Introduction to Economic Reasoning, 8e (Rohlf)
Chapter 2: Economic Systems
1) Pure capitalism is characterized by
A) public ownership of the means of production.
B) centralized decision-making.
C) pure competition.
D) economic planning.
E) equal incomes.
2) In a “laissez-faire” economy,
A) the central planning board dictates which goods and services will be produced.
B) the role of government is very limited.
C) there is no private property.
D) income is equally distributed.
E) self-interest is not permitted to influence decision-making.
3) According to the invisible hand doctrine
A) as individuals pursue their own interest, they also promote the good of the society as a whole.
B) government can be relied on to ensure that businesspersons serve society.
C) economic planning is the most effective way of guiding the production decisions of
businesses.
D) the unselfish nature of businesspersons guides them to promote the good of the society.
E) competition is undesirable.
4) In pure capitalism, the production decisions of businesses are guided by
A) the central planning board.
B) the way that consumers spend their incomes.
C) the needs of households.
D) government commands.
E) social concerns.
5) In pure capitalism,
A) each household is equally important in guiding the production decisions of businesses.
B) output is distributed to those who are willing and able to pay for it.
C) consumer sovereignty ensures that the basic needs of all consumers will be met.
D) there is very limited competition.
E) central planners dictate what goods and services will be produced.
6) Which of the following is not a function of prices in a capitalist economy?
A) dividing up the economy’s limited output
B) ensuring that income is distributed fairly
C) motivating businesses to produce the products desired by consumers
D) rationing the society’s output of goods and services
E) conserving scarce resources
7) The belief that competitive capitalism helps to ensure political freedom is attributed to
A) Milton Friedman.
B) Adam Smith.
C) Arthur Okun.
D) John Kenneth Galbraith.
E) Ronald Reagan.
8) Which of the following is an example of a common property resource?
A) an apartment building
B) a river
C) a taxicab
D) a hamburger
E) a very ordinary plot of land
9) In pure capitalism, consumers are protected from shoddy products and high prices by the
presence of
A) a strong central government.
B) the unselfish nature of businesspersons.
C) competition.
D) central planners.
E) Ralph Nader, the consumer advocate.
10) In pure capitalism, the scarcest resources tend to be employed very conservatively because
A) they are carefully rationed by the central planning board.
B) they tend to have high prices.
C) businesspersons are concerned about future generations.
D) businesses gain by helping one another.
E) the central government rations their use.
11) In pure capitalism, the prices of economic resources would influence
A) the answer to the “how to produce” question, but not the income distribution in the economy.
B) the income distribution, but not the answer to the “how to produce” question.
C) the answers to “what” and “how” to produce, but not the answer to the “for whom” question.
D) the answers to all three fundamental questions.
E) the answers to “how” and “for whom” to produce, but not the answer to the “what” question.
12) In pure capitalism, the answer to the “how to produce” question
A) would depend primarily on how consumers spend their incomes.
B) would be dictated by the central planning board.
C) would be influenced by the prices of the economic resources.
D) would not be influenced by technological change.
E) would be determined primarily by tradition or custom.
13) The two types of markets shown in the circular flow model are
A) business and household.
B) real and money.
C) competitive and monopolistic.
D) product and resource.
E) planned and unplanned.
14) According to the circular flow model
A) households sell economic resources to businesses.
B) businesses sell economic resources to households.
C) households buy economic resources from businesses.
D) businesses buy and sell economic resources.
E) households buy and sell economic resources.
15) The payments to the owners of land, labor, capital, and entrepreneurship are, respectively
A) rent, wages, dividends, and salaries.
B) interest, wages, dividends, and profits.
C) profits, wages, dividends, and interest.
D) rent, wages, interest, and profits.
E) taxes, wages, premiums, and profits.
16) According to the concept of consumer sovereignty
A) producers respond to the dictates of central planners.
B) businesses attempt to produce the products that are most desired by consumers.
C) all members of society have an equal voice in determining what products will be produced.
D) the central government must ensure that businesses produce the proper mix of products.
E) you get what you pay for.
17) Which of the following is not a characteristic of pure command socialism?
A) public ownership of the means of production
B) decentralized decision-making
C) economic planning
D) allocation by command
E) production targets dictated by central planners
18) In pure command socialism,
A) workers select their own employment.
B) central planning coordinates economic decisions.
C) individual enterprises are free to decide what products to produce.
D) output must be distributed equally to all consumers.
E) decision-making is highly decentralized.
19) Which of the following is not an accurate description of the information flows in the
command pyramid?
