P1. HOW PEOPLE INTERACT

Which of the following is a principle concerning how people interact?

• Markets are usually a good way to organize economic activity.

• Rational people think at the margin.

• People respond to incentives.

• All of the above are correct.

Trade between countries tends to

• reduce both competition and specialization.

• reduce competition and increase specialization.

• increase competition and reduce specialization.

• increase both competition and specialization.

Trade

• allows specialization, which increases costs.

• allows specialization, which reduces costs.

• reduces specialization, which increases costs.

• reduces specialization, which reduces costs.

Central planning refers to

• markets guiding economic activity. Today many countries that had this system have abandoned it.

• markets guiding economic activity. Today many countries that did not have this system have implemented it.

• government guiding economic activity. Today many countries that had this system have abandoned it.

• government guiding economic activity. Today many countries that did not have this system have implemented it.

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?

• There is no such thing as a free lunch.

• People buy more when prices are low than when prices are high.

• No matter how much people earn, they tend to spend more than they earn.

• Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.

The term "invisible hand" was coined by

• Adam Smith.

• John Maynard Keynes.

• Karl Marx.

• David Ricardo.

The "invisible hand" directs economic activity through

• advertising.

• prices.

• central planning.

• government regulations.

The invisible hand refers to

• how central planners made economic decisions.

• how the decisions of households and firms lead to desirable market outcomes.

• the control that large firms have over the economy.

• government regulations without which the economy would be less efficient.

The self-interest of the participants in an economy is guided into promoting general economic self-interest by

• the invisible hand.

• market power.

• government intervention.

• oikonomos.

In a market economy, who makes the decisions that guide most economic activity?

• firms only

• households only

• firms and households

• government