Chapter 02 – Understanding Economics and How It Affects Business
220. A rare and scarce earth metal known as Neodymium is used in many consumer and
military products including smart-phones, smart-bombs, laptop computer monitors, and
electric/hybrid cars. In one year’s time, the price of Neodymium has gone from $19/lb. to
$129/lb. Under these circumstances and the fact that at least 1 kilogram is used in each
electric car that is assembled, a graph of the supply and demand for this product would
show:
A. The current price of Neodymium to be below the equilibrium price for this rare earth
metal.
B. The price of Neodymium to be above the equilibrium price for this rare earth metal.
C. The price of Neodymium to reflect the adjustment of quantity demanded and quantity
supplied.
D. Consumer demand for a product such as electric cars to shift to the right indicating the
desire to purchase the rare earth metal at any price.
Feedback: When there is a shortage of a natural resource, it becomes scarce. The continued
demand for the product will cause the price to increase, at least temporarily, above the
equilibrium point where the quantity supplied and the quantity demanded constitute the
market price: the price that sellers are willing to sell the product for, and buyers are willing to
buy.
221. The price of iPhones™ is falling. In a free-market economic system where everything
else is equal, the most likely explanation is:
A. Suppliers are not producing enough product.
B. Sellers cannot keep up with market demand.
C. The government determined that the product was not worth the price tag that the
producer was asking.
D. The product has competition at the equilibrium price.
Feedback: If producers (sellers) are able to supply the amount of iPhones™ needed at the
market price, but in the short-run, the price is falling, everything else being equal, the likely
problem is added competition in the marketplace.
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224. Which of the following statements most accurately identifies a limitation of the free-
market economic system?
A. Free-market economies offer little opportunity for the poor to work their way out of
poverty.
B. Free-market economies have been unable to create wealth as rapidly as other types of
economic systems.
C. Free-market economies are generally plagued by shortages of needed consumer goods.
D. Free-market economies tend to result in unequal distribution of wealth.
Feedback: Free-market economies have been a major factor in the creation of wealth enjoyed
by many of the world’s nations. This type of system gives people opportunities to work their
way out of poverty. And, the ability of market prices to adjust will help eliminate shortages
(and surpluses) of goods and services. However, the incentive structure in a free-market
economy naturally leads to inequality in the distribution of income and wealth.
225. A major premise of a socialist system is:
A. To make sure that those that create wealth are allowed to keep that wealth.
B. To reduce the inequality in the distribution of wealth.
C. To create incentives to encourage entrepreneurs to create jobs and economic growth.
D. To keep tax rates extremely low so that businesses do not need to support government
projects.
226.
Chapter 02 – Understanding Economics and How It Affects Business
A major benefit of socialism is the:
A. Ability to stimulate rapid economic growth.
B. Ability to keep taxes low.
C. Emphasis on social equality.
D. Emphasis on private enterprise instead of public ownership.
227. Under the __________ system there is very little incentive to work hard or to produce
quality goods or services.
A. capitalist
B. socialist
C. communist
D. mixed economy
228. Under the __________ system the number of choices in the market is directly related
to government involvement in markets.
A. capitalist
B. socialist
C. communist
D. mixed economy
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239. Abby left her native land in Eastern Europe to become a nanny for a family in a
western suburb of Chicago, Illinois. One of the benefits of her arrangement was that she
could attend the community college near her family’s residence. When she arrived at her
new job, she experienced some immediate differences. Abby noted that public
transportation in northern Illinois was limited and expensive, making it difficult to get to
school. For a negligible fee, the government in her native country provided public
transportation to everyone. The economic system in Abby’s native country was more
characteristic of ___________.
A. pure capitalism.
B. socialism.
C. mercantilism.
D. communism.
Feedback: Under socialism, businesses produce most of the wealth, but the government owns
key businesses such as steel mills, coal mines and utilities. Socialism places a great deal of
emphasis on social equality, and the governments of socialist countries generally implement a
wide range of social programs designed to promote this equality.
240.
