Chapter 16—Economies in Transition
MULTIPLE CHOICE
1. The economic system that answers the What, How and For Whom questions the way they have always
been answered is a:
a.
market economy.
c.
soviet economy.
b.
command economy
d.
traditional economy.
2. The economic system that answers the What, How and For Whom questions by central authority is a:
a.
market economy.
c.
traditional economy.
b.
command economy
d.
any of these
3. The economic system that answers the What, How and For Whom questions using prices determined
by the interaction of supply and demand is a:
a.
market economy.
c.
soviet economy.
b.
command economy
d.
traditional economy.
4. The economic system that has the benefit of cooperation among individuals but suffers from a lack of
individual initiative that leads to greater production describes the:
a.
market economy.
c.
soviet economy.
b.
command economy
d.
traditional economy.
5. An economic system is the organizations and methods used to determine:
a.
what goods and services are produced.
b.
how goods and services are produced.
c.
for whom goods and services are produced.
d.
all of these.
6. Which of the following is a basic question answered by an economic system?
a.
for whom goods and services are produced.
b.
how goods and services are produced.
c.
what goods and services are produced.
d.
all of these.
7. Which of the following economic systems answers the basic economic questions by copying the
previous generation?
a.
Traditional economy.
c.
Market economy.
b.
Command economy.
d.
Capitalism.
8. Which of the following societies is the most likely to have a traditional economy?
a.
The United States.
b.
The Inuit (native people of Northern Canada).
c.
Cuba under Castro’s rule.
d.
Modern-day Hong Kong.
9. A principal feature of a command economy is that ____________.
a.
production decisions are made by profit-maximizing firms.
b.
there is a central planning board at the top, which transmits economic decisions down to
the various producing and consuming units below.
c.
consumers are allowed to determine that is produced based on their demand for goods and
services.
d.
regulatory agencies constrain the most egregious forms of market power in a market
system of allocation.
10. In a command economy, the basic economic questions are answered by:
a.
central authority.
c.
the traditional methods.
b.
individual buyers and sellers.
d.
none of these.
11. Which of the following statements is true about a command economy?
a.
Shortages occur because of complexities in the planning process.
b.
Planners determine what, how many, and for whom goods and services are to be produced.
c.
Planners often allocate goods and services through a rationing system.
d.
The quality of produced goods and services tends to be inferior.
e.
All of these are true.
12. Which of the following statements best describes the role played by prices in a command economy
such as the former Soviet Union?
a.
Prices were used to allocate resources.
b.
Prices played the same role as in a market economy.
c.
Prices were used to ration final goods and services but not to allocate resources.
d.
None of these statements is descriptive.
13. In the former Soviet economy, the supreme planning board that transmitted economic decisions down
to producing and consuming units was called the:
a.
Soviet Ministry.
b.
Polit Bureau.
c.
Gosplan.
d.
Soviet Central Committee for Economic Planning.
14. Who was one of the first proponents of employing market economies instead of command economies?
a.
Robert Heilbroner.
c.
Jeffrey Sachs.
b.
Karl Marx.
d.
Adam Smith.
15. Proponents of a command economy argue that it promotes:
a.
efficiency.
c.
consumer sovereignty.
b.
equity.
d.
economic growth.
16. The economic systems of the former Soviet Union, the People’s Republic of China, and Cuba are best
classified as:
a.
traditional economies.
c.
market economies.
b.
command economies.
d.
decentralized economies.
17. In a market economy, the three economic questions are answered by which of the following?
a.
Prices determined by the interaction of the forces of supply and demand.
b.
A cartel of major transnational corporations, government agencies, and consumer
advocates.
c.
A trilateral commission of major corporations, the military, and elite university professors.
d.
A central authority such as people’s committee, a government agency, or a dictator.
18. Which of the following is a key criticism of the market economy as a system of allocation?
a.
Goods and services are allocated unequally based on ability to pay.
b.
Producers have strong incentives to innovate because successful innovators are rewarded
with higher profit.
c.
Consumers can transmit their preference for product quality and variety by way of their
“dollar votes” cast in the marketplace. Since price is freely set based on supply and
demand, there are few shortages or surpluses.
d.
None of the above.
19. The economic system that is generally considered to be the most efficient at answering the What to
produce and the How to produce questions is the:
a.
market economy.
c.
soviet economy.
b.
command economy
d.
traditional economy.
20. Which of the following represents key strengths of the market economy as a system of allocation?
a.
Goods and services are allocated based on willingness and ability to pay, rather than based
on need.
b.
Producers have strong incentives to innovate because successful innovators are rewarded
with higher profit.
c.
Since price is freely set based on supply and demand, shortages and surpluses are
minimized.
d.
Both b. and c. above are correct.
