Economics Test Bank


1. What is the most basic economic issue for all societies?   A  

A         Scarcity

B          Taxation

C         Inflation

D         Recession

A company decides to install more machines and lay off workers.  Which economic question is addressed directly?                                                                      A

A         How to produce

B          What to produce

C         For whom to produce

D         Where to produce

In economic terms, what are land, labor, capital and entrepreneurship?  B
A         Production possibility

B          Factors of production

C         Production trade-offs

D         Opportunity costs

Jenny has enough money to buy either a CD or to go to a movie with her friends.  In economics, what is the choice that Jenny “gives up” called?   C 

A         Positive cost    

B          Negative cost  

C         Opportunity cost

D.        Marginal cost

What is the main idea behind the study of economics?     C,

A.        Monetary policy

B          Efficiency of production

C         Allocation of scarce resources

D         Business decisions

Read the statement below.

“There is no free lunch.” 

In economic terms, what does this mean?  A

A         Someone must pay for everything.

B          All production is designed to reduce scarcity.

C         Choices are never based on self-interest.

D         People only think of others when making choices.

How does the process of specialization change an economy? C

A         Eliminates unemployment

B          Decreases competition

C         Improves efficiency of production

D         Increases government to control

Use the following “equation” to answer the two questions below.

     Unlimited Wants + Limited Resources = ?????

Which of the following best completes the above “equation”?  A

A         Scarcity

B          Competition                 
C         Savings

D         Equilibrium

To deal with the problem described in the “equation” above, societies establish which of the following?                                                B

A         Governments

B          Economic systems

C         Hierarchies                  
D         Private businesses


In every economic system, what must people choose to do?  B

A         Satisfy all the wants of their society

B          Make the best use of scarce resources

C         Create an equal distribution of income    

D         Save money to reduce the national debt

Which of the following is an opportunity cost of building a new public high school?
A         Cost of hiring teachers for all subjects at the new school 

B          Change in the annual tax rate to pay for the new school 

C         Cost of constructing the new school at a later date

D         Other goods and services given up in order to build the school

Which of the following is a result of the specialization of labor?                 C

A         Increased inflation

B          Identical income

C         Increased output

D         Less interdependence

In which of the following economic systems is the “factors of production”  privately owned?                              A

            A   Capitalism

            B   Socialism

            C   Socialism

            D   Confucianism


In economic terms, what is a “stock”?    
A         A share, or part ownership, of a company
B          Pieces of paper that represent money

C         Ownership of an entire company

D         A place where individuals raise money

Which of the following decisions will guarantee that a person will make money 
in the stock market?                                                                          E2 B

A         Buying the stock of a big company like Microsoft

B          Nothing will guarantee making money in the market

C         Buying the stock of a small company like Starbucks Coffee

D         Purchasing stocks after the market has dropped for a week

What is “compounding interest?”     B                    

A         Interest subtracted from the principle once or twice a year
B          Interest gained on the principle and on interest already earned

C         Adding 5% or more interest to an item purchased the previous year

D         Liquefying your assets when a decision to move to another state is made

What is the greatest advantage to diversification in a stock portfolio?  C

A         Investors get more annual reports.

B          Investors concentrate on one stock.

C         Investors reduce their risks.

D         Investors are guaranteed a profit.
Which of the following is true of an investment in bonds?   C

A         They are insured by the Federal Deposit Insurance Corporation.

B          They are held for three to six weeks, then sold.

C         They are a low-risk investment.

D         They entitle the holder to a share of ownership in a corporation.
Why is investing in a money-market mutual fund a higher risk than investing in a certificate of deposit?                                                                          B

A         It is not insured by the Federal Deposit Insurance Corporation.

B          It does not earn a fixed rate of interest.

C         It is not protected by the Securities and Exchange Commission.

D         It must be held for a preset amount of time.

                  Which of the following describes what you are doing when you invest in a mutual fund?                                                                                                 D

                  A         Getting insurance from the Federal Deposit Insurance Corporation

                  B          Getting a fixed return on your investment

                  C         Investing money in insurance policies from the federal government

                  D         Investing in a variety of stocks and bonds

                  In June, Leslie won a cash prize of $2,000. She plans to use this money to pay her tuition bill four months later in September. Why would Leslie put this money in a savings account instead of a 1- year, 12 month, and certificate of deposit? C                                    
                  A         Get a higher rate of return

                  B          Avoid paying property taxes

                  C         Assure liquidity of the account

                  D         Make a long-term investment

Which of the following statements will help to maximize your stock investment? C

A         Buy low, sell low

B          Buy high, sell low

C         Buy low, sell high

D         Buy high, sell high

Which of the following is the Rule of 72 intended to approximate?  B

A         Net gain from a stock purchase

B          Number of years to double an investment

C         Risk profile of an investment

D         Average rate of return on an investment

Because bonds are considered a safe investment, which characteristic would you expect them to have?                                                             D

A         They take a short time to mature.

B          They have high interest rates.

C         They take a long time to mature.

D         They have lower rates of return.

Which of the following describes a publicly held corporation? B

A         Stocks are not available to company owners.

