Question 1

Which of the following statements is FALSE?
A) One definition of total income is that it is the annual cost of producing the entire output of final goods and services.
B) Transactions in which households buy final goods and services occur in the factor market.
C) The value of total output is identical to total income.
D) Saving is the difference between consumer income and expenditures.

Accepted Answer

Transactions in which households buy final goods and services occur in the product market, not the factor market. The factor market is where households sell the use of their factors of production (like labor) to businesses.

Question 2

In the circular flow model, profits are considered to be
A) a subtraction from the Gross Domestic Product (GDP).
B) a cost of doing business.
C) equal to zero, or else the circular flow would be out of balance.
D) a form of interest payment.

Accepted Answer

In the circular flow model, businesses incur costs in order to produce goods and services, including profits as a reward for the owners or shareholders. Therefore, profits are considered a cost of doing business and are included in the expenses of a company. They are not subtracted from the GDP or a form of interest payment, and if profits were equal to zero, it would mean that businesses are not making any money and the circular flow would not be accurate.

Question 3

The circular flow of income shows
A) goods, services, and money payments flowing in the same direction.
B) goods and money payments flowing in one direction and services flowing in the opposite direction.
C) goods and services flowing in one direction and money payments in the other direction.
D) goods flowing in one direction and services and money payments flowing in the other direction.

Accepted Answer

The circular flow of income shows that goods and services flow from firms to households and money payments flow from households to firms. This is represented by the circular flow diagram where the outer circle shows the flow of goods and services and the inner circle shows the flow of money payments. Therefore, choice C is the correct answer as it represents both the flow of goods and services in one direction and the flow of money payments in the opposite direction.

Question 4

Which of the following is consistent with the circular flow of income? I. Goods and services flow in one direction.
II) Payments and incomes flow in one direction.
III) Sellers receive less than what buyers spend.
A) I only
B) II only
C) III only
D) Both I and II

Accepted Answer

The circular flow of income refers to the continuous flow of goods, services, incomes, and payments between producers and consumers in an economy. Option I is consistent with the circular flow of income as goods and services flow in one direction from firms to households and from households to firms. Option II is also consistent with the circular flow of income as payments and incomes flow in one direction from households to firms and from firms to households. Option III is not consistent with the circular flow of income as sellers receive the same amount as what buyers spend because every transaction in the economy involves an equal exchange where buyers pay sellers for goods and services, and sellers receive payments equal to the amount spent by buyers. Therefore, the best answer is D.

Question 5

The observation that goods and services flow in one direction and money payments flow in another direction is the principle behind
A) the double coincidence of wants.
B) a barter economy.
C) a pure command economy.
D) the circular flow of income.

Accepted Answer

The concept of goods and services flowing in one direction and money payments flowing in another direction forms the basis of the Circular Flow of Income, which is an economic model used to illustrate the flow of income and expenditure in an economy. The other options (A, B, and C) are not correct because they do not relate to this principle. The double coincidence of wants refers to the challenge of finding a trading partner who has what you want and wants what you have in a barter economy, whereas a barter economy involves direct exchange of goods and services without the use of money. A pure command economy is one in which the government controls all aspects of production and distribution of goods and services, which is not related to the flow of goods and services and money payments.

Question 6

How do economists view profits?
A) Profits are an asset the business holds.
B) Profits are one of the costs paid to a factor of production.
C) Profits are guaranteed as long as a firm operates ethically.
D) The firm's profit equals the sum of all payments to the 5 factors of production.

Accepted Answer

Economists view profits as a cost to a factor of production, specifically, entrepreneurship or risk-taking. Profit is the reward for taking on risk and starting a business, and it is included in the total costs of production.

Question 7

In the product markets, households
A) are the buyers of goods and services.
B) are the sellers of resources.
C) are neither buyers nor sellers in the market.
D) none of the above is correct.

Accepted Answer

In the product markets, households are the buyers of goods and services. They purchase items such as food, clothing, and entertainment, among others, from businesses operating in these markets. This constitutes their demand for products.

Question 8

Profits represent
A) the income earned from a bond.
B) the payments firms make to their employees.
C) a reward to entrepreneurs.
D) the difference between total tax revenue and total government spending.

Accepted Answer

Profits represent a reward to entrepreneurs for taking risks and successfully operating a business.

Question 9

The value of total output and total income in the simple circular flow model
A) are measures of the economy's level of savings.
B) include only intermediate goods.
C) are equal to each other.
D) are related in the sense that national income is less than national product.

Accepted Answer

In the simple circular flow model, all goods and services produced by firms are sold to households or other firms. Hence, total output equals total income, since all expenditures on output end up as income for someone else in the economy. Therefore, the correct choice is C – both total output and total income are equal to each other in the model.

Question 10

Which of the following is true about product markets?
A) Goods and services flow from households to firms.
B) Goods and services flow from firms to households.
C) Factors (land, labor, capital, and entrepreneurial ability) flow from households to firms.
D) Factors (land, labor, capital, and entrepreneurial ability) flow from firms to households.

Accepted Answer

In product markets, goods and services flow from firms (producers) to households (consumers).

Question 11

According to the circular flow, the dollar value of a nation's output is equal to
A) profits.
B) total income.
C) net income minus taxes.
D) wages.

Accepted Answer

In the circular flow model, the dollar value of a nation's output is equal to total income. This includes all the income earned by households, businesses, and the government in the economy. It includes not only wages but also profits, rent, and interest payments.

