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This Document Contains Chapters 3 to 4 Chapter 03 Markets, Demand and Supply, and the Price System MULTIPLE CHOICE 1. Given that resources can be allocated by the government, the market, a random process, or on a first-come first-serve basis, which of the following statements is true? A. The market system is not entirely fair but it creates incentives to increase supplies and improve standards of living. B. The random process of allocation allows individuals to acquire purchasing power and enhances the value of the resources that they own. C. Since the government system does not distinguish between those who have income and those that do not, government allocation of resources is the most efficient. D. There will be no shortages under the first-come first-serve basis of allocation. E. A random process of allocation is fair in the sense that everyone gains and there are no losers. Answer: A 2. In a country that depends on the government to decide the allocation of resources, A. social efficiency is maximized and resources are allocated to where they are most highly-valued. B. individuals are incentivized to acquire higher skills and education. C. the allocation system is fair in the sense that everyone gets an equal opportunity. D. individuals aspire to join the ranks of the government. E. there is hardly any shortage or scarcity of goods. Answer: D 3. If a society's scarce resources are allocated by the government, which of the following is most likely to result? A. Only those who circumvent the government’s rules will prosper. B. Under a government allocation, no one will have to do without. C. It provides an incentive to be a member of government and thus help determine the allocation rules. D. Under a government allocation, some will have to do without, but the government guarantees that resource allocations are fair. E. Government allocation provides incentives to increase production and efficiency and to create value. Answer: C 4. Which of the following statements is not true about a market system? A. The market system provides an incentive to consumers to acquire purchasing ability. B. The market system magnifies the problem of scarcity of goods and services. C. The market system provides an incentive for allocating resources. D. The market system provides an incentive to improve the quality of goods produced. E. The market system provides everything everyone wants to consume. Answer: B 5. _______ ensure that resources are allocated to where they are most highly valued. A. Communist governments B. Consumers C. Suppliers D. Non-governmental organizations E. Markets Answer: E 6. Margaret can use her quarterly savings to buy a teakwood study table for her room or spend it on a small Christmas party with her family. The _____ cost of her enjoyment at the Christmas party would then equal the forgone utility of the study table. A. transaction B. exchange C. opportunity D. direct E. sunk Answer: C 7. Money exchanges are more efficient than barter because: A. money exchanges do not require a double coincidence of wants. B. the government guarantees the value of money. C. money usually has an intrinsic value. D. money is backed by a physical commodity. E. opportunity costs are higher with barter trades. Answer: A 8. Most markets involve the use of money for transactions because: A. goods and services can be exchanged more easily with money than without it. B. goods and services cannot be exchanged without money. C. using money requires a double coincidence of wants. D. the transaction costs of using money are very high. E. the value of money remains same across countries over time. Answer: A 9. Barter can best be defined as: A. the direct exchange of one good for money. B. the direct exchange of money for a good. C. the direct exchange of goods and services without the use of money. D. the direct exchange of labor services for wages. E. the payment of interest on a savings account. Answer: C 10. The term barter refers to exchanges made: A. only with the use of money. B. without the use of money. C. outside the U. S. economy. D. only in underdeveloped countries. E. within countries in a monetary union. Answer: B 11. Barter requires a double coincidence of wants. This means that: A. at least two traders must demand a commodity. B. any two traders involved in a transaction must have money. C. each trader must demand at least two commodities. D. either of the two trades involved in a transaction must have money. E. when two traders are involved in a transaction each trader must want what the other has to offer. Answer: E 12. The exchange of goods and services directly without money is called: A. the double coincidence of wants. B. barter. C. arbitration. D. currency trade. E. illegal trade. Answer: B 13. Other things remaining the same, an individual demand schedule shows the various quantities of a good: A. that a person wants and is able to purchase at alternative prices. B. that are demanded with a change in the quantity demanded of a substitute good. C. that a person is able to purchase at alternative income levels. D. that are demanded at various levels of utility. E. that are demanded by the market at various