Multiple Choice - Identify the choice that best completes the

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Multiple Choice - Identify the choice that best completes the

     Final Subjective Examination Review - Honors Economics

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; A business doubled the price of a product in order to increase profits. If the demand for the product is elastic,

    then a dramatic decline in revenues will follow.

    ; A demand schedule shows a listing of the various quantities demanded of a particular product at all prices that

    might prevail in the market.

    ; A market economy does not provide for everyone's basic needs (some people will not make it). ; A popular model used to illustrate the concept of opportunity cost is the production possibilities frontier.

    ; According to John Maynard Keynes's theory of the multiplier-accelerator effect, a decline in investment

    spending will lead to a downward spiral of the economy.

    ; Actions in one part of the country or world that have an economic impact on what happens elsewhere are

    examples of economic interdependence.

    ; All levels of government combined consume about one-third of the nation's output. ; An advantage of a corporation is that owners have limited liability for debt.

    ; An economy at its production possibilities frontier is operating at full potential. ; An example of a market economy is the United States, whereas the Inuit have a traditional economy and North

    Korea and the former Soviet Union are examples of command economies.

    ; An example of mandatory spending (government does not have a choice) is financing for interest payments on

    the federal debt.

    ; An increase in the price of cameras results in a decrease in the demand for film. The two products are


    ; An increase in the price of milk causes a decrease in the demand for cereal. The two products are


    ; Ann earns $10,000 annually and pays a tax of $1,000. Jerome earns $60,000 during the same period and pays

    taxes of $20,000. The tax they both paid was a progressive tax.

    ; Because a modest price increase has little or no effect, the demand for the product is inelastic.

    ; Consumers ultimately determines the products that a free enterprise economy produces. ; Consumers' willingness to replace a costly item with a less costly item is an example of the substitution effect.

    ; Decreases in aggregate supply can be caused by tightening of immigration laws.

    ; Economists think of prices as a “system” because they help buyers and sellers allocate resources between


    ; For most products and services, increased price results in demand for fewer products.

    ; In a general partnership, partners usually draw up legal papers called articles of partnership. ; In a market economy, a high price is a signal for producers to produce more and buyers to buy less, while a

    low price is a signal for producers to produce less and buyers to buy more (the price system!).

    ; In its direct role as an economic organization, American government owns and manages public utilities.

    ; In the short run, an increase in the money supply results in lower interest rates.

    ; Manufactured goods needed to produce other goods and services are called capital goods.

    ; Non-profit organizations may provide goods and services to members.

    ; Rationing is often viewed as unfair, rationing creates high administrative costs, and rationing decreases the

    incentive to work.

    ; Rent payments and property taxes would be counted as fixed costs.

    ; Since the colonial period, the census has revealed a trend toward smaller households.

    ; The “incidence of a tax refers to those who bear the final burden of taxation (who pays for it!). ; The alternative minimum tax requires people to pay a minimum tax of 20 percent.

    ; The benefits of long-term economic growth include an increase in the standard of living, an increase in

    employment, and a boost in economic growth of other nations.

    ; The concept of voluntary exchange means people freely and willingly engage in market transactions. ; The Council of Economic Advisers advises the president on economic developments and strategy.

    ; The dollar value of all final goods and services and the most comprehensive measure of a country's total

    production output is Gross Domestic Product (GDP).

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    ; The Equal Pay Act of 1963, the Civil Rights Act of 1964, and set-aside contracts can be used to establish more

    equal pay between men and women.

    ; The FDIC was established to protect the savings of the American people.

    ; The first federal budget surplus in three decades occurred in 1998.

    ; The first federal legislation to exempt unions from the antitrust laws was the Clayton Antitrust Act.

    ; The government's role in a mixed economy is that it is the regulator charged with preserving competition. ; The incidence of a tax (who pays for it) can more effectively be shifted from the supplier to the consumer if

    the demand curve is inelastic (and consumers will pay for it even if the price is increased due to the tax). ; The invisible barrier that hinders women and minorities from advancement up the corporate ladder is known as

    the glass ceiling.

    ; The largest category of state spending is intergovernmental expenditures.

    ; The level of profit-maximizing output is reached when marginal cost is equal to marginal revenue.

    ; The local chamber of commerce works to promote the welfare of its members and the community.

    ; The minimum wage is an example of a federal law that supports economic equity.