A) Data regarding production capacities is transmitted from producing units to central planners.
B) Production targets are transmitted from producing units to the central planners.
C) Facts about consumer preferences are transmitted from consuming units to the central
planners.
D) Data regarding raw materials supplies flows from producing units to central planners.
E) Information about labor capabilities is transmitted from producing units to central planners.
20) In pure command socialism, the job of ensuring that specific production objectives agree (so
that ax handle manufacturers don’t produce 500,000 handles, while ax head manufacturers
produce only 250,000 heads) is performed by
A) the market.
B) prices.
C) commands from the central authority.
D) economic planning.
E) consumer sovereignty.
21) A likely weakness of pure command socialism is
A) its inability to provide for a fair distribution of output.
B) its inability to foster rapid economic growth.
C) its inefficient use of economic resources.
D) its inability to eliminate scarcity.
E) its highly decentralized decision-making.
22) Pure capitalism and pure command socialism are alike in that
A) both systems are characterized by public ownership of the means of production.
B) both systems use markets to implement the fundamental economic choices.
C) they are both economic models.
D) consumer sovereignty exists in both systems.
E) both systems use economic planning to coordinate economic decisions.
23) One reason the United States is not an example of pure capitalism is because
A) self-interest is an important motivating force in the economy.
B) there is significant government intervention in the economy.
C) most enterprises are privately owned.
D) the economy is characterized by decentralized decision-making.
E) there is a strong central planning board.
24) Which of the following is not true of the United States economy?
A) Most enterprises are privately owned.
B) Pure competition exists throughout the economy.
C) The economy is coordinated primarily by the market mechanism.
D) Some decisions are implemented by command or government dictate, rather than through
markets.
E) Some enterprises are publicly owned.
25) Which of the following countries is commonly associated with an industrial policy?
A) Japan
B) United States
C) Germany
D) Sweden
E) Canada
26) When a nation pursues an “industrial policy,” government policymakers attempt to
A) enhance competition.
B) reduce income inequality.
C) promote particular industries.
D) combat unemployment and inflation.
E) prevent environmental damage.
27) Which of the following functions of government is most consistent with the model of pure
capitalism?
A) correcting for externalities
B) redistributing income
C) providing public goods
D) preventing unemployment and inflation
E) establishing a legal framework
28) Codetermination the requirement that corporations have worker representatives on their
boards of directors is associated with which of the following countries?
A) Germany
B) France
C) Japan
D) Russia
E) Sweden
29) Which of the following is a true statement?
A) Great Britain practices industrial policy.
B) Codetermination is practiced in France.
C) Germany has long practiced indicative economic planning.
D) Sweden uses government policy primarily to alter the income distribution.
E) The economy of Hong Kong approximates pure command socialism.
30) Which of the following countries pursue an industrial policy?
A) Germany, France, and Great Britain
B) Sweden, France, and the United States
C) South Korea, Taiwan, and Japan
D) Canada, Hong Kong, and Australia
E) Russia, Poland, and Hungary
31) Which of the following statements about Russia’s efforts to reform its economy is false?
A) Central planning has been largely abandoned.
B) State ownership of the means of production has been reduced.
C) Free market prices now play a much more important role.
D) The legal system has been dramatically reformed to protect private property rights.
E) Reform efforts have led to the emergence of an entrepreneurial class.
32) Which of the following is an accurate description of the difference between the Russian and
Chinese efforts at economic reform?
A) Russia took a “go slow” approach, while the Chinese introduced reforms so rapidly that their
approach has been described as “shock therapy.”
B) Russia has done very little to reform its economy, while the Chinese have introduced many
market-related reforms.
C) Russia introduced market reforms in a relatively short time period, while China has taken a
very cautious, go-slow approach.
D) China has done very little to reform its economy, while Russia has introduced many market-
related reforms.
E) Both Russia and China have introduced market-related reforms at a rapid rate, but the
Russians have gone to much greater lengths to publicize their efforts.
1) Which of the following is not a characteristic of pure capitalism?
A) public ownership of the means of production
B) the pursuit of self-interest
C) markets and prices
D) pure competition
E) limited government
2) In a market economy, the scarcest resources will be used very conservatively because
A) central planners will allocate such resources only where they are most needed.
B) the scarcest resources will tend to have the highest prices.
C) government officials will not permit their use.
D) the scarcest resources will tend to have the lowest prices.
3) In a capitalist economy,
A) businesses are free to produce whatever products they choose.
B) consumers are free to utilize their incomes as they see fit.