21. A strength of the market economy is that:
a.
it results in an equal distribution of wealth.
b.
resources are used efficiently.
c.
planners rather than consumers determine answers to the basic economic questions.
d.
information for production and distribution decisions passes directly from the government
to buyers.
22. In a market economy, buyers and sellers communicate their intentions to one another through:
a.
government planners.
b.
negotiations overseen by government agencies.
c.
elected officials.
d.
prices.
23. In a market economy:
a.
collective decision-making is more important than individual decision-making.
b.
goods and services are distributed as if by an “invisible hand” to those who can not afford
them.
c.
profit provides an incentive to be productive.
d.
the distribution of wealth is equitably distributed.
24. What type of economic system is commonly described as being controlled by an “invisible hand”?
a.
A traditional economy.
c.
A market economy.
b.
A command economy.
d.
A communist economy.
25. Which of the following is true in a market economy?
a.
Central planners determine answers to the basic economic questions.
b.
Resources are used efficiently.
c.
The distribution of wealth is equal.
d.
Information for production and distribution decisions pass directly to buyers from the
government.
26. An economic system that answers the What, How, and For Whom questions using prices determined
by the interaction of the forces of supply and demand is a:
a.
market economy.
c.
traditional economy.
b.
command economy.
d.
none of these.
27. The father of modern economics that wrote The Wealth of Nations is:
a.
Karl Marx
c.
Adam Smith
b.
John Maynard Keynes
d.
Thorstein Veblen
28. According to Adam Smith, the “invisible hand” refers to which of the following?
a.
The “best interests of society (public interest) will occur as an outcome of the market
process coordinating the self-interested interactions of buyers and sellers (private interest).
b.
Government interference is the invisible hand of inefficiency.
c.
Bribes and graft is the invisible hand of inefficiency.
d.
The “best interests of society” will occur as an outcome of careful guidance by
government authorities in allocating scarce goods and services.
29. Adam Smith was an advocate of:
a.
mercantilism.
c.
unrestricted or free trade.
b.
a nation maximizing its stock of gold.
d.
the visible hand of public interest.
30. In Adam Smith’s competitive market economy, the question of what goods to produce is determined
by:
a.
the “invisible hand” of the price system.
b.
businesses.
c.
unions.
d.
the government, through laws and regulations.
31. In Adam Smith’s competitive market economy, the question of what goods to produce is determined
by the:
a.
“invisible hand” of the price system.
c.
“invisible hand” of public interest.
b.
“invisible hand” of government.
d.
“visible hand” of laws and regulations.
32. Adam Smith’s book, The Wealth of Nations, was published at the time of the:
a.
War of 1812.
c.
U.S. Civil War.
b.
U.S. Declaration of Independence.
d.
Great Depression.
33. Adam Smith wrote that the:
a.
economic problems of eighteenth-century England were caused by free markets.
b.
government should control the economy.
c.
pursuit of private self interest promotes the public interest in a market economy.
d.
public or collective interest is not promoted by people pursuing their self interest.
34. Adam Smith’s basic economic philosophy stated in The Wealth of Nations can be stated as:
a.
laissez faire.
c.
the least government is best.
b.
allow to act.
d.
all of these.
35. What famous economist said, “By pursuing his own interest he (an individual) frequently promotes
that of the society more effectually than when he really intends to promote it?”
a.
Alfred Marshall.
c.
Karl Marx.
b.
Adam Smith.
d.
Robert L. Heilbroner.
36. Adam Smith, in his book, The Wealth of Nations, advocated:
a.
socialism.
b.
an economy guided by an “invisible hand.”
c.
government control of the “invisible hand.”
d.
the adoption of mercantilism.
37. According to Adam Smith’s invisible hand doctrine:
a.
self-interest best serves the interests of society.
b.
laissez faire must be improved by government intervention.
c.
producers should serve the best interests of society.
d.
only laissez faire mercantilism best serves the interests of society.
38. Adam Smith’s book The Wealth of Nations was published at the time of the:
a.
Great Depression.
c.
U.S. Civil War.
b.
U.S. Declaration of Independence.
d.
War of 1812.
39. According to Adam Smith, what is the primary source of a nation’s wealth?
a.
The amount of gold and silver in the government’s possession.
b.
A spirit of cooperation in which people share according to their means.
c.
Strong central planning authorities.
d.
The people’s ability to produce products and trade in free markets.
40. What famous economist said that the market economy seemed to be controlled by an invisible hand?
a.
Alfred Marshall.
c.
Karl Marx.
b.
Adam Smith.
d.
Robert L. Heilbroner.
41. Which of the following is not an idea advocated by Adam Smith?
a.
Businesspersons conspiring to fix prices are a threat to the price system.
b.
Pursuit of private self interest with an invisible hand is the best way to promote the public
interest.
c.
