ECON 131: Macroeconomics

Economics deals primarily with the concept of

Scarcity

What term refers to the property that society has limited resources and therefore cannot produce all the goods and services people wish to have?

Scarcity

When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing

Scarcity

In a market economy, economic activity is guided by

Self-interest and prices

In the circular-flow diagram, which of the following items flows from firms to households through the markets for the factors of production?

Wages, Rent, and Profit

Suppose the Federal Reserve announces that it will be making a change to a key interest rate to decrease the money supply. This is likely because the Federal Reserve is

Worried about inflation

If the United States decides to trade with Yemen, we know that

Yemen and the United States can both benefit. Trade between countries benefits both sides

"Invisible hand" refers to

Free Market

Consider Mandy's decision to go to college. If she goes to college, she will spend $20,000 on tuition, $10,000 on room and board, and $2,000 on books. If she does not go to college, she will earn $18,000 working in a store and spend $8,000 on room and board. Mandy's cost of going to college is

$42,000 ()

Refer to Table 2-4. What is the opportunity cost to Picnicland of increasing the production of hotdogs from 450 to 900?

225 burgers (975-750=225)

Refer to Table 2-4. What is the opportunity cost to Picnicland of increasing the production of burgers from 450 to 750?

450 hotdogs (1350-900=450)

Refer to Figure 2-5. It is possible for this economy to produce

60 dryers and 50 washers

23. Refer to Figure 2-5. If this economy devotes all of its resources to the production of dryers, then it will produce

80 dryers and 0 washers

The short-run tradeoff between inflation and unemployment implies that, in the short run,

A decrease in the growth rate of the quantity of money will be accompanied by an increase in the unemployment rate

Senator Brown wants to increase taxes on people with high incomes and use the money to help the poor. Senator Johnson argues that such a tax will discourage successful people from working and will therefore make society worse off. An economist would say that

A good decision requires that we recognize both view points

When society requires that firms reduce pollution, there is

A tradeoff because of reduced incomes to the firms' owners and workers

The opportunity cost of obtaining more of one good is shown on the production possibilities frontier as the

Amount of the other good that must be given up

The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as

An externality

Inflation is defined as

An increase in the overall level of prices in the economy

Suppose that a country that has a high level of output per person agrees to trade with a country that has a low level of output per person. Which country can benefit?

Both

Refer to Figure 2-5. It is not possible for this economy to produce at point

C

The terms equality and efficiency are similar in that they both refer to benefits to society. However they are different in that

EQUALITY refers to uniform distribution of those benefits and EFFICIENCY refers to maximizing benefits from scarce resources.

One tradeoff society faces is between efficiency and equality. Define each term (i.e. what efficiency is and what equality is). If the U.S. government redistributes income from the rich to the poor, explain how this action affects efficiency and equality.

Efficiency is about how to maximize the total output from the existing scarce resources; equality is about how to equally/fairly distribute the total output among members of the society. If the U.S. government redistributes income from the rich to the poor, this improves equality at the expense of efficiency.

Which of the following concepts cannot be illustrated by the production possibilities frontier?

Equality

When the government redistributes income from the wealthy to the poor,

Equality is improved but efficiency is not

Large or persistent inflation is almost always caused by

Excessive growth in the quantity of money

Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce

Externalities

Central Planning

Government guiding economic activity. Today many countries that had this system have abandoned it.

If an externality is present in a market, economic efficiency may be enhanced by

Government intervention

Under what conditions might government intervention in a market economy improve the economy's performance?

Government intervention can improve market outcome when a. Externalities, such as pollution. b. Monopoly c. Income inequality

In the simple circular-flow diagram, the participants in the economy are

Households and firms

Economics is the study of

How society manages its scarce resources

When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good

Increases as more of the good is produced

Suppose the government taxes the wealthy at a higher rate than it taxes the poor and then develops programs to redistribute the tax revenue from the wealthy to the poor. This redistribution of wealth

Is more equal but less efficient for society

Refer to Figure 2-5. This economy cannot currently produce 70 washers and 70 dryers because

It does not have the resources and technology to produce that level of output

A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages?

