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Test Bank 1
to accompany
Economics
Sixteenth Edition
Campbell R. McConnell
University of Nebraska
Stanley L. Brue
Pacific Lutheran University
Prepared by
Stanley L. Brue
Pacific Lutheran University
www.mhhe.com
Test Bank 1 to accompany
ECONOMICS
Campbell R. McConnell and Stanley L. Brue
Published by McGraw-Hill,
an imprint of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas,
New York, NY 10020. Copyright
2005 by The McGraw-Hill Companies, Inc.
All rights reserved.
The contents, or parts thereof, may be reproduced in print form solely for classroom use with
ECONOMICS
provided such reproductions bear copyright notice, but may not be reproduced in any other form or for any
other purpose without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited
to, in any network or other electronic storage or transmission, or broadcast for distance learning.
1 2 3 4 5 6 7 8 9 0
Text printer code/Cover printer code 0 9 8 7 6 5 4
ISBN
0-07-288479-7
Table of Contents
1 The Nature and Method of Economics 1
2 The Economizing Problem 31
3 Individual Markets: Demand and Supply 69
3W Applications and Extensions of Supply and Demand Analysis 109
4 The Market System 125
5 The U.S. Economy: Private and Public Sectors 141
6 The United States in the Global Economy 175
7 Measuring Domestic Output and National Income 197
8 Introduction to Economic Growth and Instability 229
9 Basic Macroeconomic Relationships 253
10 The Aggregate Expenditures Model 289
11 Aggregate Demand and Aggregate Supply 335
12 Fiscal Policy 369
13 Money and Banking 403
14 How Banks and Thrifts Create Money 433
15 Monetary Policy 455
16 Extending the Analysis of Aggregate Supply 489
17 Economic Growth 515
18 Deficits, Surpluses, and the Public Debt 531
19 Disputes over Macro Theory and Policy 547
20 Elasticity of Demand and Supply 575
21 Consumer Behavior and Utility Maximization 611
22 The Costs of Production 647
23 Pure Competition 687
24 Pure Monopoly 731
25 Monopolistic Competition and Oligopoly 773
26 Technology, R&D, and Efficiency 819
27 The Demand for Resources 843
28 Wage Determination 875
29 Rent, Interest, and Profit 909
30 Government and Market Failure 929
31 Public Choice Theory and Taxation 953
32 Antitrust Policy and Regulation 979
33 Agriculture: Economics and Policy 1001
34 Income Inequality and Poverty 1021
35 Labor Market Institutions and Issues: Unionism,
Discrimination, and Immigration 1047
36 The Economics of Health Care 1077
37 International Trade 1097
38 Exchange Rates, the Balance of Payments, and Trade Deficits 1127
39W The Economics of Developing Countries (Internet-Only Chapter) 1157
40W Transition Economies: Russia and China (Internet-Only Chapter) 1177
Preface
Test Bank I contains more than 6,300 multiple-choice and true-false questions. We have created
approximately 670 new question for this edition; the remaining 5,630 have been checked and refined to
ensure compatibility with the 16
th
Edition.
Test Bank I continues to be accurate, functional, and user-friendly.
1. New questions: All new question are so identified. This will provide long-time users of
Economics with a fresh set of questions.
2. Grouping by topic: As in previous editions, all questions are grouped by topic and sequenced in
the same order as the text material. A table at the beginning of each Test Bank chapter lists the
topics and corresponding question numbers. Each topic has been numbered for easy reference.
This sequencing should reduce the time required to make up well-balanced exams.
3. Consider This and Last Word questions: Test Bank I contains and identifies two or three
questions on each Consider This and Last Word vignette.
4. Coding: Each item contains a code that identifies the particular type of question. For example,
A=application of concept; D=definition; G=graphical analysis, and so forth. These codes are
identified following this Preface, while the coding itself is found above each question. Former
users of Test Bank I have found these codes useful in preparing exams and in identifying the
types of questions missed by students.
5. Page references: Each question includes a 16
th
Edition page reference. To aid instructors who are
using the paperback split volumes, we list three separate page numbers: E indicates the
Economics page number; MA indicates the Macroeconomics split volume page number; and MI
indicates the Microeconomics split volume page number.
All Test Bank I questions are also available in a Brownstone test generating system for PCs and
Macintosh computers. Contact your McGraw-Hill/Irwin sales representative for more information.
We wish to thank Robert Jensen for assistance and Becky Szura for her expertise in creating the
Brownstone Diploma version.
Stanley L Brue
Campbell R. McConnell
Conversion Chart
There are three versions of the 16
th
edition of McConnell/Brue Economics:
Macroeconomics, Microeconomics, and Economics. Test Bank I follows the Economics
chapter order. Use the following chart to see how Test Bank I/Economics chapters
correspond with the other two books:
Economics/TB I Chapter
Macroeconomics Chapter Microeconomics Chapter
1-6 1-6 1-6
7-19 7-19 ***
20-36 *** 7-23
37-38 20-21 24-25
3W 3W 3W
39W 22W ***
40W 23W 26W
Bold type indicates chapters common to all three books.
