Question 1

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 principle that goods and services flow in one direction and money payments flow in another direction describes the circular flow of income, which is the concept that explains how money, goods, and services are exchanged in an economy. The circular flow of income shows the relationships between households, firms, the government, and international trade, and how income and consumption are interrelated. Therefore, the correct choice is D.

Question 2

Which of the following would most likely be sold in the product markets?
A) a portable power bank
B) stocks and bonds
C) plastic material
D) entrepreneurial ability

Accepted Answer

A portable power bank is a tangible consumer good that can be sold in the product markets. Stocks and bonds are traded in financial markets, plastic material is a raw material that is typically sold in factor markets, and entrepreneurial ability is a resource or factor of production rather than a product.

Question 3

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 4

Suppose Tina purchases an iTune download of her favorite song. This purchase has taken place in the
A) product markets.
B) factor markets.
C) labor markets.
D) resource markets.

Accepted Answer

The purchase of an iTune download is a transaction in the product market, where final goods and services are bought and sold by consumers.

Question 5

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 to households, as firms produce and sell products to consumers. Factors of production, including land, labor, capital, and entrepreneurial ability, flow from households to firms in factor markets, as individuals provide these resources to firms in exchange for payment.

Question 6

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 7

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 model shows that the total income in an economy equals total expenditures. This includes the expenditures of households on consumption goods and services and the expenditures of firms on factors of production, such as labor and capital. Therefore, the correct answer is option D. Options A, B, and C are incorrect as they do not reflect the total income in an economy.

Question 8

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 paid to a factor of production (entrepreneurship), which is separate from the costs paid to the other four factors (land, labor, capital, and natural resources). Profits are also seen as a motivator for entrepreneurs to take on the risk and uncertainty of starting and running 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 income earned by households is spent on goods and services produced by firms, which in turn generates income for the firms. This creates a circular flow of income and output. Therefore, the value of total output and total income in the model is equal to each other.

Question 10

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

Profits are considered to be a cost of doing business in the circular flow model. They represent the difference between total revenue and total costs incurred by a business.

Question 11

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 model shows the flow of goods and services from firms to households and the flow of payments (e.g., wages, rent, and profits) from households to firms. In return, firms use these payments to buy production factors (e.g., labor and capital) to produce more goods and services. This creates a circular flow of money payments and goods and services, with goods and services flowing in one direction and money payments flowing in the other direction. Option C accurately describes this flow.

Question 12

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

According to the circular flow model, the dollar value of a nation's output is equal to the total income generated by households through factors of production (such as wages, rent, and interest) and by firms through sales of goods and services. Therefore, the correct choice is B, total income.

Question 13

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

Option I is consistent with the circular flow of income because goods and services flow from firms to households and the government, and money flows from households and the government to firms for the purchase of these goods and services. 
Option II is also consistent with the circular flow of income because payments from households and the government for goods and services provide incomes for firms and households respectively. 
Option III is not consistent with the circular flow of income because sellers receive the same amount as what buyers spend (in a closed economy without imports/exports), making it a two-way flow of money.

Question 14

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 a reward or return for the risk and effort that entrepreneurs take on in producing goods and services. It is not considered a cost, and is instead factored in as a source of revenue for the business.

Question 15

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 can be equal to or less than total output, but it cannot be greater than total output because all income ultimately comes from the production and sale of goods and services.

Question 16

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. This means that they are purchasing products from businesses or firms in exchange for money.

Question 17

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 on the risk of starting and running a business. It is the amount of money that remains after deducting all expenses from total revenue.

Question 18

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 circular flow is that in every economic exchange, the seller receives exactly the same amount that the buyer spends. This is because in a market economy, both the buyer and the seller want to maximize their own benefits, and therefore will agree to an exchange only if they both perceive that they will be better off afterwards. This principle is applicable to both the markets for goods and services, as well as the markets for inputs and resources.

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 different by the amount of firm profits
D) will be equal.

Accepted Answer

According to the circular flow model, the total value of output produced equals the total income generated in the economy. This is because every dollar of expenditure made by households for buying goods and services becomes income for the firms producing those goods and services. Therefore, the value of total output produced and total income earned will always be equal.

Question 20

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 resources such as labor, capital, and entrepreneurial ability to firms in exchange for income. Therefore, the correct answer is A - households sell resources.

Quiz 8: Measuring the Economys Performance

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

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

Which of the following statements is FALSE?

Suppose Tina purchases an iTune download of her favorite song. This purchase has taken place in the

Which of the following is TRUE about product markets?

In the simple circular flow model

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

How do economists view profits?

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

In the circular flow model, profits are considered to be

The circular flow of income shows

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

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.

Economists consider profit to be

Which of the following statements is FALSE?

In the product markets, households

Profits represent

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

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

In the factor market, households