Deck 2: The Market System and the Circular Flow

Question 1

Capitalism is an economic system that:

A) produces more capital goods than consumer goods.
B) produces more consumer goods than capital goods.
C) is characterized by government control of markets.
D) gives private individuals and corporations the right to own productive resources.

Answer 1

D

Question 2

The economy of North Korea would best be classified as:

A) a laissez-faire economy.
B) a command system.
C) a capitalist economy.
D) a market system.

Answer 2

B

Question 3

As of 2012,the economy of Hong Kong most closely approximates:

A) socialism.
B) a command economy.
C) pure capitalism.
D) a market economy.

Answer 3

D

Question 4

In a market system,well-defined property rights are important because they:

A) reduce unnecessary investment.
B) limit destructive economic growth.
C) create economic problems.
D) encourage economic activity.

Question 5

The economy of Cuba most closely approximates:

A) laissez-faire capitalism.
B) a command economy.
C) pure capitalism.
D) a market economy.

Question 6

The economy of Australia would best be classified as:

A) a command system.
B) socialism.
C) pure capitalism.
D) a market system.

Question 7

Economic systems differ according to what two main characteristics?

A) Ownership of resources and methods of coordinating economic activity
B) Quantity of output produced and who receives the output
C) Who produces the output and what technology is used to produce it
D) The system of government and the quantity of natural resources available

Question 8

Which statement best describes a capitalist economy?

A) The production of goods and services is determined primarily by markets,but the allocation of goods and services is determined primarily by government.
B) The production of goods and services is determined primarily by government,but the allocation of goods and services is determined primarily by markets.
C) The production and allocation of goods and services is determined primarily through markets.
D) The production and allocation of goods and services is determined primarily through government.

Question 9

The market system is characterized by:

A) extensive government constraints on individual behavior.
B) private ownership of the means of production.
C) government control of all production decisions.
D) government rationing of all goods and services.

Question 10

Legal and social rules that affect the ownership of property are:

A) property rights.
B) the coincidence of wants.
C) the division of labor.
D) the freedom of enterprise.

Question 11

The institution of private property encourages:

A) lack of maintenance because people are not forced by law to do it.
B) lack of easy exchange because ownership is sometimes hard to prove.
C) easy exchange of some property because a formal title or deed exists.
D) lack of incentives because the owner is responsible for maintenance costs.

Question 12

Which statement best describes a command economy?

A) The production of goods and services is determined primarily by markets,but the allocation of goods and services is determined primarily by government.
B) The production of goods and services is determined primarily by government,but the allocation of goods and services is determined primarily by markets.
C) The production and allocation of goods and services is determined primarily through markets.
D) The production and allocation of goods and services is determined primarily through government.

Question 13

The market system is an economic system that:

A) produces more consumer goods than capital goods.
B) produces more capital goods than consumer goods.
C) gives private individuals and institutions the right to own resources used in production.
D) gives the government the right to tax individuals and corporations for the production of capital goods.

Question 14

The Soviet Union economy of the 1980s would best be classified as:

A) a market system.
B) pure capitalism.
C) laissez-faire capitalism.
D) a command system.

Question 15

A basic characteristic of a command system is that:

A) wages paid to labor are higher.
B) government owns most economic resources.
C) markets function mostly free from government intervention.
D) government planners play a limited role in deciding what goods will be produced.

Question 16

In a capitalistic economy:

A) consumers are not sovereign.
B) markets are not competitive.
C) there is a reliance on the market system.
D) the government owns the means of production.

Question 17

Which is a major feature of the market system?

A) Government-established prices in all markets
B) Reallocation of all resources from private to public uses
C) The right to own private property and control resource uses
D) Central planning by government to provide goods and services

Question 18

Another term for capitalism is the:

A) command system.
B) socialist economy.
C) market system.
D) system of inputs and outputs.

Question 19

Which would not be characteristic of a capitalist economy?

A) Government ownership of the factors of production
B) Competition and unrestricted markets
C) Reliance on the market system
D) Free enterprise and choice

Question 20

The private ownership of property resources and use of prices to direct and coordinate economic activity is characteristic of:

A) a command system.
B) a market system.
C) communism.
D) socialism.