*** indicates chapters that do not appear in a particular split version of the text.
W indicates chapters that are available only at the book’s website,
www.mcconnell16.com.
Coding System for Test Bank I
The codes above each question indicate the following question types:
A = Application of Concept
A question that tests student understanding of a definition or concept.
C = Complex Analysis
A question that calls for students to apply more than one concept in order to reach the
correct answer.
D = Definition
A straightforward question that tests recognition of a definition.
E = Equation
A question that calls for solving one or more equations. Many of these are designated
as advanced analysis questions.
F = Fact
A problem that tests ability to recall a fact or some data.
G = Graphical
A question that requires students to demonstrate working facility with graphs.
T = Table
A question that requires students to interpret or manipulate tabular material.
New = New Question
A question that is new to this edition of Test Bank I.
E = Economics, 16
th
Edition
MA = Macroeconomics, 16
th
Edition
MI = Microeconomics, 16
th
Edition
CHAPTER 1
The Nature and Method of Economics
Topic Question numbers
___________________________________________________________________________________________________
1. Economics; economic perspective 1-20
2. Benefits of studying economics 21-23
3. Methodology 24-40
4. Economic policy and goals 41-47
5. Macroeconomics and microeconomics 48-56
6. Positive and normative statements 57-66
7. Logical pitfalls 67-82
Consider This 83-84
Last Word 85-87
True-False 88-100
Appendix
8. Construction and interpretation of graphs 101-155
___________________________________________________________________________________________________
Multiple Choice Questions
Economics; economic perspective
Type: D Topic: 1 E: 4 MI: 4 MA: 4 Status: New
1. For economists, the word "utility" means:
A) versatility and flexibility. B) rationality. C) pleasure and satisfaction. D) purposefulness.
Answer: C
Type: D Topic: 1 E: 4 MI: 4 MA: 4 Status: New
2. In economics, the pleasure, happiness, or satisfaction received from a product is called:
A) marginal cost. B) rational outcome. C) status fulfillment. D) utility.
Answer: D
Type: A Topic: 1 E: 4 MI: 4 MA: 4 Status: New
3. When economists say that people act rationally in their self interest, they mean that individuals:
A) look for and pursue opportunities to increase their utility.
B) generally disregard the interests of others.
C) are mainly creatures of habit.
D) are unpredictable.
Answer: A
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 2
Type: A Topic: 1 E: 3 MI: 3 MA: 3
4. According to Emerson: "Want is a growing giant whom the coat of Have was never large enough to cover."
According to economists, "Want" exceeds "Have" because:
A) people are greedy. C) human beings are inherently insecure.
B) productive resources are limited. D) people are irrational.
Answer: B
Type: A Topic: 1 E: 4 MI: 4 MA: 4
5. According to economists, economic self-interest:
A) is a reality that underlies economic behavior. C) is more characteristic of men than of women.
B) has the same meaning as selfishness. D) is usually self-defeating.
Answer: A
Type: A Topic: 1 E: 4 MI: 4 MA: 4
6. When entering a building, Sam diverts his path to go through an open door rather than make the physical
effort to open the closed door that is directly in his path. This is an example of:
A) irrational behavior. C) marginal benefit-marginal cost analysis.
B) a lazy person. D) programmed learning.
Answer: C
Type: A Topic: 1 E: 4 MI: 4 MA: 4
7. Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any
money on my financial investment." His economist friend points out that in effect he did lose money,
because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of
deposit instead of the coins. The economist's analysis in this case incorporates the idea of:
A) opportunity costs C) imperfect information.
B) marginal benefits that exceed marginal costs. D) normative economics.
Answer: A
Type: A Topic: 1 E: 4-5 MI: 4-5 MA: 4-5
8. There is too little of a good thing when its marginal:
A) benefit exceeds its marginal cost. C) cost equals its marginal benefit.
B) cost exceeds its marginal benefit. D) benefit is still positive.
Answer: A
Type: D Topic: 1 E: 3 MI: 3 MA: 3
9. Economics may best be defined as the:
A) interaction between macro and micro considerations.
B) social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of
economic wants.
C) empirical testing of value judgments through the use of logic.
D) use of policy to refute facts and hypotheses.
Answer: B
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 3
Type: D Topic: 1 E: 3 MI: 3 MA: 3
10. The study of economics is primarily concerned with:
A) keeping private businesses from losing money.
B) demonstrating that capitalistic economies are superior to socialistic economies.
C) choices that are made in seeking to use scarce resources efficiently.
D) determining the most equitable distribution of society's output.
Answer: C
Type: D Topic: 1 E: 4 MI: 4 MA: 4
11. The economic perspective refers to:
A) macroeconomic phenomena, but not microeconomic phenomena.
B) microeconomic phenomena, but not macroeconomic phenomena.
C) the making of rational decisions in a context of marginal costs and marginal benefits.
D) unlimited resources in a context of limited economic wants.
Answer: C
Type: D Topic: 1 E: 4 MI: 4 MA: 4
12. The economic perspective entails:
A) irrational behavior by individuals and institutions.
