 450
0 500

103. Giventhetableshown,whatistheopportunitycosttoToylandofincreasingtheproductionofdollsfrom200to
300?
a. 200firetrucks
b. 150firetrucks
c. 100firetrucks
d. Itisimpossibletotellwhattheopportunitycostissinceinthisexamplecostsarenotconstant.
ANSWER:b. 150firetrucks.
TYPE:MSECTION:1DIFFICULTY:2
104. Giventhetableshown,whichofthefollowingstatementsaccuratelydescribestheproductionpossibilitiesfor
Toyland?
a.Theopportunitycostofanadditional100dollsis50firetrucks.
b. Theopportunitycostofanadditional100dollsis100firetrucks.
c. Withoutadditionalinformation,itisimpossibletodeterminetheopportunitycostofanadditionaldoll.
d. Theopportunitycostofanadditional100dollsincreasesasmoredollsareproduced.
ANSWER:d. Theopportunitycostofanadditional100dollsincreasesasmoredollsareproduced.
TYPE:MSECTION:1DIFFICULTY:2
Chapt er 2/ Thi nki ng Li ke an Economi st 44

binationofbathtubsandbarrelswouldbe

NSW tubs.
IO
106. Accordingtothegraph,whatisthe
ntAto
tubs
cebetweenthe8bathtubsyou
105. Accordingtothegraph,anefficientcom
a. 30barrelsand6bathtubs.
b. 20barrelsand8bathtubs.
c. 25barrelsand12bathtubs.
d. 15barrelsand12bathtubs.
A ER:a. 30barrelsand6bath
TYPE:MSECT N:1DIFFICULTY:3
opportunitycostofmovingfrompoi
pointB?
a. 8bath
b. 20barrels
c. thedifferen
getandthe20barrelsyougiveup
d. thedifferencebetweenthe20barrelsyougetandthe8bathtubsyougiveup
ANSWER:b. 20barrels
TYPE:MSECTION:1DIFFICULTY:3
107. Accordingtothegraph,ifthiseconomyputsallofitsresourcesintotheproductionofbathtubsitcouldproduce
a. 20barrelsand12bathtubs.
b. 35barrelsandnobathtubs.
c. nobarrelsand16bathtubs.
d. Thiseconomywouldnotchoosetoputallofitsresourcesintotheproductionofonegood.
ANSWER:c. nobarrelsand16bathtubs.
TYPE:MSECTION:1DIFFICULTY:2
108. Accordingtothegraph,whichofthefollowingcombinationsisimpossibleforthiseconomytoproduce?
a. 30barrelsand6bathtubs
b. 25barrelsand12bathtubs
c. 20barrelsand8bathtubs
d. 10barrelsand14bathtubs
ANSWER:b. 25barrelsand12bathtubs
TYPE:MSECTION:1DIFFICULTY:3
109. Accordingtothegraph,ifthiseconomymovedfrompointCtopointE,
a. itstillwouldnotbeproducingefficiently.
b. therewouldbenogainineitherbathtubsorbarrels.
c. itwouldbeproducingmorebarrelsandmorebathtubsthanatpointC.
d. ItisnotpossibleforthiseconomytomovefrompointCtopointEwithoutadditionalresources.
ANSWER:a. itstillwouldnotbeproducingefficiently.
TYPE:MSECTION:1DIFFICULTY:3
110. Thefieldofeconomicsistraditionallydividedintotwobroadsubfields,
a. nationaleconomicsandinternationaleconomics.
b. consumereconomicsandproducereconomics.
c. privatesectoreconomicsandpublicsectoreconomics.
d. microeconomicsandmacroeconomics.
ANSWER:d. microeconomicsandmacroeconomics.
TYPE:MSECTION:1DIFFICULTY:1
Chapt er 2/ Thi nki ng Li ke an Economi st 45

111. Microeconomicsisthestudyof
a. thebehaviorofconsumers.
b. howindividualhouseholdsandfirmsmakedecisions.
c. howgovernmentaffectstheeconomy.
d. howtheeconomyasawholeworks.
ANSWER:b. howindividualhouseholdsandfirmsmakedecisions.
TYPE:MSECTION:1DIFFICULTY:1
112. Macroeconomicsisthestudyof
a. individualdecisionmakers.
b. economichistory.
c. economywidephenomena.
d. howfirmsmaximizeprofit.
ANSWER:c. economywidephenomena.
TYPE:MSECTION:1DIFFICULTY:1
113. Whichofthefollowingwouldbeconsideredatopicofstudyinmacroeconomics?
a. theimpactofagriculturalpricesupportprogramsinthecottonindustry
b. theeffectonU.S.steelproducersofanimportquotaimposedonforeignsteel
c. theeffectofanincreaseinthepriceofimportedoilontheU.S.inflationrate
d. theeffectofanincreaseinthepriceofimportedcoffeebeansontheU.S.coffeeindustry
ANSWER:c.theeffectofanincreaseinthepriceofimportedoilontheU.S.inflationrate
TYPE:MSECTION:1DIFFICULTY:2
114. AmicroeconomistmightstudyeachofthefollowingEXCEPT
a. theeffectsofrentcontrolonhousinginNewYorkCity.
b. howacollegestudentmakesfinancialdecisions.
c. howtariffsonshoesaffectstheshoeindustry.
d. theeffectontheeconomywhenunemploymentrateschange.
ANSWER:d. theeffectontheeconomywhenunemploymentrateschange.
TYPE:MSECTION:1DIFFICULTY:2
115. AmacroeconomistwouldstudyeachofthefollowingEXCEPTthe
a. impactofminimumwagelawsonemploymentinthefastfoodindustry.
b. effectofchangesinsavingratesonGDP.
c. impactofmonetarypolicyontherateofinflation.
d. effectoftaxpolicyontherateofeconomicgrowth.
ANSWER:a. impactofminimumwagelawsonemploymentinthefastfoodindustry.
TYPE:MSECTION:1DIFFICULTY:2
116. Whichofthefollowingistrue?
a. Microeconomicsandmacroeconomicsaretwoseparatedivisionsofeconomics,independentofeachother.
b. Itispossibletounderstandmacroeconomicswithoutunderstandingmicroeconomics,butnotviceversa.
c. Microeconomicsandmacroeconomicsaretwodistinctbutcloselyintertwinedfieldsofeconomics.
d. Microeconomicsandmacroeconomicsaretwodifferentnamesforbasicallythesamethingineconomics.
ANSWER:c. Microeconomicsandmacroeconomicsaretwodistinctbutcloselyintertwinedfieldsofeconomics.
TYPE:MSECTION:1DIFFICULTY:2
117. Wheneconomistsaretryingtoexplaintheworldtheyare
a. scientists.
b. policyadvisors.
c. intherealmofnormativeeconomics.
d. inovertheirheads.
ANSWER:a. scientists.
TYPE:MSECTION:1DIFFICULTY:1
Chapt er 2/ Thi nki ng Li ke an Economi st 46

