Chapter 2 - Economist as Scientist

Economists always agree on which public policy is the best. True False

False

Different values are a reason for disagreement among economists. True False

True

Economists from which administrative department help design tax policy? a.Department of the Treasury b.Department of Justice c.Office of Management and Budget d.Department of Labor

a.Department of the Treasury

Positive statements are a. microeconomic. b. statements of prescription that involve value judgments. c. statements of description that can be tested. d. macroeconomic.

c. statements of description that can be tested.

Refer to the Figure. If this economy devotes all of its resources to the production of washers, then it will produce a.60 dryers and 50 washers b.80 dryers and 50 washers c.0 dryers and 100 washers d.80 dryers and 0 washers

c.0 dryers and 100 washers

Which of the following statements is normative? a. Printing too much money causes inflation. b. Large government deficits cause an economy to grow more slowly. c. People work harder if the wage is higher. d. The unemployment rate should be lower.

d. The unemployment rate should be lower.

Economic models are a. useless if they are simple. b. created to duplicate reality. c. usually made of wood and plastic. d. built with assumptions.

d. built with assumptions.

Normative statements are prescriptive, whereas positive statements are descriptive. True False

true

In the circular-flow diagram, which of the following is NOT a factor of production? a.Labor b.Revenue c.Land d.Capital

Revenue

In making which of the following statements is an economist acting more like a scientist? a. The rate of inflation should be reduced because it robs the elderly of their savings. b. A reduction in unemployment benefits will reduce the unemployment rate. c. The unemployment rate should be reduced because unemployment robs individuals of their dignity. d. The state should increase subsidies to universities because the future of our country depends on education.

A reduction in unemployment benefits will reduce the unemployment rate.

Refer to the Figure. Which arrow represents the flow of factors of production? a.B b.D c.A d.C

C In the circular-flow diagram, the outer set of arrows represents the flow of dollars, and the inner set of arrows shows the corresponding flow of inputs and outputs. Factors of production flow from households to firms in the markets for factors of production, therefore arrow C must represent this flow.

Policies such as rent control and trade barriers persist because almost all economists agree that those policies are desirable. True False

False

The advice of economists is the only thing a policymaker has to consider when implementing a proposed policy. True False

False

The scientific method is only applicable to studying the natural sciences. True False

False

When economists are trying to explain the world, they are policy advisers, but when economists are trying to help improve the world they are scientists. True False

False

In order to understand how the real world works, economists try to capture every aspect of the real world in their models that they construct. True False

False Economists make assumptions when constructing economic models in order to simplify the world and make it easier to understand. Depending on the question they want to answer, economists might change their assumptions to fit the goal of the model.

The Council of Economic Advisers was created in 1946 and consists of two members and a staff of several dozen economists. True False

False The Council of Economic Advisers was created in 1946 and consists of three members and a staff of several dozen economists.

In which of the following cases is the assumption most reasonable? a. To address the impact of money growth on inflation, an economist assumes that money is strictly coins. b. To estimate the speed at which a beach ball falls, a physicist assumes that it falls in a vacuum. c. To address the benefits of trade, an economist assumes that there are two people and two goods. d. To address the impact of taxes on income distribution, an economist assumes that everyone earns the same income.

To address the benefits of trade, an economist assumes that there are two people and two goods.

Which of the following statements regarding the circular-flow diagram is true? a. The factors of production are owned by households. b. If Susan works for IBM and receives a paycheck, the transaction takes place in the market for goods and services. c. If IBM sells a computer, the transaction takes place in the market for factors of production. d. The factors of production are owned by firms. e. None of the above is true.

a. The factors of production are owned by households.

Suppose two economists are arguing about policies that deal with unemployment. One economist says, "The government could lower unemployment by one percentage point if it would just increase government spending by 50 billion dollars." The other economist responds, "That's ridiculous. If the government spent an additional 50 billion dollars, it would reduce unemployment by only one-tenth of 1 percent, and that effect would only be temporary!" These economists a. disagree because they have different scientific judgments. b. disagree because they have different values. c. really don't disagree at all. It just looks that way. d. do none of the above.

a. disagree because they have different scientific judgments.

Which of the following is an example of a normative, as opposed to positive, statement? a.Gasoline prices ought to be lower than they are now. b.As the price of cars rises, more people choose to take the bus. c.The discount rate is the interest rate the Federal Reserve charges banks to borrow funds. d.An increase in the cigarette tax would cause a decrease in the number of smokers.

a.Gasoline prices ought to be lower than they are now.

Which of the following is an example of a positive, as opposed to normative, statement? a.Inflation occurs when the government prints too much money. b.Taxes are bad for the economy. c.Everyone should receive free health care. d.The world would be a better place without monopolies.

a.Inflation occurs when the government prints too much money.

Which of the following statements about economic models is correct? a.Models assume away irrelevant details, allowing us to see what is truly important. b.Models are not helpful in solving public policy debates. c.The more details a model includes, the better the model. d.It is not appropriate for models to incorporate equations or diagrams.

a.Models assume away irrelevant details, allowing us to see what is truly important.

Carol and Sharon are economists. Carol thinks that the wealthiest 5% of the US population should pay higher health insurance premiums so that those who are unemployed can still receive basic health care. Sharon thinks that the wealthiest should not be punished for their success and that the unemployed simply shouldn't receive health care if they cannot afford to pay for it themselves. In this example, Carol and Sharon a.have differences in values. b.will never come to an agreement because health care is a complicated market. c.disagree about the validity of a positive theory. d.have differences in scientific judgments.

a.have differences in values.

Almost all economists agree that a legitimate role for the government is a.the redistribution of income. b.creating large federal budget deficits. c.subsidizing professional sports franchises. d.managing agricultural subsidies.

a.the redistribution of income.

Differences in scientific judgment between economists are similar to all of the following except a.two biologists arguing about the fairness of health insurance premiums. b.meteorologists debating how much snow fall we will get in the upcoming blizzard. c.physicists debating how much friction is caused by salt on the roads. d.doctors debating which antibiotic is appropriate for a particular infection.

a.two biologists arguing about the fairness of health insurance premiums.

Suppose an economy produces two goods, food and clothing. This economy always operates on its production possibilities frontier. Last year, it produced 2000 units of food and 500 articles of clothing. This year it experienced a technological advance in its clothing-making industry. As a result, this year the society wants to produce 2200 units of food and 500 articles of clothing. Which of the following statements is correct? a.Because the technological advance occurred in the clothing-making industry, increases in output can only occur in the food industry. b.The technological advance reduced the amount of resources needed to produce 500 articles of clothing, so these resources could be used to produce more food. c.Because the technological advance occurred in the clothing-making industry, it is not possible to increase food production without reducing clothing production below 500. d.In order to increase food production in these circumstances without reducing machine production, the economy must experience unemployment.

b

Which of the following statements about microeconomics and macroeconomics is not true? a. Microeconomics and macroeconomics cannot be entirely separated. b. The study of very large industries is a topic within macroeconomics. c. Microeconomics is a building block for macroeconomics. d. Macroeconomics is concerned with economy-wide phenomena.

b. The study of very large industries is a topic within macroeconomics.

Which of the following will not shift a country's production possibilities frontier outward? a. an advance in technology b. a reduction in unemployment c. an increase in the capital stock d. an increase in the labor force

b. a reduction in unemployment

Suppose two economists are arguing about policies that deal with unemployment. One economist says, "The government should fight unemployment because it is the greatest social evil." The other economist responds, "That's ridiculous. Inflation is the greatest social evil." These economists a. disagree because they have different scientific judgments. b. disagree because they have different values. c. really don't disagree at all. It just looks that way. d. do none of the above

b. disagree because they have different values.

Refer to the Figure. Max works as a CPA for a corporation and is paid a salary in exchange for the accounting services he performs. Jim owns land and rents his land to companies in exchange for rent payments. If Max's income is represented by a flow of dollars from Box D to Box B of this circular-flow diagram, then Jim's income is represented by a flow of dollars from a.Box C to Box A b.Box D to Box B c.Box A to Box C d.Box C to Box D

b.Box D to Box B

Refer to the Figure. Jeff receives his first paycheck for working as a waiter. To which of the arrows does this transaction directly contribute? a.A and B b.C and D c.B only d.C only

b.C and D In the circular-flow diagram, the outer set of arrows represents the flow of dollars, and the inner set of arrows shows the corresponding flow of inputs and outputs. Factors of production, such as labor, flow from households to firms in the markets for factors of production. Similarly, income flows from firms to households in this same market. Therefore, this transaction must contribute to arrows C and D.

