Ten Principles of Economics 161
65. In the short run, which of the following is not correct?
a. Increasing the money supply increases the demand for goods and services.
b. Increasing the money supply encourages firms to hire more workers.
c. Lowering the money supply leads to a higher level of unemployment.
d. Policies that encourage higher employment will also induce a lower rate of inflation.
66. In response to the deep economic downturn in the US in 2008 and 2009, the US
a. reduced taxes.
b. increased government spending.
c. increased the supply of money.
d. All of the above are correct.
162 Ten Principles of Economics
67. The combination of President Obama’s strategies and the Federal Reserve’s reaction to the deep
economic downturn in the US in 2008 and 2009
a. intended to reduce unemployment.
b. may lead to excessive inflation over time.
c. resulted in higher taxes and an increased supply of money.
d. Both a and b are correct.
68. The short-run tradeoff between inflation and unemployment implies that, in the short run,
a. a decrease in the growth rate of the quantity of money will be accompanied by an increase in
the unemployment rate.
b. an increase in the growth rate of the quantity of money will be accompanied by an increase in
the unemployment rate.
c. policymakers are able to reduce the inflation rate and, at the same time, reduce the
unemployment rate.
d. policymakers can influence the inflation rate, but not the unemployment rate.
Ten Principles of Economics 163
69. The irregular and largely unpredictable fluctuations in economic activity are called
a. market failure.
b. business cycle.
c. inflation.
d. unemployment.
70. The business cycle is the
a. relationship between unemployment and inflation.
b. irregular fluctuations in economic activity.
c. positive relationship between the quantity of money in an economy and inflation.
d. predictable changes in economic activity due to changes in government spending and taxes.
71. The business cycle is measured by the
a. production of goods and services.
b. number of people employed.
c. the interest rate.
d. Both a and b are correct.
164 Ten Principles of Economics
72. Irregular fluctuations in economic activity are known as the
a. business cycle.
b. broken window fallacy.
c. tradeoff between inflation and unemployment.
d. ten principles of economics.
73. Both the production of goods and services and the unemployment rate are used to measure
a. the business cycle.
b. productivity.
c. the interest rate.
d. inflation.
Ten Principles of Economics 165
74. The “broken window fallacy”
a. explains why inflation is so high.
b. is a justification for the government to print more money.
c. is illustrated when a government program is justified not on its merits but on the number of jobs
it will create.
d. has nothing to do with public policy.
75. When a government program is justified not on its merits but on the number of jobs it will create,
a. the program is an efficient use of taxpayer dollars.
b. it should be approved only if the unemployment rate is low.
c. taxes should be raised to fund the program.
d. it is known as the “broken window fallacy.”
166 Ten Principles of Economics
76. Congressman Dearmark justified spending $3 million on a new entertainment complex in his
district because it will create 450 new jobs for his residents. As a student of economics, you know
that
a. this is a case of the “broken window fallacy.”
b. this is a great use of taxpayer dollars.
c. this policy diverts money from spending somewhere else in the economy.
d. Both a and c are correct.
77. It once took 90 percent of our population to grow our food. It now takes only 3 percent of the
population to grow our food. Which of the following statements is true?
a. This loss of jobs has been detrimental to our economy.
b. The government should provide subsidies to encourage more people to become farmers.
c. This reduction in the number of farmers explains the increase in the price of food.
d. This is progress because freed-up labor is used to produce other goods.
Ten Principles of Economics 167
True/False and Short Answer
1. Scarcity means that there is less of a good or resource available than people wish to have.
a. True
b. False
3. Economics is the study of how society allocates its unlimited resources.
a. True
b. False
168 Ten Principles of Economics
4. Because resources are scarce, a society cannot give all individuals the standard of living to which
each aspires.
a. True
b. False
5. Equality means distributing society’s resources in the most efficient manner.
a. True
b. False
6. Economists study how people make decisions.
a. True
b. False
Ten Principles of Economics 169
7. With careful planning, we can usually get something that we like without having to give up
something else that we like.
a. True
b. False
8. Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff.
