Question 1

In a simple circular flow model,
A)households are suppliers of resources.
B)firms are suppliers of final products.
C)households are demanders of final products.
D)firms are demanders of resources.
E)all of the answers are true.

Accepted Answer

All of the answers are true in a simple circular flow model. Households provide resources to firms while in turn, the firms supply final products to households. This creates a circular flow of goods and services between the two sectors. Moreover, both households and firms are also involved in the factor markets and product markets, respectively, as they demand resources and final products, respectively.

Question 2

A hypothesis is:
A)a normative economic statement.
B)a testable proposition.
C)a statement that cannot be evaluated using real-world data.
D)a model with no connection to the real world.

Accepted Answer

A hypothesis is a testable proposition or prediction that can be evaluated through empirical observation or experimentation, making it a scientific statement. A normative economic statement is an opinionated statement that cannot be tested or proven, while a statement that cannot be evaluated using real-world data is not a hypothesis. A model with no connection to the real world is not a hypothesis either, as it lacks empirical validation or relevance.

Question 3

What is the difference between a theory and a hypothesis?
A)A hypothesis abstracts from reality while a theory describes reality.
B)A theory abstracts from reality while a hypothesis describes reality.
C)A theory is an established explanation.
D)A hypothesis is not an established explanation.
E)A theory is an established explanation AND a hypothesis is not an established explanation.

Accepted Answer

A theory is a well-substantiated explanation of some aspect of the natural world that is based on a body of evidence, while a hypothesis is a proposed explanation made on the basis of limited evidence as a starting point for further investigation.

Question 4

Which of the following would be primarily determined in factor markets?
A)The number of computers produced.
B)The wage rates for high school teachers.
C)The price of automobiles.
D)Interest rates.

Accepted Answer

Factor markets are where factors of production (like labor) are bought and sold, so wage rates for high school teachers would be determined there.

Question 5

Which of the following is not a payment made to households in exchange for the use of factors of production?
A)rent
B)interest
C)wages
D)taxes

Accepted Answer

Taxes are not a payment made to households in exchange for the use of factors of production. Instead, taxes are payments made by households to the government to finance government programs and services. Rent, interest, and wages are all payments made to households in exchange for the use of their land, capital, and labor, respectively.

Question 6

Economists use theories to:
A)abstract from the complexities of the world.
B)understand economic behavior.
C)explain and help predict human behavior.
D)do all of the actions listed.

Accepted Answer

Economists use theories to abstract from the complexities of the world, understand economic behavior, and explain and help predict human behavior. Therefore, all of the actions listed are correct.

Question 7

A theory can best be defined as:
A)an untestable assertion or statement of untestable fact.
B)a testable statement that can be definitively proven to be true or false using empirical analysis.
C)a normative statement that can be tested empirically through analysis of real-world data.
D)a deliberate simplification of factual relationships that attempts to explain and predict how those relationships work.

Accepted Answer

A theory is a simplified explanation of factual relationships that can predict how those relationships work. It is based on empirical evidence and is testable, but not necessarily definitively provable in all cases. Option A is incorrect because a theory must be testable. Option B is incorrect because even if a theory is testable, it may not definitively be proven to be true or false. Option C is incorrect because normative statements are value judgments, whereas theories are explanations of factual relationships.

Question 8

Identify the chain of events in creating a theory:
A)gather data, evaluate results, tentatively accept the theory, support or refute the hypothesis.
B)predict behavior, evaluate the results, formulate a hypothesis.
C)select a theory, create a hypothesis, evaluate the evidence.
D)formulate a hypothesis, gather data, evaluate the results, support or refute the hypothesis, tentatively accept theory.

Accepted Answer

The correct sequence of events in creating a theory is to formulate a hypothesis, gather data, evaluate the results, support or refute the hypothesis, and tentatively accept the theory based on the evidence. This process may repeat itself several times until the theory is well-supported by empirical evidence. Option A is incorrect because it skips the step of formulating a hypothesis. Option B is incorrect because it puts predicting behavior before formulating a hypothesis, which is not necessarily accurate. Option C is incorrect because it puts selecting a theory before creating a hypothesis, which is not the typical order of events in the scientific method.

