Chapter 1 Practice Quiz Introducing the Economic Way of Thinking

1. Scarcity exists when people consume beyond their needs. b. only in rich nations. c. in all countries in the world. d. only in poor nations. C. No matter what economic system a country has, it is always faced with the problem of scarcity.

2. Which of the following would eliminate scarcity as an economic problem? Moderation of people’s competitive instincts. b. Discovery of large new energy reserves. c. Resumption of steady productivity growth. d. None of the above because scarcity cannot be eliminated. Because it is impossible to provide everyone with everything they want, we will always have scarcity.

3. Which of the following is not a resource? a. Land. b. Labor. c. Money. d. Capital. C. Money is not a resource because it has no intrinsic value. Money that is used to make an investment is called financial capital.

4. Economics is the study of a. how to make money. b. how to operate a business. c. people making choices because of the problem of scarcity. d. the government decision-making process. C. Economics is the study of how people must decide among alternatives to meet their wants and needs in this world of scarcity.

5. Microeconomics approaches the study of economics from the viewpoint of a. individuals or specific markets. b. the operation of the Federal Reserve. c. economy wide effects d. the national economy. Microeconomics is the study of the decision- making process for individuals, business owners, and government.

6. A review of the performance of the U.S. economy during the 1990’s is primarily the concern of a. macroeconomics. b. microeconomics. c. both macroeconomics and microeconomics. d. neither macroeconomics nor Macroeconomics is the study of the economy as a whole.

7. An economic theory claims that a rise in gasoline prices will cause gasoline purchases to fall, ceteris paribus. The phrase “ceteris paribus” means that a. other relevant factors like consumer incomes must be held constant. b. gasoline prices must first be adjusted for inflation. c. the theory is widely accepted, but cannot be accurately tested. d. consumers need for gasoline remains the same regardless of price. Anytime price changes we always make the assumption that nothing else changes.

8. An economist notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. The economist has a. confused association with and causation. b. misunderstood the ceteris paribus assumption. c. used normative economics to answer a positive question. d. built an untestable model. A. Just because one action follows another, does not mean that the first caused the second.

9. Which of the following is a statement of positive economics? The income tax system collects a lower percentage of the incomes of the poor. b. A reduction in the tax rates of the rich makes the tax system more fair. c. Tax rates ought to be raised to finance health care. d. All of the above are primarily statements of positive economics. Positive economic statements are testable by facts and explain the world as it is without making value judgements.

10. Which of the following is a statement of positive economics? a. An unemployment rate of greater than 8 percent is good because prices will fall. b. An unemployment rate of 7 percent is a serious problem. c. If the overall unemployment rate is 7 percent, unemployment rates among African Americans will average 15 percent. d. Unemployment is a more severe problem than inflation. C. Other answers are based on a value judgment concerning the relationship between black and white unemployment rates.

11. Which of the following is a statement of normative economics? a. The minimum wage is good because it raises wages for the working poor. b. The minimum wage is supported by unions. c. The minimum wage reduces the number of jobs for less skilled workers. d. The minimum wage encourages firms to substitute capital for labor. A. Even though the minimum wage reduces jobs for some working poor, it is a value judgement that the minimum wage is good for the economy overall.

12. Select the normative statement that completes the following sentence: If the minimum wage is raised rapidly, then a. inflation will increase. b. workers will gain their rightful share of total income. c. profits will fall. d. unemployment will rise. B. To say that workers have right to a certain part of total income entails a value judgment.

13. Computer programs, or software, are an example of land. labor. capital. none of the above. C. A computer software program is a human-made good used to produce other goods.

14. Which of the following would not be classified as a capital resource? a. The Empire State Building b. A Caterpillar bulldozer c. A Macintosh computer d. 100 shares of stock in General Motors D. Stocks are financial assets that are not human-made goods that produce other goods.

D. All of the answers are true. 15. A model (or theory): a. is a general statement about the causal relationship between variables based on facts. b. helps explain and predict the relationship between variables. c. when expressed as a downward (negatively) sloping graph implies an inverse relationship between the variables. d. all of the above. D. All of the answers are true.