Name:_________________________________
Period: _________________
Use your notes and textbook to answer the following questions and
prepare for the test
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Make sure you can read and understand the circular flow Model of a Market Economy
Know all the key vocabulary words from Ch. 2 and Ch. 3
Economics Ch. 2 and Ch. 3 Study Guide
Answer the following questions on a separate paper
(this will be turned in on the day of the test)
1. What is an economic system?
2. What are the three key/basic economic questions faced by all countries?
3. How do a traditional economy, a market economy, a command economy, and a mixed economy
differ?
4. In what economy do people’s jobs depend upon what their ancestors did?
5. What economy allows individual choices but also has some government regulation?
6. Who makes the economic decisions in a market economy?
7. What part do individuals play in a command economy?
8. Why is a Free Market Economy more likely than a Planned Economy to encourage growth?
9. What type of economy does the Unites States have?
10. List the advantages and disadvantages of both free market economics and centrally planned
economies. Assess the way each system values economic freedom and economic equity:
11. How do countries decide to distribute income?
12. What are factor payments?
13. What are two different kinds of factor payments?
14. Why aren’t all people paid the same amount in factor payments?
15. Provide your own example of two unequal factor payments:
16. This is the heart of the differences between economic systems today.
17. How does each society answer the questions of distribution (what is produced and who will
consume)? (hint: it is the heart of the differences between economic systems today)
18. List and describe the four different economic goals and societal values?
19. How does a nation improve its standard of living ?
20. Why do governments provide safety nets for their citizens?
21. You and your friends decide to earn money by providing a good or service. How are the three
economic questions in your market answered?
22. What is a market and why do they exist?
23. How does specialization make us more efficient?
24. What is the base/foundation of he Free Market System?
25. What are examples of private property?
26. What does private property promote (list all the positives for private property)?
27. What is the profit motive?
28. What is the Freedom of Choice?
29. What is the difference between the factor market and the product market?
30. Describe the circular flow model of a market economy: (make sure you recognize and can
explain the flow chart )
31. What is the purpose or role of the household?
32. What is the purpose or role of the firm?
33. What is the motivating force in The Free Market System?
34. What is the regulating force in The Free Market System?
35. How does competition among firms benefit consumers?
36. Explain what Adam Smith meant by “the invisible hand of the marketplace”?
37. What are the Advantages of the Free Market System?
38. What is an incentive?
39. What is consumer sovereignty?
40. What is the connection between incentives and consumer sovereignty in a free market economy?
41. Why is economic equity difficult to achieve in a free market economy?
42. Explain how a factory assembly line is an example of specialization:
43. Suppose that you are opening a new music store in your town. What resources would you need
from the factor market? What would you offer in the product market? How would the
government affect your business?
44. What constitutional guarantees underlie the American free enterprise system?
45. How does the government support free enterprise and protect public interest?
46. What do you call laws requiring companies to provide full information about their products?
47. Explain the importance of the following terms in the U.S. free enterprise system:
Profit motiveOpen OpportunityPrivate property rightsCompetition48. What are some opportunity costs of a greater government role in the economy?
49. What is the public interest?
50. Explain how the decisions you make as a consumer influence the economy:
51. Compare macroeconomics with microeconomics, and give an example of each:
52. How does gross domestic product provide a means to analyze economic growth?
53. What does GDP tell economists about business cycles?
54. Give one example of a new technology that has resulted in greater productivity for the United
States:
55. How do patents and copyrights promote innovation?
56. How does innovation help the economy?
57. Describe and explain how economic stability measured?
58. Are the macroeconomic goals of employment, growth, and stability best met by the public sector
(–includes all levels of government: national, state & local) or by the private sector (INCLUDES
HOUSEHOLDS & BUSINESSES)? Explain your reasoning:
59. What are public goods? List a few examples of public goods:
60. What is the “free-rider” problem?
61. Why is free rider a type of market failure?
62. Explain this sentence: Most public goods generate positive externalities:
63. What are positive externalities? (be able to recognize examples of externalities)
64. What are negative externalities? (be able to recognize examples of externalities)
65. Is the criminal justice system (police and the courts) a public good?
66. A city has a shortage of parking spaces near downtown businesses. Should the city build a new
parking garage or leave it to the private sector? Explain your reasoning:
67. Choose one of the federal agencies listed on page 55 and explain how it acts to limit negative
externalities: