Deck 4: The Market System and the Private and Public Sector

Question 1

Which of the following is true of a freely functioning market?

A) Markets lead to morally correct outcomes.
B) Market allocation leads to the most equitable distribution of resources.
C) Market outcomes are decided by firms.
D) Markets move resources to where they are least valued.
E) Markets do not allow obsolescence and inefficiency to thrive.

Answer 1

E

Question 2

The wireless communication business has changed dramatically since the 1980s, going from mobile phones to smartphones. This was only possible because:

A) of the persuasive advertising campaigns undertaken by firms in the wireless communication industry.
B) consumers welcomed the changes and were willing and able to pay for them.
C) of the dot-com stock market bubble that lasted from 1995 to 2000.
D) the government tightly regulated the wireless communication industry with regulations and taxes.
E) businesses needed to produce these products in order to recoup their investment in research and development.

Answer 2

B

Question 3

In a market system, who ultimately determines what is produced?

A) Consumers
B) Business managers
C) Entrepreneurs
D) The government
E) Stockholders

Answer 3

A

Question 4

Firms try to minimize costs and maximize profits and in the process produce:

A) the goods and services that buyers want at the highest possible cost.
B) the goods and services that buyers want at the least possible cost.
C) the maximum amount of goods or services that they are capable of producing.
D) economically inefficient amounts of goods or services.
E) only those goods and services which command a very high price in the market.

Question 5

The resources owned by firms that shut down in the process of creative destruction:

A) are used in activities that are identical to the failed business.
B) are used where they have less value and thus reduce cost.
C) move to activities where they are more highly valued.
D) are liquidated and can never be used again.
E) are written off and contribute to wastage in the economy.

Question 6

Which of the following correctly describes the market-clearing price?

A) It is the price which minimizes the aggregate surplus in the market.
B) It is the same as the equilibrium price.
C) It is the price at which the maximum quantity of the good is sold.
D) It is the minimum price at which the product must be sold for the firm to remain in business.
E) It is the price at which firms have to exit the market.

Question 7

The idea that in a market system the consumer determines what is to be produced is called:

A) consumer monopoly.
B) habeas corpus.
C) consumer sovereignty.
D) business sovereignty.
E) caveat emptor.

Question 8

Identify the correct reason behind the rise in agricultural produce in the U.S. despite a drastic decline in the percentage of the country's workforce employed in this sector.

A) Use of improved technology
B) Reduced production costs due to government subsidies
C) Foreign investment in the agricultural sector
D) Fall in the demand for agricultural produce
E) Increased imports of agricultural goods

Question 9

'Walkmans' that played audio cassettes were withdrawn from the market by Sony Corporations soon after MP3 players became popular among consumers. Which of the following factors is most likey to have led to this outcome?

A) Scarcity
B) Corporate governance
C) Consumer sovereignty
D) Corporate social responsibility
E) Tragedy of Commons

Question 10

NARRBEGIN: Figure 4.1
The figure given below represents the equilibrium price and output in the market for restaurant meals and delivery meals.
Figure 4.1

Refer to Figure 4.1. Which of the following is represented by this figure?

A) Delivery meals and restaurant meals are complementary goods.
B) When producers of delivery and restaurant meals change their preferences, the consumers respond.
C) The increase in demand for delivery meals could have been caused by a change in consumers' tastes.
D) The fall in demand for restaurant meals was caused by an increase in the price for restaurant meals.
E) The demand for delivery meals is less elastic than that for restaurant meals.

Question 11

NARRBEGIN: Figure 4.1
The figure given below represents the equilibrium price and output in the market for restaurant meals and delivery meals.
Figure 4.1

Refer to Figure 4.1. The demand for Restaurant Meals shift in one direction while the demand for Delivery meals shift in another direction. This implies:

A) the demand for Restaurant Meals increased while that for Delivery Meals decreased.
B) the demand for Restaurant Meals decreased while that for Delivery Meals increased.
C) the demand for Restaurant Meals increased while that for Delivery Meals increased.
D) the demand for Restaurant Meals decreased while that for Delivery Meals decreased.
E) the demand for Restaurant Meals and the demand for Delivery Meals adds up to 1.

