Even a wealthy country faces scarcity, because its resources are limited while the wants of its people are not.
Correct Answer
True
True. Scarcity exists whenever wants exceed the resources available, and no country has unlimited labor, land, tools or raw materials. Wealthy nations still face trade-offs, such as spending on schools versus spending on police and fire protection.
Category: Scarcity and Choice
Question 2
Economics is primarily the study of money and the stock market.
Correct Answer
False
False. Economics is the study of how people make choices under conditions of scarcity. Money and financial markets are topics within it, but the field covers choices about time, work, production, education and much more.
Category: Scarcity and Choice
Question 3
In Adam Smith's pin factory example, dividing pin making into separate tasks let a small team produce far more pins than the same workers could make working alone.
Correct Answer
True
True. Smith described pin making as a series of distinct operations and showed that a small team, each specializing in a few steps, could produce many thousands of pins a day. A single worker doing every step could make only a handful.
Category: Specialization and Trade
Question 4
Economies of scale occur when the average cost of producing each unit rises as total output increases.
Correct Answer
False
False. Economies of scale occur when the average cost of producing each unit falls as total output increases. A large factory can use specialized equipment and assembly lines that a small one cannot.
Category: Specialization and Trade
Question 5
Microeconomics and macroeconomics are complementary ways of looking at the same economy.
Correct Answer
True
True. Microeconomics focuses on individual households and firms, while macroeconomics looks at the economy as a whole, and each depends on the other. A firm's hiring decisions depend on whether the overall economy is growing, and the overall economy reflects the decisions of households and firms.
Category: Micro and Macro
Question 6
Fiscal policy refers to changes in interest rates and in the availability of bank credit.
Correct Answer
False
False. Fiscal policy involves government spending and taxes. Policy that works through interest rates and bank lending is monetary policy, which a central bank conducts.
Category: Economic Policy
Question 7
In the United States, fiscal policy decisions are made by Congress together with the executive branch.
Correct Answer
True
True. Fiscal policy is set by a nation's legislative body along with the executive. In the United States the executive branch proposes the federal budget, and Congress passes the spending and tax laws.
Category: Economic Policy
Question 8
In the circular flow diagram, households receive wages and salaries from firms in the goods and services market.
Correct Answer
False
False. Households receive wages, salaries and other factor payments in the labor market, where they sell their labor to firms. In the goods and services market, households are the buyers and pay firms for what they produce.
Category: Theories and Models
Question 9
Economists often use the words theory and model interchangeably, although a model is sometimes viewed as the more applied of the two.
Correct Answer
True
True. Both terms describe a simplified representation of how variables interact. Strictly, a theory is more abstract and a model is more applied or empirical, and models are often used to test theories.
Category: Theories and Models
Question 10
A good economic theory includes every detail of the real-world situation it describes.
Correct Answer
False
False. A good theory is simple enough to understand while still capturing the key features of the situation. Including every detail would make it as complicated as reality and defeat its purpose.
Category: Theories and Models
Question 11
The underground economy consists of transactions in which buyers and sellers break one or more government regulations.
Correct Answer
True
True. When government regulations limit or forbid certain transactions, some buyers and sellers trade anyway outside the law. These transactions form the underground economy, sometimes called a black market.
Category: Economic Systems
Question 12
In a traditional economy, rapid technological change and steady economic progress are typical.
Correct Answer
False
False. A traditional economy runs on custom, with goods produced the same way they always have been, so there is typically little economic progress. Rapid change is more typical of market-oriented economies.
Category: Economic Systems
Question 13
Most real-world economies are mixed, combining elements of market and command systems.
Correct Answer
True
True. Nearly every economy blends private decision making with some government direction, and some also keep traditional elements. Economies differ mainly in where they fall between the market and command ends of the spectrum.
Category: Economic Systems
Question 14
In a market economy, a central planning board decides how much of each good businesses will supply.
Correct Answer
False
False. In a market economy, decisions are decentralized: private owners decide what to produce based on what buyers demand. A central planning board making these decisions is a feature of a command economy.
Category: Economic Systems
Question 15
Exports are goods and services produced domestically and sold to buyers in other countries.
Correct Answer
True
True. Exports are products made at home and sold abroad. Their counterpart, imports, are products made abroad and sold domestically.
Category: Globalization
Question 16
Gross domestic product measures the total amount of money a national government spends in a year.
Correct Answer
False
False. Gross domestic product measures the size of total production in an economy. Government spending is only one part of the economy and is not what GDP measures.
Category: Globalization
Question 17
Market-oriented economies still depend on government rules, such as rules that enforce contracts and protect property.
Correct Answer
True
True. No market is completely free. Markets need a basic set of rules, such as protecting property, preventing fraud and violence, and enforcing contracts, to keep the playing field even.
Category: Economic Systems
Question 18
Specialization reduces a society's need to trade, because each worker produces everything he or she consumes.
Correct Answer
False
False. Specialization increases the need to trade. A specialized worker produces only a narrow range of goods and uses the income earned to buy everything else from others.
Category: Specialization and Trade
Question 19
Globalization involves financial investment that crosses national borders as well as trade in goods and services.
Correct Answer
True
True. Globalization covers more than shipping products from one country to another: money also flows across borders as people and firms invest in other countries. It also includes growing political and cultural ties among nations.
Category: Globalization
Question 20
Macroeconomics focuses on the decisions of individual households and individual business firms.
Correct Answer
False
False. Macroeconomics studies the economy as a whole, including growth, unemployment, inflation and the trade balance. The study of individual households and firms is microeconomics.
Category: Micro and Macro