Question 9

A good economic theory:
A)includes every detail that affects the economic behavior of interest.
B)relies on simplifying assumptions in order to explain economic behavior.
C)does not rely on simplifying assumptions.
D)is impossible to achieve because of the difficulty of conducting controlled experiments.
E)is normative and therefore not testable.

Accepted Answer

Economic theories often make simplifying assumptions in order to isolate and explain specific economic behavior or phenomena. While these assumptions may not perfectly align with reality, they can still be useful in helping people understand and analyze economic situations.

Question 10

An economic theory:
A)should be as detailed as possible in order to model the complexity of an economy.
B)is an abstraction from reality.
C)is only useful if it rests on realistic assumptions.
D)is unrealistic and therefore of dubious usefulness in explaining what occurs in a complex economy.

Accepted Answer

An economic theory is a simplified, abstract representation of reality that helps to explain and predict economic behavior. It is not meant to model the complexity of an economy in its entirety, but rather to provide a framework for understanding and analyzing certain aspects of it. However, the theory must be based on realistic assumptions in order to be useful in explaining real-world phenomena. Choosing option A would be incorrect as an overly detailed theory may fail to generalize well, which means it may be relevant to that specific case but not to other cases. Option D is an overgeneralization that is not accurate as economic theories are useful in explaining economic phenomena, as long as their assumptions are realistic.

Question 11

Economists need to develop abstractions in order to:
A)avoid analyzing real-world economic interactions, which are too complicated to understand.
B)distinguish normative economic behavior from positive economic behavior.
C)avoid committing the fallacy of composition.
D)understand and explain economic behavior.
E)justify their salaries, much in the way lawyers speak and write in "legalese."

Accepted Answer

Developing abstractions helps economists understand and explain complex economic behavior by simplifying it into manageable models and frameworks.

Question 12

The best test of an economic theory is:
A)the rigor of its mathematical formulation.
B)its ability to explain and predict.
C)the accuracy of its assumptions.
D)the level of real-world detail it captures.

Accepted Answer

The ultimate goal of any economic theory is to explain and predict real-world phenomena. While mathematical rigor, accuracy of assumptions, and level of detail are important, the ability to explain and predict is the most essential test of its validity.

Question 13

In the simple circular flow model:
A)firms are suppliers of resources and demanders of products.
B)households are suppliers of products and demanders of resources.
C)households are demanders of products and suppliers of resources.
D)firms are the suppliers of both resources and products.
E)households are the suppliers of both resources and products.

Accepted Answer

In the simple circular flow model, households are demanders of products (such as goods and services) and suppliers of resources (such as labor, capital, and land) to firms. On the other hand, firms are demanders of resources and suppliers of products. This reflects the interdependence and exchange between households and firms in a market economy, where goods and services are produced and consumed through the interaction of buyers and sellers.

Question 14

A good economic theory:
A)rests on realistic assumptions.
B)explains economic behavior and predicts well.
C)can best be expressed mathematically.
D)always provides a highly detailed analysis of an economic sector.

Accepted Answer

Good economic theories explain economic behavior effectively and make accurate predictions, regardless of the realism of their assumptions or the level of detail and mathematical expression involved.

Question 15

Which of the following is correct?
A)"Theory" and "hypothesis" are interchangeable terms meaning the same thing.
B)A hypothesis may result from a tested and confirmed theory.
C)A theory may result from a tested and confirmed hypothesis.
D)A hypothesis is a theory whose formulation relies on mathematics.

Accepted Answer

A hypothesis is an educated guess or prediction about a phenomenon that is specific, testable, and falsifiable. It serves as the starting point for scientific research and experimentation. If a hypothesis is tested and confirmed through observational or experimental evidence, it may then be elevated to the status of a theory - a well-established and widely accepted explanation for a natural phenomenon that has been repeatedly tested and confirmed through multiple lines of evidence. Therefore, a theory may result from a tested and confirmed hypothesis. A theory and a hypothesis are not interchangeable terms as they serve different scientific purposes. A theory is typically broader in scope and supported by a larger body of evidence, whereas a hypothesis is a more narrow and specific prediction that is being tested. The formulation of a hypothesis does not necessarily rely on mathematics.

