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Chapter 2 UNDERSTANDING EVOLVING ECONOMIC SYSTEMS AND COMPETITION
TRUE-FALSE QUESTIONS
1. Economics is the study of a society’s financial institutions.
ANS: F
REF: How Business and Economies Work
OBJ: 1
Rationale: Economics is the study of how a society uses scarce resources to produce and distribute goods and services.
2. When Raoul Welsh is evaluating the construction industry in terms of interest rates, employment cycles, and the rate of new home building nationwide, he is looking at microeconomics.
ANS: F
REF: How Business and Economies Work
OBJ: 1
Rationale: Microeconomics focuses on individual parts of the economy.
3. An analyst at Merrill Lynch who is evaluating Home Depot as an investment for her clients is taking a microeconomics approach because she is not focusing on the economy as a whole.
ANS: T
REF: How Business and Economies Work
OBJ: 1
4. It takes four consecutive quarters of decline in the GDP for economists to consider the economy to be in a recession.
ANS: F
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: A decline in GDP that lasts for at least two consecutive quarters is a recession.
5. Full employment means about 95 percent of the working force is employed.
ANS: T
REF: Macroeconomics: The Big Picture
OBJ: 2
6. Tyron Lewis has recently quit his job in the administrative offices at the nearby hospital and is currently seeking a retail management position. He would be described as structurally unemployed.
ANS: F
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: Lewis is frictionally unemployed.
7. Freida Bida lost her job as a result of a recession and would be described as experiencing cyclical unemployment.
ANS: T
REF: Macroeconomics: The Big Picture
OBJ: 2
8. Belinda Asher works in a vegetable processing plant and is out of work about six months a year due to the periodic harvest times. She can be described as seasonally unemployed.
ANS: T
REF: Macroeconomics: The Big Picture
OBJ: 2
9. Purchasing power is the amount a family can buy if it uses all of its available cash and credit.
ANS: F
REF: What Is Inflation?
OBJ: 3
Rationale: Purchasing power is the value of what money can buy.
10. The situation in which the average of all prices of products is rising is called inflation.
ANS: T
REF: What Is Inflation?
OBJ: 3
11. An increase in the price of crude oil could trigger cost-push inflation.
ANS: T
REF: What Is Inflation?
OBJ: 3
12. Monetary policy deals with tax revenues and expenditures at the national level.
ANS: F
REF: Achieving Macroeconomic Goals
OBJ: 4
Rationale: Monetary policy controls the amount of money in circulation.
13. The Federal Reserve System can print money and raise taxes.
ANS: F
REF: Achieving Macroeconomic Goals
OBJ: 4
Rationale: The Federal Reserve is the central banking unit of the U.S.
14. When Congress passes a law to raise individual tax rates, it is creating fiscal policy.
ANS: T
REF: Achieving Macroeconomic Goals
OBJ: 4
15. The national debt is the accumulation of deficits that have occurred in the past as a result of expenditures exceeding tax revenues.
ANS: T
REF: Achieving Macroeconomic Goals
OBJ: 4
16. The higher the price of a good or service, the greater the quantity demanded.
ANS: F
REF: Microeconomics: Zeroing on Business and Consumers
OBJ: 5
Rationale: Typically, the higher the price, the lower demand is.
17. The higher the price of a good or service, the greater the amount a producer is willing to supply.
ANS: T
REF: Microeconomics: Zeroing on Business and Consumers
OBJ: 5
18. At the equilibrium point, quantity demanded equals quantity supplied.
ANS: T
REF: Microeconomics: Zeroing on Business and Consumers
OBJ: 5
19. A farmer’s market where sixty farmers come weekly to sell the produce they grow in their gardens is an example of monopolistic competition.
ANS: F
REF: Competing in a Free Market
OBJ: 6
Rationale: This would be an example of pure competition.
20. No true examples of a pure monopoly exist today.
ANS: F
REF: Competing in a Free Market
OBJ: 6
Rationale: Public utilities are examples of pure monopolies.
21. Monopolistic competition is a market structure in which entry is easy.
ANS:T
REF: Competing in a Free Market
OBJ: 6
22. Legal challenges arising from laws designed to control anticompetitive behavior occur in monopolistic competition.
ANS: F
REF: Competing in a Free Market
OBJ: 6
Rationale: These challenges arise in oligopolies.
