AMERICAN HERITAGE EXAM 3 UPDATED ACTUAL
QUESTIONS AND CORRECT ANSWERS
Question:
1. Market Weaknesses
Answer:
Imperfect Information: exchanges that are not beneficial because they're made
on poor info
Monopoly: firms restrict exchange by buying out or destroying competitors
Public Goods: goods consumed in common, consumption by one doesn't
diminish for the rest
Externalities: exchanges where some costs or benefits go to third parties not
involved in exchange
Economic Instability or Recession: resources are left unused
Economic Injustice: society decides distribution of income generated by market
economy is unfair
Question:
2. Imperfect Information (Market Weakness)
Answer:
If those taking part of exchange don't have adequate information about products
involved or the terms of the exchange, it is possible they will miscalculate and
exchange can harm one or both parties
- information is difficult and costly to find: easy ways to find inaccurate info
(value/cost of good is inaccurate)
- PROTECTION: exchanges are repetitive meaning grocery store must treat
customers right and same a restaurant or they'd fail
- government trying to help by providing info through labels, warnings on
products and requiring laws and courts to provide certain info to consumers
Ex: Teenager buying cigarettes from store clerk: may be unaware of
consequences of smoking
Question:
3. FDA and Prescription Drugs
Answer:
Two possible errors:
1. Allow harmful drug
2. Prevent a good drug
Lives may be lost when drugs that could have helped are kept off the market
,Question:
4. Monopoly Power (Market Weakness)
Answer:
- Most serious weakness is that economic power is concentrated in hands of a few
individuals or businesses
- this enables people to charge prices that exceed the market which shrinks
society wealth
- leads to income inequality
- most important effect is to redistribute the gains from trade so monopolist
captures all of the gain
Question:
5. Cartel
Answer:
A group of firms that come together to make agreements about setting high
prices in market and act together like a monopoly
Question:
6. Government strategies to control economic power
Answer:
1. Government can regulate economically powerful firms, forcing them to price
their products and behave like competitive firms
2. Government can take action to foster competition in order to limit the
economic power of any one firm
Question:
7. Sherman Antitrust Act (1890)
Answer:
First federal action against monopolies, it was signed into law by Harrison and
was extensively used by Theodore Roosevelt for trust-busting. However, it was
initially misused against labor unions
Question:
8. Public Goods (Market Weakness)
Answer:
- market fails to work at all so we accept government intervention to provide
public goods that markets can't provide effectively
- good or service that, if consumed by one individual, does not diminish the
amount of that good or service that remains available to others
- radio and television signals, navigation aids, national defense are good
examples of public goods
- creates the free rider problem: people hoping and waiting for someone else to
solve the problem and then free ride off it
, Question:
9. Externalities (Market Weakness)
Answer:
- occurs whenever a third party not directly involved in an exchange either
benefits or suffers costs because of exchange
- factory pollution damaging homes, contamination of drinking water by farmers'
pesticides, blood donations by people with diseases
- external costs allow exchanges to take place that should not because no net
benefits are created
- goods or services involving external benefits will be underproduced by market
economies and goods with external costs are overproduced
- Government intervention: define property rights, tax polluters, Collective Action
Problems: little incentive
Question:
10. Economic Instability or Recession (Market Weakness)
Answer:
- whenever the actual level of output in the economy falls significantly below the
output that the economy can produce with full employment of resources, the
economy is in a recession
- negative shock hits the economy
- If wages and prices adjust downward quickly, full employment is preserved and
stabilizes BUT contracts, inertia, and other forces prevent quick adjustment of
wages and prices
- most costly market inefficiency
- when GDP shrinks by less than 10 percent
- government uses fiscal policy and monetary policy to boost total spending
Question:
11. GDP
Answer:
Gross Domestic Product- the total market value of all final goods and services
produced annually in an economy
Question:
12. Fiscal Policy
Answer:
- involves government expenditures and taxes
- requires government to spend more or tax less, or run a deficit in federal budget
