Module 6 Practice Exam and Glossary V14
Term
Circular Flow Diagram
Definition
The flow of resources between four main players in the economy—households,
businesses, the government, and the rest of the world. The four main players interact in
Circular Flow Diagram Businesses
three types of markets —factor, product, and financial.
Includes any company type that earns income from the sale of goods and services.
Example: They grow, harvest, prepare cherries for pies.
Circular Flow Diagram Factor market
The exchange of the factors of production including components of land, labor, and
capital, such as a coffee company purchasing equipment to process coffee beans.
Circular Flow Diagram Financial market
Refers to the stock market and banking services, including the loans to all the other
economic players use to meet their goals. Example: Loaning money for a new coffee
grinder factory to be built.
Circular Flow Diagram Government
Circular Flow Diagram Households
Circular Flow Diagram Product market
Circular Flow Diagram Rest of the world
Common Good
Eminent domain
Represents any lawmaking body (local, state, or national) that collects taxes and provides
services to individuals and businesses. Example: Sets standards for food safety, taxes for
production of cherry pies.
Include individuals like you and those living in the same home. Example: You and your
mom purchase cherry pies.
The buying and selling of finished goods and services. Example: buying a morning latte.
Represents interaction with all those three groups in foreign countries. Example: Export
cherry pies to international consumers.
A common good is property that everyone owns equally, such as tax-supported land or
structures like public parks, schools, or beaches. Everyone helps pay for common goods
through taxes and has equal opportunity to use them.
Power of a government to pay for and take a person’s property for an alternative use
without consent.
Externalities
Costs or benefits to third parties. “Third-party,” or “third parties,” describes people who
did not make the initial choice that created the externality. Externalities may be positive or
negative depending on how they affect other people. Externalities result from the freerider problem, the use of common goods, and the use of free resources.
Free Resources
One impact of externalities is on the use of free resources. Free resources refer to
productive ingredients that exist in quantities greater than people need or want for
production. However, this does not mean they are unlimited or not valuable.
Free Rider
Incentive
The free-rider problem refers to how people can benefit from a good without necessarily
paying for the costs of that good.
A cost or benefit that encourages a person to make a choice or take action.
Negative Externalities
Undesirable and unwelcome effects on third parties. Example: People flush old
prescription medications, contaminating the drinking water.
Positive Externalities
Desirable and welcome effects on third parties. Example: Students clean up beach litter
that attracts more tourists. More tourists buy goods and services boosting the local
economy.
1: Define the situation or problem. 2: Identify the important criteria for solution
Steps in a rational
decision making model
evaluation. 3: Consider all possible solutions or alternatives. 4: Calculate the consequences
of these solutions versus satisfying the criteria. 5: Choose the best option.
Module 6 Practice Exam V14
1.
In this circular flow diagram, the flow direction that could represent personal income taxes corresponds to letter
A. B
B. E
C. O
D. P
2.
Steve's stock portfolio makes a five percent gain and he sells a portion of his holdings. Under which heading on
the chart would this go? Who else benefits from Steve's gain?
A. Factors for Production; Steve would pay the rest of the world via foreign policy
B. Factors for Production; Steve would pay the government more in the form of taxes
C. Wages, Rent, and Dividends; Steve would pay the rest of the world via foreign policy
D. Wages, Rent, and Dividends; Steve would pay the government more in the form of taxes
3. An externality is an
A. intended consequence for a third-party
B. unintended consequence for a third-party
C. intended consequence for a second-party
D. unintended consequence for a second-party
4.
The map above shows air release, or emissions, sites across the United States. These sites include locations such
as smokestacks, factories, and high vehicle traffic areas. The data in the map most directly relate to potential
negative and positive externalities affecting
A. commons
B. incentives
C. free resources
D. free riders
5. An automobile company is building a new factory in your town. What may be a positive externality of this
event?
A. Better schools from increase in property tax revenue
B. Noise produced by the workers and factory machines
C. Reduction of contaminants in the local water supply
D. Improvement in the level of pollutants in the air
6. Which of these is a negative externality that might be caused by a Canadian company carrying out large-scale
strip mining, which is environmentally destructive, in Brazil?