Government should control the economy.
d.
The government should provide for national defense and little else.
42. Most of the world’s economies are mixed economies because _________.
a.
a cartel of powerful transnational firms demands it.
b.
the market system of allocation is always best.
c.
the command system of allocation is always best.
d.
government intervention in an overall market system exists because markets fail when
there is market power, a great deal of inequality, pollution externalities, or public goods.
43. In the real world, most economic systems are:
a.
market economies.
c.
mixed economies.
b.
command economies
d.
traditional economies.
44. The economic system in which the basic economic questions are answered through markets with some
government intervention is a:
a.
command economy.
c.
market economy.
b.
mixed economy.
d.
planned economy.
45. Which of the following economies is an example of a mixed system?
a.
The United States.
c.
Sweden.
b.
The United Kingdom.
d.
All of these.
46. Which of the following statements is true?
a.
The doctrine of laissez-faire advocates an economic system with extensive government
intervention and little individual decision-making.
b.
In capitalism income is distributed on the basis of need.
c.
Adam Smith was the father of socialism.
d.
Most real-world economies are mixed economic systems.
e.
The “invisible hand” refers to government economic control.
47. The economic system characterized by private ownership of resources and market is:
a.
capitalism.
c.
fascism.
b.
communism.
d.
socialism.
48. Which of the following is not a characteristic of capitalism?
a.
Private ownership of the factors of production.
b.
Businesses make their own product and price decisions.
c.
Public ownership of the factors of production.
d.
Decentralized decision-making using markets.
49. Which of the following is a characteristic of capitalism?
a.
Equality of income.
b.
Government decision-making is preferred to decentralized decision-making.
c.
Market determination of prices and quantity.
d.
Government ownership of all capital.
50. The term “capitalism” refers to which of the following?
a.
A religion based on amassing capital.
b.
An economic system characterized by private ownership of resources, and decentralized
market allocation.
c.
An economic system characterized by government ownership of resources and centralized
allocation.
d.
None of the above answers are correct.
51. Property rights allowing individuals to own goods, services, and factors of production are most
important in:
a.
socialistic economies.
c.
capitalistic economies.
b.
planned economies.
d.
command economies.
52. Which of the following is a criticism of capitalism?
a.
Unequal distribution of income.
c.
Exploitation of workers.
b.
Failure to protect the environment.
d.
All of these.
53. Which of the following is one common criticism of capitalism?
a.
Poor product quality and little product diversity.
b.
Inefficiency of nationalized industries.
c.
Inability to adjust quickly to changing economic conditions.
d.
Inadequate environmental protection.
54. Which of the following is not a characteristic of capitalism?
a.
Private ownership of resources.
b.
Decentralized decision-making using markets.
c.
Representative democracy.
d.
Consumer sovereignty.
55. An economic system characterized by private ownership of the factors of production and economic
activity coordinated through a system of markets and prices is called:
a.
capitalism.
c.
communism.
b.
socialism.
d.
none of these.
56. Which of the following statements is true?
a.
The doctrine of laissez-faire advocates an economic system with extensive government
intervention and little individual decision-making.
b.
In capitalism income is distributed on the basis of need.
c.
Adam Smith was the father of socialism.
d.
Most real-world economies are mixed economic systems.
e.
The “invisible hand” refers to government economic control.
57. Which of the following is a characteristic of capitalism?
a.
Government ownership of all capital.
b.
Government decision-making is preferred to decentralized decision-making.
c.
Market determination of prices and quantity.
d.
Equality of income.
58. The freedom of consumers to cast their dollar votes to buy, or not to buy, at prices determined in
competitive markets describes:
a.
socialism.
c.
consumer sovereignty.
b.
communism.
d.
the aspirations of Karl Marx.
59. The term “socialism” refers to which of the following?
a.
A religion centered on community interaction.
b.
An economic system characterized by private ownership of resources, and decentralized
market allocation.
c.
An economic system characterized by government ownership of resources and centralized
allocation.
d.
None of the above answers are correct.
60. Which of the following is a correct characterization of socialism?
a.
Tradition answers the basic economic questions.
b.
Markets are used exclusively to answer the basic economic questions.
c.
Central planning is seldom used to answer the basic economic questions.
d.
Government ownership of many resources and centralized decision-making answers the
basic economic questions.
61. Under socialism, which of the following industries would probably be owned by the government?
a.
Steel.
c.
Agriculture.
b.
Electricity.
d.
All of these.
62. In a socialistic system, most economic decisions are made by:
a.
firms.
c.
stockholders.
b.
consumers.
d.
government planners.
63. Which of the following applies to a real-world socialistic economy?
a.
Private ownership of all factors of production.
b.
Government ownership of all factors of production.
c.
Government ownership of most of the factors of production.
d.
Lack of central planning.
