1

1. DEFINITION

AND

SCOPE

OF

ECONOMICS

TRUE/FALSE
1. Economics is the study of how fairly goods and services are distributed within society.
ANSWER: F
2. Scarcity means that there is less of a good or resource available than people wish to
have. ANSWER: T
3. Scarcity is the fundamental problem of the economy. ANSWER T
4. Millionaires do not face the problem of scarcity. ANSWER F
5. Scarcity is a problem only for the poor. ANSWER F
6. Resources are used to create goods and services. ANSWER T
7. Inputs in production processes are called resources. ANSWER T
8. Money is scarce, but resources are not. ANSWER F
9. An optimal decision is one that chooses the most desirable from among all possibilities
that are available. ANSWER T
10. Economics studies the logic of choices made from among available possibilities. ANSWER
T
11. Economics examines the options open to households, business firms, governments, and
entire societies by the limited resources at their command. ANSWER T
12. Economics examines the options open to households and business firms, but ignores the
options of governments and entire societies. ANSWER F
13. Scarcity of resources implies that people must make decisions consistent with the
means they have available to them. ANSWER T
14. Given its size, the United States does not have to worry about limitations on resources.
ANSWER F
15. All actions and purchases, even those of wealthy people, involve a sacrifice. ANSWER T
16. Tradeoffs mean that you give up one thing to get something else. ANSWER T
17. The scarcity of physical resources is far more fundamental to the study of economics
than the scarcity of funds. ANSWER T
18. Goods that are actually produced by firms are not really limited in supply, because the
firms can always produce more of them. ANSWER F
19. Although finished goods are scarce, the inputs to produce them are not scarce.
ANSWER F
20. If a society distinguished between needs and wants, it is possible that resources would
be abundant for meeting the societys needs but would be scarce for meeting its wants.
ANSWER T
21. Although finished goods are scarce, the inputs to produce them are not scarce.
ANSWER F
22. If a society distinguished between needs and wants, it is possible that resources would
be abundant for meeting the societys needs but would be scarce for meeting its wants.
ANSWER T
23. Both parties gain in a voluntary exchange. ANSWER T
24. The field of economics is divided into two subfields: microeconomics and
macroeconomics. ANSWER: T
25. Macroeconomics studies the factors that change national employment and income.
ANSWER: T

2
26. Normative statements describe how the world is, while positive statements prescribe
how the world should be. ANSWER: F
27. Society would be better if the welfare system were abolished is a normative
statement, not a positive statement. ANSWER: T
28. When economists are trying to explain the world they are acting as scientists, and when
they are trying to improve it, they are policymakers. ANSWER: T
29. While the scientific method is applicable to studying natural sciences, it is not useful in
studying an economic system. ANSWER: F
30. Since natural experiments offered by history cant be used in economics, carefully
constructed laboratory experiments must be used. ANSWER: F
31. An economic model can accurately explain how the economy is organized because it is
designed to include every feature of the real world. ANSWER: F
32. All scientific models, including economic models, simplify reality in order to improve our
understanding of it. ANSWER: T
MULTIPLE CHOICE
1. The word that comes from the Greek word for one who manages a household is
a. market.
b. consumer.
c. producer.
d. economy.
2. The word economy comes from the Greek word for
a. environment.
b. one who manages a household.
c. one who participates in a market.
d. conservation.
3. Households and economies have each of the following in common EXCEPT both
a. must allocate scarce resources.
b. face many decisions.
c. must allocate the goods and services they produce.
d. must have a central decision maker.
4. Economics is defined as the study of
a. business.
b. how society manages its scarce resources.
c. central planning.
d. government regulation.
5. Economics is the study of
a. how society manages its scarce resources.
b. the governments role in society.
c. how a market system functions.
d. how to increase production.
6. Economics is the study of the logic of
a. rational decisions.
b. decision-making activities.
c. ends and means.
d. choosing options from those available.
e. All of the above are correct.

7. The central question in economics is how to

a. make the best use of scarce resources.
b. use government planning agencies.
c. induce people to want less.
d. increase human knowledge.
8. One popular definition of economics is the study of
a. how scarcity increases opportunities to meet ends.
b. how markets overcome scarcity.
c. one goal and three tasks.
d. how to use limited means to meet unlimited wants.
e. wants versus needs.
9. Economists study all of the following EXCEPT
a. how people make decisions.
b. how people interact with one another.
c. the forces and trends that affect the economy as a whole.
d. how societies change over time.
10. Which of the following is NOT a major area of study for economists?
a. how people make decisions
b. how countries choose national leaders
c. how people interact with each other
d. how forces and trends affect the overall economy
11. Economics deals primarily with the concept of
a. scarcity.
b. poverty.
c. change.
d. power.
12. Which of the following is NOT included in the decisions that every society must make?
a. what goods will be produced
b. who will produce goods
c. what determines consumer preferences
d. who will consume the goods
13. Both households and societies face many decisions because
a. resources are scarce.
b. populations may increase or decrease over time.
c. wages for households and therefore society fluctuate with business cycles.
d. people, by nature, tend to disagree.

