American Economic System Review
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Course Introduction
This course offers an in-depth exploration of the American economic system, examining its foundations, development, and current structure. Students will analyze the roles of consumers, businesses, and government, as well as the interplay of supply and demand in markets. The course covers topics such as economic cycles, fiscal and monetary policy, labor markets, financial institutions, and the impact of globalization. Emphasis is placed on understanding how economic decisions are made within the United States, how economic indicators are interpreted, and the implications for both individuals and the broader society.
Recommended Textbook
Economics USA 8th Edition Edition by
Nariman Behravesh
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Page 2
Chapter 1: What is Economics
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Q1) In addition to its fertility,the value of land as an economic resource may stem from its
A) location.
B) mobility.
C) omniscience.
D) gender.
E) conscience.
Answer: A
Q2) Which of the following is the best example of land?
A) mineral deposits
B) human efforts
C) buildings and equipment that contribute to production
D) accounts receivable
E) goods and services purchased by households for their enjoyment
Answer: A
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Page 3
Chapter 2: Markets and Prices
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Q1) The fact that there is no way to prevent citizens from benefiting from expenditures on national defense,whether they pay taxes or not,is an example of a(n)
A) unfair distribution of income.
B) external economy.
C) external diseconomy.
D) public good.
E) transfer payment.
Answer: D
Q2) A supply curve shifts with changes in
A) technology.
B) income.
C) tastes.
D) the number of buyers.
E) market price.
Answer: A
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Chapter 3: The Business Firm: Organization,motivation,and
Optimal Input Decisions
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Q1) In economic analysis,the long run
A) is a period of time during which a firm may vary one or two of its inputs.
B) represents a planning horizon for a firm currently making an investment decision.
C) exists when all inputs are frozen.
D) is never realized.
E) is the time a firm needs to vary output to respond to changes in demand.
Answer: B
Q2) Under diminishing marginal returns,as the amount of a variable input is reduced,the marginal product of a dollar's worth of the input will
A) exceed total product.
B) exceed average cost.
C) rise.
D) fall.
E) remain the same, but total input cost will rise.
Answer: C
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Page 5
Chapter 4: Getting Behind the Demand and Supply Curves
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Q1) The law of diminishing marginal utility means that as more of a commodity is consumed,total utility will
A) rise but at a declining rate.
B) fall steadily, eventually becoming negative.
C) remain unchanged until the individual is satiated.
D) generally be less than marginal utility.
E) fall when marginal utility falls.
Q2) A $1 price increase would reduce the quantity demanded in this market by A) zero.
B) one.
C) two.
D) three.
E) four.
Q3) As consumption is increased from 5 to 7 units,marginal utility is A) rising.
B) falling.
C) constant.
D) zero.
E) negative.
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Page 6
Chapter 5: Market Demand and Price Elasticity
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Q1) When a demand curve is price inelastic
A) a reduction in price increases the amount spent on the good.
B) the quantity demanded will increase even if price remains constant.
C) a 1 percent increase in price will result in a less than 1 percent decrease in the quantity demanded.
D) the change in quantity will always be greater than the change in price.
E) demand must be falling.
Q2) Government aid to agriculture in the United States
A) has not been effective in increasing the net worth of farm households.
B) has eliminated acreage allotment programs.
C) has restricted most agricultural exports to less developed countries.
D) has been costly and inefficient.
E) made the farmers responsible for storing the surpluses.
Q3) Which of the following values would most likely represent the cross elasticity of demand between butter and margarine? A) -5.0
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Chapter 6: Economic Efficiency,market Supply,and Perfect Competition
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Q1) At what price per unit would the firm find it no more profitable to operate than NOT to operate?
A) $1
B) $2
C) $3
D) $4
E) $5
Q2) Profit-maximizing firms should increase output to the point where
A) total revenue is largest.
B) total revenue just exceeds total cost.
C) an increase in revenue is just offset by an increase in cost.
D) fixed costs are covered.
E) total cost is minimized.
Q3) Compared to its initial position,a typical firm in new short-run equilibrium
A) finds its average fixed cost higher.
B) increases its plant size.
C) finds its marginal cost higher.
D) makes less profit.
E) reduces average variable cost.
