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6. Trade between the United States and Guatemala
a. benefits both the United States and Guatemala.
b. is a losing proposition for the United States because Guatemalan labor is less expensive than
U.S. labor.
c. is a losing proposition for Guatemala because capital is much more abundant in the U.S. than in
Guatemala.
d. is a losing proposition for Guatemala because U.S. workers are more productive than
Guatemalan workers.
7. England can benefit from trade
a. only with nations that can produce goods England cannot produce.
b. only with less developed nations.
c. only with nations outside of Europe.
d. with any nation.
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8. If Switzerland chooses to engage in trade, it
a. will only benefit if it trades with countries that produce goods Switzerland cannot produce.
b. cannot benefit if it trades with less developed countries.
c. should first attempt to produce the good itself.
d. can benefit by trading with any other country.
9. If the United States decides to trade with Yemen, we know that
a. Yemen will benefit, but trade with a less developed country could not benefit the United States.
b. it will not benefit Yemen because workers in the United States are more productive.
c. Yemen and the United States can both benefit.
d. it will not benefit either country because their cultural differences are too vast.
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10. Dee is an accomplished actress and a homeowner who pays a landscaper to maintain her lawn
rather than do it herself. Dee has determined that she can earn more in the hour it would take her
to work on her lawn than she must pay her landscaper. This scenario is an example of which
principle of economics?
a. Trade can make everyone better off.
b. Markets are usually a good way to organize economic activity.
c. Governments can sometimes improve market outcomes.
d. Prices rise when the government prints too much money.
11. Annie is an excellent baker and Sam has a plentiful farm. If Sam trades eggs and butter to Annie
for some of Annie’s bread and pastries,
a. only Sam is made better off by trade.
b. only Annie is made better off by trade.
c. both Sam and Annie are made better off by trade.
d. neither Sam nor Annie are made better off by trade.
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12. Dale is a guitar teacher and Terrence is a tile layer. If Dale teaches Terrence’s daughter to play
the guitar in exchange for Terrence tiling Dale’s kitchen floor,
a. only Dale is made better off by trade.
b. only Terrence is made better off by trade.
c. both Dale and Terrence are made better off by trade.
d. neither Dale nor Terrence are made better off by trade.
13. Senator Bright, who understands economic principles, is trying to convince workers in her district
that trade with other countries is beneficial. Senator Bright should argue that trade can be
beneficial
a. only if it allows us to obtain things that we couldn‘t make for ourselves.
b. because it allows specialization, which increases total output.
c. to us if we can gain and the others involved in the trade lose.
d. in only a limited number of circumstances because others are typically self-interested.
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14. Suppose that a country that has a high level of output per person agrees to trade with a country
that has a low level of output per person. Which country can benefit?
a. only the one with a low level of output per person.
b. only the one with a high level of output per person.
c. both
d. neither
15. Suppose that a country that has a high average wage level agrees to trade with a country that has
a low average wage level. Which country can benefit?
a. only the one with a low level of output per person.
b. only the one with a high level of output per person.
c. both
d. neither
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16. Suppose Country A has a high average wage level and a high level of output per person, while
Country B has a low average wage level and a low level of output per person. Which country can
benefit from trade?
a. Only Country A can benefit.
b. Only Country B can benefit.
c. Both Country A and Country B can benefit.
d. Neither Country A nor Country B can benefit.
17. Trade between countries tends to
a. reduce both competition and specialization.
b. reduce competition and increase specialization.
c. increase competition and reduce specialization.
d. increase both competition and specialization.
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18. Trade
a. allows specialization, which increases costs.
b. allows specialization, which reduces costs.
c. reduces specialization, which increases costs.
d. reduces specialization, which reduces costs.
19. Trade makes costs
a. higher and reduces the variety of goods and services available.
b. higher but raises the variety of goods and services available.
c. lower but reduces the variety of goods and services available.
d. lower and raises the variety of goods and services available.
20. When the United States trades with China,
a. both countries will likely benefit.
b. only United States will benefit.
c. only China will benefit.
d. neither country will benefit.
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21. When Ukraine trades with Italy,
a. both countries are likely made better off.
b. only Italy benefits since Ukraine can produce all goods at a higher level of quality than Italy.
c. only Ukraine benefits since Italy’s low wages guarantee that Italian firms will be profitable
regardless of trade.
d. neither country will benefit since Ukraine is more efficient than Italy in the production of all
goods.
22. Benefits from trade would not include
a. the ability of people and nations to specialize.
b. a greater variety of goods and services becoming available.
c. less competition.
d. lower prices.
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23. Central planning refers to
a. markets guiding economic activity. Today many countries that had this system have abandoned
it.
b. markets guiding economic activity. Today many countries that did not have this system have
implemented it.
c. government guiding economic activity. Today many countries that had this system have
abandoned it.
d. government guiding economic activity. Today many countries that did not have this system have
implemented it.
24. In communism, central planners decide which of the following?
a. what goods and services will be produced
b. how much will be produced
c. who produced and consumed the goods and services
d. All of the above are correct.
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25. One advantage market economies have over centrally-planned economies is that market
economies
a. provide an equal distribution of goods and services to households.
b. establish a significant role for government in the allocation of resources.
c. solve the problem of scarcity.
d. are more efficient.