B) a comparison of marginal benefits and marginal costs in decision making.
C) short-term but not long-term thinking.
D) rejection of the scientific method.
Answer: B
Type: D Topic: 1 E: 4 MI: 4 MA: 4
13. Rational behavior suggests that:
A) everyone will make identical choices.
B) resource availability exceeds economic wants.
C) individuals will make different choices because their preferences and circumstances differ.
D) an individual's economic goals cannot involve tradeoffs.
Answer: C
Type: D Topic: 1 E: 4 MI: 4 MA: 4
14. Economics involves marginal analysis because:
A) most decisions involve changes from the present situation.
B) marginal benefits always exceed marginal costs.
C) marginal costs always exceed marginal benefits.
D) much economic behavior is irrational.
Answer: A
Type: A Topic: 1 E: 5 MI: 5 MA: 5
15. You should decide to go to a movie:
A) if the marginal cost of the movie exceeds its marginal benefit.
B) if the marginal benefit of the movie exceeds its marginal cost.
C) if your income will allow you to buy a ticket.
D) because movies are enjoyable.
Answer: B
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 4
Type: D Topic: 1 E: 5 MI: 5 MA: 5
16. Marginal costs exist because:
A) the decision to produce more of some product means the sacrifice of other products.
B) wants are scarce relative to resources.
C) households and businesses make rational decisions.
D) most decisions do not involve sacrifices or tradeoffs.
Answer: A
Type: D Topic: 1 E: 3 MI: 3 MA: 3
17. The assertion that "There is no free lunch" means that:
A) there are always tradeoffs between economic goals.
B) all production involves the use of scarce resources and thus the sacrifice of alternative goods.
C) marginal analysis is not used in economic reasoning.
D) choices need not be made if behavior is rational.
Answer: B
Type: A Topic: 1 E: 4 MI: 4 MA: 4
18. Consumers spend their incomes to get the maximum benefit or satisfaction from the goods and services
they purchase. This is a reflection of:
A) resource scarcity and the necessity of choice.
B) rational behavior.
C) marginal costs that exceed marginal benefits.
D) the tradeoff problem that exists between competing goals.
Answer: B
Type: A Topic: 1 E: 5 MI: 5 MA: 5
19. There can be too much of a good thing. This statement suggests that:
A) rational choice cannot be applied to many economic decisions.
B) a good may be produced to the point where its marginal cost exceeds its marginal benefit.
C) certain goods and services such as education and health care are inherently desirable and should be
produced regardless of costs and benefits.
D) a good may be produced to the point where its marginal benefit exceeds its marginal cost.
Answer: B
Type: A Topic: 1 E: 5 MI: 5 MA: 5
20. Even though local newspapers are very inexpensive, people rarely buy more than one of them each day.
This fact:
A) is an example of irrational behavior.
B) implies that reading should be taught through phonics rather than the whole language method.
C) contradicts the economic perspective.
D) implies that, for most people, the marginal benefit of reading a second newspaper is less than the
marginal cost.
Answer: D
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 5
Benefits of studying economics
Type: A Topic: 2 E: 5 MI: 5 MA: 5
21. Studying economics:
A) helps one become a better-informed citizen and voter.
B) is detrimental to good citizenship because economics emphasizes individualism.
C) is a waste of time since we all participate in the economy whether we understand it or not.
D) is important because economics is the science of earning money.
Answer: A
Type: A Topic: 2 E: 5 MI: 5 MA: 5
22. Learning economics:
A) is detrimental to good citizenship because economics emphasizes individualism.
B) is helpful to employers, but not to workers and consumers.
C) is important because economics is the science of earning money.
D) helps students improve analytical skills that are in great demand in the workplace.
Answer: D
Type: A Topic: 2 E: 6 MI: 6 MA: 6
23. The study of economics:
A) is similar to management, marketing, and finance since it emphasizes how to make money.
B) is helpful to businesses, but not particularly helpful in making personal buying decisions.
C) is mainly an academic, not a vocational subject.
D) looks at the economy from the viewpoint of one's own pocketbook, not from the standpoint of society's
interest.
Answer: C
Methodology
Type: D Topic: 3 E: 6 MI: 6 MA: 6
24. An economic hypothesis:
A) has the same meaning as an economic principal or economic law.
B) is usually a normative statement.
C) is a possible explanation of cause and effect.
D) is a stronger generalization than an economic law.
Answer: C
Type: A Topic: 3 E: 6 MI: 6 MA: 6
25. Which of the following terms implies the least degree of confidence in an economic generalization?
A) a hypothesis B) a theory C) a principle D) a law
Answer: A
Type: A Topic: 3 E: 7 MI: 7 MA: 7
26. Which of the following terms implies the greatest degree of confidence in an economic generalization?
A) a hypothesis B) a theory C) a principle D) an anomaly
Answer: C
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 6
Type: D Topic: 3 E: 7 MI: 7 MA: 7
27. A well-tested economic theory is often called:
A) a hypothesis. B) a prototype. C) a principle. D) an anomaly.
