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Exam 2: Understanding Economics and How It Affects Business

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Question 71

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Lance owns Lance Lawns Irrigation Systems, LLC, a company that installs and maintains underground lawn irrigation systems. Business is down due to new housing starts being negatively impacted by a deep recession. To make things worse, his bank called yesterday to inform him that his credit limit (interest fee of 12.5%) will be cut from $30,000 per year to $15,000 per year, unless he is willing to pay a higher interest rate of 20%. As Lance drives to the first job this morning, he knows that his last task of the day will be to reduce the hours for his two employees. He can't afford to work employees eight hours per day, with only a $15,000 line of credit. Which of the following strategies will help Lance's situation?

A) Increase government spending on public parks.
B) Decrease government spending so that banks can keep more reserves.
C) Fed decreases interest rates
D) Fed increases the federal funds rates to jump-start the economy.

E) B) and D)
F) None of the above

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Question 72

True/False

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The government of Velovia made progress in its efforts to bring rapid inflation under control. Although prices are still rising, the rate of increase has slowed considerably. This suggests that Velovia is experiencing disinflation.

A) True
B) False

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Question 73

Multiple Choice

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In most large cities there are a large number of bakeries. These bakeries produce similar, but not identical, products. Some bakeries claim to have the best cheesecakes in town, while others brag about their cookies or specialty breads. The bakery market in a large city is an example of:

Current measures of productivity in the service sector provide an accurate measure of changes in the quality of output.

Three important economic indicators of the United States are the unemployment rate, the price indices, and the:

It is understandable that productivity is rising faster in the service sector because service businesses have newer technologies than the manufacturing sector and fewer laborers.

Communist values are disappearing because:

While scanning the movies section in your local online newspaper, you click on the business section by mistake. While you're there, you quickly scan a report that says government spending will again exceed tax revenues in the current year. This means that the:

GLAMOR GAL, a popular women's cosmetics company is gaining popularity among younger women. Differentiating itself from the sea of companies that compete for the same business, it focuses on products for sensitive, youthful skin. GLAMOR GAL clearly operates in an oligopolistic environment.

unemployment refers to unemployment caused by the restructuring of firms or by a mismatch between the skills of job seekers and the requirements of available jobs.

A problem with the CPI is that it measures the price changes of only food and clothing, while ignoring what happens to the prices of such important items as medical care and energy.

Which of the following indicators provides the clearest indication that an economy is experiencing deflation?

Adam Smith believed that since businesspeople are motivated to improve their own prosperity, their actions are unlikely to benefit society as a whole.

Deanne is a vocal critic of socialism. She likes to point out that in recent years the governments in many socialistic nations have cut back on government services and have reduced taxes. Deanne believes that this trend will ultimately result in all nations adopting pure capitalistic ideals. Recent evidence suggests that Deanne's views are essentially correct.

At the equilibrium price, the quantity consumers desire to buy equals the quantity sellers desire to sell.

The total value of a country's output of final goods and services in a given year is known as the gross domestic product (GDP).

(p. 37 Jill owns a bakery that specializes in cheesecakes. Until recently, Jill charged a price of $12 for each cheesecake. At this price Jill's customers bought an average of 84 cheesecakes each week. For the last few weeks, she has reduced her price to $10.50 per cheesecake, and her customers have purchased an average of 96 cheesecakes each week. These results are consistent with the economic concept of demand.

Recently, Hugo Chavez, the Prime Minister of Venezuela announced that he is standing behind the concept of state owned utilities and public schools in his nation. Although not all industry is owned and managed by the government, his ideas would lead one to believe that he has a preference for socialism.

Danny was laid off from his job five months ago. At first, he looked for a new job every day. During the past six weeks, however, Danny became depressed about his employment status and quit trying to find a job. According to the criteria used by the government, Danny is a civilian whose job status is included in computing the national unemployment rate.

If the national debt is $10 trillion, the national deficit will be considerably higher.