4
14. A good is considered scarce in a society when
a. more output of the good is possible.
b. everyone in that society cannot have all they want of the good.
c. the government restricts production of the good.
d. only the richest people in the economy can buy all they want of the good.
15. Scarcity exists when
a. there is less than an infinite amount of a resource or good.
b. society can meet the wants of every individual.
c. there is less of a good or resource available than people wish to have.
d. the government fails to produce goods.
16. Approximately what percentage of the worlds economies experience scarcity?
a. 25%
b. 50%
c. 75%
d. 100%
17. When a society cannot produce all the goods and services people wish to have it is said
that the economy is experiencing
a. scarcity.
b. communism.
c. externalities.
d. market failure.
18. For
a.
b.
c.
d.

society, a good is not scarce if

at least one individual in society can obtain all he or she wants of the good.
firms are producing at full capacity.
all members of society can have all they want of it.
those who have enough income can buy all they want of the good.

19. Which product would be considered scarce?

a. Nike shoes
b. Monet paintings
c. 1-carat diamonds
d. All of the above are correct.
20. Which of the following goods best meets the definition of scarcity?
a. air
b. water in the ocean
c. water in a city
d. wood in a forest
21. The
a.
b.
c.
d.

problem of scarcity
has been cooked up by disenchanted anticapitalists.
exists because resources are limited relative to wants.
is solved by promoting economic growth.
is caused by artificially high prices.

22. Because of scarcity, every economic decision involves

a. a trade-off.
b. a free good.
c. a trade-in.
d. an increasing cost.
e. a money payment.
23. Which of the following must cope with scarcity?
a. individuals
b. companies
c. governments
d. families
e. All of the above are correct.
24. A principle that economists emphasize is that the __________ of decision makers are
always limited.
a. ideas
b. goals
c. resources
d. opportunities
e. offices
25. In economics, capital refers to
a. the finances necessary for firms to produce their products.
b. buildings and machines used in the production process.
c. the money households use to purchase firms output.
d. the city where firms must apply for the business license in their state.
26. Which of the following is considered by economists to be the most fundamentally
scarce?
a. money
b. ideas
c. needs
d. food
e. physical resources
27. The
a.
b.
c.
d.
e.
28. How
a.
b.
c.
d.
e.

main reason that finished goods are scarce is that

raw material resources are scarce.
factories are not operated efficiently.
distribution systems are clogged.
taxes are destroying work incentives.
All of the above are correct.
does scarcity affect the range of possible choices that decision makers face?
It narrows the choice to a single option.
It narrows the range of choices.
It increases the possible methods for solving problems.
It clarifies the choices by highlighting the best solutions.
It simplifies the choices and therefore widens the range.

6
29. Scarcity is a concept that applies to all of the following except
a. time.
b. natural resources.
c. human wants.
d. machinery.
30. The
a.
b.
c.
d.

fundamental goal of economics is to

allow everyone to have five yachts and two automobiles.
redistribute income and eliminate poverty.
reduce unemployment so that lower welfare payments are necessary.
learn to cope with the scarcity of virtually all resources.

31. Economics is considered a social science because

a. it deals with the decisions by the government regarding how resources are
allocated.
b. it deals with decisions that affect society.
c. it deals with the economic decisions of individuals, firms, and the government.
d. it uses the research methods of the physical sciences.
32. Every economic decision involves a trade-off because of
a. theory.
b. opportunism.
c. consumption.
d. scarcity.
e. efficiency.
33. In most societies, resources are allocated by
a. a single central planner.
b. those who own the resources.
c. those firms that use resources to provide goods and services.
d. the combined actions of millions of households and firms.
34. Which is the best statement about the way economists study the economy?
a. They study the past, but do not try to predict the future.
b. They use a probabilistic approach based on correlations between economic events.
c. They devise theories, collect data, then analyze the data to test the theories.
d. They use controlled experiments much the same way a biologist or physicist does.
35. By scientific method we mean
a. the use of modern electronic testing equipment to understand the world.
b. the dispassionate development and testing of theories about how the world works.
c. the use of controlled experiments in understanding the way the world works.
d. finding evidence to support preconceived theories about how the world works.
36. A common thread between economics and other sciences such as physics is that
a. experiments are most often conducted in a lab.
b. real-world observations often lead to theories.
c. a Ph.D. is required to truly understand any science.
d. both deal primarily with abstract concepts.

