Chapter 29
Economies in Transition
1. An economic system is the organizations and methods used to determine
a. what goods and services are produced.
b. how goods and services are produced.
c. for whom goods and services are produced.
d. All of the above answers are correct.
ANS
a. Incorrect. Each answer is correct.
b. Incorrect. Each answer is correct.
c. Incorrect. Each answer is correct.
d. Correct. Each answer is correct.
2. In a command economy, the basic economic questions are answered by
a. central authority.
b. individual buyers and sellers.
c. traditional methods.
d. None of the above answers are correct.
ANS
a. Correct. In a command economy, the basic economic questions are answered by
central authority.
b. Incorrect. In a command economy, the basic economic questions are answered
by central authority.
c. Incorrect. In a command economy, the basic economic questions are answered
by central authority.
d. Incorrect. Answer a. is correct.
3. Adam Smith was an advocate of
a. mercantilism.
b. a nation maximizing its stock of gold.
c. unrestricted or free trade.
d. the visible hand of public interest.
ANS
a. Incorrect. Adam Smith rejected mercantilism as the best way to maximize a nation’s
wealth.
b. Incorrect. Adam Smith rejected mercantilism as the best way to maximize a nation’s
wealth.
c. Correct. Adam Smith was an advocate of unrestricted or free trade.
d. Incorrect. Adam Smith’s phrase was the “invisible hand” in reference to private interest.
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4. 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. "invisible hand" of public interest.
d. "visible hand" of laws and regulations.
ANS
a. Correct. The question of what goods to produce is determined by the "invisible hand" of
the price system.
b. Incorrect. The question of what goods to produce is determined by the "invisible hand" of
the price system.
c. Incorrect. The question of what goods to produce is determined by the "invisible hand" of
the price system.
d. Incorrect. The question of what goods to produce is determined by the "invisible
hand" of the price system.
5. Adam Smith wrote that the
a. economic problems of 18th-century England were caused by free markets.
b. government should control the economy.
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.
ANS
a. Incorrect. The problem was caused by insufficient use of free markets.
b. Incorrect. Adam Smith advocated that the economy be controlled by the free market
system.
c. Correct. Adam Smith wrote that the pursuit of private self-interest promotes the public
interest in a market economy.
d. Incorrect. Adam Smith wrote that the public interest is best promoted by a system based
on private interest.
6. Which of the following is a criticism of capitalism?
a. Unequal distribution of income
b. Failure to protect the environmen.
c. Exploitation of workers
d. All of the above answers are correct.
ANS
a. Incorrect. Each answer is correct.
b. Incorrect. Each answer is correct.
c. Incorrect. Each answer is correct.
d. Correct. Each answer is correct.
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7. Which of the following statements is true?
a. The doctrine of laissez-faire advocates an economic system with extensive government
intervention and little individual decision-making.
b. In capitalism income is distributed on the basis of need.
c. Adam Smith was the father of socialism.
d. Most real-world economies are mixed economic systems.
ANS
a. Incorrect. This doctrine advocates minimum government intervention and maximum
individually decision making.
b. Incorrect. In capitalism income is distributed by the price system.
c. Incorrect. Adam Smith was the father of economics.
d. Correct. Real-world economies have a mix of traditional, command, and market
economies.
8. Which of the following is a strength of a command-based economic system?
a. Goods can be allocated based on need rather than based on willingness and ability to pay.
b. Producers have strong incentives to innovate because successful innovators are rewarded
with higher profit.
c. Consumers can transmit their preference for product quality and variety by way of their
“dollar votes’ cast in the marketplace.
d. Because price is freely set based on supply and demand, there are few shortages or
surpluses.
ANS
a. Correct. This is a key strength of command systems.
b. Incorrect. This is a strength of a market economy.
c. Incorrect. This is a strength of a market economy.
d. Incorrect. This is a strength of a market economy.
9. The term “socialism” refers to which of the following?
a. A religion centered on community interaction
b. An economic system characterized by private ownership of resources, and
decentralized market-price allocation
c. An economic system characterized by government ownership of resources and
centralized allocation
d. An economic system characterized by voluntary allocation
ANS
a. Incorrect. Socialism is a socioeconomic system, not a religious system.
b. Incorrect. This is capitalism.
c. Correct. This is socialism.
d. Incorrect. This is communism.
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10. 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.
ANS
a. Correct. Karl Marx was a 19th century German philosopher.
b. Incorrect. Karl Marx was a 19th century German philosopher.
c. Incorrect. Karl Marx was a 19th century German philosopher.
d. Incorrect. Karl Marx was a 19th century German philosopher.
11. Karl Marx published
a. Das Kapital.
b. General Theory of Communism.
c. The Wealth of Nations.
d. The Capitalist Manifesto.
ANS
a. Correct. Karl Marx published Das Kapital.
b. Incorrect. Karl Marx published Das Kapital.
c. Incorrect. Adam Smith published The Wealth of Nations.
d. Incorrect. Karl Marx published Das Kapital.
