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0 Learning Objectives: 12.1 Describe the predominant economic systems and how they impact business. 12.2 Define scarcity and identify the problems posed by limited resources. 12.3 Explain how the economic concepts of supply and demand influence prices. 12.4 Identify the types of competition that exist within the free markets. 12.5 Understand the key economic indicators that determine how the economy is doing. 12.6 Describe how fiscal and monetary policy control the economy. Quick answer key: Question # Multiple Choice True/False 1 B False 2 A True 3 D True 4 A False 5 C True 6 A True 7 D False 8 D True 9 B False 10 A True 11 B False 1 12 C False 13 A True 14 B False 15 A True 16 D False 17 D True 18 C True 19 A False 20 C True 21 D False 22 B False 23 B True 24 C True 25 D False 26 A True 27 C 28 B 29 C 30 A 2 Multiple Choice Questions: 1. Under which economic system does the government own most basic businesses and distribute profits to the people? A) B) C) D) capitalism socialism communism mixed economies Learning Objective 12.1 Answer – B 2. Which economic system grants people the freedom to buy and sell whichever goods and services they please? A) B) C) D) capitalism socialism communism mixed economies Learning Objective 12.1 Answer – A 3. Which of the following addresses the scarcity of resources? A) B) C) D) microeconomics macroeconomics opportunity costs resource development Learning Objective 12.2 Answer – D 3 4. Which of the following statements is true about the economic concept of supply? A) B) C) D) supply increases as price increases supply decreases as price increases supply increases as demand increases supply decreases as demand decreases Learning Objective 12.3 Answer – A 5. Which of the following statements is true about the economic concept of demand? A) B) C) D) supply decreases as demand decreases demand increases as price increases demand decreases as price increases supply increases as demand increases Learning Objective 12.3 Answer – C 6. In which type of competition are there few sellers and product differentiation is a major factor in market success? A) B) C) D) oligopoly monopoly perfect competition monopolistic competition Learning Objective 12.4 Answer – A 7. Which of the following represents a business cycle? A) B) C) D) expansion following by prosperity depression followed by recession contraction followed by recession expansion followed by contraction Learning Objective 12.5 Answer – D 4 8. Which economic indicator represents the total value of goods and services produced in a country in a given year? A) B) C) D) price indexes unemployment rate national debt gross domestic product Learning Objective 12.5 Answer – D 9. Which conditions exist during a period of stagflation? A) B) C) D) too few dollars are chasing too many goods inflation and unemployment are high prices of goods and services have risen over 5% the government has spent more money that it has collected Learning Objective 12.6 Answer – B 10. Which of the following best describes fiscal policy? A) B) C) D) the use of taxes and government spending to influence the economy raising and lowering interest rates to influence the economy increasing the prices of goods and services to influence the economy using the unemployment rate to determine the state of the economy Learning Objective 12.6 Answer – A 11. Which of the following best defines a system in which decisions about what to produce and in what quantities are by the market? A) B) C) D) trade market free market social equality mixed economies Learning Objective 12.1 Answer – B 5 12. Which of the following economic systems creates a free market in which open competition exists between companies? A) B) C) D) communism socialism capitalism mixed economies Learning Objective 12.1 Answer – C 13. In which of the following economic systems does the government make all economic decisions and own most businesses? A) B) C) D) communism socialism capitalism mixed economies Learning Objective 12.1 Answer – A 14. Which of the following best defines what you give up in order to do or get something else? A) B) C) D) economics opportunity cost microeconomics macroeconomics Learning Objective 12.2 Answer – B 6 15. Which of the following best defines the quantity of products that consumers are willing to buy at different prices at a specific time? A) B) C) D) demand supply market price supply price Learning Objective 12.3 Answer – A 16. What is the term used for when the supply curve and demand curve cross on a graph? A) B) C) D) market price demand price supply price equilibrium price Learning Objective 12.3 Answer – D 17. Who decides what to produce and in what amounts in countries without free markets? A) B) C) D) consumers competitive prices from other countries economists government Learning Objective 12.3 Answer – D 18. What are the four types of competition? A) B) C) D) perfect competition, market competition, oligopoly, and monopoly market competition, monopolistic competition, oligopoly, and monopoly perfect competition, monopolistic competition, oligopoly, and monopoly perfect competition, market competition, monopolistic competition, and monopoly Learning Objective 12.4 Answer – C 7 19. Which of the following best defines the degree of competition in which there are