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Chapter 1/Ten Principles of Economics ❖ 41
85. Which of these activities will most likely impose an external cost?
a.
Betty plants flowers in her garden.
b.
Bonnie gets a flu vaccine.
c.
Bridget drives her car after having too much alcohol to drink.
d.
Becky buys a new flat screen television.
86. Which of these activities will most likely result in an external benefit?
a.
A college student buys a deck of cards to play solitaire in her dorm room.
b.
An elderly woman plants a flower garden on the vacant lot next to her house.
c.
An executive purchases a book to read on a business trip.
d.
A ten-year-old uses his allowance to buy new Nike shoes.
87. Which of these activities will most likely result in an external benefit?
a.
Jake purchases a dilapidated house and cleans up the yard and exterior of the house.
b.
John purchases an iPhone and downloads new apps.
c.
Jack purchases a new SUV and drives it to work every day.
d.
Joe purchases a suit and wears it on his interviews.
88. When a single person (or small group) has the ability to influence market prices, there is
a.
competition.
b.
market power.
c.
an externality.
d.
a lack of property rights.
89. Market power refers to the
a.
power of a single person or small group to influence market prices.
b.
ability of a person or small group to successfully market new products.
c.
power of the government to regulate a market.
d.
importance of a certain market in relation to the overall economy.
90. Which of the following firms is likely to have the greatest market power?
a.
an electric company
b.
a farmer
c.
a grocery store
d.
a local electronics retailer
42 ❖ Chapter 1/Ten Principles Of Economics
91. Which of the following firms is most likely to have market power?
a.
a grocery store in a metropolitan area
b.
a gas station in a suburb
c.
a pub in a college town
d.
the only hotel in a rural area
92. An example of a firm with market power is a
a.
delicatessen in New York.
b.
cable TV provider in St. Louis.
c.
clothing store in Los Angeles.
d.
family farm in Illinois.
93. The price of diamonds is high, in part because the majority of the world’s diamonds are controlled by a single firm.
This is an example of
a.
a market failure caused by an externality.
b.
a market failure caused by market power.
c.
a market failure caused by equality.
d.
There is no market failure in this case.
94. The ability of an individual to own and exercise control over scarce resources is called
a.
market failure.
b.
property rights.
c.
externality.
d.
market power.
HOW THE ECONOMY AS A WHOLE WORKS
1. In 2008, the average American earned about $47,000 while the average Nigerian earned about $1,400. Which of
the following statements is likely?
a.
The average American purchases more televisions than the average Nigerian.
b.
The average American has better nutrition and healthcare than the average Nigerian.
c.
The average American has a longer life expectancy than the average Nigerian.
d.
All of the above are correct.
Chapter 1/Ten Principles of Economics ❖ 43
2. In the United States, incomes historically have grown about 2 percent per year. At this rate, average income dou-
bles every
a.
15 years.
b.
25 years.
c.
35 years.
d.
45 years.
3. In the United States, incomes have historically grown
a.
about 0.5 percent per year.
b.
about 2 percent per year.
c.
about 4 percent per year.
d.
about 6 percent per year.
4. Over the past century, the average income in the United States has risen about
a.
twofold.
b.
fivefold.
c.
eightfold.
d.
tenfold.
5. The term "productivity"
a.
means the same thing as "efficiency."
b.
is seldom used by economists, as its meaning is not precise.
c.
refers to the quantity of goods and services produced from each unit of labor input.
d.
refers to the variety of goods and services from which households can choose when they shop.
6. Productivity is defined as the
a.
amount of goods and services produced from each unit of labor input.
b.
number of workers required to produce a given amount of goods and services.
c.
amount of labor that can be saved by replacing workers with machines.
d.
actual amount of effort workers put into an hour of working time.
7. The amount of goods and services produced from each unit of labor input is called
a.
opportunity cost.
b.
productivity.
c.
externality.
d.
marginal benefit.
44 ❖ Chapter 1/Ten Principles Of Economics
8. What is the most important factor that explains differences in living standards across countries?
a.
the quantity of money
b.
the level of unemployment
c.
productivity
d.
equality
9. Almost all variation in living standards is attributable to differences in countries'
a.
population growth rates.
b.
productivity.
c.
systems of public education.
d.
taxes.