Answer: C
Type: C Topic: 3 E: 7 MI: 7 MA: 7
28. Economists:
A) use both the economic perspective and the scientific method.
B) use the economic perspective but not the scientific method.
C) make positive economic statements, but not normative economic statements.
D) reject theorizing as being impractical.
Answer: A
Type: A Topic: 3 E: 6 MI: 6 MA: 6
29. The scientific method is:
A) not applicable to economics, because economics deals with human beings.
B) also known as the economic perspective.
C) analysis that moves from broad generalizations called laws to theories and then to hypotheses.
D) used by economists and other social scientists, as well as by physical scientists and life scientists.
Answer: D
Type: D Topic: 3 E: 7 MI: 7 MA: 7
30. The process by which economists test hypotheses against facts to develop theories, principles, and models
is called:
A) the economic perspective. B) the scientific method. C) policy economics. D) microeconomcis.
Answer: B
Type: D Topic: 3 E: 6 MI: 6 MA: 6
31. Economic theories:
A) are useless because they are not based on laboratory experimentation.
B) that are true for individual economic units are never true for the economy as a whole.
C) are generalizations based on a careful observation of facts.
D) are abstractions and therefore of no application to real situations.
Answer: C
Type: A Topic: 3 E: 6 MI: 6 MA: 6
32. Theoretical economics:
A) is also known as policy economics.
B) is the process of deriving principles of economics.
C) is highly impractical since it does not deal with the real world.
D) rejects the scientific method as being inappropriate for the social sciences.
Answer: B
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 7
Type: D Topic: 3 E: 7 MI: 7 MA: 7
33. Which of the following is a correct statement?
A) Economic concepts or laws that are valid during depression are necessarily valid during prosperity.
B) Though not quantitatively exact, economic laws are useful because they allow us to predict and
therefore control or adjust to events.
C) Economics is as scientific as are physics and chemistry because economic laws are as quantitatively
precise as the laws of physics or chemistry.
D) Because economics is concerned with questions of "ought," it is a branch of applied ethics and not
scientific.
Answer: B
Type: D Topic: 3 E: 7 MI: 7 MA: 7
34. In constructing models, economists:
A) make simplifying assumptions. C) must use mathematical equations.
B) include all available information. D) attempt to duplicate the real world.
Answer: A
Type: D Topic: 3 E: 7 MI: 7 MA: 7
35. Economic models:
A) are of limited use because they cannot be tested empirically.
B) are limited to variables that are directly related to one another.
C) emphasize basic economic relationships by abstracting from the complexities of the real world.
D) are unrealistic and therefore of no practical consequence.
Answer: C
Type: D Topic: 3 E: 7 MI: 7 MA: 7
36. The term "ceteris paribus" means:
A) that if event A precedes event B, A has caused B.
B) that economics deals with facts, not values.
C) other things equal.
D) prosperity inevitably follows recession.
Answer: C
Type: D Topic: 3 E: 7 MI: 7 MA: 7
37. The basic purpose of the other-things-equal assumption is to:
A) allow one to reason about the relationship between variables X and Y without the intrusion of variable
Z.
B) allow one to focus upon micro variables by ignoring macro variables.
C) allow one to focus upon macro variables by ignoring micro variables.
D) determine whether X causes Y or vice versa.
Answer: A
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 8
Type: A Topic: 3 E: 7 MI: 7 MA: 7
38. Suppose an economist says that "Other things equal, the lower the price of bananas, the greater the amount
of bananas purchased." This statement indicates that:
A) the quantity of bananas purchased determines the price of bananas.
B) all factors other than the price of bananas (for example, consumer tastes and incomes) are assumed to
be constant.
C) economists can conduct controlled laboratory experiments.
D) one cannot generalize about the relationship between the price of bananas and the quantity purchased.
Answer: B
Type: D Topic: 3 E: 6 MI: 6 MA: 6
39. An hypothesis is:
A) a fundamental truth that all economists accept.
B) a tentative, untested statement of possible cause and effect.
C) the same as a normative statement.
D) also known as a principle or law.
Answer: B
Type: D Topic: 3 E: 8 MI: 8 MA: 8
40. The term "other things equal" means that:
A) the associated statement is normative.
B) many variables affect the variable under consideration.
C) a number of relevant variables are assumed to be constant.
D) when variable X increases so does related variable Y.
Answer: C
Economic policy and goals
Type: F Topic: 4 E: 8 MI: 8 MA: 8 Status: New
41. Which of the following statements is true?
A) The process of deriving economic theories and principles is known as policy economics.
B) Full employment, price-level stability, and economic growth are widely accepted macroeconomics
goals in the United States.
C) Normative economics deals with "what is," whereas positive economics deals with "what ought to be."
D) There can be too little of a good thing, but never too much of a good thing.
Answer: B
Type: A Topic: 4 E: 8 MI: 8 MA: 8
42. In formulating economic policy it is important to:
A) use only positive economics, not normative economics.
B) consider the benefits and costs of the various policy options for reaching desired goals.
C) avoid outcomes for which marginal benefits exceed marginal costs.
D) use only normative economics, not positive economics.
Answer: B
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 9
Type: D Topic: 4 E: 9 MI: 9 MA: 9
43. If there is a tradeoff between goals A and B:
A) greater fulfillment of A means lesser fulfillment of B.
B) goals A and B are positively correlated.
C) causation exists between the two goals.
D) greater fulfillment of A means greater fulfillment of B.
Answer: A
Type: A Topic: 4 E: 9 MI: 9 MA: 9
44. The achieving of complete economic freedom is most likely to conflict with the goal of:
A) price-level stability. C) an equitable distribution of income.
B) economic growth. D) economic efficiency.
Answer: C
Type: A Topic: 4 E: 9 MI: 9 MA: 9
45. If a reduction in the unemployment rate is always accompanied by a reduction in income inequality, then:
A) full employment and greater income equality are conflicting goals.
B) full employment and greater income equality are compatible goals.
C) reduced income inequality is a more important goal than is achieving full employment.
D) achieving full employment is a more important goal than reducing income inequality.
Answer: B
Type: A Topic: 4 E: 10 MI: 10 MA: 10
46. Most of the disagreement among economists involves:
A) the use of statistics. B) the gathering of facts. C) generalizing upon facts. D) policy economics.
Answer: D
Type: A Topic: 4 E: 9 MI: 9 MA: 9
47. With respect to the basic economic goals of society, for example, economic growth, full employment,
economic efficiency, price level stability, economic freedom, distributional equity, and economic security,
it can be said that:
A) all are accepted and assigned similar priorities in every industrialized society.
B) all are precisely measurable.
C) some goals are complementary and others are conflicting.
D) all are conflicting goals.
Answer: C
Macroeconomics and microeconomics
Type: D Topic: 5 E: 9 MI: 9 MA: 9
48. Macroeconomics approaches the study of economics from the viewpoint of:
A) the entire economy.
B) governmental units.
C) the operation of specific product and resource markets.
D) individual firms.
Answer: A
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 10
Type: A Topic: 5 E: 9 MI: 9 MA: 9
49. Which of the following is associated with macroeconomics?
A) an examination of the incomes of Harvard Business School graduates
B) an empirical investigation of the general price level and unemployment rates since 1990
C) a study of the trend of pecan prices since the Second World War
D) a case study of pricing and production in the textbook industry
Answer: B
Type: A Topic: 5 E: 9 MI: 9 MA: 9
50. The problems of aggregate inflation and unemployment are:
A) major topics of macroeconomics. C) major topics of microeconomics.
B) not relevant to the U.S. economy. D) peculiar to command economies.
Answer: A
Type: A Topic: 5 E: 9 MI: 9 MA: 9
51. Which of the following statements pertains to macroeconomics?
A) Because the minimum wage was raised, Mrs. Olsen decided to enter the labor force.
B) A decline in the price of soybeans caused farmer Wanek to plant more land in wheat.
C) The national productivity rate grew by 2.7 percent last year.
D) The Pumpkin Center State Bank increased its interest rate on consumer loans by 1 percentage point.
Answer: C
Type: D Topic: 5 E: 9 MI: 9 MA: 9
52. Macroeconomics can best be described as the:
A) analysis of how a consumer tries to spend income.
B) study of the large aggregates of the economy or the economy as a whole.
C) analysis of how firms attempt to maximize their profits.
D) study of how supply and demand determine prices in individual markets.
Answer: B
Type: D Topic: 5 E: 9 MI: 9 MA: 9
53. Microeconomics is concerned with:
A) the aggregate or total levels of income, employment, and output.
B) a detailed examination of specific economic units that make up the economic system.
C) positive economics, but not normative economics.
D) the establishing of an overall view of the operation of the economic system.
Answer: B
Type: D Topic: 5 E: 9 MI: 9 MA: 9
54. Microeconomics:
A) is the basis for the "after this, therefore because of this" fallacy.
B) is not concerned with details, but only with the overall big picture of the economy.
C) is concerned with individual economic units and specific markets.
D) describes the aggregate flows of output and income.
Answer: C
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 11
Type: A Topic: 5 E: 9 MI: 9 MA: 9
55. Which of the following is a macroeconomic statement?
A) The gross profits of all U.S. businesses were $182 billion last year.
B) The price of beef declined by 3 percent last year.
C) General Motors' profits increased last year.
D) The productivity of steelworkers increased by 1 percent last year.
Answer: A
Type: A Topic: 5 E: 9 MI: 9 MA: 9
56. Which of the following is a microeconomic statement?
A) The real domestic output increased by 2.5 percent last year.
B) Unemployment was 6.8 percent of the labor force last year.
C) The price of personal computers declined last year.
D) The general price level increased by 4 percent last year.
Answer: C
Positive and normative statements
Type: D Topic: 6 E: 10 MI: 10 MA: 10
57. A normative statement is one that:
A) is based on the law of averages. C) applies only to macroeconomics.
B) applies only to microeconomics. D) is based on value judgments.
Answer: D
Type: A Topic: 6 E: 10 MI: 10 MA: 10
58. Which of the following is a normative statement?
A) The temperature is high today. C) It is too hot to play tennis today.