Question 21

By free enterprise,we mean that:

A) products are provided free to those who cannot afford to buy them.
B) individual producers determine how to produce,but government agencies determine what will be produced.
C) individuals may obtain resources,organize production,and sell the resulting output in any legal way they choose.
D) individuals are free to produce those products that government agencies determine can be produced profitably.

Question 22

How do workers typically express self-interest?

A) By minimizing the economic losses of other business firms
B) By maximizing the economic profits of other business firms
C) By seeking the highest price when purchasing a consumer product
D) By seeking jobs with the best combination of wages and benefits

Question 23

How does human specialization contribute to an economy's output?

A) It makes use of differences in abilities.
B) It is a process of creative destruction.
C) It works like an "invisible hand."
D) It decreases derived demand.

Question 24

A characteristic of the market system is:

A) frequent use of price controls.
B) frequent use of barter.
C) extensive use of capital goods.
D) low interest rates.

Question 25

Which statement best describes a capitalist economy?

A) Society determines production and the allocation of goods and services only through markets.
B) Government policies determine the production and the allocation of goods and services.
C) Government policies determine the production,but not the allocation,of goods and services.
D) The role of individual self-interest is relatively unimportant because government makes most economic decisions.

Question 26

A market system is best characterized by:

A) extensive government intervention in economic activity.
B) the private production of most capital goods.
C) government regulation of all private markets.
D) central planning and control.

Question 27

Advantages of specialization do not include:

A) increased production of economic goods with no increase in resources.
B) the more efficient use of scarce resources.
C) increased ability to utilize the division of labor.
D) less interdependence.

Question 28

Which statement is correct?

A) In a market system,buyers and sellers must be in face-to-face contact with each other.
B) Prices affect the distribution of goods in a market system but not the allocation of resources.
C) In a market system,prices serve to ration goods and services to consumers.
D) The operation of a market system has little,if any,effect on the distribution of income in the economy.

Question 29

Competition is more likely to exist when:

A) there is free entry into and exit out of industries.
B) there is a single supplier of all goods and services.
C) the government purchases most goods and services.
D) products are produced by a few large firms.

Question 30

Which is characteristic of the market system?

A) Unselfish individuals
B) Centralized decision making
C) Free enterprise and choice
D) Government ownership of the means of production

Question 31

A competitive economy assumes each industry consists of a:

A) large number of small firms facing a large number of small buyers.
B) few large firms facing a large number of small buyers.
C) large number of small firms facing a few large buyers.
D) few small firms facing a few small buyers.

Question 32

Which of the following does not explain why specialization increases output?

A) Specialization capitalizes on differences in ability.
B) Specialization promotes self-sufficiency and independence.
C) Specialization fosters learning by doing.
D) Specialization saves time by eliminating shifting between tasks.

Question 33

Which is assumed to be most limited in scope under a market system?

A) Freedom of enterprise
B) Freedom of choice
C) Competition
D) Government

Question 34

Which statement is correct?

A) The operation of a market system eventually results in an equal distribution of income.
B) Producers are "kings" in a market economy because they determine what is produced.
C) The market system is efficient at allocation of resources but not in getting consumer goods to their most valued uses.
D) Freedom of choice and enterprise are essential elements of the market system.

Question 35

All of the following accurately describe a market economy except:

A) government establishes maximum and minimum prices for most goods and services.
B) prices serve as a signaling mechanism to buyers and sellers.
C) the allocation of resources is determined by their prices.
D) the actions of buyers and sellers establish a product's price.

Question 36

The process in which workers do specialized tasks to make a product is referred to as:

A) a coincidence of wants.
B) roundabout production.
C) freedom of choice.
D) division of labor.

Question 37

In a market economy,entrepreneurs are most concerned with:

A) maximizing utility or satisfaction from limited incomes.
B) increasing the wages and salaries of workers.
C) maximizing profits or minimizing losses.
D) the selfish pursuit of money.

Question 38

Specialization and trade are beneficial to society because:

A) the output of economic goods may be increased with no increase in resources.
B) scarce resources are utilized more efficiently.
C) a division of labor lowers prices for products.
D) all of the above are correct.

Question 39

The maximization of profit and the minimization of losses is the primary factor affecting the economic decision making of:

A) workers.
B) consumers.
C) public officials.
D) entrepreneurs.

Question 40

Which condition will encourage competition?