10. The income of a typical worker in a country is most closely linked to which of the following?
a.
population
b.
productivity
c.
market power
d.
government policies
11. A direct or positive relationship exists between a country's
a.
productivity and its standard of living.
b.
amount of government spending and its productivity.
c.
total population and its average citizen’s income.
d.
rate of population growth and the extent of its trade with other countries.
12. The primary determinant of a country's standard of living is
a.
the country’s ability to prevail over foreign competition.
b.
the country’s ability to produce goods and services.
c.
the total supply of money in the economy.
d.
the average age of the country's labor force.
13. The historical rise in living standards of American workers is primarily a result of
a.
the influence of labor unions in America.
b.
tariff protection imposed by the American government.
c.
the enactment of minimum-wage laws in America.
d.
the rise in American productivity.
14. The fact that different countries experience different standards of living is largely explained by differences in those
countries'
a.
populations.
b.
productivity levels.
c.
locations.
d.
None of the above is correct. Economists are puzzled by differences in standards of living around
the world.
15. Suppose that the average income of a Costa Rican is higher than the average income of a Guatemalan. You might
conclude that
a.
Costa Rican firms are faced with stricter government regulations than Guatemalan firms.
b.
total income is divided among fewer workers in Costa Rica since it has a smaller labor force than
Guatemala.
c.
Guatemala's climate allows for longer growing seasons and therefore Guatemala can produce large
quantities of grain and other crops.
d.
productivity in Costa Rica is higher than in Guatemala.
16. The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by
a.
unstable economic conditions in Eastern Europe.
b.
increased competition from abroad.
c.
a decline in the rate of increase in U.S. productivity.
d.
a strong U.S. dollar abroad, hurting U.S. exports.
17. Slow growth in US incomes during the 1970s and 1980s was primarily due to
a.
slow productivity growth in the US.
b.
increased competition from Japan.
c.
increased competition from European countries.
d.
a rapid decrease in the quantity of money in the economy.
18. Suppose a typical worker in India can produce 32 units of product in an eight-hour day, while a typical worker in
Bangladesh can produce 30 units of product in a 10-hour day. We can conclude that
a.
worker productivity in Bangladesh is higher than in India.
b.
the standard of living will likely be higher in India than in Bangladesh.
c.
productivity is 4 units per hour for the worker in Bangladesh and 3 units per hour for the worker in
India.
d.
there will be no difference between the standard of living in India and Bangladesh.
46 ❖ Chapter 1/Ten Principles Of Economics
19. Suppose that in Ireland total annual output is worth $600 million and people work 30 million hours. In Canada
total annual output is worth $800 million and people work 50 million hours. Productivity is higher
a.
in Ireland. Most variation in the standard of living across countries is due to differences in
productivity.
b.
in Ireland. Differences in productivity explain very little of the variation in the standard of living
across countries.
c.
in Canada. Most variation in the standard of living across countries is due to differences in
productivity.
d.
in Canada. Differences in productivity explain very little of the variation in the standard of living
across countries.
20. According to a recent study of Chilean bus drivers, drivers who are paid by the number of passengers they
transport have higher productivity than drivers who are paid by the hour. If Chilean bus drivers are paid by the
number of passengers they transport and Colombian bus drivers are paid by the hour, we can conclude that
a.
Chilean bus drivers likely have a higher standard of living than Colombian bus drivers.
b.
Colombian bus drivers likely have a higher standard of living than Chilean bus drivers.
c.
Chilean and Colombian bus drivers likely have the same standard of living.
d.
Chilean and Colombian bus drivers likely have a higher standard of living than US bus drivers.
21. US citizens have better nutrition, better healthcare, and a longer life expectancy than citizens of Ghana. Which of
the following conclusions can be drawn from this statement?
a.
Average income in the US is higher than the average income in Ghana.
b.
The US has a higher standard of living than Ghana.
c.
Productivity in the US is higher than productivity in Ghana.
d.
All of the above are correct.