7
37. The use of theory and observation is more difficult in economics than in sciences such as
physics due to the difficulty in
a. evaluating an economic experiment.
b. devising an economic experiment.
c. actually performing an experiment in an economic system.
d. All of the above are correct.
38. Because it is difficult for economists to use experiments to generate data, they generally
must
a. do without data.
b. use whatever data the world gives them.
c. select a committee of economists to make up data for all economists to use.
d. use hypothetical, computer-generated data.
39. When testing theories, economists
a. must make do with whatever data the world gives them.
b. can manipulate economic conditions easier than other scientific fields.
c. can enlist the governments help to manipulate economic conditions.
d. can achieve statistically valid results with much smaller sample sizes.
38. One difficulty economists face that some other scientists do not is that
a. unlike other sciences, economic studies must include the largest economic player,
the government.
b. economists unfortunately receive less government funding than other scientists.
c. corporations are reluctant to disclose necessary information for economic research.
d. experiments are often difficult in economics.
40. The most common data for testing economic theories come from
a. carefully controlled and conducted laboratory experiments.
b. traditional economies.
c. historical episodes of economic change.
d. centrally planned economies.
41. For
a.
b.
c.
d.

economists, substitutes for laboratory experiments are often

natural experiments offered by history.
computer-generated experiments.
studies conducted by other disciplines such as sociologists.
well-constructed simulations.

42. Economists make assumptions

a. to diminish the chance of wrong answers.
b. to make the world easier to understand.
c. because all scientists make assumptions.
d. to make certain that all necessary variables are included.
43. The art of scientific thinking includes
a. knowing how the major organs of the human body work.
b. understanding every scientific fieldphysics, biology and economics.
c. deciding which assumptions to make.
d. being able to mathematically express natural forces.
44. If an economist develops a theory about international trade based on the assumption
that there are only two countries and two goods,

8
a. the theory can be useful only in situations involving two countries and two goods.
b. it is a total waste of time, since the actual world has many countries trading many
goods.
c. the theory can be useful in helping economists understand the complex world of
international trade involving many countries and many goods.
d. the theory can be useful in the classroom, but has no use in the real world.
45. The 1973 war in the Middle East provided economists with the opportunity to observe
the inverse relationship between
a. oil prices and living standards.
b. military buildups and government spending.
c. the flow of crude oil and oil prices.
d. the flow of crude oil and political power.
45. Historical episodes are valuable to economists because
a. it allows economists to see how far the discipline has evolved.
b. hindsight is always 20/20.
c. it is easier to evaluate a past situation than to predict a future situation.
d. they allow economists to evaluate economic theories of the present.
46. What would be the best statement about a theory based on assumptions that are not
true?
a. If the assumptions underlying the theory are not true, the theory must be false.
b. The ideas may be good in theory, but not in practice.
c. The theory is a good one if it helps us to understand how the world works.
d. The theory is a good one if no logical mistakes were made in developing it.
47. What is the goal of theories?
a. to provide an interesting, but not useful, framework of analysis
b. to provoke stimulating debate in scientific journals
c. to demonstrate that the developer of the theory is capable of logical thinking
d. to help scientists understand how the world works
48. When economists attempt to simplify the real world and make it easier to understand
they make
a. assumptions.
b. mistakes in judgment.
c. predictions.
d. evaluations.
49. Good assumptions can
a. cause economists to leave out important variables which make their theories
worthless.
b. simplify the complex world and make it easier to understand.
c. further complicate an already difficult topic.
d. allow economists to see the big picture instead of only small segments.
50. For
a.
b.
c.
d.

a scientist, the decision of which assumption to make is

the easiest part of the scientific method.
the flip of a coin.
almost impossible.
part art.

51. The art of scientific thinking is

a. easier with a solid mathematical background.
b. the ability to make an abstract subject easy to understand.
c. deciding which assumptions to make.
d. not necessary to be an economist.
52. When scientists make good assumptions, they
a. greatly simplify the problem without substantially affecting the answer.
b. further complicate an already complicated subject.
c. can leave out necessary variables that may result in incorrect answers.
d. may not be able to reach an appropriate conclusion.
53. An example of a product that experiences infrequent price changes would be
a. stocks on the New York Stock Exchange.
b. gasoline prices.
c. the newsstand price of magazines.
d. electricity.
54. When studying the effects of public policy changes, economists have often observed
that
a. there is a difference between the long run and short run.
b. unemployment and inflation are directly related in the short run.
c. with stock prices, what goes up, must come down.
d. if the policy is well-designed, it will always be effective.
55. When studying the effects of public policy changes, economists
a. often falsify results if the desired effect is not reached.
b. may make different assumptions for the long run and the short run.
c. attempt to consider only the direct effects and not indirect effects.
d. can immediately change policies if they are ineffective.
56. Good economic models
a. often leave out important variables, causing serious errors.
b. omit many details to allow us to see what is truly important.
c. are designed to give a complete picture of a given relationship.
d. cause economics to be misunderstood by the general public.
57. Economists use models in order to
a. learn how the economy works.
b. make their profession appear more precise.
c. make economics difficult for students.
d. make sure that all of the details of the economy are included in their analysis.
58. Models used by economists
a. cannot be useful to economists if they are based on false assumptions.
b. make the economics profession more difficult than necessary.
c. allow economists to learn how the economy works.
d. must include every possible variable in the economy to be useful to economists.
59. Economists begin building an economic model by
a. writing grants for government funding.
b. conducting controlled experiments in a lab.

