Deck 2: Some Tools of the Economist

Question 1

The Social Security system of the United States is based on the pay-as-you-go principle. This indicates that funding of the benefits paid to current retirees comes primarily from

A) the income generated by the system's ownership of stock.
B) the tax payments of current workers.
C) the funds that current retirees paid into their personal savings accounts during their working years.
D) money created by the Federal Reserve system.

Answer 1

the tax payments of current workers.

Question 2

Demographic conditions

A) were much less favorable for the Social Security system in 1950 than is currently the case.
B) are currently unfavorable because the number of retirees is growing rapidly as the result of the high birth rate in the United States during 1930-1945.
C) will be less favorable for the Social Security system once the baby boom generation begins to retire.
D) don't affect the financial status of the Social Security system because it is based on the same principles as private insurance programs.

Answer 2

will be less favorable for the Social Security system once the baby boom generation begins to retire.

Question 3

The previous surplus of the Social Security system is expected to become a deficit because the

A) payroll tax rate is scheduled to decline at that time.
B) number of workers relative to the number of Social Security recipients will decline as the baby boom generation moves into the retirement phase of life.
C) stock market is not expected to perform nearly as well during the next two decades as was the case during the 1980s and 1990s.
D) growth rate of the U.S. economy is expected to slow during the next two decades.

Answer 3

number of workers relative to the number of Social Security recipients will decline as the baby boom generation moves into the retirement phase of life.

Question 4

The payments made to the beneficiaries of the Social Security program are financed by

A) insurance premiums previously paid into the system by the beneficiaries.
B) current receipts derived from the Social Security payroll tax.
C) income derived from funds that were previously invested in stocks and bonds.
D) governmental savings accounts based on the amount of funds the recipient previously paid into the system.

Question 5

The current Social Security system works to the disadvantage of blacks primarily because the

A) average annual earnings of blacks are generally lower than other groups.
B) average life expectancy of blacks is generally less than other groups.
C) Social Security tax rates imposed on blacks are higher than those imposed on other groups.
D) Social Security benefit formula is disadvantageous to blacks.

Question 6

When the Social Security surplus is used to cover the current operating expenses of the federal government, it will

A) make it easier for future taxpayers to provide promised Social Security benefits to baby boomers.
B) reduce the outstanding debt of the federal government.
C) make it possible for Congress and the president to spend more without raising current taxes or borrowing from the general public.
D) increase the credibility of the Social Security benefits promised to future retirees.

Question 7

Given the current tax rate structure and promised benefit levels, persons that are currently 40 years old or younger can expect to earn approximately what real rate of return on their Social Security contributions?

A) 0 percent
B) 2 percent
C) 10 to 12 percent
D) 15 to 20 percent

Question 8

When the Social Security system begins running a deficit, the bonds in the trust fund will be drawn down. The funds to redeem these bonds will have to come from

A) higher taxes, spending reductions in other programs, or additional government borrowing.
B) the surplus funds deposited in governmental banking accounts.
C) equity capital being liquidated.
D) the sale of private equities and securities that the government has been purchasing with the funds.

Question 9

The current Social Security System surplus of revenues relative to expenditures is used to purchase

A) U.S. Treasury bonds.
B) bonds issued by domestic corporations.
C) U.S. stock.
D) U.S. and foreign stock.

Question 10

Which of the following best explains why the Social Security system will face financial difficulties in the future?

A) Too much Social Security revenue was invested in the private sector rather than in government bonds.
B) In the next two decades, the number of workers paying into the system will decline sharply relative to the number of retirees collecting benefits.
C) The federal government does not pay interest on the money it borrows from the Social Security system.
D) The funds in the Social Security trust fund were invested in high-risk ventures that failed to pay off.

Question 11

The Social Security system is currently generating tax revenues that exceed the benefits paid to recipients. This surplus is

A) being invested in foreign bonds, which will provide Americans with a source of income when the baby boom generation retires.
B) separated from other government revenue so politicians will not spend the money during the current period.
C) being channeled into earmarked private savings accounts.
D) invested in government bonds, the redemption of which will require an increase in taxes (or additional Treasury borrowing).