A) Government licensing requirements in order to enter an industry
B) A small number of buyers and sellers in a market
C) The freedom of sellers and buyers to enter or exit an industry
D) The government serving as the only supplier of goods to consumers

Question 41

All economic systems must answer certain fundamental economic questions.Which is not one of these questions?

A) Which actions should government take to reduce inflation?
B) How will the goods and services be produced?
C) What goods and services will be produced?
D) Who is to receive the output?

Question 42

Issues of the distribution of goods and services and incomes in a competitive market system are the primary topic of which fundamental question?

A) What goods and services will be produced?
B) How will the goods and services be produced?
C) How will the system promote progress?
D) Who will get the goods and services?

Question 43

Consumer sovereignty and "dollar votes" are most related to which fundamental question about a competitive market system?

A) What goods and services will be produced?
B) How will the goods and services be produced?
C) How will the system promote progress?
D) Who will get the goods and services?

Question 44

An economic system in which money is not used is a:

A) planned economy.
B) market economy.
C) mixed economy.
D) barter economy.

Question 45

What to produce in a market economy is ultimately determined by the:

A) output decisions of business firms.
B) income plans of households.
C) spending decisions of households.
D) workers' technical skills.

Question 46

Economic efficiency would be primarily discussed with respect to which of the fundamental questions about a competitive market economy?

A) What goods and services will be produced?
B) How will the goods and services be produced?
C) How will the system promote progress?
D) Who will get the goods and services?

Question 47

The process by which new products and technologies drive out existing products and techniques is known as:

A) Destructive creation.
B) Creative destruction.
C) Consumer sovereignty.
D) Capital accumulation.

Question 48

The use of money for exchange:

A) increases the use of barter.
B) reduces consumer sovereignty.
C) increases the importance of a coincidence of wants.
D) encourages more specialization in production.

Question 49

Which is necessary to make a trade in a barter economy?

A) Money
B) Unlimited wants
C) A medium of exchange
D) A coincidence of wants

Question 50

Which is the main problem with the barter system of exchange? Barter:

A) encourages self-interest and selfishness.
B) fosters specialization and division of labor.
C) requires a coincidence of wants.
D) undermines the right to leave property to one's heirs.

Question 51

A prerequisite of specialization is:

A) a capitalistic economic system.
B) a medium of exchange or money system.
C) free enterprise.
D) competition.

Question 52

Which fundamental question about a competitive market system primarily focuses on technological progress and capital accumulation?

A) What goods and services will be produced?
B) How will the goods and services be produced?
C) How will the system promote progress?
D) Who will get the goods and services?

Question 53

In 1997,McDonald's introduced the "55-cent special." It turned out to be an unsuccessful product.In the marketplace for fast-food products,this lack of success is an example of:

A) normal profit.
B) economic costs.
C) consumer sovereignty.
D) medium of exchange.

Question 54

Which is not one of the Four Fundamental Questions?

A) How will goods and services be produced?
B) How should the system promote progress?
C) Who is to receive the output of the system?
D) What goods and services should be produced by government?

Question 55

Consider a barter situation where you have pens and you want pencils.To achieve your objective there must be a(n):

A) use of capital goods.
B) entry and exit from the market.
C) large number of sellers.
D) coincidence of wants.

Question 56

Why might a company use barter rather than money to make a transaction?

A) Barter is generally more efficient than money exchanges.
B) Barter can enable two firms to trade when their cash flows are limited.
C) Money requires a coincidence of wants but barter is more direct.
D) Money is economically efficient for large transactions,but barter is preferred for smaller transactions.

Question 57

Which is an example of barter?

A) A person trading a desk for a box of tools
B) A person buying clothes at a used clothing store
C) A gift of tuition money from parents to their children
D) The purchase of stock on the New York Stock Exchange

Question 58

The direct exchange of goods for goods is:

A) barter.
B) the circular flow.
C) the invisible hand.
D) roundabout production.

Question 59

In 1999,McDonald's introduced the "Big Xtra" and it turned out to be a successful product.In the marketplace for fast-food products,this success would be an example of:

A) derived demand.
B) medium of exchange.
C) consumer sovereignty.
D) roundabout production.

Question 60

The introduction in 1996 of "Arch Deluxe" was a hit product for McDonald's.This example shows that in the market for such fast-food products:

A) normal profits are greater than economic profits.
B) the medium of exchange is more important than the message.
C) consumer sovereignty is less important than specialization.
D) the dollar votes of consumers determined which products succeed.