10
c. making assumptions.
d. reviewing statistical forecasts.
60. A model is
a. a theoretical abstraction with very little value.
b. useful to only the ones who constructed it.
c. a realistic and carefully constructed theory.
d. a simplification of real life.
61. Which of the following is NOT true concerning models?
a. Models simplify reality.
b. Models can explain how the economy is organized.
c. Models assume away irrelevant details.
d. Models cannot be used to make predictions.
62. Which of the following is NOT true about most economic models?
a. They are built using the tools of mathematics.
b. They are useful to economists, but not to policymakers.
c. They do not include every feature of the economy.
d. They are built using assumptions.
63. Which of the following is the most accurate statement about economic models?
a. Economic models attempt to mirror reality exactly.
b. Economic models are useful, but should not be used for policymaking.
c. Economic models omit many details to allow us to see what is truly important.
d. Economic models cannot be used in the real world because they omit details.
64. The foundation stones from which economic models are built are
a. economic policies.
b. the legal system.
c. assumptions.
d. statistical forecasts.
65. The field of economics is traditionally divided into two broad subfields,
a. national economics and international economics.
b. consumer economics and producer economics.
c. private sector economics and public sector economics.
d. microeconomics and macroeconomics.
66. Which of the following would be considered a topic of study in macroeconomics?
a. the impact of agricultural price support programs in the cotton industry
b. the effect on U.S. steel producers of an import quota imposed on foreign steel
c. the effect of an increase in the price of imported oil on the U.S. inflation rate
d. the effect of an increase in the price of imported coffee beans on the U.S. coffee
industry
67. A microeconomist might study each of the following EXCEPT
a. the effects of rent control on housing in New York City.
b. how a college student makes financial decisions.
c. how tariffs on shoes affects the shoe industry.
d. the effect on the economy when unemployment rates change.
68. A macroeconomist would study each of the following EXCEPT the

11
a.
b.
c.
d.

impact of minimum-wage laws on employment in the fast food industry.

effect of changes in saving rates on GDP.
impact of monetary policy on the rate of inflation.
effect of tax policy on the rate of economic growth.

69. Which of the following is true?

a. Microeconomics and macroeconomics are two separate divisions of economics,
independent of each other.
b. It is possible to understand macroeconomics without understanding
microeconomics, but not vice versa.
c. Microeconomics and macroeconomics are two distinct but closely intertwined fields
of economics.
d. Microeconomics and macroeconomics are two different names for basically the same
thing in economics.
70. When economists are trying to explain the world they are
a. scientists.
b. policy advisors.
c. in the realm of normative economics.
d. in over their heads.
71. When economists are trying to help improve the world they are
a. concerned with positive economics.
b. policy advisors.
c. scientists.
d. meddling.
72. Which is the best statement about the roles of economists?
a. Economists are best viewed as policymakers.
b. Economists are best viewed as scientists.
c. In trying to explain the world, economists are policymakers; in trying to improve the
world, they are scientists.
d. In trying to explain the world, economists are scientists; in trying to improve the
world, they are policymakers.
73. For
a.
b.
c.
d.

economists, statements about the world are of two types:

assumptions and theories.
true statements and false statements.
specific statements and general statements.
positive statements and normative statements.

74. Which of the following is an example of a positive statement?

a. Prices rise when the government prints too much money.
b. If welfare payments increase, the world will be a better place.
c. Inflation is more harmful to the economy than unemployment.
d. The benefits to the economy of improved equity are greater than the costs of
reduced efficiency.
75. A normative statement describes how the world
a. was in the past.
b. is.
c. will be in the future.
d. ought to be.