A. Decline in the quality of Brazilian roadways
B. Increased competition among North American businesses
C. Decreased trust in North American businesses
D. Funding for education in Brazilian schools
7. Fiona and her fellow Green Committee members are studying the effects of the use of energy-efficient light
bulbs. Which of these may be a reason to oppose the switch?
A. Learning government standards involved in light bulb manufacturing
B. Learning that energy-efficient light bulbs are harder to recycle
C. Reading literature about government-sponsored solar-power initiatives
D. Reading that the old light bulbs are more plentiful and less cost effective
8. You have a lot of free time after school. You applied for a temporary job to save money for college. Two
companies called to offer you a part-time position. The criterion likely to be most important to you in
choosing which company to work for is the
A. pay rate
B. schedule
C. nature of work
D. ability to advance
9. Florida’s Congress decides to allow more coal shipping into the state by trains. Which of the following would be
a negative externality for the environment?
A. Increase taxes on citizens
B. More renewable resources used
C. Increase air pollution
D. Higher costs on coal
10. Starbucks opens next to the local coffee shop in town. Which situation is a negative externality?
A. Local coffee shop loses customers
B. Increase taxes
C. Higher cost of local coffee shop products
D. There are no negative externalities everyone loves Starbucks
11. Pollution in your community is growing. Which of the following scenarios explains the relationship between
household and government in the circular flow diagram?
A. There is no relationship between households and government
B. Less tourism causes government shut down
C. Governments decrease taxes to allow people more money to spend in the economy
D. Increased pollution causes government to raise taxes on the citizens to pay for pollution cleanup.
12. The state of Florida decides to create a train route that would travel directly from Jacksonville to Tampa. Which
of the following would be an example of a positive externality for the local people?
A. The state will have to increase taxing in order to pay for the new project
B. Many jobs would be created to build the railway, as well as keep it running
C. The governor would be re-elected for a 2nd term
D. The amount of tolls taken in from travelers on the roadways will decrease
13. Due to the rising costs of business, a popular local clothing store in a small town is forced to close its doors.
Who will be impacted by the negative externalities the most?
A. The workers laid off and their families
B The clothing store in the next town over
C The President of the United States
D The designers who supply the store with their brand
14. Due to a recent major gas leak, the local government is forced to mandate that all people must stay indoors for
at least 24 hours during clean up. This shows a connection between:
A The government and financial market sectors B
The household and product market sectors C The
government and household sectors
D The financial market and product market sectors
15. SM Air has manufactured Hardy, a super lightweight alloy twice the strength of steel but at half the weight and
at only 2/3rds the labor force. This new revolutionary alloy will change our perception on energy conservation,
therefore, fostering a new era of environmental conservation. Using the Circular flow chart, what major players
of our economy will be impacted the greatest as a result of the mass production of Hardy?
a.
b.
c.
d.
Government and household
Factor Market and household
Product market and rest of the world
Business firms and the factor market
16. The renowned M and S, a candy producer is seeking a new location to manufacture their new line of candy
called Snickerdoodle. This mouthwatering and savory caramelized chocolate will be introduced the week before
Valentine’s Day at a discounted rate and will be sold and distributed nationally from their new location. How
will the manufacturing of the new plant negatively impact the local environment?
a. M and S will be holding interviews for 100 new jobs in the community
b. The trucks will be diesel fueled, therefore, increasing the fuel sales of local gas stations
c. New roads will be constructed to accommodate the increased demand for delivery trucks cutting through
forest and farm land.
d. More highway patrols will be required to enforce safety laws, therefore leading to an increase in local
property taxes
17. How does the use of solar power might result in a positive externality to local businesses?
a. decrease in sales from a hardware store
b. increase in the utility bill
c. expansion of the inventory in hardware stores
d. savings on household taxes
18. A new bowling alley opened on a very poor neighborhood. Which of the following may result in a negative
externality for the local environment?