23. A strategic alliance is a cooperative agreement between business firms.
ANS: T
REF: Trends in Economics and Competition
OBJ: 7
24. A key trend in macroeconomics and competition is the rising entrepreneurial spirit in developing nations.
ANS: T
REF: Trends in Economics and Competition
OBJ: 7
MULTIPLE-CHOICE QUESTIONS
1. Economics is the study of:
A. the tax structure of a country
B. how countries use limited resources to produce and distribute goods and services
C. the fiscal policy of a country
D. how the government influences businesses
E. the financial institutions of a society
ANS: B
REF: How Business and Economies Work
OBJ: 1
2. _____ is the study of how people use limited resources to produce and distribute goods and services in a society.
A. Finance
B. Acculturation
C. Economics
D. Marketing
E. Resource management
ANS: C
REF: How Business and Economies Work
OBJ: 1
3. _____ is the study of the economy as a whole. It looks at aggregate data for large groups of persons, companies or products.
A. Economics aggregation
B. Macroeconomics
C. National economics
D. Microeconomics
E. Fiscal economic
ANS: B
REF: How Business and Economies Work
OBJ: 1
4. A manager in the entertainment industry would be looking at her company’s _____ environment if she were studying the national level of personal income, the unemployment rate, interest rates, inflation, and death statistics.
A. fiscal economic
B. national economic
C. macroeconomic
D. competitive
E. microeconomic
ANS: C
REF: How Business and Economies Work
OBJ: 1
5. Macroeconomics studies:
A. the activities of individual companies and products
B. the economy as a whole by looking at aggregate data
C. the supply and demand of individual households
D. personal household income
E. changes in resource availability in the marketplace
ANS: B
REF: How Business and Economies Work
OBJ: 1
6. Microeconomics studies:
A. individual companies, markets, or households
B. fiscal and monetary policy on a national level
C. the interactions of aggregated national and international economic data
D. monetary policy as it pertains to specific industries
E. none of the above
ANS: A
REF: How Business and Economies Work
OBJ: 1
7. The manager of the Dodge truck division that evaluates competing models, consumer demand based on style, labor and material costs, and current prices of all trucks would be taking a(n) _____ perspective.
A. individual economic
B. aggregated economic
C. macroeconomic
D. microeconomic
E. fiscal economic
ANS: D
REF: How Business and Economies Work
OBJ: 1
Rationale: Microeconomics studies individual companies, markets, or households.
8. The service sector in Portugal accounts for about three-fourth of the nation’s GDP and only about one percent comes from industry. This type of information would be revealed through a study of:
A. area economics
B. microeconomics
C. aggregated economic
D. regional monetary policy
E. macroeconomics
ANS:E
REF: How Business and Economies Work
OBJ: 1
Rationale: Macroeconomics studies a nation's economy as a whole by looking at aggregate data.
9. An individual who considering opening a home décor store in Cleveland, Ohio, would be studying the area's _____ if he were to examine the employment statistics, area income levels, and local competition.
A. area economics
B. microeconomics
C. aggregated economic
D. regional monetary policy
E. macroeconomics
ANS: B
REF: How Business and Economies Work
OBJ: 1
Rationale: Microeconomics studies individual companies, markets, or households.
10. The relationship of the inputs and outputs of households, businesses, and governments can be graphically explained through the use of a(n):
A. organizational chart
B. leveraged pyramid
C. circular flow
D. PERT table
E. business matrix
ANS: C
REF: How Business and Economies Work
OBJ: 1
11. To examine how the sectors of the economy interact, you should think in terms of a(n):
A. circular flow
B. linear graph
C. diamond shape
D. economic hierarchy
E. decision tree
ANS: A
REF: How Business and Economies Work
OBJ: 1
12. The most basic measure of economic growth is the:
A. consumer price index
B. gross domestic product
C. producer price index
D. total of all goods and services produced
E. combined producer and consumer price indices
ANS: B
REF: Macroeconomics: The Big Picture
OBJ: 2
13. If you were told the output of goods and services produced in Tajikistan, a former Soviet Republic had increased by eight percent in 2005, you would correctly refer to this increase as:
A. growth standardization
B. economic growth
C. nationalized growth
D. an example of recessionary growth
E. output maximization
ANS: B
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: Economic growth is defined as an increase in a nation's output of goods and services.