118. Wheneconomistsaretryingtohelpimprovetheworldtheyare
a. concernedwithpositiveeconomics.
b. policyadvisors.
c. scientists.
d. meddling.
ANSWER:b. policyadvisors.
TYPE:MSECTION:1DIFFICULTY:1
119. Whichisthebeststatementabouttherolesofeconomists?
a. Economistsarebestviewedaspolicymakers.
b. Economistsarebestviewedasscientists.
c. Intryingtoexplaintheworld,economistsarepolicymakers;intryingtoimprovetheworld,theyarescientists.
d. Intryingtoexplaintheworld,economistsarescientists;intryingtoimprovetheworld,theyarepolicymakers.
ANSWER:d. Intryingtoexplaintheworld,economistsarescientists;intryingtoimprovetheworld,theyare
policymakers.
TYPE:MSECTION:2DIFFICULTY:2
120. Foreconomists,statementsabouttheworldareoftwotypes:
a. assumptionsandtheories.
b. truestatementsandfalsestatements.
c. specificstatementsandgeneralstatements.
d. positivestatementsandnormativestatements.
ANSWER:d. positivestatementsandnormativestatements.
TYPE:MSECTION:2DIFFICULTY:1
121. Economistsviewpositivestatementsas
a. affirmative,justifyingexistingeconomicpolicy.
b. optimistic,puttingthebestpossibleinterpretationonthings.
c. descriptive,makingaclaimabouthowtheworldis.
d. prescriptive,makingaclaimabouthowtheworldoughttobe.
ANSWER:c. descriptive,makingaclaimabouthowtheworldis.
TYPE:MSECTION:2DIFFICULTY:2
122. Economistsconsidernormativestatementstobe
a. descriptive,makingaclaimabouthowtheworldis.
b. statementsaboutthenormalconditionoftheworld.
c. prescriptive,makingaclaimabouthowtheworldoughttobe.
d. statementswhichestablishproductiongoalsfortheeconomy.
ANSWER:c. prescriptive,makingaclaimabouthowtheworldoughttobe.
TYPE:MSECTION:2DIFFICULTY:2
123. Whichofthefollowingisanexampleofapositivestatement?
a. Pricesrisewhenthegovernmentprintstoomuchmoney.
b. Ifwelfarepaymentsincrease,theworldwillbeabetterplace.
c. Inflationismoreharmfultotheeconomythanunemployment.
d. Thebenefitstotheeconomyofimprovedequityaregreaterthanthecostsofreducedefficiency.
ANSWER:a. Pricesrisewhenthegovernmentprintstoomuchmoney.
TYPE:MSECTION:2DIFFICULTY:2
124. Anormativestatementdescribeshowtheworld
a. wasinthepast.
b. is.
c. willbeinthefuture.
d. oughttobe.
ANSWER:d. oughttobe.
TYPE:MSECTION:2DIFFICULTY:1
Chapt er 2/ Thi nki ng Li ke an Economi st 47

125. Whichofthefollowingisanexampleofanormativestatement?
a. Ifthepriceofaproductdecreases,quantitydemandedincreases.
b. Reducingtaxratesonthewealthywouldbegoodforthecountry.
c. Ifthenationalsavingrateweretoincrease,sowouldtherateofeconomicgrowth.
d. Alloftheabovearecorrect.
ANSWER:b. Reducingtaxratesonthewealthywouldbegoodforthecountry.
TYPE:MSECTION:2DIFFICULTY:2
126. Pricesrisewhenthegovernmentprintstoomuchmoneyisanexampleofa
a. positiveeconomicstatement.
b. statementmadebytheCarteradministration.
c. normativeeconomicstatement.
d. welfarestatement.
ANSWER:a. positiveeconomicstatement.
TYPE:MSECTION:2DIFFICULTY:2
127. EconomistsfromtheTreasuryDepartmentprovide
a. theannualEconomicReportofthePresident.
b. Congresswiththeannualbudget.
c. enforcementoftheU.S.Antitrustlaws.
d. adviceontaxpolicytothePresident.
ANSWER:d. adviceontaxpolicytothePresident.
TYPE:MSECTION:2DIFFICULTY:1
128. Wheneconomistsarespeakingaspolicyadvisors,theyaremorelikelytouse
a. normativestatements.
b. positivestatements.
c. objectivestatements.
d. Alloftheabovearecorrect.
ANSWER:a. normativestatements.
TYPE:MSECTION:2DIFFICULTY:1
129. Evaluatingapositivestatementinvolves
a. evaluatingvaluesaswellasfacts.
b. examiningevidence.
c. ourviewsonethicsandreligion.
d. Alloftheabovearecorrect.
ANSWER:b. examiningevidence.
TYPE:MSECTION:2DIFFICULTY:1
130. Youknowaneconomisthascrossedthelinefromscientisttopolicyadviserwhenhe
a. explainsjustthefacts.
b. makespositivestatements.
c. makesnormativestatements.
d. cantreachaconclusion.
ANSWER:c. makesnormativestatements.
TYPE:MSECTION:2DIFFICULTY:1
131. Inadditiontoadvisingthepresident,onedutyoftheCouncilofEconomicAdvisorsisto
a. preparethefederalbudget.
b. writegovernmentregulations.
c. adviseCongressoneconomicmatters.
d. writetheannualEconomicReportofthePresident.
ANSWER:d. writetheannualEconomicReportofthePresident.
TYPE:MSECTION:2DIFFICULTY:2
Chapt er 2/ Thi nki ng Li ke an Economi st 48