Question 61

The "invisible hand" concept to describe the guiding function of prices was developed by:

A) Jeremy Bentham.
B) Adam Smith.
C) Milton Friedman.
D) David Ricardo.

Question 62

The influential book written by Adam Smith was:

A) Capitalism and Freedom.
B) The Affluent Society.
C) The Age of the Economist.
D) The Wealth of Nations.

Question 63

Which best describes the "invisible hand" concept?

A) Highly detailed central direction of an economy will maximize the public's best interests.
B) The market system works best when resources are highly substitutable.
C) The problem of scarcity can best be overcome in a system of mixed capitalism.
D) The desires of producers and resource suppliers to further their own self-interest will tend to promote the social interest.

Question 64

Which of the following does not explain why the command systems of the Soviet Union and Eastern Europe failed?

A) Coordination problems.
B) Prices and profits did not fluctuate to reflect wants for a different allocation of resources.
C) Incentive problems.
D) The failure to use money for most exchanges.

Question 65

A major feature of a market system is that:

A) there is economic equality.
B) there is consumer sovereignty.
C) there is full employment.
D) all producers make profits.

Question 66

The basic economic argument for the market system is that it promotes:

A) an efficient allocation of resources.
B) equality in the distribution of income.
C) personal freedom.
D) the use of money.

Question 67

The term "dollar votes" means:

A) inflation will occur if consumers do not spend wisely.
B) voters may be offered dollars to help elect certain political candidates.
C) government is responsible for determining what will be considered legal money.
D) consumers "vote" for certain products to be produced by how they spend their incomes.

Question 68

In a market economy,the money incomes of individuals depend primarily upon:

A) government policies in setting wages and interest rates.
B) the value and amounts of the productive resources the individuals possess.
C) the amount of college education the individuals have.
D) who you know and how well you know them.

Question 69

The idea that the desires of resource suppliers and producers to further their own self-interest will automatically further the public interest is known as:

A) consumer sovereignty.
B) the invisible hand.
C) derived demand.
D) profit maximization.

Question 70

By consumer sovereignty we mean that:

A) government is responsible for protecting consumer interests.
B) consumers determine what goods and services are produced.
C) businesses decide what the consumer will buy.
D) all goods and services are produced by consumers.

Question 71

From society's point of view,the economic function of profits is to:

A) equalize incomes.
B) ensure that the rich get richer.
C) provide revenues to pay high wages.
D) direct resources in response to changes in the economy.

Question 72

The market system is said to be characterized by "consumer sovereignty." This is because:

A) a large number of consumer goods are produced.
B) the prices of consumer goods are regulated by government.
C) consumer goods are more profitable than investment goods.
D) of the major role of consumers in determining what goods are produced.

Question 73

The development of CDs and DVDs,which significantly reduced the market for cassette tapes,is an example of:

A) specialization.
B) derived demand.
C) roundabout production.
D) creative destruction.

Question 74

The failure of the McDonald's McLean burger was an example of:

A) an increase in demand.
B) consumer sovereignty.
C) technological advances.
D) economic profit.

Question 75

Within a market economy,some industries may be declining while other industries may be expanding.This indicates that:

A) incomes are declining.
B) productive resources are being reallocated.
C) factors of production are scarce.
D) producers are not maximizing profits.

Question 76

The idea that firms and resource suppliers,while seeking to further their own self-interests in a market economy,also promote the public interest describes:

A) the guiding function of prices.
B) capital accumulation.
C) the "invisible hand."
D) "dollar votes."

Question 77

The term "consumer sovereignty" means that:

A) consumers are controlled by the actions of the marketplace.
B) what is produced is ultimately determined by what consumers purchase.
C) there are no limits on what consumers may buy under capitalism.
D) businesses produce with tax minimization as their primary goal.

Question 78

Command systems in the Soviet Union and pre-reform China failed primarily because of:

A) coordination and incentive problems.
B) greater resource scarcity than in market systems.
C) the failure to accumulate and use capital.
D) the failure to specialize in production.

Question 79

In the circular flow model,households:

A) buy products and resources.
B) sell products and resources.
C) buy products and sell resources.
D) sell products and buy resources.

Question 80

The development of the Internet and e-mail to often replace regular mail services is an example of:

A) roundabout production.
B) derived demand.
C) creative destruction.
D) specialization.