Question 12

In the simple circular flow model,
A) households spend the income they receive from labor services but save the income they receive from selling the other factors of production.
B) businesses buy labor services from households, but supply other factors of production themselves.
C) households spend their entire income on consumer products.
D) profits are a type of income that is not received by households.

Accepted Answer

In the simple circular flow model, households spend their entire income on consumer products, reflecting the assumption that all income earned by households (from providing labor and other resources) is used to purchase goods and services from businesses. This model simplifies the economic interactions between households and businesses, ignoring savings, investments, and other complexities.

Question 13

One of the principles behind the concept of the circular flow is that
A) in every economic exchange, the seller receives exactly the same amount that the buyer spends.
B) in every economic exchange, the seller receives less than the amount that the buyer spends.
C) the seller of goods receives exactly the same amount that the buyer spends, but the seller of resources receives less than the buyer spends.
D) in exchange involving products, the seller receives less than the amount the buyer spends, but in resource markets the seller receives more than the buyer spends.

Accepted Answer

The principle behind the concept of the circular flow is that in every economic exchange, the seller receives exactly the same amount that the buyer spends. This is because every transaction involves both a buyer and a seller, and the money paid by the buyer is received by the seller, resulting in a circular flow of income and spending in the economy.

Question 14

The simple circular flow of income shows that the total income in an economy equals
A) total profits earned by firms.
B) all taxes paid by households.
C) the total amount of money supplied by the government.
D) total expenditures.

Accepted Answer

The simple circular flow of income shows that the total income in an economy equals total expenditures. This is because the total income earned by households is spent on goods and services produced by firms, which in turn generates income for the firms. This cycle of spending and earning creates a flow of income and expenditures in the economy, and the total value of this flow is equal to the total income in the economy.

Question 15

Suppose an individual buys a new CD of her favorite musical artist. This purchase has taken place in the
A) product markets.
B) factor markets.
C) labor markets.
D) resource markets.

Accepted Answer

The purchase of a CD falls under the category of a product market transaction, as the individual is buying a product for personal consumption. Factor markets involve the exchange of resources (such as labor or capital) between firms and households, while labor markets specifically pertain to the buying and selling of labor services.

Question 16

Economists consider profit to be
A) a cost of producing goods and services.
B) the same as a salary.
C) a reward for incurring losses.
D) something that should be eliminated by antitrust laws.

Accepted Answer

Economists consider profit to be the reward for bearing the risks of production and investing resources in the production of goods and services. It is also considered as a residual income after deducting all the costs of producing goods and services.

Question 17

Which of the following statements is FALSE?
A) The value of total income is equal in value to total output because profit is a cost of production.
B) In the circular flow model, households sell factor services to businesses in return for factor payments.
C) Businesses sell goods and services to households who use their income to pay for them.
D) Total income is always greater than total output.

Accepted Answer

Total income cannot be greater than total output in the circular flow model because all income is ultimately derived from the sale of goods and services, which make up output. Therefore, total income must equal total output.

Question 18

In the factor market, households
A) sell resources.
B) buy resources.
C) are neither buyers nor sellers of resources.
D) are both buyers and sellers of resources.

Accepted Answer

In the factor market, households sell their resources (such as labor, land, and capital) to firms in exchange for payment (such as wages, rent, and interest). Therefore, households are sellers of resources in the factor market.

Question 19

According to the circular flow, the value of total output produced and total income
A) should differ by the value of intermediate goods.
B) should increase by the unanticipated rate of inflation.
C) will always be increasing in a capitalist economy.
D) will be equal.

Accepted Answer

According to the circular flow model, total output produced and total income should be equal. This is because every dollar spent on goods and services (total output) by households is a dollar of income earned by firms, and every dollar spent on factors of production (wages, rent, and profits) by firms is a dollar of income earned by households. Therefore, the value of total output produced and total income will be equal in a closed economy.

Question 20

Which of the following would most likely be sold in the product markets?
A) A new car
B) Stocks and bonds
C) Iron ore
D) Entrepreneurial ability

Accepted Answer

Product markets are where finished goods and services are sold to consumers, and a new car would be a finished good sold in the product market. Stocks and bonds are examples of financial assets that are sold in the financial market, while iron ore is a natural resource sold in the resource market. Entrepreneurial ability is a factor of production and is not sold in any market.

Quiz 8: Measuring the Economys Performance

Which of the following statements is FALSE?

In the circular flow model, profits are considered to be

The circular flow of income shows

Which of the following is consistent with the circular flow of income? I. Goods and services flow in one direction. II) Payments and incomes flow in one direction. III) Sellers receive less than what buyers spend.

The observation that goods and services flow in one direction and money payments flow in another direction is the principle behind

How do economists view profits?

In the product markets, households

Profits represent

The value of total output and total income in the simple circular flow model

Which of the following is true about product markets?

According to the circular flow, the dollar value of a nation's output is equal to

In the simple circular flow model,

One of the principles behind the concept of the circular flow is that

The simple circular flow of income shows that the total income in an economy equals

Suppose an individual buys a new CD of her favorite musical artist. This purchase has taken place in the

Economists consider profit to be

Which of the following statements is FALSE?

In the factor market, households

According to the circular flow, the value of total output produced and total income

Which of the following would most likely be sold in the product markets?