ECONOMICS
American Free Enterprise System- Ch 3
1. Explain the importance of the following in terms of the free enterprise system: (12 points)

Profit motive: force that encourages people to improve their material well-being, drives the free enterprise
system

Voluntary Exchange: when consumer and producer agree to exchange money for a product both expect to gain

Private Property Rights: property owners are protected from government seizure, prohibiting others from using
their property, and having the right to buy and sell property

Competition: When producers compete with one another to attract consumers, they create new products,
resulting in more choices for the consumer.
2. Why have some nations begun a transition to a free enterprise? (6 points)
Some centrally planned nations are switching to free enterprise systems in order to keep pace with the
evolving global economy.
.
3. How does the U.S. free enterprise system compare with other economic systems? (6 points)
The freedoms inherent in the U.S. free enterprise system (see question 1 above), and individuals, not
government, make economic decisions.
4. What constitutional guarantees underlie American free enterprise system? (6 points)
Private property rights, free contract, and freedom from unfair taxation are guaranteed by the Constitution.
5. Name a benefit of the free enterprise system. (6 points)

An open opportunity for all to compete in the marketplace

The production of a variety of goods and services

Buyers and sellers are free to decide what will be produced
6. What is macroeconomics? (3 points)
The study of the behavior and decision making of entire economies
7.
What is microeconomics? (6 points)
The study of the behavior and decision making of smaller units such as families and individuals.
American Free Enterprise System- Ch 3
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8. How does gross domestic product (GDP) provide a means to analyze economic growth? (6 points)
A strong GDP reflects a healthy economy; a healthy economy is the result of a well-functioning free
enterprise system.
9. What does the GDP tell economists about business cycles? (6 points)
The GDP tells economists where the nation is within the business cycle and helps them to predict business
cycles.
10. Describe how economic stability is measured? (6 points)
It is measured by indicators such as price levels and the health of the nation’s financial institutions. If the
price of a product such as milk fluctuates significantly, the economy is unstable and consumers/producers
are hurt. Stability is also measured by how well financial institutions are shielded from economic downturns.
11. Why is a free rider a type of market failure? (6 points)
They are failures because they involve people consuming goods and services for which they have not paid.
This is not an efficient distribution of goods.
12. What is the difference between the public sector and the private sector? (6 points)
The public sector consists of goods and services provided by the government; examples would include
Social Security and Medicare payments.
The private sector consists of all transactions between individuals or businesses; examples include the
sale of merchandise at a local store and the business of a multinational corporation.
13. How does welfare attempt to raise the poor people’s standard of living? (6 points)
It collects tax money from individuals and businesses and redistributes it to people with little or no income.
14. Why does poverty exist in a free market economy? (6 points)
Because a free market economy generates wealth but does not spread it evenly throughout the society. The
systems rewards the most productive members of society. As a result, people with fewer opportunities to be
productive may suffer.
15. How is Social Security an example of income redistribution? (6 points)
The Social Security Administration taxes a portion of citizens’ income while they are working and
redistributes it to the nation’s elderly and the disabled.
American Free Enterprise System - Ch 1-2
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Week 3 of 10.
The 2nd quiz towards your midterm.
American Free Enterprise System - Ch 1-2
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