Which of the following steps does an economist not take when studying the economy? a.Collect data b.Create data in a laboratory c.Devise theories d.Analyze data

b.Create data in a laboratory

Economists from which administrative department help enforce the nation's antitrust laws? a.Department of the Treasury b.Department of Justiceb.Department of Justice c.Office of Management and Budget d.Department of Labor

b.Department of Justice

In the circular-flow diagram, which of the following items does NOT flow from households to firms? a.Factors of production b.Goods and services c.Labor d.Revenue

b.Goods and services

In the circular-flow diagram, which of the following do firms NOT do? a.Hire workers b.Produce factors of production c.Produce goods and services d.Use factors of production to produce output

b.Produce factors of production In the circular-flow diagram, households sell the use of their labor, land, and capital to firms in the markets for the factors of production. Firms use these factors of production to produce goods and services.

In the circular-flow diagram, which of the following do households NOT do? a.Buy goods and services that firms produce b.Produce goods and services c.Own the factors of production d.Sell their labor to firms

b.Produce goods and services

Suppose an economy only produces two goods, pizza and tables. Last month, the economy produced 100 pizzas and 10 tables. This month, the same economy produced 125 pizzas and 15 tables. Which of the following statements could NOT explain this change? a.This month, the economy experienced an improvement in technology. b.This month, the economy experienced a change in the opportunity cost of producing pizza. c.This month, the economy reduced the unemployment of its resources. d.This month, the economy experienced an increase in resources.

b.This month, the economy experienced a change in the opportunity cost of producing pizza.

In the markets for factors of production in the circular-flow diagram, households are _________ and firms are __________. a.buyers, buyers b.sellers, buyers c.buyers, sellers d.sellers, sellers

b.sellers, buyers

Which of the following would likely be studied by a microeconomist rather than a macroeconomist? a.the effect of changes in health care standards on gross domestic product b.the effect of gas prices on the profitability of snowplow companies in New England c.the effect of national debt on the interest rate d.barriers to effective international trade

b.the effect of gas prices on the profitability of snowplow companies in New England

Some economists disagree because their scientific judgment differs. Which of the following instances best reflects this source of disagreement? a.One economist believes that we should have a proportional rather than a progressive tax system; another economist believes that those in the top 5% of income earners should pay a higher percentage of their income in taxes. b.One economist believes in taxing cigarette manufacturers in order to try to decrease second-hand smoke; another economist believes the government should not intervene in free markets. c.One economist believes that the level of household saving would not be affected by a change in the tax laws; another economist believes that taxing a household's consumption would change a household's saving behavior. d.One economist believes that everyone should be given free health care; another economist believes that free markets should determine the distribution of health care benefits in a society.

c

Which of the following is most likely to produce scientific evidence about a theory? a. a radio talk show host collecting data on how capital markets respond to taxation b. a lawyer employed by General Motors addressing the impact of air bags on passenger safety c. a tenured economist employed at a leading university analyzing the impact of bank regulations on rural lending d. an economist employed by the AFL/CIO doing research on the impact of trade restrictions on workers' wages

c. a tenured economist employed at a leading university analyzing the impact of bank regulations on rural lending

Which of the following issues is related to microeconomics? a. the impact of the deficit on saving b. the impact of technology on economic growth c. the impact of oil prices on auto production d. the impact of money on inflation

c. the impact of oil prices on auto production

Refer to the Figure. Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of each sofa is a.3/2 cars. b.not constant. c.2/3 of a car. d.600 cars.

c.2/3 of a car.

Suppose an economist develops a theory that higher gas prices lead people to take more local vacations. According to the scientific method, which of the following is the economist's next step? a.Devise another theory that contradicts the initial one. b.Gather up support from other economists who agree with the theory. c.Collect and analyze data. d.Publish the theory as is.

c.Collect and analyze data.

Which of the following statements about economic models is NOT correct? a.Economic models are often composed of equations and diagrams. b.Economic models leave out irrelevant details. c.Economic models are not useful because they oversimplify the real world. d.Economists use assumptions to construct models.

c.Economic models are not useful because they oversimplify the real world.

