Question 1

How does 'consumer sovereignty' determine the types and quantities of the goods produced in an
economy?

Accepted Answer

Consumers register their preferences for the type and quantity of goods and services they want in the
market when they buy something. The dollars spent are like voting for that product to continue to be
produced. If the dollar votes for a certain product are great enough to create a proﬁt, businesses will
produce and sell that product. In contrast, if the dollar votes do not create suﬃcient revenues to cover
costs, businesses will not produce the product. Thus, consumers collectively direct resources to
industries that are meeting their wants and away from industries that are not meeting their wants.

Question 2

The incentive problem under communist central planning refers to the idea that

Accepted Answer

A)  planners had to direct required inputs to each enterprise. 
B)  workers, managers, and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products. 
C)  the immediate effect of more investment was less consumption. 
D)  exports had to be equal to imports for a central plan to work. 
A)  planners had to direct required inputs to each enterprise. 
B)  workers, managers, and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products. 
C)  the immediate effect of more investment was less consumption. 
D)  exports had to be equal to imports for a central plan to work. B

Question 3

In a market system, the distribution of goods and services largely depends on the distribution of income
and people's preferences.

Accepted Answer

A) True 
 B)False  True

Question 4

The invisible hand refers to the

Accepted Answer

A)  fact that the U.S. tax system redistributes income from rich to poor. 
B)  notion that, under competition, decisions motivated by self-interest promote the social interest. 
C)  tendency of monopolistic sellers to raise prices above competitive levels. 
D)  fact that government controls the functioning of the market system. 
A)  fact that the U.S. tax system redistributes income from rich to poor. 
B)  notion that, under competition, decisions motivated by self-interest promote the social interest. 
C)  tendency of monopolistic sellers to raise prices above competitive levels. 
D)  fact that government controls the functioning of the market system.

Question 5

Which of the following is not one of the ﬁve fundamental questions that an economy must deal with?

Accepted Answer

A)  How will the goods and services be produced? 
B)  Why should the goods and services be produced? 
C)  Who is to receive the goods and services produced in the economy? 
D)  In what ways will progress be promoted? 
A)  How will the goods and services be produced? 
B)  Why should the goods and services be produced? 
C)  Who is to receive the goods and services produced in the economy? 
D)  In what ways will progress be promoted?

Question 6

A production system where various workers concentrate on different specialized tasks to contribute toward a whole product is referred to as

Accepted Answer

A)  a coincidence of wants. 
B)  roundabout production. 
C)  freedom of enterprise. 
D)  division of labor. 
A)  a coincidence of wants. 
B)  roundabout production. 
C)  freedom of enterprise. 
D)  division of labor.

Question 7

(Consider This) Explain the differences in economic systems between North and South Korea and the
economic outcomes of the two systems.

Accepted Answer

North Korea, under the inﬂuence of the S

Question 8

List nine characteristics of the market system.

Accepted Answer

The nine key features are: (1) private p

Question 9

The market system's answer to the fundamental question "How will the system accommodate change?" is essentially

Accepted Answer

A)  "Through government leadership and direction." 
B)  "Through the guiding function of prices and the incentive function of proﬁts." 
C)  "Through training and retraining programs." 
D)  "Through trial and error." 
A)  "Through government leadership and direction." 
B)  "Through the guiding function of prices and the incentive function of proﬁts." 
C)  "Through training and retraining programs." 
D)  "Through trial and error."

Question 10

Enterprise managers and workers in the Soviet Union often resisted innovations in production methods because

Accepted Answer

A)  production targets were often increased when innovation occurred. 
B)  there was a chronic shortage of computers. 
C)  workers could not be reallocated geographically. 
D)  innovations ordinarily increased dependence on world markets. 
A)  production targets were often increased when innovation occurred. 
B)  there was a chronic shortage of computers. 
C)  workers could not be reallocated geographically. 
D)  innovations ordinarily increased dependence on world markets.

Question 11

Which of the following is necessary to make a trade in a barter economy?

Accepted Answer

A)  money 
B)  unlimited wants 
C)  a medium of exchange 
D)  a coincidence of wants 
A)  money 
B)  unlimited wants 
C)  a medium of exchange 
D)  a coincidence of wants

Question 12

Which of the following statements about markets and prices is correct?

Accepted Answer

A)  In a market system, buyers and sellers must be in face-to-face contact with each other. 
B)  Prices affect the distribution of goods in a market system, but not the allocation of resources. 
C)  In a market system, prices serve to ration goods and services to consumers. 
D)  The operation of a market system has little, if any, effect on the distribution of income in the economy. 
A)  In a market system, buyers and sellers must be in face-to-face contact with each other. 
B)  Prices affect the distribution of goods in a market system, but not the allocation of resources. 
C)  In a market system, prices serve to ration goods and services to consumers. 
D)  The operation of a market system has little, if any, effect on the distribution of income in the economy.

Question 13

Describe the three major virtues of a market system.