    ; The minimum wage was established by the Fair Labor Standards Act and the first minimum wage was set at

    $0.25/hour in 1939. When adjusted for inflation, the minimum wage had the most purchasing power in 1968. ; The money used to buy the tools and equipment needed for production is known as financial capital.

    ; The nation's monetary policy often comes under attack from politicians.

    ; The problem with Continental dollars (printed by Congress during the revolution) was that so much was

    printed they became nearly worthless.

    ; The Securities and Exchange Commission (SEC) regulates the sale of stock in a corporation.

    ; The sequence for the approval of the federal budget is president to Congress back to president.

    ; The situation in which some necessities have little value while some non-necessities have a much higher value

    is known as paradox of value.

    ; The study of economics is important because it enables us to become better decision makers. ; The Taxpayer Relief Act of 1997 did little to benefit people without children or capital gains. ; The theory that wages are based on the supply and demand for a worker's skills is the traditional theory of


    ; Transfer payments from the government to individuals or other levels of government might be used for Social

    Security, interstate highway construction, or subsidies to farmers.

    ; Unlike a general partnership, in a limited partnership the inactive partner has limited liability for the business's


    ; Unlike many politicians, the Fed (Federal Reserve System) is concerned about the long-run health of the


    ; When a customer's need for a product is not urgent, demand tends to be elastic.

    ; When a manufacturer of pain medication reduced the price of the medication by 30%, profits declined by

    almost exactly 30%. Demand for the product is unit elastic.

    ; When labor and management ask a third party to collect information about a dispute and present non-binding

    recommendations, they are using fact-finding.

    ; Workers with knowledge-based education and managerial skills are professional labor.

“The study of economic theory is not defensible on aesthetic grounds it hardly rivals in elegance the

    mathematics or physics our sophomores learn. The theory is studied only as an aid in solving real problems, and it is good only in the measure that it performs this function.”

    George J. Stigler, "Monopolistic Competition in retrospect," in Five Lectures on Economic Problems,

    London: Longmans, Green and Co., 1949, p. 22.

     According to this author, a good economic theory is one that helps solve real problems.

    Diaguita Indians have lived in this region for generations...We grow beans, corn and potatoes on the mountain slopes. To irrigate these crops, we still use the channels built centuries ago by our ancestors.

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    We also breed llamas...In our community, the more llamas you own, the richer you are.

    In the economic system described in this passage, answers to the basic economic questions would be determined

    by habit and custom.

    Study the graph above. Suppose this nation starts with producing all military goods. It then decides to produce a mix of civilian and military goods represented by point B. What represents the cost in military goods given up? Is it the vertical distance from point A to point x?

     In the production possibilities frontier shown in this graph, increased productivity caused production to move

    from point b to point d. This production possibilities frontier is depicting economic growth.

In this production possibilities frontier, factories that are available but idle could cause production to move

    from point a to point e.

    Too much marketing today focuses on awareness rather than reasons to buy. In the old days, awareness

    advertising was more effective. There was less competition. All you had to worry about was whether or

    not people remembered your product. As technology and more kinds of media have come about, it’s no

    longer enough to be remembered. The consumer has too many choices. Your marketing has to send the

    message that you are relevant. You need to be sending reasons to buy.

    Source: Business Week, June 7, 1999

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This passage advises advertisers to focus on the economic concept of utility.

    GDP = C + I + G + F

    In this economic model, the “F” represents the difference between the dollar value of goods sent abroad and goods purchased from abroad.

    “[E]very individual, therefore, endeavours as much as he can [to direct his resources toward his own

    business] so that its produce may be of greatest value; every individual...neither intends to promote the

    public interest, nor knows how much he is promoting it...He intends only his own gain, and he is in this...led

    by an invisible hand to promote an end which was no part of his intention...By pursuing his own interest he

    frequently promotes that of the society more effectually than when he really intends to promote it.”

    From Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nation, 1776.

    According to Adam Smith, profit directs the choices business people make about how to use their resources.

     This cartoonist would like government to interfere with business less.

    In the 20th century, the Soviet Union collapsed because its command-and-control economy couldn’t keep

    up with the West’s free market. In the 21st century, the same fate will befall companies whose CEOs

    [chief executive officers] attempt to control everything. In a world that is becoming ever more chaotic and

    dependent on brainpower, teams at the top will make more sense than a single outrageously paid CEO

    who sits behind a “buck stops here” plaque.