prices. Answer: A 14. Identify the correct statement. A. Demand is the total quantity of a product that people are willing, even if unable, to purchase at a given price. B. Demand for a product is the same as the quantity demanded of a product. C. Demand represents the different quantities of a good or service that provides consumers the same amount of utility. D. Demand is the quantity of a product that people are willing and able to purchase at different prices. E. Demand is the quantity of a product that producers are willing to produce at a particular price. Answer: D 15. The amount of a product that people are willing and able to purchase at a specific price is referred to as the: A. demand. B. quantity demanded. C. law of demand. D. consumption function. E. purchasing power. Answer: B 16. According to the law of demand, if the price of movie rentals decreases, ceteris paribus,: A. the demand for movie rentals would increase. B. the quantity demanded of movie rentals would decrease. C. the quantity demanded of movie rentals would increase. D. the demand for movie rentals would decrease. E. the quantity demanded of movie rentals would not change. Answer: C 17. Which of the following statements correctly defines the law of demand? A. The lower the price of a commodity, the lower the quantity demanded of that commodity. B. As the price of a commodity increases, the quantity demanded of that commodity also increases. C. The lower the price of a commodity, the greater the quantity of that commodity that is demanded. D. The lower the price of a commodity, the greater the quantity of that commodity that is supplied. E. The quantity demanded of a particular good decreases with an increase in the price of a substitute good. Answer: C 18. Which of the following determines the quantity demanded of a commodity? A. The income levels of consumers B. The price of the commodity C. The prices of related commodities D. The number of buyers E. Consumers’ expectations Answer: B 19. The downward slope of the demand curve is attributed to: A. the inverse relationship between price and quantity demanded. B. the direct relationship between income and quantity demanded. C. the direct relationship between price and quantity demanded. D. the inverse relationship between income and quantity demanded. E. the direct relationship between consumer preferences and quantity demanded. Answer: A 20. The demand curve of a commodity slopes downward because of: A. the insatiable nature of human wants. B. the presence of double coincidence of wants. C. the law of demand. D. the scarcity of goods and services in an economy. E. the law of diminishing marginal utility. Answer: C 21. Consider a demand curve for peaches. Which of the following movements will be observed if the price of peaches decline at a point in time? A. The demand curve will rotate inward at the given price level. B. The will be a movement up along the demand curve. C. The demand curve will rotate outward at the given price level. D. There will be a movement down along the demand curve. E. There will be no change in the demand curve. Answer: D 22. The market demand curve is derived by: A. studying an individual’s demand for a product over a year. B. comparing the monthly consumption of a group of people. C. surveying a set of consumers and ascertaining their preferences. D. adding up the quantities that consumers in a market are willing and able to purchase at each price. E. calculating the average price a random sample of consumers are willing to pay for a product. Answer: D NARRBEGIN: Table 3. 1 The table given below reports the quantity demanded of a good by individuals 1, 2, and 3 at different prices. 23. Refer to Table 3. 1. Calculate the market demand at prices $5, $4, $3, $2, and $1 respectively. A. Market demand is 30, 40, 50, 60, and 70 B. Market demand is 30, 60, 90, 120, and 150 C. Market demand is 30, 50, 70, 90, and 1,100 D. Market demand is 10, 30, 40, 50, and 70 E. Market demand is 10, 20, 30, 40, and 50 Answer: B 24. Refer to Table 3. 1. If Quantity Demanded 1, Quantity Demanded 2, and Quantity Demanded 3 are market demand schedules, then the change from Quantity Demanded 1 to Quantity Demanded 2 may have been due to: A. an increase in price. B. a decrease in the number of sellers. C. an increase in the number of buyers. D. a decrease in price. E. an increase in the price of a complementary good. Answer: C 25. Refer to Table 3. 1. If Quantity Demanded 1, Quantity Demanded 2, and Quantity Demanded 3 are market demand schedules, then the change from Quantity Demanded 1 to Quantity Demanded 3 may have been due to: A. an increase in price. B. an increase in the number of sellers. C. a decrease in price. D. a decrease in the number of buyers. E. a decrease in the price of a substitute good. Answer: D 26. The change in the quantity demanded of any good is always caused by: A. a change in consumers’ preferences for that good. B. a change in the general income levels of the consumers who buy that good. C. an increase or decrease in the population. D. a change in the price of that good. E. a change in the price of substitute goods. Answer: D 27. Which of the following will cause an inward shift in the demand for steaks at a restaurant? A. A