Page 8
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Chapter 7: Monopoly and Its Regulation
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Q1) Firms that become monopolies because their operating systems and design standards gain widespread adoption are monopolies because of A) control over basic inputs.
B) government action.
C) network effects.
D) economies of scale.
E) product differentiation.
Q2) Schumpeter and Galbraith argue that,in a dynamic sense,innovation is less likely in A) monopoly.
B) pure oligopoly.
C) monopolistic competition.
D) perfect competition.
E) differentiated oligopoly.
Q3) If the demand curve is horizontal,marginal revenue must be the same as A) total revenue.
B) quantity.
C) average costs.
D) price.
E) sales.
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Page 9
Chapter 8: Monopolistic Competition,oligopoly,and Antitrust Policy
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Q1) The price leadership model that applies when the firm that changes price is regarded as an accurate interpreter of industry cost and demand conditions is the ________ model.
A) marginal firm
B) cartel
C) perceived interdependence
D) barometric firm
E) dominant firm
Q2) The large number of firms in a monopolistically competitive market ensures that A) there is no room for new competitive entrants.
B) all firms charge identical prices.
C) product differentiation will disappear and output becomes homogeneous.
D) pricing and production actions by a single firm do not lead to retaliatory actions by rival firms.
E) collusion among producers become commonplace.
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Chapter 9: Pollution and the Environment
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Q1) As a result of this government action,we would expect that the price of glass produced by Crystal would
A) fall steeply.
B) fall slightly.
C) stay about the same.
D) rise.
E) do any of the above, since government action may either raise or lower costs.
Q2) During the 1980s,environmentalists
A) were pleased with the Reagan administration's environmental policy.
B) argued for the elimination of the EPA.
C) argued for reduced water and air quality standards as being economically more desirable.
D) accused the Reagan administration of emasculating the EPA.
E) raised large amounts of money to donate to pollution abatement programs.
Q3) The price system functions most effectively when
A) supply equals demand.
B) there is no divergence between private costs and social costs.
C) prices equal output.
D) external diseconomies equal external economies.
E) there is a complete absence of direct regulation.
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Chapter 10: The Supply and Demand for Labor
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Q1) Of those listed below,the main factor contributing to the downfall of the New York Herald Tribune was
A) poor management.
B) the fear of new technology among union representatives.
C) an unwillingness by the newspaper to install new technology.
D) an unwillingness of Tribune representatives to compromise.
E) competition from the Times, News, and Post.
Q2) This is an equilibrium because
A) no worker wishes to work for a lower wage.
B) a higher wage would produce an excess supply; a lower wage would produce an excess demand.
C) at a wage above this, employers are not willing to hire any workers.
D) this wage is consistent with union ambitions.
E) higher or lower wages generate shifts in the supply and demand curve to restore that wage.
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Chapter 11: Interest,rent,and Profit
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Q1) The basic difference between rent and other payments for productive inputs is that
A) a reduction in rent will not influence the availability of the input; reductions in other input payments will reduce their availability.
B) rent is earned income to the input owner; other input payments are unearned.
C) rent is payment for use of an input; other input payments are made to obtain input services.
D) rent is payment for an input that has alternative uses; other input payments are for unique inputs.
E) There are no basic differences among these payments.
Q2) Profits from innovation represent greater than normal returns to capital,because in the case of innovation
A) it is extremely difficult to calculate an expected rate of return.
B) borrowers are often taken advantage of by lenders.
C) no one wants to lend innovators any money to finance their businesses.
D) it leads to the formation of a natural monopoly.
E) the rate of return generally exceeds the interest rate.
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13
Chapter 12: Poverty,income Inequality,and Discrimination
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Q1) Those who argue against income inequality say that
A) inequality does not help the rich very much and may well reduce society's output.
B) a more equal distribution of income raises the productivity of society because the rich do not want to work and the poor cannot.
C) the poor are important patrons of new and high quality products that benefit the entire society.
D) capital formation would be greater because the poor save more since they spend only on necessities, while the rich squander their incomes on conspicuous consumption of useless goods.
E) income inequality leads to political inequality and reduced opportunity for advanced education and training.
Q2) Which of the following government programs provides goods or services rather than cash payments to the poor?
A) Aid to Families with Dependent Children
B) unemployment insurance
C) Social Security
D) Medicaid
E) old-age insurance
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14
Chapter 13: Economic Growth
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Q1) Improvements in agricultural technology will
A) raise the price of food.