132. TheCouncilofEconomicAdvisorsconsistsof
a. threemembersandastaffofseveraldozeneconomists.
b. sixmembersandastaffofseveraldozeneconomists.
c. twelvemembersandastaffofaboutahundredeconomists.
d. severaldozenmembersandastaffofseveralhundredeconomists.
ANSWER:a. threemembersandastaffofseveraldozeneconomists.
TYPE:MSECTION:2DIFFICULTY:2
133. ThePresidentoftheUnitedStatesreceivestaxpolicyadvicefromeconomistsinthe
a. FederalReserve.
b. DepartmentofJustice.
c. DepartmentofTreasury.
d. CongressionalBudgetOffice.
ANSWER:c. DepartmentofTreasury.
TYPE:MSECTION:2DIFFICULTY:2
134. Economistsinwhichdepartmenthelpenforceantitrustlaws?
a. DepartmentofLabor
b. DepartmentofJustice
c. DepartmentofTreasury
d. DepartmentofCommerce
ANSWER:b. DepartmentofJustice
TYPE:MSECTION:2DIFFICULTY:2
135. EconomistswhoareprimarilyresponsibleforadvisingCongressoneconomicmattersworkinwhichagency?
a. theFederalReserve
b. theCongressionalBudgetOffice
c. theDepartmentofTreasury
d. theDepartmentofCommerce
ANSWER:b. theCongressionalBudgetOffice
TYPE:MSECTION:2DIFFICULTY:2
136. ThePresidentoftheUnitedStateshasreceivedguidancefromtheCouncilofEconomicAdviserssince
a. 1932.
b. 1946.
c. 1955.
d. 1963.
ANSWER:b. 1946.
TYPE:MSECTION:4DIFFICULTY:1
137. TheCouncilofEconomicAdvisershas
a. 3membersandastaffofeconomists.
b. 5membersandastaffofeconomists.
c. 7membersandastaffofeconomists.
d. 9membersandastaffofeconomists.
ANSWER:a. 3memberandastaffofeconomists.
TYPE:MSECTION:4DIFFICULTY:1
138. DutiesoftheCouncilofEconomicAdvisersinclude
a. advisingthePresident.
b. designingtaxpolicy.
c. writetheannualEconomicReportofthePresident.
d. Alloftheabovearecorrect.
e. Bothaandcarecorrect.
ANSWER:e. Bothaandcarecorrect.
TYPE:MSECTION:4DIFFICULTY:2
Chapt er 2/ Thi nki ng Li ke an Economi st 49

139. Taxpolicyisdesignedbythe
a. CouncilofEconomicAdvisers.
b. DepartmentofTreasury.
c. DepartmentofLabor.
d. DepartmentofJustice.
ANSWER:b. DepartmentofTreasury.
TYPE:MSECTION:4DIFFICULTY:1
140. Thenationsantitrustlawsareenforcedbythe
a. DepartmentofLabor.
b. CouncilofEconomicAdvisers.
c. DepartmentofJustice.
d. DepartmentofTreasury.
ANSWER:c. DepartmentofJustice.
TYPE:MSECTION:4DIFFICULTY:1
141. AdutyoftheDepartmentofLaboristo
a. analyzedataonworkers.
b. designtaxpolicy.
c. enforcethenationsantitrustlaws.
d. advisethePresident.
ANSWER:a. analyzedataonworkers.
TYPE:MSECTION:4DIFFICULTY:1
142. TheFederalReserve
a. designstaxpolicy.
b. enforcesthenationsantitrustlaws.
c. setsthenationsmonetarypolicy.
d. analyzesthedataonworkers.
ANSWER:c. setsthenationsmonetarypolicy.
TYPE:MSECTION:4DIFFICULTY:1
143. CongressreliesoneconomistsattheCongressionalBudgetOfficeto
a. enforcethenationsantitrustlaws.
b. analyzeeconomicdevelopmentsintheUnitedStates.
c. setthenationsmonetarypolicy.
d. obtainindependentevaluationsofpolicyproposals.
ANSWER:d. obtainindependentevaluationsofpolicyproposals.
TYPE:MSECTION:4DIFFICULTY:1
144. Supposethatsomeonemakestheargumentthatbecauseemptyalcoholcontainersarefoundatmanyaccidents,the
containerscauseaccidents.Thiswouldbeanexampleof
a. soundlogic.
b. reversecausality.
c. omittedvariables.
d. slope.
ANSWER:c. omittedvariables.
TYPE:MSECTION:4DIFFICULTY:1
Chapt er 2/ Thi nki ng Li ke an Economi st 50

145. Intheearly19thcentury,theRussiangovernmentsentdoctorstosouthernRussianvillagestoprovideassistance
duringacholeraepidemic.Thevillagersnoticedthatwhereverdoctorsappeared,peopledied.Therefore,many
doctorswerechasedawayfromvillages,andsomewereevenkilled.Thisreactiontothecorrelationbetweendoctors
anddeathsismostlikelyaproblemof
a. omittedvariables.
b. reversecausality.
c. governmentpropaganda.
d. medicalincompetence.
ANSWER:b. reversecausality.
TYPE:MSECTION:4DIFFICULTY:1
146. Onewaytodeterminethedirectionofcausalityisto
a. assumethe2variablesmoveinthesamedirection.
b. assumethe2variablesmoveinoppositedirections.
c. determinewhichvariablemovesfirst.
d. determinewhichvariableisthedependentvariableandwhichvariablecouldbetheindependentvariable.
ANSWER:c. determinewhichvariablemovesfirst.
TYPE:MSECTION:4DIFFICULTY:2
147. Anyeconomistthatsaysallpolicydecisionsareeasy
a. mustunderstandtherelationshipbetweenamarketeconomyandthegovernment.
b. mustberunningforoffice.
c. hasaPh.D.ineconomics.
d. cannotbetrusted.
ANSWER:d. cannotbetrusted.
TYPE:MSECTION:4DIFFICULTY:1
148. JohnMaynardKeynesbelievedtheideasofeconomiststobe
a. generallyincorrect.
b. powerful.
c. pieintheskyideals.
d. rantingsofmadmen.
ANSWER:b. powerful.
TYPE:MSECTION:4DIFFICULTY:1
149. JohnMaynardKeynesreferredtoeconomicsasaneasysubject,
a. atwhichveryfewexcel.
b. butnotaseasyasphilosophyorthepuresciences.
c. whichveryfewcanenjoy.
d. whichdealsprimarilywithcommonsense.
ANSWER:a. atwhichveryfewexcel.
TYPE:MSECTION:4DIFFICULTY:1
150. GeorgeBernardShaw,amongothers,hascriticizedeconomistsbecause
a. theyhavetoomuchinfluencewithgovernmentdecisions.
b. manyideasaretootheoreticalandthereforedonotworkinreallife.
c. theytendtospeakadifferentlanguage,causingmostpeopletonotunderstandthem.
d. theyseemtogiveconflictingadvicetopolicymakers.
ANSWER:d. theyseemtogiveconflictingadvicetopolicymakers.
TYPE:MSECTION:4DIFFICULTY:2
Chapt er 2/ Thi nki ng Li ke an Economi st 51

151. PresidentRonaldReagansTrivialPursuitgameforeconomistswouldhave
a. noquestionsbuthundredsofanswers.
b. 100questionsand3000answers.
c. 1000questionsbutnoanswers.
d. hundredsofquestionsbutnotanswersthatcouldapplytothequestionsasked.
ANSWER:b. 100questionsand3000answers.
TYPE:MSECTION:4DIFFICULTY:1
152. The2basicreasonswhyeconomistsoftenappeartogiveconflictingadvicetopolicymakersaredifferencesin
a. opinionsandeducation.
b. scientificjudgmentsandvalues.
c. scientificjudgmentsandeducation.
d. opinionsandvalues.
ANSWER:b. scientificjudgmentsandvalues.
TYPE:MSECTION:4DIFFICULTY:2
153. The3propositionsaboutwhichmosteconomistsagreemostoftenare(inorderfromfirsttothird)
a. rentcontrol,tariffsandquotas,andfloatingexchangerates.
b. tariffsandquotas,floatingexchangerates,andfiscalpolicy.
c. rentcontrol,fiscalpolicy,andtariffsandquotas.
d. fiscalpolicy,rentcontrol,andfloatingexchangerates.
ANSWER:a. rentcontrol,tariffsandquotas,andfloatingexchangerates.
TYPE:MSECTION:4DIFFICULTY:3
154. Tariffsandquotasare
a. policiesthatrestricttrade.
b. areimplementedtoincreasetradeefficiency.
c. opposedbyalmostalleconomists.
d. Bothaandcarecorrect.
e. Bothaandbarecorrect.
ANSWER:d. Bothaandcarecorrect.
TYPE:MSECTION:4DIFFICULTY:3
155. In2002,theBushadministrationimposedlargetariffstoprotectdomestic
a. steelproducers.
b. shoeproducers.
c. wineproducers.
d. clothingproducers.
ANSWER:a. steelproducers.
TYPE:MSECTION:4DIFFICULTY:1
156. Asurveywhichaskedtheopinionofacademic,business,andgovernmenteconomistsontenpropositionsabout
economicpolicyfoundthat
a. therespondentswerealmostequallydividedonthepropositions.
b. therespondentsfavoredthepropositionsbyaslightmargin.
c. therespondentsdisagreedwiththepropositionsbyaslightmargin.
d. therewasoverwhelmingendorsementofthepropositionsamongtherespondents.
ANSWER:d. therewasoverwhelmingendorsementofthepropositionsamongtherespondents.
TYPE:MSECTION:3DIFFICULTY:2
Chapt er 2/ Thi nki ng Li ke an Economi st 52

157. Almostalleconomistsagreethatrentcontrol
a. improvestheavailabilityandqualityofhousing.
b. allowsthemarketforhousingtoworkmoreefficiently.
c. adverselyaffectstheavailabilityandqualityofhousing.
d. isaveryinexpensivewaytohelpthemostneedymembersofsociety.
ANSWER:c. adverselyaffectstheavailabilityandqualityofhousing.
TYPE:MSECTION:3DIFFICULTY:2
158. Whichofthefollowingisthebestexplanationforwhypoliciessuchasrentcontrolandimportquotaspersistin
spiteofthefactthatexpertsareunitedintheiroppositiontosuchpolicies?
a. Economistshavenotyetconvincedthegeneralpublicthatthepoliciesareundesirable.
b. Economistsaresimplywrongabouttheeconomicimpactofthesepolicies.
c. Economistshavedifferentvaluesthandomostpeople.
d. Economistsareusuallyofadifferentpoliticalpartythanarelawmakers.
ANSWER:a. Economistshavenotyetconvincedthegeneralpublicthatthepoliciesareundesirable.
TYPE:MSECTION:3DIFFICULTY:2
159. HowdidthegreateconomistJohnMaynardKeynesexplainhiscommentthatalthougheconomicsisaneasysubject
comparedwiththehigherbranchesofphilosophyorpurescience,itisasubjectatwhichfewexcel?
a. Mostpeoplewhostudyeconomicsarenotverybright.
b. Goodeconomistsmustpossessararecombinationofgifts.
c. Economicsisactuallyquiteboring;hence,peopletendtoloseinterestinit.
d. Goodthinkersbecomefrustratedwitheconomicsbecauseitisnotlogicalorrelevant.
ANSWER:b. Goodeconomistsmustpossessararecombinationofgifts.
TYPE:MSECTION:4DIFFICULTY:2
160. Economistusegraphsto
a. findhowvariablesarerelatedintherealworld.
b. expresseconomicideasthatcannotbeexpressedwithequationsorwords.
c. visuallyexpressideasmoreclearlythanmightbethecaseiftheyareexpressedwithequationsorwords.
d. Bothaandcarecorrect.
e. Alloftheabovearecorrect.
ANSWER:d. Bothaandcarecorrect.
TYPE:MSECTION:4DIFFICULTY:2
161. Atypeofgraphthatcanbeusedtodisplaytherelationshipbetweentwovariablesis
a. apiechart.
b. abargraph.
c. atimeseriesgraph.
d. thecoordinatesystem.
ANSWER:d. thecoordinatesystem.
TYPE:MSECTION:4DIFFICULTY:2
162. Acoordinatesystemisusedto
a. showtheflowofincomeandproductsinaneconomicsystem.
b. organizelaborandotherresourcesintheproductionprocess.
c. alloweconomiststoshowtwovariablesonasinglegraph.
d. teacheconomistshowtodrawgraphsconsistently.
ANSWER:c. alloweconomiststoshowtwovariablesonasinglegraph.
TYPE:MSECTION:4DIFFICULTY:2
Chapt er 2/ Thi nki ng Li ke an Economi st 53
163. Anorderedpairis
a. theprocessofcheckingcalculationstwicebeforeplacingthemonagraph.
b. twonumberswhichcanberepresentedbyasinglepointonagraph.
c. twonumbersthatarerepresentedbysidebysidepointsonagraph.
d. twopointsonagraphwhichareequaldistancesfromtheorigin.
ANSWER:b. twonumberswhichcanberepresentedbyasinglepointonagraph.
TYPE:MSECTION:4DIFFICULTY:2
164. Theorderedpairthatrepresentstheoriginonagraphis
a. (1,1).
b. (0,0).
c. (0,1).
d. (1,0).
ANSWER:b. (0,0).
TYPE:MSECTION:4DIFFICULTY:2
165. Thexcoordinateisthe
a. firstnumberofanorderedpairandrepresentsthepointshorizontallocation.
b. secondnumberofanorderedpairandrepresentsthepointshorizontallocation.
c. firstnumberofanorderedpairandrepresentsthepointsverticallocation.
d. secondnumberofanorderedpairandrepresentsthepointsverticallocation.
ANSWER:a. firstnumberofanorderedpairandrepresentsthepointshorizontallocation.
TYPE:MSECTION:4DIFFICULTY:3
166. Theycoordinateisthe
a. firstnumberofanorderedpairandrepresentsthepointshorizontallocation.
b. secondnumberofanorderedpairandrepresentsthepointshorizontallocation.
c. firstnumberofanorderedpairandrepresentsthepointsverticallocation.
d. secondnumberofanorderedpairandrepresentsthepointsverticallocation.
ANSWER:d. secondnumberofanorderedpairandrepresentsthepointsverticallocation.
TYPE:MSECTION:4DIFFICULTY:3
167. Thegraphshownisknownasa
a. timeseries.
b. bargraph.
c. scatterplot.
d. piechart.
ANSWER:c. scatterplot.
TYPE:MSECTION:4DIFFICULTY:2

