Chapter 1 : The Big Ideas

Inflation

An increase in the general level of prices

Incentives

Rewards and penalties the motivate behavior

Opportunity Cost

The value of the opportunities lost

Part of the reason the Great Depression was so destructive was that economists didn't understand how to use government policy very well in the 1930s. Does this mean that we should lose confidence about the know-how of economists? a. No. Economics is not a perfect science, since there are so many variables. Furthermore, economic conditions are continuously changing. Today, the tools of monetary and fiscal policies are better understood to reduce swings in unemployment and GDP. b. No. Economics is a perfect science. The Great Depression was so destructive because the government at that time ignored the advice of economists. c. No. Economists have mathematical models that will perfectly predict booms and busts in the economy. They were able to predict the Great Depression and its outcome on economic variables. d. Looking back, the Great Depression was not that bad. Economists were correct all along.

a. No. Economics is not a perfect science, since there are so many variables. Furthermore, economic conditions are continuously changing. Today, the tools of monetary and fiscal policies are better understood to reduce swings in unemployment and GDP.

Assess the validity of the following statement in terms of incentives: A scientist who earns a percentage of the profits from any new medicine he or she may invent is likely to work longer hours in a laboratory researching new cures for diseases than a scientist who will get a handshake and a thank you note from the boss if he or she invents a new medicine. a. True. The potential for monetary reward provides an incentive to work harder. b. False. The opportunity cost of the time is the same, whether the reward is money or a handshake for inventing a new medicine. c. False. The chance to gain recognition from the boss would outweigh any potential monetary reward. d. False. The opportunity cost of the time is larger if the reward is recognition from the boss.

a. True. The potential for monetary reward provides an incentive to work harder

When bad weather in India destroys the crop harvest, does this sound like a fall in the total "supply" of crops or a fall in people's "demand" for crops? a. fall in supply b. fall in demand c. fall in either supply or demand d. fall in both supply and demand

a. fall in supply

If a student studies hard simply to avoid feeling like a failure, this demonstrates that: a. incentives matter, because feeling like a failure would be a penalty of not studying hard enough. b. incentives do not matter, since no financial rewards or penalties were mentioned. c. incentives do not matter, because only the student knows his or her feelings. d. incentives matter, because the student is probably aware that higher grades may lead to a higher income in the future.

a. incentives matter, because feeling like a failure would be a penalty of not studying hard enough.

According to the United Nations, there were roughly 300 million humans on the planet 1,000 years ago. Essentially all of them were poor by modern standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today, between 1 billion and 3 billion humans (out of about 7 billion total humans) are poor. What happened to the total number of people living in deep poverty? a. It rose. b. It fell. c. It remained the same. d. The answer is impossible to determine from the given information.

a. it rose

Which of the following describes an incentive that does NOT affect one's decision whether to obey the speed limit? a. the benefits of getting the car maintained b. the costs of a speeding ticket c. the benefits of arriving safely at one's destination d. the benefits of getting to one's destination faster

a. the benefits of getting the car maintained

By how much did national output fall during the Great Depression? a. 20% b. 30% c. 40% d. 60%

b. 30%

Nobel Prize-winner Milton Friedman said that a bad central banker is like a "fool in the shower." In a shower, of course, when you turn the faucet to change the temperature of the water, there won't be an actual change in the temperature for a few seconds. So if a "fool in the shower" is always making big changes in the temperature based on how the water feels right now, the water is likely to swing back and forth between too hot and too cold. How does this apply to central banking? a. It doesn't. Friedman didn't know anything about central banking. b. It takes a fairly long time for central bank decisions to trickle through the economy. c. The central bank is a ridiculous institution that does more harm than good in the economy. d. Both B and C are true.

b. It takes a fairly long time for central bank decisions to trickle through the economy.

In recent years, Zimbabwe has had hyperinflation, with prices tripling (or more!) every month. According to what you learned in this chapter, what do you think the government can do to end this hyperinflation? a. Print more money. b. Print less money. c. Set a minimum legal price for goods. d. Set a maximum legal price for goods.

b. Print less money

How do specialization and trade help you to avoid boredom and ignorance? a. Trade causes us to consume less, so we have to find other things to keep our attention. b. Specialization allows people to focus on one thing, thus learning more about it, than if they had to learn a little about everything, alleviating ignorance; trade introduces us to new items to prevent boredom. c. Specialization allows people to learn a lot about everything so they are not bored. d. Trade allows us to meet new people, so we aren't bored.

b. Specialization allows people to focus on one thing, thus learning more about it, than if they had to learn a little about everything, alleviating ignorance; trade introduces us to new items to prevent boredom.

Nobel Prize-winner and New York Times columnist Paul Krugman has noted that economics is a lot like medicine: Knowledge is limited and many cures are quite painful. What are some other ways that economics and medicine are alike? a. They are both perfect sciences. That is, there is always a perfect remedy to cure every problem. b. They are not perfect sciences. You are never 100% sure of the consequences and outcome of a remedy. Medicine is a practice and economics is also a practice. c. They are similar because lags do not exist when a cure is applied in either field. d. Neither field has changed a lot since its inception.

b. They are not perfect sciences. You are never 100% sure of the consequences and outcome of a remedy. Medicine is a practice and economics is also a practice.