report by the American Medical Association states that the consumption of steak reduces the risk of cardiovascular disease B. A 50 percent reduction in the price of steaks C. A double-digit increase in the price of chicken D. A recession leading to a significant fall in the income levels of consumers E. The expectation that the price of steaks will double within two months Answer: D 28. Which of the following would lead to a rightward shift in the demand curve for golf balls? A. An increase in the price of golf clubs B. A decrease in the popularity of golf C. An increase in the number of golfers D. A decrease in the price of golf balls E. An increase in the golf club membership fee Answer: C 29. Which of the following will cause an increase in the quantity demanded of ice cream at an ice cream store? A. The onset of summer brings about an increase in the temperature. B. The price of frozen yogurt that is sold at the store is reduced by 5 percent. C. A new ice cream flavor is introduced at the store. D. The store introduces a limited period offer of 20 percent off on the price of ice cream. E. The income of the store’s consumers increases. Answer: D 30. Which of the following will have no impact on the demand for ice cream? A. A change in population size B. A change in the price of ice cream C. A change in seasons D. A change in consumer preferences E. A change in consumer incomes Answer: B 31. Other things remaining unchanged, which of the following is most likely to cause an increase in the demand for personal computers? A. A reduction in the price of personal computers. B. An increase in the supply of personal computers. C. An increase in the cost of computer printing ink. D. An increase in the number of computer manufacturers. E. A requirement by universities that all students buy personal computers Answer: E 32. Other things remaining the same, if a large part of the population decided against having soda for health reasons, this would result in: A. an increase in the quantity of soda supplied. B. an increase in the quantity supplied of complements like fries and burgers. C. a decrease in the price of soda. D. a rightward shift of the demand curve for soda. E. a decrease in the quantity demanded of substitutes like mineral water. Answer: C 33. Assume that a hurricane in Brazil destroys half of the coffee crop. Considering that Brazil is a major coffee producing country, consumers expect the price of coffee to increase in the near future. How does this reflect on the demand for coffee? A. There is a movement upward along the demand curve for coffee. B. The demand curve for coffee shifts inward. C. The demand curve for coffee shifts outward. D. There is a movement downward along the demand curve for coffee. E. The demand for coffee declines. Answer: C 34. Margarine and butter can both be used as a spread on toast. This means that they are: A. independent goods. B. complementary goods. C. substitute goods. D. Giffen goods. E. inferior goods. Answer: C 35. If an increase in the price of good X causes the demand curve for product Y to shift to the right, then X and Y are most likely to be which of the following? A. Shoes and laces B. Tennis balls and tennis rackets C. Turkey and chicken D. Knives and forks E. DVD players and DVDs Answer: C 36. Other things remaining the same, when a fall in the price of one good is followed by an increase in the demand for another good, both goods are said to be: A. inferior goods. B. substitute goods. C. Giffen goods. D. public goods. E. complementary goods. Answer: E 37. Every Friday night Elizabeth either goes bowling or goes to the movies. Because the price of bowling went up, Elizabeth now sees more movies. Elizabeth’s behavior would be best described as a change in which determinant of demand? A. Price of complementary goods B. Expectations C. Income D. Number of buyers E. Price of substitute goods Answer: E 38. If the price of hot dogs were to decrease, which of the following changes would we expect to occur in the hot dog bun market? A. The equilibrium price of hot dog buns would decrease and the quantity of hot dog buns sold would increase. B. The equilibrium price of hot dog buns would increase and the quantity of hot dog buns sold would decrease. C. The equilibrium price of hot dog buns would increase and the quantity of hot dog buns sold would increase. D. The equilibrium price of hot dog buns would decrease and the quantity of hot dog buns sold would decrease. E. The equilibrium price of hot dog buns would stay the same and the quantity of hot dog buns sold would increase. Answer: C 39. Last year a firm made 1,000 units of its product available at a price of $5 per unit. This year the firm will still make 1,000 units available, but only if the price is $7 per unit. What is most likely to have happened? A. Supply has increased B. Supply has decreased C. Demand has decreased D. Demand has increased E. Quantity supplied has increased Answer: B 40. Which of the following is true of the law of supply? A. The law of supply is the sole determinant of market prices. B. The law of supply states that as the price of a good rises, the quantity supplied rises. C. The law of supply holds good only in the long-run. D. The law of supply