168. Inthegraphshown,thecorrectdesignationofpointAis:
(6,24)

NSW (24,6)
YPE N:4DIFFICULTY:2
aph,cupsofcoffeeperdayandthe
utsleephave
a. apositivecorrelation.
b. anegativecorrelation.
c. arandomcorrelation.
d. nocorrelation.
ANSWER:a. apositivecorrelation.
TYPE:MSECTION:4DIFFICULTY:2
a. (6,0)
b. (0,24)
c.
d. (24,6)
A ER:d.
T :M SECTIO
169. According tothegr
hoursthatsomeonecangowitho
Chapt er 2/ Thi nki ng Li ke an Economi st 54

utsleep?
drinksperday,themoretimehecangowithoutsleep.
betweenhowmuchcoffeeperdayapersondrinksandhowlongtheycangowithout
apersondrinksperday,thelongerhecangowithoutsleep.
rela ofcoffeeperdayandtimewithoutsleepistoounpredictabletoconsider.
sondrinksperday,thelongerhecangowithoutsleep.
TYPE:MSECTION:4DIFFICULTY:3
71.
b. dcurves.
frompointAtopointBisa
e.

ecurve.
thecurve.
Bis
beencausedby
tion.
angeinincome.
ngeinthepriceofroses.
ngeinthecostofproducingroses.
ngeinincome.
170. Basedonthegraphshown,whatwouldyousayabouttherelationshipbetweencoffeeandhourswitho
a. Thelesscoffeeaperson
b. Thereisnorelationship
sleep.
c. Themorecoffee
d. The tionshipbetweencups
ANSWER:c. Themorecoffeeaper
1 Inthegraph,thecurvesshownare
a. supplycurves.
deman
c. preferencecurves.
d. incomeconsumptioncurves.
ANSWER:b. demandcurves.
TYPE:MSECTION:4DIFFICULTY:1
172. Inthegraphshown,themovement
a. shiftofthecurv
b. changeinpreferences.
c. movementalongth
d. Alloftheabovearecorrect.
ANSWER:c. movementalong
TYPE:MSECTION:4DIFFICULTY:2
173. Inthegraphshown,themovementfrompointBto
pointCisa
a. shiftofthecurve.
b. changeinprice.
c. movementalongthecurve.
d. changeincoststothefirm.
ANSWER:a. shiftofthecurve.
TYPE:MSECTION:4DIFFICULTY:2
174. Inthegraphshown,theslopeofthecurvebetween
pointsAand
a. 5/2
b. 2/5
c. 2/5
d. 5/2
ANSWER:d. 5/2
TYPE:MSECTION:4DIFFICULTY:2
175. Inthegraphshown,themovementfrompointBtopointCcouldhave
a. infla
b. ach
c. acha
d. acha
ANSWER:b. acha
TYPE:MSECTION:4DIFFICULTY:3
Chapt er 2/ Thi nki ng Li ke an Economi st 55

latedandthereforemoveinthesamedirection.
moveinoppositedirections.
moveinoppositedirections.
thereforemoveinoppositedirections.
y.
x.
x.
ementaboutslope?
teslope,andaverticallinehasazeroslope.
peof1,andaverticallinehasaslopeof1.
rizontallinehasazeroslope,andaverticallinehasaninfiniteslope.
theabovearecorrect.
roslope,andaverticallinehasaninfiniteslope.
correct?
honevariablerespondstochangesinanothervariable.
bydeltax/deltay.
lesaremovinginthesamedirection.
thelineislinear.
deltax/deltay.
176. Inthegraphshown,thepriceofrosesandthequantityofrosesare
a. directlyre
b. directlyrelatedandtherefore
c. inverselyrelatedandtherefore
d. independentofeachother.
ANSWER:c. inverselyrelatedand
TYPE:MSECTION:4DIFFICULTY:3
177. Theslopeofastraightlineiscalculatedby
a risedividedbyrun.
b. rundividedbyrise.
c. theaverageofriseandrun.
d. riseplusrun.
ANSWER:a. risedividedbyrun.
TYPE:MSECTION:4DIFFICULTY:2
178. Theslopeofalineiscalculatedby
a. changeinx/changein
b. changeiny/changein
c. x/y.
d. x+y.
ANSWER:b. changeiny/changein
TYPE:MSECTION:4DIFFICULTY:2
179. Whichofthefollowingisacorrectstat
a. Ahorizontallinehasaninfini
b. Ahorizontallinehasaslo
c. Aho
d. Noneof
ANSWER:c. Ahorizontallinehasaze
TYPE:MSECTION:4DIFFICULTY:2
180. Theslopeofafairlyflatupwardslopinglinewillbea
a. smallpositivenumber.
b. largepositivenumber.
c. smallnegativenumber.
d. largenegativenumber.
ANSWER:a. smallpositivenumber.
TYPE:MSECTION:4DIFFICULTY:3
181. WhichofthefollowingstatementsaboutslopeisNOT
a. Slopeexplainshowmuc
b. Slopecanbecomputed
c. Slopeispositiveifthe2variab
d. Slopedoesnotchangeif
ANSWER:b. Slopecanbecomputedby
TYPE:MSECTION:4DIFFICULTY:3
182. Inapiechart,eachsliceofthepierepresents
a. aspecificpercentageofthetotalpie.
b. anequalshareofthetotalpie.
c. theamountofthepieeachofthetwovariablesrepresents.
d. onehalfofthetotalpie.
ANSWER:a. aspecificpercentageofthetotalpie.
TYPE:MSECTION:4DIFFICULTY:1
Chapt er 2/ Thi nki ng Li ke an Economi st 56

y
ivelyrelated.
tand.
morethan2variables.
variable.
neconomistmustuse
nomics?