many sellers in a market an one is large enough to dictate the price of a product? A) B) C) D) perfect competition monopolistic competition market competition monopoly Learning Objective 12.4 Answer – A 20.Which of the following best defines a degree of competition in which just a few sellers dominate the market? A) B) C) D) perfect competition market competition oligopoly monopoly Learning Objective 12.4 Answer – C 21. In the United States there are laws prohibiting which type of competition? A) B) C) D) market competition perfect competition oligopoly monopoly Learning Objective 12.4 Answer – D 22. What are the major indicators of the economic condition? A) B) C) D) gross domestic product, global economy, price indexes and inflation gross domestic product, unemployment rate, price indexes and inflation global economy, unemployment rate, price indexes and inflation gross domestic product, unemployment rate, global economy Learning Objective 12.5 Answer – B 8 23. What is the difference between gross domestic product (GDP), and gross national product (GNP)? A) Gross domestic product (GDP) is the value of goods and services produced by a country’s factors of production, regardless of where these factors are based. Gross national product (GNP) is the total value of final goods and services produced in a country in a given year. B) Gross domestic product (GDP) is the total value of final goods and services produced in a country in a given year. Gross national product (GNP) is the value of goods and services produced by a country’s factors of production, regardless of where these factors are based. C) Gross domestic product (GDP) is the total value of final goods and services produced by individual towns, cities or regions within a specific country. Gross national product (GNP) is the total value of final goods and services for an entire country. D) Gross domestic product (GDP) is the total value of final goods and services for an entire country. Gross national product (GNP) is the total value of final goods and services produced by individual towns, cities or regions within a specific country. Learning Objective 12.5 Answer – B 24. What are the four types of unemployment? A) B) C) D) cyclical, international, frictional, structural international, seasonal, frictional, structural cyclical, seasonal, frictional, structural cyclical, seasonal, frictional, international Learning Objective 12.5 Answer – C 25. What type of unemployment best defines job seekers who are between jobs? A) B) C) D) cyclical international structural frictional Learning Objective 12.5 Answer – D 9 26. Which of the following best defines a set of monthly statistics that measures the pace of inflation and deflation? A) B) C) D) consumer price index (CPI) inflation price index (IPI) producer price index (PPI) economic price index (EPI) Learning Objective 12.5 Answer – A 27. Which of the following best defines a set of monthly statistics that measures prices at the wholesale level? A) B) C) D) consumer price index (CPI) inflation price index (IPI) producer price index (PPI) economic price index (EPI) Learning Objective 12.5 Answer – C 28. When the Fed raises the interest rate, making it more expensive for businesses to borrow money, they are hoping that it does which of the following to the economy? A) B) C) D) Slows the economy as businesses start to borrow more money Slows the economy as businesses start to spend less Boosts the economy as businesses start to spend more Boosts the economy as businesses start to borrow less Learning Objective 12.6 Answer – B 10 29. When the Fed lowers the interest rate, making it easier for business to borrow money, they are hoping that it does which of the following to economy? A) B) C) D) Slows the economy as businesses start to borrow more money Slows the economy as businesses start to spend less Boosts the economy as businesses start to spend more Boosts the economy as businesses start to borrow less Learning Objective 12.6 Answer – C 30.Which of the following best defines the management of the money supply and interest rates? A) B) C) D) monetary policy economic policy fed policy fiscal policy Learning Objective 12.6 Answer – A 11 True/false Questions: 1. Socialism is an economic system in which all or most of the factors of production and distribution are privately owned and operated for profit. Learning Objective 12.1 Answer – False 2. Capitalism creates a free market in which open competition exists between companies. Learning Objective 12.1 Answer – True 3. The intent of socialism is to create social equality, by taxing the wealthy and redistributing the wealth through government programs. Learning Objective 12.1 Answer – True 4. Workers in communist countries tend to get longer vacations and work fewer hours, which accounts for slower business growth. Learning Objective 12.1 Answer – False 5. Mixed economies are economic systems in which some allocation of resources is made by the market and some is made by the government. Learning Objective 12.1 Answer – True 12 6. Macroeconomics is the economics study that looks at the operation of a nation’s economy as a whole. Learning Objective 12.2 Answer – True 7. Scarcity is an economic problem that suggests that both resources and consumer wants are scarce or limited. Learning Objective 12.2 Answer – False 