Question 12

NARRBEGIN: Figure 4.1
The figure given below represents the equilibrium price and output in the market for restaurant meals and delivery meals.
Figure 4.1

Refer to Figure 4.1. If the price in the Delivery Meals market remains at $10 but demand shifts to D2 which of the following situations will be observed?

A) People would be willing and able to purchase 75 units while only 60 units would be available.
B) People would be willing and able to purchase only 60 units while 75 units would be available.
C) People would be willing and able to purchase 75 units while only 50 units would be available.
D) People would be willing and able to purchase 75 units while only 25 units would be available.
E) People would be willing and able to purchase 50 units and producers would supply exactly 50 units.

Question 13

Mark's ability to purchase goods and services depends on:

A) his aesthetic sense.
B) his ability to hunt out the best bargains.
C) the amount of information that he has.
D) his money income.
E) his intelligence level.

Question 14

NARRBEGIN: Figure 4.1
The figure given below represents the equilibrium price and output in the market for restaurant meals and delivery meals.
Figure 4.1

Refer to Figure 4.1. The demand for Restaurant Meals shift in one direction while the demand for Delivery Meals shift in another direction. Which of the following impacts will it have on the quantity of Restaurant Meals and Delivery meals purchased by consumers?

A) The quantity of Restaurant Meals purchased declines while the quantity of Delivery Meals purchased rises.
B) The quantity of Restaurant Meals purchased rises while the quantity of Delivery Meals purchased declines.
C) Both the quantity of Restaurant Meals purchased and the quantity of Delivery Meals purchased declines.
D) Both the quantity of Restaurant Meals purchased and the quantity of Delivery Meals purchased increases.
E) The quantity of Restaurant Meals purchased and the quantity of Delivery Meals purchased add up to 100.

Question 15

NARRBEGIN: Figure 4.1
The figure given below represents the equilibrium price and output in the market for restaurant meals and delivery meals.
Figure 4.1

Refer to Figure 4.1. In which direction will the resources flow following a shift in the demand for Restaurant Meals and Delivery Meals as represented by the figure?

A) Resources flow from where they are more highly valued to where they are less highly valued in order to make the consumer better off.
B) Resources flow from where they are more highly valued to where they are less highly valued in order to reduce prices.
C) Resources flow from where they are more highly valued to where they are less valued in order to reduce costs.
D) Resources flow from Restaurant production and sales to Delivery production and sales.
E) Resources flow to Restaurant production and sales and away from Delivery production and sales.

Question 16

The market process by which new products and new firms replace existing products and firms is called:

A) technology transfer.
B) marginal rate of substitution.
C) capital replacement.
D) creative destruction.
E) market saturation.

Question 17

Which of the following situations is an example of creative destruction?

A) An aspiring fashion designer acting as a part-time model in fashion shows
B) Farm workers moving to technologically advanced industrial sector after undergoing proper training
C) An old residential building demolished for constructing a new shopping mall and multiplex
D) A garment manufacturer reducing production to recover its losses
E) An athlete serving as a brand ambassador for Nike

Question 18

The term consumer sovereignty refers to:

A) the fact that consumers' choices are limited to what the producers decide to produce.
B) a situation in which the government decides what is produced.
C) the idea that consumers ultimately determine what is produced.
D) the idea that consumers try to maximize their utility.
E) the idea that the preferences of both producers and the government ultimately determine what is produced.

Question 19

NARRBEGIN: Figure 4.1
The figure given below represents the equilibrium price and output in the market for restaurant meals and delivery meals.
Figure 4.1

Refer to Figure 4.1. Identify the impact on the price of Restaurant Meals and Delivery Meals following the direction of the shifts in demand in these two industries.

A) The price of Restaurant Meals rises while the price of Delivery Meals declines.
B) The price of both Restaurant Meals and Delivery Meals declines.
C) The price of Restaurant Meals declines while the price of Delivery Meals rises.
D) The price of both Restaurant Meals and Delivery Meals rises.
E) The price of Restaurant Meals and the price of Delivery Meals add up to $10.

Question 20

The process of new products and new firms replacing existing products and firms is called:

A) transformational innovation.
B) technological development.
C) price skimming.
D) consumer sovereignty.
E) creative destruction.

