Question 1

Which of the following best describes a market economy?

Accepted Answer

An economic system based on private property and markets, where individuals decide how, what, and for whom to produce.

Question 2

In a market economy, what role do price fluctuations play?

Accepted Answer

They play a central role in coordinating individuals' wants and allocating resources.

Question 3

Which of the following is a key difference between capitalism and socialism?

Accepted Answer

In capitalism, ownership of the means of production resides with a small group of individuals called capitalists.

Question 4

Suppose a government provides free vaccinations to all citizens. This is an example of:

Accepted Answer

Providing a public good and correcting for a positive externality.

Question 5

Which of the following is NOT a role of government in a market economy?

Accepted Answer

Setting all prices in the market.

Question 6

A negative externality occurs when:

Accepted Answer

A decision harms a third party not taken into account by the decision maker.

Question 7

Which of the following best describes a public good?

Accepted Answer

A good that is both non-rival and non-excludable.

Question 8

Which of the following is an example of a merit good?

Accepted Answer

Education, because the government believes it is good for people even if they choose not to consume it.

Question 9

A corporation differs from a sole proprietorship in that:

Accepted Answer

Shareholders in a corporation are not personally liable for the corporation's actions.

Question 10

Which of the following is an example of a government acting as a referee in the economy?

Accepted Answer

Setting safety and overtime rules for businesses.

Question 11

Suppose a city government decides to tax factories for the pollution they emit. This policy is most likely aimed at:

Accepted Answer

Correcting for a negative externality.

Question 12

Which of the following is a characteristic of a centrally planned socialist economy?

Accepted Answer

Government planning boards set society's goals and direct production.

Question 13

If a good is excludable and rival in consumption, it is classified as:

Accepted Answer

A private good.

Question 14

Which of the following is an example of a market failure?

Accepted Answer

A market that does not lead to a desired result, such as under-provision of public goods.

Question 15

Which of the following is a plausible reason for government failure?

Accepted Answer

Government intervention makes the situation worse than if the market was left alone.

Question 16

A multinational corporation is best defined as:

Accepted Answer

A corporation with substantial operations in both production and sales in more than one country.

Question 17

Which of the following international institutions is primarily concerned with monetary issues?

Accepted Answer

The International Monetary Fund (IMF).

Question 18

Suppose the government wants to encourage the consumption of a good that has positive externalities. Which policy is most appropriate?

Accepted Answer

Provide a subsidy for the good.

Question 19

If a country has a market economy, which of the following statements is most likely true?

Accepted Answer

Individuals are free to do whatever they want as long as it is legal.

Question 20

Which of the following best explains why global policy issues differ from national policy issues?

Accepted Answer

There is no global government, so international institutions must coordinate economic relations among countries.

Economic Institutions: Market Economies, Capitalism, Socialism, and the Role of Government

Study Guide - Practice Questions