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CHAPTER 1

DEFINITIONS

1. Macroeconomics.

2. Economics.

3. Microeconomics.

4. Positive Economics.

5. Normative Economics.

6. Factors of production.

7. Ceteris Paribus.

8. Positive Relationship.

9. Negative Relationship.

10. Econometrics
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MULTIPLE CHOICE, CHAPTER I

1. Economics is best defined as the study of:

a. how to make cash.

b. how people attempt to maximize their satisfaction
c. how prices are set.
d. how people can allocate scarce resources among unlimited wants
e. how firms attempt to maximize their profits, given some production targets

2. Which of the following is a microeconomic problem or issue

a. the growth of GDP per capita

b. inflation rate
c. the price of bread
d. the level of interest rates
e. none of the above

3. Which of the following is not a resource

a. capital
b. labor
c. land
d. the government
e. entrepreneurial activity

4. Macroeconomics is primarily concerned with

a. aggregate economic activity

b. unemployment in a particular firm or industry caused by mechanization and
automation.
c. how individual decides in purchasing a particular commodity
d. what and how to produce a particular good
e. goods a nation should produce in the world economy.

5. Which of the following is a positive statement

a. increased funding for AIDS program is the most important priority for
government spending this years
b. inflation is too low.
c. women should be paid the same wages as men if they have the same
qualifications and responsibilities.
d. the poverty rate is higher than it was ten years ago
e. the distribution of income in this country is unfair

6. The ceteris paribus assumption means

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a. in the short run

b. all things being equal.
c. people behave like practical economists
d. in a market economy
e. resources are scarce

7. Which of the following is a macroeconomic goal

a. price stability
b. efficiency
c. economic freedom
d. equity
e. all of the above

8. Microeconomics is the study of

a. unemployment rates and GDP growth rates

b. decision making by specific individuals
c. decision making by the average individual or firm
d. how the government affects individuals
e. how economic activity is organized differently in different countries

9. The opportunity cost of any choice is

a. all the other opportunities that were forgone
b. the worst opportunity that was forgone
c. the opportunity that could not quite be attained
d. the next best opportunity that was forgone
e. the average of all the alternatives forgone

10. Economic models

a. are useful simplifications of the real world
b. are useless because they are oversimplified
c. are too abstract for the average person to understand
d. allow economists to make predictions about average behavior
e. both a and d are correct

RESOURCES

Mabry, Rodney and Ulbrich, Holley M. Economics Test Bank and Instructors Manual. 2nd
edition, Houghton Mifflin, 1994 Boston, MA. ISBN 0-395-66998-7.

Other sources from other chapters:

Duy, Timothy. Principles of Macroeconomics Test Bank Item File. 5th edition. Case and Fair
Supplement. Prentice Hall, Upper Saddle River, NJ 07458.
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Boyes, Melvin and Melvin, Michael. Economics Test Bank. Houghton Mifflin, 1991, Boston,
MA ISBN 0-395-57100-6.
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TRUE/FALSE

Directions: For the following statements, indicate whether the statement is true or false. If the
statement is false, make the necessary change(s) in order for it to be a true statement.

1. Economics is a natural science which focuses on the study of human interaction based on
limited wants and limited resources.
False; economics is a social science which focuses on the study of human interaction based
on unlimited wants and limited resources.

2. Factors of production refer to different elements required to produce final products and are
made up of land, labor, wages, and government.
False; factors of production refer to different elements required to produce final products
and are made up of land, labor, capital, and entrepreneurship.

3. Entrepreneurship refers to manual skills and labor refers to mental skills such as innovation.
False; entrepreneurship refers to mental skills such as innovation and labor refers to
manual skills.

4. The interest rate, by definition, is the cost of borrowing money; therefore, when the interest
rate increases, it would cost more to borrow money.
True

5. With the concept of ceteris paribus, we are able to study several economic factors or
variables at once.
False; with the concept of ceteris paribus, we are only allowing for one factor change at a
time.

6. Economic models and graphs are simplified representations of different economic

phenomena and relations.
True

7. If you are given a model that has a positive relationship, then the two economic variables X
and Y are inversely related.
False; if a model has a positive relationship, then X and Y are directly related.

8. Economic theories are statements or propositions about patterns of human behavior that will
take place under all circumstances; they are established explanations that account for known
facts.
False; economic theories are statements or propositions about patterns of human behavior
that are expected to take place under certain circumstances; they are established
explanations that account for known facts.
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9. The beginning of any theory is gathering of data that allows for testing and allows for some
type of prediction about behavior in response to changed conditions.
False; the beginning of any theory is a hypothesis, a testable proposition that makes some
type of prediction about behavior in response to changed conditions.
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Essay Questions:

1. “The government should provide goods such as health care, education and highways because
it can provide them free.” Is this statement true or false? Explain your answer.

2. “Individuals who economize are missing the point of life. Money is not so important that it
should rule the way we live.” Evaluate this statement.

3. “I examined the statistics for our basketball team’s wins last year and found that, when the
third team played more, the winning margin increased. If the coach played the third team
more, we would win by a bigger margin.” Evaluate this statement.

4. What is the difference between “macroeconomics,” “microeconomics,” and “econometrics?”

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5. How do economists use the “ceteris paribus” assumption?

6. Discuss the difference between a positive vs negative relationship between economic

variables.

7. From the eight types of specialized fields outlined in “What do Economists Do,” explain one
of the fields and why you feel that it is relevant or important today.