Chapter 2

Which of the following statements about the Council of Economic Advisers is NOT true? It writes the annual Economic Report of the President. It was created in1946 It implements the president's tax policies. It advises the president of the United States on economic policy matters.

It implements the president's tax policies.

Scientific Method

Objective development and testing of theories

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

Office of Management and Budget

Sometimes economists disagree because their values differ. Which of the following instances best reflects this source of disagreement? 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. 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. 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. One economist believes that American jobs are being lost to over-seas manufacturers; another economist disputes this claim.

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

Role of Assumptions

simplify the complex world, make it easier to understand

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? the Department of the Treasury the Council of Economic Advisers the Federal Reserve the Department of Justice

the Federal Reserve

A production possibilities frontier only shows

the choices available, not whi ch point of production is best.

Economic models

Simplifications of reality based on assumptions

According to the concept of the 'broken window fallacy' protests and riots that result in the destruction of property are good for the economy. True False

T

why economists disagree

- Economists often give conflicting policy advice. - They sometimes disagree about the validity of alternative positive theories about the world. - They may have different values and, therefore, different normative views about what policy should try to accomplish.

The scientific method: Observation, Theory and more observation

An ecnonomist observes inflation, creates a theory that excessive growth in money causes inflation, and then collects data on money growth and inflation to see if there is a relationship

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 Box C to Box D Box C to Box A Box A to Box C Box D to Box B

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? C only A and B B only C and D

C and D

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

Department of Justice

Positive statements

Descriptions of the world as it is

The fact that there are far fewer farmers now than at the turn of the century has caused massive food shortages in the United States. True False

F

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

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

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.

Normative statements

Prescription for how the world ought to be

Economists who are primarily responsible for advising Congress on economic matters work in which agency? the Federal Reserve the Department of Labor The Congressional Budget Office the Department of Justice

The Congressional Budget Office

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

The United States should restrict employers from outsourcing work to foreign countries.

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

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

This is a common occurrence. The policymaker knows the best policy but chooses not to institute it for other reasons.

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

True

circular flow diagram

a diagram of the economy that shows the flow of goods and services, factors of production, and monetary payments between households and firms

The production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

The circular-flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

Economic models are

built with assumptions

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

differences in scientific judgment and values

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

factors of production exchanging labor for income

Efficiency

getting maximum output from the resources avaliable

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

has an adverse effect on the economy.

In the simple circular-flow diagrams, the participants in the economy are households, firms, and government households and markets households and firms firms and government

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. cannot be determined decreases increases remains constant

increases

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

increases unemployment among young and unskilled workers.

Factors of production

inputs such as land, labor and capital

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

inside

When a government program is justified based only on the number of jobs it will create, the program is most certainly an efficient use of taxpayer dollars. it is known as the "broken window fallacy." it will be automatically approved if the unemployment rate is low. it is justifiable to raise taxes to fund the program.

it is known as the "broken window fallacy."

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

labor

Opportunity costs are usually________ constant along a prodution possibilities forntier

not

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

positive economic statement.

The economist as policy adviser

positive statements describe the world as it is, while normative statements prescribe how the world outght to be.

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

prescriptive.

macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

the study of how households and firms make decisions and how they interact in markets

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

two biologists arguing about the fairness of health insurance premiums

Opportunity cost

whatever must be given up to obtain some item