Question 12

During the last two decades, most of the surplus generated by the Social Security system was

A) used to finance current government expenditures.
B) invested in government bonds that will make it possible for the federal government to pay future retirement benefits without an increase in federal taxes.
C) used to pay down the national debt.
D) invested in bonds offered by foreign governments and businesses that will provide a stream of future income for the finance of retirement benefits.

Question 13

By 2030, the number of workers per Social Security beneficiary will be approximately

A) two.
B) three.
C) four.
D) six.

Question 14

In 2015, the number of workers per Social Security beneficiary was approximately ____; by the year 2030, this figure is expected to ____.

A) 5; increase to approximately 8
B) 2.8; fall to approximately 2.2
C) 2.2; increase to approximately 3.2
D) 8; fall to approximately 5

Question 15

Which of the following about Social Security is true?

A) All of the current revenues flowing into the Social Security system are needed for benefit payments to current retirees.
B) If the Social Security surplus was used to pay down the privately held federal debt, this would reduce future taxes and, thereby, make it easier to deal with the retirement of the baby boomers.
C) During the 1980s and 1990s, most of the social security surplus was used to reduce the national debt.
D) When the Social Security surplus is used to cover the current operating expenses of the federal government, it will make it easier for future taxpayers to provide promised Social Security benefits to baby boomers.

Question 16

Social Security, officially known as Old Age and Survivors Insurance (OASI),

A) collects funds from current workers and invests them in order to provide these workers with a stream of income during the retirement phase of life.
B) is based on the same principles as private insurance programs.
C) is an intergenerational income transfer program.
D) is a voluntary savings program run by the government.

Question 17

The Social Security program is primarily a

A) compulsory retirement income program set up on sound insurance principles.
B) forced-savings program where workers save during their working years and receive the principal and interest on these savings at retirement.
C) program designed to tax current workers in order to provide benefits for current retirees.
D) voluntary savings program run by the government.

Question 18

The Social Security retirement program is financed by a 10.6 percent payroll tax that applies to earnings up to an income cutoff that is adjusted upward annually by the growth rate of nominal wages. As of 2016, the income cutoff was

A) $15,000.
B) $32,700.
C) $118,500.
D) $250,000.

Question 19

As the baby boom generation, born during 1946 through 1960, reaches retirement age during the 2011 through 2030 period, the number of workers per Social Security beneficiary is expected to

A) increase to five.
B) remain constant at approximately seven.
C) decline to approximately five.
D) decline to approximately two.

Question 20

When the Social Security system enters its deficit years and the bonds held in the trust fund are drawn down,

A) overall taxes will be reduced as the trust funds are used to pay benefits to retirees.
B) the payroll taxes used to finance Social Security benefits can be reduced because the trust funds will be sufficient to pay the retirement benefits of the baby boom generation.
C) taxes will have to be raised (or additional funds will have to be borrowed) in order to redeem the bonds held in the trust fund.
D) income taxes will have to be reduced in order to keep the revenues and expenditures of the Social Security system in balance.

Question 21

Which of the following about Social Security is true?

A) Labor participation tends to increase as spousal earnings increase.
B) Social Security works to the disadvantage of low-wage workers due to their shorter life expectancy.
C) Low-wage workers derive a higher rate of return from their Social Security taxes than high-wage workers.
D) High-wage workers generally begin full-time work at younger ages than low-wage workers.

Question 22

Under the current Social Security system, married persons may draw benefits based on

A) only their own earnings.
B) their own earnings or draw 50 percent of the benefits earned by their spouse.
C) their own earnings plus 50 percent of their spouse's earnings.
D) their own earnings plus 100 percent of their spouse's earnings.