26. The basic principles of economics suggest that
a. markets are seldom, if ever, a good way to organize economic activity.
b. government should become involved in markets when trade between countries is involved.
c. government should become involved in markets when those markets fail to produce efficient or
fair outcomes.
d. All of the above are correct.
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27. Which of the following statements best characterizes a basic difference between market
economies and centrally- planned economies?
a. Society relies more upon prices to allocate resources when the economy is centrally-planned
than when it is market-based.
b. The self-interest of households is reflected more fully in the outcome of a centrally-planned
economy than in the outcome of a market economy.
c. Government plays a larger role in the economic affairs of a market economy than in the
economic affairs of a centrally-planned economy.
d. None of the above are correct.
28. Market economies are distinguished from other types of economies largely on the basis of
a. the political affiliations of government officials.
b. the process by which government officials are elected or appointed.
c. the ways in which scarce resources are allocated.
d. the number of retail outlets available to consumers.
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29. The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the
a. 1960s.
b. 1970s.
c. 1980s.
d. 1990s.
30. The economy of the former Soviet Union is best described as a
a. primitive economy.
b. market economy.
c. hybrid economy.
d. centrally-planned economy.
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31. Communist countries worked under the premise that
a. markets were the best way to organize economic activity.
b. central planners were in the best position to determine the allocation of scarce resources in the
economy.
c. households and firms, guided by an “invisible hand,” could achieve the most efficient allocation
of scarce resources.
d. allowing the market forces of supply and demand to operate with no government intervention
would achieve the most efficient allocation of scarce resources.
32. Prior to the collapse of communism, communist countries worked on the premise that economic
well-being could be best attained by
a. a market economy.
b. a strong reliance on prices and individuals’ self-interests.
c. a system of large privately-owned firms.
d. the actions of government central planners.
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33. The failure of communism in a large number of countries is at least partly explained by
a. the fact that those countries relied absolutely on the invisible hand.
b. the fact that those countries did little or nothing to restrict trade with other countries.
c. the lack of information, on the part of central planners in those countries, about tastes and
preferences in their economies.
d. the lack of information, on the part of central planners in those countries, about how much
authority the government had in affecting economic outcomes.
34. The idea that only the government can organize economic activity in a way that promotes
economic well-being for a country as a whole
a. is a basic principle regarding individual decisionmaking.
b. amounts to a denial of one of the basic principles regarding interactions among people.
c. supports the idea that the “invisible hand” should guide economic activity.
d. was promoted by the economist Adam Smith in a well-known 1776 book.
Ten Principles of Economics 95
35. Which of the following statements about markets is most accurate?
a. Markets are usually a good way to organize economic activity.
b. Markets are usually inferior to central planning as a way to organize economic activity.
c. Markets fail and are therefore not an acceptable way to organize economic activity.
d. Markets are a good way to organize economic activity in developed nations, but not in less
developed nations.
36. Which of the following observations was made famous by Adam Smith in his book The Wealth of
Nations?
a. There is no such thing as a free lunch.
b. People buy more when prices are low than when prices are high.
c. No matter how much people earn, they tend to spend more than they earn.
d. Households and firms interacting in markets are guided by an “invisible hand” that leads them to
desirable market outcomes.
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37. The term “invisible hand“ was coined by
a. Adam Smith.
b. David Ricardo.
c. Karl Marx.
d. Benjamin Franklin.
38. The “invisible hand” refers to
a. the government.
b. the free market.
c. central planners.
d. large businesses.
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39. The famous observation that households and firms interacting in markets act as if they are guided
by an “invisible hand” that leads them to desirable market outcomes comes from whose 1776
book?
a. David Ricardo
b. Thorstein Veblen
c. John Maynard Keynes
d. Adam Smith
40. Adam Smith‘s book The Wealth of Nations was published in
a. 1692.
b. 1776.
c. 1816.
d. 1936.
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41. Both The Wealth of Nations and the Declaration of Independence share the point of view that
a. every person is entitled to life, liberty, and the pursuit of happiness.
b. individuals are best left to their own devices without the government guiding their actions.
c. the government plays a central role in organizing a market economy.
d. because of human nature a strong legal system is necessary for a market system to survive.
42. The “invisible hand“ directs economic activity through
a. advertising.
b. prices.
c. central planning.
d. government regulations.
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43. The “invisible hand” refers to
a. how central planners made economic decisions.
b. how the decisions of households and firms lead to desirable market outcomes.
c. the control that large firms have over the economy.
d. government regulations without which the economy would be less efficient.
44. The invisible hand’s ability to coordinate the decisions of the firms and households in the economy
can be hindered by
a. government actions that distort prices.
b. increased competition in markets.
c. enforcement of property rights.
d. too much attention paid to efficiency.
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45. When the “invisible hand” guides economic activity, prices of products reflect
a. only the values that society places on those products.
b. only the costs to society of producing those products.
c. both the values that society places on those products and the costs to society of producing those
products.
d. none of the above; when the “invisible hand” guides economic activity, prices of products are
set by the government in a manner that is thought to be “fair.”
46. The “invisible hand” works to promote general well–being in the economy primarily through
a. government intervention.
b. the political process.
c. people’s pursuit of self-interest.
d. altruism.