MACRO
What is the equivalent cost of a 1965 pack of cigarettes measured in 1995 prices?
$0.45 x (152.4/31.5) = $2.18 > $2.00
Mary receives $10,000 of dividends on her General Motors stock.
$10,000 of profit from firms to market for factors of production. $10,000 income from market for factors of production to households. Capital services from households to market for factors of production. Inputs from market for factors of production to firms.
Joe gets a $15 haircut.
$15 of spending from households to market for goods and services. $15 of revenue from market for goods and services to firms. Services from firms to market for goods and services. Services from market for goods and services to households.
Suppose you find $20. If you choose to use the $20 to go to the football game, your opportunity 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.
Mary buys a car from General Motors for $20,000.
$20,000 of spending from households to market for goods and services. $20,000 of revenue from market for goods and services to firms. Car moves from firm to market for goods and services. Car moves from market for goods and services to household.
General Motors pays Joe $5,000 per month for work on the assembly line.
$5,000 of wages from firms to market for factors of production. $5,000 of income from market for factors of production to households. Labor from households to market for factors of production. Inputs from market for factors of production to firms.
If a cobbler buys leather for $100 and thread for $50 and uses them to produce and sell $500 worth of shoes to consumers, the contribution to GDP is
$500
Referring to question 17, your decision rule should be to complete the hot-dog stand as long as the cost to complete the stand is less than
$800
If inflation is 8 percent and the real interest rate is 3 percent, then the nominal interest rate should be
11%
If the nominal interest rate is 7 percent and the inflation rate is 3 percent, then the real interest rate is
4%
In 1989, the CPI was 124.0. In 1990, it was 130.7. What was the rate of inflation over this period?
5.4%
Name two economic propositions for which more than 90 percent of economists agree.
A ceiling on rents reduces the quantity and quality of housing available. Tariffs and import quotas usually reduce general economic welfare.
Indexed contract
A contract that requires that a dollar amount be automatically corrected for inflation
circular flow diagram
A diagram of the economy that shows the flow of goods and services, factors of production, and monetary payments between households and firms
Which contributes more when measuring GDP, a new diamond necklace purchased by a wealthy person or a soda purchased by a thirsty person? Why?
A diamond necklace because GDP measures market value.
Why would the exclusion of this type of production affect the measurement of Caribbean output more than U.S. output?
A greater proportion of the output produced by less-developed nations is nonmarket output. That is, it is not sold and recorded as a market transaction.
In making which of the following statements is an economist acting more like a scientist?
A reduction in unemployment benefits will reduce the unemployment rate.
Which of the following statements is true?
A self-sufficient country at best can consume on its production possibilities frontier.
shortage
A situation in which quantity demanded is greater than quantity supplied
surplus
A situation in which quantity supplied is greater than quantity demanded
Which of the following activities is most likely to produce an externality?
A student has a party in her dorm room.
Cost of Living Allowance (COLA)
An automatic increase in income in order to maintain a constant standard of living
market economy
An economic system where interaction of households and firms in markets determines the allocation of resources
marginal change
An incremental adjustment to an existing plan
When an economist makes a normative statement, is she more likely to be acting as a scientist or a policy adviser? Why?
As a policy adviser because normative statements are prescriptions about what ought to be and are somewhat based on value judgments.
Why do people choose to become interdependent as opposed to self-sufficient?
Because a consumer gets a greater variety of goods at a much lower cost than they could produce by themselves. That is, there are gains from trade.
Why does a production possibilities frontier have a negative slope (slope down and to the right)?
Because if an economy is operating efficiently, production choices have opportunity costs. If we want more of one thing, we must have less of another.
Why is a restriction of trade likely to reduce material welfare?
Because it forces people to produce at a higher cost than they pay when they trade.
Why is the production possibilities frontier bowed outward?
Because resources are specialized and, thus, are not equally well suited for producing different outputs.
Why does income = expenditure = GDP?
Because the income of the seller equals the expenditure of the buyer and GDP can be measured with either one.
What are the components of expenditure? Provide an example of each.
Consumption (food), investment (factory), government purchases (military equipment), net exports (sale of a Ford to France minus purchase of a Toyota produced in Japan).
How is your purchase of a $40,000 BMW automobile that was produced entirely in Germany recorded in the U.S. GDP accounts?
Consumption increases by $40,000, and net exports decrease by $40,000.
positive statements
Descriptions of the world as it is
In a and b above and c and d above, which is the opportunity cost of which—college for work or work for college? corn for beans or beans for corn?
Each is the opportunity cost of the other because each decision requires giving something up.
Name two reasons why economists disagree.
Economists may have different scientific judgments. Economists may have different values.
Can you give your roommate any insight into why economists might disagree on this issue?
Economists may have different scientific judgments. Economists may have different values. There may not really be any real disagreement because the majority of economists may actually agree.
Suppose you lend money to your sister at a nominal interest rate of 10 percent because you both expect the inflation rate to be 6 percent. Furthermore, suppose that after the loan has been repaid, you discover that the actual inflation rate over the life of the loan was only 2 percent. Who gained at the other's expense—you or your sister? Why?
Expected real interest rate = 4%. Actual interest rate = 8%. Actual real interest rate = 8 percent. You gained and your sister lost.
transfer payment
Expenditures by government for which they receive no goods or services
Self-sufficiency is the best way to increase one's material welfare.
F;
Net national product always exceeds a nation's GNP because of depreciation.