14. The GDP of Polandin 2006 was approximately $512 billion. This $512 billion represents:
A. how much money Polish households spent in 2006
B. the estimated growth of discretionary profit in Poland for 2006
C. the actual growth of discretionary profit in Poland in 2006
D. the total value of all final goods and services produced in Poland during 2006
E. the taxable portion of the materials produced by the production sector of the nation in 2006
ANS: D
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: GDP stands for the gross domestic product.
15. Imagine that you were reading an international marketing text in which you learned that the GDP for a nation that was a member of the former Soviet Union was $1.56 billion. A few pages later in the same text, the book states that that nation’s real GDP was $800,000. From reading this information, you would know that:
A. this former member of the Soviet Union had a high rate of inflation
B. the various methods used to calculate GDP do not produce the same results
C. GDP is an approximation of the actual total value and is never precise
D. the second GDP measurement reflected only the value of the products produced in the nation and did not include the value of services
E. the former member of the Soviet Union was experiencing a recession
ANS: A
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: With inflation, the average of all prices of goods and services rises.
16. When determining the GDP in 2005 for Chile, the economists adjusted the current market prices by 3.1 percent to correct for inflated values. This adjusted GDP is called the nation’s _____ GDP.
A. interpreted
B. real
C. frictional
D. cyclical
E. non-inflated
ANS: B
REF: Macroeconomics: The Big Picture OBJ: 2
Rationale: With inflation, the average of all prices of goods and services rises.
17. The _____ GDP takes inflation into account and uses adjusted market prices.
A. frictional
B. real
C. adjusted
D. cyclical
E. re-evaluated
ANS: B
REF: Macroeconomics: The Big Picture
OBJ: 2
18. Patterns of expansion and contraction in aggregate economic activity, as measured by GDP, are called:
A. business standards
B. business cycles
C. cyclical adjustments
D. economic yields
E. standards of business deviation
ANS: B
REF: Macroeconomics: The Big Picture
OBJ: 2
19. A decline in real GDP that lasts for two consecutive quarters is called a(n):
A. economic downsizing
B. depression
C. recession
D. resource divestment
E. economic regression
ANS: C
REF: Macroeconomics: The Big Picture
OBJ: 2
20. As soon as any nation has experienced two consecutive quarterly declines of its gross domestic product, that nation will be in a(n):
A. recession
B. depression
C. regression
D. adjustment period
E. economic downsizing
ANS: A
REF: Macroeconomics: The Big Picture
OBJ: 2
21. What is the name of the business cycle that follows a recession?
A. inflation
B. prosperity
C. deflation
D. upsizing
E. recovery
ANS: E
REF: Macroeconomics: The Big Picture
OBJ: 2
22. The government does not consider full employment to mean 100 percent of its citizens are employed because:
A. some people are preparing for later employment by attending school
B. some people choose to stay home to raise children rather than have a job outside the home
C. some people are temporarily unemployed while they wait to start new jobs
D. some people are not working because jobs are limited, and competition for jobs is intense.
E. all of the above conditions can and do exist
ANS: E
REF: Macroeconomics: The Big Picture
OBJ: 2
23. In 2002, more than two-thirds of population of Haitiwere not working, but were actively seeking employment. This 66.67 percent represents the nation’s:
A. inflationary unemployment
B. recessionary unemployment
C. position on the international unemployment scale
D. employment of scale
E. unemployment rate
ANS: E
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: The unemployment rate is the percentage of the total labor force that is actually looking for work but is not actually working.
24. The unemployment rate is the percentage of the total work force that is not working but is:
A. drawing unemployment checks
B. physically and mentally able to work
C. actively looking for work
D. on vacation
E. laid off, terminated, or downsized due to some economic activity outside of their control
ANS: C
REF: Macroeconomics: The Big Picture
OBJ: 2
25. Which of the following is NOT a form of unemployment?
A. frictional unemployment
B. seasonal unemployment
C. fiscal unemployment
D. cyclical unemployment
E. structural unemployment
ANS: C
REF: Macroeconomics: The Big Picture
OBJ: 2
26. Avery Lutz quit his landscaping job in Florida and has moved to British Colombia, where he is actively seeking employment in the real estate industry. This is an example of _____ unemployment.
