Economics Chapter 1 Macro

Suppose you find $20. If you choose to use the $20 to go to the football game, youropportunity cost of going to the game is..?

$20 (because you could have used the $20 to buy other things) plus the value of your time spent at the game.

You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand? (Assume that the hot dogs cost you nothing.) Your decision rule should be to complete the hot-dog stand as long as the cost to complete the stand is less than..

$800

How People Make Decisions

1. People face trade-offs. 2. The cost of something is what you give up to get it. 3. Rational people think at the margin. 4. People respond to incentives.

How People Interact

5. Trade can make everyone better off. 6. Markets are usually a good way to organize economic activity. 7. Governments can sometimes improve market outcomes.

How the Economy as a Whole Works

8. A country's standard of living depends on its ability to produce goods and services. 9. Prices rise when the government prints too much money. 10. Society faces a short-run trade-off between inflation and unemployment.

Marginal Change

A small incremental adjustment to an existing plan of action

Principle 8

A country's standard of living depends on its ability to produce goods and services

Market Failure

A situation in which a market left on its own fails to allocate resources efficiently.

Which of the following activities is most likely to produce an externality? - A student that reads a novel for pleasure. - A student sit at home and watches television. - A student has a party in her dorm room. - A student eats a hamburger in the student union.

A student has a party in her dorm room.

International trade benefits a nation when..

All nations are specializing in producing what they do best.

Foreign Trade

Allows a country to have a greater variety of products at a lower cost than if it tried to produce everything at home

Market Economy

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

Inflation

An increase in the overall level of prices in the economy.

Externality

Cost or benefit of an economic activity experienced by a third party. The uncompensated impact of one person's actions on the well-being of a bystander.

Trade-off

Giving up one thing for another

Principle 7

Governments can sometimes improve market outcomes

High and persistent inflation is caused by..

Governments increasing the quantity of money too much.

Efficiency

Efficiency means that society is getting the maximum benefits from its scarce resources. Efficiency refers to the size of the economic pie.

Equality

Equality means that those benefits are distributed uniformly among society's members. Equality refers to how the pie is divided into individual slices.

Business Cycle

Fluctuations in economic activity, such as employment and production.

Which of the following would be least capable of producing an externality? - Education - Food - Cigarettes - Studio Equipment - Inoculations against disease

Food

Raising taxes and increasing welfare payments..

Improves equality at the expense of efficiency.

Productivity can be increased by - Raising union wages. - Improving the education of workers. - Restricting trade with foreign countries. - Raising minimum wages.

Improving the education of workers.

An increase in the price of beef provides.. - Information that tells producers to produce more beef. - Information that tells consumers to buy more beef. - Information that tells consumers to buy less pork. - No information because prices in a market system are managed by planning boards.

Information that tells producers to produce more beef.

If a central bank uses the tools of monetary policy to reduce the demand for goods and services, the likely result is (lower/higher) inflation and (lower/higher) unemployment in the short run.

Lower; Higher

Principle 6

Markets are usually a good way to organize economic activity

Which of the following situations descries the greatest market power? - A student's impact on college tuition - Volvo's impact on the price of autos - Microsoft's impact on the price of desktop operating systems - a farmer's impact on the price of corn

Microsoft's impact on the price of desktop operating systems.

Principle 1

People face trade-offs

Principle 4

People respond to incentives

Principle 9

Prices rise when the government prints too much money

Rational People

Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities. They compare Marginal Benefits and the Marginal Costs.

Principle 3

Rational people think at the margin

Trade-offs are required because wants are unlimited and resources are..

Scarce

Principle 10

Society faces a short-run trade-off between inflation and unemployment

Economics is the study of how..

Society manages its scarce resources

The main reason that some nations have a higher average living standards than other is that..

Some nations have higher levels of productivity.

Incentive

Something that induces a person to act, either punishment or reward.

Becuase people respond to incentives, we would expect that if the average salary of accountants increases by 50% while the average salary of teachers increases by 20%..

Students will shift their majors from education to accounting.

Market Power

The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

Property Rights

The ability of an individual to own and exercise control over scarce resources.

Adam Smith's "invisible hand" refers to..

The ability of free markets to reach desirable outcomes, despite the self-interest of market participants.

A rational person does not act unless..

The action produces marginal benefits that exceed marginal costs.

If a nation has high and persistent inflation, the most likely explanation is..

The central bank creating excessive amounts of money.

Principle 2

The cost of something is what you give up to get it

Which of the following is not part of the opportunity cost of going on vacation? - The money you spent on a Broadway show - The money you spent on food - The money you spent on airline tickets - The money you could have made if you had stayed home and worked

The money you spent on food.

Productivity

The quantity of goods and services produced from each unit of labor input.

Most economists describe the short-run effects of money growth as follows: - Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services. - Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services. - More hiring means lower unemployment.

This line of reasoning leads to one final economy-wide trade-off: a short-run trade-off between inflation and unemployment.

Principle 5

Trade can make everyone better off

In the short run, a decrease in inflation temporarily increases unemployment. (T/F)

True

Market participants act as if guided by an 'invisible hand' to produce outcomes that promote general economic well-being. (T/F)

True

Opportunity Cost

What you give up to get that item.

You have spent $1,000 building a hot-dog stand based on estimates of sales of $2,000. The hot-dog stand is nearly completed, but now you estimate total sales to be only $800. You can complete the hot-dog stand for another $300. Should you complete the hot-dog stand? (Assume that the hot dogs cost you nothing.)

Yes