Question 1

Which of the following best describes the scientific method as used by economists?

Accepted Answer

It consists of observation, theory, and more observation, with data collected and analyzed to evaluate theories.

Question 2

Why are experiments often difficult in economics compared to physical sciences?

Accepted Answer

Economists must often rely on naturally occurring data and cannot easily conduct controlled experiments.

Question 3

In the circular-flow diagram, what role do households play in the market for factors of production?

Accepted Answer

Households are sellers of factors of production.

Question 4

Which statement about economic models is correct?

Accepted Answer

Economic models are built with assumptions to simplify reality and focus on what is truly important.

Question 5

Suppose an economy can produce either 500 computers and 0 tons of wheat, or 0 computers and 5000 tons of wheat. What does this illustrate about the production possibilities frontier (PPF)?

Accepted Answer

The endpoints of the PPF show the maximum output of each good if all resources are devoted to its production.

Question 6

If the opportunity cost of producing 100 more computers is 1000 tons of wheat, what is the opportunity cost per computer?

Accepted Answer

$$ \frac{1000}{100} = 10 $$ tons of wheat per computer.

Question 7

Which of the following points on a production possibilities frontier (PPF) is considered efficient?

Accepted Answer

A point on the PPF.

Question 8

A shift outward in the production possibilities frontier (PPF) can be caused by:

Accepted Answer

An improvement in technology.

Question 9

Which of the following is a positive statement?

Accepted Answer

"Prices rise when the government increases the quantity of money."

Question 10

Why do economists use assumptions in their models?

Accepted Answer

To simplify the complex world and make it easier to understand.

Question 11

Which of the following best describes the difference between microeconomics and macroeconomics?

Accepted Answer

Microeconomics studies how households and firms make decisions, while macroeconomics studies inflation, unemployment, and economic growth.

Question 12

If a point lies inside the production possibilities frontier, what does this indicate?

Accepted Answer

The economy could produce more of one or both goods without sacrificing the other.

Question 13

Which of the following is a normative statement?

Accepted Answer

"The government should print less money."

Question 14

In the circular-flow diagram, what happens to the dollar after a firm receives it from selling goods?

Accepted Answer

It is used by the firm to pay for inputs in the factor market, such as rent or wages.

Question 15

Which of the following is NOT a reason why economists may disagree?

Accepted Answer

All economists always agree on every policy.

Question 16

Suppose the government increases the quantity of money in the economy. According to most economists, what is the likely effect?

Accepted Answer

Prices will rise (inflation).

Question 17

If a country is operating on its production possibilities frontier, what does this imply about its resource use?

Accepted Answer

Resources are being used efficiently.

Question 18

Which of the following government policies is most likely to increase the long-run rate of capital formation, according to most economists?

Accepted Answer

An appropriately designed fiscal policy.

Question 19

What does the outer loop in the circular-flow diagram represent?

Accepted Answer

The flow of dollars between households and firms.

Question 20

If the production possibilities frontier shifts outward, which of the following could be a cause?

Accepted Answer

An improvement in production technology.

Chapter 2: Thinking Like an Economist – Principles of Macroeconomics

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