    Source: “The Global Corporation Becomes the Leaderless Corporation,” Business Week, August 30,


    The author of this passage believes that global corporations should have leadership teams.

    Demand Schedule for CDs

    Price per CD Quantity Demanded (in millions)

    $10 1,100

    $12 900

    $14 700

    $16 500

    $18 300

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    $20 100

    If you were to graph this demand schedule, the demand curve would slope downward from left to right.

    Like a driver applying a quick tap of the brakes, the Federal Reserve yesterday raised the cost of

    borrowing to keep the U.S. economy from running ahead too fast. As a result, consumers can

    expect to pay a little more when buying homes, cars, and other big-ticket items, as well as when

    carrying credit-card balances. Source: The Columbus

    Dispatch, July 1, 1999.

    The Fed’s action in the passage cause the result described because banks will raise their loan interest rates.

     According to this demand curve, if the price of movie videos increases from $14 to $16, then the

    quantity demanded will fall from 600 to 400.

     An increase in population could cause the movement (shift) shown in the graph, so that at any price the

    quantity demanded will be higher than before the shift.

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    A decrease in income could cause the movement (shift) shown in this graph, so that at any price the quantity demanded will be lower than before the shift.

    Rice is what you’ll probably end up with these days if your local McDonald’s is in Indonesia. With the collapse of the Indonesian currency, the rupiah, in 1998, potatoes...have quintupled in price. That means rice is turning with an increasing frequency as an alternative to the french fry.... It’s not hard to fathom why fries are an endangered menu item says Jack Greenberg, CEO of McDonald’s: “No one can afford them.”

    Source: Reprinted from December 14, 1998 issue of Business Week, by special permission, copyright ?.

    Based on this passage, McDonald’s is serving rice in its Indonesian restaurants because of an increase in the price of a substitute (potatoes).

    The movement in the graph shows that the quantity demanded of butter decreased at all prices (curve shift) because the price of margarine decreased. These are substitute products.

    It is always a difficult problem knowing how best to price a product.... Was it best to charge a high price and sell a smaller number...or charge a lower price and aim for volume? [Noumenon Corporation] decided to [test] the market for its new accounting program at different prices. The firm...raised prices in increments of

    $20 all the way up to $210. They found that total revenue was maximized at a price of $90. As a result of this experiment, they decided the Intuit Accounting program at $89.95, much lower than the prices of

    competing software programs.

    Source: Adapted from The Study of Economics, by Turley Mings, Dushkin Publishing.

    In the experiment described in the passage, Noumenon Corporation was trying to determine the price that would bring in the most money, the profit maximizing point.

    Supply Schedule for CDs

    Price per CD Quantity supplied (in millions)

    $10 100

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    $12 300

    $14 500

    $16 700

    $18 900

    $20 1,100

    If you were to graph this supply schedule, the supply curve would slope upward from left to right.

     In 1980, women were earning approximately 40% less than men because it shows that they earned 60% of whatever men earned. Also according to the graph, if men in general were earning approximately $20,000 in 1965, women would have been earning approximately $12,000 because it shows they would have earned 60% of what a man was earning. ($20,000 X .60 = $12,000)

From the graph, you can conclude that 1968 had a minimum wage with more purchasing power than in any

    other year (it is the tallest column!).

    “We’ll cut your taxes” is the most repeated campaign promise in the history of American politics.

    Yet somehow it is still considered visionary, worth a fight. Worth, indeed, a crusade.

    Why? It’s in our blood. Historically, Americans have hated taxes, and not merely because we had to

    pay them. We’ve hated taxes because we’ve perceived them to be an infringement on our

    libertyand the source of big, powerful, and mischievous government. This was true from the

    beginning. It wasn’t just “taxation without representation” that bothered us so much. It was

    taxation. Period.

    Source: The Washington Post, April 12, 1999.

    This passage compares the feelings of Americans toward taxation today to those same feelings around the time of the American Revolution.

    America can celebrate Tax Freedom Day? on May 3, 2001, according to the Tax Foundation’s

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    annual calculation. That means that the nation’s taxpayers have to work from January 1, 2001, to the 123rd day of the year before earning enough money to pay for governmentfederal, state, and

    localand start spending money on themselves. ...Individual income taxes represent the largest component of Americans’ tax bills....

