Study Guide

Field 048: Social Studies—Economics
Sample Multiple-Choice Questions

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Objective 0001
Economic Concepts and Systems (Standard 1)

1. Marginal utility theory is based on which of the following assumptions?

  1. No change in consumption activities can make all consumers better off without making others worse off.
  2. The satisfaction households derive from consumption of a commodity declines as consumption of that commodity increases.
  3. The price of a commodity will decline when the supply of that commodity exceeds the demand.
  4. Households have a thorough understanding of how the economy works and learn quickly from purchasing mistakes.
Answer
Correct Response: B.
This question requires the examinee to demonstrate knowledge of scarcity, marginalism, opportunity cost, capital, the laws of supply and demand, productivity, and other economic terms and concepts. Marginal utility theory is concerned primarily with the changes in satisfaction that consumers obtain from consuming more or less of a given commodity. According to this theory, satisfaction declines as consumption of that product increases.
Objective 0001
Economic Concepts and Systems (Standard 1)

2. Unlike most economists, Joseph Schumpeter argued that business cycles produced more good than harm. Schumpeter's conviction stemmed primarily from his belief that business cycles:

  1. resulted from invention and innovation.
  2. prompted consumers to save discretionary income.
  3. reduced economic inequality.
  4. removed the underlying causes of inflation.
Answer
Correct Response: A.
This question requires the examinee to demonstrate knowledge of the history and development of the field of economics and the influence of major economic theorists (e.g., Adam Smith, Thomas Malthus, Karl Marx, John Maynard Keynes) on the formulation of public policy and the operation of national economies. In his writings, Joseph Schumpeter argued that the workings of the business cycle can best be seen as a process of "creative destruction" in which the forces of innovation cleared the way for the generation of new wealth.

Read the passage below; then answer the two questions that follow.

Scholars have offered various explanations for the inordinate length of the Great Depression. One of the more convincing is what might be called a structural unemployment interpretation. According to this analysis, the main growth industries of the interwar period were much more capital-intensive and required smaller amounts of labor than less expansive industries. Throughout the 1920s, there was a steady drop in the proportion of people working in manufacturing, mining, and agriculture. Many industries in these sectors were producing more goods than ever, but they needed fewer workers to do so because of advances in production technology.

Adjusting to these developments would have been troublesome under the most auspicious conditions. Unfortunately, these were scarcely the best of times, given weaknesses on the demand front, where a maldistribution of income had placed limits on consumer purchases—a problem that, by itself, had potentially devastating consequences in an economy that had become increasingly based on mass consumption. When the structural unemployment dilemma was added to this basic demand problem, conditions got considerably worse. As they did so, each of these problems reinforced one another in ways that dashed any hopes for an early recovery from the sharp economic downturn exacerbated by the stock market crash of 1929.

Objective 0002
Economic Research Skills (Standard 7)

3. Which of the following responses best describes the writer's main purpose in the passage?

  1. to illustrate the destructive consequences of the Great Depression for working people
  2. to compare major causes of the Great Depression
  3. to raise questions about which industries were most severely affected by the Great Depression
  4. to explain why the Great Depression resisted efforts to return to economic prosperity
Answer
Correct Response: D.This question requires the examinee to demonstrate knowledge of how to identify purpose, point of view, and central questions in economic documents and statements. In the opening sentence, the author notes that "[s]cholars have offered various explanations for the inordinate length of the Great Depression." The author then proceeds to explain why the structural unemployment interpretation is a powerful explanation of why the Great Depression lasted as long as it did.
Objective 0002
Economic Research Skills (Standard 7)

4. Which of the following types of evidence could best be used to support the writer's main argument in the passage?

  1. data on levels of unemployment in the national economy throughout the 1920s
  2. data on changes in consumer spending patterns during the 1920s
  3. data on employment levels in the fastest and slowest growing industries of the 1920s
  4. data on changes in the structure of the U.S. economy during the 1920s
Answer
Correct Response: C.
This question requires the examinee to demonstrate knowledge of how to analyze assumptions, logical validity, factual accuracy, evidence, and conclusions in economic arguments and interpretations. The provision of data on employment levels in the fastest and slowest growing industries of the 1920s would enable the author to establish the validity of the structural unemployment interpretation by showing that during this period higher levels of joblessness occurred in more capital-intensive industries.
Objective 0003
The Market Economy (Standard 2)