Question 21

According to the World Bank, low-income economies are heavily concentrated in:

A) Europe and Africa.
B) Europe and Asia.
C) Asia and Africa.
D) Asia and Australia.
E) North America and Australia.

Question 22

In economics parlance, the term investment refers to:

A) the cost of employing human capital.
B) expenditure on expense accounts of employees.
C) the expenditure incurred on salaries and rent.
D) business spending for acquiring capital goods.
E) the expenses on the purchase of stocks of a corporation.

Question 23

Which of the following is true of households?

A) It consists of the employed members of the family.
B) It can comprise of either related members or unrelated individuals.
C) It refers to only the owners of rented apartments.
D) It comprises of a family of at least four members.
E) It generally describes a family that has two earning members.

Question 24

Which of the following does not constitute a household consumption item?

A) A pair of jeans
B) A bottle of Beck's beer
C) A haircut
D) An electronic scanning machine
E) A packet of breakfast cereals

Question 25

Which of the following is a valid difference between sole proprietorship and partnership?

A) Partnerships require a written agreement while sole proprietorships do not.
B) Partnerships require a state charter while sole proprietorships do not.
C) Partnerships generate lower profits than sole proprietorships.
D) Partnerships are characterized by unlimited liability, while sole proprietorships are not.
E) Partnerships consist of two or more partners sharing the responsibility of the firm, while sole proprietorship consist of a single individual.

Question 26

In a market system, consumer demands dictate _____ and the search for profit defines _____.

A) for whom goods and services are produced; how goods and services are produced
B) what is produced; for whom goods and services are produced
C) where goods and services are produced; for whom goods and services are produced
D) what is produced; where goods and services are produced
E) what is produced; how goods and services are produced

Question 27

Identify the international organization that makes loans to developing countries.

A) The World Bank
B) The Federal Reserve
C) The World Trade Organization
D) The Industrial Development Board
E) The Bank of England

Question 28

Based on the fact that the companies Ford, IBM, PepsiCo, and McDonald's own and operate units in many different countries, they are categorized as:

A) joint ventures.
B) sole proprietorship firms.
C) partnership firms.
D) multinational firms.
E) co-operative firms.

Question 29

A country is categorized as a low-income economy by the World Bank if its per capita income is below:

A) $1,000.
B) $100.
C) $10,000
D) $50.
E) $5,000.

Question 30

The _____ tend to have a smaller public sector relative to the total economy.

A) communist economies
B) centrally planned economies
C) socialist economies
D) market economies
E) mercantilist economies

Question 31

When a household owns shares of stock:

A) it has ownership rights in that firm.
B) it is entitled to the majority of the firm's profits.
C) it is liable to bear the entire loss faced by the firm.
D) it can consume the firm's products without paying for it.
E) it is responsible for correcting any defect in the product identified by the customers.

Question 32

Which of the following sectors in the economy accounted for about 70% of the spending in the U.S. during 2009?

A) The government
B) Firms
C) The foreign sector
D) Investors
E) Households

Question 33

According to the World Bank, the high-income oil-exporting nations like Libya, Saudi Arabia, Kuwait, and the United Arab Emirates:

A) are considered to be developing countries.
B) are the major trade partners of the U.S.
C) are also considered as industrial market economies.
D) have highly interdependent economies.
E) are considered highly developed countries.

Question 34

Which of the following statements is a defining feature of a corporation?

A) The owners of a corporation face unlimited liability on debts.
B) A corporation owns and operates units in foreign countries.
C) A corporation is created by a verbal agreement.
D) A corporation that is based on a verbal agreement is also recognized by State law.
E) A corporation has a legal identity that is separate from that of its owners.

Question 35

Which of the following economic indicators is used by the World Bank to classify countries as industrial economies or developing countries?

A) GDP
B) Rate of inflation
C) Net exports
D) Per capital income
E) Budget deficits

Question 36

In a market system, which of the following factors determines a consumers's ability to pay for a good or service?

A) Technology
B) Consumer's income
C) Cost of production
D) Consumer's wants
E) Market supply

Question 37

Which of the following is a defining feature of a multinational firm?

A) It exports goods and services to foreign nations.
B) It develops joint ventures with foreign firms.
C) It owns and operates production facilities in more than one country.
D) It employs agents in various countries to sell their products abroad.
E) It holds patents on its products and services.

