Review Questions (Chapter 2) for Econ111

1.

Which of the following is FALSE, regarding economics as a science? a. Economic knowledge is obtained through the scientific method, just as in any other science. b. It is difficult to conduct experiments in economic matters. c. Economists pay close attention to natural experiments resulting from historical events. d. Economic theories represent irrefutable facts.

---

2.	Economists use assumptions in order to: a. recreate real situations accurately, with all their complexity. b. avoid dealing with issues they would rather not talk about. c. simplify economic theories, so as to make it possible to answer economic questions. d. make their theories more realistic.

---

3.	Economic models are: a. simplified versions of economic theories. b. created by making assumptions. c. usually composed of diagrams and equations. d. all of the other options are true.

---

4.

All of the following are characteristics of the Circular Flow Model of the economy, EXCEPT: a. the model has two markets: one for goods and services and one for factors of production. b. the model includes two sectors: the Firms sector and the Households sector. c. the model describes two circular flows: one for inputs and one for resources. d. the two flows described by the model move in opposite directions.

---

5.

The circular flow model of the economy demonstrates that: a. the economy actually has only two sectors: firms and households. b. dollars in the economy are used over and over in an endless cycle. c. firms produce and provide factors of production. d. government is the source of revenue for households to purchase goods and services from firms.

---

6.

Which of the following is true regarding the Production Possibilities Frontier Model of the economy? a. Any point along the PPF represents an efficient level of production. b. Any point in the area below the PPF represents a combination of production that is not feasible. c. The opportunity cost of producing one more unit of one of the goods represented in the PPF remains the same at any point along the PPF. d. Increases in the resources available for production will cause the PPF to shift towards the origin.

---

7.	Economic growth in the economy can be portrayed in the Production Possibilities Frontier model as a: a. movement up and to the left along the PPF. b. shift of the PPF away from the origin. c. movement down and to the right along the PPF. d. shift of the PPF towards the origin.

---

8.	Microeconomics is the study of: a. how governments can get the economy out of a recession. b. economy-wide phenomena, including inflation, unemployment, and economic growth. c. how households and firms make decisions and how they interact in markets. d. how governments can reduce inflation.

---

9.

Which of the following is an example of a normative statement? a. Higher interest rates will cause people to borrow and invest less. b. The government should increase spending during recessions, so that the economy recovers quickly. c. When the price of a good increases, consumers respond by reducing the quantity that they want to purchase of the good. d. Over the past 50 years, the number of women that participate in the labor force has increased dramatically.

---

10.

Economists tend to disagree with each because: a. different economists espouse different theories, so they believe different things are going on in the economy. b. different economists make different assumptions, leading them to different conclusions in economic matters. c. different economists have different values and priorities in economic matters. d. all the other options are true.