is valid only in a market system of allocation. E. The law of supply asserts that as the cost of producing a good rises, the quantity supplied rises. Answer: B 41. Other things remaining unchanged, which of the following is a determinant of the quantity supplied of a good? A. The cost of inputs used in production B. The price of the product C. The income levels of consumers D. The price expectations of producers E. The preferences of consumers Answer: B 42. Ceteris paribus, a change in the quantity supplied along the supply curve of Braun coffee makers is: A. directly related to the price of a Morphy Richards coffee maker. B. directly related to the price of milk and cream. C. directly related to the prices of inputs used in the production of Braun coffee makers. D. directly related to changes in the technology used in producing coffee makers. E. directly related to the price of a Braun coffee maker. Answer: E 43. The relationship between prices and the corresponding quantities supplied is shown in a: A. supply schedule. B. demand schedule. C. price-earnings ratio. D. demand curve. E. production schedule. Answer: A 44. A rightward shift of a market supply curve might be caused by: A. the entry of new firms in the industry. B. an increase in the wages of labor employed in the industry. C. an increase in the price of the final product. D. a decrease in the income of consumers. E. an increase in the price of a substitute good. Answer: A NARRBEGIN: Table 3. 2 The table given below represents the supply schedules of the only three DVD producers in the market for DVDs. 45. According to Table 3. 2, if the supply schedules 1, 2, and 3 are the market supply schedules for DVDs in three different time periods, what could explain the change from the Supply 1 schedule to the Supply 2 schedule? A. A decrease in the price of DVDs B. A decrease in the cost of DVD players C. A change in consumer preferences D. A change in the average income of consumers E. An increase in the cost of producing DVDs Answer: E 46. The market supply curve for any product: A. always depends on the market demand for that product. B. depends on the general income level of the consumers in the market. C. is a summation of individual firms’ supply curves. D. equals the total revenue generated through sale of the commodity. E. is affected by the prices of related products. Answer: C 47. Assume that Ford Motor Company engineers achieve a revolutionary technological breakthrough in the production process of automobiles. Which of the following is expected to take place? A. A movement up the existing supply curve for Ford automobiles B. The supply of Ford automobiles will remain unchanged C. An inward shift of the supply curve for Ford automobiles D. A movement down along an existing supply curve for Ford automobiles E. An outward shift of the supply curve for Ford automobiles Answer: E NARRBEGIN: Table 3. 3 The table given below reports the quantity of bread loaves demanded and supplied at different per unit prices. 48. According to Table 3. 3, equilibrium in the market for bread occurs at the price of: A. $2 per unit B. $3 per unit C. $4 per unit D. $4. 5 per unit E. $1. 5 per unit Answer: B 49. Refer to Table 3. 3. Which of the following would occur in the market for bread if the market price exceeded the equilibrium price by $1? A. The quantity of bread demanded in the market would increase B. The bread market would face a surplus of 36 loaves of bread C. The supply of bread in the market would increase D. The bread market would face a shortage of 72 loaves of bread E. The demand for bread in the market would decrease Answer: B NARRBEGIN: Table 3. 4 The table given below reports the quantity demanded and supplied of a commodity in a market at different price levels. 50. Refer to Table 3. 4. In the market represented by this table, at equilibrium: A. the market price is $5 per unit. B. there is a surplus of 900 units. C. there is a shortage of 900 units. D. 900 units are traded at a price of $3 per unit. E. the market price is $1 per unit and the quantity traded is 500 units. Answer: D 51. Consider the market described by Table 3. 4. Identify the correct statement. A. The law of demand is violated B. The law of supply is violated C. There is no equilibrium D. At $5 per unit, people will purchase 400 units E. At $2 per unit, people will purchase 900 units Answer: D 52. The output level that occurs in any market that is in equilibrium: A. is the quantity where the supply curve intersects the y-axis. B. is the quantity where the demand curve intersects the x-axis. C. is the quantity at an output level where buyers will pay more than suppliers require. D. is an output level where buyers will not pay as much as suppliers require. E. means consumers or producers cannot be made better off by an expansion or contraction of output. Answer: E NARRBEGIN: Figure 3. 1 In the figure given below D1 and S1 are the original demand and supply curves. Figure 3. 1 NARREND 53. Refer to Figure 3. 1. Given D1, if supply moves from S1 to S2 it implies: A. quantity supplied has increased. B. demand will decrease from B to A. C. a surplus will exist equal to AB. D. supply has decreased, and equilibrium price and equilibrium quantity will move to G and B respectively. E. supply has decreased, and equilibrium price and equilibrium quantity will move to E and A respectively. Answer: E 54. Refer to Figure 3. 