Question 23

The Social Security Trust Fund

A) will provide a stream of future revenue for the federal government.
B) is a "pot" of money set aside for the payment of future benefits.
C) is a net asset of the U.S. Treasury worth approximately $2 trillion.
D) is of zero asset value to the federal government.

Question 24

Which of the following tends to increase the attractiveness of a retirement system based on savings and investment rather than pay-as-you-go principles?

A) A persistent increase in the number of workers relative to the number of retirees.
B) A large number of workers relative to the number of retirees.
C) A reduction in the number of workers relative to the number of retirees.
D) A persistent increase in the life expectancy of retirees.

Question 25

The bonds held in the Social Security Trust Fund

A) are a valuable asset of the federal government.
B) will generate a future stream of net income for the federal government.
C) are an IOU from one government agency (the U.S. Treasury) to another (the Social Security Administration).
D) are necessary to provide retirement benefits for future retirees.

Question 26

Which of the following groups derive the highest rate of return from the taxes they pay into the Social Security retirement system?

A) Blacks.
B) Whites.
C) Hispanics.
D) Married women working full-time.

Question 27

The net value to the federal government of the bonds currently held in the Social Security Trust Fund is

A) approximately $1 trillion.
B) now approaching $2 trillion.
C) greater than $2.5 trillion.
D) zero, because the federal government is both the payee and recipient of the interest and principal represented by these bonds.

Question 28

If the U.S. economy grew rapidly in the future, would this eliminate the long run deficit of Social Security?

A) No; future Social Security benefits are tied to nominal wages and therefore increases in real incomes will also increase the future retirement benefits.
B) Yes; a rapid real growth rate would increase tax revenues without increasing the real benefit levels of future recipients.
C) Yes, more rapid growth would lead to inflation and this would help eliminate the system's long run deficit.
D) Yes, but only if the rapid growth led to a substantial increase in net exports.

Question 29

The structure of the Social Security system is particularly advantageous to

A) blacks.
B) those with life shortening diseases such as diabetes.
C) groups with below average earnings and above average life expectancy.
D) groups with above average earnings and below average life expectancy.

Question 30

When the current Social Security surpluses end and the bonds in the trust funds are reduced in order to make payments to retirees, the financing for the redemption of the trust fund bonds will come from

A) higher taxes or more government borrowing.
B) the surplus funds deposited in government banking accounts.
C) equity capital being liquidated.
D) the sale of private equities and securities that the government has been purchasing with the funds.

Question 31

Jane states that "Social Security is an unfair program. It discriminates against married women in the workforce and middle-income recipients." Evaluate this view.

Question 32

Persons who die before age 65 or soon thereafter, receive little or nothing from their Social Security payroll tax payments. Which of the following groups is harmed the most by this attribute of the Social Security retirement system?

A) High-income workers.
B) Hispanics.
C) Heavy cigarette smokers.
D) College graduates.

Question 33

Which of the following sayings best reflects the concept of opportunity cost?

A) "You can't teach an old dog new tricks."
B) "Time is money."
C) "I have a baker's dozen."
D) "There's no business like show business."

Question 34

What will the federal government have to do in order to redeem the bonds in the Social Security Trust Fund?

A) raise taxes
B) cut expenditures on other government programs
C) borrow additional funds
D) Some combination of a, b, and c.

Question 35

Will a large quantity of bonds held in the Social Security Trust Fund make it easier to deal with the retirement of the baby boomers?

A) Yes; the federal government will be able to redeem these bonds in the future without raising taxes or increasing its borrowing.
B) Yes; the interest on these bonds will provide the federal government with a stream of net revenue in the future.
C) Yes, but only if the federal government holds these bonds until they mature.
D) No; the federal government cannot redeem the bonds without raising revenues for their redemption from other sources.

Question 36

On average, persons with more education tend to draw Social Security benefits for a

A) longer period of time than average
B) shorter period of time than average
C) period of time that is comparable to the U.S. average
D) longer period of time if they have a master's degree but a shorter period of time if they have a Ph.D.