12

76. Which of the following is an example of a normative statement?

a. If the price of a product decreases, quantity demanded increases.
b. Reducing tax rates on the wealthy would be good for the country.
c. If the national saving rate were to increase, so would the rate of economic growth.
d. All of the above are correct.
77. When economists are speaking as policy advisors, they are more likely to use
a. normative statements.
b. positive statements.
c. objective statements.
d. All of the above are correct.
78. Evaluating a positive statement involves
a. evaluating values as well as facts.
b. examining evidence.
c. our views on ethics and religion.
d. All of the above are correct.
79. You know an economist has crossed the line from scientist to policy adviser when he
a. explains just the facts.
b. makes positive statements.
c. makes normative statements.
d. cant reach a conclusion.
80. Any economist that says all policy decisions are easy
a. must understand the relationship between a market economy and the government.
b. must be running for office.
c. has a Ph.D. in economics.
d. cannot be trusted.
81. The 2 basic reasons why economists often appear to give conflicting advice to
policymakers are differences in
a. opinions and education.
b. scientific judgments and values.
c. scientific judgments and education.
d. opinions and values.
82. The 3 propositions about which most economists agree most often are (in order from
first to third)
a. rent control, tariffs and quotas, and floating exchange rates.
b. tariffs and quotas, floating exchange rates, and fiscal policy.
c. rent control, fiscal policy, and tariffs and quotas.
d. fiscal policy, rent control, and floating exchange rates.
83. A survey which asked the opinion of academic, business, and government economists
on ten propositions about economic policy found that
a. the respondents were almost equally divided on the propositions.
b. the respondents favored the propositions by a slight margin.
c. the respondents disagreed with the propositions by a slight margin.
d. there was overwhelming endorsement of the propositions among the respondents.
84. Almost all economists agree that rent control

13
a.
b.
c.
d.

improves the availability and quality of housing.

allows the market for housing to work more efficiently.
adversely affects the availability and quality of housing.
is a very inexpensive way to help the most needy members of society.

85. Which of the following is the best explanation for why policies such as rent control and
import quotas persist in spite of the fact that experts are united in their opposition to
such policies?
a. Economists have not yet convinced the general public that the policies are
undesirable.
b. Economists are simply wrong about the economic impact of these policies.
c. Economists have different values than do most people.
d. Economists are usually of a different political party than are lawmakers.
86. How did the great economist John Maynard Keynes explain his comment that although
economics is an easy subject compared with the higher branches of philosophy or pure
science, it is a subject at which few excel?
a. Most people who study economics are not very bright.
b. Good economists must possess a rare combination of gifts.
c. Economics is actually quite boring; hence, people tend to lose interest in it.
d. Good thinkers become frustrated with economics because it is not logical or
relevant.
87. Economist use graphs to
a. find how variables are related in the real world.
b. express economic ideas that cannot be expressed with equations or words.
c. visually express ideas more clearly than might be the case if they are expressed
with equations or words.
d. Both a and c are correct.
e. All of the above are correct.
88. The single most important purpose of your textbook is to teach you
a. about the effects of the governments economic policies.
b. the language of economics.
c. the economists way of thinking.
d. how to make money.
89. Which of the following statements is true?
a. Economists are usually allowed to conduct experiments in order to test their
theories.
b. Economics is not a true science because economists are not usually allowed to
conduct experiments to test their theories.
c. Economics is a social science rather than a true science because it cannot employ
the scientific method.
d. Economists are usually not allowed to conduct experiments, and so must rely on
natural experiments offered by history.
90. Which of the following statements is true?
a. All economic models are created using the same set of basic assumptions.
b. Different economic models employ different sets of assumptions.
c. Good economic models should attempt to mimic reality as closely as possible.
d. Economic models, to be accepted, must be tested by conducting experiments.

14
91. Which of the following is NOT a positive statement?
a. Higher gasoline prices will reduce gasoline consumption.
b. Equity is more important than efficiency.
c. Trade restrictions lower our standard of living.
d. If a nation wants to avoid inflation, it should not print too much money.
92. Two economists, Adam and Joan, are discussing the possibility of substantially reforming
the current federal tax system. Adam thinks the current system is fine but Joan is in
favor of reform. Which of the following is the least likely explanation for the
disagreement?
a. Adam is a positive economist and Joan is a normative economist.
b. Adam and Joan have different positive views about the effect of changing the tax
system.
c. Adam and Joan have different values, and so have different normative views about
policy.
d. Adam is better off under the current system and Joan would be better off if the
reforms were implemented.
93. Bill has noticed that increases in unemployment insurance claims are associated with
recessions, and therefore advocates limits on unemployment insurance so as to
prevent recessions. Martha has noticed that most drug addicts once attended schools,
and therefore advocates getting rid of schools so as to prevent drug addiction.
a. The reasoning of both Bill and Martha suffers from the omitted variable problem.
b. The reasoning of both Bill and Martha suffers from the reverse causality problem.
c. Bills reasoning suffers from the reverse causality problem and Marthas reasoning
suffers from the omitted variable problem.
d. Marthas reasoning suffers from the reverse causality problem and Bills reasoning
suffers from the omitted variable problem.
94. Economics
a. is a narrowly focused discipline.
b. is a broad-ranging discipline.
c. concerns itself only with the U.S. economy.
d. says little about everyday life.
e. deals with minor problems.
95. Economics is a social science in the sense that it
a. rigorously examines human behavior.
b. is not as scientific as physics.
c. relies on historical data instead of mathematical data.
d. relies on statistics instead of mathematics.
e. All of the above are correct.
96. For the typical student, taking an introductory course in economics should
a. turn the student into an economist.
b. teach the student solutions to most social problems.
c. teach the student how to answer complex social questions.
d. help the student learn to rationally analyze social problems.
e. All of the above are correct.

