Chapter 02 – Understanding Economics and How It Affects Business
298. Which of the following statements about the Federal Reserve Bank (the Fed) is most
accurate?
A. The Fed is an agency of the U.S. Treasury Department that has the responsibility of
collecting tax receipts for the IRS.
B. The Fed manages the U.S. money supply and interest rates.
C. The Fed is the primary government agency involved in carrying out our nation’s fiscal
policies.
D. The Fed is the agency of the government that ensures the U.S. maintains enough gold
reserves to pay any foreign debts that result from international trade.
Feedback: The Fed operates as a semi-private organization that has the goal of keeping the
economy growing without causing inflation. It does this by managing the supply of money
and interest rates.
299. During the recent economic crisis, Presidents George W. Bush and Barack Obama
increased government spending by $2 trillion, in order to revive the ailing economy. Their
strategy followed the economic theory known as:
A. Malfusian
B. Bernankeism
C. Keynesian
D. Greenspanian
Feedback: Keynesian economic theory and later adaptations suggest that government policy
could be effective in helping manage the economy. By increasing government spending on
infrastructure such as the building and repair of roads, bridges, schools, and utilities, the
government will purchase goods and services and put people to work.
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302. Your professor showed you an Internet video of the chair of the Federal Reserve Bank
speaking to the American public. The message he is conveying indicates that Fed
economists are worried about inflation and believe the best course of action would be to
slow the economy. Which of the following policies is the Fed most likely to pursue?
A. Increase taxes.
B. Decrease interest rates.
C. Restrict the money supply and increase interest rates.
D. Devalue the dollar on international currency exchanges.
Feedback: When the Fed is concerned about inflation it is likely to try to slow down the
economy by increasing interest rates and restricting the money supply.
303.
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Ben recently lost his job at a major U.S. auto plant in one of the rust belt states. After
looking unsuccessfully for work in a similar industry for several months, he plans to start
interviewing with road and bridge repair companies. He speculates that if the government
begins to contract with companies that repair highways and bridges, he may find steady
work, at least in the short term. Which of the following statements best describes the
strategy behind his thoughts?
A. The best way for the government to reign in on too much money floating around the
system is to hire people and pay them wages.
B. Ben doesn’t understand the causes of unemployment. We obviously don’t need any
more autos on the roads if the plant has closed. Repairs will slow down rather than
increase.
C. If the current administration asks the Fed to raise interest rates, it will do more than if
the current administration begins contracting with road repair companies.
D. By increasing government spending through road and bridge repair and construction,
the government will intervene in the free-market economic system to help jump-start a
weak economy.
Feedback: Keynesian economic theory believes that government intervention is sometimes
necessary in the short term in order to jump-start an ailing economy. By employing citizens
and paying them wages, workers would start spending again, which would help stabilize wide
swings in the business cycle..
304.
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Lance owns Lance Lawns Irrigation Systems, LLC, a company that installs and maintains
underground lawn irrigation systems. Business is down due to new housing starts being
negatively impacted by a deep recession. To make things worse, his bank called yesterday
to inform him that his credit limit (interest fee of 12.5%) will be cut from $30,000 per year
to $15,000 per year, unless he is willing to pay a higher interest rate of 20%. As Lance
drives to the first job this morning, he knows that his last task of the day will be to reduce
the hours for his two employees. He can’t afford to work employees eight hours per day,
with only a $15,000 line of credit. Which of the following strategies will help Lance’s
situation?
A. Increase government spending on public parks.
B. Decrease government spending so that banks can keep more reserves.
C. Fed decreases interest rates
D. Fed increases the federal funds rates to jump-start the economy.
Feedback: When the economy is in a recession, the Fed will usually step-in and lower interest
rates, to promote easier borrowing for businesses. If businesses are able to borrow money,
they can purchase more assets to run their businesses.
305.
Chapter 02 – Understanding Economics and How It Affects Business
In one of his weekly broadcasts, the Federal Reserve Chairman remarked that inflation
had begun to tick upward. However, unemployment in the U.S was still quite high and
economic growth had slowed. With short-term interest rates close to 0 (zero), the Chair
did not visualize that ____________ policy would be able to do anything for the high
unemployment problem. He felt that _______ policy would be more useful for bolstering
employment, but that would require local and state governments and the federal
government to provide tax breaks for corporations?