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Jorge Martinez is a well-educated entrepreneur who operated a small business in his home
country of Florentina. At the encouragement of his American relatives, Jorge recently
immigrated to the United States and applied for U.S. citizenship. “In Florentina, tax rates
were very high,” Jorge complained. “The government used the taxes I paid to finance all
sorts of social programs to help the less fortunate. While this is a noble goal, it has really
undermined the profit incentive of individuals such as me. I really feel that these high
taxes have stifled economic growth.” Jorge’s comments illustrate the reason many socialist
countries are experiencing a(n):
A. Antitrust problem.
B. Depression.
C. Brain drain.
D. Budget surplus.
Feedback: Socialist economies tend to be characterized by high marginal tax rates on bright
and talented individuals such as doctors, engineers, lawyers, business owners, and gifted
artists and performers. This has encouraged many of these individuals to immigrate to other
countries, such as the United States, which have lower marginal tax rates. This problem is
called the brain drain.
241.
Chapter 02 – Understanding Economics and How It Affects Business
Recently, Hugo Chavez, the Prime Minister of Venezuela, announced that he is standing
behind the concept of state owned utilities, public schools, and the communications
industry of his nation. Although not all industry is owned and managed by the
government, his ideas would lead one to believe that he has a preference for:
A. A capitalistic state
B. A socialistic state
C. A communistic state
D. A nationalistic state
Feedback: A nation whose government owns several but not all important industries is
operating under the political system known as socialism. Usually the utility companies,
telecommunications companies, and broadcasting companies are among those owned by the
government.
242. Mike spends a lot of time blogging. Yesterday, he left the following comment on a site
where participants were discussing the pros and cons of healthcare: “If you think
healthcare is expensive now, wait until it is free. The problem with free rides is, eventually
everyone piles on the bus and no one is left to push it. Then the system collapses.” He was
responded to by Martha, who added, “Universal healthcare is not a dirty word. It’s the
salvation for many people. If I have to pay a little more in taxes and know that my
neighbor’s kids have good pre-school and can see the doctor when needed, it’s worth it to
me.” Mike and Martha are discussing the benefits and drawbacks of:
A. Healthcare under communism.
B. Healthcare under capitalism.
C. Healthcare under socialism
D. Healthcare under nationalism.
Feedback: In a country that practices socialism, the government owns and operates many of
the industries that serve a major part of the population such as healthcare,
telecommunications, and utilities.
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246. A command economic system is characterized by:
A. Reliance on the forces of supply and demand to determine what is produced.
B. Reliance on the government to determine what is produced and who gets the output.
C. An extremely rapid rate of economic growth.
D. Freedom of choice and freedom of competition.
247. The social and economic goals of __________ include private ownership of land and
business.
A. capitalism
B. socialism
C. communism
D. a mixed economy
248.
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During the recent recession, the administrations of Presidents George W. Bush and Barack
Obama flooded several banking, financial services, and insurance firms with government
funds in exchange (at least temporarily) for government ownership rights. The
unprecedented move signaled the government’s concern that the global banking system
might collapse if these firms ended up in bankruptcy. The decision for active government
involvement in the operations of these firms demonstrates:
A. The unforgiving nature of capitalism.
B. The desire for more individuals in the U.S. to live under a socialist system.
C. The trend toward mostly capitalist nations to move toward socialism.
D. The freedoms the U.S. government has under capitalism.
Feedback: The trend is clearly toward more mixed economies; even in the United States.
Socialist nations are taking on more capitalist perspectives and capitalist nations are adapting
some socialist principles.
249. As the term “global” become “local”, and as we see more opportunities to compete in
the global market,
A. the long-term trend is for most nations to operate as mixed economies.
B. disagreements about the best economic system to embrace will cause many nations to
close their doors to outside commerce.
C. the only industries that governments will want to own are the ones that are profitable.
D. the forecast is for socialist nations to trend toward communism (Cuba is the example)
and for capitalist nations to trend toward socialism.
Feedback: The trend in the global economy is toward mixed economies since neither free-
market nor command economies have resulted in optimal economic conditions.
250.
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Over the years, the government of Montivia has focused on implementing programs that
promote equality. On the short-term, though, Montivia legislators are concerned about the
very slow rate of growth that has plagued its national economy. In order to address this
problem, the government is likely to:
A. Take control of more major industries.
B. Reduce taxes and cut back on some social programs.
C. Make sure to balance its budget.
D. Avoid the use of fiscal policies and reduce the supply of money in circulation.
Feedback: The government of Montivia has emphasized achieving equality, but now wants to
encourage more growth. In order to encourage faster growth, countries typically adopt a more
market-oriented approach by cutting back on social programs and reducing taxes.
251.
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In an effort to promote rapid growth, the government of Goldinia has kept taxes low, done
little to regulate business activities, and implemented only modest social programs. The
government is now facing political pressure to do more to clean up the environment and to
reduce the inequalities of income and wealth. Which of the following statements is most
accurate? Goldinia’s government is currently taking:
A. A purely capitalist approach to achieve its economic goals, and is likely to continue
doing so in the future.