Question 38

Which of the following institutions form the private sector in an economy?

A) Only households
B) Households and the government
C) Households, businesses, and foreign firms
D) Households and businesses only
E) Foreign investors and foreign governments

Question 39

Which among the following industrial countries has the highest per capita income as measured by the World Bank in 2009?

A) Kuwait
B) Norway
C) The United States
D) Saudi Arabia
E) Japan

Question 40

Which of the following is true of investment spending in the U.S. economy?

A) Investment spending in 2009 was higher than in 2006.
B) Investment spending was almost double of household spending.
C) Businesses had reduced expenditures on capital goods in 2008 and 2009.
D) Investment spending exhibited a more or less steady increase between 1959 and 2009.
E) Investment spending fluctuated relatively less than consumption.

Question 41

The _____ illustrates the money flows that connect the various sectors in the economy.

A) aggregate demand and aggregate supply diagram
B) circular flow diagram
C) liquidity preference theory
D) income-expenditure diagram
E) quantity theory of money

Question 42

NARRBEGIN: Scenario 4.1
Scenario 4-1
In a given year, country A exported $12 million worth of goods to country B and $6 million worth of goods to country C; country B exported $4 million worth of goods to country A and $7 million worth of goods to country C; and country C exported $5 million worth of goods to country A and $2 million worth of goods to country B.
According to Scenario 4-1, country C has net exports of:

A) zero.
B) $13 million.
C) $6 million.
D) $13 million.
E) $6 million.

Question 43

In 2009, combined government spending in the U.S. economy was about:

A) $50 billion.
B) $500 billion.
C) $12,163 billion.
D) $5,000 billion.
E) $2,012 billion.

Question 44

The term net exports refers to:

A) the situation when a country's exports exceed its imports.
B) the situation when a country's imports exceed its exports.
C) the shortages that result when a country imposes a price ceiling.
D) the shortages that result when a country imposes a price floor.
E) the difference between the value of exports and the value of imports.

Question 45

Total government spending in the U.S. economy was around _____ of GDP in the financial year 2010.

A) 5 percent
B) 36 percent
C) 25 percent
D) 44 percent
E) 16 percent

Question 46

When the government's spending is less than tax revenue, it implies that:

A) the government budget is balanced.
B) the government is running a deficit.
C) there is a budget surplus.
D) there is a higher chance of default by the government.
E) the government needs to borrow from the central bank.

Question 47

Which of the following is true of Western Europe, Japan, Canada, Mexico, and China taken together?

A) All these countries are classified as high-income countries by the World Bank.
B) They are all members of the North American Free Trade Agreement [NAFTA].
C) All these countries are considered developed countries by the World Bank.
D) They are collectively the largest trade partners of the U.S.
E) They are the five largest exporters of agricultural produce in the world.

Question 48

The public sector of the U.S. economy includes:

A) the federal, the state, and the local government.
B) multinational corporations and the federal government.
C) the Federal Reserve bank of the U.S.
D) the judiciary and the federal government.
E) households.

Question 49

A surplus in a country's trade balance means that:

A) net exports exceed transfer payments.
B) the country's currency is over-valued.
C) the value of net exports is positive.
D) imports into the country exceed exports.
E) domestic savings exceeds domestic investment.

Question 50

Which of the following is true of the U.S. government?

A) The government in the United States takes the form of a single-party state where opposition parties are not legally allowed to take power.
B) The size of the federal government in the U.S. has been declining since 1930.
C) Employment in the government sector currently exceeds employment in the manufacturing sector.
D) The U.S. federal government plays a much smaller role than state and local government due to states' rights.
E) The service sector of the U.S. economy employs more number of people than the U.S. government.

Question 51

Which of the following is true of fiscal spending at the federal, state, and local levels of the U.S. government?

A) In 2009, total government spending equalled around $1 billion.
B) Investment expenditure in the U.S. exceeds the total spending at all levels of government.
C) Government spending at federal, state, and local levels declined steadily from the 1960s until about 1980.
D) Through the 1950s and 1960s, the U.S. government maintained a balanced budget.
E) Federal government spending exceeds state and local government spending in the U.S.