B) The humidity is high today. D) It will cool off later this evening.
Answer: C
Type: D Topic: 6 E: 10 MI: 10 MA: 10
59. A positive statement is one which is:
A) derived by induction. C) subjective and is based on a value judgment.
B) derived by deduction. D) objective and is based on facts.
Answer: D
Type: A Topic: 6 E: 10 MI: 10 MA: 10
60. Which of the following is a positive statement?
A) The humidity is too high today. C) The temperature is 92 degrees today.
B) It is too hot to jog today. D) I enjoy summer evenings when it cools off.
Answer: C
Type: D Topic: 6 E: 10 MI: 10 MA: 10
61. Normative statements are concerned with:
A) facts and theories. C) what is.
B) what ought to be. D) rational choice involving costs and benefits.
Answer: B
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 12
Type: D Topic: 6 E: 10 MI: 10 MA: 10
62. A positive statement is concerned with:
A) some goal that is desirable to society. C) what is.
B) what should be. D) the formulation of economic policy.
Answer: C
Type: A Topic: 6 E: 10 MI: 10 MA: 10
63. Ideally, value judgments are involved at the:
A) levels of facts, theory, and policy. C) level of facts only.
B) levels of facts and theory only. D) level of policy only.
Answer: D
Type: A Topic: 6 E: 10 MI: 10 MA: 10
64. Most of the disagreement among economists involves:
A) facts. B) principles. C) positive statements. D) normative statements.
Answer: D
Type: A Topic: 6 E: 10 MI: 10 MA: 10
65. "Economics is concerned with using scarce productive resources efficiently in attempting to satisfy
society's economic wants." This statement is:
A) positive, but incorrect. C) normative, but incorrect.
B) positive and correct. D) normative and correct.
Answer: B
Type: A Topic: 6 E: 10 MI: 10 MA: 10
66. Ben says that "An increase in the tax on beer will raise its price." Holly argues that "Taxes should be
increased on beer because college students drink too much." We can conclude that:
A) Ben's statement is normative, but Holly's is positive.
B) Holly's statement is normative, but Ben's is positive.
C) Both statements are normative.
D) Both statements are positive.
Answer: B
Logical pitfalls
Type: D Topic: 7 E: 11 MI: 11 MA: 11
67. The fallacy of composition states that:
A) because economic systems are composed of so many diverse economic units, economic laws are
necessarily inexact.
B) the anticipation of a particular event can affect the composition of that event when it occurs.
C) what is true for the individual must necessarily be true for the group.
D) because event A precedes event B, A is necessarily the cause of B.
Answer: C
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 13
Type: D Topic: 7 E: 11 MI: 11 MA: 11
68. The "after this, because of this" fallacy states that:
A) because event A precedes event B, A is necessarily the cause of B.
B) the very attempt to accomplish a certain objective may create conditions that prohibit the achievement
of that goal.
C) events may drastically alter plans; one's intentions and actual accomplishments may differ
considerably.
D) generalizations that are accurate at the level of microeconomics may be inaccurate at the level of
macroeconomics.
Answer: A
Type: A Topic: 7 E: 11 MI: 11 MA: 11
69. The safest way for an individual to leave a burning theater is to run for the nearest exit; it is therefore also
the best means of escape for a large audience. This assertion illustrates the:
A) "after this, therefore because of this" fallacy. C) fallacy of composition.
B) correlation fallacy. D) fallacy of limited decisions.
Answer: C
Type: D Topic: 7 E: 11 MI: 11 MA: 11
70. Which of the following has to do with the idea that generalizations that apply to individuals are also always
valid for a group?
A) the law of large numbers C) the fallacy of composition
B) the law of averages D) the post hoc, ergo propter hoc fallacy
Answer: C
Type: D Topic: 7 E: 11 MI: 11 MA: 11
71. The fallacy of composition states that:
A) generalizations relevant to microeconomics never apply to macroeconomics.
B) expectations give rise to self-fulfilling prophesies.
C) generalizations pertaining to individuals always apply to the group.
D) quantifiable economic goals are always incompatible with one another.
Answer: C
Type: D Topic: 7 E: 11 MI: 11 MA: 11
72. The "after this, because of this" fallacy states that:
A) positive statements are always followed by normative judgments.
B) positive statements can never be proven true or false.
C) if one acts on one's expectations, those expectations will always be fulfilled.
D) cause and effect can be determined merely by observing the sequence of events.
Answer: D
Type: A Topic: 7 E: 11 MI: 11 MA: 11
73. If you leave a football game at the end of the third quarter, you will avoid traffic and get home more
quickly. Therefore, everyone should leave the game early. This assertion illustrates the:
A) moral hazard problem. C) fallacy of limited decisions.
B) adverse selection problem. D) fallacy of composition.
Answer: D
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 14
Type: D Topic: 7 E: 11 MI: 11 MA: 11
74. Which of the following has to do with the problem of distinguishing cause and effect in economic
reasoning?
