10 free sample questions with answers and explanations. See how you'd score on the real CLEP exam.
A country has a limited amount of resources and must decide how to allocate them between producing guns and producing butter. If the country chooses to produce more guns, what is the opportunity cost of this decision?
Explanation
The decrease in the production of butter is correct because the opportunity cost of producing more guns is the decrease in the production of butter, since the country has limited resources and must allocate them between the two goods.
What is the concept that describes the value of the next best alternative that is given up when a choice is made?
Explanation
Opportunity cost is correct because it refers to the value of the next best alternative that is given up when a choice is made, which is a fundamental concept in understanding the cost of making decisions.
What is the term for the fundamental problem of economics that arises because people have unlimited wants but limited resources?
Explanation
Scarcity is correct because it refers to the basic economic problem that arises from the mismatch between unlimited human wants and limited resources, which forces people to make choices.
What happens to resource allocation when a market is subject to externalities?
Explanation
Less efficient allocation is correct because externalities, such as pollution or other side effects not reflected in market prices, can lead to an overuse or underuse of resources, resulting in a less efficient allocation compared to what would occur if all costs and benefits were internalized by the market.
What is the primary function of a resource market?
Explanation
Allocating resources efficiently is correct because the primary function of a resource market is to match the supply of resources with the demand for them, ensuring that resources are used in the most valuable ways possible, thus maximizing efficiency.
What type of market structure is characterized by a single buyer of a resource?
Explanation
Monopsony is correct because it refers to a market structure where there is only one buyer of a particular resource, giving that buyer significant market power to influence the price of the resource.
What happens to the price of a resource when demand increases and supply remains constant?
Explanation
An increase in price is correct because when demand for a resource increases and the supply of that resource remains the same, the higher demand leads to a higher price, since consumers are willing to pay more to acquire the limited available resource.
What determines resource prices in a market economy?
Explanation
Supply and demand is correct because the interaction between the amount of a resource available and the amount that consumers are willing to buy determines the price, since high demand and low supply lead to higher prices, and low demand and high supply lead to lower prices.
Who is responsible for implementing monetary policy in the United States?
Explanation
The Federal Reserve is correct because it is the central bank of the United States, responsible for setting interest rates, buying or selling government securities, and regulating the money supply, by applying its dual mandate of maximum employment and price stability.
What is the term for a decrease in government spending or an increase in taxes?
Explanation
Contractionary fiscal policy is correct because it refers to a deliberate decrease in government spending or an increase in taxes, which reduces the amount of money in circulation and helps to slow down the economy, by applying the principles of fiscal policy.