B          Large numbers of stockholders can buy/sell stock

C         Stocks are not usually traded at stock exchanges

D         Family members are excluded from holding stock

Your running shoes were designed in the United States and assembled in Asia. What type of a enterprise does this involve? B 

A         General partnership      

B          Multinational corporation
C         Trade association

D         Domestic monopoly

Why invest in mutual funds instead of a single stock?        E2 B

A         To diversify capital

B          To reduce risk

C         To increase profits

D         To decrease profits

Which strategy is most likely to improve a person’s financial situation over his/her lifetime?                                        B  
A   Using credit to spend more than one earns each pay period

B    Starting to save as soon as one begins earning an income

C   Gaining work experience early instead of staying in school

D   Making each financial decision quickly based on a hunch


In a market economy, what is the government’s role?    C

A         Decides what goods are manufactured

B          Owns and operates major industries

C         Encourage competition among businesses

D         Sets prices on goods and services

There is a country in which the government owns all the industries, businesses, and farms.  The government sets production and wages.  The government provides all education, childcare, and medical care for all the people.  What type of economy does this describe?                       C                    

A         Market  

B          Traditional

C         Command

D         Transitional

When comparing a traditional economy with a command economy, which of the following is true of both?                        A

A         Slow economic growth

B          Freely fluctuating prices

C         Private ownership of business

D         Support of business competition

What is the economic system in which customs and religion of previous generations determine how the economy will use its scarce resources?  D

A         Market

B          Transitional

C         Command

D         Traditional

Which of the following is a characteristic of traditional economies?   D

A         Fast growing communities

B          High standard of living

C         Light industrial production

D         Slow economic growth

A government sets quotas and prints and distributes posters to inspire workers to increase their productivity. In which type of economy would this most likely take place?                                                                                               A

A         Command

B          Traditional       

C         Market

D         Transitional
What is the benefit of competition in a free market system? B
A         Make sure everyone gets an equal share of resources

B          Create a variety of new and cheaper products

C         Cause producers to try to put each other out of business

D         Follow the traditional methods of production

In general, what type of economy does the United States have?  B

A         Transitional

B          Market

C         Command

D         Traditional

What is the primary incentive that motivates a manufacturer to sell a product?  A
A         Making profits on sales

B          Putting others out of business

C         Pleasing the government           

D         Reputation of the product 

Which type of economy produces the highest standard of living for its citizens? B

A         Transitional
B          Market

C         Traditional

D         Command

Why would an inefficient factory close down under capitalism? A

A         Low or negative profits

B          Government mandates

C         A central planner’s decision

D         Adverse effects on income distribution

Which of the following countries exhibit the characteristics of a market economy? A

A         United States

B          Cuba

C         North Korea

D         China

Which characteristic best describes a traditional economy?    B

A         Labor unions and wages

B          Customs and religions

C         Communism and inflation

D         Markets and systems

Which of the following is a main feature of a command economy? B

A         Private ownership

B          Central planning

C         Heavy reliance on markets

D         Profit driven decision making

15        How are the basic questions of economics answered in a traditional economy?

A         People rely heavily on how things have always been done.
B          Large corporations compete for business.
C         The government generally owns all means of production.
      D         Technological advancements encourage growth.


In a market economy, what determines the price and quantity of most goods produced?                                    B        

A         Substitute goods

B          Supply and demand

C         Economic policies

D         Quality of goods

In a market economy, when consumers and producers act in their own self-interest, which is most likely to be the overall result? C

A         The market will have less variety and fewer products will be made.

B          The consumer will pay excessively high prices for goods and services.

C         The producers are likely to earn a profit making products people want.

D         The individuals or businesses will lose money no matter what they sell.

What is the most likely to happen when consumers want to buy more scooters than the store has available for sale?                                                          B

A         Profit on scooter sales will be smaller.

B          Price of the scooter will increase.

C         Manufacturers will stop making it.

D         Stores will make a different model.

Assume the government subsidizes the production of a good every year. Which of these would be the most likely result if that government stopped the subsidies? C

A         Increase in the number of producers

B          Better selection of products

C         Increase in the price of products

D         Better wages for workers

On a supply and demand graph, what is the point called at which quantity demanded equals quantity supplied?                    B

A         Surplus

B          Equilibrium                  

C         Shortage

D         Equidistant

Sugar is an important input in the production of cookies.  If the price of sugar decreases, what would we expect to happen to the supply of cookies?              B

A         No change

B          Increases

C         Decreases

D         Disappears

Which of the following is the best example of the law of supply?   A

A         A sandwich shop increases the number of sandwiches when the price increases.

B          A supplier provides more shoes to local stores as prices of ladies shoes fall.

C         A catering company buys a new dishwasher to make employees’ work easier.

D         A milling company builds a new factory to process flour to export.

Which of these actions would most likely result in a decrease in consumer spending?
A         Increasing income taxes

B          Decreasing the interest rate

C         Increasing government spending

D         Decreasing the reserve requirement

If a government sets a maximum price for a good or service, what does it create? A
A         Price ceiling

B          Price floor       

C         Inflated price

D         Illegal price

What is the result of a price ceiling which is a price set below the equilibrium price?                                                                                                                              A

A         Shortage

B          Surplus

C         Equilibrium

D         Equidistant

A hurricane hit Florida and destroyed half of the orange crop. What would most likely happen to the orange market?  C

A         Demand for oranges will rise

B          The price of oranges will fall

C         The price of oranges will increase

D         Supply of oranges will increase

How many businesses make up an oligopoly? A

A         Few

B          None

C         One

D         Most

Which of the following describes a market in which one firm controls the supply and pricing of a good or service? D                 

A         Monopolist competition

B          Oligopoly

C         Perfectly competitive

D         Monopoly

Which factor will decrease the demand for a product? B

A         Increased popularity of a product

B          A decrease in the number of buyers

C         A decrease in the price of a complementary good

D         An increase in the price of a substitute good