Question 37

Which of the following about Social Security is true?

A) The regressive nature of the Social Security benefit formula works to the advantage of groups with below average earnings.
B) Groups with an below average life expectancy gain from Social Security because they will typically draw retirement benefits over a more lengthy period of time.
C) The life expectancy of Hispanics at age 20 is generally lower than the figures for whites and blacks.
D) Hispanics derive a higher return from their Social Security taxes than whites, and substantially higher than blacks.

Question 38

Detailed studies indicate that, on balance, the Social Security retirement system

A) redistributes a substantial amount of income from the rich to the poor.
B) redistributes a substantial amount of income from whites to blacks.
C) is particularly advantageous to those with a shorter life expectancy.
D) is not particularly advantageous to the poor due to their shorter life expectancy.

Question 39

Which of the following about Social Security is true?

A) The regressive nature of the Social Security benefit formula works to the disadvantage of blacks and other groups with below-average earnings.
B) Social Security works to the disadvantage of blacks and other groups with below-average life expectancy.
C) Blacks derive a higher rate of return from their Social Security taxes than whites.
D) Hispanics derive a lower rate of return from their Social Security taxes than both whites and blacks.

Question 40

Briefly explain why the Social Security system will face a "crisis" in the coming years.

Question 41

The opportunity cost of an option

A) measures the undesirable aspects of the option.
B) includes only the monetary cost of the option.
C) is the highest-valued alternative that must be given up as the result of choosing the option.
D) is objective, and it will be the same for all individuals.

Question 42

Figure 2-4
Which of the following is true of Figure 2-4?

A) If the economy operates at point A, it is impossible to produce more of both food and clothing.
B) If the economy operates at point B, it is impossible to increase the output of clothing without giving up food production.
C) If the economy operates at point A, resources are being used efficiently.
D) If the economy operates at point B, resources are being used inefficiently.

Question 43

Figure 2-6
Which of the following will most likely shift the production possibilities curve for breadfruit and fish outward from AA to BB in Figure 2-6?

A) an improvement in the form of economic organization
B) lower investment and a reduction in the country's capital stock
C) an increase in the price of breadfruit
D) a decrease in the average number of hours worked

Question 44

The primary benefit that results when a nation employs its resources in accordance with the principle of comparative advantage is

A) an expansion in investment resulting from a reallocation of resources away from consumption.
B) a larger output resulting from a more efficient use of resources.
C) greater equality of income resulting from an increase in the number of workers.
D) an increase in the profitability of business enterprises resulting from an increase in investment.

Question 45

Figure 2-8
Points A, B, and C in Figure 2-8 indicate consumption and investment for three economies. Other things constant, which of the economies is likely to grow more rapidly in the future?

A) economy A
B) economy B
C) economy C
D) They would all be expected to grow at the same rate.

Question 46

Figure 2-9
Refer to Figure 2-9. If the economy moves from point A to point D, the opportunity cost is

A) 10 toasters.
B) 20 toasters.
C) 30 toasters.
D) 30 toothbrushes.

Question 47

With voluntary exchange,

A) both the buyer and seller will be made better off.
B) the buyer will be made better off, while the seller will be made worse off.
C) the seller will be made better off, while the buyer will be made worse off.
D) both the buyer and the seller will be made worse off.

Question 48

Which of the following will most likely occur under a system of clearly defined and enforced private property rights?

A) Resource owners will fail to conserve vital resources, even if they expect their supply to be highly limited in the future.
B) Resource owners will ignore the wishes of others, including others who would like to use the resource that is privately owned.
C) Resource owners will fail to consider the wishes of potential future buyers when they decide how to employ privately owned resources.
D) Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.

Question 49

"Now that Terrance paints the broad surfaces and I do the trim work, we can paint a house in three-fourths the time that it took for each of us to do both." This statement most clearly reflects

A) the importance of secondary effects.
B) the fallacy of composition.
C) the law of comparative advantage.
D) behavior inconsistent with economizing.