1. If demand shifts from D1 to D2 and supply shifts from S1 toS2: A. equilibrium price will rise to F, but equilibrium quantity will remain at B B. equilibrium price will move to C and equilibrium quantity to G C. demand will decrease and supply will increase. D. equilibrium price will rise to G, and equilibrium quantity will remain at B E. both equilibrium price and equilibrium quantity will decrease. Answer: D NARRBEGIN: Figure 3. 2 The figure given below represents the equilibrium in the market for bicycles under different demand and supply situations. The vertical axis in each panel shows the price of bikes. Figure 3. 2 NARREND 55. Refer to Figure 3. 2. Which of the following panels represents the equilibrium situation in the bicycle market, if there were an increase in the price of metal used in the production of bicycles? A. Panel A B. Panel B C. Panel C D. Panel D E. Panel E Answer: C NARRBEGIN: Figure 3. 3 In the figure given below D1 and S1 are the initial demand and supply curves for a commodity in the market. Figure 3. 3 NARREND 56. Refer to Figure 3. 3. If the change in the demand in this market occurred before the change in supply, then starting from the initial equilibrium: A. firms would experience a fall in profits and then a gradual increase in profits after the change in supply occurred. B. there would be an immediate shortage, lasting until the price reaches P2. C. price would change from P1 to P2 after the change in demand and would change again from P3 to P4 after the change in supply. D. there would be a surplus until the price reaches P4. E. there would be a surplus even after price reaches P4. Answer: B 57. If both supply and demand for a good increase, which of the following will definitely happen? A. Equilibrium price will remain the same B. Equilibrium price will increase C. Equilibrium price will decrease D. Equilibrium quantity will increase E. Equilibrium quantity will decrease Answer: D NARRBEGIN: Figure 3. 4 The below figure shows the demand and supply of DVD rentals in a city. S1 and D1 are the original supply and demand curves. The demand curve shifts from D1 to D2. Figure 3. 4 NARREND 58. Refer to Figure 3. 4 and identify the true statement. A. The supply of DVD rentals has decreased. B. The original equilibrium quantity was 57. C. The new equilibrium price is $3. D. The demand for DVD rentals has decreased. E. The new equilibrium quantity is 48. Answer: D NARRBEGIN: Figure 3. 5 The below figure shows the demand and supply curves in the market for coffee. S1 and D1 are the original demand and supply curves. Figure 3. 5 NARREND 59. Based on Figure 3. 5, which of the following conditions would most likely move the point of equilibrium from A to D? A. An increase in the income of a coffee buyer. B. A decrease in the price of coffee. C. A drought in Colombia, a major coffee producer, that affects the coffee harvest. D. A decrease in the price of non-dairy creamers that are consumed along with coffee. E. An increase in the price of tea, assumed to be a substitute for coffee. Answer: C 60. When will a shortage occur in a market? A. When the actual price is lower than the equilibrium price B. When quantity supplied is greater than the equilibrium quantity C. When the quantity that consumers are willing and able to purchase decreases D. When the quantity available at zero price is insufficient to meet demand E. When a price floor is set in the market Answer: A 61. Assume that at the current market price of $4 per unit of a good, you are willing and able to buy 20 units. Last year at a price of $4 per unit, you would have purchased 30 units. What is most likely to have happened over the last year? A. Demand has increased B. Demand has decreased C. Supply has increased D. Supply has decreased E. Quantity supplied has decreased Answer: B 62. A market survey conducted by an electronics manufacturer reported a year on year growth in the sale of television sets, along with an increase in the selling price. Which of the following could be a likely cause for this situation? A. A decrease in supply B. An increase in demand C. A decrease in demand D. An exception to the law of demand E. An increase in supply Answer: B 63. When a freely functioning market is in disequilibrium: A. the government must set a price ceiling. B. the government must set a price floor. C. the price and quantities demanded and/or supplied change until equilibrium is established D. it will continue to remain in disequilibrium. E. it will reach equilibrium at a very high/low price. Answer: C NARRBEGIN: Table 3. 5 The table given below reports the quantity demanded and supplied of a commodity at different prices in a market. 64. Refer to Table 3. 5. If government imposes a price ceiling of $2: A. the price will be above equilibrium. B. the price will fall to $1 because producers will be forced to incur losses. C. demand will increase. D. a surplus will result equal to 20 units. E. a shortage will result equal to 20 units. Answer: E 65. Refer to Table 3. 