Accepted Answer

The three major virtues of the market sy

Question 14

The fact that the major indicator of enterprise success in the Soviet Union and pre-reform China was the quantity of output implied that

Accepted Answer

A)  product quality was neglected. 
B)  production costs were minimized. 
C)  product mix met consumer needs. 
D)  technological advance was too rapid. 
A)  product quality was neglected. 
B)  production costs were minimized. 
C)  product mix met consumer needs. 
D)  technological advance was too rapid.

Question 15

A characteristic of centrally planned economies is that

Accepted Answer

A)  the price is relatively unimportant in allocating resources. 
B)  proﬁts are the main measure of success of a ﬁrm. 
C)  entrepreneurship is quite prevalent and highly rewarded. 
D)  there are many incentives for innovation and hard work. 
A)  the price is relatively unimportant in allocating resources. 
B)  proﬁts are the main measure of success of a ﬁrm. 
C)  entrepreneurship is quite prevalent and highly rewarded. 
D)  there are many incentives for innovation and hard work.

Question 16

Freedom of enterprise

Accepted Answer

A)  is a characteristic that is common to most economic systems. 
B)  in a market system means that entrepreneurs can obtain and use economic resources without any legal restraint. 
C)  allows businesses, within broad limits, to choose what goods to produce. 
D)  refers primarily to the right of consumers to purchase what they want. 
A)  is a characteristic that is common to most economic systems. 
B)  in a market system means that entrepreneurs can obtain and use economic resources without any legal restraint. 
C)  allows businesses, within broad limits, to choose what goods to produce. 
D)  refers primarily to the right of consumers to purchase what they want.

Question 17

The invisible hand refers to the many indirect controls that the federal government imposes in a market
system.

Accepted Answer

A) True 
 B)False

Question 18

The choice of the most eﬃcient production technique is not affected by how much buyers want to buy
the product.

Accepted Answer

A) True 
 B)False

Question 19

One essential trade-off involving business risk in a market system is reﬂected in which of the following statements?

Accepted Answer

A)  Access to the ﬁrm's proﬁts and gains are open only to those who take on the business risk of the ﬁrm. 
B)  Those who receive guaranteed payments from the ﬁrm are also guaranteed a share of the ﬁrm's proﬁts. 
C)  Those who make bad decisions regarding risk will suffer losses; those who decide wisely will gain proﬁts. 
D)  Those who bear the business risk of the ﬁrm are guaranteed to always gain proﬁts. 
A)  Access to the ﬁrm's proﬁts and gains are open only to those who take on the business risk of the ﬁrm. 
B)  Those who receive guaranteed payments from the ﬁrm are also guaranteed a share of the ﬁrm's proﬁts. 
C)  Those who make bad decisions regarding risk will suffer losses; those who decide wisely will gain proﬁts. 
D)  Those who bear the business risk of the ﬁrm are guaranteed to always gain proﬁts.

Question 20

Money functions as a medium of exchange by eliminating the need for a coincidence of wants.

Accepted Answer

A) True 
 B)False

Exam 2: The Market System and the Circular Flow

How does 'consumer sovereignty' determine the types and quantities of the goods produced in an economy?

The incentive problem under communist central planning refers to the idea that

In a market system, the distribution of goods and services largely depends on the distribution of income and people's preferences.

The invisible hand refers to the

Which of the following is not one of the ﬁve fundamental questions that an economy must deal with?

A production system where various workers concentrate on different specialized tasks to contribute toward a whole product is referred to as

(Consider This) Explain the differences in economic systems between North and South Korea and the economic outcomes of the two systems.

List nine characteristics of the market system.

The market system's answer to the fundamental question "How will the system accommodate change?" is essentially

Enterprise managers and workers in the Soviet Union often resisted innovations in production methods because

Which of the following is necessary to make a trade in a barter economy?

Which of the following statements about markets and prices is correct?

Describe the three major virtues of a market system.

The fact that the major indicator of enterprise success in the Soviet Union and pre-reform China was the quantity of output implied that

A characteristic of centrally planned economies is that

Freedom of enterprise

The invisible hand refers to the many indirect controls that the federal government imposes in a market system.

The choice of the most eﬃcient production technique is not affected by how much buyers want to buy the product.

One essential trade-off involving business risk in a market system is reﬂected in which of the following statements?

Money functions as a medium of exchange by eliminating the need for a coincidence of wants.

Demand, Supply, and Market Equilibrium

Market Failures Caused by Externalities Asymmetric Information

Public Goods, Public Choice, and Government Failure

An Introduction to Macroeconomics

Measuring Domestic Output and National Income

Economic Growth

Business Cycles, Unemployment, and Inflation

Basic Macroeconomic Relationships

The Aggregate Expenditures Model

Aggregate Demand and Aggregate Supply

Fiscal Policy, Deficits, and Debt

Money, Banking, and Financial Institutions

Money Creation

Interest Rates and Monetary Policy

Financial Economics

Extending the Analysis of Aggregate Supply

Current Issues in Macro Theory and Policy

International Trade

The Balance of Payments, Exchange Rates, and Trade Deficits

The Economics of Developing Countries

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