5. The equilibrium price of a commodity is the price at which:

  1. producers are willing to supply a commodity.
  2. quantity produced equals quantity supplied.
  3. consumers are willing to purchase a commodity.
  4. quantity demanded equals quantity supplied.
Answer
Correct Response: D.
This question requires the examinee to demonstrate knowledge of the operation of supply and demand, prices, and price elasticity in market economies. Equilibrium price is a stable point at which no forces are acting to raise or lower the price of a product because quantity demanded equals quantity supplied.
Objective 0003
The Market Economy (Standard 2)

6. Which of the following responses best describes a distinguishing characteristic of oligopolistic market structures?

  1. production of a single product
  2. limited nonprice competition between firms
  3. significant barriers to entry
  4. limited control over price by firms
Answer
Correct Response: C.
This question requires the examinee to demonstrate knowledge of the characteristics of pure competition, monopolistic competition, oligopoly, and monopoly market structures, and the benefits of competition. Oligopolistic market structures are characteristic of industries dominated by a few large firms. The resources and market power of these firms make it extremely difficult for new enterprises to enter the industry.
Objective 0004
Institutions and Operation of the National Economy (Standard 3)

7. In the circular flow model, households are on the:

  1. demand side of the factor market and the product market.
  2. demand side of the factor market and the supply side of the product market.
  3. supply side of the factor market and the product market.
  4. supply side of the factor market and the demand side of the product market.
Answer
Correct Response: D.
This question requires the examinee to demonstrate knowledge of the circular flow model of economic exchanges. In the circular flow model, households supply firms with capital, land, and labor in the factor market and serve as a source of demand in the product market through their purchases of goods and services.
Objective 0004
Institutions and Operation of the National Economy (Standard 3)

8. A period of deflation would likely have the most adverse effect on which of the following businesses?

  1. a manufacturing company that has a large inventory of unsold goods
  2. an agricultural enterprise that is seeking to negotiate a loan
  3. a transportation firm that is planning to replace its fleet of aging vehicles
  4. a mining company that has recently expanded its labor force
Answer
Correct Response: A.
This question requires the examinee to demonstrate knowledge of stages of the business cycle and the causes and effects of inflation, deflation, and unemployment on different groups in the economy. During a period of deflation—a decline in general price levels—a manufacturing company with a large inventory of unsold goods could only sell those goods at reduced prices—prices that, depending on the severity of deflationary forces, might be well below the cost of production.
Objective 0005
The Role of Government (Standard 4)

9. Which of the following ratios provides the best measure for assessing whether the size of the U.S. national debt poses a serious threat to the nation's economic well-being?

  1. debt-to-gross investment ratio
  2. debt-to-gross domestic product ratio
  3. debt-to-disposable personal income ratio
  4. debt-to-balance of payments ratio
Answer
Correct Response: B.
This question requires the examinee to demonstrate knowledge of the federal budget process, the national debt, and major areas of government spending. Gross domestic product (GDP) is the market value of all final goods and services produced in a country over a given period of time. A steadily rising debt-to-GDP ratio generally indicates that a country has serious economic problems that need to be addressed. If not, the government will face a situation in which meeting debt obligations requires severe cutbacks in spending that threaten its economic well-being.
Objective 0005
The Role of Government (Standard 4)

10. The federal government would most likely adopt a contractionary fiscal policy during periods when:

  1. firms are producing beyond their normal capacity.
  2. the ratio of consumer installment debt to personal income is decreasing.
  3. business inventories on hand are increasing.
  4. the cost of labor input per unit of output in manufacturing is decreasing.
Answer
Correct Response: A.
This question requires the examinee to demonstrate knowledge of factors influencing fiscal policy and the effects of fiscal policies on the U.S. economy. When firms are producing beyond their normal capacity, it generally indicates that consumer demand is strong and the economy is growing. There being little need during such periods for additional stimulus, it would be a good time for the government to reduce spending, particularly if the increased pace of economic activity is fueling inflationary forces.
Objective 0006
The International Economy (Standard 5)

