Question

1) According to Adam Smith, an economy of people making decisions based on self interest would

Select one:

a. lead to economic warfare as consumers, workers and employers would never come to any agreement.

b. create a chaotic and conflicted economy.

c. lead to socialism, thus Smith argued for governmental controlled prices and wages.

d. lead to a "harmony of interests".

2) An economic model is defined as:

Select one:

a. data adjusted for irrational actions.

b. a simplified representation of the way in which facts are related.

c. a value judgment.

d. a presentation of all relevant real-world variables.

3) Adam Smith argued that

Select one:

a. governments needed to control markets.

b. markets are effective in the allocation of resources and goods.

c. lower wages were bad for the economy.

d. lower interest rates were bad for the economy.

Answer 1

1. d. lead to a "harmony of interests".

Self-interest will drive people to buy what they need while produce goods that others need. Thus People will inadvertently meet society’s requirements while pursuing their self-interest devoid of government interference.

2. a simplified representation of the way in which facts are related.

Economic models are simplified descriptions pertaining to reality.

3.b. markets are effective in the allocation of resources and goods.

(Affinity of free markets to adjust themselves through competition, supply and demand, and self-interest as argued by Adam smith)