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Chapter 2 Study Guide

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Multiple ChoiceEdit

1. In the simple circular-flow diagram, the participants in the economy are

  • a. firms and government.
  • b. households and firms.
  • c. households and government.
  • d. households, firms, and government.
  • e. firms and government.

2. In the circular-flow diagram, which of the following is not a factor of production?

  • a. labor
  • b. land
  • c. capital
  • d. money
  • e. entrepreneurship
Figure 2-1
Figure 2-1
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3. Refer to Figure 2-1. If Box C in this diagram represents the markets for goods and services, boxes A and B of this circular-flow diagram represent

  • a. firms and households.
  • b. households and government.
  • c. the markets for goods and services and the markets for fi nancial assets.
  • d. the markets for goods and the markets for services.
  • e. the market for factors of production.

4. Unemployment would cause an economy to

  • a. produce inside its production possibilities frontier.
  • b. produce on its production possibilities frontier.
  • c. produce outside its production possibilities frontier.
  • d. experience an inward shift of its production possibilities frontier.
  • e. experience an outward shift of its production possibilities frontier.

5. Production possibilities frontiers are usually bowed outward. This is because

  • a. the more resources a society uses to produce one good, the fewer resources it has available to produce another good.
  • b. it reflects the fact that the opportunity cost of producing a good decreases as more and more of that good is produced.
  • c. of the effects of technological change.
  • d. resources are specialized; that is, some are better at producing particular goods rather than other goods.
  • e. of the diminishing marginal utility associated with increased amounts of a good.

6. The following table contains some production possibilities for an economy for a given year. If the production possibilities frontier is bowed outward, then “?” could be

  • a. 370.
  • b. 340.
  • c. 330.
  • d. 320.
  • e. 310.
Figure 2-2
Figure 2-2
DzwonkowskiAdded by Dzwonkowski










7. Refer to Figure 2-2. This economy has the ability to produce at which point(s)?

  • a. J, K, M, N
  • b. K, M, N
  • c. K, N
  • d. M
  • e. J, K, L, N
Figure 2-3
Figure 2-3
DzwonkowskiAdded by Dzwonkowski











8. Refer to Figure 2-3. The opportunity cost of this economy moving from point A to point B is

  • a. zero toasters.
  • b. ten toasters.
  • c. ten toothbrushes.
  • d. twenty toasters.
  • e. twenty toothbrushes.
Figure 2-4
Figure 2-4
DzwonkowskiAdded by Dzwonkowski












9. Refer to Figure 2-4. Which of the following events would explain the shift of the production possibilities frontier from A to B?

  • a. The economy’s citizens developed an enhanced taste for batteries.
  • b. The economy experienced a technological advance in the production of batteries.
  • c. The economy experienced an overall technological advance in all areas of production.
  • d. More capital became available in the economy.
  • e. More labor became available in the economy.

10. A production possibilities frontier shifts outward when

  • a. the economy experiences economic growth.
  • b. the desires of the economyís citizens change.
  • c. the economy abandons inefficient production methods in favor of efficient production methods.
  • d. opportunity costs are lessened.
  • e. government increases the amount of money in the economy.

11. One way to characterize the difference between positive statements and normative statements is as follows:

  • a. Positive statements tend to reflect optimism about the economy and its future, whereas normative statements tend to reflect pessimism about the economy and its future.
  • b. Positive statements offer descriptions of the way things are, whereas normative statements offer opinions on how things ought to be.
  • c. Positive statements involve advice on policy matters, whereas normative statements are supported by scientific theory and observation.
  • d. Economists outside of government tend to make normative statements, whereas government-employed economists tend to make positive statements.
  • e. Microeconomists make positive statements, whereas macroeconomists make normative statements.

12. Suppose an economy produces two goods, food and machines. This economy always operates on its production possibilities frontier. Last year, it produced fifty units of food and thirty machines. This year, it experienced a technological advance in its machine-making industry. As a result, this year the society wants to produce fifty-five units of food and thirty machines. Which of the following statements is correct?

  • a. Because the technological advance occurred in the machine-making industry, it will not be possible to increase food production without reducing machine production to less than thirty.
  • b. Because the technological advance occurred in the machine-making industry, increases in output can only occur in the machine industry.
  • c. In order to increase food production in these circumstances without reducing machine production, the economy must reduce inefficiencies.
  • d. The technological advance reduced the amount of resources needed to produce thirty machines, so these resources could be used to produce more food.
  • e. In order to produce the fifty-five units of food and thirty machines, the economy would have to reduce its level of unemployment.

AnswersEdit

  1. B
  2. D
  3. B
  4. B
  5. B
  6. A
  7. B
  8. D
  9. -
  10. -
  11. B

Free ResponseEdit

1. Using the following outline, draw a circular-flow diagram representing the interactions between households and firms in a simple economy, assuming that the market for goods and services is in the top box and firms are in the box to the left. Explain briefly the various parts of the diagram.

2. Draw a production possibilities frontier showing increasing opportunity cost of hammers in terms of horseshoes.

  • a. On the graph, identify the area of feasible outcomes and the area of infeasible outcomes.
  • b. On the graph, label a point that is efficient and a point that is inefficient.
  • c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to make both horseshoes and hammers, on this economy.
  • d. On a second graph, illustrate the effect of a new computerized assembly line in the production of hammers on this economy.
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