a. neighborhood gets disrupted by an increase in noise of people listening to concerts at night.
b. littering in surrounding areas
c. crime increases
d. diners would feel an increase in sales
19. The government determined to cut sales taxes. Which of the following may result in a negative externality
for the local environment?
a. non-profits would have to lay off employees.
b. trash pickup may experience delays
c. households would increase their shopping list
d. conservation programs can suffer budget cuts
20. A new bookstore opens in your neighborhood. Which circumstance would most likely be a positive
externality? (6.02)
A. Sales taxes increase to fund added services to the community.
B. The old bookstore down the street loses some customers.
C. Traffic increases in your neighborhood
D. Property taxes increase
21. Your community has recently built 2 additional schools. Which of the following would be a negative
externality for the local environment?
A. Less use of renewable resources
B. Higher Property Taxes
C. More groundwater pollution
D. More water consumption
22. The federal government approves setting a limit on industrial emissions. Which of the following would be a
potential negative externality for the local environment?
A. An decrease in air pollution
B. Industry Job layoffs
C. Lower rates of childhood asthma
D. Decrease in Acid rain
23. A new Walmart is opening in your community. Which of the following would be an example of a positive
externality associated with this event?
a. Traffic becomes worse in the community
b. The local hardware store is forced to close
c. Walmart offers scholarships to local high school students
d. Target decides not to open a store in your community
24.
Using the circular flow diagram above, which of the following scenarios would best represent D on the
chart?
a.
b.
c.
d.
The city uses donated land to establish a new park
High school students receive scholarships established by the mayor
A local manufacturing plant adds new machinery to increase production
Congress increases import taxes
25. A new manufacturing plant is opening in your community. Which of the following would be a possible
positive externality of this new business?
a. The plant dumps waste into the local river leading to polluted drinking water
b. Local hospitals see an increase in on-the-job injuries
c. New restaurants open due to an increase in employment and earnings by residents
d. A sales tax increase to fund new roads to support more traffic around the plant
26. The city council allocates funds for new school buildings to be built. Which of the following circumstances
would be a positive externality?
a) Students would enjoy the schools
b) The cost to build would allow jobs to be created and the unemployment rate to decrease.
c) Citizens would support the building of the schools.
d) Students would score better on standardize tests.
27. Silver Springs has had an increase growth of algae due to toxic runoff of the nearby farms. Which of the
following circumstances would be a positive externality?
a) The algae has been shown to increase the vegetation in the lakes thereby increasing the fish
population and improving the animal life.
b) Cows are growing bigger due to the waters effects and eating more food.
c) Fish are dying as are the other animals in the areas.
d) People are not liking the smell from the algae.
28. A severe cold front reaches through to Southern Georgia, closing businesses and schools for 3 days. What is
a positive externality?
A. Jacket sales are up
B. Overtime approved for sanitation workers
C. 3 more days of school in June
D. Gas prices go up
29. The local YMCA starts offering after school sports activities to kids of all ages for free. What is a
potential negative externality?
A. Less neighborhood crime
B. Improved wellness visits
C. Decrease in business at the local fast food restaurant
D. Bus pass use goes up
30. A local factory is found to be dumping waste into the water supply. What is a negative externality resulting
from this practice?
A. Hospital visits rise due to increased illness
B. A new ER doctor is hired at the hospital
C. Factory workers lose their jobs
D. Neighboring businesses see more customers after the factory shuts down
Module 6 Practice Exam V14 Answer Key
1. B: Household pay taxes to the Government.
2. D: Selling a portion of his holdings are an increase in income (wages, rent, dividends) and the increase in
income requires more taxes paid to the government.
3. B: Externalities are unintended consequences to third parties.
4. C: Air is considered a free resource. This map shows how a free resources are being effected by emissions.
5. A: A new factory would mean better salaries for employees and higher tax revenue. They can use this money
for better schools.
6. C: If the company is causing destruction in Brazil, it will lead to a greater distrust of companies from Canada.
7. B: The point of energy efficient light bulbs is to help the environment. If they cannot be recycled, then it
would defeat the purpose of being environmentally friendly.