F; GNP - depreciation = NNP
If three variables are related, a change in the variable not represented on the x-, y-coordinate system will cause a movement along the curve drawn in the x-, y-coordinate system.
F; a change in a variable not represented on the graph will cause a shift in the curve.
Talented people who are the best at everything have a comparative advantage in the production of everything.
F; a low opportunity cost of producing one good implies a high opportunity cost of producing the other good.
An auto manufacturer should continue to produce additional autos as long as the firm is profitable, even if the cost of the additional units exceeds the price received.
F; a manufacturer should produce as long as the marginal benefit exceeds the marginal cost.
A perfectly competitive market consists of products that are all slightly different from one another.
F; a perfectly competitive market consists of goods offered for sale that are all exactly the same.
In the short run, a reduction in inflation tends to cause a reduction in unemployment.
F; a reduction in inflation tends to raise unemployment.
An individual farmer is likely to have market power in the market for wheat.
F; a single farmer is too small to influence the market.
If Japan has an absolute advantage in the production of an item, it must also have a comparative advantage in the production of that item.
F; absolute advantage compares the quantities of inputs used in production while comparative advantage compares the opportunity costs.
The United States will benefit economically if we eliminate trade with Asian countries because we will be forced to produce more of our own cars and clothes.
F; all countries gain from voluntary trade.
If there is a shortage of a good, then the price of that good tends to fall.
F; an excess demand causes the price to rise.
An increase in the price of steel will shift the supply of automobiles to the right.
F; an increase in the price of an input shifts the supply curve for the output to the left.
If borrowers and lenders agree on a nominal interest rate and inflation turns out to be greater than they had anticipated, lenders will gain at the expense of borrowers.
F; borrowers will gain at the expense of lenders
In the United States, investment is the largest component of GDP.
F; consumption is the largest component of GDP.
The production of an apple contributes more to GDP than the production of a gold ring because food is necessary for life itself.
F; contribution is based on market value.
Economic models must mirror reality or they are of no value.
F; economic models are simplifications of reality.
A new car produced in 2015, but first sold in 2016, should be counted in 2016 GDP because that is when it was first sold as a final good.
F; goods are counted in the year produced.
A tax on liquor raises the price of liquor and provides an incentive for consumers to drink more.
F; higher prices reduce the quantity demanded.
It is impossible for real interest rates to be negative.
F; if inflation exceeds the nominal interest rate, the real interest rate is negative.
When the price of a good is below the equilibrium price, it causes a surplus.
F; it causes an excess demand.
The production possibilities frontier is bowed outward because the trade-off between the production of any two goods is constant.
F; it is bowed outward because the trade-offs are not constant.
When a country removes a specific import restriction, it always benefits every worker in that country.
F; it may harm those involved in that industry.
If apples and oranges are substitutes, an increase in the price of apples will decrease the demand for oranges.
F; it will increase the demand for oranges.
Macroeconomics is concerned with the study of how households and firms make decisions and how they interact in specific markets.
F; macroeconomics is the study of economy-wide phenomena.
An increase in the price of helicopters purchased by the U.S. military is captured by the CPI.
F; military helicopters are not consumer goods.
When a line has negative slope, the two variables measured on each axis are positively correlated.
F; negative slope implies negative correlation.
Normative statements can be refuted with evidence.
F; normative statements cannot be refuted.
Points outside the production possibilities frontier are attainable but inefficient.
F; points outside the production possibilities frontier cannot yet be attained.
An increase in the price of diamonds will have a greater impact on the CPI than an equal percentage increase in the price of food because diamonds are so much more expensive.
F; prices in the CPI are weighted according to how much consumers buy of each and food is a larger portion of the consumption basket.
If nominal GDP in 2016 exceeds nominal GDP in 2015, real output must have risen.
F; prices or real output could have risen.
Adam Smith's "invisible hand" concept describes how corporate business reaches into the pockets of consumers like an "invisible hand."
F; the "invisible hand" refers to how markets guide self-interested people to create desirable social outcomes.
Because an increase in gasoline prices causes consumers to ride their bikes more and drive their cars less, the CPI tends to underestimate the cost of living.
F; the CPI tends to overstate the cost of living because people substitute toward cheaper goods.
If the CPI rises at 5 percent per year, then every individual in the country needs exactly a 5 percent increase in their income for their standard of living to remain constant.
F; the CPI tends to overstate the effects of inflation.
The producer price index (PPI) is constructed to measure the change in price of total production.
F; the PPI measures the price of raw materials.
When the government redistributes income with taxes and welfare, the economy becomes more efficient.
F; the economy becomes less efficient because it decreases the incentive to work hard.
If the lumberyard sells $1,000 of lumber to a carpenter and the carpenter uses the lumber to build a garage that he sells for $5,000, the contribution to GDP is $6,000.
F; the garage is the final good, valued at $5,000.
The largest category of goods and services in the CPI is medical care
F; the largest category is housing
The law of demand states that an increase in the price of a good decreases the demand for that good.
F; the law of demand states that an increase in the price of a good decreases the quantity demanded of that good (a movement along the demand curve).
If a country's workers can produce 5 hamburgers per hour or 10 bags of French fries per hour, absent trade, the price of 1 bag of fries is 2 hamburgers.
F; the price of 1 bag of fries is 1/2 of a hamburger.
When the city of Chicago purchases a new school building, the investment component of GDP increases.
F; the purchase is included in government purchases.
The statement, "An increase in inflation tends to cause unemployment to fall in the short run" is normative.
F; the statement is positive.