12. In Marx's ideal communist society, the state
a. actively promotes income incentives.
b. follows the doctrine of laissez faire.
c. owns resources and conducts planning.
d. does not exist.
ANS
a. Incorrect. Under communism, the state promotes income equality.
b. Incorrect. Communism rejects the doctrine of laissez faire.
c. Incorrect. This state does not exist.
d. Correct. Any “haves” will give voluntarily to “have-nots” without the government.
13. According to Adam Smith, the “invisible hand” refers to which of the following?
a. The “best interests of society” (public interest) will occur as an outcome of the market
process coordinating the self-interested interactions of buyers and sellers (private
interest).
b. Government interference in markets to prevent greed.
c. Bribes and graft that interfere with the market process.
d. The “best interest of society,” (public interest) will occur as an outcome of careful
guidance by government authorities in allocating scarce goods and services according to
private interest.
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ANS
a. Correct. This is consistent with Smith’s statement about the invisible hand in his book
The Wealth of Nations.
b. Incorrect. The invisible hand refers to decentralized markets generating an efficient
allocation in the best interests of society.
c. Incorrect. The invisible hand refers to decentralized markets generating an efficient
allocation in the best interests of society.
d. Incorrect. The invisible hand refers to decentralized markets generating an efficient
allocation in the best interests of society.
14. A principal feature of a command economy is that ____________.
a. production decisions are made by profit-maximizing firms.
b. there is a central planning board at the top, which transmits economic decisions down
to the various producing and consuming units below.
c. consumers are allowed to determine that is produced based on their demand for goods
and services.
d. regulatory agencies constrain the most egregious forms of market power in a market
system of allocation..
ANS
a. Incorrect. This is a principal feature of a market ecomomy.
b. Correct. This is a principal feature of a command economy.
c. Incorrect. This is a principal feature of a market economy.
d. Incorrect. This is a principal feature of a mixed economy.
15. Which nation achieved the ideal communist society as described by Marx?
a. Castro's Cuba
b. Mao's China
c. Stalin's Soviet Union
d. No nation has achieved Marx's vision of a communist society.
ANS
a. Incorrect. No nation has achieved Marx's vision of communist society.
b. Incorrect. No nation has achieved Marx's vision of communist society.
c. Incorrect. No nation has achieved Marx's vision of communist society.
d. Correct. No nation has achieved Marx's vision of communist society.
16. Adam Smith's book, The Wealth of Nations, was published at the time of the
a. War of 1812.
b. U.S. Declaration of Independence.
c. U.S. Civil War.
d. Great Depression.
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ANS
a. Incorrect. The Wealth of Nations was published in 1776.
b. Correct. The Wealth of Nations was published in 1776.
c. Incorrect. The Wealth of Nations was published in 1776.
d. Incorrect. The Wealth of Nations was published in 1776.
17. Which of the following economies is an example of a mixed system?
a. The United States.
b. The United Kingdom.
c. Sweden.
d. All of the above answers are correct.
ANS
a. Incorrect. All real-world economies are mixed systems.
b. Incorrect. All real-world economies are mixed systems.
c. Incorrect. All real-world economies are mixed systems.
d. Correct. Each answer is correct.
18. Property rights allowing individuals to own goods, services, and factors of production
are most important in
a. socialistic economies.
b. planned economies.
c. capitalistic economies.
d. command economies.
ANS
a. Incorrect. Government is most important in this economy.
b. Incorrect. Government is most important in this economy.
c. Correct. Earning profits and a market system depend on private property rights.
d. Incorrect. Government is most important in the economy.
19. Which of the following is a correct characterization of socialism?
a. Tradition answers the basic economic questions.
b. Markets are used exclusively to answer the basic economic questions.
c. Central planning is used to answer the basic economic questions.
d. Government ownership of many resources and centralized decision-making answers the
basic economic questions.
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ANS
a. Incorrect. Under socialism, government decision-making is the primary method used to
answer the basic economic questions.
b. Incorrect. Under socialism, government decision-making is the primary method used to
answer the basic economic questions.
c. Incorrect. Under socialism, government decision-making is the primary method used to
answer the basic economic questions.
d. Correct. Socialism is characterized by government ownership of many resources
and centralized decision-making answers the basic economic questions.
20. Which of the following statements is true?
a. The United States today comes closer to the socialist form of economic organization
than it does to capitalism.
b. When central planners set prices above equilibrium for goods and services they create
shortages.
c. According to Karl Marx, under capitalism, workers would be exploited and would
revolt against the owners of capital.
d. Adam Smith argued that government's role in society would be to do absolutely
nothing.
ANS
a. Incorrect. The United States is clearly capitalism.
b. Incorrect. Shortages are caused by prices set below equilibrium.
c. Correct. Karl Marx believed capitalism contained the seeds of its own destruction.
d. Incorrect. Adam Smith advocated that the government’s role was to be minimized and not
absolutely nothing.
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