Refer to the Figure. Efficient production is represented by which point(s)? a.L, M, N, O, and P b.L, M, Q c.L, M d.Q

c.L, M

Economists from which administrative department help the president formulate spending plans and regulatory policies? a.Department of the Treasury b.Department of Justice c.Office of Management and Budget d.Department of Labor

c.Office of Management and Budget

Sometimes economists disagree because their values differ. Which of the following instances best reflects this source of disagreement? a.One economist believes that when the tax on gasoline rises, people will reduce their consumption of gasoline; another economist argues that the demand for gasoline is inelastic and thus unresponsive to changes in the gas tax. b.One economist believes that the labor market is strengthening because the unemployment rate is declining; another argues that the unemployment rate is not a good measure of the labor market's health. c.One economist advises against a consumption tax because she thinks it's unfair for low-income people; another economist argues that what's fair isn't relevant. d.One economist believes that American jobs are being lost to over-seas manufacturers; another economist disputes this claim.

c.One economist advises against a consumption tax because she thinks it's unfair for low-income people; another economist argues that what's fair isn't relevant.

A survey of professional economists revealed that more than three-fourths of them agreed with a number of statements. Which of the following statement is NOT one of those propositions? a.Economic growth in developed countries like the United States leads to greater levels of well-being. b.Local and state governments should eliminate subsidies to professional sports franchises. c.The United States should restrict employers from outsourcing work to foreign countries. d.The United States should eliminate agricultural subsidies.

c.The United States should restrict employers from outsourcing work to foreign countries.

Suppose an economist advises a state's governor to raise the tax on cigarettes. The governor does not implement the policy because it would not be popular with voters. Which of the following statements best describes the scenario? a.This is a common occurrence. Policymakers typically disregard economists' advice since they don't believe it's useful. b.This would never happen because policymakers always follow economists' advice. c.This is a common occurrence. The policymaker knows the best policy but chooses not to institute it for other reasons. d.This is an uncommon occurrence. More often than not, policymakers follow the advice of economists.

c.This is a common occurrence. The policymaker knows the best policy but chooses not to institute it for other reasons.

Which of the following events would cause a production possibilities frontier to shift outward? a.a shift in resources from the production of one good to the production of the other good b.an increase in the money supply c.a technological improvement d.a change in society's preferences for one good over another

c.a technological improvement

In the markets for goods and services in the circular-flow diagram, households are _________ and firms are __________. a.buyers, buyers b.sellers, buyers c.buyers, sellers d.sellers, sellers

c.buyers, sellers

Any point outside a country's production possibilities frontier represents a combination of two goods that an economy a.can produce using all available resources and technology. b.will never be able to produce even with an increase in resources or superior technology. c.cannot currently produce. d.can produce using some portion, but not all, of its resources and technology.

c.cannot currently produce.

What are the two basic reasons why economists often appear to give conflicting advice to policymakers? a.differences in education and values b.differences in scientific judgment and education c.differences in scientific judgment and values d.differences in knowledge and opinions

c.differences in scientific judgment and values

Economists make assumptions to a.make models easier for students to understand. b.better match the complexity of the real world. c.focus their thinking. d.represent their political bias.

c.focus their thinking.

Almost all economists agree that a large federal budget deficit a.is highly desirable to keep an economy healthy. b.signals that we should increase subsidies to farmers. c.has an adverse effect on the economy. d.implies we should restructure the welfare system.

c.has an adverse effect on the economy.

In the simple circular-flow diagrams, the participants in the economy are a.households and markets. b.firms and government. c.households and firms. d.households, firms, and government.

c.households and firms.

When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good _________ as more of the good is produced. a.decreases b.remains constant c.increases d.cannot be determined

c.increases

"Total revenue rises when the quantity sold increases and prices remain constant" is an example of a a.negative economic statement. b.statement that contradicts one of the basic principles of economics. c.positive economic statement. d.normative economic statement.

c.positive economic statement.

Positive statements are NOT a.descriptive. b.made by economists speaking as scientists. c.prescriptive. d.claims about how the world is.

c.prescriptive. Positive statements are descriptive because they make a claim about how the world is. When an economist uses positive statements, he is speaking as a scientist. However, when an economist uses normative statements, he is speaking as a policy adviser.

Almost all economists agree that government subsidies on ethanol in the United States should be a.increased. b.unchanged. c.reduced. d.doubled.

c.reduced. In surveys of professional economists, many propositions were endorsed by an overwhelming majority of respondents. Included in that list was "Government subsidies on ethanol in the United States should be reduced or eliminated."

Economic growth is depicted by a. a movement along a production possibilities frontier toward capital goods. b. a shift in the production possibilities frontier inward. c. a movement from inside the curve toward the curve. d. a shift in the production possibilities frontier outward.

d. a shift in the production possibilities frontier outward.