Question 52

The income transferred by the government from a citizen who is earning income to another citizen is referred to as:

A) fiscal spending.
B) transfer payment.
C) budgetary allowance.
D) taxation.
E) internal debt.

Question 53

Which of the following statements about transfer payments is true?

A) Transfer payments are not included in total government expenditures.
B) Transfer payments involve the international remittance of funds.
C) Transfer payments refer to the transfer of money by the commercial banks to the people.
D) Transfer payments are made by the government to taxpayers.
E) Transfer payments are made when governments purchase goods and services.

Question 54

A trade deficit occurs when:

A) a country imposes a price floor.
B) a country's imports exceed its exports.
C) a country imposes a price ceiling.
D) a country's exports exceed its imports.
E) when the domestic product market is in disequilibrium.

Question 55

In a market economy, _____ own(s) all the basic resources or factors of production.

A) households
B) the federal government
C) the Federal Reserve bank
D) the local government
E) business firms

Question 56

NARRBEGIN: Scenario 4.1
Scenario 4-1
In a given year, country A exported $12 million worth of goods to country B and $6 million worth of goods to country C; country B exported $4 million worth of goods to country A and $7 million worth of goods to country C; and country C exported $5 million worth of goods to country A and $2 million worth of goods to country B.
According to Scenario 4-1, country A has net exports of:

A) $18 million.
B) $8 million.
C) $13 million.
D) $9 million.
E) $6 million.

Question 57

An import is defined as:

A) a purchase of goods or services from another country.
B) a business transaction between two or more domestic firms.
C) a sale of goods or services to another nation.
D) a tariff on foreign merchandise.
E) a trade agreement between two industrial countries.

Question 58

Which of the following is true of U.S. net exports prior to the 1960s?

A) Since most of the oil needs of the U.S. were met through imports, imports exceeded exports prior to the 1960s in the U.S.
B) Prior to the 1960s, exports from the U.S. more or less equalled imports into the U.S.
C) The U.S. was running a trade surplus prior to the 1960s.
D) Prior to the 1960s, the U.S. ran twin deficits- both a current account deficit as well as a budget deficit.
E) Since the U.S. dollar was overvalued prior to the 1960s, the U.S. exported less than it imported.

Question 59

Which of the following observations is true of the federal budget between 1960 and 2010?

A) The federal budget was in deficit in the early 1960s.
B) Between 1960 and 1970 the federal budget deficit reflected a sharp increase.
C) The federal budget was in surplus between 1970 and 1980.
D) The federal budget deficit was the highest in the late 1990s.
E) The federal budget deficit was lower than 600 billion dollars in 2010.

Question 60

NARRBEGIN: Scenario 4.1
Scenario 4-1
In a given year, country A exported $12 million worth of goods to country B and $6 million worth of goods to country C; country B exported $4 million worth of goods to country A and $7 million worth of goods to country C; and country C exported $5 million worth of goods to country A and $2 million worth of goods to country B.
According to Scenario 4-1, country B is running a: ____ with country A and a ____ with country C.

A) trade deficit with country A and a trade surplus with country C.
B) trade surplus with both countries A and C.
C) trade surplus with country A and a trade deficit with country C.
D) trade deficit with voth countries A and C.
E) balanced trade with country A and a trade deficit with country C.

Question 61

An unmarried couple holding joint title to their condominium constitutes a household.

Question 62

Which of the following flows from the government to the households, according to the circular flow diagram?

A) Goods and services
B) Resources of production
C) Taxes
D) Government services
E) Loans

Question 63

The circular flow of income model shows:

A) the flow of output and income within one sector of the economy.
B) how different sectors of the economy are linked together.
C) that income is rarely equal to output.
D) how business firms interact with one another.
E) how businesses sell their resource services to households.

Question 64

According to the theory of consumer sovereignty, the preferences of the business sector alone determines the equilibrium price and output of a good or service in a market.

Question 65

According to the circular flow diagram, with households and firms as the only two sectors, money saved by the households reenters the economy in the form of:

A) human capital.
B) investment spending.
C) fiscal spending.
D) consumption spending.
E) deposits.

Question 66

The replacement of film-based still cameras by digital cameras and recently by digital SLR cameras exemplifies creative destruction.

