Chapter 22
Practice Quiz Tutorial
Economies in Transition
©2004 South-Western
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1. The economic system in which all of the basic
decisions are made through a centralized
authority, such as a government agency, is
termed a
a. market economy.
b. capitalistic economy.
c. command economy.
d. traditional economy.
C. To answer the three basic economic questions,
the market economy uses the price system and a
traditional economy is based on customs.
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2. Command economies typically suffer from
a. unemployment, but not underemployment.
b. neither unemployment nor
underemployment.
c. both unemployment and underemployment.
d. underemployment, but not unemployment.
D. Command economies assign people jobs
rather than allow the market system to
determine wages and employment.
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3. Adam Smith stated that the only role of
government in society should be to
a. provide defense.
b. enforce contracts.
c. do absolutely nothing.
d. both (a) and (b).
D. Adam Smith believed in a limited role of
the government to provide national defense,
education, maintain infrastructure, enforce
contracts, and little else.
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4. When making economic decisions, Adam
Smith urged society to
a. follow the principle of self-interest.
b. follow the principle of public interest.
c. transfer wealth according to need.
d. provide equal income for all citizens.
A. Adam Smith stated “By pursuing his own
interest he frequently promotes that of the
society more effectively than when he really
intends to promote it.”
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5. The doctrine of laissez faire
a. advocates an economic system with extensive
government intervention and little individual
decision-making.
b. was advocated by Adam Smith in his book
The Wealth of Nations.
c. was advocated by Karl Marx in his book Das
Kapital.
d. is described by none of the above.
B. Laissez faire is a French expression
meaning “allow them to act” stated
differently, “The least government is the
best government.”
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6. In Adam Smith’s competitive market economy,
the question of what goods to produce is
determined by the
a. “invisible hand” of the price system.
b. “invisible hand” of government.
c. “visible hand” of public interest.
d. “visible hand” of laws and regulations.
A. The “invisible hand” refers to a system
where no central authority makes the key
economic decisions, but rather decisions are
made collectively by all consumers and
producers in the economy.
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7. Adam Smith wrote that the
a. economic problems of the 18th-century
England were caused by free markets.
b. government should control the economy
with an “invisible hand.”
c. pursuit of private self-interest promotes the
public interest in a market economy.
d. public or collective interest is not promoted
by people pursuing their self-interest.
C. Adam Smith recognized that everyone
making decisions based on their own self
interest would enhance the public interest.
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8. Adam Smith, in his book The Wealth of
Nations, advocated
a. socialism.
b. an economy guided by an “invisible
hand.”
c. government control of the “invisible
hand.”
d. the adoption of mercantilism.
B. Adam Smith advocated a laissez faire
stance by government. That is, the
government should provide the foundation
for a free market system, but should not be
a major participant in answering the
questions of What, How, and for Whom. 9
9. The economic system in which private
individuals own the factors of production is
a. a planned economy.
b. capitalism.
c. collectivism.
d. socialism.
B. For answers a,c, d, resources or factors of
production are owned by the government.
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10. Which of the following is not a basic
characteristic of capitalism?
a. Economic decisions occur in markets.
b. Factors of production are privately owned.
c. Income is distributed on the basis of need.
d. Businesses make their own product and
price decisions.
C. Karl Marx believed people would be
motivated by the principle “from each
according to his ability, to each
according to his need.”
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11. According to Karl Marx, under capitalism,
a. profits would be shared fairly.
b. incomes would be distributed equally.
c. workers would be exploited and revolt
against owners of capital.
d. workers would actually own the factors of
production.
C. Karl Marx believed that private
ownership and profits lead to exploitation.
The result is a class struggle between a few
“haves” and “have nots.”
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12. Karl Marx predicted which of the
following?
a. market system would self destruct.
b. “haves” would revolt against the “havenots.”
c. wealthy were entitled to profits as their
reward for risk-taking.
d. none of the above.
A. Karl Marx argued the market system
would destroy itself because owners would
go too far and pay starvation wages in order
to maximize profits.
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13. How many nations in the world today
operate totally according to Karl Marx’s
theory of communism?
a. None.
b. Several.
c. Only the United States.
d. Many.
A. Under Marx’s idealized society of
communism, people would distribute
wealth according to need and no central
authority would be necessary.
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14. In Marx’s ideal communist society, the
state
a. actively promotes income equality.
b. follows the doctrine of laissez faire.
c. owns resources and conducts planning.
d. does not exist.
D. Under Marx’s idealized society of
communism, individuals with ability and
not the government would distribute the
wealth of society according to each
person’s need.
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15. Karl Marx was a (an)
a. 19th-century German philosopher.
b. 18th-century Russian economist.
c. 14th-century Polish banker.
d. 19th-century Russian journalist.
A. Karl Marx was born in Germany, the
son of a lawyer. Marx was an
outstanding student at Berlin University.
In 1841, after receiving a doctorate in
philosophy, he turned to journalism.
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