QUESTIONS AND CORRECT ANSWERS
Question:
1. Market Weaknesses
Answer:
Imperfect Information: exchanges that are not beneficial because they're made
on poor info
Monopoly: firms restrict exchange by buying out or destroying competitors
Public Goods: goods consumed in common, consumption by one doesn't
diminish for the rest
Externalities: exchanges where some costs or benefits go to third parties not
involved in exchange
Economic Instability or Recession: resources are left unused
Economic Injustice: society decides distribution of income generated by market
economy is unfair
Question:
2. Imperfect Information (Market Weakness)
Answer:
If those taking part of exchange don't have adequate information about products
involved or the terms of the exchange, it is possible they will miscalculate and
exchange can harm one or both parties
- information is difficult and costly to find: easy ways to find inaccurate info
(value/cost of good is inaccurate)
- PROTECTION: exchanges are repetitive meaning grocery store must treat
customers right and same a restaurant or they'd fail
- government trying to help by providing info through labels, warnings on
products and requiring laws and courts to provide certain info to consumers
Ex: Teenager buying cigarettes from store clerk: may be unaware of
consequences of smoking
Question:
3. FDA and Prescription Drugs
Answer:
Two possible errors:
1. Allow harmful drug
2. Prevent a good drug
Lives may be lost when drugs that could have helped are kept off the market
,Question:
4. Monopoly Power (Market Weakness)
Answer:
- Most serious weakness is that economic power is concentrated in hands of a few
individuals or businesses
- this enables people to charge prices that exceed the market which shrinks
society wealth
- leads to income inequality
- most important effect is to redistribute the gains from trade so monopolist
captures all of the gain
Question:
5. Cartel
Answer:
A group of firms that come together to make agreements about setting high
prices in market and act together like a monopoly
Question:
6. Government strategies to control economic power
Answer:
1. Government can regulate economically powerful firms, forcing them to price
their products and behave like competitive firms
2. Government can take action to foster competition in order to limit the
economic power of any one firm
Question:
7. Sherman Antitrust Act (1890)
Answer:
First federal action against monopolies, it was signed into law by Harrison and
was extensively used by Theodore Roosevelt for trust-busting. However, it was
initially misused against labor unions
Question:
8. Public Goods (Market Weakness)
Answer:
- market fails to work at all so we accept government intervention to provide
public goods that markets can't provide effectively
- good or service that, if consumed by one individual, does not diminish the
amount of that good or service that remains available to others
- radio and television signals, navigation aids, national defense are good
examples of public goods
- creates the free rider problem: people hoping and waiting for someone else to
solve the problem and then free ride off it
, Question:
9. Externalities (Market Weakness)
Answer:
- occurs whenever a third party not directly involved in an exchange either
benefits or suffers costs because of exchange
- factory pollution damaging homes, contamination of drinking water by farmers'
pesticides, blood donations by people with diseases
- external costs allow exchanges to take place that should not because no net
benefits are created
- goods or services involving external benefits will be underproduced by market
economies and goods with external costs are overproduced
- Government intervention: define property rights, tax polluters, Collective Action
Problems: little incentive
Question:
10. Economic Instability or Recession (Market Weakness)
Answer:
- whenever the actual level of output in the economy falls significantly below the
output that the economy can produce with full employment of resources, the
economy is in a recession
- negative shock hits the economy
- If wages and prices adjust downward quickly, full employment is preserved and
stabilizes BUT contracts, inertia, and other forces prevent quick adjustment of
wages and prices
- most costly market inefficiency
- when GDP shrinks by less than 10 percent
- government uses fiscal policy and monetary policy to boost total spending
Question:
11. GDP
Answer:
Gross Domestic Product- the total market value of all final goods and services
produced annually in an economy
Question:
12. Fiscal Policy
Answer:
- involves government expenditures and taxes
- requires government to spend more or tax less, or run a deficit in federal budget