8. Market price is the price determined by supply and demand. Learning Objective 12.3 Answer – True 9. Demand is the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Learning Objective 12.3 Answer – False 10. The point on a graph where supply and demand cross is known as the equilibrium point or equilibrium price. Learning Objective 12.3 Answer – True 11. Oligopoly is the degree of competition in which a large number of sellers produce very similar products that buyers nevertheless perceive as different. Learning Objective 12.4 Answer – False 13 12. Perfect competition is a degree of competition in which just a few sellers dominate the market. Learning Objective 12.4 Answer – False 13. Deregulation is the removal of government control and strict oversight in a market that thereby opens the market for others to enter. Learning Objective 12.4 Answer – True 14. The three major indicators of economic conditions are global economy, unemployment rate, and price indexes and inflation. Learning Objective 12.5 Answer – False 15. Gross domestic product (GDP) is the total value of final goods and services produced in a country in a given year. Learning Objective 12.5 Answer – True 16. Production values for a Texas factory owned by a Japanese computer company would be included in the US gross domestic product (GNP), since the production takes place within the country’s borders. Learning Objective 12.5 Answer – False 17. Recession is a period during which the gross domestic product of a nation declines for two or more quarters. Learning Objective 12.5 Answer – True 14 18. Unemployment rate is the number of civilians 16 years of age and older who are unemployed and have tried to find a job within the prior four weeks. Learning Objective 12.5 Answer – True 19. Cyclical is a type of unemployment where people are between ending one job and beginning another. Learning Objective 12.5 Answer – False 20.Stagflation is the situation where the economy is slowing but prices are rising. Learning Objective 12.5 Answer – True 21. Consumer price index (CPI) is a set of monthly statistics that measures prices at the wholesale level. Learning Objective 12.5 Answer – False 22. Supply and demand are in balance where there are too few dollars for too many goods. Learning Objective 12.5 Answer – False 23. A business cycle is a pattern that consists of a period of rapid economic expansion alternating with a period of economic decline. Learning Objective 12.5 Answer – True 15 24. Fiscal policy is the government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending. Learning Objective 12.6 Answer – True 25. The national deficit is the sum of government deficits over time. Learning Objective 12.6 Answer – False 26. Monetary policy is the management of the money supply and interest rates. Learning Objective 12.6 Answer – True 16 Short Answer questions: 1. List and explain the three types of economic systems. Answer – The three types of economic systems are capitalism, socialism, and communism. Capitalism is an economic system in which all or most of the factors of production and distribution are privately owned and operated for profit. Socialism is an economic system in which most businesses are owned by the government so profits can be evenly distributed among all people. Communism is an economic system in which the government owns most businesses and limits the freedom of choice of its people. 2. What is the difference between macroeconomics and microeconomics? Answer – Macroeconomics is the part of economics study that looks at the operation of a nation’s economy as a whole. Microeconomics is the part of economics study that looks at the behavior of people and organizations in particular markets. 3. Explain the concepts of supply and demand, and how they affect market price. Answer – Supply is the quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. Demand is the quantity of products that consumers are willing to buy at different prices at a specific time. The market price for a product or service is determined by supply and demand. 4. List and explain the four type of competition within free markets. Answer – The four types of competition within free markets is perfect competition, monopolistic competition, oligopoly, and monopoly. In perfect competition there are many sellers in a market and none is large enough to dictate the price of a product. In monopolistic competition there are a large number of sellers that produce similar products that buyers nevertheless perceive as different. Oligopoly is the degree of competition in which just a few sellers dominate the market. Monopoly is the degree of competition in which only one seller controls the total supply of a product or service and sets the price. 17 5. List the three economic indicators of economic conditions. Answer – The three economic indicators of economic conditions are gross domestic product, unemployment rate, and price indexes and inflation. 6. Explain the anticipated effects on the economy when the Fed lowers or raises interest rates. Answer – When the economy is booming the Fed tends to raise the interest rate, making it more expensive to borrow money, which helps to slow the economy. The Fed lowers the interest rate when the economy is doing poorly to entice businesses to borrow money to hopefully grow the economy. 18