A) the law of large numbers C) the post hoc, ergo propter hoc fallacy
B) the law of averages D) the fallacy of composition
Answer: C
Type: D Topic: 7 E: 11 MI: 11 MA: 11
75. Which of the following best illustrates the post hoc, ergo propter hoc fallacy?
A) Because it was 90 degrees today, I worked up a sweat playing tennis.
B) I took the day off work to go to the beach and that's why it rained.
C) Because it rained at the football game, my new sweater got wet.
D) Because I have studied diligently this semester, my grade average has improved.
Answer: B
Type: D Topic: 7 E: 11 MI: 11 MA: 11
76. The fallacy of composition is essentially the error of:
A) omitting relevant variables in constructing a model.
B) reasoning from the general to the particular.
C) confusing cause and effect in economic relationships.
D) generalizing from the particular to the general.
Answer: D
Type: D Topic: 7 E: 11 MI: 11 MA: 11
77. The post hoc fallacy and the correlation problem both relate to:
A) the calculation of marginal costs and marginal benefits of any economic activity.
B) the issue of determining causation.
C) the frequent inability of households and businesses to behave rationally.
D) the tradeoff problem associated with competing goals.
Answer: B
Type: A Topic: 7 E: 11 MI: 11 MA: 11
78. If variables X and Y are positively correlated, this means that:
A) X is the cause of Y .
B) Y is the cause of X.
C) causation necessarily exists, but we don't know whether X or Y is the cause.
D) causation may or may not exist between X and Y .
Answer: D
Type: A Topic: 7 E: 11 MI: 11 MA: 11 Status: New
79. "The government deregulated the electricity industry in California and a shortage of electricity soon
occurred. It is clear that the deregulation caused the shortage." This statement needs careful analysis
because it may reflect the:
A) the fallacy of composition. C) use of loaded terminology.
B) post hoc, ergo propter hoc fallacy. D) the law of averages.
Answer: B
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 15
Type: A Topic: 7 E: 10 MI: 10 MA: 10 Status: New
80. A caller to a radio talk show states that multinational corporations are "greedy exploiters of the poor." This
is an example of:
A) loaded terminology.
B) the "after this, therefore because of this fallacy."
C) the fallacy of composition.
D) the economic perspective.
Answer: A
Type: A Topic: 7 E: 10 MI: 10 MA: 10 Status: New
81. A caller to a radio talk show states that protesters against globalization are a collection of "anarchist punks,
naïve college students, and trade union radicals." This is an example of:
A) the fallacy of composition. C) loaded terminology.
B) the economic perspective. D) marginal analysis.
Answer: C
Type: F Topic: 7 E: 11 MI: 11 MA: 11 Status: New
82. A study found that the incidence of skin cancer increases along with the amount of time people work under
fluorescent light, leading some people to conclude that fluorescent lighting is a cause of skin cancer. But
further analysis found that people who work in offices, where fluorescent light is common, suffer more
sunburn on their vacations than other workers. The sunburns, not the fluorescent light, were the cause of
the higher incidence of skin cancer. The original conclusion illustrates:
A) the fallacy of composition.
B) confusion of correlation and causation.
C) identifying marginal costs and marginal benefits.
D) biases and loaded terminology.
Answer: B
Consider This Questions
Type: F E: 4 MI: 4 MA: 4 Status: New
83. (Consider This) Free products offered by firms:
A) may or may not be free to society, but are never free to individuals.
B) may or may not be free to individuals, but are never free to society.
C) are produced and distributed at no cost to society.
D) usually are items nobody wants.
Answer: B
Type: F E: 4 MI: 4 MA: 4 Status: New
84. (Consider This) The assertion by economists that "there is no free lunch" is:
A) contradicted by the presence of free goods offered by firms.
B) applies to goods that have prices, not to goods given away free by firms.
C) remains true even for goods given away free by firms.
D) applies to agricultural goods, but not to manufactured goods.
Answer: C
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 16
Last Word Questions
Type: A E: 12 MI: 12 MA: 12
85. (Last Word) The economic perspective used in customer decision making at fast-food restaurants is
reflected in:
A) customers selecting the shortest line.
B) decisions for which marginal costs exceed marginal benefits.
C) all customer lines tending to be of different length.
D) irrational purchasing of high-fat-content food.
Answer: A
Type: A E: 12 MI: 12 MA: 12
86. (Last Word) At fast-food restaurants:
A) consumers enjoy complete and accurate information.
B) decisions are usually made by trial and error.
C) decisions entail comparisons of marginal costs and marginal benefits.
D) benefits always exceed costs.
Answer: C
Type: A E: 12 MI: 12 MA: 12
87. (Last Word) Consumers might leave a fast-food restaurant without being served because:
A) they are misinformed about the marginal cost and marginal benefits of the food being served.
B) they conclude that the marginal cost (monetary plus time costs) exceeds the marginal benefit.
C) the environment is not conducive to a rational choice.
D) the lines waiting for service are not of equal length.
Answer: B
True/False Questions
Type: D E: 7 MI: 7 MA: 7
88. An economic model is an ideal or utopian type of economy that society should strive to obtain through
economic policy.