5. If government imposes a price floor of $2: A. the price floor will not have an effect. B. the price will fall to $1 because producers will be forced to incur losses. C. demand will increase. D. a surplus will result equal to 20 units. E. a shortage will result equal to 20 units. Answer: A 66. Refer to Table 3. 5. If government imposes a price ceiling of $4: A. the price ceiling will not have an effect. B. the price will fall to $1 because producers will be forced to incur losses. C. demand will increase. D. a surplus will result equal to 20 units. E. a shortage will result equal to 20 units. Answer: A 67. Which of the following is not an example of a price ceiling? A. The Chinese government sets the price of housing in China below equilibrium. B. The government of the former Soviet Union set prices on food below those prevailing in the free market. C. In the 1970s, the Nixon administration imposed wage and price controls, thereby keeping wages and prices from rising. D. In the late 1970s, the U. S. government required gasoline to be sold at a price per gallon that was below what would have prevailed in a free market. E. The U. S. government requires that sugar be sold at a price that exceeds the world price of sugar. Answer: E 68. In a market where the price is restricted by price floors or price ceilings, A. all sellers will be able to sell everything they produce. B. surpluses and shortages will exist. C. all buyers will get what they want. D. disequilibrium will automatically correct itself. E. surpluses and shortages will put pressure on the price to move to its equilibrium. Answer: B 69. Which of the following is true of a price floor? A. A price floor allows supply and demand to function effectively. B. A price floor is set such that the price is not allowed to increase above a certain level. C. A price floor is beneficial to buyers in a market. D. A price floor usually creates a shortage of a good in a market. E. A price floor is set such that the price is not allowed to decrease below a certain level. Answer: E NARRBEGIN: Figure 3. 6 The below figure shows the demand and supply curves in the market for gasoline. The price and quantity at the point of intersection of the demand and supply curves is $30 and 300 gallons respectively. Figure 3. 6 NARREND 70. Assume that the market for gasoline in Figure 3. 6 is in equilibrium. What is the most likely consequence of a government-imposed price ceiling at $10 per unit? A. The profit made by gasoline producers will increase. B. The demand for gasoline will decrease. C. The quantity of gasoline supplied to the market will decrease. D. There will be a surplus of gasoline in the market. E. The demand curve for gasoline will shift to the right. Answer: C 71. The removal of a price ceiling in a market results in: A. an increase in the market price. B. a shortage in the market. C. over-production of the commodity and a surplus. D. a fall in the market price. E. abnormal profits for producers. Answer: A 72. In the market for eggs, a removal of the price ceiling on eggs results in: A. an increase in the demand for eggs. B. farmers supplying more eggs to the market. C. consumers demanding a larger quantity of eggs. D. farmers supplying more eggs to the market. E. consumers demanding a smaller quantity of eggs. Answer: B 73. The leaders of the reforms in the countries that turned from government-run economies to market economies were told by their economic advisers to watch the price of eggs, not the heavy industries such as power generation and oil refining, because: A. eggs are the cheapest commodities that people consume. B. people like to eat eggs. C. eggs have many different nutrients that people need. D. they anticipated that the market for eggs would be the quickest to emerge. E. the market for eggs can be easily controlled by the government. Answer: D TRUE/FALSE 1. In general, the purpose of markets is to facilitate the exchange of goods and services between buyers and sellers. Answer: True 2. Without money, no transaction can occur. Answer: False 3. An example of barter is voluntary work at an old-age home. Answer: False 4. It is absolutely necessary for at least one trader to have money for barter exchange to take place. Answer: False 5. According to the law of demand, if the price of a netbook decreases, ceteris paribus, the demand for netbooks would increase. Answer: False 6. Inferior goods are low quality goods that people prefer to buy less of. Answer: False 7. According to the law of demand, when the price of a BMW or a Gucci purse increases, the quantity demanded of these goods will also increase because consumers consider them prestigious. Answer: False 8. The demand for luxurious goods are usually unaffected by an increase in income. Answer: False 9. The demand schedule is a price list for a fixed basket of consumer goods following a particular format. Answer: False 10. The demand schedule shows that the price of a good and quantity demanded are directly related to each other. Answer: False 11. The market demand curve is derived by summing individual demand curves horizontally. Answer: True 12. According to the law of supply, if the price of calculators decrease, the supply of calculators will decrease, everything else held constant. Answer: False 13. Assume that the supply curve for tomatoes is upward sloping. If the price per pound increases from $0. 