12

1. Which of the following economic environments is most consistent with economic growth and prosperity?
2. a.Widespread use of government subsidies, tax breaks, tariffs and quotas that favor some businesses relative to others
3. b.Monetary policy that keeps interest rates low in order to push the prices of assets upward
4. c.Central planning that directs resources into the production of goods and services in targeted industries
5. d.Open markets and a legal system that enforces contracts in an even-handed manner

13

1. If higher tariffs, such as those enacted by the Smoot-Hawley trade bill, reduce the imports of the United States, which of the following will be most likely to occur?
2. a.U.S. employment will increase.
3. b.The unemployment rate of the United States will decline.
4. c.U.S. exports will increase because foreigners will want to buy more from U.S. producers.
5. d.U.S. exports will decline because foreigners will be earning fewer of the dollars needed to purchase goods and services from Americans.

14

1. When a nation specializes in areas where it has a comparative advantage and trades freely with other nations,
2. a.the nation's total output will be lower because of this specialization.
3. b.both the nation and its trading partners will be able to achieve a higher output as a result of the trade.
4. c.the nation's output will be lower, but that of its trading partners will be higher.
5. d.the nation's output will be higher, but that of its trading partners will be lower.

15

1. How will high tax rates affect the level and efficiency of capital formation projects?
2. a.Higher tax rates will attract more foreign investment, but less domestic investment.
3. b.Higher tax rates will attract more domestic investment, but less foreign investment.
4. c.Investors will seek out investments with higher tax-sheltering benefits, even if they have a lower pre-tax rate of return.
5. d.Investment will increase because investors will undertake more projects in order to offset the lower after-tax return.

16

1. Why is the market process more likely to approve productive, and reject unproductive, projects than the political process?
2. a.When the political process is used, legislators have a strong incentive to oppose unproductive projects favored by well-organized interest groups.
3. b.In the market, a project will earn a profit regardless of whether people value it.
4. c.When the political process is used, if a project is favored by the majority, it must be productive.
5. d.In the market, projects will continue to be undertaken only if they generate revenues that are sufficient to cover their costs.

17

1. When government enterprises are funded or subsidized by taxes,
2. a.it will be difficult to determine whether consumers value the good or service more than its cost.
3. b.the benefits of the goods produced will always be less than the costs.
4. c.the benefits of the goods produced will always be greater than the costs.
5. d.the opportunity cost of producing the good or service will be lower because the government helped pay for it.

18

1. When goods are produced through government enterprises, their opportunity cost is
2. a.the tax revenues used to subsidize the government enterprises.
3. b.the reduction in private sector output that could have been produced with the resources utilized by the government enterprises.
4. c.zero, as long as the government can produce goods at a lower cost than the private sector.
5. d.zero, because the government is producing the goods instead of the private sector.

19

1. Which of the following correctly describes the external benefit resulting from an individual's purchase of a winter flu shot?
2. a.The flu shot is cheaper than the cost of treatment when you get the flu.
3. b.The flu shot reduces the likelihood others will catch the flu.
4. c.The income of doctors increases when you get the flu shot.
5. d.The flu shot reduces the likelihood you will miss work as the result of sickness; therefore, you will earn more income.

20

1. An externality is an example of
2. a.a market failure.
3. b.a monopoly.
4. c.a competitive market.
5. d.economic freedom.

21

1. Which of the following is a way that a firm might achieve a monopoly?
2. a.The dominant firm benefits from economies of scale as it grows, making it difficult for other smaller firms to compete.
3. b.The government gives a firm an exclusive license to produce a good or service.
4. c.The government imposes tariffs and quotas that prevent foreign firms from entering the market to compete.
5. d.all of the above.