    Source: “America to Celebrate Tax Freedom Day,” Tax Foundation, April 23, 2001.

    According to the passage, the meaning of “Tax Freedom Day” is that by that day, you have earned enough to

    pay your taxes for the year.

     In both panels (A-B) of the graph, the cost of the tax results in a shift of the supply curve (S to S + tax). Can you

    tell how much of the tax increase of $1 does the producer pass on (the incidence of the tax) to the consumer in each case? (hint: look at selling prices!)

    Back in 1940, when the Social Security program was just getting under way, average life

    expectancy was less than 64 years. The program’s designers expected that most people would

    contribute to the program most of their lives and die before collecting a dime in retirement

    benefits.... Today, average life expectancy in the United States is more than 75 years.... As life

    expectancy has soared, birthrates have declined, leaving fewer and fewer workers to support the

    ballooning number of retirees. In 1950, [the system] was solidly supported with 16 workers paying

    for each retiree; today, there are just over three workers per beneficiary.

    Source: Carrie Lips, Cato Institute’s Project on Social Security Privatization.

    According to the passage, the increase in average life expectancy has created a problem for the Social Security

    system because more people are collecting retirement benefits.

    The federal budget deficit is gone, transformed by a strong economy into a string of projected

    surpluses that should grow larger for years to come....

    Eliminating the deficit is hardly the end of the government’s financial troubles, however.... [T]he

    national debt was built up over decades of deficit spendingthe federal government has not run

    steady surpluses since the 1920sand it remains an economic millstone of considerable


    Source: The New York Times, January 31, 1999.

    According to this passage, at the time it was written (1999), the national debt was falling due to the surplus in

    the budget.

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    Based on the map, can you tell which of the states spent $5,000 or more per student? (hint: look at the map key!)

    Is the number of available but jobless workers in the United States shrinking to the point that

    employers may be forced to grant inflationary wage increases to attract new employees or keep the

    ones they have?

    “Should labor markets continue to tighten, significant increases in wages, in excess of productivity

    growth, will inevitably emerge, absent the unlikely repeal of the law of supply and demand,”

    [Federal Reserve Chairman Alan] Greenspan told Congress.

    Source: “Shrinking Labor Pool Raises Fear of Wage Pressures and Higher Prices,” The

    Washington Post, June 25, 1999.

    This passage is describing a worker shortage. It talks about having to increase wages in order to attract workers.

Because Russian currency is not trusted, real money plays a fairly small part in Russia’s economy

    today. Most business is conducted by barter or with IOUs. For example, workers rarely receive wages in the form of cash. A bicycle factory outside the city of Perm pays its workers in bicycles! To get cash, the workers have to sell their “paychecks.” More often than not, they simply trade the bicycles for the products they want.

    According to the passage, most business in Russia is conducted without currency because Russian currency is not accepted.

    Have monetary policymakers got [inflation] licked?

    Central bankers will tell you that they have not, and not just out of modesty. Although plenty of them

    have targets for inflation, none is sure precisely how, or how rapidly, changes in monetary policy

    affect the economy. So they cannot be certain that a sensible-looking interest-rate cut will not revive

    inflationor that a cautious-looking rise will not tip the economy into a recession.

    Hence the search for...a simple rule for choosing [a] monetary policy that keeps inflation down without

    hitting the economy too hard.

    Source: The Economist, August 10, 1996.

    In the passage, central bankers (such as the Fed) are wrestling with the inflation versus economic growth tradeoff.

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    In the cartoon, the comments by Federal Reserve Board Chairman Alan Greenspan probably dampened investor enthusiasm about the economic outlook in one of his pronouncements (causing investors to take Valium, Prozac and/or Maalox to help with the stress).

     Higher interest rates could cause aggregate supply curve ASto shift to AS due to higher costs for 1 0


An increase in consumer saving could cause aggregate demand curve AD to shift to AD due to less funds 10

    available for purchases.

    It will take a few years for the global economy to achieve a new equilibrium between manufacturing

    production and consumer demand. Many goods are now in oversupply, and consumer demand is

    impaired by falling currencies and growth-inhibiting governmental policies.... But these are cyclical

    imbalances of the sort that have occurred for decades and will keep recurring from time to time.

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