Chapter 2
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.
In making which of the following statements is an economist acting more like a scientist? -The unemployment rate should be reduced because unemployment robs individuals of their dignity. -The state should increase subsidies to universities because the future of our country depends on education. -A reduction in unemployment benefits will reduce the unemployment rate. -The rate of inflation should be reduced because it robs the elderly of their savings.
A reduction in unemployment benefits will reduce the unemployment rate.
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 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 the production possibilities frontier bowed outward?
Because resources are specialized and, thus, are not equally well suited for producing different outputs.
Name two reasons why economists disagree.
Economists may have different scientific judgments. Economists may have different values.
You are watching NewsHour with Jim Lehrer on public television. The first focus segment is a discussion of the pros and cons of free trade (lack of obstructions to international trade). For balance, there are two economists present—one in support of free trade and one opposed. Your roommate says, "Those economists have no idea what's going on. They can't agree on anything. One says free trade makes us rich. The other says it will drive us into poverty. If the experts don't know, how is the average person ever going to know whether free trade is best?" 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.
Economic models must mirror reality or they are of no value.
False
It is reasonable to assume that the world is composed of only one person when modeling international trade.
False
Macroeconomics is concerned with the study of how households and firms make decisions and how they interact in specific markets.
False
Normative statements can be refuted with evidence.
False
Points outside the production possibilities frontier are attainable but inefficient.
False
When economists make positive statements, they are more likely to be acting as scientists.
True
The production possibilities frontier is bowed outward because the trade-off between the production of any two goods is constant.
False
The statement, "An increase in inflation tends to cause unemployment to fall in the short run" is normative.
False
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.
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.
Which statements are testable: positive statements or normative statements? Why?
Positive statements are statements of fact and are refutable by examining evidence.
Describe the scientific method.
The dispassionate development and testing of theory by observing, testing, and observing again.
Which of the following statements regarding the circular-flow diagram is true? -The factors of production are owned by firms. -None of these answers are true. -The factors of production are owned by households. -If IBM sells a computer, the transaction takes place in the market for factors of production. -If Susan works for IBM and receives a paycheck, the transaction takes place in the market for goods and services.
The factors of production are owned by households.
Which of the following statements about microeconomics and macroeconomics is not true? -Macroeconomics is concerned with economy-wide phenomena. -Microeconomics is a building block for macroeconomics. -Microeconomics and macroeconomics cannot be entirely separated. -The study of very large industries is a topic within macroeconomics.
The study of very large industries is a topic within macroeconomics.
Which of the following statements is normative? -The unemployment rate should be lower. -Large government deficits cause an economy to grow more slowly. -Printing too much money causes inflation. -People work harder if the wage is higher.
The unemployment rate should be lower.
You are watching NewsHour with Jim Lehrer on public television. The first focus segment is a discussion of the pros and cons of free trade (lack of obstructions to international trade). For balance, there are two economists present—one in support of free trade and one opposed. Your roommate says, "Those economists have no idea what's going on. They can't agree on anything. One says free trade makes us rich. The other says it will drive us into poverty. If the experts don't know, how is the average person ever going to know whether free trade is best?" 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 estimate the speed at which a beach ball falls, a physicist assumes that it falls in a vacuum. -To address the impact of taxes on income distribution, an economist assumes that everyone earns the same income. -To address the impact of money growth on inflation, an economist assumes that money is strictly coins. -To address the benefits of trade, an economist assumes that there are two people and two goods.
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.
An advance in production technology would cause the production possibilities curve to shift outward.
True
Assumptions make the world easier to understand because they simplify reality and focus our attention.
True
If an economy is operating on its production possibilities frontier, it must be using its resources efficiently.
True
If an economy is operating on its production possibilities frontier, it must produce less of one good if it produces more of another.
True
If an economy were experiencing substantial unemployment, the economy is producing inside the production possibilities frontier.
True
Most economists believe that tariffs and import quotas usually reduce general economic welfare.
True
When people act as scientists, they must try to be objective.
True
You are watching NewsHour with Jim Lehrer on public television. The first focus segment is a discussion of the pros and cons of free trade (lack of obstructions to international trade). For balance, there are two economists present—one in support of free trade and one opposed. Your roommate says, "Those economists have no idea what's going on. They can't agree on anything. One says free trade makes us rich. The other says it will drive us into poverty. If the experts don't know, how is the average person ever going to know whether free trade is best?" 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.
Which of the following will not shift a country's production possibilities frontier outward? -an increase in the capital stock -an increase in the labor force -an advance in technology -a reduction in unemployment
a reduction in unemployment
Economic growth is depicted by -a movement from inside the curve toward the curve. -a shift in the production possibilities frontier outward. -a shift in the production possibilities frontier inward. -a movement along a production possibilities frontier toward capital goods.
a shift in the production possibilities frontier outward.
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 -a lawyer employed by General Motors addressing the impact of air bags on passenger safety -a staffer for a politician collecting data on how capital markets respond to taxation -an economist employed by the AFL/CIO doing research on the impact of trade restrictions on workers' wages
a tenured economist employed at a leading university analyzing the impact of bank regulations on rural lending
Points on the production possibilities frontier are -unattainable. -inefficient. -none of these answers. -efficient. -normative.
efficient
Identify the parts of the circular-flow diagram immediately involved in the following transactions. a. Mary buys a car from General Motors for $20,000. b. General Motors pays Joe $5,000 per month for work on the assembly line. c. Joe gets a $15 haircut. d. Mary receives $10,000 of dividends on her General Motors stock.
a. $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. b. $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 move from market for factors of production to firms. c. $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. d. $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.
Economic models are -useless if they are simple. -usually made of wood and plastic. -created to duplicate reality. -built with assumptions.
built with assumptions.
Which of the following is not a factor of production? -labor -land -capital -All of these answers are factors of production. -money
money
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, "Hogwash. 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. -none of these answers are correct. -really don't disagree at all. It just looks that way. -disagree because they have different values.
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, "Hogwash. Inflation is the greatest social evil." These economists -disagree because they have different values. -really don't disagree at all. It just looks that way. -disagree because they have different scientific judgments. -none of these answers are correct.
disagree because they have different values.
The scientific method requires that -only correct theories are tested. -scientists be objective. -scientists use test tubes and have clean labs. -only incorrect theories are tested. -scientists use precision equipment.
scientists be objective.
Positive statements are -statements of prescription that involve value judgments. -macroeconomic. -statements of description that can be tested. -microeconomic.
statements of description that can be tested.
Which of the following issues is related to microeconomics? -the impact of money on inflation -the impact of technology on economic growth -the impact of oil prices on auto production -the impact of the deficit on saving
the impact of oil prices on auto production