Economics: Supply & Demand — Answer Key
Part A: Multiple Choice
Circle the best answer for each question.
1. A drought destroys half the wheat crop in the country. What will most likely happen to the price of bread?
A) The price will drop because people eat less bread
B) The price will rise because the wheat supply is lower
C) The price will stay the same because bread is a need
D) The price will drop because farmers will grow more wheat
When a drought cuts the wheat supply in half, there is less wheat available to make bread while demand stays the same, so bakeries must pay more for wheat and pass that higher cost on to customers.
2. Which is the best example of how the government helps keep markets fair?
A) The government tells every store what prices to charge
B) The government closes all businesses that earn a profit
C) The government creates safety rules so products do not harm people
D) The government gives money only to the largest companies
Safety regulations protect consumers by requiring businesses to meet quality standards, preventing companies from selling dangerous or harmful products just to save money.
3. If inflation rises quickly, what happens to the money in a person's wallet?
A) It can buy more goods than before
B) It can buy fewer goods than before
C) It becomes worth exactly the same as before
D) It turns into a different kind of currency
Rapid inflation means prices climb faster than people's income, so the same amount of cash in your wallet purchases fewer items than it did before prices went up.
4. A new factory opens and starts making sneakers in a town where two other sneaker factories already exist. What is the most likely result?
A) All three factories will raise their prices together
B) Consumers will have to buy fewer sneakers
C) Increased competition may lead to lower prices for sneakers
D) The government will shut down the new factory
More factories making the same product means more competition for customers, so each factory may lower prices or improve quality to attract buyers away from the others.
Part B: Fill in the Blank
Write the correct answer on each line.
1. When prices rise across the whole economy over time, it is called inflation.
Inflation describes a sustained rise in the general price level, not just one item getting more expensive. It reduces the purchasing power of every dollar in circulation.
2. The government uses tax money to pay for public services like roads and schools.
Tax revenue is how the government funds public services -- without taxes collected from citizens and businesses, there would be no money to build roads, run schools, or pay public workers.
3. A decrease in the overall supply of a resource can cause its price to increase.
When supply drops but demand stays steady, buyers compete for fewer available goods, which drives the price upward until some buyers can no longer afford to purchase.
4. Government regulations protect consumers by setting rules businesses must follow.
Government regulations set clear rules businesses must obey -- like food safety standards and truth-in-advertising laws -- so consumers can trust that products are safe and fairly described.
5. When many sellers offer the same product, the level of competition in the market is high.
High competition means many sellers are vying for the same customers, which typically leads to lower prices and better products because each seller must work harder to win business.