15

97. Tools used by economists include

a. historical study.
b. mathematical reasoning.
c. statistical inference.
d. All of the above are correct.
98. Economics is a social science rather than a hard science like physics because
a. economists abstract from reality when creating their theories.
b. economics is easier to study than physics.
c. economists must explain their theories to policy makers who lack formal
mathematical training.
d. economists study human behavior, which is affected by an unpredictable and vast
range of influences.
99. Abstraction can be thought of as
a. ignoring reality in order to build theory.
b. omitting unimportant details in order to understand complex phenomena.
c. creating absurdity in order to explain simplicity.
d. assuming complexity when simplicity will do.
e. stylizing reality rather than analyzing cause and effect.
100. What is the appropriate degree of abstraction?
a. The more detail there is, the better.
b. The detail should be minimized in order to avoid all complexity.
c. Abstraction is unnecessary, and should be avoided.
d. Abstraction is the essence of analysis, and is pursued for its own sake.
e. It depends on the objective of the analysis.
101. The process of focusing on only the most important factors to explain a phenomenon is
called
a. abstraction.
b. marginal analysis.
c. rational choice.
d. controlled experimentation.
e. the trade-off between efficiency and equality.
102. Economists make assumptions because
a. they need to incorporate value judgments into their models.
b. analysis without assumptions would be impossibly complex.
c. they always have imperfect information about reality.
d. assumptions are the final product of careful economic analysis.
e. assumptions allow economists to ignore things that they cannot explain.
103. Assume that all individuals have perfect information about prices now and in the
future, that they have identical tastes, that all markets are competitive, and that there
is no government. This statement is indicative of how economists
a. apply the law of supply and demand.
b. employ marginal analysis.
c. are prevented from getting correct answers.
d. abstract for analytic purposes.
e. use realistic assumptions to develop theory.

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104. A theory can best be defined as

a. an untested assertion of untested fact.
b. a collection of assumptions that simplify the real world.
c. an opinion of a reliable person who studies a subject or discipline.
d. a deliberate simplification of factual relationships that attempts to explain how
those relationships work.
e. the body of knowledge that has been scientifically verified by the scientific
community.
105. To an economist, theory can be thought of as
a. abstraction for the sake of argument.
b. one persons opinion, which is just as good as anothers.
c. another term for the description of a situation.
d. beliefs which cannot necessarily be verified.
e. explanation of mechanisms behind observed phenomena.
106. Which of the following statements is correct?
a. Theory and hypothesis are interchangeable terms for 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.
107. During one winter quarter at Frozen U., snow falls every Friday night. Students assume
that, on their campus, Fridays cause snow. This hypothesis
a. should more properly be considered a theory.
b. assumes that correlation implies causation.
c. assumes that causation implies correlation.
d. reflects the fallacy of composition.
108. Economists and others use economic theory
a. only to analyze situations in which money changes hands.
b. as a partial basis for public policy recommendations.
c. to confuse their enemies.
d. to replace value judgments about important policy issues.
109. Economic theory
a. is a deliberate simplification of factual relationships.
b. seeks to disprove a hypothesis.
c. is based mainly on assumptions.
d. seeks to prove political ideals.
110. A theory is an abstraction used often by economists to
a. describe a problem.
b. keep all assumptions in their proper places.
c. explain why things work the way they do.
d. describe a hierarchical ordering of facts.
e. arrange variables into a graphical format.

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111. Economic theory is a necessity, not a luxury. This statement is true because theory
a. always leads to practical and useful policy.
b. can prevent depressions in the economy.
c. substitutes for vast amounts of data.
d. provides a structure for organizing and analyzing data.
e. always leads to accurate predictions.
112. Policy-oriented economists seek to develop theories to
a. explain how things work so policies can be formulated.
b. describe what happened in a particular time period in history.
c. describe current economic events.
d. find correlations between events.
e. change peoples values and ethics.
113. In the 19th century, Russian peasants noticed that during cholera epidemics there
were lots of doctors around; in an attempt to eliminate cholera, they killed all the
doctors. This is an example of
a. mistaking correlation with causation.
b. the fallacy of opportunism.
c. excessive abstraction.
d. rationality.
e. marginal analysis.
114. An
a.
b.
c.
d.
e.

economic model can be defined as

a testable claim which can be evaluated with proper data.
a representation of a theory or a part of a theory.
another word for theory.
a method to distinguish correlation from causation.
All of the above are correct.