Question 16

The circular flow of economic activity is a model of the:
A)flow of goods, services, and payments between households and firms.
B)influence of government on business behavior.
C)role of unions and government in the economy.
D)interaction among taxes, prices, and profits.
E)economy's banking system.

Accepted Answer

The circular flow of economic activity model shows the flow of goods, services, and payments between households (consumers) and firms (producers). It illustrates how businesses produce goods and services, which households then consume, and how households provide the labor that businesses need to produce goods and services. Money flows from households to businesses in exchange for goods and services, and flows back from businesses to households as wages, profits, and rent.

Question 17

An economist at the University of Alaska at Anchorage has been asked to explain why the price of Alaskan crude oil has fallen recently.In order to assemble a scholarly answer, the professor should take which steps?
A)Develop a hypothesis, test the proposition by engaging in empirical analysis, and examine the data to see if it fits with the facts.
B)Gather data on crude oil prices and seemingly unrelated variables in order to look for associations, then formulate a hypothesis based on those unexpected associations.
C)Ask people in Alaska why they are not purchasing oil.
D)None of the above. The oil industry is controlled by a cartel; therefore price changes in the industry cannot be explained using economic theories.

Accepted Answer

The professor should start by developing a hypothesis and then engage in empirical analysis to test the hypothesis. This involves examining the data to see if it fits with the facts. This approach is central to the scientific method used in economics. The other options are not appropriate because option B suggests looking for unexpected associations, which may lead to spurious correlations that do not explain the fall in oil prices. Option C is not useful because it assumes that the problem lies with consumers, whereas the price of oil is determined by supply and demand in the market. Option D is incorrect because the oil industry is not completely controlled by a cartel; there are many factors that influence oil prices, including supply shocks and changes in demand.

Question 18

In the graph of the circular flow model below, area B represents 
A)product markets.
B)firms.
C)factor markets.
D)households.

Accepted Answer

The answer of In the graph of the circular flow...

Question 19

The simple circular flow model shows that workers and owners of land and capital offer their services through:
A)product markets.
B)factor markets.
C)money markets.
D)government.
E)the foreign currency market.

Accepted Answer

The simple circular flow model includes two markets: product markets and factor markets. In factor markets, workers and owners of land and capital offer their services in exchange for payment or income. Therefore, the correct choice is B) factor markets.

Question 20

In the circular flow model:
A)households receive income from businesses in exchange for providing inputs and use that income to buy goods and services from businesses.
B)businesses receive revenues from households in exchange for providing goods and services and use those revenues to buy inputs from households.
C)households receive revenue for selling goods and services to businesses, and use that revenue to buy inputs from businesses.
D)Households receive income from businesses in exchange for providing inputs and use that income to buy goods and services from businesses AND businesses receive revenues from households in exchange for providing goods and services and use those revenues to buy inputs from households.

Accepted Answer

The circular flow model shows the flow of goods, services, and money between households and businesses. Households provide inputs to businesses in exchange for income, which they then use to buy goods and services from businesses. Meanwhile, businesses receive revenue from households for their products and services, which they then use to purchase inputs (such as labor) from households. Therefore, both statements in option D accurately describe the circular flow model.

Quiz 1: The Role and Method of Economics

In a simple circular flow model,

A hypothesis is:

What is the difference between a theory and a hypothesis?

Which of the following would be primarily determined in factor markets?

Which of the following is not a payment made to households in exchange for the use of factors of production?

Economists use theories to:

A theory can best be defined as:

Identify the chain of events in creating a theory:

A good economic theory:

An economic theory:

Economists need to develop abstractions in order to:

The best test of an economic theory is:

In the simple circular flow model:

A good economic theory:

Which of the following is correct?

The circular flow of economic activity is a model of the:

An economist at the University of Alaska at Anchorage has been asked to explain why the price of Alaskan crude oil has fallen recently.In order to assemble a scholarly answer, the professor should take which steps?

In the graph of the circular flow model below, area B represents

The simple circular flow model shows that workers and owners of land and capital offer their services through:

In the circular flow model: