Are you Economically Literate?
Take the survey on this page to find out. If you do better than 45 percent for a final
score, then you're more economically literate than 404 respondents
from across the nation who took part in the Minneapolis Fed's national
economic literacy survey.
The national telephone survey, which has a sampling error of plus
or minus 5 percentage points, was conducted in September and October
1998 by the Minnesota Center for Survey Research a the University
of Minnesota. The purpose of the 13 questions was to test the country's
knowledge of questions relating to the bank's six key concepts of
economics. Those six concepts are defined in the preceding article
"Why Johnny Can't Choose," which also provides
analysis of the survey.
Complete results of the survey, including
demographic and geographic breakdowns, are available.
Which of the following occurs when one country trades wheat
to another country in exchange for oil?
Both countries gain.
Both countries lose.
The country that trades wheat gains, the country that trades oil
The country that trades oil gains, the country that trades wheat
Answer: a. Both countries gain because both nations benefit
from specialization and exchange. If continuing exchanges of wheat
for oil take place, all other answers are ruled out, for if one
country did not benefit, there would be no incentive for it to participate
in additional exchanges.
70 % Answered Correctly
What is the most important task of all economics?
To balance imports and exports.
To balance the government's budget.
To make the best use of scarce resources.
To save money to reduce the national debt.
Answer: c. The economic wants of people in any society are virtually
limitless. Resources are scarce; thus, every economic system must choose
how to make the most efficient use of its scarce resources to produce
those goods and services it desires or needs the most.
28 % Answered Correctly
When a country's people and its other resources are fully
employed, which of the following must be true before more of any
one item can be produced?
Private enterprise has to produce it rather than the government.
There has to be less production of other products.
There has to be a general decrease in prices.
Answer: b. To produce more of any one product, some resources
must be shifted away from the production of another product when
a nation's human and material resources are being fully and efficiently
used. This illustrates the problem of economizing, always faced
when resources are limited.
19 % Answered Correctly
When industries or countries specialize in producing goods
and services, this results in ... ?
Increased price inflation.
Less output per hour worked.
Greater economic interdependence.
More equal distribution of income.
Answer: c. Specialization of labor means those workers
in a certain industry or given locations tend to produce only
those products that they can make most efficiently. Therefore,
they must buy other products that workers elsewhere make most
efficiently. These circumstances tend to increase trade between
regions or nations and promote greater economic interdependence.
50 % Answered Correctly
What is the most essential characteristic
of a market economy?
Effective labor unions.
Good government regulation.
Responsible action by business leaders.
Active competition in the marketplace.
Answer: d. Active competition in the marketplace is essential
for the effective operation of a market economy. Competitive markets
force business firms to produce the products that consumers demand
at the lowest prices that will cover costs. Although the other
answers might help a market economy to work well, a market economy
could function without any of them.
66 % Answered Correctly
In a market economy, individuals pursue their own self-interest.
Does this serve the public interest because of the ...?
Operation of competitive markets.
Social responsibility of business leaders.
Careful planning and coordination of market activity.
Individuals understand what is in the public interest.
Answer: a. In a market economy, the desire of business
owners to make profits and the desire of workers to obtain higher
wages lead to the production of those goods and services consumers
want most. A market economy relies on competition to assure that
if consumer demand goes up, increased output is supplied at the
lowest prices that will cover all costs of production and still
leave a reasonable profit. Thus, competitive markets play a stronger
role than any of the forces proposed in the other answers.
45 % Answered Correctly
What would happen to employment if the government mandated
a minimum wage above
what employers currently pay?
Employment would go up.
Employment would go down.
Employment would stay the same.
Answer: b. Since minimum wage laws are designed to raise
wages above their market-determined rates, employment would most
likely decline. The demand curve for labor slopes downward, so
quantity of labor demanded at a higher wage is less than the quantity
demanded at a lower wage.
46 % Answered Correctly
Why do professional sports players generally earn more than
farmers and steelworkers?
Team owners are monopolists.
Sports players are really entertainers rather than producers.
There are fewer professional sports players than farmers or
Good sports players are more scarce, given the demand for their
Answer: d. Salaries or wages earned by most individuals
depend basically on the demand for their services relative to
the supply of such services. Since excellent baseball players
are very scarce relative to the strong demand for their services
from major league clubs, the salaries they receive are higher
than those received by most other individuals. The other answers
may all be true, but the answer above provides the most fundamental
28 % Answered Correctly
Which of the following approaches to pollution control makes
the best use of a country's economic resources?
Abolishing the use of toxic chemicals.
Using resources to reduce all pollution damage.
Controlling pollution as long as the extra benefits are greater
than the extra costs.
Prohibiting economic activities that cause pollution or harm
Answer: c. The most efficient approach to pollution control
is to increase controls as long as the extra benefits exceed the
extra costs. The other solutions mentioned would reduce pollution,
but the costs of these policies are likely to far outweigh the
extra (or marginal) benefits.
38 % Answered Correctly
Which of the following limits an economy's potential output?
The quantity and quality of labor, capital, and natural resources.
Business demand for final goods and services.
Government regulations and spending.
The amount of money in circulation.
Answer: a. While all the items listed may influence the
amount of an economy's real output at any specific time, the upper
limit is set by the quantity and quality of its real resources--labor,
capital and natural resources. Business demand, the amount of
money in circulation, or government spending may help to increase
real output but the real resources set the ceiling on output available
24 % Answered Correctly
If your annual income rises by five percent while prices
of the things you buy rise by ten percent ...
You are better off.
You are worse off.
You are unaffected.
Answer: b. If the prices of the goods and services a person
buys rise more than the increase in that person's income, that
individual's purchasing power, that is, the ability to buy a given
quantity of goods and services, has declined.
90 % Answered Correctly
What must the government do to reduce high inflation?
Increase both spending and the money supply.
Decrease both spending and the money supply.
Decrease spending and increase the money supply.
Increase spending and decrease the money supply.
Answer: b. The combined policy of a decrease in government
spending and the money supply would be most likely to reduce inflation.
30 % Answered Correctly
Why are private businesses not likely to operate a lighthouse?
Ship owners buy insurance policies to protect themselves from
losses so they won't pay for lighthouses.
The light from the lighthouse can be used even by ships that
do not pay a fee for the service.
It would cost private business more to operate a lighthouse
than it costs the government.
The cost of operating a lighthouse is too high.
Answer: b. The lighthouse is a classic case of a public
good, that is, a good not subject to the exclusion principle.
In other words, beneficiaries of the lighthouse (ships at sea)
cannot be excluded from consumption of the benefits of the lighthouse
if they refuse to pay for those benefits. Therefore, a private
business is unlikely to build a lighthouse because it would have
great difficulty in identifying the consumer of its services and
collecting fees from them.
40 % Answered Correctly
The above test, and the rationale for the correct answers,
are based on the "Test of Economic Literacy," Second Edition,
Examiner's Manual, by John C. Soper and William Walstad, Joint
Council on Economic Education, 1987.