C) resource owners have the freedom to sell their resources to whomever they choose.
D) All of the above
E) None of the above
4) Consumer sovereignty means that
A) consumers dictate which goods and services will be produced by the way they spend their
money.
B) central planners allocate a major share of society’s resources to the production of consumer
goods.
C) the role of government in the economy is very limited.
D) all economic resources are used efficiently.
5) According to the invisible hand doctrine,
A) as individuals pursue their own interests, they tend to promote the interests of society as a
whole.
B) the actions of individuals often have unanticipated and undesirable effects on society.
C) individuals should put the interests of society first.
D) when individuals attempt to promote the best interests of the entire society, they also further
their own personal interests.
6) Adam Smith recognized that the invisible hand would function as he envisioned only if
A) individuals unconsciously considered the welfare of others in making their decisions.
B) government regulations forced businesses to behave in an ethical manner.
C) a high degree of competition existed in the economy.
D) individuals lived in accordance with the golden rule.
7) In a market economy, if consumers suddenly stop buying SUVs and start buying fuel efficient
cars,
A) the price of SUVs will tend to fall and more of them will be produced.
B) the price of fuel-efficient cars will tend to rise, making them less profitable to produce and
encouraging producers to supply more of them.
C) resources will tend to be shifted from the production of SUVs to the production of fuel-
efficient cars.
D) the price of SUVs will tend to rise, making them more profitable to produce and encouraging
producers to supply more of them.
8) Which of the following best describes command socialism?
A) An economic system characterized by private ownership of the means of production,
centralized decision-making, and command implementation.
B) An economic system characterized by public ownership of the means of production,
centralized decision-making, and market implementation.
C) An economic system characterized by public ownership of the means of production,
individual decision making, and command implementation.
D) An economic system characterized by public ownership of the means of production,
centralized decision making, and command implementation.
9) Which of the following is correct?
A) In command socialism, the basic economic choices are made by individuals.
B) In pure capitalism, powerful economic units have a substantial impact on the way economic
choices are made.
C) In command socialism, producers are required to produce whatever products central planners
dictate.
D) In pure capitalism, economic planning ensures that the various production decisions will be
consistent with one another.
10) In deciding what products to produce, the central planners in a socialist command economy
need not consider
A) the size of the economy’s labor force.
B) the production capabilities of the economy’s factories.
C) consumer preferences.
D) the economy’s stock of raw materials.
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11) In order to get the most output from society’s limited resources, the scarcest resources must
be used only where no other input will suffice.
A) In command socialism, this function is performed by planners; in pure capitalism, it is
performed by the central government.
B) In pure capitalism, this function is performed by input prices; in command socialism, it is
performed by planners.
C) In command socialism, this function is performed by the producing units; in pure capitalism,
it is performed by planners.
D) In pure capitalism, this function is performed by government regulations; in command
socialism, it is performed by output targets.
12) In a comparison of command socialism and pure capitalism, which of the following is true?
A) Prices play a larger role in command socialism than in pure capitalism.
B) Resources are likely to be used more efficiently in command socialism than in pure
capitalism.
C) Economic planning plays a larger role in pure capitalism than in command socialism.
D) Decision making is more decentralized in pure capitalism than in command socialism.
13) One function of government the U.S. economy is to “correct for externalitites.” Which of the
following is an example of government performing that function?
A) construction of a flood-control dam
B) paying a portion of the cost of a flu vaccination
C) reducing the income tax rate on citizens with low incomes
D) outlawing the sale of automobiles lacking seatbelts
14) One reason the United States is not an example of pure capitalism is that
A) most producing units are publicly owned.
B) commands are used to implement some economic decisions.
C) the pursuit of self-interest is a powerful force.
D) markets are used to coordinate most economic decisions.
15) Which of the following is a true statement?
A) Codetermination is a feature of the Swedish economy.
B) The Germans describe their economy as a “social market economy.”
C) Industrial policy is a characteristic of the British economy.
D) Japan’s leadership employs “indicative planning” in guiding its economy.
1) The purpose of an economic system is to
A) decide who owns the means of production.
B) answer the three fundamental questions of economics.
C) decide who will receive the economy’s output.
D) protect the rights of consumers and businesses.
2) In describing economic systems it is helpful to ask who makes the economic decisions and
A) how the economy’s output will be distributed.
B) who owns the means of production.
C) how self-interest will be held in check.
D) who will do the economic planning.
3) Which of the following is an element of capitalism?