99 to $1. 89, a greater quantity of tomatoes will be supplied to the market. Answer: True 14. A supply curve slopes downward because of the law of supply. Answer: False 15. A sharp increase in gasoline prices will cause the supply curve for trucking services to shift to the right. Answer: False 16. If more firms enter the telecommunications industry, we can expect the equilibrium price of telecom services to decrease and the equilibrium number of services to increase. Answer: True 17. Empirical evidence suggests that more digital cameras are being sold today than one year ago, and the selling price has decreased. The probable reason for this could have been an increase in supply. Answer: True 18. The development of a low-cost synthetic fuel is expected to cause a decrease in the price of oil. Answer: True 19. If demand increases and supply decreases, then equilibrium price must decrease, but equilibrium quantity is indeterminate. Answer: False 20. When a market is in surplus, there is pressure for the price to move upward. Answer: False 21. A price floor is the minimum price that consumers have to pay. Answer: True 22. A price floor does not benefit producers. Answer: False 23. A price ceiling imposed on a good that is below the equilibrium price will result in a shortage of that good. Answer: True 24. A rent control law, where tenants pay below-market rents, is a market restriction that may induce a decrease in the supply of rented apartments. Answer: True 25. When the price ceiling on eggs is lifted, there is a shortage of eggs in the market. Answer: False 26. A price control always benefits consumers. Answer: False Chapter 04 The Market System and the Private and Public Sector MULTIPLE CHOICE 1. In a market system, who ultimately determines what is produced? A. Consumers B. Business managers C. Entrepreneurs D. The government E. Stockholders Answer: A 2. 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. Answer: B 3. 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. Answer: C 4. 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. Answer: C 5. ‘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 Answer: C 6. 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: B 7. 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. Answer: C 8. 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: E 9. 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. Answer: D 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 NARREND 10. 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. Answer: C 11. 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. Answer: B 12. 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. Answer: A 13. 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. Answer: C 14. 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. Answer: D 15. 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. Answer: C 16. 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. Answer: E 17. 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. Answer: D 18. 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 Answer: A 19. 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 Answer: B 20. 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. Answer: B 21. 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 Answer: B 22. 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 Answer: E 23. 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. Answer: A 24. 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. Answer: E 25. 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 Answer: A 26. 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 Answer: D 27. 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. Answer: B 28. 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 Answer: D 29. 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 Answer: E 30. 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. Answer: D 31. 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. Answer: E 32. 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. Answer: C 33. 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. Answer: D 34. 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. Answer: C 35. 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 Answer: A 36. 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. Answer: A 37. 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. Answer: C 38. 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 Answer: D 39. 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. Answer: A 40. 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 Answer: B 41. 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. Answer: A 42. 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. Answer: D 43. 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. Answer: C 44. 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. Answer: B 45. 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. Answer: E 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. NARREND 46. 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. Answer: D 47. 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. Answer: E 48. 