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Chapter 02 - Understanding Economics and How It Affects Business
2-41
It is understandable that productivity is rising faster in the service sector because
service businesses have newer technologies than the manufacturing sector and fewer
laborers.
Feedback: A problem in the service sector is that it's difficult to measure the output per
worker due to the unique nature of services.
129. A rising GDP, rising unemployment rate, and rising inflation rate signify a healthy
economy.
Feedback: A rising GDP, declining unemployment rate, and decreasing inflation would
signify a healthy economy.
130. A problem with the CPI is that it measures the price changes of only food and
clothing, while ignoring what happens to the prices of such important items as medical
care and energy.
Feedback: The CPI is based on the prices of food, apparel, energy, healthcare, housing,
transportation, education, and other services.
131.
Chapter 02 - Understanding Economics and How It Affects Business
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Danny was laid off from his job five months ago. At first, he looked for a new job
every day. During the past six weeks, however, Danny became depressed about his
employment status and quit trying to find a job. According to the criteria used by the
government, Danny is a civilian whose job status is included in computing the national
unemployment rate.
Feedback: The unemployment rate refers to the number of civilians at least 16 years old who
are unemployed and tried to find a job within the prior four weeks. Danny has not tried to find
a job in six weeks, so he would not be included in the computation of the unemployment rate.
132. Larry and Moe are having an argument. Larry believes that over the past year, the
economy is experiencing rapid inflation, while Moe says that the economy actually
experienced disinflation during this period. The easiest way for Larry and Moe to
settle their argument is to look at GDP figures for the past year.
Feedback: GDP measures the market value of final goods produced in a country in a given
year. An increase in GDP may be due to inflation, or it may be due to an increase in the
production of final goods, or it may be due to a combination of both of these factors. Thus,
looking at GDP by itself does not provide a clear answer to what has happened to prices.
Larry and Moe would be better served by looking at the changes in price indexes such as the
CPI. The CPI tracks movements in the average level of prices for a market basket of
consumer goods over time.
133.
Chapter 02 - Understanding Economics and How It Affects Business
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Maureen is the office manager of a service company. She recently approved the
installation of new computers and office equipment for all workers in her office. If
Maureen's company is like most service companies, she will probably see a big jump
in the productivity figures reported for workers in her office.
Feedback: In the service sector, improvements in technology and in the number of computers
and other types of machinery used by workers often improve the quality of the service, but not
the output per worker. Thus, the productivity figures are unlikely to change very much.
134. The government of Velovia made progress in its efforts to bring rapid inflation under
control. Although prices are still rising, the rate of increase has slowed considerably.
This suggests that Velovia is experiencing disinflation.
Feedback: Disinflation occurs when the rate of inflation is slowing.
135.
Chapter 02 - Understanding Economics and How It Affects Business
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The nation of Desperia is reporting a significant decline in GDP for four consecutive
years, with no relief in sight. With unemployment at record levels and businesses
failing faster than at any time in the past century, Desperia is likely experiencing a
depression.
Feedback: An economy is in a recession if its GDP declines for 2 consecutive quarters (six
months). A depression is a severe recession. Since Desperia's GDP has shown decline for four
years and other economic conditions (the unemployment rate and the number of business
failures) are described as being the worst the nation has experienced in the past century, it
appears that the definition of a depression is satisfied.
136. Yesterday, Casey received a cable company ad for bundled TV, telephone, and
Internet service that cost appreciably more than what she is currently paying. At the
same time, she received a notice from her utility company that summer rates would be
increasing. Her school books are costing almost twice what they cost last year, and
yesterday, gasoline cost her 30 cents more per gallon than it did last week. As she
ponders the situation, she can't help but wonder how prices could be rising when so
many people have lost their jobs and are cutting back on expenditures. She is certain
that this situation characterizes her economics professor's description of stagflation.
Feedback: Stagflation is the term used to describe the situation where the economy is
slowing, yet prices are still rising. In the situation described here, Casey is experiencing rising
prices and a rising unemployment rate.
137.
Chapter 02 - Understanding Economics and How It Affects Business
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Sam is a recent college graduate with a lot of "firsts": First professional job, first new
car, first apartment, and first time making all of his own financial decisions. As he
works on his monthly budget, he can't help but wonder why he is barely "making ends
meet." Each month, it takes his entire paycheck to pay his rent, his car payment, and
buy food. Last month, he told his parents, "I'm sure I had more money when I was a
starving student!" You recently learned about key economic indicators in your
business class. You inform Sam that his problems are caused by severe deflation and
lack of demand for products and services.
Feedback: Sam is describing a higher than normal rate of inflation. Prices are rising fast, and
consumers are unable to purchase the same amount of goods and services with the same
number of dollars they used for similar purchases in the recent past. Deflation is falling prices.
In this latter environment, consumers can purchase more with less money.
138. Robin just graduated from college and is seeking her first job. She received a degree in
engineering at a prestigious university. Robin has several leads and has heard that the
market for engineers is very strong, so she is convinced that she should locate a good
job in the near future. Robin's current situation is an example of structural
unemployment.
