Question 1

The circular-flow diagram is a
A)visual model of the economy.
B)visual model of the relationships among money, prices, and businesses.
C)model that shows the effects of government on the economy.
D)mathematical model of how the economy works.

Accepted Answer

The circular-flow diagram is a visual model that represents the flow of goods and services and factors of production between households and businesses in the economy. It is a simplified representation of the functioning of the economy.

Question 2

In the simple circular-flow diagram, the participants in the economy are
A)firms and government.
B)households and firms.
C)households and government.
D)households, firms, and government.

Accepted Answer

The simple circular-flow diagram includes two participants in the economy: households (consumers) and firms (producers). Households provide the factors of production (land, labor, capital, and entrepreneurship) to firms, in exchange for wages, rent, interest, and profits. Firms use these factors of production to produce goods and services, which they sell to households, generating revenue in the form of sales. Therefore, the correct answer is B, households and firms.

Question 3

In the circular-flow diagram, firms produce
A)goods and services using factors of production.
B)output using inputs.
C)factors of production using goods and services.
D)Both (a) and (b) are correct.

Accepted Answer

Firms in the circular-flow diagram produce goods and services using inputs (factors of production) and distribute the output to households in exchange for payment. Therefore, both (a) and (b) are correct.

Question 4

A circular-flow diagram is a model that
A)helps to explain how participants in the economy interact with one another.
B)helps to explain how the economy is organized.
C)incorporates all aspects of the real economy.
D)Both (a) and (b) are correct.

Accepted Answer

A circular-flow diagram helps to explain how participants in the economy interact with one another and how the economy is organized. It does not incorporate all aspects of the real economy, but it does provide a simplified model to understand key economic relationships.

Question 5

Which of the following statements about the circular-flow diagram is correct?
A)One must imagine that the economy operates without money in order to make sense of the diagram.
B)The diagram leaves out details that are not essential for understanding the economic transactions that occur between households and firms.
C)The government cannot be excluded as a decision maker in a circular-flow diagram.
D)All of the above are correct.

Accepted Answer

The circular-flow diagram is a simplified representation of the economy that includes only the essential elements of economic transactions between households and firms. Money is crucial to modern economies and is, therefore, included in the diagram. While the government can be an important player in the economy, its inclusion is not necessary to understand the basic workings of the circular-flow diagram. Choice A is incorrect because the diagram does take money into account. Choice D is incorrect because Choice A is incorrect and Choice C is only partially correct.

Question 6

Another term for factors of production is
A)inputs.
B)output.
C)goods.
D)services.

Accepted Answer

Factors of production refer to the resources such as land, labor, capital, and entrepreneurship that are required to produce goods and services. Hence, factors of production are also known as inputs. Option B, C, and D are not synonymous with factors of production.

Question 7

Which of these terms are used interchangeably?
A)"goods and services" and "inputs"
B)"goods and services" and "factors of production"
C)"inputs" and "factors of production"
D)"land, labor, and capital" and "goods and services"

Accepted Answer

"Inputs" and "factors of production" are often used interchangeably to refer to the resources that go into producing goods and services. "Goods and services" and "factors of production" are not typically used interchangeably as they refer to different elements of the production process. "Goods and services" and "inputs" can be related in the sense that inputs are used to produce goods and services, but they are not typically used interchangeably. "Land, labor, and capital" are a specific set of factors of production and are not typically used interchangeably with "goods and services."

Question 8

Economists build economic models by
A)generating data.
B)conducting controlled experiments in a lab.
C)making assumptions.
D)reviewing statistical forecasts.

Accepted Answer

Economists build economic models by making assumptions based on certain economic factors and variables. These assumptions help in identifying the cause-and-effect relationships between various economic variables and predicting the outcomes of different economic situations. Generating data and reviewing statistical forecasts are important for validating the model assumptions but are not the primary means of building economic models. Conducting controlled experiments in a lab may be feasible for some specific economic phenomena, but it is not a common method for building economic models.

Question 9

The circular-flow diagram
A)is an economic model.
B)incorporates two types of decision makers: households and firms.
C)represents the flows of inputs, outputs, and dollars.
D)All of the above are correct.

Accepted Answer

The circular-flow diagram is an economic model that incorporates households and firms as decision makers and represents the flows of inputs, outputs, and dollars. Therefore, all of the above choices are correct.

Question 10

The circular-flow diagram is an example of
A)a laboratory experiment.
B)an economic model.
C)a mathematical model.
D)All of the above are correct.

Accepted Answer

The circular-flow diagram is a visual representation of the flow of goods and services and factors of production in an economy. It is a simplified economic model used to explain how the economy works. While it may be used in laboratory experiments or mathematical models, it is primarily an economic model.

Question 11

In the circular-flow diagram,
A)firms own the factors of production.
B)the factors of production are labor, land, and capital.
C)the factors of production are also called "output."
D)All of the above are correct.

Accepted Answer

The factors of production are labor, land, and capital. Firms may own these factors, but not necessarily. The factors of production are not the same as output, which is what is produced using the factors. Therefore, options A and C are incorrect.