Question 50

Suppose the price of an airline ticket from Dallas to Boston costs $600. A bus ticket costs $150. Traveling by plane takes 6 hours compared with 51 hours by bus. Other things constant, an individual would gain by choosing air travel if, and only if, his time were valued at more than

A) $6 per hour.
B) $8 per hour.
C) $10 per hour.
D) $15 per hour.

Question 51

Figure 2-1
In Figure 2-1, point A is

A) unattainable.
B) inefficient.
C) efficient.
D) preferable to point B.

Question 52

Three basic decisions must be made by all economies. What are they?

A) how much will be produced, when it will be produced, and how much it will cost
B) what the price of each good will be, who will produce each good, and who will consume each good
C) what will be produced, how goods will be produced, and for whom goods will be produced
D) how the opportunity cost principle will be applied, if and how the law of comparative advantage will be utilized, and whether the production possibilities constraint will apply

Question 53

Figure 2-7
If an economy operates at point A on the production possibilities curve shown in Figure 2-7,

A) to produce more food, it would have to reduce its production of clothing.
B) to produce more clothing, it would have to reduce the production of food.
C) it is operating efficiently.
D) all of the above would be correct.

Question 54

Figure 2-9
Refer to Figure 2-9. The opportunity cost of obtaining 10 additional toasters by moving from point B to point A is

A) 10 toothbrushes.
B) 20 toothbrushes.
C) 30 toothbrushes.
D) zero, since the economy has the additional resources to produce 10 additional toasters.

Question 55

If a firm or a nation desires to maximize its output, each productive assignment should be carried out by those persons who

A) have the highest opportunity cost.
B) have a comparative advantage in the productive activity.
C) can complete the productive activity most rapidly.
D) least enjoy performing the productive activity.

Question 56

Figure 2-3
Points A and B in Figure 2-3 indicate consumption and investment for two economies. Other things constant, which of the economies is likely to grow more rapidly in the future?

A) economy A
B) economy B
C) They can be expected to grow at the same rate.
D) This is uncertain since growth is not influenced by the factors indicated in this example.

Question 57

If an economy is operating at a point inside the production possibilities curve,

A) its resources are not being used efficiently.
B) the curve will begin to shift inward.
C) the curve will begin to shift outward.
D) This is a trick question because an economy cannot produce at a point inside the curve.

Question 58

Figure 2-2
Which of the following would most likely cause the production possibilities curve for breadfruit and fish to shift outward from AA to BB in Figure 2-2?

A) a decrease in the labor force of the country
B) a sudden change in consumer preferences for more fish and less breadfruit
C) a major technological advance
D) a decrease in the capital stock

Question 59

Figure 2-9
Refer to Figure 2-9. The opportunity cost of obtaining 15 additional toasters by moving from point D to point C is

A) 10 toothbrushes.
B) 20 toothbrushes.
C) 30 toothbrushes.
D) none of the above; the economy cannot move from point D to point C.

Question 60

Figure 2-5
In Figure 2-5, which of the following is true?

A) Point A is inefficient.
B) Point B is efficient.
C) Point C is unattainable.
D) All of the above are true.

Question 61

Figure 2-10
Refer to Figure 2-10. What is the opportunity cost of the movement from point A to point C?

A) 50 baseballs
B) 100 baseballs
C) 100 bananas
D) 300 bananas

Question 62

A department store buys a wool coat for $120 and sets its retail price at $300. The coat costs $85 to produce. When the coat doesn't sell, the store marks the price down to $200, then $100, and finally $70. At $70, Amy buys the coat. What was the coat's true value? Why?

Question 63

A popular video program used to teach economics to primary school children defines opportunity cost as "what you give up to get something." In light of your understanding of opportunity cost, how would you modify this definition?

Question 64

It can be said that, ultimately, consumers are the driving force in answering the three basic economic questions. Explain the consumer's role in providing these answers.