Feedback: Structural unemployment is caused by problems such as mismatches between the
skills workers have and the skills employers need or due to restructuring within an industry.
The description of Robin's situation is not consistent with this type of unemployment. Her
situation is really an example of frictional unemployment. This type of unemployment refers
to workers who have quit their job for personal reasons or those who are entering the labor
market after being out of it to go to school or to raise a family.
139.
Chapter 02 - Understanding Economics and How It Affects Business
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Fiscal policy refers to the federal government's efforts to keep the economy stable by
controlling the amount of money in circulation.
140. Fiscal policy involves the federal government's efforts to stabilize the economy by
increasing or decreasing taxes and/or government spending.
141. When the government attempts to stabilize the economy by changing taxes or
government expenditures, it is using fiscal policy.
142. The national deficit is the difference between our nation's exports and its imports.
143.
Chapter 02 - Understanding Economics and How It Affects Business
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The size of the national debt increases when the federal government runs a deficit.
144. The U.S. national debt equals the sum of all recorded years of deficits.
145. In the U.S., the percentage of GDP that the government collects through taxes is
approximately 28%.
146. The Federal Reserve Board is responsible for controlling the money supply.
147.
Chapter 02 - Understanding Economics and How It Affects Business
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Monetary policy is directly under the control of the U.S. Department of the Treasury.
148. One of the major ways the Fed influences economic conditions is through its control
of interest rates.
149. High tax rates that put money into the government's coffers tend to slow spending, and
ultimately slow the economy.
Feedback: Fiscal policy refers to the federal government's efforts to keep the economy stable
by increasing or decreasing taxes or government spending. When the government raises taxes,
the result is a tightening of consumer and business spending, which has the tendency of
slowing the economy. This draws money away from the private sector.
150.
Chapter 02 - Understanding Economics and How It Affects Business
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If the government wants to jump-start the economy resulting in more consumer
spending, it will raise taxes.
Feedback: Fiscal policy refers to the federal government's efforts to keep the economy stable
by increasing or decreasing taxes or government spending. When the government raises taxes,
the result is a tightening of consumer and business spending, which has the tendency of
slowing the economy. This draws money away from the private sector.
151. Monetary policy is implemented to ease the up and down swings of business cycles,
while fiscal policy is implemented to create swings when the cycle is stalled in an
economic boom.
Feedback: Fiscal and monetary policies have the purpose of bringing stability to the nation's
economy. Fiscal policy involves government spending by raising or lowering taxes; monetary
policy is enacted by the FED (Federal Reserve Board) by raising or lowering interest rates.
152.
Chapter 02 - Understanding Economics and How It Affects Business
If the national debt is $14 trillion, the national deficit will be considerably higher.
Feedback: The national deficit is the amount the government has overspent in one year's time.
The national debt is the total of all yearly deficits, overtime.
153. Government spending on defense decreases the national deficit.
Feedback: Any government spending, including money spent on defense increases the
national deficit because it decreases the amount of revenue that the government has collected.
154. To jump-start the economy, the FED is likely to lower interest rates, in order to
encourage individuals and businesses to spend money.
Feedback: The FED (Federal Reserve Board) meets once each month to review economic
growth and make decisions with respect to raising or lowering interest rates. If the FED
lowers interest rates, it is trying to encourage individuals and businesses to borrow more
money and spend it in ways that improve their quality of life, as well as increase the GDP. If
the FED raises interest rates, it is trying to discourage individuals and businesses from
borrowing money, so as to slow down the economy.
2-52
158.
Chapter 02 - Understanding Economics and How It Affects Business
2-53
A professor of economics at a prominent university recently urged government policy
makers to cut taxes and increase government spending in order to pull the economy
out of its current downturn. The policy measures called for by the professor are
examples of fiscal policy.
Feedback: Fiscal policy involves changes in government spending and taxes to help stabilize
the economy.
159. Joe and Tess McGreen are purchasing their first home in Durham, North Carolina.
They are seeking pre-qualification on a home loan. The unemployment rate for North
Carolina is 10.2% and GDP is declining. Chances are pretty good that the Fed will
raise interest rates in order to loosen the supply of money, resulting in a more
expensive loan for Joe and Tess.
Feedback: A 10.2% unemployment rate, as well as declining GDP are good indications that
the economy is in a recession, and/or downward business cycle. In a recessionary climate, the
FED is likely to lower interest rates to induce spending. Joe and Tess may be able to qualify
for a lower interest rate.
160.
Chapter 02 - Understanding Economics and How It Affects Business
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Sarah owns a hair styling salon. She needs to update her shop with new customer
chairs and work stations. If the Fed were to lower interest rates by 1.5 percentage
points, at the same time that the government increased the tax rate by 1.5%, she could
immediately determine that updating her shop would not increase or decrease her
financial position.
FALSE
Feedback: If Sarah applies and gets a loan to update her shop, she will have to pay a
percentage annually on the principle of the loan. We do not know the loan amount, so we do
not know the dollar amount of deductible loan expense. Taxes are paid on profits, after we
deduct all applicable expenses. Since we do not know the deductible dollar amount of interest
expense, nor do we know the dollar amount that Sarah will pay in taxes, we are unable to
determine if the percentage increase or decrease in taxes would be a wash.