115. Economists use models in order to

a. experiment with alternative circumstances.
b. make educated guesses about real life events.
c. predict outcomes under various hypothetical conditions.
d. increase understanding of how a relationship actually works.
e. All of the above are correct.
116. Why do economists tend to create models in diagrammatic form?
a. Diagrams hide reality, and theory is an attempt to avoid reality.
b. It is easier than building models out of physical objects.
c. Economic reality cannot possibly be represented except in diagrams.
d. Most economists are frustrated artists, and like to draw when possible.
e. All of the above are correct.
117. Is it possible to express an economic model in words without diagrams?
a. No, models can only be stated in diagrams.
b. No, the very definition of model requires mathematical form.
c. Yes, some of the simplest models are verbal statements.
d. Yes, although the best models always use diagrams.
e. Uncertain, economic theory has not answered this question yet.

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118. A useful economic model

a. deals only with possibilities that actually occurred.
b. makes only realistic assumptions.
c. may make some unrealistic assumptions in order to simplify a complex reality.
d. should avoid drawing conclusions that have public policy implications, since
economics is not equipped to make value judgments.
119. Economic models are often expressed in
a. equations.
b. words.
c. graphs.
d. All of the above are correct.
120. Economic models
a. are always based on realistic assumptions.
b. usually predict perfectly.
c. can never be tested with real world data.
d. are used to describe cause-and-effect relationships.
e. are too simple to be of much use.
121. Economists are often perceived as disagreeing with each other. Is this the way things
really are?
a. No, economists agree on much more than is commonly supposed.
b. No, the problem is that some economists are smarter than others.
c. No, economists stage disagreements for public amusement.
d. Yes, economists rarely agree on much of anything.
e. Yes, economists are unable to analyze problems dispassionately.
122. Which of the following is one source of disagreement between economists?
a. Some facts about the economy are unknown.
b. Economists differ in their political persuasions.
c. Economic theory may not always give an unambiguous answer to a question.
d. Solving one problem may make another problem worse.
e. All of the above are correct.
123. How useful is economic analysis in solving complex social problems?
a. It is reliable in analyzing problems, and can usefully serve as the final word on
solutions.
b. It is unreliable for understanding much of anything about social problems, and
cannot offer much advice.
c. It is useful in clarifying options, but the final decision often rests on ethical
decisions about which people differ.
d. It is useful in understanding economic problems but is only useful within that very
narrow boundary.
e. It is not useful because economists agree on so little when they use their analysis.
124. Economists may disagree about how to solve an economic problem because they
a. use different models to analyze the problem and its solutions.
b. have different political and moral beliefs.
c. disagree about the facts of the situation.
d. All of the above are correct.

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125. Economic analysis and policy are made more difficult by

a. having so much data to work with.
b. inadequate and imperfect information.
c. an incomplete consensus on the basic goals of social policy.
d. the lack of public interest and opinion on economic questions.
e. the major economic problems society faces.
126. An
a.
b.
c.
d.
e.

economist might be hired to answer which of the following questions?

What will the price of oil be next year?
Why is the median income of women about half the median income of men?
How much will interest rates change as the federal deficit decreases?
How much will inflation change if import restrictions are imposed?
All of the above are correct.

127. In the fall of 1992, candidate Bill Clintons campaign office had a large sign which read,
Its the economy, stupid. This was meant to say that
a. economic problems were the most important in the campaign.
b. there is no agreement on economic goals.
c. economists have let the country down.
d. economic theory is too abstract for people to understand.
e. there has been a loss of comparative advantage.
128. The purpose of economic science is to
a. show people that it is better to want less.
b. encourage people to care more about others.
c. analyze the problems of market economies only.
d. develop principles by which to rank alternative uses of scarce resources.
e. reach consensus on economic goals and objectives
129. Two advisors to the president have given their policy recommendations, and they are
in disagreement. Why do these economists disagree?
a. because they do not have all relevant information about the problem
b. because they disagree on the nature of some cause-effect relationship
c. because they have different values and opinions
d. All of the above are reasons for disagreements among economists.

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SHORT ANSWER
APPLICATION/SCENARIO
1. What would happen to the study of economics if scarcity disappeared?
Since economics is the study of how society allocates its scarce resources, if there were
no scarcity, there would be no need for economics. Everyone could have all the goods
and services they wanted. No one would have to make decisions based on tradeoffs,
because there would be no opportunity cost associated with the decision. (It is difficult
to conceive of a situation where time is not scarce, however).
2. Carefully define the following terms and explain their importance to the study of
economics.
a. resources
b. scarcity
a.
b.

Resources are the instruments provided by nature or by people that are used to
create goods and services that humans want. They are scarce, and include raw
materials, labor, and capital.
Scarcity is the general fact that humanity has less of resources and things than we
would like. Scarcity leads to the need for rational decisions regarding economic
resources.