Question 65

After the terrorist attacks on September 11, 2001, the United States began devoting substantial resources toward the War on Terrorism, homeland security, and relief efforts. Use the production possibilities curve to demonstrate how this might affect the production of other goods in the United States.

Question 66

Which of the following is not a basic question that each economy must answer?

A) Which resources are scarce?
B) For whom shall the goods be produced?
C) How shall goods be produced?
D) What goods shall be produced?

Question 67

Mark and John are 10-year-old twins who do not get along. They have opened separate lemonade stands and are competing with each other, selling lemonade on their block. Their mother observes that Mark is very good at making lemonade and John is an excellent young salesman. She suggests they both could make more money if they worked together. John counters that two stands will always make more money than one. Who is right? Why?

Question 68

An economics professor points to a student in the front row and announces that "sitting in class is the thing you value most during this time period." Is the professor correct? Why or why not?

Question 69

Figure 2-10
Refer to Figure 2-10. A movement from point C to point D could be caused by

A) unemployment.
B) a decrease in society's preference for bananas.
C) fewer resources available for production of bananas.
D) All of the above are correct.

Question 70

The president of a large public university proclaims, "If we can get the state government to fund our new football stadium, it will not cost us anything." Evaluate this view from an economic perspective.

Question 71

Figure 2-10
Refer to Figure 2-10. If this economy put all available resources into the production of bananas, it could produce

A) 200 bananas and also 150 baseballs.
B) 300 bananas and also 100 baseballs.
C) 400 bananas and no baseballs.
D) It is impossible to know unless we know the quantity of resources available.

Question 72

Even countries that depend primarily on market forces to resolve the basic economic questions will usually rely on the collective decision-making process to

A) determine the prices of goods and resources.
B) allocate goods that are essential to life.
C) determine the distribution of income among citizens.
D) define and enforce private-property rights and designate the acceptable forms of competitive economic behavior.

Question 73

Market economies are often criticized for how they answer the basic question, "For whom are goods produced?" This criticism usually comes from people who believe that the distribution of income is not "fair." Is there some way to separate production from distribution so that we can leave production just as it is but make the distribution of income "fairer"?

Question 74

When collective decision making is utilized to resolve economic questions regarding the allocation of resources,

A) the role of markets will be replaced by political decision making.
B) centralized decision making in all areas is inevitable.
C) the preferences of individuals are of no importance.
D) economic efficiency will be assured.

Question 75

When collective decision making is utilized to resolve economic questions regarding the allocation of resources,

A) decentralized decision making is inevitable.
B) central planning and political bargaining will replace market forces.
C) individual preferences are of no importance.
D) economic equality will result.

Question 76

What are the three basic questions faced by every economy?

A) What, how, and for whom will goods be produced?
B) When, where, and how much will be produced?
C) Why, where, and when will goods be produced?
D) How, how much, and why will goods be produced?

Question 77

Jim values his car at $2,000, and Kelly values it at $5,000. Can value be created in this situation? How? Suppose Jim refuses to sell for less than $6,000. Is value destroyed? Why or why not?

Question 78

Explain the idea of capital investment by using the story of Robinson Crusoe. What is sacrificed, and what is gained?

Question 79

Figure 2-10
Refer to Figure 2-10. If the economy moves from point C to point B, then which of the following statements is correct?

A) The economy benefited from a technological advance in the production of baseballs.
B) The opportunity cost of each additional baseball is 2 bananas.
C) The opportunity cost of each additional banana is 2 baseballs.
D) The move involves no opportunity cost; it simply reflects the desires of the economy's citizens.

Question 80

Three basic decisions must be made by all economies. What are they?

A) How much will be produced; when will it be produced; who will produce it?
B) What goods will be produced; how will goods be produced; for whom will goods be produced?
C) What will be consumed; how will goods be consumed; for whom will goods be consumed?
D) How will the opportunity cost principle be applied; if the law of comparative advantage will be utilized, how will it be utilized; will the production possibilities constraint apply?