A) economic planning
B) allocation by command
C) public ownership of the means of production
D) self-interest
4) In a capitalist economy, consumers dictate what goods and services will be produced. This is
called
A) the invisible hand doctrine.
B) the pursuit of self-interest.
C) consumer sovereignty.
D) laissez-faire.
5) In a capitalist economy, if a new product becomes popular
A) its price will tend to rise, which will encourage more businesses to produce this product.
B) its price will tend to fall, which will encourage more consumers to buy this product.
C) central planners will need to ensure that additional resources are made available to its
producers.
D) central planners will need to decide which consumers will receive this product.
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6) Pure competition is a situation in which
A) there is only one producer of a product.
B) a few, very large, firms dominate an industry.
C) there are many small buyers and sellers of a product.
D) government is the only producer of a product.
7) Which of the following is a strength of pure capitalism?
A) the protection of common-property resources
B) an equal distribution of income and output
C) production of the products which consumers want the most
D) equal treatment under the law
8) Which of the following is not a characteristic of command socialism?
A) public ownership of the means of production
B) centralized decision making
C) reliance on markets and prices
D) allocation by command
9) A socialist command economy is depicted as a pyramid in order that it reflects
A) the importance of consumer preferences in guiding decision making.
B) the fact that all factories and other forms of capital are publicly owned.
C) the centralization of economic decision making.
D) the importance of economic planning.
10) Socialist command economies are likely to use resources inefficiently because
A) market prices generally provide poor signals to producers.
B) prices play too large a role in a socialist command economy.
C) wants are likely to be unlimited in a socialism command economy.
D) planners are unable to gather and process all the information they require.
11) In a capitalist economy,
A) central planners decide how the economy’s output will be distributed.
B) low resource prices help to ensure that scarce resources are conserved.
C) a high degree of equality ensures that output is distributed fairly.
D) markets and prices take the place of economic planners.
12) Although the U.S. government’s role in ________ is clearly consistent with the model of
pure competition, its efforts to ________ are not.
A) redistributing income; stabilize the economy
B) providing public goods; establish a legal framework
C) redistributing income; correct for externalities
D) establishing a legal framework; redistribute income
13) Industrial policy is a practice commonly attributed to the ________ economy, while
codetermination is found in the ________ economy.
A) Swedish; Japanese
B) Russian; North Korean
C) German; Swedish
D) Japanese; German
14) Which of the following statements describes the modern Russian economy?
A) Central planning has been largely abandoned.
B) Central planners determine most prices.
C) Virtually all Russian industry has been privatized.
D) The Russian legal system has been totally revamped to protect private property rights.
15) In Sweden, a major purpose of government intervention is to
A) promote some industries and discourage others.
B) encourage more rapid economic growth.
C) achieve a more equal income distribution.
D) encourage foreign investment through low taxes.
16) Which of the following is an accurate description of the market reforms in Russia and China?
A) Russia has taken a more gradual and cautious approach to market reform than that pursued by
China.
B) Both Russia and China implemented market reforms at breakneck speed.
C) Both Russia and China took a very cautious approach to implementing market reforms.
D) China has taken a more gradual and cautious approach to market reform than that pursued by
Russia.
17) According to the “invisible hand” doctrine,
A) the pursuit of self-interest always maximizes the welfare of the individual.
B) competition ensures that the pursuit of self-interest also promotes the well-being of the
society.
C) individuals are always guided by their conscience to promote both their own self-interest and
the well-being of the society.
D) government regulation can ensure that the pursuit of self-interest also promotes the society’s
well-being.
18) “Codetermination” means that
A) all economic decisions are the result of corporations interacting with government regulators.
B) corporations must have worker representatives on their boards of directors.
C) state bureaucrats attempt to promote what they deem to be key sectors of the economy.
D) the state planning agency uses indirect means, such as tax incentives, to influence business
decisions.
19) Which of the following is false?
A) France turned away from economic planning in the 1990s, but the French government
continues to maintain a strong presence in sectors like power production and railroads.
B) The Russian economy grew at a rapid rate following the breakup of the Soviet Union.
C) In South Korea and Taiwan, government routinely targets specific industries for assistance.
D) In China, state-owned enterprises (SOEs) have been forced to compete with foreign
businesses.
20) In a market economy, if consumers suddenly stop buying 10-speed bikes and start buying 21-
speed bikes,
A) the price of 10-speeds will tend to fall and more of them will be produced.
B) the price of 21-speeds will tend to rise, making them more profitable to produce and
encouraging producers to supply more of them.
C) resources will tend to be shifted from the production of 21-speeds to the production of 10-
speeds.
