Question

1. A bank seeks a 4% real return on its loans and predicts a 4% annual rate of inflation. It should therefore charge a nominal interest rate of

Select one:

a. 1%

b. 4%

c. 8%

d. 12%

2. The central problem of every economic system is to

Select one:

a. redistribute income fairly.

b. increase the number of jobs available.

c. get people to cooperate effectively in using what is available to provide what is wanted.

d. get people to see that what is available is all that is necessary.

3. Fill in the blanks: Transaction costs are likely to be ________ when property rights are ________ clearly defined.

Select one:

a. lower; less

b. higher; more

c. lower; more

d. Trick question: there is no causal relationship between transaction costs and property rights.

4. A stable rule of law

Select one:

a.

invariably turns losses into profits.

b.

allows people to cooperate more effectively with one another.

c.

converts price searchers into price takers.

d.

renders the law of comparative advantage ineffective.

5. When demand for a product increases,

Select one:

a.

suppliers change their plans.

b.

demanders change their plans.

c.

the price changes.

d.

all of the above occur.

6. Which statement best describes the relationship between scarcity and shortage?

Select one:

a.

Neither scarcity nor shortages will exist if money prices are allowed to determine who gets what.

b.

Scarcity and shortages are unavoidable as long as money prices are allowed to determine who gets what.

c.

Scarcity is an inescapable fact of life but shortages are avoidable.

d.

Shortages are an inescapable fact of life but scarcity can be eliminated.

7. Pencils are produced in the market economy

Select one:

a.

only because people need pencils.

b. only because pencil production is centrally planned, from the growing of the trees and mining of the graphite to the final stages of pencil assembly.

c.

even though the final assemblers of pencils have no idea how to produce the paint, graphite, wood, rubber, and metal ferrules.

d.

by government decree.

Answer 1

1. c. 8%
(Nominal rate of interest = real return + inflation rate = 4 + 4 = 8%)

2. c. get people to cooperate effectively in using what is available to provide what is wanted.
(The central problem of every economy deals with scarcity of resources so government focuses on providing scarce resources in such a way that all wants are satisfies.)

3. c. lower; more
(Transactions costs are low when property right are more clearly defined.)

4. b. allows people to cooperate more effectively with one another.
(A stable rule of law means there is social and legal stability in the economy so it allows people to cooperate more effectively with one another.)

5. d. all of the above occur.
(All the mentioned factors occur when demand changes.)

Note: Post 4 MCQs at a time.