Which statement best describes the field of economics?
The study of how people make choices when resources are limited
✓
The study of how money is printed and circulated
The study of how companies raise their stock prices
The study of how governments collect taxes
Correct Answer
The study of how people make choices when resources are limited
Economics studies how individuals, businesses and societies make decisions when resources cannot satisfy every want. The study of how money is printed and circulated describes only one narrow topic within the field. The study of how companies raise their stock prices belongs to finance, not to economics as a whole. The study of how governments collect taxes is one policy question, not the definition of the discipline.
Category: Scarcity and Choice
Question 2
A town council has enough funds this year to repair its roads or build a new library, but not both. Which economic concept does this situation most directly illustrate?
Globalization
Scarcity
✓
Division of labor
Economies of scale
Correct Answer
Scarcity
Scarcity means wants exceed the resources available, so the council must give up one project to fund the other. Globalization is the growth of economic, political and cultural connections across national borders. Division of labor is the splitting of production into separate tasks. Economies of scale describe falling average cost as output grows.
Category: Scarcity and Choice
Question 3
In 1776, which thinker published The Wealth of Nations, a work often viewed as the start of economics as a formal field of study?
Karl Marx
John Maynard Keynes
Adam Smith
✓
Milton Friedman
Correct Answer
Adam Smith
Adam Smith published The Wealth of Nations in 1776, and it is widely treated as the founding work of modern economics, including its analysis of the division of labor. Karl Marx wrote in the 1800s, long after 1776. John Maynard Keynes did his major work in the 1900s. Milton Friedman was a twentieth-century economist.
Category: Specialization and Trade
Question 4
At a sandwich shop, one worker takes orders, a second assembles the sandwiches, and a third runs the cash register. What does this arrangement illustrate?
Scarcity
Globalization
Fiscal policy
Division of labor
✓
Correct Answer
Division of labor
Division of labor splits the production of a good or service into separate tasks performed by different workers, as the shop does with ordering, assembly and payment. Scarcity is the gap between wants and available resources, not a way of organizing work. Globalization is the growth of economic, political and cultural connections across national borders. Fiscal policy is government decisions about spending and taxes.
Category: Specialization and Trade
Question 5
A car factory's average cost per car falls sharply as it expands production from 100 cars a year to 50,000 cars a year. Which term describes this pattern?
Economies of scale
✓
Specialization
Globalization
Scarcity
Correct Answer
Economies of scale
Economies of scale occur when the average cost of producing each unit declines as total output increases, which is exactly the pattern described. Specialization is workers or firms focusing on particular tasks, which can help create the savings but is not the name for falling average cost. Globalization is the growth of economic, political and cultural connections across national borders. Scarcity is the condition of wants exceeding available resources.
Category: Specialization and Trade
Question 6
Which is one reason that specialization raises a society's total output?
Workers who switch tasks often avoid boredom and work harder
Workers who repeat a task learn to do it faster and better
✓
Government planners can assign every worker to a task
Raw materials become cheaper whenever workers specialize
Correct Answer
Workers who repeat a task learn to do it faster and better
Workers who focus on one task build skill through repetition and often find better methods, so output rises, a point Adam Smith stressed. Workers who switch tasks often avoid boredom and work harder is the opposite of the specialization argument. Government planners can assign every worker to a task describes central planning, not a source of the productivity gains. Raw materials become cheaper whenever workers specialize is not one of the sources of the gain; the gains come from skill, matching tasks to talents, and economies of scale.
Category: Specialization and Trade
Question 7
Why does an economy in which workers specialize depend on trade?
Specialized workers cannot be paid wages in money
Specialization makes every good more scarce than before
Each worker produces a narrow range of goods and must buy the rest
✓
Specialization removes the need for buyers and sellers
Correct Answer
Each worker produces a narrow range of goods and must buy the rest
A specialized worker makes only a small part of what he or she needs and uses the income earned to buy the rest from others, so specialization requires trade. Specialized workers cannot be paid wages in money is false, since they are typically paid wages. Specialization makes every good more scarce than before is backward, because specialization raises total output. Specialization removes the need for buyers and sellers is also backward, since it makes markets more important.
Category: Specialization and Trade
Question 8
An economist studies how a single bakery decides how many workers to hire and what price to charge for its bread. Which branch of economics does this work belong to?
Macroeconomics
International finance
Monetary economics
Microeconomics
✓
Correct Answer
Microeconomics
Microeconomics studies the decisions of individual agents such as households, workers and business firms, including a firm's hiring and pricing choices. Macroeconomics looks at the economy as a whole, such as national unemployment and inflation. International finance studies exchange rates and capital flows between countries. Monetary economics studies money, banking and central bank policy.
Category: Micro and Macro
Question 9
Which term names the trend toward expanding economic, political, and cultural connections among people around the world, including buying and selling that increasingly crosses national borders?
Globalization
✓
Specialization
Privatization
Inflation
Correct Answer
Globalization
Globalization is the trend toward expanding economic, political and cultural connections around the world, including buying and selling that increasingly crosses national borders. Specialization is workers or firms focusing on particular tasks, which can happen within one country. Privatization is the transfer of government-owned businesses to private owners. Inflation is a rise in the overall price level.
Category: Globalization
Question 10
Which set lists three goals commonly used to judge the health of a nation's overall economy?
