Economic Literacy Survey

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?

1. Both countries gain.

2. Both countries lose.

3. The country that trades wheat gains, the country that trades oil loses.

4. The country that trades oil gains, the country that trades wheat loses.

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?

1. To balance imports and exports.

2. To balance the government's budget.

3. To make the best use of scarce resources.

4. 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?

1. Private enterprise has to produce it rather than the government.

2. There has to be less production of other products.

3. 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 ... ?

1. Increased price inflation.

2. Less output per hour worked.

3. Greater economic interdependence.

4. 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?

1. Effective labor unions.

2. Good government regulation.

3. Responsible action by business leaders.

4. 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 ...?

1. Operation of competitive markets.

2. Social responsibility of business leaders.

3. Careful planning and coordination of market activity.

4. 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?

1. Employment would go up.

2. Employment would go down.

3. 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?

1. Team owners are monopolists.

2. Sports players are really entertainers rather than producers.

3. There are fewer professional sports players than farmers or steelworkers.

4. Good sports players are more scarce, given the demand for their services.

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 explanation.

28 % Answered Correctly

Which of the following approaches to pollution control makes the best use of a country's economic resources?

1. Abolishing the use of toxic chemicals.

2. Using resources to reduce all pollution damage.

3. Controlling pollution as long as the extra benefits are greater than the extra costs.

4. Prohibiting economic activities that cause pollution or harm the environment.

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?

1. The quantity and quality of labor, capital, and natural resources.

2. Business demand for final goods and services.

3. Government regulations and spending.

4. 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 for production.

24 % Answered Correctly

If your annual income rises by five percent while prices of the things you buy rise by ten percent ...

1. You are better off.

2. You are worse off.

3. 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?

1. Increase both spending and the money supply.

2. Decrease both spending and the money supply.

3. Decrease spending and increase the money supply.

4. 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?

1. Ship owners buy insurance policies to protect themselves from losses so they won't pay for lighthouses.

2. The light from the lighthouse can be used even by ships that do not pay a fee for the service.

3. It would cost private business more to operate a lighthouse than it costs the government.

4. 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.