A. structural
B. fiscal
C. frictional
D. predictable
E. seasonal
ANS: C
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: Frictional unemployment is short-term employment that is not related to the business cycle.
27. Jarvis Washington recently quit his job as a veterinarian's assistant and is now trying to find a job with another veterinarian. This is an example of _____ unemployment.
A. structural
B. regulated
C. fiscal
D. expected
E. frictional
ANS: E
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: Frictional unemployment is short-term employment that is not related to the business cycle.
28. For the past ten years, Lou Lopez has been a welder for Ford Motor Company. This morning her boss informed her a robot would replace her. Lopez's unemployment is an example of _____ unemployment.
A. frictional
B. cyclical
C. mechanical
D. structural
E. operational
ANS: D
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: Structural unemployment is caused by a mismatch between the available jobs and the skills of the available workers.
29. Forty-five percent of the labor force in Armenia is involved in the agricultural sector, but the economic growth in the nation comes from industry and tourism. What type of unemployment would such a mismatch of ability and job requirements cause?
A. frictional
B. predictable
C. mechanical
D. structural
E. operational
ANS: D
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: Structural unemployment is caused by a mismatch between the available jobs and the skills of the available workers.
30. Structural unemployment is unemployment that results from:
A. the changing structure of an industry
B. the restructuring of an organization
C. the change in business cycles
D. the change in seasonal needs
E. people moving to new geographical areas
ANS: A
REF: Macroeconomics: The Big Picture
OBJ: 2
31. The laborers displaced due to assembly line automation at the textile plant may not have the skills needed to operate the computerized machines that replaced them. This is an example of _____ unemployment.
A. cyclical
B. frictional
C. structural
D. operational
E. fiscal
ANS: C
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: Structural unemployment is caused by a mismatch between the available jobs and the skills of the available workers.
32. In 1998 the tourism industry in Egypt had 43 percent unemployment due to an economic downturn that gripped the country as a result of an increase of terrorists’ activities. The workers in the tourism industry were experiencing _____ unemployment.
A. seasonal
B. structural
C. cyclical
D. frictional
E. operational
ANS: C
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: When the economy is in a recession, many companies must lay off workers, which causes cyclical unemployment.
33. When the economy is in a recession, many companies must lay off workers, which causes _____ unemployment.
A. structural
B. cultural
C. cyclical
D. frictional
E. operational
ANS: C
REF: Macroeconomics: The Big Picture
OBJ: 2
34. Martha Maguire recently was laid off from her telemarketing job for a large catalog retailer. Each January, Maguire is laid off as soon as the Christmas season is over. She will be hired back sometime during the summer. In terms of unemployment, Maguire is a good example of _____ unemployment.
A. structural
B. seasonal
C. tactical
D. frictional
E. operational
ANS: B
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: Seasonal unemployment occurs during specific seasons in certain industries.
35. On the island of Martha’s Vineyard, jobs are plentiful during the summer months, but difficult to find in September once the tourist season ends and many restaurants and inns close. What kind of unemployment do people who work in the island's restaurants experience annually?
A. structural
B. seasonal
C. geographical
D. operational
E. tactical
ANS: B
REF: Macroeconomics: The Big Picture
OBJ: 2
Rationale: Seasonal unemployment occurs during specific seasons in certain industries.
36. The situation in which the average of all prices of products is rising is called:
A. deflation
B. inflation
C. upsizing
D. purchase power acceleration
E. rejuvenation
ANS: B
REF: What Is Inflation?
OBJ: 3
37. The two types of inflation are:
A. demand-pull and supply-push
B. recessionary and recovery
C. cost-pull and supply-push
D. demand-pull and cost-push
E. demand push and supply-pull
ANS: D
REF: What Is Inflation?
OBJ: 3
38. _____ inflation is inflation that occurs when the demand for goods and services is greater than the supply.
A. Supply-side
B. Demand-push
C. Demand-side
D. Cost-push
E. Demand-pull
ANS: E
REF: What Is Inflation?
OBJ: 3
39. _____ inflation is triggered by increases in production costs which increase the costs of final goods and services.