erythingelseconstant
relationshipbetween2variables
ationshipbetween2variables
ndingonthequadrant.
epandq,notxandy.
thepoint.
fthepoint.
ofthepoint.
yarezeroisknownasthe
dtomoveinoppositedirections.
tomoveinthesamedirection.
movewhiletheotherremainsconstant.
ementofthetwovariablesisunpredictable.
dtomoveinoppositedirections.
183. Graphssuchasbargraphsarelimitedinthatthe
a. canonlyshowvariablesthatareposit
b. areextremelydifficulttounders
c. provideinformationforonlyasinglevariable.
d. provideinformationonno
ANSWER:c. provideinformationforonlyasingle
TYPE:MSECTION:4DIFFICULTY:2
184. Inordertoprovideinformationontwovariables,a
a. abargraph.
b. piechart.
c. thecoordinatesystem.
d. atimeseriesgraph.
ANSWER:c. thecoordinatesystem.
TYPE:MSECTION:4DIFFICULTY:1
185. WhichofthefollowingisNOTaproblemassociatedwithgraphingineco
a. omittedvariables
b. holdingev
c. reversecausality
d. theabilitytoshowa
ANSWER:d. theabilitytoshowarel
TYPE:MSECTION:4DIFFICULTY:2
186. Thefirstnumberinanorderedpairis
a. theycoordinate.
b. thexcoordinate.
c. eitherxory,depe
d. notusefultoknow,sincemostgraphsineconomicsus
ANSWER:b. thexcoordinate.
TYPE:MSECTION:4DIFFICULTY:1
187. Thexcoordinategivesthe
a. diagonallocationof
b. verticallocationo
c. horizontallocationofthepoint.
d. thequadrantlocationofthepoint.
ANSWER:c. horizontallocation
TYPE:MSECTION:4DIFFICULTY:1
188. Thepointwherebothxand
a. origin.
b. null.
c. zerocoordinate.
d. center.
ANSWER:a. origin.
TYPE:MSECTION:4DIFFICULTY:1
189. When2variableshaveanegativecorrelation,
a. theyten
b. theytend
c. onevariablewill
d. themov
ANSWER:a. theyten
TYPE:MSECTION:4DIFFICULTY:1
Chapt er 2/ Thi nki ng Li ke an Economi st 57

monthateachpricehisdemandcurvewill
andcurvefromlefttoright.
fromrighttoleft.
ndwilladjustslightlytoapricechange.
willadjustgreatlytoapricechange.
willadjustslightlytoapricechange.
eitheraxischanges,
evariablesarerelated.
ontheaxisaffectthecurve.
leisontheverticalaxis,butnotonthehorizontalaxis.
achyou
softhegovernmentseconomicpolicies.
geofeconomics.
swayofthinking.
190. Ademandcurveshowstherelationship
a. betweenincomeandquantitydemanded.
b. betweenpriceandincome.
c. betweenpriceandquantitydemanded.
d. amongincome,price,andquantitydemanded.
ANSWER:c. betweenpriceandquantitydemanded.
TYPE:MSECTION:4DIFFICULTY:2
191. IfStevenchoosestobuymorebagelsper
a. shiftinward.
b. shiftoutward.
c. notshift,buthewillmovealonghisdem
d. notshift,buthewillmovealonghisdemandcurve
ANSWER:b. shiftoutward.
TYPE:MSECTION:4DIFFICULTY:3
192. Arelativelysteepdemandcurvemeansthat
a. quantitydema
b. quantitydemand
c. quantitydemandwillnotadjusttoapricechange.
d. thechangeinquantitydemandwillexactlyequalachangeinprice.
ANSWER:a. quantitydemand
TYPE:MSECTION:4DIFFICULTY:3
193. Whenarelevantvariablethatisnotnamedon
a. therewillbeamovementalongthecurve.
b. thecurvemayormaynotchange.Itdependsonhowth
c. thecurvewillbeunaffectedsinceonlythevariables
d. thecurvewillshift.
ANSWER:d. thecurvewillshift.
TYPE:MSECTION:4DIFFICULTY:2
194. Whenavariableonanaxisofagraphchanges,thecurve
a. willnotshift.
b. willshift.
c. mayormaynotchange.Itdependsonhowthevariablesarerelated.
d. willshiftifthevariab
ANSWER:a. willnotshift.
TYPE:MSECTION:4DIFFICULTY:2
195. Thesinglemostimportantpurposeofyourtextbookistote
a. abouttheeffect
b. thelangua
c. theeconomistswayofthinking.
d. howtomakemoney.
ANSWER:c. theeconomist
TYPE:MSECTION:4DIFFICULTY:1
Chapt er 2/ Thi nki ng Li ke an Economi st 58

196. Whichofthefollowingstatementsistrue?
a. Economistsareusuallyallowedtoconductexperimentsinordertotesttheirtheories.
b. Economicsisnotatruesciencebecauseeconomistsarenotusuallyallowedtoconductexperimentstotesttheir
theories.
c. Economicsisasocialscienceratherthanatruesciencebecauseitcannotemploythescientificmethod.
d. Economistsareusuallynotallowedtoconductexperiments,andsomustrelyonnaturalexperimentsofferedby
history.
ANSWER:d. Economistsareusuallynotallowedtoconductexperiments,andsomustrelyonnaturalexperiments
offeredbyhistory.
TYPE:MSECTION:1DIFFICULTY:1
197. Whichofthefollowingstatementsistrue?
a. Alleconomicmodelsarecreatedusingthesamesetofbasicassumptions.
b. Differenteconomicmodelsemploydifferentsetsofassumptions.
c. Goodeconomicmodelsshouldattempttomimicrealityascloselyaspossible.
d. Economicmodels,tobeaccepted,mustbetestedbyconductingexperiments.
ANSWER:b. Differenteconomicmodelsemploydifferentsetsofassumptions.
TYPE:MSECTION:1DIFFICULTY:2
198. Productionpossibilitiesfrontiersareusuallybowedoutward.Thisisbecause
a. themoreresourcesasocietyusestoproduceonegood,thefewerresourcesithasavailabletoproduceanother
good.
b. itreflectsthefactthattheopportunitycostofproducingagoodfallsasoneproducesmoreandmoreofit.
c. oftheeffectsoftechnologicalchange.
d. resourcesarespecialized,thatis,somearebetteratproducingparticulargoodsratherthanothergoods.
ANSWER:d. resourcesarespecialized,thatis,somearebetteratproducingparticulargoodsratherthanothergoods.
TYPE:MSECTION:1DIFFICULTY:2
199. Supposeaneconomyproducestwogoods,foodandmachines.Thiseconomyalwaysoperatesonitsproduction
possibilitiesfrontier.Lastyear,itproduced50unitsoffoodand30machines.Thisyear,itisproducing55unitsof
foodand33machines.Whichofthefollowingwouldnotexplaintheincreaseinoutput?
a. areductioninunemployment
b. anincreaseinthelaborforce
c. animprovementintechnology
d. Alloftheabovearecorrect.
ANSWER:a. areductioninunemployment
TYPE:MSECTION:1DIFFICULTY:2
200. Supposeaneconomyproducestwogoods,foodandmachines.Thiseconomyalwaysoperatesonitsproduction
possibilitiesfrontier.Lastyear,itproduced50unitsoffoodand30machines.Thisyearitexperienceda
technologicaladvanceinitsmachinemakingindustry.Asaresult,thisyearthesocietywantstoproduce55unitsof
foodand30machines.Whichofthefollowingstatementsistrue?
a. Becausethetechnologicaladvanceoccurredinthemachinemakingindustry,itwillnotbepossibletoincrease
foodproductionwithoutreducingmachineproductionbelow30.
b. Becausethetechnologicaladvanceoccurredinthemachinemakingindustry,increasesinoutputcanonlyoccur
inthemachineindustry.
c. Inordertoincreasefoodproductioninthesecircumstanceswithoutreducingmachineproduction,theeconomy
mustreduceinefficiencies.
d. Thetechnologicaladvancereducedtheamountofresourcesneededtoproduce30machines.Theseresources
couldbeusedtoproducemorefood.
ANSWER:d. Thetechnologicaladvancereducedtheamountofresourcesneededtoproduce30machines.These
resourcescouldbeusedtoproducemorefood.
TYPE:MSECTION:1DIFFICULTY:3
Chapt er 2/ Thi nki ng Li ke an Economi st 59