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. Answer: A 49. 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. Answer: C 50. 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. Answer: A 51. 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. Answer: C 52. 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. Answer: D 53. 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 Answer: B 54. 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. Answer: D 55. 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. Answer: D 56. 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. Answer: B 57. 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. Answer: C 58. 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. Answer: E 59. 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 Answer: B 60. 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 Answer: A 61. 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. Answer: D 62. 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. Answer: A 63. 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. Answer: A 64. 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. Answer: B 65. 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 Answer: C 66. 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. Answer: B 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 NARREND 67. 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 Answer: C 68. 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 Answer: D 69. 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 Answer: B 70. 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. Answer: C 71. 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. Answer: E 72. 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 Answer: D 73. 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. Answer: B 74. 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 Answer: C 75. 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. Answer: E 76. 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. Answer: E TRUE/FALSE 1. 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. Answer: False 2. An unmarried couple holding joint title to their condominium constitutes a household. Answer: True 3. 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. Answer: True 4. The replacement of film-based still cameras by digital cameras and recently by digital SLR cameras exemplifies creative destruction. Answer: True 5. A person obtains income is obtained by selling the services of the resources that he or she owns. Answer: True 6. In a market system, the distribution of income is determined by the ownership of resources. Answer: True 7. A household consists of only related family members like a father, mother, and children and not unrelated members like two students sharing a rented apartment. Answer: False 8. In 2009, household spending was the smallest component of total spending in the U. S. economy. Answer: False 9. Consumption or household spending of an economy comprises of both consumer spending and business spending. Answer: False 10. Empirical evidence on the U. S. economy suggests that household spending and income have an inverse relationship. Answer: False 11. The owner of a sole proprietorship has limited liability, while stockholders of corporations have unlimited liability. Answer: False 12. An enterprise that has only one shareholder does not constitute a corporation. Answer: False 13. If a corporation cannot pay its debts, creditors cannot seek payment from shareholders’ personal wealth. Answer: True 14. According to the World Development Report published by the World Bank, developing countries greatly outnumber industrial countries. Answer: True 15. The United States is the largest consumer and importer of grains and other agricultural output in the world. Answer: False 16. If total U. S. trade consists of $10 billion in electronics imports from Japan and $9 billion in automobile exports to Germany, then the U. S. net export account will be negative. Answer: True 17. Annual expenditures by the federal government exhibited an upward trend, rising from $3 billion in 1930 to more than $1 trillion in 2010. Answer: True 18. National economic policies are usually set by the local government in the U. S. , making it the focus of economic discussions. Answer: False 19. Since the U. S. is organized as a market economy, the government sector does not play a role in economic activity. Answer: False 20. Spending on goods and services by all levels of government in the U. S. combined is smaller than investment spending but larger than consumption. Answer: False 21. Empirical evidence suggests that the federal budget has remained more or less in surplus between 1990 and 2002. Answer: False 22. A financial intermediary accepts deposits from savers and makes loans to borrowers. Answer: True 23. The government sector sells resource services to households and buys goods and services from firms. Answer: False 24. When the government sector is included in the circular flow diagram, the total value of private production will equal the value of household income. Answer: False Test Bank for Microeconomics William Boyes, Michael Melvin 9781111826154

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