Praxis 5911 Economics

If the price elasticity of demand for a good is greater than 1, it is classified as:

• perfectly elastic

• elastic

• inelastic

• unit elastic

Answer explanation

When the price elasticity of demand for a good is greater than 1, it is considered elastic. This means that a change in price will result in a proportionally larger change in quantity demanded. In other words, consumers are highly responsive to changes in price, and a small increase in price will lead to a significant decrease in quantity demanded. Elastic goods have many substitutes available in the market, allowing consumers to easily switch to alternatives if the price increases. Therefore, producers of elastic goods need to be cautious when setting prices, as even a slight increase may lead to a substantial decrease in revenue due to the highly responsive nature of demand.

Which factor is a determinant of long-run aggregate supply?

• current price level

• current exchange rate

• technology level

• level of consumer confidence

Answer explanation

The correct answer is technology level. Long-run aggregate supply (LRAS) is determined by factors that affect the economy's productive capacity, such as technology level, capital stock, and the size and quality of the labor force. The current price level and consumer confidence primarily affect short-run aggregate supply, not LRAS.

What is the primary function of money in an economy?

• providing employment

• facilitating trade

• reducing poverty

• controlling inflation

Answer explanation

The primary function of money is to facilitate trade. Money acts as a medium of exchange, allowing goods and services to be traded without the need for a barter system. Barter systems require a direct exchange of goods and services, which can be inefficient and difficult. Money simplifies this process by acting as a universally accepted medium of exchange.

When the marginal cost of producing an additional unit of a good is equal to the marginal benefit derived from consuming that unit, the rational decision would be to:

• increase production

• reevaluate production models

• decrease production

• maintain current production

Answer explanation

When the marginal cost of producing an additional unit of a good is equal to the marginal benefit derived from consuming that unit, it is rational to maintain current production. This means that the additional cost and additional benefit are in balance, indicating that the current level of production is optimal. Making any changes in production would result in either higher costs without proportionate benefits or missed opportunities for additional benefits.

When a country has less favorable terms of trade, it means that the country:

• trades additional exports to maintain its imports

• imports additional goods for the value of its exports

• reduces its exports and increases its imports

• reduces its imports and increases its exports

Answer explanation

When a country has less favorable terms of trade, it means that the country needs to export additional goods and services to maintain a similar amount of imports. This implies that the country is getting a less favorable deal in international trade because the value of their exports has descreased, which means the have to exchange more of their marketable goods and services to acquire the same amount of imports.

 In a command economy, resource allocation is managed primarily by 

• large corporations 

• labor unions 

• competitive markets 

• central planning 

Answer explanation

In a command economy, the government  

determines the allocation of resources and the distribution of outputs through central planning. 

The view that specialization leads to gains from trade is based on which of the following principles? 

• Comparative advantage 

• Absolute advantage 

• Price elasticity 

• Market equilibrium 

Answer explanation

Comparative advantage is the principle that total output can be increased when individuals or countries specialize in producing goods and services for which they have the lowest opportunity cost. 

In the circular flow model of a market economy, which of the following describes the roles of firms and households in the product markets and in the factor markets? 

• PRODUCT MARKETS: Firms sell goods to households. FACTOR MARKET: Firms sell resources to to households.  

• PRODUCT MARKETS: Firms sell goods to households. FACTOR MARKET: Firms buy resources from households. 

• PRODUCT MARKETS: Firms buy goods from households. FACTOR MARKET: Firms buy resources from households. 

• PRODUCT MARKETS: Firms buy goods from households. FACTOR MARKET: Firms sell resources to households.

Answer explanation

Firms (businesses) produce goods and sell them to households (consumers). In a market economy, it is assumed that all resources—land, labor, and capital—are owned by households and that firms purchase these resources from households through the

factor markets. 

Assume that the marginal propensity to consume increased from 0 7.5 in year 1 to 0 8.0 in year 2. Based on this information, which of the following is a correct conclusion? 

•  In year 1, a $100 billion increase in  government spending would have increased real output by a maximum of $75 billion. 

• From year 1 to year 2, the spending  multiplier increased from 4 to 5. 

• A given change in government spending would have had a more powerful effect in year 1 than in year 2. 

• The marginal propensity to save  

  increased from year 1 to year 2.

Answer explanation

The question tests whether the student can link the marginal propensity to consume to the calculation of the spending multiplier. The value of the spending multiplier is equal to 1/(1-MPC) . Using this formula, the spending multiplier increases from 4 to 5 between year 1 and year 2.