Question 12

Factors of production are
A)the mathematical calculations firms make in determining their optimal production levels.
B)social and political conditions that affect production.
C)the physical relationships between economic inputs and outputs.
D)inputs into the production process.

Accepted Answer

Factors of production are the inputs into the production process, including land, labor, capital, and entrepreneurship. These are the resources that firms use to create goods and services, and they are essential for economic growth and development.

Question 13

Factors of production are
A)used to produce goods and services.
B)also called output.
C)abundant in most economies.
D)assumed to be owned by firms in the circular-flow diagram.

Accepted Answer

Factors of production are resources such as labor, land, capital, and entrepreneurship that are used in the production of goods and services. They are not output themselves, but the inputs used to create output. The availability of factors of production varies in different economies, and they can be owned by households, firms, or the government.

Question 14

Economic models
A)are people who act out the behavior of firms and households so that economists can study this behavior.
B)are usually detailed replications of reality.
C)incorporate simplifying assumptions that often contradict reality, but also help economists better understand reality.
D)are useful to researchers but not to teachers because economic models omit many details of the real-world economy.

Accepted Answer

Economic models are simplifications of the real economy, allowing economists to study specific aspects of economic behavior. Therefore, they will inherently contradict reality in some ways, but this is necessary to isolate specific variables and gain a better understanding of how they interact.

Question 15

Which of the following statements is correct?
A)Few economic models incorporate assumptions.
B)Different economic models employ different sets of assumptions.
C)Good economic models attempt to mimic reality as closely as possible.
D)Economic models, to be accepted, must be tested by conducting experiments.

Accepted Answer

Different economic models are based on different assumptions, which may be appropriate for specific situations or phenomena. It is not feasible for economic models to mimic reality perfectly, as there are always limitations in the available data and understanding of the system being modeled. Moreover, economic models cannot be tested through experiments like other empirical sciences because controlled experiments may be either impossible or unethical within the bounds of the social sciences.

Question 16

Which of these statements about economic models is correct?
A)For economists, economic models provide insights about the world.
B)Economic models are built with assumptions.
C)Economic models are often composed of equations and diagrams.
D)All of the above are correct.

Accepted Answer

All of the statements are correct. Economic models are built with assumptions in order to simplify the complex reality of economic systems. These models are often composed of equations and diagrams which allow for a quantitative analysis of economic issues. For economists, economic models provide insights and predictions about the behavior of economic actors and the potential impacts of economic policies.

Question 17

In constructing models, economists
A)leave out equations, since equations and models tend to contradict one another.
B)ignore the long run, since models are useful only for short-run analysis.
C)sometimes make assumptions that are contrary to features of the real world.
D)try to include every feature of the economy.

Accepted Answer

Economists sometimes make assumptions that are contrary to features of the real world in order to simplify their models and make them more tractable. This is necessary because building a model that includes every feature of the economy would be too complex to analyze and understand. Therefore, economists have to strike a balance between realism and simplicity when constructing models. A model that is too simplistic may not capture important economic relationships, while a model that is too complex may be too difficult to analyze and understand.

Question 18

In the circular-flow diagram, which of the following is not a factor of production?
A)labor
B)land
C)capital
D)money

Accepted Answer

Money is not a factor of production, but rather a medium of exchange used to facilitate transactions between consumers and producers. It is not used to create goods or services, but rather to represent the value of those goods and services in the economy.

Question 19

Economic models are built with
A)recommendations concerning public policies.
B)facts about the legal system.
C)assumptions.
D)statistical forecasts.

Accepted Answer

Economic models are built on assumptions about the behavior of individuals, firms, and markets. These assumptions help simplify complex economic systems and make them easier to understand and analyze. The models can then be used to make predictions and evaluate different policy options. However, these models are only as good as the assumptions they make, and it is important to carefully consider the validity of those assumptions. Economic models may use statistical forecasts or include facts about the legal system, but those are not the cornerstone of the model-building process.

Question 20

Which two groups of decision makers are included in the simple circular-flow diagram?
A)markets and government
B)households and government
C)firms and government
D)households and firms

Accepted Answer

The simple circular-flow diagram includes two groups of decision makers - households and firms. These two groups interact in the market to exchange goods and services for money. While the government and market are important components in the overall economy, they are not included as decision makers in the basic circular-flow model.

Quiz 2: Thinking Like an Economist

The circular-flow diagram is a

In the simple circular-flow diagram, the participants in the economy are

In the circular-flow diagram, firms produce

A circular-flow diagram is a model that

Which of the following statements about the circular-flow diagram is correct?

Another term for factors of production is

Which of these terms are used interchangeably?

Economists build economic models by

The circular-flow diagram

The circular-flow diagram is an example of

In the circular-flow diagram,

Factors of production are

Factors of production are

Economic models

Which of the following statements is correct?

Which of these statements about economic models is correct?

In constructing models, economists

In the circular-flow diagram, which of the following is not a factor of production?

Economic models are built with

Which two groups of decision makers are included in the simple circular-flow diagram?