128. When interdiction efforts manage to stem the flow of illegal drugs into the United States, assuming no change in
demand, the price of these substances rises. This price increase leads to more crime as addicts attempt to maintain their
now more-expensive habits. Economists call this side-effect of the drug business
a.
the illusion of rationality.
b.
an externality.
c.
the cost disease of personal services.
d.
inflation.
e.
unemployment.
129. The use of chlorofluorocarbons in refrigerators and air conditioners is alleged to cause the destruction of the ozone
layer that surrounds the earth. This layer protects humans from ultraviolet radiation, which causes skin cancer. Industry
has been prohibited from using these substances in aerosol cans, but the government has been reluctant to ban their use
altogether because of the serious economic consequences. Economists analyze such problems and refer to them as
a.
issues of unfairness.
b.
examples of excess abstraction.
c.
externalities.
d.
comparative advantage issues.
e.
examples of trade-offs between output and equality.
130. Rent control is usually justified on the grounds that it protects moderate- to low-income families from the burden of
rapidly rising rents and from eviction if they are unable to pay. It also prevents landlords from reaping windfalls as
property values rise. Opponents note that rent controls usually lead to a reduced supply of rental housing and shortages.
The proponents of rent controls support them primarily on the grounds of
a.
efficiency.
b.
equality.
c.
externalities.
d.
cost disease of services.
131. Because there is a trade-off between total output and equality of income distribution,
a.
greater equality of distribution will generally result in higher levels of output.
b.
greater output is generally associated with more equal distribution.
c.
policies designed to increase output will only succeed if distribution is more equal.
d.
policies intended to expand output must necessarily fail.
e.
policies designed to equalize distribution may adversely affect the size of output.
132. In 1980, in order to stimulate agricultural production, Fidel Castro allowed Cuban farmers to sell their goods directly
to consumers and keep whatever profit they made. Some farmers were earning $50,000 per year, compared with the
average worker income of $2,400. The workers resented this. Castro denounced the farmers as “capitalist gangsters” and
closed the free markets. Cuban cash income declined five percent and fresh vegetables were in short supply. This
illustrates the economic concept of the
a.
b.
c.
d.
e.
133. In terms of the competing claims of equality and efficiency, in the United States we have
a.
chosen greater wage inequality for lower unemployment.
b.
chosen higher unemployment for less wage inequality.
c.
both greater wage inequality and higher unemployment.
d.
not faced a trade-off between wage inequality and unemployment.
e.
been able to choose both less wage inequality and lower unemployment.
134. In contrast to the United States, the European Union has chosen
a.
greater wage inequality for lower unemployment.
b.
less wage inequality and lower unemployment.
c.
greater wage inequality and higher unemployment.
d.
similar wage inequality but more unemployment.
e.
less wage inequality for higher unemployment.
135. In the United States, the fact that the gap between the rich and the poor has been increasing is often justified by
economists on the grounds that greater
a.
efficiency can never be achieved without greater inequality.
b.
inequality does not create any problems.
c.
inequality is a desirable end in itself.
d.
inequality is an undesirable consequence of greater efficiency.
e.
efficiency should be achieved at any cost.
136. The 1981 tax reform act reduced taxes on high-income individuals. Many economists believed that high tax rates
would deter high-income individuals from working and investing, thus slowing the growth of income. This illustrates the
issue of
a.
the equality-efficiency trade-off.
b.
usury.
c.
the effects of budget deficits on future generations.
d.
the cost disease of the public sector.
e.
the importance of externalities.
137. Because there is a trade-off between inflation and unemployment in the short run,
a.
lower unemployment will typically cause inflation to fall.
b.
policies designed to reduce unemployment will typically set off a recession.
c.
policies designed to reduce inflation will cause unemployment to fall as well.
d.
higher inflation will generally be associated with higher unemployment.
e.
lower inflation will generally be associated with higher unemployment.