201. ThecountryofEconolandproducestwogoods,textbooksandwidgets.Lastyearitproduced200textbooksand500
widgets.Thisyearitproduced250textbooksand600widgets.Givennootherinformation,whichofthefollowing
couldNOTexplainthechange?
a. Econolandexperiencedareductioninunemployment.
b. Econolandexperiencedanimprovementinwidgetmakingtechnology.
c. Econolandacquiredmoreresources.
d. Noneoftheabovearecorrect.
ANSWER:d. Noneoftheabovearecorrect.
TYPE:MSECTION:1DIFFICULTY:2
202. Supposetherearetwocountries,FreedoniaandSylvania,whichhaveidenticalamountsofresources,identical
technologies,andidenticalpopulations.Bothproducetwotypesofgoods,consumergoodsandcapitalgoods,and
theybothalwaysoperateontheirproductionpossibilitiesfrontiers.TheonlydifferenceisthatthisyearFreedonia
choosestoproducerelativelymoreconsumergoodsthanSylvania.Asaresult,
a. FreedoniawillhaveahigherlivingstandardthisyearbutwillgrowslowerthanSylvania.
b. FreedoniawillhaveahigherlivingstandardthisyearandwillgrowfasterthanSylvania.
c. SylvaniawillhaveahigherlivingstandardthisyearbutwillgrowslowerthanFreedonia.
d. SylvaniawillhaveahigherlivingstandardthisyearandwillgrowfasterthanFreedonia.
ANSWER:a FreedoniawillhaveahigherlivingstandardthisyearbutwillgrowslowerthanSylvania.
TYPE:MSECTION:1DIFFICULTY:3
203. WhichofthefollowingisNOTapositivestatement?
a. Highergasolinepriceswillreducegasolineconsumption.
b. Equityismoreimportantthanefficiency.
c. Traderestrictionslowerourstandardofliving.
d. Ifanationwantstoavoidinflation,itshouldnotprinttoomuchmoney.
ANSWER:b. Equityismoreimportantthanefficiency.
TYPE:MSECTION:2DIFFICULTY:2
204. Twoeconomists,AdamandJoan,arediscussingthepossibilityofsubstantiallyreformingthecurrentfederaltax
system.AdamthinksthecurrentsystemisfinebutJoanisinfavorofreform.Whichofthefollowingistheleast
likelyexplanationforthedisagreement?
a. AdamisapositiveeconomistandJoanisanormativeeconomist.
b. AdamandJoanhavedifferentpositiveviewsabouttheeffectofchangingthetaxsystem.
c. AdamandJoanhavedifferentvalues,andsohavedifferentnormativeviewsaboutpolicy.
d. AdamisbetteroffunderthecurrentsystemandJoanwouldbebetteroffifthereformswereimplemented.
ANSWER:a. AdamisapositiveeconomistandJoanisanormativeeconomist.
TYPE:MSECTION:3DIFFICULTY:2
205. Billhasnoticedthatincreasesinunemploymentinsuranceclaimsareassociatedwithrecessions,andtherefore
advocateslimitsonunemploymentinsurancesoastopreventrecessions.Marthahasnoticedthatmostdrugaddicts
onceattendedschools,andthereforeadvocatesgettingridofschoolssoastopreventdrugaddiction.
a. ThereasoningofbothBillandMarthasuffersfromtheomittedvariableproblem.
b. ThereasoningofbothBillandMarthasuffersfromthereversecausalityproblem.
c. BillsreasoningsuffersfromthereversecausalityproblemandMarthasreasoningsuffersfromtheomitted
variableproblem.
d. MarthasreasoningsuffersfromthereversecausalityproblemandBillsreasoningsuffersfromtheomitted
variableproblem.
ANSWER:a. ThereasoningofbothBillandMarthasuffersfromtheomittedvariableproblem.
TYPE:MSECTION:4DIFFICULTY:2
Chapt er 2/ Thi nki ng Li ke an Economi st 60
TRUE/FALSE
1. Whilethescientificmethodisapplicabletostudyingnaturalsciences,itisnotusefulinstudyinganeconomic
system.
ANSWER:FTYPE:TSECTION:1
2. Sincenaturalexperimentsofferedbyhistorycantbeusedineconomics,carefullyconstructedlaboratory
experimentsmustbeused.
ANSWER:FTYPE:TSECTION:1
3. Aneconomicmodelcanaccuratelyexplainhowtheeconomyisorganizedbecauseitisdesignedtoincludeevery
featureoftherealworld.
ANSWER:FTYPE:TSECTION:1
4. Allscientificmodels,includingeconomicmodels,simplifyrealityinordertoimproveourunderstandingofit.
ANSWER:TTYPE:TSECTION:1
5. Acircularflowdiagramisavisualmodelofhowaneconomyisorganized.
ANSWER:TTYPE:TSECTION:1
6. Inasimplecircularflowdiagram,firmsownthefactorsofproductionandusethemtoproducegoodsandservices.
ANSWER:FTYPE:TSECTION:1
7. Inasimplecircularflowdiagram,thetwotypesofmarketsinwhichhouseholdsandfirmsinteractarethemarkets
forgoodsandservicesandthemarketsforfactorsofproduction.
ANSWER:TTYPE:TSECTION:1
8. Inthemarketsforgoodsandservices,asinthemarketsforthefactorsofproduction,householdsarebuyersand
firmsaresellers.
ANSWER:FTYPE:TSECTION:1
9. Inacircularflowdiagram,oneloopshowstheflowofrealgoods,servicesandfactorsofproduction,andtheother
loopshowsthecorrespondingflowofdollars.
ANSWER:TTYPE:TSECTION:1
10. Aproductionpossibilitiesfrontierisagraphwhichshowsthevariouscombinationsofoutputstheeconomycan
possiblyproducegivenitsfactorsofproductionandtechnology.
ANSWER:TTYPE:TSECTION:1
11. Aneconomycanproduceatanypointonor
outsidetheproductionpossibilitiesfrontier,butit
cannotproduceatpointsinsidethefrontier.
ANSWER:FTYPE:TSECTION:1
12. Anefficientoutcomeineconomicsisoneinwhich
theeconomyisconservingthelargestpossible
amountofresources,whilestillmeetingtheneeds
ofsociety.
ANSWER:FTYPE:TSECTION:1
13. Aneconomyisbeingefficientifitisimpossibleto
producemoreofonegoodwithoutproducingless
ofanother.
ANSWER:TTYPE:TSECTION:1
14. Inthegraphshown,pointsA,B,andDrepresentfeasibleorattainableoutcomesforsociety.
ANSWER:TTYPE:TSECTION:1