Labor is more productive making cotton cloth with a mechanical loom than with a hand loom

In the circular-flow diagram, which of the following items flows from households to firms through the markets for the factors of production?

Land, Labor, and Capital

A society allocates its scarce resources to various jobs. This includes:

Land, People, Machines

In the short run, an increase in the money supply is likely to lead to

Lower unemployment and higher inflation

A rational decision maker takes an action only if the

Marginal benefit is greater than the marginal cost

Which markets are represented in the simple circular-flow diagram?

Markets for goods and services and markets for factors of production

A rationale for government involvement in a market economy is

Markets sometimes... 1. fail to produce a fair distribution of economic well-being 2. fail to produce an efficient allocation of resources 3. property rights have to be enforced

In the circular-flow diagram, which of the following is not a factor of production?

Money

Production is efficient if the economy is producing at a point

On the Production Possibilities Frontier

Billie Jean has $120 to spend and wants to buy either a new amplifier for her guitar or a new mp3 player to listen to music while working out. Both the amplifier and the mp3 player cost $120, so she can only buy one. This illustrates the basic concept that

People face trade-offs

The production possibilities frontier provides an illustration of the principle that

People face trade-offs

The phrase "no such thing as a free lunch" means

People must face trade-offs

A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?

People respond to incentives

The "invisible hand" works to promote general well-being in the economy primarily through

People's pursuit of self-interest

Which of the following is an example of a positive, as opposed to normative, statement?

Prices rise when the government prints too much money.

Unemployment would cause an economy to

Produce inside its production possibilities frontier

What is the most important factor that explains differences in living standards across countries?

Productivity

In the circular-flow diagram, which of the following items does not flow from households to firms?

Profit

Almost all economists agree that tariffs and import quotas

Reduces general economic welfare

The term "productivity"

Refers to the quantity of goods and services produced from each unit of labor input

The overriding reason why households and societies face many decisions is that

Resources are scarce

Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should

Sell the ticket because the marginal benefit exceeds the marginal cost

Efficiency

Society is getting the maximum benefits from its scarce resources

The production possibilities frontier is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and

The available production technology

In most societies resources are allocated by

The combined actions of millions of households and firms

Which of the following statements about the circular-flow diagram is correct?

The diagram leaves out details that are not essential for understanding the economic transactions that occur between households and firms

The two loops in the circular-flow diagram represent

The flows of inputs and outputs and the flow of dollars.

Suppose a nation is currently producing at a point inside its production possibilities frontier. We know that

The nation is not using all available resources or is using inferior technology or both

Which of the following firms is most likely to have market power?

The only gasoline station in a rural area

As a result of a successful attempt by government to cut the economic pie into more equal slices

The pie gets smaller, and there will be less pie overall

The opportunity cost to attend college is

The value of the best opportunity a student gives up to attend college

For most students, the largest single cost of a college education is

The wages given up to attend school

A production possibilities frontier can shift outward if

There is a technological improvement

If an economy is producing efficiently, then

There is no way to produce more of one good without producing less of another good

Refer to Figure 2-5. Suppose this economy is producing at point D. Which of the following statements would best explain this situation?

There is widespread unemployment in the economy

High-school athletes who skip college to become professional athletes

Understand that the opportunity cost of attending college is very high

Which of the following is an example of a normative, as opposed to positive, statement?

Universal health care would be good for U.S. citizens

The country of Gerance produces two goods, cars and wine. Last year, it produced 1,000 cars and 15,000 cases of wine. This year, it produced 1,300 cars and 20,000 cases of wine. Given no other information, which of the following events could not explain this change?

a. Gerance experienced a reduction in unemployment. b. Gerance experienced an improvement in car-making technology. c. Gerance acquired more resources. **d. Any of these events could explain the change.

In the markets for the factors of production in the circular-flow diagram,

households are sellers and firms are buyers