ECON exam 2
If the government levies $20 billion in taxes to finance additional spending on military weapons, the net impact on total employment will be
small because the higher taxes will reduce spending in the private sector, which will tend to offset any jobs created by the government spending.
The value of money is steady when the
supply of money grows slowly (e.g. at approximately the same rate as goods and services).
If the Fed is going to create an environment for economic progress, it should focus on
the achievement of price stability.
The law of comparative advantage indicates that if a group of individuals wants to maximize their joint output, then each good should be supplied by
the low opportunity cost producer.
Competition is present when..
the market is open and alternative firms are free to enter and compete.
Sound institutions protect
the rights of the buyers and sellers and enforce the rules and regulations against fraud and misrepresentation
Competition is
the source of market discipline
The political attractiveness of tariffs, quotas, and other trade restrictions is primarily the result of
the special interest nature of trade restrictions.
The value of money is determined by
the supply of, and demand for, money.
When regulatory requirements make it costly and complex to open a business,
the volume of trade will decline and economic growth will be retarded.
Fannie Mae and Freddie Mac held a competitive advantage over other mortgage lenders primarily because
they could borrow funds cheaper than other lenders because their bonds were perceived to be backed by the federal government.
Inflation generates
uncertainty, reduces the gains from trade, and thereby retards economic growth.
When an investment project generates output that is valued more highly than the value of the resources required for its production,
undertaking the project will create wealth.
Capital goods are assets that will help
us produce more consumption goods in the future.
Unprofitable and unproductive investments
will occur in a world of uncertainty.
Tesla Motors is an electric car company that has tried to open its own dealerships around the U.S. These dealerships are usually opposed by local independent dealerships selling cars from other companies, and these local independent dealerships pressure legislatures and courts to prohibit Tesla from opening new dealerships. Which of the following is correct?
Consumers who would like to buy directly from Tesla are made worse off by such regulations.
Which of the following is an example of an economic institution that tends to encourage economic growth?
Secure private property rights, which provide an incentive to invest and be productive.
Which of the following is true regarding the per person income of the world during the past 1000 years?
The world's income per person changed very little during the 800 years prior to 1813, but it has increased by nearly tenfold during the past 200 years.
In order to meet these mandates, Fannie and Freddie
-began accepting more mortgages with little or no down payment. -substantially increased their mortgages to sub prime borrowers, those with a poor credit history.
Competition encourages firms to:
-supply goods and services consumers value highly -relative to cost and produce efficiently (keep their costs low).
MONEY SERVES THREE PRIMARY FUNCTIONS
1. Medium of exchange 2. Store of value 3. Unit of account
During 1999-2005 Fannie Mae and Freddie Mac held more than
40 percent of all home mortgages.
MONETARY STABILITY
A STABLE MONETARY POLICY IS ESSENTIAL FOR THE CONTROL OF INFLATION, EFFICIENT ALLOCATION OF INVESTMENT, AND ACHIEVEMENT OF ECONOMIC STABILITY.
Which of the following best describes the relationship between economic freedom and real per capita Gross Domestic Product (GDP)?
As economic freedom increases, real per capita GDP increases.
COMPETITIVE MARKETS
COMPETITION PROMOTES THE EFFICIENT USE OF RESOURCES AND PROVIDES THE INCENTIVE FOR INNOVATIVE IMPROVEMENTS
Private ownership of property involves three things
Exclusive use, Protection against invaders, & Transferability
Which of the following economies are most free?
Hong Kong and Singapore
If a business firm continues to sustain losses, what usually happens in a market economy?
It goes out of business and the resources it was using become available for use in other areas.
M2 IS
LESS LIQUID
M1 IS
MORE LIQUID
Protection against invaders
Others are prohibited from using the property without the owners permission.
Transferability:
Owners have the right to buy, sell, or derive income from their land, natural resources, capital, and entrepreneurial talent.
Exclusive use
Owners of private property can decide how their property will be used
LIMITS ON GOVERNMENT REGULATION:
REGULATORY POLICIES THAT REDUCE EXCHANGE AND RESTRICT COMPETITION IMPEDE ECONOMIC PROGRESS.
Which of the following will most likely occur under a system of clearly defined and enforced private property rights?
Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.