22. In a particular country in 1998, the average worker needed to work 25 hours to produce 40 units of output. In that
same country in 2008, the average worker needed to work 40 hours to produce 68 units of output. In that country,
the productivity of the average worker
a.
decreased by 1.7 percent between 1998 and 2008.
b.
remained unchanged between 1998 and 2008.
c.
increased by 4.75 percent between 1998 and 2008.
d.
increased by 6.25 percent between 1998 and 2008.
23. In a particular country in 2000, the average worker needed to work 40 hours to produce 55 units of output. In that
same country in 2008, the average worker needed to work 30 hours to produce 45 units of output. In that country,
the productivity of the average worker
a.
decreased by about 6 percent between 2000 and 2008.
b.
remained unchanged between 2000 and 2008.
c.
increased by about 9 percent between 2000 and 2008.
d.
increased by about 18 percent between 2000 and 2008.
Chapter 1/Ten Principles of Economics ❖ 47
24. In a particular country in 1998, the average worker needed to work 40 hours to produce 100 units of output. In that
same country in 2008, the average worker needed to work 36 hours to produce 72 units of output. In that country,
the productivity of the average worker
a.
decreased between 1998 and 2008, so we would expect the standard of living to have decreased
accordingly.
b.
increased between 1998 and 2008, so we would expect the standard of living to have increased
accordingly.
c.
decreased between 1998 and 2008, so we would expect inflation to have decreased accordingly.
d.
increased between 1998 and 2008, so we would expect inflation to have increased accordingly.
25. In a particular country in 1999, the average worker had to work 20 hours to produce 55 units of output. In that
same country in 2009, the average worker needed to work 28 hours to produce 77 units of output. In that country,
the productivity of the average worker
a.
increased by 2 percent between 1999 and 2009.
b.
increased by 5 percent between 1999 and 2009.
c.
remained unchanged between 1999 and 2009.
d.
decreased by 3 percent between 1999 and 2009.
26. A worker in Equador can earn $3 per day making cotton cloth on a hand loom. A worker in the United States can
earn $70 per day making cotton cloth with a mechanical loom. What accounts for the difference in wages?
a.
U.S. textile workers belong to a union.
b.
There is little demand for cotton cloth in Equador and great demand in the U.S.
c.
Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.
d.
Equador has a low-wage policy to make its textile industry more competitive in world markets.
27. To promote good economic outcomes, policymakers should strive to enact policies that
a.
enhance productivity.
b.
enhance individuals' market power.
c.
result in a rapidly-growing quantity of money.
d.
All of the above are correct.
28. To raise productivity, policymakers could
a.
increase spending on education.
b.
provide tax credits to firms for capital improvements.
c.
fund research and development.
d.
All of the above are correct.
48 ❖ Chapter 1/Ten Principles Of Economics
29. To increase living standards, public policy should
a.
ensure that workers are well educated and have the necessary tools and technology.
b.
make unemployment benefits more generous.
c.
move workers into jobs directly from high school.
d.
ensure a greater degree of equality, taking all income-earners into account.
30. The increase in living standards of American workers over the past century is primarily due to
a.
the success of labor unions.
b.
minimum-wage laws.
c.
improvements in productivity.
d.
None of the above are correct.
31. To improve living standards, policymakers should
a.
impose restrictions on foreign competition.
b.
formulate policies designed to increase productivity.
c.
impose tougher immigration policies.
d.
provide tax breaks for the middle class.
32. Incomes of U.S. households in the 1970s and 1980s
a.
grew rapidly, due to the widespread success of labor unions in pushing up wages during those
decades.
b.
grew rapidly, due to several increases in the minimum wage during those decades.
c.
grew rapidly, due to government policies that discouraged the importation of foreign products
during those decades.
d.
grew slowly, due to slow growth of the output of goods and services per hour of U.S. workers' time
during those decades.
33. An increase in the overall level of prices in an economy is referred to as
a.
the income effect.
b.
inflation.
c.
deflation.
d.
the substitution effect.
34. Inflation is defined as
a.
a period of rising productivity in the economy.
b.
a period of rising income in the economy.
c.
an increase in the overall level of output in the economy.
d.
an increase in the overall level of prices in the economy.
Chapter 1/Ten Principles of Economics ❖ 49
35. In the early 1920s,
a.