It is reasonable to assume that the world is composed of only one person when modeling international trade.
F; there must be at least two individuals for trade.
If there is an increase in supply accompanied by a decrease in demand for coffee, then there will be a decrease in both the equilibrium price and quantity in the market for coffee.
F; there will be a decrease in the equilibrium price, but the impact on the equilibrium quantity is ambiguous.
Price and quantity demanded for most goods are positively related.
F; they are negatively correlated.
Because people carry umbrellas to work in the morning and it rains later in the afternoon, carrying umbrellas must cause rain.
F; this is an example of reverse causation
Wages are an example of a transfer payment because there is a transfer of payment from the firm to the worker.
F; transfer payments are expenditures for which no good or service is received in return.
If an advanced country has an absolute advantage in the production of everything, it will benefit if it eliminates trade with less-developed countries and becomes completely self-sufficient.
F; voluntary trade benefits all traders.
If trade benefits one country, its trading partner must be worse off due to trade.
F; voluntary trade benefits both traders.
Workers in the United States have a relatively high standard of living because the United States has a relatively high minimum wage.
F; workers in the United States have a high standard of living because they are productive.
A goal for a society is to distribute resources more equally and fairly. How might you distribute resources if everyone were equally talented and worked equally hard? What if people had different talents and some people worked hard, while others did not?
Fairness might require that everyone get an equal share because they were equally talented and worked equally hard. Fairness might require that people not get an equal share because they were not equally talented and did not work equally hard.
Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant beans.
Farmer Jones gives up 10,000 bushels of corn.
Farmer Jones has 100 acres of land. He can plant corn, which yields 100 bushels per acre, or he can plant beans, which yield 40 bushels per acre. He chooses to plant corn.
Farmer Jones gives up 4,000 bushels of beans.
final production
Finished products sold to the end user
If workers and firms negotiate a wage increase based on their expectation of inflation, who gains or loses (the workers or the firms) if actual inflation turns out to be higher than expected? Why?
Firms gain, workers lose, because wages didn't rise as much as the cost of living.
What are the steps that one must go through in order to construct a consumer price index?
Fix the basket, find the prices, compute the basket's cost, choose a base year, and compute the index.
business cycle
Fluctuations in economic activity
Explain the difference between GDP and GNP. If the residents of the United States generate as much production in the rest of the world as the rest of the world produces in the United States, what should be true about U.S. GDP and GNP?
GDP is the production within the borders of the United States. GNP is the production of Americans no matter where the production takes place. They should be equal.
If your neighbor hires you to mow her lawn instead of doing it herself, what will happen to GDP? Why? Did output change?
GDP will rise because the mowing of the lawn was a market transaction. However, output didn't really rise.
In 1965, the CPI was 31.5. In 1995, the CPI was 152.4. While it is commendable that your grandfather quit smoking, what is wrong with his explanation?
He is only looking at the cost of cigarettes uncorrected for inflation. It is likely that the real cost has not risen as much as first appears or maybe even gone down
Provide some examples of this type of activity
Household production done by an individual without pay such as gardening, cleaning, sewing, home improvement or construction, child supervision, etc.
Suppose the world consists of two countries—the United States and Mexico. Furthermore, suppose there are only two goods—food and clothing. Which of the following statements is true?
If the United States has a comparative advantage in the production of food, then Mexico must have a comparative advantage in the production of clothing.
What are the variables that should affect the amount of a good that consumers wish to buy, other than its price?
Income, prices of related goods, tastes, expectations, and number of buyers in the market.
factors of production
Inputs such as land, labor, and capital
The government declares marijuana and cocaine illegal. The price of illegal drugs increases, creating more gangs and gang warfare. Due to the high price of illegal drugs, fewer street drugs are consumed.
Intended: Fewer street drugs are consumed. Unintended: More gangs and gang warfare.
The government bans imports of sugar from South America. South American sugar beet growers can't repay their loans to U.S. banks and turn to more profitable crops such as coca leaves and marijuana. U.S. sugar beet growers avoid a financial crisis.
Intended: Improve the financial condition of U.S. sugar beet growers. Unintended: Cause South American growers to grow marijuana and coca leaves.
The government prohibits the killing of wolves. The wolf population increases. Sheep and cattle herds suffer losses.
Intended: Increase the wolf population. Unintended: Damage to sheep and cattle herds.
The government places rent controls on apartments restricting rent to $300 per month. Few landlords are willing to produce an apartment at this price causing more homelessness. Some low-income renters are able to rent an apartment more cheaply.
Intended: Low-income renters get a cheap apartment. Unintended: Some people find no apartment at all causing more homelessness.
The government raises the minimum wage to $15 per hour. Some workers find jobs at the higher wage making these workers better off. Some workers find no job at all because few firms want to hire low-productivity workers at this high wage.
Intended: Raise the wage of low-productivity workers. Unintended: Some workers are unemployed at the higher wage.
The government raises the tax on gasoline by $2 per gallon. The deficit is reduced, and people economize on their use of gasoline. There is a boom in bicycle sales.
Intended: Reduce the deficit and use less gasoline. Unintended: Bicycle sales increase.
What do you think would happen to the amount of time it would take to find a parking place?
It would take much longer to find a parking place.
Joe is a tax accountant. He receives $100 per hour doing tax returns. He can type 10,000 characters per hour into spreadsheets. He can hire an assistant who types 2,500 characters per hour into spreadsheets. Which of the following statements is true?
Joe should hire the assistant as long as he pays the assistant less than $25 per hour.
