Practice_Ch2 - Chapter 2 Practice Test The Market System...

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Chapter 2 Practice Test The Market System and the Circular Flow 1. Refer to the following: The above is a circular flow model of the economy. In the diagram, consumer expenditures are represented by: a. Flow 1 b. Flow 2 c. Flow 3 d. Flow 4 Answer: d Feedback: Consumer expenditures represent a flow of money from households to firms in the product market. 2. Which of the following is a capital good? a. A steel fabrication facility b. A state highway construction bond c. A share of Microsoft stock d. A gallon of milk Answer: a Feedback: “Capital goods” includes tools, machinery, productive equipment, and buildings. Purely financial instruments such as stocks and bonds are not capital goods. 3. In a competitive economy, prices do all of the following except: a. guide consumers in their purchases of goods and services b. guide firms in their purchases of inputs c. discourage innovation d. guide firms in deciding which markets to enter Answer: c Feedback: By themselves, prices neither encourage nor discourage innovation. However, the guiding function of prices influences consumer and firm choices.
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4. The “command system” is also known as: a. capitalism b. the market system c. the political system d. socialism or communism Answer: d Feedback: In a command economy, the government owns most of the economic resources and a central economic plan determines most economic choices. This is also known as socialism or communism. 5. In a specific industry, firms are making positive economic profits. We should expect that: a. firms will enter the industry b. firms will exit the industry c. product prices will rise in the industry d. firms will neither exit nor enter the industry, as it is in equilibrium Answer: a Feedback: Positive economic profits are the signal that firms will enter an industry; economic losses the signal that firms will leave. If economic profits are zero, the industry is in equilibrium. 6. Private ownership of resources is best captured by which of the following concepts? a. Freedom of choice b. Freedom of enterprise c. Property rights d. Self-interest Answer: c Feedback: Property rights are the rights of individuals to obtain, use, and dispose of their own property resources. 7. Suppose output is falling in a specific competitive industry. Which of the following most likely represents the market conditions in this industry? a. Economic profits are negative b. Economic profits are positive c. There has been increased demand for product or service d. The industry is in equilibrium Answer: a Feedback: If economic profits are negative, then firms’ owners are not being fully compensated for the resources they are providing. This will cause some of them to pull out of the industry, reducing output. 8. Which of the following best exemplifies the “guiding function” of prices?
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Practice_Ch2 - Chapter 2 Practice Test The Market System...

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