Germany experienced a very high rate of inflation.
b.
the quantity of German money was declining rapidly.
c.
the value of German money remained almost constant.
d.
All of the above are correct.
36. During the early 1920s in Germany, prices
a.
doubled annually.
b.
doubled monthly.
c.
tripled monthly.
d.
tripled annually.
37. In less than two years in the early 1920s, the cost of a German newspaper rose from 0.30 marks to 70,000,000
marks. This is a spectacular example of
a.
market power caused by a change in the country’s standard of living.
b.
market power caused by a single firm controlling the newspaper production.
c.
inflation caused by increased productivity in the economy.
d.
inflation caused by an increase in the quantity of money in the economy.
38. One of the 20th century’s worst episodes of inflation occurred in
a.
the United States in the 1960s.
b.
Italy in the 1950s.
c.
Russia in the 1930s.
d.
Germany in the 1920s.
39. In the United States, the overall level of prices more than doubled during the
a.
1950s.
b.
1960s.
c.
1970s.
d.
1980s.
40. President Gerald Ford referred to inflation as
a.
a blight on our nation's economy.
b.
a necessary evil to combat high unemployment.
c.
public enemy number one.
d.
a fly in the ointment.
50 ❖ Chapter 1/Ten Principles Of Economics
41. The U.S. president who referred to inflation as “public enemy number one” was
a.
Richard Nixon.
b.
Gerald Ford.
c.
Jimmy Carter.
d.
Ronald Reagan.
42. In which of the following decades was there both high inflation and rapid money supply growth in the US?
a.
the 1970’s and the 1990’s
b.
the 1970’s but not the 1990’s
c.
the 1990’s but not the 1970’s
d.
neither the 1970’s nor the 1990’s
43. In the 1990s, inflation in the United States was
a.
very close to zero.
b.
about 3 percent per year.
c.
about 6 percent per year.
d.
commonly referred to as “public enemy number one.”
44. Large or persistent inflation is almost always caused by
a.
excessive government spending.
b.
excessive growth in the quantity of money.
c.
foreign competition.
d.
higher-than-normal levels of productivity.
45. Which of the following would a permanent increase in the growth rate of the money supply change permanently?
a.
inflation
b.
unemployment
c.
both inflation and unemployment
d.
neither inflation nor unemployment
46. Most economists believe that an increase in the quantity of money results in
a.
an increase in the demand for goods and services.
b.
lower unemployment in the short run.
c.
higher inflation in the long run.
d.
All of the above are correct.
Chapter 1/Ten Principles of Economics ❖ 51
47. In the short run, which of the following rates of growth in the money supply is likely to lead to the lowest level of
unemployment in the economy?
a.
3 percent per year
b.
5 percent per year
c.
7 percent per year
d.
9 percent per year
48. In the short run, which of the following rates of growth in the money supply is likely to lead to the highest level of
unemployment in the economy?
a.
1 percent per year
b.
2 percent per year
c.
3 percent per year
d.
4 percent per year
49. In the short run, an increase in the money supply is likely to lead to
a.
lower unemployment and lower inflation.
b.
lower unemployment and higher inflation.
c.
higher unemployment and lower inflation.
d.
higher unemployment and higher inflation.
50. Suppose that the Federal Reserve Bank announces that it will be making a change to a key interest rate to increase
the money supply. This is likely because
a.
the Federal Reserve Bank is worried about inflation.
b.
the Federal Reserve Bank is worried about unemployment.
c.
the Federal Reserve Bank is hoping to reduce the demand for goods and services.
d.
the Federal Reserve Bank is worried that the economy is growing too quickly.
51. Low rates of inflation are generally associated with
a.
low rates of government spending.
b.
small or nonexistent government budget deficits.
c.
low rates of productivity growth.
d.
low rates of growth of the quantity of money.
52. Which of the following is the most correct statement about the relationship between inflation and unemployment?
a.
In the short run, falling inflation is associated with falling unemployment.
b.
In the short run, falling inflation is associated with rising unemployment.
c.
In the long run, falling inflation is associated with falling unemployment.
d.
In the long run, falling inflation is associated with rising unemployment.