138. An article in a recent economics periodical asks the question: “Is low inflation worth it?” By “it,” the article probably
means
a.
the loss of comparative advantage.
b.
enduring externalities.
c.
unemployment.
d.
repealing the law of supply and demand.
e.
the opportunity cost of higher interest rates.
139. In the short run, efforts to reduce the unemployment rate are likely to cause
a.
a decrease in the inflation rate.
b.
an increase in the inflation rate.
c.
no change in the inflation rate.
d.
Uncertain-economists have found no relationship between the two variables.
140. If a government enacts a rent control to protect apartment tenants, the result is likely going to be
a.
an increase in rents with a surplus of apartments.
b.
an increase in rents with a shortage of apartments.
c.
a decrease in rents with a surplus of apartments.
d.
a decrease in rents with a shortage of apartments.
141. If a government enacts a price floor on agricultural products to protect wheat farmers, the result is likely going to be
a.
an increase in price with a surplus of wheat.
b.
an increase in price with a shortage of wheat.
c.
a decrease in price with a surplus of wheat.
d.
a decrease in price with a shortage of wheat.
142. If a voluntary trade takes place,
a.
both parties will benefit from the transaction.
b.
only one party will benefit from the transaction.
c.
neither party will benefit from the transaction.
d.
both parties will benefit only if the government regulates the transaction.
143. The dramatic increase in the standard of living since the Industrial Revolution
a.
means that societies and individuals face no constraints.
b.
has not meant unlimited abundance for societies or persons.
c.
means that “opportunity cost” is a meaningless concept.
d.
has reduced the choices open to persons.
e.
has made economics less useful to persons.
144. Probably the most important factor affecting material well-being is
a.
inflation rates.
b.
unemployment rates.
c.
budget deficits.
d.
growth in productivity.
e.
monopoly power.
145. In 1971, a bank worker could process 265 checks in 1 hour. Currently, computers with built-in reader-sorter
processing capacity have pushed that number above 100,000 checks per hour. Economists describe this type of activity as
a.
exploitation of labor.
b.
an increase in labor productivity.
c.
speed-up.
d.
comparative advantage.
e.
mutual gains from voluntary trade.
146. Economics
a.
is a narrowly focused discipline.
b.
is a broad-ranging discipline.
c.
concerns itself only with the U.S. economy.
d.
says little about “everyday life.”
e.
deals with minor problems.
147. Which of the following statements is true?
a.
Economic theory does not make unrealistic assumptions.
b.
Economists should not ignore details while focusing on complex problems.
c.
Abstraction forms an important part of economic analysis.
d.
The word theory means same for both economists and laymen.
148. Economics is a social science in the sense that it
a.
rigorously examines human behavior.
b.
is not as scientific as physics.
c.
relies on historical data instead of mathematical data.
d.
relies on statistics instead of mathematics.
e.
All of the above are correct.
149. For the typical student, taking an introductory course in economics should
a.
turn the student into an economist.
b.
teach the student solutions to most social problems.
c.
teach the student how to answer complex social questions.
d.
help the student learn to make rational decisions.
e.
All of the above are correct.
150. Tools used by economists include
a.
historical study.
b.
mathematical reasoning.
c.
statistical inference.
d.
All of the above are correct.
151. Economics is a social science rather than a “hard” science like physics because
a.
economists abstract from reality when creating their theories.
b.
economics is easier to study than physics.
c.
economists must explain their theories to policy makers who lack formal mathematical training.
d.
economists study human behavior, which is affected by an unpredictable and vast range of influences.
152. Abstraction can be thought of as
a.
ignoring reality in order to build theory.
b.
omitting unimportant details in order to understand complex phenomena.
c.
creating absurdity in order to explain simplicity.
d.
assuming complexity when simplicity will do.
e.
stylizing reality rather than analyzing cause and effect.
153. What is the appropriate degree of abstraction?
a.
The more detail there is, the better.
b.
