Chapter 1

fiscal policy

economic policies that involve government spending and taxes

market

interaction between potential buyers and sellers; a combination of demand and supply

gross domestic product (GDP)

measure of the size of total production in an economy

monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing

imports

products (goods and services) made abroad and then sold domestically

exports

products (goods and services) made domestically and sold abroad

model vs theory

seeing a physical thing vs an equation or idea (a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation)

private enterprise

system where private individuals or groups of private individuals own and operate the means of production (resources and businesses)

microeconomics

the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms

macroeconomics

the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance

labor market

the market in which households sell their labor as workers to business firms or other employers

economics

the study of how humans make choices under conditions of scarcity

globalization

the trend in which buying and selling in markets have increasingly crossed national borders

division of labor

the way in which different workers divide required tasks to produce a good or service

traditional economy

typically an agricultural economy where things are done the same as they have always been done

scarcity

when human wants for goods and services exceed the available supply

economies of scale

when the average cost of producing each individual unit declines as total output increases

specialization

when workers or firms focus on particular tasks for which they are well-suited within the overall production process

Residents of the town of Smithfield like to consume hams, but each ham requires 10 people to produce it and takes a month. If the town has a total of 100 people, what is the maximum amount of ham the residents can consume in a month?

100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10.

In a command economy, the __________ either makes most economic decisions itself or at least strongly influences how the decisions are made. A. government B. firm C. business sector D. market

A

The circular flow diagram of economic activity is a model of the: A.flow of goods, services, and payments between households and firms. B. interaction among taxes, prices, and profits. C. role of unions and government in the economy. D. influence of government on business behavior

A

Which of the following best characterizes the circular flow of income? A. Businesses buy resources from households, and households use their income from the sale of resources to buy goods and services from businesses. B. Businesses buy resources from the government, and households buy goods and services from businesses. C. Households buy factors of production from businesses, and businesses buy goods and services from households. D. The government purchases resources from businesses and households and then sells goods and services to businesses and households.

A

In the ____________, households work and receive payment from firms. A. savings market B. financial capital market C. labor market D. financial investment market

C

In the circular flow diagram model: A. businesses receive revenues from households in exchange for providing goods and services and use those revenues to buy inputs from households. B. households receive income from businesses in exchange for providing inputs and use that income to buy goods and services from businesses. C. Both (a) and (b) are correct. D. households receive revenue for selling goods and services to businesses, and use that revenue to buy inputs from businesses.

C

Which of the following is most likely a topic of discussion in macroeconomics? A. a decrease in the production of DVD players by a consumer electronics company B. an increase in the wage rate paid to automobile workers C. a decrease in the unemployment rate D. an increase in the price of a hamburger

C

The chapter defines private enterprise as a characteristic of market-oriented economies. What would public enterprise be? Hint: It is a characteristic of command economies.

Public enterprise means the factors of production (resources and businesses) are owned and operated by the government.

What is scarcity? Can you think of two causes of scarcity?

Scarcity means human wants for goods and services exceed the available supply. Supply is limited because resources are limited. Demand, however, is virtually unlimited. Whatever the supply, it seems human nature to want more.

A consultant works for $200 per hour. She likes to eat vegetables, but is not very good at growing them. Why does it make more economic sense for her to spend her time at the consulting job and shop for her vegetables?

She is very productive at her consulting job, but not very productive growing vegetables. Time spent consulting would produce far more income than it what she could save growing her vegetables using the same amount of time. So on purely economic grounds, it makes more sense for her to maximize her income by applying her labor to what she does best (i.e. specialization of labor).

Why might Belgium, France, Italy, and Sweden have a higher export to GDP ratio than the United States?

The United States is a large country economically speaking, so it has less need to trade internationally than the other countries mentioned. (This is the same reason that France and Italy have lower ratios than Belgium or Sweden.) One additional reason is that each of the other countries is a member of the European Union, where trade between members occurs without barriers to trade, like tariffs and quotas.

What would be another example of a "system" in the real world that could serve as a metaphor for micro and macroeconomics?

There are many physical systems that would work, for example, the study of planets (micro) in the solar system (macro), or solar systems (micro) in the galaxy (macro).

circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

goods and services market

a market in which firms are sellers of what they produce and households are buyers

underground economy

a market where the buyers and sellers make transactions in violation of one or more government regulations

In a market-oriented economy, the amount of a good that is produced is primarily decided by the interaction of: A. producers and input suppliers. B. buyers and sellers. C. producers and government planning committees. D. all consumers.

B

Which of the following best describes a fiscal policy tool? A. bank lending B. government spending C. financial capital markets D. household spending

B

Which of the following best describes a monetary policy tool? A. taxes B. interest rates C. government spending D. household savings

B

n a discussion of economics, which of the following would exert the most influence on an individual firm's decision to hire workers? A. wage levels B. the macroeconomy C. the firm's income D. household income

B

market economy

an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand

command economy

an economy where economic decisions are passed down from government authority and where the government owns the resources