Which of the following statements is true about a market economy?
Market participants act as if guided by an "invisible hand" to produce outcomes that promote general economic well-being.
Define GDP and explain the important terms in the definition.
Market value of all final goods and services produced within a country in a given period of time. ....
monopoly
Market with only one seller
What are the two subfields within economics? Which is more likely to be a building block of the other? Why?
Microeconomics and macroeconomics. Microeconomics is more of a building block of macro because when we address macro issues (for example, unemployment) we have to consider how individuals respond to work incentives such as wages and welfare.
Which of the following situations describes the greatest market power?
Microsoft's impact on the price of desktop operating systems
What do you think would happen to the number of students desiring to park their cars on campus?
More students would wish to park on campus
Which would have a greater impact on the CPI: a 20 percent increase in the price of Rolex watches or a 20 percent increase in the price of new cars? Why?
New cars, because there are a greater number of new cars in the typical consumption basket.
From 1978 to 1979, the minimum wage increased 25 cents. Did minimum-wage workers see an increase in their standard of living? (Use the data from question 2 in the Practice Problems above.)
No, $2.65 x (72.6/65.2) = $2.95, which is greater than $2.90.
Thinking in terms of opportunity cost, would the lower price of a parking permit necessarily lower the true cost of parking?
No, because we would have to factor in the value of our time spent looking for a parking place.
Is air scarce? Is clean air scarce?
No, you don't have to give up anything to get air. Yes, you can't have as much clean air as you want without giving up something to get it (pollution equipment on cars, etc.).
If you buy a $20,000 Toyota that was produced entirely in Japan, does this affect U.S. GDP? Show how this transaction would affect the appropriate expenditure categories that make up GDP.
No. Consumption would increase by $20,000 and net exports would decrease by $20,000. As a result, U.S. GDP is unaffected.
Is it likely that the United States will be better off if we limit auto imports? Explain.
No. If we import autos, it is because the opportunity cost of producing them elsewhere is lower than in the United States.
Does this mean that residents of the Caribbean nation are actually as well off materially as residents in the United States?
No. It just means that quantitative comparisons between nations of greatly different levels of development are very difficult to do and are often inaccurate.
Would the opportunity cost of parking be the same for students with no outside employment and students with jobs earning $15 per hour?
No. Students who could be earning money working are giving up more while looking for a parking place. Therefore, their opportunity cost is higher.
Can you "beat the market" with public information? That is, can you use publicly available information to help you buy something cheap and quickly sell it at a higher price? Why or why not?
No. Usually the market immediately adjusts, so that the price has already moved to its new equilibrium value before the amateur speculator can make his or her purchase.
In the real world, does every person in the country gain when restrictions on imports are reduced? Explain.
No. When we reduce restrictions on imports, the country gains from the increased trade but individuals in the affected domestic industry may lose.
Is a more realistic model always better?
Not necessarily. Realistic models are more complex. They may be confusing, and they may fail to focus on what is important.
Explain the law of demand.
Other things equal, price and quantity demanded of a good are negatively related.
Explain the law of supply.
Other things equal, price and quantity supplied of a good are positively related.
real GDP
Output valued at base-year prices
nominal GDP
Output valued at current prices
unemployment
Percent of the labor force that is out of work
Which statements are testable: positive statements or normative statements? Why?
Positive statements are statements of fact and are refutable by examining evidence.
normative statements
Prescription for how the world ought to be
Suppose a frost destroys much of the Florida orange crop. At the same time, suppose consumer tastes shift toward orange juice. What would we expect to happen to the equilibrium price and quantity in the market for orange juice?
Price will increase; quantity is ambiguous.
Suppose both buyers and sellers of wheat expect the price of wheat to rise in the near future. What would we expect to happen to the equilibrium price and quantity in the market for wheat today?
Price will increase; quantity is ambiguous.
If real GDP in 2016 exceeds real GDP in 2015, did real output rise? Did prices rise?
Real output rose because the value of output in each year is measured in constant base-year prices. We have no information on prices.
If this information about the storm is publicly available so that all buyers and sellers in the apple market expect the price of apples to rise in the future, what will happen immediately to the supply and demand for apples and the equilibrium price and quantity of apples?
Sellers reduce supply (supply shifts left) in the hope of selling apples later at a higher price, and buyers increase demand (demand shifts right) in the hope of buying apples now before the price goes up. The price will immediately rise, and the quantity exchanged is ambiguous.
economic models
Simplifications of reality based on assumptions
Provide an example of a transfer payment. Do we include it in GDP? Why or why not?
Social Security payments. No, because the government received no good or service in return.
If the government printed twice as much money, what do you think would happen to prices and output if the economy were already producing at maximum capacity?
Spending would double, but since the quantity of output would remain the same, prices would double.
Susan can work full time or go to college. She chooses work.
Susan gives up a college degree and the increase in income through life that it would have brought her (but doesn't have to pay tuition).
Susan can work full time or go to college. She chooses college.
Susan gives up income from work (and must pay tuition).
A country with a larger GDP per person generally has a greater standard of living or quality of life than a country with a smaller GDP per person.
T
A monopolistic market has only one seller.
T
A recession occurs when real GDP declines.
T
Absolute advantage is a comparison among producers based on productivity.
T
An advance in production technology would cause the production possibilities curve to shift outward.
T
An advance in the technology employed to manufacture Rollerblades™ will result in a decrease in the equilibrium price and an increase in the equilibrium quantity in the market for Rollerblades™.