Answer: False
Type: D E: 7 MI: 7 MA: 7
89. Because economic generalizations are abstract, they are impractical and useless.
Answer: False
Type: D E: 7 MI: 7 MA: 7
90. If economic theories are solidly based on relevant facts, then appropriate economic policy becomes obvious
and undebatable.
Answer: False
Type: A E: 10 MI: 10 MA: 10
91. Normative statements are expressions of facts.
Answer: False
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 17
Type: D E: 10 MI: 10 MA: 10
92. Positive statements are expressions of value judgments.
Answer: False
Type: D E: 3 MI: 3 MA: 3
93. The primary objective of economics is to help businesspersons operate their firms profitably.
Answer: False
Type: D E: 9 MI: 9 MA: 9
94. The basic goals for the U.S. economy are always complementary since the achievement of any one goal
simultaneously furthers the attainment of other basic goals.
Answer: False
Type: D E: 9 MI: 9 MA: 9
95. Macroeconomics explains the behavior of individual households and business firms; microeconomics is
concerned with the behavior of aggregates or the economy as a whole.
Answer: False
Type: D E: 4 MI: 4 MA: 4
96. Rational behavior implies that everyone will make identical choices.
Answer: False
Type: D E: 4 MI: 4 MA: 4
97. Marginal analysis means that decision-makers compare the extra benefits with the extra costs of a specific
choice.
Answer: True
Type: D E: 4 MI: 4 MA: 4
98. Certain inherently desirable products such as education and health care should be produced so long as
resources are available.
Answer: False
Type: A E: 4 MI: 4 MA: 4
99. Rational individuals may make different choices because their preferences and circumstances differ.
Answer: True
Type: D E: 4 MI: 4 MA: 4
100. Choices entail marginal costs because resources are scarce.
Answer: True
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 18
Appendix
Multiple Choice Questions
Construction and interpretation of graphs
Type: D Topic: 8 E: 16 MI: 16 MA: 16
101. If we say that two variables are directly related, this means that:
A) the relationship between the two is purely random.
B) an increase in one variable is associated with a decrease in the other variable.
C) an increase in one variable is associated with an increase in the other variable.
D) the two graph as a downsloping line.
Answer: C
Type: D Topic: 8 E: 16 MI: 16 MA: 16
102. If we say that two variables are inversely related, this means that:
A) the two graph as an upsloping line.
B) an increase in one variable is associated with a decrease in the other.
C) an increase in one variable is associated with an increase in the other.
D) the resulting relationship can be portrayed by a straight line parallel to the horizontal axis.
Answer: B
Type: D Topic: 8 E: 16 MI: 16 MA: 16
103. Economists:
A) always put the independent variable on the horizontal axis and the dependent variable on the vertical
axis.
B) always put the dependent variable on the horizontal axis and the independent variable on the vertical
axis.
C) are somewhat arbitrary in assigning independent and dependent variables to the horizontal and vertical
axes.
D) measure the slope of a line differently than do mathematicians.
Answer: C
Type: D Topic: 8 E: 16 MI: 16 MA: 16
104. Which of the following statements is correct?
A) The value of the independent variable is determined by the value of the dependent variable.
B) The value of the dependent variable is determined by the value of the independent variable.
C) The dependent variable designates the "cause" and the independent variable the "effect."
D) Dependent variables graph as upsloping lines; independent variables graph as downsloping lines.
Answer: B
Chapter 1: The Nature and Method of Economics
McConnell/Brue: Economics, 16/e Page 19
Use the following to answer questions 105-108:
Type: G Topic: 8 E: 16 MI: 16 MA: 16
105. Refer to the above diagram. Which line(s) show(s) a positive relationship between x and y?
A) A only B) both A and D C) A, B, and D D) both C and E
Answer: C
Type: G Topic: 8 E: 16 MI: 16 MA: 16
106. Refer to the above diagram. Which line(s) show(s) a negative relationship between x and y?
A) A only B) both A and D C) A, B, and D D) both C and E
Answer: D
Type: G Topic: 8 E: 18 MI: 18 MA: 18
107. Refer to the above diagram. Which line(s) show(s) a positive vertical intercept?
A) A and D only B) B and C only C) A, D, and E D) A, D, and B
Answer: C
Type: G Topic: 8 E: 18 MI: 18 MA: 18
108. Refer to the above diagram. Which line(s) show(s) a negative vertical intercept?
A) C only B) both C and E C) B, C, and E D) both B and C
Answer: D
Type: G Topic: 8 E: 16 MI: 16 MA: 16
109. If two variables are inversely related, then as the value of one variable:
A) increases, the value of the other may either increase or decrease.
B) decreases, the value of the other decreases.
C) increases, the value of the other decreases.
D) increases, the value of the other increases.
Answer: C
Type: G Topic: 8 E: 16 MI: 16 MA: 16
110. If a positive relationship exists between x and y:
A) an increase in x will cause y to decrease. C) the relationship will graph as an upsloping line.
B) a decrease in x will cause y to increase. D) the vertical intercept must be positive.
Answer: C