The table above shows one set of production possibilities. What is the opportunity cost of increasing the production of corn from 800 bushels to 1200 bushels? a.400 bushels of wheat b.1300 bushels of wheat c.200 bushels of wheat d.500 bushels of wheat

d.500 bushels of wheat

A survey of professional economists revealed that more than three-fourths of them agreed with a number of statements. Which of the following statement is NOT one of those propositions? a.Tariffs and import quotas usually reduce general economic welfare. b.Fiscal policy has a significant stimulative impact on a less than fully employed economy. c.A ceiling on rents reduces the quantity and quality of housing available. d.Flexible and floating exchange rates are not an effective international monetary arrangement.

d.Flexible and floating exchange rates are not an effective international monetary arrangement.

Which of the following statements about the Council of Economic Advisers is NOT true? a.It writes the annual Economic Report of the President. b.It was created in 1946. c.It advises the president of the United States on economic policy matters. d.It implements the president's tax policies.

d.It implements the president's tax policies.

Which of the following statements about the circular-flow diagram is NOT correct? a.It helps explain how participants in the economy interact with one another. b.It represents the flows of inputs, outputs, and dollars. c.It is an economic model. d.It incorporates all aspects of the real economy.

d.It incorporates all aspects of the real economy.

Economists who are primarily responsible for advising Congress on economic matters work in which agency? a.the Federal Reserve b.the Department of Labor c.the Department of Justice d.The Congressional Budget Office

d.The Congressional Budget Office

Refer to the Figure. If this society moves from point R to point U, a.it gives up 160 sweaters to get 140 bushels of apples. b.it gives up 20 bushels of apples to get 60 sweaters. c.it gives up 60 bushels of apples to get 80 sweaters. d.it gives up 80 sweaters to get 60 bushels of apples.

d.it gives up 80 sweaters to get 60 bushels of apples

Some, but not all, government economists are employed within the administrative branch of government. Which of the following government agencies employs economists outside of the administrative branch? a.the Department of the Treasury b.the Council of Economic Advisers c.the Department of Justice d.the Federal Reserve

d.the Federal Reserve

Which of the following would likely be studied by a macroeconomist rather than a microeconomist? a.the effect of rent control on housing in New York City b.how tariffs affect the cotton industry c.the effect of an increase in the gas tax on fuel consumption d.the effects of borrowing by the federal government

d.the effects of borrowing by the federal government

The scientific method requires that a. only correct theories are tested. b. scientists use test tubes and have clean labs. c. only incorrect theories are tested. d. scientists use precision equipment. e. scientists be objective.

e. scientists be objective.

Points on the production possibilities frontier are a. efficient. b. inefficient. c. unattainable. d. normative. e. none of the above.

efficient

According to the circular-flow diagram, if Molly is an employee who delivers packages for Deliver Dynamite, she participates in the markets for a.factors of production exchanging packages for revenue. b.goods and services exchanging labor for income. c.factors of production exchanging labor for income. d.goods and services exchanging packages for wages, rent, and profit.

factors of production exchanging labor for income.

There is only one explanation for why economists give conflicting advice on policy issues, and it is that they have different scientific judgments about the validity of alternative theories. True False

false Economists often appear to give conflicting advice to policymakers. The two basic reasons for this are differences in scientific judgments and differences in values.

The production possibilities frontier is a graph that shows the various combinations of output that an economy should produce.

false The production possibilities frontier is a graph that shows the various combinations of output that the economy can produce given the available factors of production and the available production technology. It says nothing about what an economy should produce.

Almost all economists agree that a minimum wage a.does not affect unemployment. b.creates a shortage of workers. c.increases unemployment among young and unskilled workers. d.is necessary to meet a minimum standard of living.

increases unemployment among young and unskilled workers.

When an economy is operating _______ its production possibilities frontier, we know that there are unused resources of inefficiencies in the economy. a.inside b.on or inside c.on d.outside

inside

The economy cannot currently produce at point C because a.it is not using the most efficient production process. b.it would be inefficient to produce there. c.it is not using all of its resources. d.it does not have the resources and technology to produce that level of output.

it does not have the resources and technology to produce that level of output.

In the circular-flow diagram, which of the following items does NOT flow from firms to households? a.Output b.Goods c.Labor d.Wages

labor

Which of the following is not a factor of production? a. land b. labor c. capital d. money e. All of the above are factors of production.

money

Consider the production possibilities frontier for an economy that produces only sofas and cars. The opportunity cost of each car is the slope of the production possibilities frontier. True False

true

Points on the production possibilities frontier represent efficient levels of production. True False

true