B. A purely socialist approach to achieve its economics goals, and is likely to continue
doing so in the future.
C. A predominately socialist approach to achieving economic goals, but the current
pressures it faces suggest it is likely to adopt a more capitalist approach in the future.
D. A predominately capitalist approach toward achieving economic goals, but the current
pressures it faces suggest it is likely to adopt a more socialist approach in the future.
Feedback: Goldinia’s low taxes and limited government regulation are consistent with
capitalism. However, the political pressures to implement policies that will deal with
environmental problems and promote social equality suggest that the government may adopt a
more socialist approach in the future. This movement toward mixed economic systems is a
major trend in the world economy.
252.
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The prime minister of the nation of Urbania has called for Urbania’s legislature to enact
new legislation designed to shift his country away from socialism toward a more
capitalistic system. The Prime Minister acknowledges that such a radical change will
entail some hardships, and that some citizens will be unhappy with the changes. The most
likely source of dissatisfaction with a move toward capitalism is:
A. Decrease in wealth.
B. People will have less economic freedom.
C. Tax rates will have to increase.
D. A trend toward unequal distribution of wealth.
Feedback: Capitalism tends to encourage the creation of wealth, and allows people a great
deal of economic freedom. Moreover, tax rates tend to be lower in capitalist economies than
in socialist economies. However, capitalism does tend to result in a more unequal distribution
of income and wealth.
253. The National Coalition on Healthcare Reform reports that nearly 18% of the U.S.
population under the age of 65 is without healthcare. If this advocacy group succeeds in
convincing the current administration and Congress to vote for basic healthcare for
everyone, which of the following is likely to occur?
A. More rapid economic growth.
B. Higher taxes than in past years.
C. Increasing reliance on markets to determine economic outcomes.
D. An increase in the number of insurance companies.
Feedback: Socialism attempts to create more equality—in part by relying on government
programs financed by high taxes to help the less fortunate—in this case, the reportedly 18%
of Americans who are going with adequate healthcare because they cannot afford it. In order
for the government to subsidize their healthcare, it will most likely have to increase taxes to
pay for it.
254.
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Several years ago, the nation of Florentina had a government-owned telecommunication
system that lagged far behind other nations. In several of its rural areas, there was only
one phone for an entire village of people. Government taxes collected for the purpose of
maintaining the telephone system were very meager, so the notion of expanding service
was almost impossible. The government of Florentina decided to sell the phone company
to a private firm. The private firm expanded rapidly. It reported that even poor consumers
were willing to pay for a private phone line. This government decision and subsequent
sale was:
A. A move toward nationalism.
B. A move toward communism.
C. A move toward socialism.
D. A move toward capitalism.
Feedback: In order to generate business growth, countries that were predominantly under a
socialist system have trended toward capitalism, while countries who were predominantly
capitalistic have added social and government sponsored programs.
255. The U.S. economic system relies on
A. The private sector to measure its economic well being.
B. Industries that produce capital equipment to determine how well things are going.
C. Frictional unemployment statistics as the sole measure of economic health.
D. Key economic indicators such as GDP, to measure economic progress.
256.
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The total value of final goods and services produced within a nation’s borders in a given
year is known as that nation’s:
A. aggregate production quota
B. aggregate domestic output
C. index of aggregate economic output
D. gross domestic product
257. Three important economic indicators of the United States are the unemployment rate,
the price indices, and the:
A. debt to equity ratio (DER).
B. gross resource utilization index (GRUI).
C. gross domestic product (GDP).
D. index of capital formation.
258. The four basic types of unemployment are frictional, structural, seasonal, and:
A. cyclical.
B. procedural.
C. industrial.
D. traditional.
259.
Chapter 02 – Understanding Economics and How It Affects Business
__________ unemployment refers to persons who purposefully quit their jobs and have
not yet found a new job.
A. Frictional
B. Structural
C. Cyclical
D. Seasonal
260. __________ unemployment refers to unemployment caused by the restructuring of
firms or by a mismatch between the skills of job seekers and the requirements of available
jobs.
A. Frictional
B. Structural
C. Cyclical
D. Seasonal
261. __________ unemployment refers to loss of jobs due to a recession or a similar
downturn in the economy.
A. Frictional
B. Structural
C. Cyclical
D. Seasonal
262.