A. federal; state
B. fiscal; monetary
C. monetary; fiscal
D. fiscal; federal
Feedback: Monetary policy is the responsibility of the Federal Reserve Bank and the open
market committee. Fiscal policy involves raising and lowering taxes. It is the responsibility
of Congress to pass legislation, which affects the amount of taxes businesses pay.
306. If businesses are producing at capacity, and the nation is experiencing almost full
employment (a very low rate of unemployment – less than 2%), the Fed may decide to:
A. Lower interest rates.
B. Raise taxes.
C. Lower taxes.
D. Increase interest rates.
Feedback: When the business cycle is experiencing a boom, businesses begin producing close
to capacity, most people who want to be employed are employed, and spending is robust, the
government may decide to curb inflation (rising prices) by raising interest rates to make
borrowing less attractive. If borrowing is less attractive, the demand for goods and services
will go down, and subsequently prices will remain stable.
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307. Discuss the views of economist Adam Smith. How does the “invisible hand”
philosophy suggested by Smith benefit society as a whole?
308.
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Explain the significance of “price” in a free-market economic system.
309.
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Identify and describe the 4 basic rights that form the foundation of capitalism.
310.
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When describing the state of the U.S. economy, reporters often refer to the nation’s GDP,
its unemployment rate, and the CPI. Explain what each of these terms means and why
each measure is significant.
311.
Chapter 02 – Understanding Economics and How It Affects Business
Explain the difference between fiscal policy and monetary policy. Discuss how each of
these approaches can be used to influence the state of the economy.
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312. Gig started Giganeers to earn a profit, but by working hard and increasing his market
share, he was able to create jobs for others. This is an example of the ______________
concept.
A. circular flow
B. invisible hand
C. equitable income
D. social dividend
Feedback: The invisible hand concept says that self-interest (the desire to earn a profit) leads
entrepreneurs to create jobs and produce goods and services that satisfy wants, thus benefiting
society as a whole.
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313.
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Gig’s native country of Frinezia was much different from the United States. In addition to
its higher tax rates, the government offered more extensive social programs that were
designed to redistribute income and reduce inequality. Although small businesses were
privately owned and operated in Frinezia, many basic industries were owned and operated
by the government. From this information, you would classify Frinezia’s economic system
as ___________.
A. Capitalism.
B. Socialism.
C. Communism.
D. Pluralism.
Feedback: The existence of relatively high tax rates and the emphasis on government
programs to redistribute income are hallmarks of socialism. Under socialism, governments
frequently own some, if not most, basic businesses. However, socialism, unlike communism,
does allow at least some private ownership of businesses as well.
314. The broadcast that reported a decline in total output for the United States probably got
some of its information from the government’s measurement of ___________.
A. GDP
B. CPI
C. federal deficit
D. balance of payments
Feedback: GDP is the total value of output produced by a nation’s economy.
315.
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The broadcast cited forecasts that national output might continue to fall in the future. If
total output shows decline for two consecutive quarters, economists would classify this as
a _____________.
A. depression
B. retraction.
C. period of stagflation.
D. recession.
Feedback: A recession occurs when GDP (the nation’s total output) declines for two
consecutive quarters.
316. Gig recently heard a radio report that the Fed will try to help get the U.S. economy
back on track. If the Fed takes action, Gig would likely see:
A. Lower interest rates.
B. An increase in the size of the government’s budget deficit.
C. Lower government spending.
D. An increase in the minimum wage.
Feedback: The Fed is concerned with monetary policy. The Fed achieves its goals by bringing
about changes in the supply of money and interest rates. During recessions the Fed normally
pursues policies to reduce interest rates in order to stimulate additional spending. The Fed is
not directly involved in changing the level of government spending or taxes (and thus does
not directly affect the size of the deficit). It is Congress, not the Fed, which would enact
legislation needed to increase in the minimum wage.
317.
Chapter 02 – Understanding Economics and How It Affects Business
Besides the slowdown in the general economy, Giganeers faces threats of competition
from several other companies that provide engineering consulting services. In order to
gain more business, Gig tries to convince potential clients that his company offers better
service than the competition. He has advertised heavily in professional magazines, often
quoting some of his highly satisfied clients. The market Giganeers operates in is an
example of:
A. perfect competition.
B. monopoly.
C. oligopoly.
D. monopolistic competition.
Feedback: Monopolistic competition is characterized by many firms competing by offering
differentiated products. Giganeer’s use of advertising indicates that it is trying to differentiate
its product from the many competitors it faces in the market.