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CHAPTER 8
Power and
the Economy
TRUE/FALSE
1. Economics is the study of the production and distribution of scarce goods and services.
3. The economic system consists of the institutions and processes by which a society imports and
consumes plentiful resources.
4. A market is any place or arrangement that enables people to exchange money for goods, services, or
labor.
5. Profits occur when selling prices are higher than the costs of production.
7. The labor market largely determines where people will work and how much they will be paid.
8. Adam Smith’s theories are called both laissez-faire economics and classical economics.
9. Keynesian economic theory advocates using fiscal policy, the combination of tax policy and spending
policy to ensure a healthy economy.
10. Inflation refers to a rising price level for consumer goods and services, which results in increased
purchasing power of money.
11. The Reagan administration of 1981 was successful in reducing income taxes and decreasing
unemployment.
12. Most federal revenues come from the taxes that businesses pay.
13. Social Security and Medicare are the two largest federal entitlement programs.
14. Inside directors of corporations, who are also full-time presidents or vice presidents of the corporation,
tend to dominate the board proceedings.
15. Globalization of economic power required reductions in tariffs and trade barriers around the world.
16. The “comparative advantage” argument claims that countries benefit when they focus on producing as
many goods as possible.
17. Trade slows down the flow of ideas and technology, preventing nations from learning from each other.
18. The World Trade Organization has the power to adjudicate trade disputes between countries.
MULTIPLE CHOICE
1. The American economic system is a market or free enterprise system. As such, it is largely
a. unplanned.
b. planned.
c. free lance.
d. out of control.
ANS: A REF: 214 NOT: Conceptual
2. On the whole, the private enterprise economy organizes itself with a minimum of centralized planning
or direction. The American system relies chiefly on private individuals, in search of
a. cheap goods to keep the economy moving.
b. better jobs to keep America economically sound.
c. wages and profits to get the job done.
d. the American dream to get the job done.
ANS: C REF: 214 NOT: Conceptual
3. The rate at which money is exchanged for goods and services is called
a. the market.
b. profit.
c. price.
d. inflation.
ANS: C REF: 215 NOT: Factual
4. Consumers decide what should be produced by expressing their preferences in terms of the amount of
money they spend on various goods and services, thus creating
a. consumer demand.
b. price.
c. profit.
d. inflation.
ANS: A REF: 215 NOT: Factual
6. Decisions of employers and employees to offer and accept jobs at specified wages is called
a. the capital market.
b. the labor market.
c. fiscal policy.
d. monetary policy.
ANS: B REF: 218 NOT: Factual
7. The capital market refers to money made available by banks and other lenders as loans, primarily to
business firms but to consumers as well. The interest rate charged by lenders is
a. really the price of the money.
b. really based on the stock market.
c. really highway robbery.
d. really fair for businesses but unfair to consumers.
ANS: A REF: 218 NOT: Conceptual
8. The free-enterprise system is subject to major modifications by the activities of government. Which of
the following is NOT a reason that the government intervenes in the free market?
a. To protect public property
b. To provide a stable money supply
c. To regulate industries with strong public interest
d. To set minimum standards for wages and working conditions
ANS: A REF: 220 NOT: Applied
9. Keynesian economics recommends that during a recession the national government should increase its
spending and decrease taxes, and that during a boom, it should
a. decrease taxes and raise wages.
b. take a laissez-faire stance.
c. cut spending and increase taxes.
d. increase spending, taxes and wages.
ANS: C REF: 223, 225 NOT: Conceptual
10. According to Keynesian economics, during a depression, deficit spending is justified. Conversely,
during times of economic boom, the theory recommends
a. cutting taxes.
b. increasing government spending.
c. decreasing government spending and possibly increasing taxes.
d. None of the above is true.
ANS: C REF: 225 NOT: Conceptual
11. Using government policies to increase the supply of goods and services through incentives to work,
save, and produce is called
a. monetarism.
b. laissez-faire economics.
c. Keynesianism.
d. supply-side economics.
ANS: D REF: 226, 227 NOT: Factual
12. Monetarism is another Keynesian economic theory that advocates the government’s proper role in
promoting a healthy economy is in using its power to
a. regulate the money supply to ensure that the rate of inflation remains high.
b. regulate the tax base so that inflation remains steady.
c. regulate the corporate earnings to ensure that goods are available.
d. regulate the money supply to ensure that the rate of inflation remains low.
ANS: D REF: 227 NOT: Applied
13. Monetarists believe that the national government must use its monetary policy to maintain a healthy
economy. Monetarists target an inflation rate of
a. 1–6 percent.
b. 2–4 percent.
c. 4–6 percent.
d. 1–3 percent.
ANS: D REF: 228 NOT: Factual
14. President George W. Bush sought to increase investments by doing which of the following?
a. Reducing the top capital gains tax rate
b. Increasing the top capital gains tax rate
c. Increasing the dividend income tax rate
d. Decreasing the per child tax credit
ANS: A REF: 230 NOT: Factual
15. To compute the GDP, economists sum up all the expenditures on goods and services, plus government
purchases. Care is taken to count
a. only the final product sold to consumers.
b. stocks in the production company.
c. raw materials that go into the product.
d. All of the above are true.
ANS: A REF: 233 NOT: Conceptual
16. The Gross Domestic Product (GDP) is the nation’s total production of goods and services of a single
year valued in terms of market prices. To compute the GDP, economists sum up all the expenditures
on goods and services,
a. minus government purchases.
b. plus import tariffs.
c. minus outlays to Social Security.
d. plus government purchases.