D) the price of 10-speeds will tend to rise, making them more profitable to produce and
encouraging producers to supply more of them.
21) Which of the following is is not a function of government in the U.S. economy?
A) providing public goods
B) redistributing income
C) economic planning
D) maintaining competition
22) Codetermination is a feature of which of the following economies?
A) France
B) Russia
C) Germany
D) Great Britain
1) An economic system is a set of procedures for using markets to answer the three fundamental
questions.
2) The U.S. economy is an example of pure capitalism.
3) The former Soviet Union was an example of pure command socialism.
4) Pure capitalism and pure command socialism are economic models.
5) Pure capitalism is an economic system in which the means of production are privately owned,
the fundamental economic choices are made by individuals and implemented through the market
mechanism.
6) A “market” consists of all actual or potential buyers and sellers of a product.
7) Private property, markets, and pure competition are all elements of pure capitalism.
8) In a laissez-faire economy the role of government is very limited.
9) Mixed economies face a different economic problem than “pure” economic systems.
10) Every economic system must answer the questions of what, how and for whom to produce.
Question Status: Previous Edition
11) The invisible hand doctrine describes the function of economic planning.
12) According to the invisible hand doctrine, the pursuit of self-interest may promote the good of
society as a whole.
13) Adam Smith believed that the pursuit of self-interest always promoted the good of the
society as a whole.
14) Adam Smith recognized that for self-interest to promote the public good it needed to be
guided and restrained by the invisible hand of government.
15) According to Adam Smith, self-interest needed to be restrained by competition.
16) Pure capitalism requires pure competition, a situation in which there are at least two sellers
of a product.
17) In pure capitalism, consumer sovereignty ensures that the economy’s goods and services will
be distributed fairly.
18) In pure capitalism, consumer sovereignty means that consumers determine which goods and
services businesses will produce.
19) Milton Friedman argues that competitive capitalism promotes political freedom by
separating economic and political power.
20) Arthur Okun argued that in a capitalist economy money can buy preferred treatment before
the law and other things that are not supposed to be for sale.
21) Command socialism is an economic system in which the means of production are publicly
owned, the fundamental economic choices are made by a central authority, and implemented
through the market mechanism.
22) In pure command socialism, the state owns the means of production.
23) In pure command socialism, all factories are state owned, but some farms are privately
owned.
24) The what, how, and for whom questions are answered by the central authority in a socialist
command economy.
25) In pure command socialism, the central authority must be responsive to the wishes of the
population.
26) Consumer sovereignty dictates which products will be produced in a socialist command
economy.
27) Markets and prices guide production decisions in a socialist command economy.
28) In command socialism, economic planning ensures that specific production objectives agree.
29) According to the diagram of the command pyramid, the producing units transmit production
targets to the central planning board.
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30) In the command pyramid diagram, the central planning board is found at the base of the
pyramid.
31) Before the central authority in a socialist command economy can establish production
targets, it must obtain information from producing units regarding their production capabilities.
32) The central planners in a socialist command economy must use resources efficiently if they
are to satisfy as many wants as possible.
33) One of the strengths of pure command socialism is the fact that it requires a minimum
amount of information to ensure the efficient use of resources.
34) The economies of the United States and China are both examples of mixed economies.
35) The only element of command socialism in the U.S. economy is the presence of some
publicly owned enterprises.
36) In the former Soviet Union, all prices were established in free markets.
37) Gorbachev succeeded in discrediting the Soviet planned economy and replacing it with a
well-functioning market economy.
38) Russia’s approach to economic reform was very gradual and cautious.
39) In the U.S. economy, some economic decisions are implemented by commands, rather than
through markets.
1) In pure capitalism, how does competition help ensure that self-interest seeking businesspeople
will be responsive to consumers? Provide an example to illustrate how and why the outcome
might be different in the absence of competition.
2) Market economies are sometimes described as “impersonal” because the decisions about what,
how, and for whom to produce are made by markets rather than by central planners. Do you
think this impersonality is a positive or negative feature of capitalism? Defend your conclusion.
3) Explain in detail why it is more accurate to describe the U.S. economy as a mixed economy
than as an example of pure capitalism. Supplement your explanation with examples that illustrate
the “mixed” nature of the U.S. economy.
4) Discuss in detail the role of central planners in a socialist command economy and the
information they need to perform their job. Be complete.
5) Compare the methods employed by a capitalist economy to answer the three fundamental
questions with those employed by a socialist command economy. Why is it accurate to say that
decision-making is centralized in a command economy, and decentralized in a market economy?