According to the United Nations, there were roughly 300 million humans on the planet 1,000 years ago. Essentially all of them were poor by modern standards: They lacked antibiotics, almost all lacked indoor plumbing, and none traveled faster than a horse or a river could carry them. Today, between 1 billion and 3 billion humans (out of about 7 billion total humans) are poor. So, over the last 1,000 years, what has happened to the fraction of humans who are poor? a. It rose. b. It fell. c. It stayed about the same. d. The answer is impossible to determine from the given information.

b. it fell

Johnny is an economist for the Federal Reserve. His salary is $2000 per week, however in order to receive his salary, he must show up at the office at least 32 hours per week. One day, the University of Missouri offers Johnny a job as a non-tenured econ professor. Mizzou will pay Johnny $2000 per week for the entire year to teach three classes each term -- spring, summer, and fall. Each class requires 12 hours per week in work. What is Johnny's opportunity cost to take the professor job? Choose the best answer. a. Nothing. There is no economic difference between being a professor and working for the Fed. After all, Johnny is always an economist. b. 20 hours per week of lost free time. c. 4 hours per week of lost free time. d. Impossible to determine from given information.

c. 4 hours per week of lost free time.

Economics is sometimes called "the dismal science." Of the following big ideas in Chapter 1, which one sounds dismal—like bad news? a. Incentives Matter b. The Importance of Wealth and Economic Growth c. Economic Booms and Busts Cannot Be Avoided but Can Be Moderated d. Institutions Matter

c. Economic Booms and Busts Cannot Be Avoided but Can Be Moderated

Some people worry that machines will take jobs away from people, making people permanently unemployed. In the United States, only 150 years ago most people were farmers. Now, machines do almost all of the farm work and fewer than 2% of Americans are farmers, yet that 2% produce enough food to feed the entire country while still exporting food overseas. What happened to all of those people who used to work on farms? a. Most adult males in the United Sates are unemployed now that the farm work is gone. b. Most working Americans are earning a living by fixing farm equipment. So it's okay for machines to take jobs, since we'll get jobs fixing the machines. c. Now that our food can be produced by such a small group of workers, most Americans have moved on to work in other sectors of the economy. d. Both A and B are correct.

c. Now that our food can be produced by such a small group of workers, most Americans have moved on to work in other sectors of the economy.

Ending hyperinflation in an economy is like an obese person trying to lose 100 pounds. Why? a. Ending hyperinflation in an economy, just like an obese person trying to lose 100 pounds, is an art. b. They will both always come back to where they were. That is, an economy cannot permanently get rid of hyperinflation and an obese person who has lost 100 pounds will sooner or later gain back the pounds lost. c. They are both difficult to do and will require lots of sacrifice. d. They both necessitate a lot of luck.

c. They are both difficult to do and will require lots of sacrifice.

Which of the following is NOT an incentive for earning good grades in high school? a. getting into a high-ranked university b. getting into college c. high-paying local jobs that do not require a high school diploma d. being competitive for college scholarship opportunities

c. high-paying local jobs that do not require a high school diploma

Which government agency might have helped to avoid much of the Great Depression had it acted more quickly and appropriately? a. Congress b. the office of the President c. the U.S. Federal Reserve d. the Federal Trade Commission

c. the U.S. Federal Reserve

Institutions align self-interest with the social interest: a. only when the government provides the right incentives. b. only when the government does not attempt to regulate the market. c. when markets work well. d. only when individuals are willing to act altruistically.

c. when markets work well.

Which of the following is an example of self-interest that is aligned with social interest? a. A smuggler makes drugs accessible in the underground economy. b. A salaried employee spends a lot of time relaxing by the water cooler. c. A firm does not have to pay for its pollution emissions. d. A movie star earns millions of dollars for starring in a film.

d. A movie star earns millions of dollars for starring in a film.

Let's connect Big Ideas Six and Nine: Do you think that people in poor countries are poor because they don't have enough money? In other words, could a country get richer by printing more pieces of paper called "money" and handing those out to its citizens? a. Yes, because printing paper money will create new wealth in the country. b. No, because printing lots of paper money will simply cause inflation. c. No, because wealth does not originate in the supply of paper money. d. Both B and C are correct.

d. Both B and C are correct.

A headline in The New York Times read: "Study Finds Enrollment Is Up at Colleges Despite Recession." Given what you now understand about opportunity cost, the headline should probably read: "Study Finds Enrollment Is Up at Colleges _____ Recession. a. Due to b. in Spite of c. Because of d. either a or c

d. either a or c

Who responds to incentives? a. only savers b. only entrepreneurs c. only investors d. everyone

d. everyone

Which of the following is NOT an example of nonmonetary incentives? a. power b. love c. reputation d. interest

d. interest

Which of the following is NOT an incentive governing whether one abides by the speed limit? a. getting somewhere faster b. the possibility of getting caught and ticketed for speeding c. safety d. the ability of the driver to obtain a mortgage

d. the ability of the driver to obtain a mortgage