B) lower the total product of labor.
C) raise the marginal product of labor.
D) lower the output of food.
E) raise the rate of starvation.
Q2) The law of diminishing marginal returns
A) requires that all inputs be varied proportionately.
B) states that as an input is increased (all other inputs held constant), total output falls after some point.
C) is relevant only when there is significant unemployment in the economy.
D) states that if more and more of a resource is used (the quantities of other resources being held constant), after some point, the average, marginal, and total products all become equal.
E) states that as a variable input is increased (with other inputs remaining constant), beyond some point the marginal product of the variable input falls.
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15
Chapter 14: Public Goods and the Role of the Government
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Q1) When companies and newscasters say that any additional excise tax will just be "passed on to the consumer," they are correct only if
A) the quantity demanded is completely insensitive to the price.
B) the amount of the tax is relatively small.
C) producers do not want to absorb any of the tax themselves.
D) the government allows firms to do that.
E) the tax reduces the equilibrium quantity of the good.
Q2) If external diseconomies exist in an industry,the
A) market price is too high and should be reduced.
B) industry is producing a public good.
C) socially optimal output level is below the equilibrium output level.
D) industry is perfectly competitive.
E) industry demand curve should be increased and the industry should be subsidized.
Q3) Which of the following taxes can be related to the benefit principle?
A) personal income tax
B) estate tax
C) gasoline tax
D) corporate income tax
E) inheritance tax
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Page 16
Chapter 15: National Income and Product
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Q1) Government services are valued in GDP at cost rather than at their market prices because
A) price changes occur frequently as a result of inflation, which distorts the measurement of GDP.
B) it is necessary to avoid counting intermediate goods in GDP.
C) otherwise government and private transfer payments would end up being counted in GDP.
D) most government services produced are not purchased by their users.
E) the price of a service is not always a measure of the worth of a service.
Q2) Gross domestic product (GDP)
A) equals the total wages paid in a year.
B) is a measure of government output.
C) equals the total value of final goods and services produced in a year.
D) is the sum of all goods, both final and intermediate.
E) is an obsolete economic indicator of inflation.
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Chapter 16: Business Fluctuations and Unemployment
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Q1) A major purpose of Keynes's General Theory was to explain
A) how a less-than-full employment equilibrium was possible in a capitalist economy.
B) the automatic mechanisms in a capitalist society that generate a high level of employment.
C) how supply creates its own demand.
D) the close interrelationships between the savers and investors in any society.
E) why Marx's predictions about capitalism were inevitable.
Q2) In the short run,increases in product prices increase firms' ________ per unit.
A) production costs
B) employment
C) sales
D) capacity
E) profit
Q3) If aggregate demand shifts to the right
A) unemployment increases.
B) price levels fall.
C) real output rises.
D) both the demand for money and interest rates fall.
E) consumers or investors must have decided to decrease their spending.
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Page 18
Chapter 17: The Determination of National Output and the Keynesian Multiplier
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Q1) The current equilibrium level of GDP is ________ billion.
A) $2,000
B) $2,100
C) $2,200
D) $2,300
E) $2,400
Q2) Which of the following was the most important force in bringing an end to the Great Depression?
A) the natural resilience of the economy
B) Roosevelt's New Deal policies
C) U.S. involvement in World War II
D) a delayed impact from increased business investment in the early 1930s
E) falling wages and prices
Q3) If output determines income and income determines spending
A) an equilibrium is impossible in the economy.
B) intended spending and actual spending are always equal.
C) the C + I line is the same as the 45-degree line.
D) the levels of both national output and prices rise indefinitely.
E) the level of GDP changes unless intended spending equals GDP.
Page 19
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Chapter 18: Fiscal Policy and National Output
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Q1) Which of the following events would correct the condition shown?
A) an increase in spending by the private sector
B) a decrease in potential output because of a natural disaster
C) an increase in wages and other input prices
D) an increase in the money supply by the government
E) an increase in government spending accompanied by a tax cut
Q2) Discretionary fiscal policy is
A) the responsibility of the Federal Reserve System.
B) designed to increase the size of recessionary and inflationary gaps.
C) focused on making the 45-degree line more vertical.