11. A nation has a comparative advantage over another nation in the production of a specific good when it can:

  1. produce the good at a lower opportunity cost than the other nation.
  2. establish a larger market for the good than the other nation.
  3. produce the good at a lower fixed cost per unit than the other nation.
  4. sell the good at a lower price than that charged by the other nation.
Answer
Correct Response: A.
This question requires the examinee to demonstrate knowledge of interdependence, specialization, comparative advantage, balance of payments, and other basic terms and concepts related to international economics and trade. When examining international trade, economists distinguish between absolute advantage and comparative advantage. Absolute advantage refers to situations in which one country can produce a given product using fewer resources than another country. Comparative advantage refers to the relative opportunity cost of producing a given product—that is, the cost of foregoing the production of other products as a consequence of producing the product in question.
Objective 0006
The International Economy (Standard 5)

12. Increased capital mobility in the contemporary global economy is primarily a consequence of corporate efforts to take advantage of national differences in:

  1. corporate income taxes.
  2. the provision of public goods.
  3. the cost of factor inputs.
  4. currency exchange rates.
Answer
Correct Response: C.
This question requires the examinee to demonstrate knowledge of economic globalization and the benefits and costs of an interdependent international economy. Two of the major reasons that corporations transfer production facilities to other countries are to take advantage of lower labor costs and to obtain access to inexpensive raw materials used in the production process.
Objective 0007
Consumer Economics and Personal Finance (Standard 6)

13. Which of the following responses lists the four optimal steps in the budget development process in the order in which they should be performed?







Answer
Correct Response: D.
This question requires the examinee to demonstrate knowledge of how to create and maintain a budget and factors influencing financial planning through various stages of life. A major purpose of budgets is to help people achieve financial goals. When developing budgets, individuals should first define those goals. After estimating income and expenses, they will have the information needed to create a realistic savings plan that will enable them to realize their financial aims.
Objective 0007
Consumer Economics and Personal Finance (Standard 6)

14. Which of the following responses correctly lists three investment options on a risk spectrum ranging from the safest and most secure option to the most speculative and risky option?

  1. collectibles → income mutual funds → aggressive growth stocks
  2. high-quality corporate bonds → certificates of deposit → municipal bonds
  3. money market funds → growth mutual funds → commodities
  4. government savings bonds → real estate → government securities
Answer
Correct Response: C.
This question requires the examinee to demonstrate knowledge of the formulation of personal investment strategies, characteristics of various types of savings and investment options, and the risks and benefits associated with each type of investment. Although money market funds are not federally insured and the rate paid on money invested changes daily, they are less risky than growth mutual funds, which focus on equities that do not pay dividends and may not achieve the growth necessary to make them a good investment. Because of their price volatility, commodities are among the riskiest and most speculative of all investment options.
Objective 0008
Economics Instruction and Assessment (Standard 8)

15. An economics teacher is seeking to deepen student understanding of the concept of economic incentives. The teacher is most likely to help students achieve this learning objective by having them:

  1. explain how a high school student's decision to work 20 hours per week during the school year could reduce his or her lifetime income.
  2. analyze the effect on small-business owners of an increase in the minimum wage, a new tax policy, or a change in interest rates.
  3. assess the distribution methods used to allocate various goods and services such as parking spaces and tickets to popular art exhibits.
  4. examine the effect that changes in the structure of the economy have had on income for manufacturing jobs.
Answer
Correct Response: B.
This question requires the examinee to demonstrate knowledge of instructional strategies and resources for promoting student understanding of concepts and skills related to economics. Changes in labor costs, tax liabilities, and the costs of capital each create various incentives or disincentives for small business owners to expand the scope of their operations.