Rising inflation, low taxes, high interest rates
Rising living standards, low unemployment, low inflation
✓
Rising unemployment, falling wages, high tariffs
Falling output, low inflation, high unemployment
Correct Answer
Rising living standards, low unemployment, low inflation
A healthy macroeconomy shows growth in the standard of living, low unemployment and low inflation. Rising inflation, low taxes, high interest rates includes rising inflation, which erodes purchasing power. Rising unemployment, falling wages, high tariffs describes a weakening economy. Falling output, low inflation, high unemployment pairs one good outcome with two signs of recession.
Category: Micro and Macro
Question 11
In the United States, which institution conducts monetary policy?
Congress
The Department of Labor
The Federal Reserve
✓
The Supreme Court
Correct Answer
The Federal Reserve
Monetary policy, which affects interest rates and bank lending, is conducted by a nation's central bank, and in the United States that is the Federal Reserve. Congress shares responsibility for fiscal policy, meaning spending and taxes, with the president. The Department of Labor collects labor statistics and enforces labor laws. The Supreme Court interprets the law and does not set economic policy.
Category: Economic Policy
Question 12
A national government raises income tax rates and cuts its spending on highways. What type of economic policy is this?
Monetary policy
Antitrust policy
Trade policy
Fiscal policy
✓
Correct Answer
Fiscal policy
Fiscal policy is government policy on spending and taxes, so a tax increase combined with a spending cut is fiscal policy. Monetary policy works through interest rates and bank lending and is run by a central bank. Antitrust policy deals with monopolies and competition among firms. Trade policy concerns tariffs and other rules for buying and selling across borders.
Category: Economic Policy
Question 13
Why do economists build theories and models?
To reduce a complex situation to its essential features
✓
To describe every detail of an economy exactly
To avoid the need for any real-world data
To predict the future with complete certainty
Correct Answer
To reduce a complex situation to its essential features
A theory or model is a deliberate simplification that keeps only the features needed to understand an issue. To describe every detail of an economy exactly would defeat the purpose, since a model that includes everything is as hard to understand as reality. To avoid the need for any real-world data is wrong, because models are tested against data. To predict the future with complete certainty is beyond any economic model.
Category: Theories and Models
Question 14
In the circular flow diagram, which group sells labor in the labor market?
Firms
Households
✓
Banks
Foreign buyers
Correct Answer
Households
In the circular flow diagram, households supply labor and other resources to firms and receive wages, salaries and other factor payments. Firms are the buyers of labor in that market. Banks are not one of the two groups in the basic diagram. Foreign buyers are also left out of the basic diagram, which ignores trade with other countries.
Category: Theories and Models
Question 15
In the basic circular flow model, what moves from buyers to sellers in the goods and services market?
Labor and other productive resources
Wages, salaries and other factor payments
Spending that becomes revenue for producers
✓
Finished products and services
Correct Answer
Spending that becomes revenue for producers
In the goods and services market, households buy output, and their spending becomes the revenue of firms. Labor and other productive resources flow from households to firms in the labor market. Wages, salaries and other factor payments flow from firms to households in the labor market. Finished products and services flow from sellers to buyers, the opposite direction.
Category: Theories and Models
Question 16
Which part of a real economy does the basic circular flow diagram leave out?
Households
Firms
The labor market
Financial markets
✓
Correct Answer
Financial markets
The basic circular flow diagram simplifies the economy to households and firms in two markets, so it omits financial markets as well as government and foreign trade. Households are one of the two groups in the diagram. Firms are the other group. The labor market is one of the two markets it shows.
Category: Theories and Models
Question 17
In which type of economic system do most people farm with long-established methods and children usually follow their parents' occupations?
Traditional economy
✓
Market economy
Command economy
Mixed economy
Correct Answer
Traditional economy
A traditional economy is typically agricultural and runs on custom, with occupations passed down within families and production done the way it always has been. A market economy relies on decentralized decisions by private owners responding to demand. A command economy follows decisions handed down by a government authority. A mixed economy combines market and command elements.
Category: Economic Systems
Question 18
In which type of economic system does a central authority decide what is produced, how it is produced, and what wages are paid?
Traditional economy
Command economy
✓
Market economy
Underground economy
Correct Answer
Command economy
In a command economy, economic decisions are handed down from government authority, which also owns the resources. A traditional economy follows custom rather than central directives. A market economy leaves these decisions to private individuals and businesses. An underground economy is a set of transactions that break government regulations, not a system for organizing production.
Category: Economic Systems
Question 19
Which feature defines a market economy?
A planning agency sets most prices and wages
Custom decides what each family produces
Private owners make decentralized decisions about resources
✓
The state owns most factories and farms
Correct Answer
Private owners make decentralized decisions about resources
In a market economy, private individuals and groups own and operate resources and businesses, and decisions are decentralized, guided by what buyers demand. A planning agency sets most prices and wages describes a command economy. Custom decides what each family produces describes a traditional economy. The state owns most factories and farms is another feature of a command economy.
Category: Economic Systems
Question 20
How do economists usually classify the economy of the United States?
As a pure command economy
As a traditional economy
As a free market with no regulation
As a mixed economy that leans toward the market end
✓
Correct Answer
As a mixed economy that leans toward the market end
The U.S. economy is market-oriented, but government also sets rules, collects taxes and provides some services, so it is a mixed economy near the market end. As a pure command economy is wrong because private owners make most production decisions. As a traditional economy is wrong because production is not organized around custom. As a free market with no regulation is wrong because every market operates under some government rules.
Category: Economic Systems