LEGAL SYSTEM
THE FOUNDATION FOR ECONOMIC PROGRESS IS A LEGAL SYSTEM THAT PROTECTS PRIVATELY OWNED PROPERTY AND ENFORCES CONTRACTS IN AN EVENHANDED MANNER.
AN EFFICIENT CAPITAL MARKET
TO REALIZE ITS POTENTIAL, A NATION MUST HAVE A MECHANISM THAT CHANNELS CAPITAL INTO WEALTH-CREATING PROJECTS
Which of the following is true of taxes?
Taxes drive a wedge between what buyers pay and what sellers receive.
In the Western states, local, state, and federal governments have created publicly owned parks, forests, and monuments. This vast land area can no longer be privately developed. What will be the effect of this policy?
The land will be used less productively than under private ownership.
Why do nations often impose trade barriers that make it difficult for their own citizens to trade with people in another country?
Trade restrictions often provide benefits to highly visible special interest groups while imposing a less visible cost on the general populace.
Business structure
Unlike other economic systems, a market economy does not mandate the types of firms that are permitted to compete.
"Trade restrictions such as tariffs and quotas are like a blockade that a nation imposes on its own people." Is this statement true?
Yes, both the trade restrictions and a blockade will reduce the gains from specialization and trade.
The M2 money supply is
a broader measure of money that includes various savings accounts.
The experience of the 1930s indicates that substantial tax increases during a severe recession will result in
a reduction in output and employment.
Because private owners are held responsible for damages their property causes to the property of others, private owners have
a strong incentive to take steps to reduce the chance that they will harm the property of others.
Which of the following is most important if a country is going to achieve and sustain rapid economic growth?
an open and competitive capital market
The Fed's low short-term interest rate policy of 2002 to 2004 encouraged decision makers to
borrow more and increase their purchases of housing.
Losses will lead to
business failure and bring unproductive investments to a halt.
Private property rights grant the owner of property the right to
buy, sell, or derive income from their land, natural resources, capital and entrepreneurial talent
High marginal tax rates will
cause some people to work and earn less than would be the case if marginal tax rates were lower.
Money is to an economy what language is to
communication.
During the past quarter of a century, the world's extreme poverty rate (per capita income of less than $1.25 per day) has
declined substantially.
The employment opportunities of the unlicensed producers are
diminished and potential gains from trade lost
The dramatic changes in per capita income and life expectancy over the last 200 years are due to
economic growth, caused by increases in productivity.
In a market economy, persons undertaking an investment project must
either personally supply the required funds or convince other investors to do so
Secure property rights promote economic progress because they
encourage individuals to produce efficiently and undertake productive activities.
If import restrictions prohibit foreigners from selling various goods and services in the U.S. market,
foreigners will have fewer U.S. dollars with which to buy U.S. goods and services.
Competition is present when
freedom of entry and rival firms are present in a market.
mistaken investments are a necessary price that must be paid for
fruitful innovations in new technologies and products
Money of stable value enhances the
gains from trade.
Technology and innovation are
important sources of growth
As output and employment contracted during the early 1930s, policy makers
increased both tariffs and tax rates.
Over the long haul, rapid increases in the supply of money lead to
inflation.
When the inflation rate is high and volatile,
investment is more risky and gains from trade are reduced
When whale oil was in high demand in the middle of the nineteenth century, whales were being hunted to excess because
no one owned the whales or the hunting rights, thus there was no incentive to conserve whales for the future.
Politicians will often be able to gain from support of trade restrictions because
organized interest groups benefiting from the restrictions will make large contributions to political campaigns while most others will not feel strongly about the restrictions.
Which of the following is most important for the achievement of high levels of real per capita income?
production of goods and services highly valued by consumers
Even-handed enforcement of contracts fuels economic prosperity because it
promotes gains from trade by keeping transaction costs low.
In order to achieve a high economic freedom rating, a country must
protect property rights, enforce contracts even-handedly, and rely extensively on markets to allocate goods and services
The M1 money supply consists of currency held by the
public, checking accounts, and traveler's checks.
The basic postulate of economics indicates that a higher minimum wage will
reduce the employment of low-skill workers.
An increase in marginal tax rates will
reduce the share of additional earnings that individuals are permitted to keep.
High tariffs and other restraints on international trade will
reduce the volume of trade and the realization of gains from specialization, exchange, and the competitive process.
A country cannot realize its full potential unless
restrictions that limit trade and reduce competitiveness are kept to a minimum