T
An increase in the price of imported cameras is captured by the CPI but not by the GDP deflator
T
An unintended consequence of public support for higher education is that low tuition provides an incentive for many people to attend state universities even if they have no desire to learn anything.
T
Assumptions make the world easier to understand because they simplify reality and focus our attention.
T
Cigarettes should be valued in GDP at $5.50 per pack even though $1.00 of that price is tax because the buyers paid $5.50 per pack.
T
Comparative advantage is a comparison among producers based on opportunity cost.
T
Comparative advantage, not absolute advantage, determines the decision to specialize in production.
T
Depreciation is the value of the wear and tear on the economy's equipment and structures.
T
For an economy as a whole, income equals expenditure because the income of the seller must be equal to the expenditure of the buyer.
T
High and persistent inflation is caused by excessive growth in the quantity of money in the economy.
T
If Coca-Cola and Pepsi are substitutes, an increase in the price of Coca-Cola will cause an increase in the equilibrium price and quantity in the market for Pepsi.
T
If Germany's productivity doubles for everything it produces, this will not alter its prior pattern of specialization because it has not altered its comparative advantage.
T
If U.S. GDP exceeds U.S. GNP, then foreigners produce more in the United States than U.S. citizens produce in the rest of the world.
T
If a producer is self-sufficient, the production possibilities frontier is also the consumption possibilities frontier.
T
If an economy is operating on its production possibilities frontier, it must be using its resources efficiently.
T
If an economy is operating on its production possibilities frontier, it must produce less of one good if it produces more of another.
T
If an economy were experiencing substantial unemployment, the economy is producing inside the production possibilities frontier.
T
If consumers expect the price of shoes to rise, there will be an increase in the demand for shoes today.
T
If gains from trade are based solely on comparative advantage, and if all countries have the same opportunity costs of production, then there are no gains from trade.
T
If golf clubs and golf balls are complements, an increase in the price of golf clubs will decrease the demand for golf balls.
T
If lenders demand a real rate of return of 4 percent and they expect inflation to be 5 percent, then they should charge 9 percent interest when they extend loans.
T
If pencils and paper are complements, an increase in the price of pencils causes the demand for paper to decrease or shift to the left.
T
If producers have different opportunity costs of production, trade will allow them to consume outside their production possibilities frontiers.
T
If the Bureau of Labor Statistics fails to recognize that recently produced automobiles can be driven for many more miles than older models, then the CPI tends to overestimate the cost of living
T
If the nominal interest rate is 12 percent and the rate of inflation is 7 percent, then the real rate of interest is 5 percent
T
If three variables are related, one of them must be held constant when graphing the other two in the x-, y-coordinate system.
T
If your wage rises from $5.00 to $6.25 while the CPI rises from 112 to 121, you should feel an increase in your standard of living.
T
Most economists believe that tariffs and import quotas usually reduce general economic welfare.
T
Nominal GDP employs current prices to value output while real GDP employs constant base-year prices to value output.
T
Rational people act only when the marginal benefit of the action exceeds the marginal cost.
T
Reverse causality means that while we think A causes B, B may actually cause A.
T
Sue is better at cleaning, and Bob is better at cooking. It will take fewer hours to eat and clean if Bob specializes in cooking and Sue specializes in cleaning than if they share the household duties evenly.
T
The "base year" in a price index is the benchmark year against which other years are compared
T
The core CPI measures consumer prices excluding food and energy.
T
The gains from trade can be measured by the increase in total production that comes from specialization.
T
The law of supply states that an increase in the price of a good increases the quantity supplied of that good.
T
The market supply curve is the horizontal summation of the individual supply curves.
T
The slope of a line is equal to the change in y divided by the change in x along the line.
T
There is a positive correlation between lying down and death. If we conclude from this evidence that it is unsafe to lie down, we have an omitted variable problem because critically ill people tend to lie down.
T
To a student, the opportunity cost of going to a basketball game would include the price of the ticket and the value of the time that could have been spent studying.
T
When a jet flies overhead, the noise it generates is an externality.
T
When a line slopes upward in the x-, y-coordinate system, the two variables measured on each axis are positively correlated.
T
When economists make positive statements, they are more likely to be acting as scientists.
T
When economists say, "There ain't no such thing as a free lunch," they mean that all economic decisions involve trade-offs.
T
When graphing in the coordinate system, the x-coordinate tells us the horizontal location while the y-coordinate tells us the vertical location of the point.
T
When people act as scientists, they must try to be objective.
T
Why is there a trade-off between equality and efficiency?
Taxes and welfare make us more equal but reduce incentives for hard work, lowering total output.
Suppose there is an increase in the price of imported BMW automobiles (which are produced in Germany). Would this have a larger impact on the CPI or the GDP deflator? Why?
The CPI, because BMWs are in the typical consumption basket, but BMWs are not included in U.S. GDP.
market power
The ability of an individual or group to substantially influence market prices
What are the gains from trade?
The additional output that comes from countries with different opportunity costs of production specializing in the production of the item for which they have the lower domestic opportunity cost.
base year
The benchmark year against which other years are compared
In the Wealth of Nations, Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." What do you think he meant?
The butcher, brewer, and baker produce the best food possible, not out of kindness, but because it is in their best interest to do so. Self-interest can maximize general economic well-being.
monopoly
The case in which there is only one seller in the market
Why do you think air bags have reduced deaths from auto crashes less than we had hoped?
The cost of an accident was lowered. This changed incentives, so people drive faster and have more accidents.
Describe the scientific method.