The detail should be minimized in order to avoid all complexity.
c.
Abstraction is unnecessary, and should be avoided.
d.
Abstraction is the essence of analysis, and is pursued for its own sake.
e.
It depends on the objective of the analysis.
154. The process of focusing on only the most important factors to explain a phenomenon is called
a.
abstraction.
b.
marginal analysis.
c.
rational choice.
d.
controlled experimentation.
e.
the trade-off between efficiency and equality.
155. Economists make assumptions because
a.
they need to incorporate value judgments into their models.
b.
analysis without assumptions would be impossibly complex.
c.
they always have imperfect information about reality.
d.
assumptions are the final product of careful economic analysis.
e.
assumptions allow economists to ignore things that they cannot explain.
156. “Assume that all individuals have perfect information about prices now and in the future, that they have identical
tastes, that all markets are competitive, and that there is no government.” This statement is indicative of how economists
a.
apply the law of supply and demand.
b.
employ marginal analysis.
c.
are prevented from getting correct answers.
d.
abstract for analytic purposes.
e.
use realistic assumptions to develop theory.
157. A theory can best be defined as
a.
an untested assertion of untested fact.
b.
a collection of assumptions that simplify the real world.
c.
an opinion of a reliable person who studies a subject or discipline.
d.
a deliberate simplification of factual relationships that attempts to explain how those relationships work.
e.
the body of knowledge that has been scientifically verified by the scientific community.
158. To an economist, theory can be thought of as
a.
abstraction for the sake of argument.
b.
one person’s opinion, which is just as good as another’s.
c.
another term for the description of a situation.
d.
beliefs which cannot necessarily be verified.
e.
explanation of mechanisms behind observed phenomena.
159. Which of the following statements is correct?
a.
Theory and hypothesis are interchangeable terms for the same thing.
b.
A hypothesis may result from a tested and confirmed theory.
c.
A theory may result from a tested and confirmed hypothesis.
d.
A hypothesis is a theory whose formulation relies on mathematics.
160. During one winter quarter at Frozen U., snow falls every Friday night. Students assume that, on their campus,
Fridays cause snow. This hypothesis
a.
should more properly be considered a theory.
b.
assumes that correlation implies causation.
c.
assumes that causation implies correlation.
d.
reflects the fallacy of composition.
161. Economists and others use economic theory
a.
only to analyze situations in which money changes hands.
b.
as a partial basis for public policy recommendations.
c.
to confuse their enemies.
d.
to replace value judgments about important policy issues.
162. Economic theory
a.
is a deliberate simplification of factual relationships.
b.
seeks to disprove a hypothesis.
c.
is based mainly on assumptions.
d.
seeks to prove political ideals.
163. A theory is an abstraction used often by economists to
a.
describe a problem.
b.
keep all assumptions in their proper places.
c.
explain why things work the way they do.
d.
describe a hierarchical ordering of facts.
e.
arrange variables into a graphical format.
164. Economic theory is a necessity, not a luxury. This statement is true because theory
a.
always leads to practical and useful policy.
b.
can prevent depressions in the economy.
c.
substitutes for vast amounts of data.
d.
provides a structure for organizing and analyzing data.
e.
always leads to accurate predictions.
165. Policy-oriented economists seek to develop theories to
a.
explain how things work so policies can be formulated.
b.
describe what happened in a particular time period in history.
c.
describe current economic events.
d.
find correlations between events.
e.
change people’s values and ethics.
166. In the 19th century, Russian peasants noticed that during cholera epidemics there were lots of doctors around; in an
attempt to eliminate cholera, they killed all the doctors. This is an example of
a.
mistaking correlation with causation.
b.
the fallacy of opportunism.
c.
excessive abstraction.
d.
rationality.
e.
marginal analysis.
167. An economic model can be defined as
a.
a testable claim which can be evaluated with proper data.
b.
a representation of a theory or a part of a theory.
c.
another word for theory.
d.
a method to distinguish correlation from causation.
e.
