Ch 2

Economists always agree on which public policy is the best. 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

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

False

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

False

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

False

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

False

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

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

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

True

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

True

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

True

Refer to the Figure. 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

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 D to Box B b.Box A to Box C c.Box C to Box D d.Box C to Box A

a.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.C and D b.B only c.C only d.A and B

a.C and D

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

a.Department of Justice

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

a.Produce factors of production

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

a.Produce goods and services.

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.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. b.Because the technological advance occurred in the clothing-making industry, it is not possible to increase food production without reducing clothing production below 500. c.In order to increase food production in these circumstances without reducing machine production, the economy must experience unemployment. d.Because the technological advance occurred in the clothing-making industry, increases in output can only occur in the food industry.

a.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.

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 a change in the opportunity cost of producing pizza. b.This month, the economy reduced the unemployment of its resources. c.This month, the economy experienced an increase in resources. d.This month, the economy experienced an improvement in technology.

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

Which of the following steps does an economist not take when studying the economy? a.create data in a laboratory b.devise theories c.analyze data d.collect data

a.create data in a laboratory

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

a.goods and services

In the circular-flow diagram, which of the following is NOT a factor of production? a.revenue b.land c.capital d.labor

a.revenue

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

a.sellers, buyers

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

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

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

b.0 dryers and 100 washers

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.not constant. b.2/3 of a car. c.600 cars. d.3/2 cars.

b.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.Gather up support from other economists who agree with the theory. b.Collect and analyze data. c.Publish the theory as is. d.Devise another theory that contradicts the initial one.

b.Collect and analyze data.

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

b.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, Q b.L, M c.Q d.L, M, N, O, and P

b.L, M

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

b.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 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. b.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. c.One economist believes that American jobs are being lost to over-seas manufacturers; another economist disputes this claim. d.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 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.

Some economists disagree because their scientific judgment differs. Which of the following instances best reflects this source of disagreement? a.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. b.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. c.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. d.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 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.

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.Local and state governments should eliminate subsidies to professional sports franchises. b.The United States should restrict employers from outsourcing work to foreign countries. c.The United States should eliminate agricultural subsidies. d.Economic growth in developed countries like the United States leads to greater levels of well-being.

b.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 would never happen because policymakers always follow economists' advice. b.This is a common occurrence. The policymaker knows the best policy but chooses not to institute it for other reasons. c.This is an uncommon occurrence. More often than not, policymakers follow the advice of economists. d.This is a common occurrence. Policymakers typically disregard economists' advice since they don't believe it's useful.

b.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.an increase in the money supply b.a technological improvement c.a change in society's preferences for one good over another d.a shift in resources from the production of one good to the production of the other good

b.a technological improvement

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

b.buyers, sellers

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

b.cannot currently produce.

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

b.differences in scientific judgment and values

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

b.factors of production exchanging labor for income

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

b.focus their thinking.

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

b.has an adverse effect on the economy.

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

b.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.remains constant b.increases c.cannot be determined d.decreases

b.increases

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

b.increases unemployment among young and unskilled workers.

In the circular-flow diagram, which of the following items does NOT flow from firms to households? a.goods b.labor c.wages d.output

b.labor

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

b.positive economic statement.

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

b.prescriptive.

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

b.reduced.

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.1300 bushels of wheat b.200 bushels of wheat c.500 bushels of wheat d.400 bushels of wheat

c.500 bushels of wheat

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

c.C

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.Fiscal policy has a significant stimulative impact on a less than fully employed economy. b.A ceiling on rents reduces the quantity and quality of housing available. c.Flexible and floating exchange rates are not an effective international monetary arrangement. d.Tariffs and import quotas usually reduce general economic welfare.

c.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 was created in 1946. b.It advises the president of the United States on economic policy matters. c.It implements the president's tax policies. d.It writes the annual Economic Report of the President.

c.It implements the president's tax policies.

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

c.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 Department of Labor b.the Department of Justice c.The Congressional Budget Office d.the Federal Reserve

c.The Congressional Budget Office

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

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

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

c.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 Council of Economic Advisers b.the Department of Justice c.the Federal Reserve d.the Department of the Treasury

c.the Federal Reserve

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

c.the effects of borrowing by the federal government

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

d.Department of the Treasury

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

d.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.Taxes are bad for the economy. b.Everyone should receive free health care. c.The world would be a better place without monopolies. d.Inflation occurs when the government prints too much money.

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

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

d.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.will never come to an agreement because health care is a complicated market. b.disagree about the validity of a positive theory. c.have differences in scientific judgments. d.have differences in values.

d.have differences in values.

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

d.inside

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

d.the redistribution of income.

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

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