Chapt er 2/ Thi nki ng Li ke an Economi st 61

15. Inthegraphshown,theopportunitycosttotheeconomyofmovingfrompointAtopointBis10dishwashers.
ANSWER:TTYPE:TSECTION:1
16. Inthegraphshown,theopportunitycostofmoredoghousesincreasesasmoredoghousesareproduced.
ANSWER:TTYPE:TSECTION:1
17. Thetradeoffbetweentheproductionofdifferentgoodscanchangebecauseoftechnologicalimprovementovertime.
ANSWER:TTYPE:TSECTION:1
18. Economicgrowthcausesaproductionpossibilitiesfrontiertoshiftoutward.
ANSWER:TTYPE:TSECTION:1
19. IfgovernmentregulationsdesignedtoprotectU.S.wetlandsremovedveryproductivefarmlandfromproduction,
theproductionpossibilitieswouldshiftinward.
ANSWER:TTYPE:TSECTION:1
20. Thefieldofeconomicsisdividedintotwosubfields:microeconomicsandmacroeconomics.
ANSWER:TTYPE:TSECTION:1
21. Normativestatementsdescribehowtheworldis,whilepositivestatementsprescribehowtheworldshouldbe.
ANSWER:FTYPE:TSECTION:2
22. Societywouldbebetterifthewelfaresystemwereabolishedisanormativestatement,notapositivestatement.
ANSWER:TTYPE:TSECTION:2
23. Wheneconomistsaretryingtoexplaintheworldtheyareactingasscientists,andwhentheyaretryingtoimprove
it,theyarepolicymakers.
ANSWER:TTYPE:TSECTION:2
24. TheCouncilofEconomicAdvisorshasasitsdutiesbothadvisingthePresidentoftheUnitedStatesandformulating
monetarypolicy.
ANSWER:FTYPE:TSECTION:2
25. Asurveyofbusiness,government,andacademiceconomistsrevealedwidespreaddisagreementontenpropositions
abouteconomicpolicy.
ANSWER:FTYPE:TSECTION:3
26. Twovariableswhicharenegativelyrelatedwillmoveinoppositedirections.
ANSWER:TTYPE:TSECTION:4
Chapt er 2/ Thi nki ng Li ke an Economi st 62
SHORTANSWER

APPLICATION/SCENARIO
1. Usingthisoutline,drawacircularflowdiagram
representingtheinteractionsbetweenhouseholdsandfirms ina
simpleeconomy.Explainbrieflythevariouspartsofthe
diagram.

ANSWER:

Thisdiagramshouldduplicatetheessentialcharacteristicsofthediagraminthetext,withanexplanationofthe
meaningofeachflowandeachmarket.Itisimportantthatthestudentunderstandsthattheinnerlooprepresents
theflowofrealgoodsandservicesandthattheouterlooprepresentsthecorrespondingflowofpayments.
TYPE:SKEY1:GSECTION:1OBJECTIVE:3RANDOM:Y
2. Drawaproductionpossibilitiesfrontiershowingincreasingopportunitycostforhammersandhorseshoes.
a. Onagraph,identifytheareaoffeasibleoutcomesandtheareaofinfeasibleoutcomes.
b. Onthegraph,labelapointthatsefficientaspointEandapointthatinefficientaspointI.
c. Onagraph,illustratetheeffectofthediscoveryofanewveinofironore,aresourceneededtomakeboth
horseshoesandhammers,onthiseconomy.
d. Onagraphforhammersandhorseshoes,illustratetheeffectanewcomputerizedassemblylineinthe
productionofhammerswouldhave.
Chapt er 2/ Thi nki ng Li ke an Economi st 63
ANSWER:

TYPE:SSECTION:1
3. TheprairiedoghasalwaysbeenconsideredaproblemforAmericancattleranchers.Theydigholesthatcattleand
horsescanstepinandtheyeatgrassnecessaryforcattle.Recently,ranchershavediscoveredthatthereisademand
forprairiedogsaspets.Insomeareasprairiedogscansellforashighas$150.Cattlemenarenowfencingoffprairie
dogtownsontheirlandsothesetownswillnotbedisturbedbytheircattle.
Drawaproductionpossibilitiesfrontiershowingaranchersproductionoptionbetweencattleproduction
andprairiedogproductionshowingincreasingopportunitycostandshowwhatwouldhappenineachofthe
followingsituations.(Useaseparategraphforeachsituation.)
a. Theoutcomeisefficient,withrancherschoosingtoproduceequalnumbersofcattleandprairiedogs.
b. Asaprotestagainstthegovernmentintroducingthegraywolfbackintothewildintheirstate,ranchersdecide
nottouse25%oftheavailablegrasslandforgrazing.
c. Thepriceofprairiedogsincreasesto$200each,soranchersdecidetoallotadditionallandforprairiedogs.
d. Thegovernmentgrantsnewleasestoranchers,givingthem10,000newacresofgrasslandeachforgrazing.
e. Adroughtdestroysmostoftheavailablegrassforgrazingofcattle,butnotprairiedogssincetheyalsoeatplant
roots.

Chapt er 2/ Thi nki ng Li ke an Economi st 64
ANSWER:

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

Chapt er 2/ Thi nki ng Li ke an Economi st 65

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