ANS: D REF: 233 NOT: Conceptual
17. The total value of nation’s production of goods and services for a year is called the Gross Domestic
Product (GDP). The GDP divided by the population is a measure of
a. economic well-being.
b. how one nation compares to others.
c. the stock market performance.
d. inflation.
ANS: A REF: 233 NOT: Conceptual
18. Some economic activities escape measurement in the GDP. This underground economy involves
activities that are unreported to the government and are therefore not counted in the GDP. Which of
the following is NOT an example of this underground economy?
a. Illegal drug transactions
b. Illegal gun transactions
c. Unreported income tax
d. A waiter’s correctly reported tips
ANS: D REF: 234 NOT: Applied
20. Most U. S. government spending goes into entitlement programs. Fifty percent of federal spending is
used to provide all classes of people with legally enforceable rights to government benefits. Which of
these is NOT a form of entitlement?
a. Food stamps
b. Social security
c. Medicaid
d. Clothing assistance
ANS: D REF: 235, 236 NOT: Applied
21. The national debt is the sum total of all annual federal deficits. The current debt is about $42,000 for
every
a. corporation in America.
b. person serving in the U.S. armed forces.
c. person over 65 in America.
d. man, woman, and child in America.
ANS: D REF: 237 NOT: Applied
22. The annual negative imbalance between revenues and expenditures of the U.S. government, or when
the government spends more than it collects in any given year is called
a. a federal deficit.
b. the national debt.
c. national income accounting.
d. the trade deficit.
ANS: A REF: 237 NOT: Factual
23. The federal debt requires the U.S. Treasury Department to borrow large amounts of money. This
money is diverted from the private sector where it would otherwise be available as loans for all but
which of the following?
a. New and expanding businesses
b. Credit items for consumers
c. Modernizing industrial plants
d. Helping less developed nations modernize industrial plants
ANS: D REF: 239 NOT: Applied
24. Today, almost one-quarter of the world’s total economic output is sold in a country other than the
country in which it was produced. The U.S. currently exports about _________ percent of the value of
its GDP and imports about _________ percent.
a. 5, 10
b. 13, 16
c. 1, 2
d. 3, 6
25. U.S. firms that dominated the domestic market in the 1950s and 1960s—steel, automobiles, aircraft,
computers, electronics, agriculture, etc.—began to look abroad to expand their own sales. American
corporations became
a. multidisciplinary.
b. multifaceted.
c. multinational.
d. multi-million dollar corporations.
ANS: C REF: 245 NOT: Conceptual
26. The principle of comparative advantage suggests that if nations devote more of their resources to the
production of those goods that they produce most efficiently, then all trading nations
a. must pay tariffs.
b. benefit.
c. lose profits.
d. None of the above is true.
ANS: B REF: 246 NOT: Factual
27. Which of the following is NOT true of trade with other nations?
a. Competition abroad cuts costs and improves quality of goods produced in the
United States.
b. Trade quickens the flow of ideas and technology.
c. Trade expands the menu of goods and services available to trading countries.
d. Trade is directly responsible for job loss and unemployment.
ANS: D REF: 247, 248 NOT: Applied
28. In 1993, the United States, Canada, and Mexico signed the North American Free Trade Agreement
(NAFTA). Objections by U.S. labor unions were drowned out by
a. protesting hippies.
b. support by the American corporate community, Congress, President Bill Clinton, and
former President George H.W. Bush.
c. support from foreign corporations and the Mexican president.
d. support from the European corporations who traded with Canada.
ANS: B REF: 248 NOT: Conceptual
29. NAFTA envisioned __________ on products from Mexico, the United States, and Canada.
a. an increase in taxes
b. the removal of tariffs
c. more revenues
d. higher prices
ANS: B REF: 248 NOT: Factual
30. Created in 1993, the _________ has been given power to adjudicate trade disputes among countries
and monitor and enforce trade agreements.
a. WTO
b. GATT
c. NAFTA
d. OMB
ANS: A REF: 248 NOT: Factual
ANS: market
REF: 214
2. The _________ consists of the decisions of employers and employees to offer and accept jobs at
specified wages (prices).
3. The __________ controls the supply of money and credit and interest rates (sets monetary policy).
4. A __________ involves the purchase of enough stock in publically held corporations to force the
ouster and replacement of existing corporate management.
5. The international organization that adjudicates trade disputes among countries and monitors and
enforces trade agreements is the __________.
SHORT ANSWER
1. Briefly describe the two ways in which economic decisions are made.
4. What is the GDP and what are the limitations associated with it?
5. Explain the two challenges to the imperial position of corporate management that began in the 1980s.
6. Explain why America’s corporate and financial institutions would support tariffs.
7. Explain the importance of the General Agreement on Tariffs and Trade (GATT).
ESSAY
1. What is the role of markets in the United States in determining basic economic outcomes: What is to
be produced, how it is produced, and for whom will it be produced? How does global trading influence
these same economic outcomes?
2. Why does the government intervene in the economy? Write an essay that explains the many ways in
which the government seeks to direct the economy in a mixed economic system like the United States.
3. Describe the role of deficit spending and national debt in the disagreement between President Obama
and conservative Republican members of Congress.
4. Compare and contrast Keynesian and supply-side economics. What are the underlining principles of
these economic theories? What tools does each theory advocate the government use for “fixing”
various economic situations?
5. Write an essay that explains the benefits of increased global trade for the United States as well as the
case for protectionism of the U.S. economy.
6. Compare the corporate raiders’ claims that corporate takeovers are good for American to the
opponents’ argument against the takeovers.
7. Explain the relationship between the relationship between the end of the farming-dominated economy
and the end of the general laissez-faire stance of the national government.
8. Explain the similarities and differences in the economic strategies used by President George H.W.
Bush and President Bill Clinton. How did the outcomes vary?