a. True
b. False
9. The classic tradeoff between “guns and butter” states that when a society spends more on national
defense, it has less to spend on consumer goods to raise the standard of living.
a. True
b. False
170 Ten Principles of Economics
10. Efficiency means everyone in the economy should receive an equal share of the goods and
services produced.
a. True
b. False
11. Equality refers to how the pie is divided, and efficiency refers to the size of the economic pie.
a. True
b. False
12. Government policies that improve equality usually increase efficiency at the same time.
a. True
b. False
Ten Principles of Economics 171
13. Using income tax revenue to fund the welfare system illustrates the conflict between efficiency
and equality.
a. True
b. False
14. An individual deciding how to allocate her limited time is dealing with both scarcity and trade-offs.
a. True
b. False
15. The cost of an action is measured in terms of foregone opportunities.
a. True
b. False
172 Ten Principles of Economics
16. Tuition is the single-largest cost of attending college for most students.
a. True
b. False
17. If wages for accountants rose, then accountants’ leisure time would have a lower opportunity
cost.
a. True
b. False
18. A marginal change is a small incremental adjustment to an existing plan of action.
a. True
b. False
Ten Principles of Economics 173
19. An increase in the marginal cost of an activity necessarily means that people will no longer
engage in any of that activity.
a. True
b. False
20. If the average cost of transporting a passenger on the train from Chicago to St. Louis is $75, it
would be irrational for the railroad to allow any passenger to ride for less than $75.
a. True
b. False
21. The fact that people are willing to pay much more for a diamond, which is not needed for
survival, than they are willing to pay for a cup of water, which is needed for survival, is an
example of irrational behavior.
a. True
b. False
174 Ten Principles of Economics
22. A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal
benefit.
a. True
b. False
23. Suppose one county in Missouri decides it wants to reduce alcohol consumption, so the county
passes a law that raises the price of a bottle of beer by $1. As a result, people drive to other
counties to drink alcohol, which results in an increase in drunk driving. This illustrates the principle
that people respond to incentives.
a. True
b. False
24. A tax on gasoline is an incentive that encourages people to drive smaller more fuel-efficient cars.
a. True
b. False
Ten Principles of Economics 175
25. To say people respond to incentives means that people may alter their decisions when the costs
and benefits of an action change.
a. True
b. False
26. One of the effects of gas prices rising from about $2 to about $4 per gallon was airlines ordering
new, fuel-efficient aircraft.
a. True
b. False
27. Trade allows each person to specialize in the activities he or she does best, thus increasing each
individual‘s productivity.
a. True
b. False
176 Ten Principles of Economics
28. Trade with any nation can be mutually beneficial.
a. True
b. False
29. Trade can make everyone better off except in the case where one person is better at doing
everything.
a. True
b. False
30. The invisible hand ensures that economic prosperity is distributed equally.
a. True
b. False
Ten Principles of Economics 177
31. A market economy cannot produce a socially desirable outcome because individuals are
motivated by their own selfish interests.
a. True
b. False
32. Communist countries worked on the premise that government officials were in the best position to
allocate the economy’s scarce resources.
a. True
b. False
33. The government can potentially improve market outcomes if market inequalities or market failure
exists.
a. True
b. False
178 Ten Principles of Economics
34. One way that governments can improve market outcomes is to ensure that individuals are able to
own and exercise control over their scarce resources.
a. True
b. False
35. Market failure refers to a situation in which the market does not allocate resources efficiently.
a. True
b. False
36. Market power and externalities are two possible causes of market failure.
a. True
b. False
Ten Principles of Economics 179
37. Market failure is the ability of a single person to have a substantial influence on market prices.
a. True
b. False
38. Productivity is defined as the quantity of goods and services produced from each unit of labor
input.
a. True
b. False
39. Inflation is the primary determinant of a country’s living standards.
a. True
b. False
180 Ten Principles of Economics
40. Inflation increases the value of money.
a. True
b. False
41. Inflation measures the increase in the quantity of goods and services produced from each hour of
a worker’s time.
a. True
b. False
42. The goal of President Obama’s stimulus package and increased government spending following
the deep economic downturn in 2008 and 2009 was to reduce inflation.
a. True
b. False