Macroeconomics ECO121
Practice Test For Selected Topics
Chapter 2
Resources and Scarcity, Production Possibilities, the Circular Flow of Income and Capitalism

The following questions have been altered and are the property of William Walstad in connection with the text of McConnell & Brue, Macroeconomics, 12th edition, McGraw Hill, 1993.

If you can answer the following questions, you are on your way to a successful exam. If you can't answer some of them don't be intimidated. It is our job to understand why the correct answer is correct before we sit for the exam. Come and ask me for help or ask in class.

  1. Which of the following is considered to be a factor of production?
    (a) money in a checking account.
    (b) a firm's common stock.
    (c) US savings bonds.
    (d) an auto plant.
  2. Money is not considered to be an economic resource because:
    (a) money is not a free gift of nature.
    (b) as such it is not productive.
    (c) the terms of trade can be determined in nonmonetary terms.
    (d) idle money balances do not earn interest income.
  3. If an economy is being productively efficient, then that means the economy is:
    (a) producing the products most wanted by society.
    (b) fully employing all of society's resources.
    (c) maximizing the returns to the factors of production.
    (d) using the least costly production techniques.
    (e) both (b) and (d) are correct.
  4. If an economy is being allocatively efficient, then that means the economy is:
    (a) using the least costly production techniques.
    (b) producing the goods most wanted by society.
    (c) fully employing all economic resources.
    (d) maximizing the returns to factors of production.
  5. The production possibilities curve represents which of the following?
    (a) the maximum amount of labor and capital available for production.
    (b) combinations of goods and services among which consumers are indifferent.
    (c) maximum combinations of goods available with fixed resources and technology.
    (d) the maxim rate of growth of capital and labor in an economy.

    Use the following production possibilities schedule to answer the next four questions.

    Production Possibilities
    ProductABCDEF
    Tanks012 345
    Autos 1000 950 850 650 350 0

  6. In moving form possibility C to possibility D, the marginal cost of a tank in terms of autos is:
    (a) 50
    (b) 100
    (c) 200
    (d) 300
  7. The opportunity cost of each additional tank in terms of autos:
    (a) remains constant.
    (b) falls as more tanks are produced.
    (c) increases as more tanks are produced.
    (d) cannot be measured.
  8. According to the production possibilities schedule, 4 tanks and 650 autos is:
    (a) attainable, but involves an efficient use of society's resources.
    (b) attainable, but would not be in the best interest of a strong national defense.
    (c) not attainable because it is not listed in the table.
    (d) not attainable because society does not have sufficient resources to produce this combination.
  9. Given the production possibilities schedule a combination of three tanks and 350 autos:
    (a) illustrates the tradeoff between tanks and autos.
    (b) is attainable, but involves the unemployment or inefficient use of some of society's resources.
    (c) cannot be produced by society, given it current level of resources and production technology.
    (d) is not attainable because this combination is not listed in the schedule.
  10. A movement along the production possibilities curve would imply that:
    (a) the labor force has grown.
    (b) productivity has increased.
    (c) society has chosen a different set of points.
    (d) productivity has declined.
  11. Increases in resources or improvements to resources through education or technology will tend to cause society's production possibilities curve to:
    (a) shift inward or to the left.
    (b) shift outward or to the right.
    (c) become horizontal.
    (d) become vertical.
  12. The production possibilities curve Bowes outward from the origin because:
    (a) opportunity costs decrease as the production of a good increases.
    (b) opportunity costs increase as the production of a good increases.
    (c) more production of one good results in more production of the other good.
    (d) resources are of uniform quality.
  13. The simple circular flow of income model shows that workers, entrepreneurs, and the owners of land and capital offer their services through:
    (a) product markets.
    (b) resource markets.
    (c) employment agencies.
    (d) business firms.

    Use the circular flow model to answer the next 2 questions
    Inside Loop = Counter Clockwise
    Outside Loop = Clockwise

  14. Flow #1 represents:
    (a) goods and services.
    (b) land, labor, capital and entrepreneurship.
    (c) personal consumption expenditures.
    (d) rent, wages, interest and profit.
  15. Flow #3 represents:
    (a) goods and services.
    (b) land, labor, capital and entrepreneurship.
    (c) personal consumption expenditures.
    (d) rent, wages, interest and profit.
  16. When society overallocates resources to the production of a product it means that:
    (a) investment in the product is declining.
    (b) opportunity cost of the product is declining.
    (c) marginal benefit is greater than the marginal cost.
    (d) marginal benefit is less than the marginal cost.


Back to Macroeconomics, ECO 121 Test Page