All of the above are correct.
168. Economists use models in order to
a.
experiment with alternative circumstances.
b.
make educated guesses about real life events.
c.
predict outcomes under various hypothetical conditions.
d.
increase understanding of how a relationship actually works.
e.
All of the above are correct.
169. Why do economists tend to create models in diagrammatic form?
a.
Diagrams hide reality, and theory is an attempt to avoid reality.
b.
It is easier than building models out of physical objects.
c.
Economic reality cannot possibly be represented except in diagrams.
d.
Most economists are frustrated artists, and like to draw when possible.
e.
All of the above are correct.
170. Is it possible to express an economic model in words without diagrams?
a.
No, models can only be stated in diagrams.
b.
No, the very definition of model requires mathematical form.
c.
Yes, some of the simplest models are verbal statements.
d.
Yes, although the best models always use diagrams.
e.
Uncertain, economic theory has not answered this question yet.
171. A useful economic model
a.
deals only with possibilities that actually occurred.
b.
makes only realistic assumptions.
c.
may make some unrealistic assumptions in order to simplify a complex reality.
d.
should avoid drawing conclusions that have public policy implications, since economics is not equipped to
make value judgments.
172. Economic models are often expressed in
a.
equations.
b.
words.
c.
graphs.
d.
physical objects..
173. Economic models
a.
are always based on realistic assumptions.
b.
usually predict perfectly.
c.
can never be tested with real world data.
d.
are used to describe cause-and-effect relationships.
e.
are too simple to be of much use.
174. Economists are often perceived as disagreeing with each other. Is this the way things really are?
a.
No, economists agree on much more than is commonly supposed.
b.
No, the problem is that some economists are smarter than others.
c.
No, economists “stage” disagreements for public amusement.
d.
Yes, economists rarely agree on much of anything.
e.
Yes, economists are unable to analyze problems dispassionately.
175. Which of the following is one source of disagreement between economists?
a.
Some facts about the economy are unknown.
b.
Economists differ in their political persuasions.
c.
Economic theory may not always give an unambiguous answer to a question.
d.
Solving one problem may make another problem worse.
e.
All of the above are correct.
176. What is the “right” degree of abstraction necessary to analyze an economic problem?
a.
simple abstraction of only minor details
b.
simple abstraction of only irrelevant details
c.
total abstraction of all variables
d.
total abstraction of all irrelevant details
e.
There is no “right” degree of abstraction to analyze an economic problem.
177. Economists may disagree about how to solve an economic problem because they
a.
use different models to analyze the problem and its solutions.
b.
have different political and moral beliefs.
c.
disagree about the facts of the situation.
d.
All of the above are correct.
178. Economic analysis and policy are made more difficult by
a.
having so much data to work with.
b.
inadequate and imperfect information.
c.
an incomplete consensus on the basic goals of social policy.
d.
the lack of public interest and opinion on economic questions.
e.
the major economic problems society faces.
179. An economist might be hired to answer which of the following questions?
a.
What will the price of oil be next year?
b.
Why is the median income of women about half the median income of men?
c.
How much will interest rates change as the federal deficit decreases?
d.
How much will inflation change if import restrictions are imposed?
e.
All of the above are correct.
180. To analyze policy options, economists are forced to deal with:
a.
politicians
b.
business people
c.
rotating statistical values
d.
things that have not occurred
e.
None of these is correct.
181. Although economic science can contribute theoretical and factual knowledge on a particular issue, the final decision
on policy questions often depends on:
a.
information that is not currently available
b.
social values
c.
ethical considerations
d.
all of these
182. Two advisors to the president have given their policy recommendations, and they are in disagreement. Why do these
economists disagree?
a.
because they do not have all relevant information about the problem
b.
because they disagree on the nature of some cause-effect relationship
c.
because they have different values and opinions
d.
All of the above are reasons for disagreements among economists.