8. A: Most of the time if you apply at two jobs you are willing to work at either one. Normally pay rates will be
the determining factor.
9. C: an increase in air pollution. Remember externalities are costs and benefits to the third party. Florida’s
Congress did not intend for increased air pollution because of the coal shipping and because it creates
unintended air pollution this is considered a negative externality.
10. A: Due to Starbucks moving next doors some consumers will go to Starbucks instead of the local coffee
shop.
11. D: when thinking about the relationship between the household and government you have to remember
what the household gives to the government which is money from taxes in exchange the government spends
the tax money on programs like those to clean up the pollution
12. B: The question asks for a positive externality for the local people. The fact that many people would now
need to be employed to build the project, as well as keep it running would be a positive effect.
13. A: the workers would feel the negative impact the most because they would now be without a job, income,
etc. While the designers will feel a negative impact, it will only be temporary as they can find a new store to
sell their merchandise.
14. C: This connection would occur because due to an environmental issue, the government is having a direct
impact on the households by forcing the residents to stay indoors.
15. A: They will be able to manufacture Hardy at only 2/3rds the labor force, therefore, leading to an increase
in the unemployment rate. In addition, the new alloy will reduce the demand for steel, also leading to the
reduction of the workforce. The household pays taxes so that the government can pay for programs for the
households. As a result in the reduction of the labor force, there will be a decrease in revenue generated by
taxes, ultimately leading to a decrease in social programs provided by the government to the households.
16. C: The question asks how will M and S negatively impact the local environment. When constructing new
roads, they must first prep the ground and surrounding area. An inference must be made that as they are
prepping, the local ecosystem will be disturbed. In addition, another interference can be made that with the
increase in delivery trucks, it will also lead to an increase in air pollution within the area.
17. C: Solar power use may result in households needing solar panes, new roofing materials, wires, etc., that
the local hardware store will stock. Thus the hardware store will make a greater profit.
18. B: An increase of people in the area normally results in greater litter in the surrounding areas.
19. A: Non-profits are often funded by local governments. Cutting sales taxes might result in the layoff of
workers.
20. (A): “An externality would be "positive" if these consequences are desirable and welcome effects on third
parties.” See page 2 of Lesson 6.02. Added services would be a positive consequence enjoyed by the
community.
21. (B): School districts receive a lot of their funding from local property taxes. Increases in taxes begin when
schools request additional funds from local governments to remain in operation which results in the form of a
higher taxes.
22. (B): Companies would have to off-set the add expense of producing less emissions or paying a fine which
could result in job-loss. It is the only negative effect on the list.
23. C – Answer choice is the only positive listed here. The other answer choices would all be negative
externalities associated with the new Walmart opening.
24. B – Point D on the circular flow diagram represents the relationship between the household and the
government. High school students receiving scholarships would best represent the effect of this relationship on
the household.
25. C – The only positive externality listed here is under answer C. New business opening due to the
manufacturing plant will have a positive effect on unemployment and the overall local economy.
26. B: The cost to build would allow jobs to be created and the unemployment rate would decrease is the best
positive externality as it would have the most impact on a third party.
27. A: an increase in the vegetation and fish population would be a unforeseen positive effect of the algae
growth.
28. B: A positive externality means we are looking for a positive third effect. Jacket sales going up would be an
initial effect. 3 more days of school and Gas prices going up are not positive effects while approved overtime
for workers would be a positive 3rd effect because they have to provide for the cleanup but are being given the
overtime.
29. C: All but the third option are positive effects. The fast food restaurant is the third party and a decrease in
business means less jobs overall for the community.
30. A: Hospital visits rise would be the negative externality as the ones getting sick are not directly related to
the initial problem and since they are not well it is a negative effect. If a new doctor is hired that is a positive
effect and neighboring businesses are happy to have increased business. Factory workers losing their jobs
would be a negative impact but directly as they are the ones who worked for the factory.