64. Socialism is an economic system characterized by:
a.
private ownership of resources and market decision-making.
b.
government ownership of resources and centralized decision-making.
c.
cooperation, sharing, and little central government.
d.
a complex structure of rules and traditions that dictates decision-making.
65. Under socialism, factories, farms, mines, and natural resources are owned by:
a.
laborers.
c.
private stockholders.
b.
government.
d.
no one.
66. Socialism is correctly described by which of the following statements?
a.
Central planning is used exclusively to answer the basic economic questions.
b.
Markets are used exclusively to answer the basic economic questions.
c.
Tradition is used exclusively to answer the basic economic questions.
d.
Government ownership of many resources and centralized decision-making answers the
basic economic questions.
67. Which of the following is a characteristic of socialism?
a.
Rejection of central planning.
b.
Government ownership of all factors of production.
c.
Government ownership of most of the factors of production.
d.
Private ownership of all factors of production.
68. Karl Marx was a(n):
a.
19th century German philosopher.
c.
14th century Polish banker.
b.
18th century Russian economist.
d.
19th century Russian journalist.
69. Karl Marx published:
a.
Das Kapital.
c.
The Wealth of Nations.
b.
General Theory of Communism.
d.
Capitalist Manifesto.
70. In Marx’s ideal communist society, the state:
a.
actively promotes income incentives.
c.
owns resources and conducts planning.
b.
follows the doctrine of laissez faire.
d.
does not exist.
71. Which nation achieved the ideal communist society as described by Marx?
a.
Castro’s Cuba.
b.
Mao’s China.
c.
Stalin’s Soviet Union.
d.
No nation has achieved Marx’s vision of communist society.
72. Which of the following statements is true?
a.
The United States today comes closer to the socialist form of economic organization than
it does capitalism.
b.
When central planners set prices above equilibrium for goods and services they create
shortages.
c.
According to Karl Marx, under capitalism, workers would be exploited and would revolt
against the owners of capital.
d.
Adam Smith argued that government’s role in society would be to do absolutely nothing.
73. A classless society and economic system where all the factors of production are owned by workers and
people share production according to their needs describes:
a.
capitalism.
c.
the invisible hand.
b.
communism.
d.
a mixed economy.
TRUE/FALSE
1. In a traditional economy, innovation is encouraged.
2. In traditional economies, people base economic decisions on the precedents established by previous
generations.
3. A traditional system solves basic economic questions by long-standing customs.
4. A traditional system operates based on the self interest of buyers and sellers.
5. In a command economy, resources are publicly owned by government and economic activity is
coordinated through a central government planning authority.
6. Centralized planning agencies are a key feature of command economies.
7. A command system uses a group of planners or central authority to make basic economic decisions.
8. The command system relies on prices set by firms on the basis of consumer demands.
9. When the official price for goods and services is below the equilibrium price in a market, prices no
longer perform their rationing function efficiently.
10. Adam Smith believed that the pursuit of the public interest is also the best way to promote the private
self interest.
11. Adam Smith argued that government should actively intervene in market to improve economic
performance.
12. Adam Smith believed that a nation would produce the maximum wealth by relying on government to
make public interest economic decisions.
13. A market system does not operate based on self-interest.
14. A mixed economy cannot exist without a politically free society.
15. Most real world economies are mixed economies.
16. In the real world, countries use a mixture of the three basic types of economic systems.
17. The basic characteristics of a pure capitalist system include the private ownership of the means of
production and economic activity being coordinated through a system of markets and prices.
18. One of the strengths of a socialist economy, according to those who advocate such a system, is that
government intervention will enable a more equitable distribution of income.
19. Government involvement has become so prevalent in the U.S. economy that the U.S. economy is now
generally considered to be a socialist economy.
20. One of the strengths of a socialist economy, according to those who advocate such a system, is that
government intervention will enable a more equitable distribution of income and therefore goods and
services produced.
21. Economic efficiency and economic freedom are commonly cited as two major benefits of socialism.
22. Under socialism, no markets can operate at all.
23. Karl Marx’s massive work, titled Das Kapital, was published in 1848.
24. In Karl Marx’s view, people under the ideal state of communism would be motivated by the principle
“from each according to his ability, to each according to his enterprise.“
25. Karl Marx predicted that the exploitation of workers would cause capitalism to self-destruct.
26. Karl Marx envisioned communism as an economic system that blends the best elements of capitalism
and socialism.
27. Karl Marx viewed socialism only as a transition to the ideal state of communism.
28. In Marx’s ideal state of communism there would be no haves and have-nots.
ESSAY
1. Discuss the three basic types of economic systems.
2. Describe the differences between capitalism and socialism.
3. What is the difference between socialism and communism? What are some examples of countries that
are largely socialistic and some that are communistic?