161. The Fed is concerned that the economy is growing too rapidly. Given these concerns,
it is likely to pursue policies to restrict the supply of money and raise interest rates.
TRUE
Feedback: The Federal Reserve System (the Fed) is in charge of monetary policy. This
involves controlling the supply of money and interest rates. When the Fed wants to slow
down the economy it will restrict the money supply and increase interest rates to reduce the
amount of borrowing.
162.
Chapter 02 - Understanding Economics and How It Affects Business
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Nick wants to buy a new car, and is planning to borrow the money for his purchase
from a bank. He read in the newspapers that the Federal Reserve is likely to
implement policies in the next few weeks that are designed to stimulate the economy.
Nick would probably get a lower interest rate on his car loan if he waits until after the
FED implements its new policies.
The Fed usually pursues policies to decrease interest rates when it wants to stimulate the
economy. If Nick wants a low interest rate on his car loan, he should wait until the Fed acts to
stimulate the economy.
163. Economics is the study of how a society _________________.
A. invests wisely in the stock market.
B. employs resources to produce goods and services and distribute them among competing
groups and individuals.
C. employs statistical techniques to make predictions about the evolution of society over
the long run.
D. governs itself for the good of its citizens.
164.
Chapter 02 - Understanding Economics and How It Affects Business
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__________ is the study of how a society employs its limited resources to produce goods
and services and how it distributes them among competing groups and individuals.
A. Economics
B. Capitalism
C. Marketing
D. Socialism
165. ___________ studies the operation of a nation's economy as a whole.
A. Microeconomics
B. Socioeconomics
C. Econometrics
D. Macroeconomics
166. ____________ looks at the behavior of individual people and organizations in specific
markets.
A. Macroeconomics
B. Finite economics
C. Microeconomics
D. Nanoeconomics
167.
Chapter 02 - Understanding Economics and How It Affects Business
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Resource development is:
A. The study of how society chooses to employ resources to produce goods and services
and distribute them for consumption among various competing groups and individuals.
B. The study of how to increase the amount of available resources and create conditions
that will make better use of these resources.
C. The part of economics that looks at the operation of a nation's economy as a whole.
D. The part of economics that looks at particular markets.
168. The study of how to increase the amount of available resources and create conditions
that will make better use of these resources is known as:
A. human resource management
B. microeconomics
C. econology
D. resource development
169. Economist Thomas Malthus believed that ______________ would limit economic
progress.
A. depletion of gold reserves
B. overpopulation
C. the tendency of governments to levy high tax rates
D. the inability of workers in developed nations to compete against cheap foreign labor
170.
Chapter 02 - Understanding Economics and How It Affects Business
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Neo-Malthusians (followers of Thomas Malthus) believe that the solution to poverty is:
A. Increasing the world population.
B. Increasing taxes on the rich and increasing social programs.
C. Birth control.
D. Educating poor people.
171. A key to economic growth and development is to:
A. Locate more deposits of gold and other precious metals.
B. Emphasize a fair and equitable distribution of income.
C. Provide people with better education.
D. Allow government planning to guide the allocation of resources.
172. _________ is considered by some to be the father of modern economics.
A. John Maynard Keynes
B. Adam Smith
C. Thomas Carlyle
D. Thomas Malthus
173.
Chapter 02 - Understanding Economics and How It Affects Business
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Which of the following is an important premise of Smith's conclusions about economic
prosperity?
A. Individual freedom is necessary if a society is to prosper.
B. Understanding the concept of survival of the fittest will lead to prosperity.
C. Determining what motivates people will lead to prosperity.
D. Command economies and structured markets must be in place before we can work
toward prosperity.
Feedback: Smith believed that freedom was vital to the survival of any economy, especially
the freedom to own land or property and to keep the profits from working the land or running
a business.
174. Which of the following would be a topic emphasized in a macroeconomics course?
A. Factors that determine how fast a nation's economy is growing.
B. How a firm decides the amount it will charge for one of its products.
C. How a consumer chooses which goods to buy.
D. The determinants of the wage rate for labor in the auto industry.
Feedback: Macroeconomics is concerned with the performance of a nation's economy as a
whole.
175.
Chapter 02 - Understanding Economics and How It Affects Business
Which of the following would be a topic emphasized in a microeconomics class?
A. How a nation's GDP is computed.
B. The reason's why the unemployment rate for the economy is rising or falling.
C. How market conditions determine the price of a specific product.
D. How the government can use fiscal and monetary policies to stabilize the economy.
Feedback: Microeconomics is concerned with the behavior and performance of people and
organizations in particular markets.
176. The main goal of resource development is to find ways to:
A. Increase the amount of resources and create conditions that will make better use of
those resources.
B. Allocate existing resources more efficiently among competing uses.
C. Find the right balance between policies that promote economic growth and policies
designed to promote other goals such as a fair distribution of income.
D. Promote the central planning of resource utilization so that resources can be allocated
to the uses that will benefit society the most.
Feedback: Resource development is the study of how to increase resources and to create the
conditions that will make better use of those resources.
177.