Question 67

Financial intermediaries are best described as:

A) informal institutions that provide funds to the government to manage budget deficits.
B) institutions that accept deposits and make loans.
C) institutions that control the money supply in the economy.
D) institutions that invest in various business ventures.
E) individuals who manage their client's investment portfolios.

Question 68

According to the circular flow of income, households interact with business firms by:

A) buying resource services from business firms.
B) paying wages for the use of labor.
C) selling goods and services to firms.
D) receiving payments from firms for use of resource services.
E) paying rent to firms for the use of land.

Question 69

In the market for digital photo frames, any change in the price of a digital photo frame would lead to a change in the overall demand for other photo frames.

Question 70

NARRBEGIN: Figure 4.2
The figure given below represents the circular flow of income between households, firms, financial intermediaries, and foreign countries.
Figure 4.2

Refer to Figure 4.2. What is the total savings of the household sector?

A) $35,000
B) $25,000
C) $17,500
D) $42,500
E) $45,000

Question 71

Which of the following will invariably be illustrated by a circular flow of income diagram?

A) The value of foreign net output
B) Trade deficit always equals payments for resource services
C) The value of output is equal to income
D) The value of private production always equals the value of household income
E) The value of net exports is positive

Question 72

NARRBEGIN: Figure 4.2
The figure given below represents the circular flow of income between households, firms, financial intermediaries, and foreign countries.
Figure 4.2

Refer to Figure 4.2. Assume investment spending decreases by $4,000. Everything else being the same, what must be the new value of net trade flows in order to maintain total expenditures on business firms' output at $35,000?

A) -$2,500
B) -$1,500
C) $3,500
D) $6,500
E) $7,500

Question 73

NARRBEGIN: Figure 4.2
The figure given below represents the circular flow of income between households, firms, financial intermediaries, and foreign countries.
Figure 4.2

Refer to Figure 4.2. Calculate the total amount of consumption expenditure.

A) $7,500
B) $25,000
C) $10,000
D) $42,500
E) $35,000

Question 74

NARRBEGIN: Figure 4.2
The figure given below represents the circular flow of income between households, firms, financial intermediaries, and foreign countries.
Figure 4.2

Refer to Figure 4.2. Suppose households reduce saving to $7,000. Everything else held constant, consumption spending must now be:

A) $18,000.
B) $22,500.
C) $28,000.
D) $32,000.
E) $38,000.

Question 75

Which of the following is not considered a financial intermediary?

A) A commercial bank
B) A savings and loan association
C) The U.S. Department of Commerce
D) A credit union
E) An investment bank

Question 76

The circular flow of income model shows that, if households and firms were the only two sectors in the economy, then:

A) income received by households is equal to the value of output produced by firms.
B) households directly lend a part of their savings to firms.
C) firms own the resources of production and rent it out to households.
D) resources used in production flow from households to firms.
E) payments for goods and services flow from firms to households.

Question 77

A trade deficit involves:

A) net flows of goods from foreign countries to the home country government.
B) net money flows from the foreign country firms to the home country government.
C) net money flows from the domestic firms to the home country government.
D) net money flows from the foreign country firms to the home country.
E) net flows of goods from foreign countries to the firms of the home country.

Question 78

Consider the circular flow of income model with households and firms as the two sectors. If business spending (investment) were suddenly decreased due to expectations of a dismal economy in the near future, then because total purchases would suddenly be reduced:

A) the income created would be reduced, and the value of output and the value of income would decline.
B) the income created would be reduced, and the value of output and the value of income would no longer be equal.
C) the income created would be reduced, and the value of output and the value of income would increase.
D) the income created would be reduced, and the value of output and the value of income would decline until the foreign sector was introduced.
E) the household sector would try to save more.

Question 79

Households and firms pay taxes to the government to:

A) increase their consumption spending.
B) finance the country's import bill.
C) increase their savings.
D) improve their standard of living.
E) finance government expenditures.

Question 80

Balance in international trade suggests that:

A) a trade surplus exists.
B) there is a net flow of goods and services from foreign countries to domestic firms.
C) a trade deficit exists.
D) domestic firms buy more foreign products than they sell.
E) the value of net exports is zero.