The dispassionate development and testing of theory by observing, testing, and observing again.
Which of the following statements is true about the impact of an increase in the price of lettuce?
The equilibrium price and quantity of salad dressing will fall.
Which of the following statements regarding the circular-flow diagram is true?
The factors of production are owned by households.
What are the two main characteristics of a perfectly competitive market?
The goods offered for sale are all the same, and the buyers and sellers are so numerous that no one buyer or seller can influence the price.
Bureau of Labor Statistics
The government agency responsible for tracking prices
substitution bias
The inability of the CPI to account for consumers' substitution toward relatively cheaper goods and services
cost of living
The income necessary to maintain a constant standard of living
gains from trade
The increase in total production due to specialization allowed by trade
What does the real interest rate measure?
The interest rate adjusted for the effects of inflation.
What is the opportunity cost of saving some of your paycheck?
The items you could have enjoyed had you spent that portion of your paycheck (current consumption).
Water is necessary for life. Diamonds are not. Is the marginal benefit of an additional glass of water greater or lesser than an additional one-carat diamond? Why?
The marginal benefit of another glass of water is generally lower because we have so much water that one more glass is of little value. The opposite is true for diamonds.
Gross National Product
The market value of all the final goods and services produced by a nation's residents in a given period of time.
Under which of the following conditions would you prefer to be the borrower?
The nominal rate of interest is 20 percent, and the inflation rate is 25 percent.
Under which of the following conditions would you prefer to be the lender?
The nominal rate of interest is 5 percent, and the inflation rate is 1 percent.
What does the consumer price index attempt to measure?
The overall cost of the goods and services purchased by the typical consumer.
If there is a surplus of a good, is the price above or below the equilibrium price for that good?
The price must be above the equilibrium price.
Real GDP
The production of goods and services valued at base-year prices
basket (of goods and services)
The quantities of each item purchased by the typical consumer
GDP deflator
The ratio of nominal GDP to real GDP multiplied by 100
producer price index
The ratio of the value of a fixed basket of goods and services purchased by firms to the basket's value in the base year multiplied by 100
Which of the following statements is correct?
The real interest rate is the nominal interest rate minus the inflation rate
Which of the following statements about microeconomics and macroeconomics is not true?
The study of very large industries is a topic within macroeconomics.
Suppose suppliers of corn expect the price of corn to rise in the future. How would this affect the supply and demand for corn and the equilibrium price and quantity of corn?
The supply of corn in today's market would decrease (shift left) as sellers hold back their offerings in anticipation of greater profits if the price rises in the future. If only suppliers expect higher prices, demand would be unaffected. The equilibrium price would rise and the equilibrium quantity would fall.
Which of the following statements is normative?
The unemployment rate should be lower.
What are the variables that should affect the amount of a good that producers wish to sell, other than its price?
The variables are input prices, technology, expectations, and number of sellers in the market.
base year
The year from which prices are used to measure real GDP
Suppose consumer tastes shift toward the consumption of apples. Which of the following statements is an accurate description of the impact of this event on the market for apples?
There is an increase in the demand for apples and an increase in the quantity supplied of apples.
Suppose there is an increase in consumers' incomes. In the market for automobiles (a normal good), does this event cause an increase in demand or an increase in quantity demanded? Does this cause an increase in supply or an increase in quantity supplied? Explain.
There would be an increase in the demand for automobiles, which means that the entire demand curve shifts to the right. This implies a movement along the fixed supply curve as the price rises. The increase in price causes an increase in the quantity supplied of automobiles, but there is no increase in the supply of automobiles.
Suppose there is an advance in the technology employed to produce automobiles. In the market for automobiles, does this event cause an increase in supply or an increase in the quantity supplied? Does this cause an increase in demand or an increase in the quantity demanded? Explain.
There would be an increase in the supply of automobiles, which means that the entire supply curve shifts to the right. This implies a movement along the fixed demand curve as the price falls. The decrease in price causes an increase in the quantity demanded of automobiles, but there is no increase in the demand for automobiles.
Suppose one country is better at producing agricultural products (because they have land that is more fertile), while another country is better at producing manufactured goods (because they have a better educational system and more engineers). If each country produced their specialty and traded, would there be more or less total output than if each country produced all of their agricultural and manufacturing needs? Why?
There would be more total output if the two countries specialize and trade because each is doing what it does most efficiently.
Who is more self-interested, the buyer or the seller?
They are equally self-interested. The seller will sell to the highest bidder, and the buyer will buy from the lowest offer.
Evaluate this statement: A technologically advanced country, which is better than its neighbor at producing everything, would be better off if it closed its borders to trade because the less productive country is a burden to the advanced country.
This is not true. All countries can gain from trade if their opportunity costs of production differ. Even the least productive country will have a comparative advantage at producing something, and it can trade this good to the advanced country for less than the advanced country's opportunity cost.
Suppose you discover that 93 percent of economists believe that free trade is generally best (which is the greatest agreement on any single issue). Could you now give a more precise answer as to why economists might disagree on this issue?
Those opposed to free trade are likely to have different values than the majority of economists. There is not much disagreement on this issue among the mainstream economics profession.
In which of the following cases is the assumption most reasonable?
To address the benefits of trade, an economist assumes that there are two people and two goods.
What is the role of assumptions in any science?
To simplify reality so that we can focus our thinking on what is actually important.
Which of the following statements about trade is true?
Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.
If the Bureau of Labor Statistics failed to recognize the increase in memory, power, and speed of newer model computers, in which direction would the CPI be biased? What do we call this type of bias?