D) intended to ensure continuing corporate dividends under changing sales conditions.
E) implemented through changes in government expenditures and tax rates.
Q3) The structural features of our economy that work to offset the effects of the business cycle are called
A) tools of discretionary policy.
B) public works programs.
C) full-employment bills.
D) automatic stabilizers.
E) countercyclical propensities.
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Page 20
Chapter 19: Inflation
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Q1) The maximum national output and employment occur when the economy's aggregate demand curve intersects the aggregate supply curve in
A) the horizontal range.
B) the upward-sloping range.
C) the vertical range.
D) all three ranges.
E) a manner impossible to determine from the diagram.
Q2) The redistributive effects of high inflation rates tend to favor
A) the saver who keeps money in a cookie jar.
B) those who work under long-term contracts.
C) no one because the prices of goods and services rise.
D) pensioners and others who live on fixed incomes.
E) speculators in assets such as land, art, and bullion.
Q3) If national output is fixed and there is a 10 percent increase in total spending,the price level will
A) fall by 10 percent.
B) remain constant.
C) rise by 10 percent.
D) rise by 10 percent times the multiplier.
E) rise by 10 percent times the dollar value of output.
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Chapter 20: Money and the Banking System
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Q1) The basic principle behind fractional-reserve banking is that
A) on a daily basis new deposits tend to equal withdrawals.
B) loans and investments are made with funds advanced by bank owners.
C) banks hold reserves either in the form of cash or deposits with the Federal Reserve banks.
D) a bank's assets are equal to its liabilities plus net worth.
E) there is a legal limit on the amount of reserves banks must retain against their loans.
Q2) To be considered money,a financial asset must
A) be convertible into gold or silver.
B) be coins, currency, or fractional reserve.
C) be issued by the Federal Reserve System.
D) serve as a medium of exchange, store of value, and standard of value.
E) be kept in banks.
Q3) Bank X has excess reserves of
A) $3,000,000.
B) $2,000,000.
C) $1,667,000.
D) $1,000,000.
E) $0.
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Page 22
Chapter 21: The Federal Reserve and Monetary Policy
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Q1) Over the 2001-03 period,the Fed steadily reduced the discount rate to 2 percent.These moves suggest that monetary policy was
A) selective.
B) redundant.
C) tight.
D) autonomous.
E) easy.
Q2) Reducing bank reserves would be an appropriate measure
A) during a recession.
B) to balance the government budget.
C) to contain strong inflationary pressures.
D) to promote an increased level of business borrowing.
E) to increase the M1 money supply.
Q3) It has been estimated that the full economic effects of monetary policy are A) realized almost immediately.
B) realized in slightly over one year.
C) realized in about one to three months.
D) unnoticed because money policy has little overall economic effect.
E) imperceptible because of the relatively minor nature of these policies.
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Page 23
Chapter 22: Supply Shocks and Inflation
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Q1) Inflationary conditions that emerge because of specific resource shortages or scarcities are called ________ inflations.
A) cost-overrun
B) sedentary-spending
C) supply-side
D) demand-side
E) parity-price
Q2) A general criticism of the Kennedy-Johnson guidelines was that they
A) required price reductions equal to the rate of increase in overall productivity.
B) permitted no increases in wages or prices regardless of the rate of inflation.
C) resulted in inefficiency, waste, and a loss of economic freedom over time.
D) applied solely to the steel industry, rather than to the economy at large.
E) were long-run remedies and thus of no help during emergencies.
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24
Chapter 23: Productivity,growth,and Technology Policy
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Q1) Economists are concerned about a slowdown in productivity because of the risk of higher inflation rates and a(n)
A) loss of our ability to diversify in manufacturing.
B) increased dependence on imported raw materials.
C) decline in service industries that depend on microelectronics technology.
D) potential decline in technological change that could affect our future rate of growth.
E) fear that it will lead to an influx of unskilled workers replacing domestic workers.
Q2) The relationship between the amount of income tax revenue collected and the marginal tax rate is called the
A) total revenue curve.
B) aggregate supply curve.
C) capital gains curve.
D) balanced budget multiplier.
E) Laffer curve.
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Chapter 24: Surpluses,deficits,public Debt,and the Federal Budget
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Q1) The debt incurred in World War II
A) was fully paid by taxes.