3. Distinguish between scarcity and shortage.

Scarcity implies that people want more of a good than is freely available. Shortage
implies that people want more than is available at the going price. All economic goods
are scarce, whereas there are shortages only in the presence of price ceilings that set
price below equilibrium levels.
4. Identify each of the following topics as being part of microeconomics or macroeconomics:
a. the impact of a change in consumer income on the purchase of luxury automobiles
b. the effect of a change in the price of Coke on the purchase of Pepsi
c. the impact of a war in the Middle East on the rate of inflation in the United States
d. factors influencing the rate of economic growth
e. factors influencing the demand for tractors
f. the impact of tax policy on national saving
g. the effect of pollution taxes on the U.S. copper industry
h. the degree of competition in the cable television industry
i. the effect of a balanced-budget amendment on economic stability
j. the impact of deregulation on the savings and loan industry
ANSWER: a, b, e, g, h, and j are microeconomic topics. c, d, f, and i are
macroeconomic topics.

21
5. Which of the following statements are positive, and which are normative?
a. The minimum wage creates unemployment among young and unskilled workers.
b. The minimum wage ought to be abolished.
c. If the price of a product in a market decreases, other things equal, quantity
demanded will increase.
d. A little bit of inflation is worse for society than a little bit of unemployment.
e. There is a tradeoff between inflation and unemployment in the short run.
f. If consumer income increases, other things equal, the demand for automobiles will
increase.
g. The U.S. income distribution is not equitable.
h. U.S. workers deserve more liberal unemployment benefits.
i. If interest rates increase, investment will decrease.
j. If welfare benefits were reduced, the country would be better off.
ANSWER: a, c, e, f, and i are positive statements. b, d, g, h, and j are normative
statements.
6. Carefully define the following terms, and explain their importance in economics.
a. abstraction
b. theory
c. model
a.
b.
c.

Abstraction is ignoring many details in order to focus on the most important

elements of a problem. The appropriate degree of abstraction depends on the topic
under consideration.
Theory is a deliberate simplification of relationships with the purpose of explaining
how those relationships work. Theory is cause-and-effect reasoning.
A model is a simplified, small-scale version of some aspect of the economy. Much
economic analysis employs models of one or more parts of the economy.

7. Why do economists abstract, and is it appropriate?

Economists (and other scientists) abstract in order to be able to focus on key variables.
It is appropriate, because the economy is very complex; trying to keep track of everything
is extremely difficult. Thus, economists focus on relevant variables and ignore those that are
less relevant to the problem at hand. Abstraction allows focus on the forest instead of the
trees.
8. Carefully distinguish between an economic theory and economic model.
An economic theory is a deliberate simplification or abstraction of factual relationships
that attempts to explain how those relationships work. It is an explanation of the
mechanism behind observed phenomena. An economic model is a representation of a theory
or a part of a theory used to gain insight into cause and effect. A theory can give rise to a
large number of models. Thus, a theory is logically prior to a model, and will ordinarily be
more inclusive than a model.
9. Why might well-educated economists disagree on appropriate public policy in some
situations?
Economists might disagree because of imperfect information, different theories on
relevant cause-effect relationships, and because of their different values.

22

10. Suppose that one can read a graph that shows information about price and quantity of
some product. Relying solely on the graph, is it possible to explain the relationship
between the two variables?
No. The graph does not, by itself, provide an explanation of the cause-effect
relationship. For this, one needs economic theory.
11. It has been said that economics is the science of common sense. Is economics
synonymous with common sense?
A large portion of economics will agree with common sense, such as higher prices
leading to a cutback in purchases or more government spending creating jobs. But
economic logic provides findings that may conflict with a non-economists common sense,
such as tariffs and quotas costing, rather than creating, jobs. Economics may be the science
of common sense, but that common sense must include a logical way of thinking.
12. Harry Truman is credited with the statement, Give me a one-armed economist,
because economists are likely to say, On the one hand, . . . on the other hand. Why do
economists waffle more than physicists or chemists?
Economists describe human behavior, which cannot be predicted as accurately as
physical or chemical reactions. Waffling can be found at the frontiers of all sciences, but the
media pay more attention to economic debates, such as the effect of supply-side tax cuts on
tax revenues, than to the debates of physicists (are quarks the smallest particle of matter?)
or chemists. Value judgments also play a larger role in economic debates, since economics
often deals with matters that directly affect the welfare of large numbers of people.
13. In the early 1800s, there was a smallpox outbreak in a remote part of Russia. The
government sent in a large group of army doctors, but they were too late to stop the
epidemic. Thirty years later, there was another smallpox scare. A local statistician cautioned
the government against a similar response, noting the increased mortality and high number
of army doctors during the earlier epidemic. Was the statistician providing good advice?
The statistician confused correlation with causation. The doctors were not the cause of
the smallpox deaths. If the statistician were correct, then we should get rid of hospitals,
since so many people die there. One cannot conclude that the army doctors could have
helped thirty years later; this would require additional data comparing smallpox deaths with
and without medical assistance.