Upward, unmeasured quality change
If nominal GDP in 2016 exceeds nominal GDP in 2015, did real output rise? Did prices rise?
We can't be certain which rose, prices or real output, because an increase in either prices or real output will cause nominal output to rise.
If we save more and use it to build more physical capital, productivity will rise and we will have rising standards of living in the future. What is the opportunity cost of future growth?
We must give up consumption today.
Why is comparative advantage important in determining trade instead of absolute advantage?
What is important in trade is how a country's costs without trade differ from each other. This is determined by the relative opportunity costs across countries.
opportunity cost
Whatever is given up to get something else
What is the difference between a normal good and an inferior good?
When income rises, demand for a normal good increases or shifts right. When income rises, demand for an inferior good decreases or shifts left.
Paying close attention to question 8, make a general statement with regard to who gains or loses (the borrower or the lender) on a loan contract when inflation turns out to be either higher or lower than expected.
When inflation is higher than expected, borrowers gain. When inflation is lower than expected, lenders gain.
externality
When one person's actions have an impact on a bystander
Suppose a lawyer who earns $200 per hour can also type 200 words per minute. Should the lawyer hire a secretary who can only type 50 words per minute? Why?
Yes, as long as the secretary earns less than $50 per hour, the lawyer is ahead.
Your car needs to be repaired. You have already paid $500 to have the transmission fixed, but it still doesn't work properly. You can sell your car "as is" for $2,000. If your car were fixed, you could sell it for $2,500. Your car can be fixed with a guarantee for another $300. Should you repair your car? Why?
Yes, because the marginal benefit of fixing the car is , and the marginal cost is $300. The original repair payment is not relevant.
Suppose a friend of yours works for the U.S. Weather Bureau. She calls you and provides you with inside information about the approaching storm—information not available to the public. Can you "beat the market" with inside information? Why or why not?
Yes. In this case, you can make your purchase before the market responds to the information about the storm.
What if you later discovered that the economist opposed to free trade worked for a labor union. Would that help you explain why there appears to be a difference of opinion on this issue?
Yes. It suggests that impediments to international trade may benefit some groups (organized labor), but these impediments are unlikely to benefit the public in general. Supporters of these policies are promoting their own interests.
Will anyone in the United States be better off if we limit auto imports? Explain.
Yes. Those associated with the domestic auto industry—stockholders of domestic auto producers and autoworkers.
In the short run,
a decrease in inflation temporarily increases unemployment.
Which of the following shifts the demand for watches to the right?
a decrease in the price of watch batteries if watch batteries and watches are complements
inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand
normal good
a good for which, other things equal, an increase in income leads to an increase in demand
demand curve
a graph of the relationship between the price of a good and the quantity demanded
supply curve
a graph of the relationship between the price of a good and the quantity supplied
production possibilities frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
Market
a group of buyers and sellers of a particular good or service
Which of the following would be excluded from 2016 GDP? The sale of
a home built in 2015 and first sold in 2016.
competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
Core CPI
a measure of the overall cost of consumer goods and services excluding food and energy
GDP deflator
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
Which of the following will not shift a country's production possibilities frontier outward?
a reduction in unemployment
Economic growth is depicted by
a shift in the production possibilities frontier outward.
market failure
a situation in which the market fails to allocate resources efficiently
Equilibrium
a situation in which the price has reached the level where quantity supplied equals quantity demanded
demand schedule
a table that shows the relationship between the price of a good and the quantity demanded
supply schedule
a table that shows the relationship between the price of a good and the quantity supplied
Which of the following is most likely to produce scientific evidence about a theory?
a tenured economist employed at a leading university analyzing the impact of bank regulations on rural lending
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.
A decrease (leftward shift) in the supply for a good will tend to cause
an increase in the equilibrium price and a decrease in the equilibrium quantity.
An increase (rightward shift) in the demand for a good will tend to cause
an increase in the equilibrium price and quantity.
inflation
an increase in the overall level of prices
Which of the following would likely cause the CPI to rise more than the GDP deflator?
an increase in the price of Hondas produced in Japan and sold in the United States
All of the following shift the supply of watches to the right except
an increase in the price of watches
If an increase in consumer incomes leads to a decrease in the demand for camping equipment, then camping equipment is
an inferior good
Real GDP is measured in ________ prices while nominal GDP is measured in ________ prices.
base year; current year
Economic models are
built with assumptions
Which of the following involve a trade-off?
buying a new car going to college watching a football game on Saturday afternoon taking a nap **All of the above involve trade-offs.**
GDP would include which of the following?
consulting services
total expenditure
consumption, investment, government purchases, and net exports
Gross domestic product (GDP) can be measured as the sum of
consumption, investment, government purchases, and net exports.
U.S. GDP would exclude which of the following?
cotton purchased by Lee Jeans
According to the principle of comparative advantage,
countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners.
An inferior good is one for which an increase in income causes a(n)
decrease in demand
The law of demand states that an increase in the price of a good
decreases the quantity demanded for that good.
The value of plant and equipment worn out in the process of manufacturing goods and services is measured by
depreciation
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
disagree because they have different scientific judgments.
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
disagree because they have different values.
Points on the production possibilities frontier are
efficient
Suppose there is an increase in both the supply and demand for personal computers. In the market for personal computers, we would expect the
equilibrium quantity to rise and the change in the equilibrium price to be ambiguous.