B) was paid by war bonds in the 1940s.
C) has never been fully paid and continues to be part of our current national debt.
D) was negligible because the war effort was covered by our excess military capacity.
E) was paid off by reparations payments from the defeated nations.
Q2) The 1990 budget agreement between President Bush and Congress incorporated
A) an increase in both the income tax and some excise tax rates.
B) substantial reductions in defense spending with no change in taxes.
C) a significant increase in the money supply to cover the revenue shortfall.
D) a line-item veto option the president can use to ensure a balanced budget.
E) a supply-side tax cut designed to improve worker incentives.
Q3) Supply-siders argue that federal budget surpluses should be used to
A) pay down the national debt.
B) increase government spending on education and health care.
C) finance tax reductions.
D) eliminate the deficit in the balance of payments.
E) increase the money supply.
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Chapter 25: Monetary Policy,interest Rates,and Economic Activity
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Q1) In the United States,the quantity of money is determined
A) entirely by commercial banks through their lending procedures.
B) entirely by the public through their willingness to hold currency.
C) primarily by the amount of gold flowing into or out of the country.
D) primarily by Congress, which legislates the amount of money to be printed by the Treasury.
E) primarily by the Federal Reserve but to some degree by the private sector.
Q2) The data on the circulation velocity of money since 1920 indicate that the velocity
A) has steadily decreased over time.
B) is quite stable in the short run.
C) tends to increase during depressions and decrease during booms.
D) has been fairly stable over the long run but not over the business cycle.
E) has been directly proportional to GDP.
Q3) In a Keynesian model,a decrease in the money supply
A) causes interest rates to fall.
B) shifts the investment function upward.
C) shifts the C + I + G + (X - M ) line downward.
D) leads to an increase in the GDP.
E) has no effect on the level of economic activity.
Page 27
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Chapter 26: Controversies Over Stabilization Policy
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Q1) When a central bank is required to provide enough information for markets and the public to understand and evaluate what the monetary authorities are doing,the central bank must have adopted a monetary policy framework known as
A) the cult of personality.
B) time inconsistency.
C) menu pricing.
D) functional finance.
E) inflation targeting.
Q2) Both the new Keynesians and traditional Keynesians would disagree with which of the following ideas?
A) Prices and wages tend to adjust slowly in the short run.
B) Real GDP adjusts to changes in aggregate demand.
C) Discretionary monetary and fiscal policies are necessary to keep the economy stabilized.
D) Changes in business and consumer spending represent a substantial source of economic instability.
E) Markets clear continuously.
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28
Chapter 27: International Trade
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Q1) If the U.S.government were to impose a quota on shoes imported from Italy,the
A) price of shoes in the United States would remain the same but the quantity bought would rise.
B) United States would reduce its export of shoes.
C) price of shoes in Italy would rise.
D) total quantity of shoes purchased (both domestically produced and imported) would decline in the United States.
E) revenue raised would exceed that from a tariff (which would have had the same effect on the shoe market).
Q2) Which of the following can be inferred from the table?
A) It costs the United States 5 billion barrels of oil for every 1 billion bushels of wheat.
B) The Arab countries have an absolute advantage in both oil and wheat.
C) It cost the Arabs 1 barrel of oil for every 0.10 bushel of wheat.
D) The United States has a comparative advantage in both oil and wheat.
E) It costs the United States 1 barrel of oil for every 1.25 bushels of wheat.
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29
Chapter 28: Exchange Rates and the Balance of Payments
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Q1) Globalization
A) affects primarily goods-producing industries.
B) is solely a late twentieth-century phenomenon.
C) reduces the volume of international trade.
D) faces little opposition within developed countries of the world.
E) leads to greater integration of the world economy.
Q2) If under freely fluctuating exchange rates,1 U.S.dollar exchanges for either 9 Swedish krona or 1.7 Swiss francs,1 Swedish krona exchanges for how many Swiss francs?
A) 0.111
B) 0.189
C) 0.588
D) 1.000
E) 5.294
Q3) Evidence clearly shows that the process of globalization leads to
A) fewer jobs.
B) reduced living standards.
C) a greater international division of labor.
D) more disparity in the international distribution of labor.
E) slower worldwide economic growth.
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Page 30