Suppose there is an increase in both the supply and demand for personal computers. Furthermore, suppose the supply of personal computers increases more than demand for personal computers. In the market for personal computers, we would expect the
equilibrium quantity to rise and the equilibrium price to fall.
Gross domestic product is the sum of the market value of the
final goods and services
Inflation can be measured by all of the following except the
finished goods price index
If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be more than they expected,
firms will gain at the expense of workers
Which of the following products would be least capable of producing an externality?
food
If U.S. GDP exceeds U.S. GNP, then
foreigners are producing more in the United States than Americans are producing in foreign countries.
efficiency
getting maximum output from the resources available
imports
goods produced abroad and sold domestically
exports
goods produced domestically and sold abroad
intermediate production
goods that are produced by one firm to be further processed by another firm
High and persistent inflation is caused by
governments increasing the quantity of money too much
The CPI will be most influenced by a 10 percent increase in the price of which of the following consumption categories?
housing
Raising taxes and increasing welfare payments
improves equality at the expense of efficiency.
Productivity can be increased by
improving the education of workers
The law of supply states that an increase in the price of a good
increases the quantity supplied of that good.
An increase in the price of beef provides
information that tells producers to produce more beef.
If your grandparents buy a new retirement home, this transaction would affect
investment
If a nation has a comparative advantage in the production of a good,
it can produce that good at a lower opportunity cost than its trading partner.
If a nation has an absolute advantage in the production of a good,
it can produce that good using fewer resources than its trading partner.
If borrowers and lenders agree on a nominal interest rate and inflation turns out to be less than they had expected,
lenders will gain at the expense of borrowers
Scarcity
limited resources and unlimited wants
A perfectly competitive market has
many buyers and sellers
standard of living
material well-being
Which of the following is not a factor of production?
money
Is your father's statement accurate
no
What general category of production is not captured by GDP in both the United States and the Caribbean nation?
nonmarket activities such as household production
Scientific Method
objective development and testing of theories
A monopolistic market has
only one seller
recession
period of decline in GDP
The "basket" on which the CPI is based is composed of
products purchased by the typical consumer
Suppose your income rises from $19,000 to $31,000 while the CPI rises from 122 to 169. Your standard of living has likely
risen
If nominal GDP in 2016 exceeds nominal GDP in 2015, then the production of output must have
risen or fallen because there is not enough information to determine what happened to real output.
Trade-offs are required because wants are unlimited and resources are
scarce
The scientific method requires that
scientists be objective
Economics is the study of how
society manages its scarce resources.
incentive
something that induces a person to act
consumption
spending by households on goods and services, with the exception of purchases of new housing
investment
spending on business capital, residential capital, and inventories
net exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
government purchases
spending on goods and services by all levels of government
Positive statements are
statements of description that can be tested
Because people respond to incentives, we would expect that if the average salary of accountants increases by 50 percent while the average salary of teachers increases by 20 percent,
students will shift majors from education to accounting.
If an increase in the price of blue jeans leads to an increase in the demand for tennis shoes, then blue jeans and tennis shoes are
substitutes
If there is an increase in the price of apples that causes consumers to purchase fewer pounds of apples and more pounds of oranges, the CPI will suffer from
substitution bias
rational people
systematically and purposefully do the best you can to achieve your objectives
property rights
the ability of an individual to own and exercise control over scarce resources
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer
A rational person does not act unless
the action produces marginal benefits that exceed marginal costs.
quantity demanded
the amount of a good that buyers are willing and able to purchase
quantity supplied
the amount of a good that sellers are willing and able to sell
productivity
the amount of goods and services produced from each unit of labor input
law of supply and demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
law of demand
the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises
Law of Supply
the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade,
the domestic price of 1 ring is 1/3 of a watch.
U.S. gross domestic product (in contrast to gross national product) measures the production and income of
the domestic service sector only
Which of the following issues is related to microeconomics?
the impact of oil prices on auto production
real interest rate
the interest rate corrected for the effects of inflation
nominal interest rate
the interest rate uncorrected for the effects of inflation
Gross Domestic Product
the market value of all final goods and services produced within a country in a given period of time
Which of the following is not part of the opportunity cost of going on vacation?
the money you spent on food.
Suppose a country's workers can produce 4 watches per hour or 12 rings per hour. If there is no trade,
the opportunity cost of 1 watch is 3 rings.
inflation rate
the percentage change in a price index
equilibrium price
the price that balances quantity supplied and quantity demanded
"invisible hand"
the principle that self-interested market participants may unknowingly maximize the welfare of society as a whole
Nominal GDP
the production of goods and services valued at current prices
equality
the property of distributing economic prosperity uniformly among the members of society
efficiency
the property of society getting the most it can from its scarce resources
If the price of a good is equal to the equilibrium price,
the quantity demanded is equal to the quantity supplied, and the price remains unchanged.
equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price
inflation
the rate at which prices are rising
Consumer Price Index
the ratio of the value of the fixed basket purchase by the typical consumer to the basket's value in the base year multiplied by 100
Macroeconomics
the study of economy-wide phenomena
Microeconomics
the study of how households and firms make decisions and how they interact in markets
economics
the study of how society manages its scarce resources
If the price of a good is below the equilibrium price,
there is a shortage, and the price will rise.
If the price of a good is above the equilibrium price,
there is a surplus, and the price will fall.
complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
An example of a transfer payment is
unemployment benefits
Depreciation
value of worn out equipment and structures
total income
wages, rent, and profit
Workers in the United States enjoy a high standard of living because
workers in the United States are highly productive.
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
