Econ 202

Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?

Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.

Instead of conducting laboratory experiments to generate data to test their theories, economists often

gather data from historical episodes of economic change.

Central planning refers to

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

Which of the following is an important cause of inflation in an economy?

growth in the quantity of money in the economy

Economics is the study of

how society manages its scarce resources.

In a market economy, economic activity is guided by

self-interest and prices.

Government policies can change the costs and benefits that people face. Those policies have the potential to

All of the above are correct.

To raise productivity, policymakers could

All of the above are correct.

Which of the following statements does not apply to a market economy?

Government policies are the primary forces that guide the decisions of firms and households.

Economists face an obstacle that many other scientists do not face. What is that obstacle?

It is often difficult and sometimes impossible to perform experiments in economics.

Which of the following statements best represents the principle represented by the adage, "There is no such thing as a free lunch"?

Kendra must decide between going to Colorado or Cancun for spring break.

Suppose the state of Massachusetts passes a law that bans smoking in restaurants. As a result, residents of Rhode Island who do not like breathing second-hand smoke begin driving across the border to Massachusetts to eat at restaurants there. Which of the following principles does this best illustrate?

People respond to incentives

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

Prices rise when the government prints too much money.

After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year. However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision?

The marginal cost of going to Ft. Lauderdale decreases.

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

When the quantity of money grows rapidly, inflation is a predictable consequence.

The slow growth of U.S. incomes during the 1970s and 1980s can best be explained by

a decline in the rate of increase in U.S. productivity.

Inflation is defined as

an increase in the overall level of prices in the economy.

Economic models

are simplifications of reality, and in this respect economic models are no different from other scientific models.

Stan buys a 1966 Mustang for $2,000, planning to restore and sell the car. He goes on to spend $8,000 restoring the car. At this point he can sell the car for $9,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a new engine the car would sell for $12,000. Stan should

be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.

Economists speaking like policy advisers make

claims about how the world should be.

Making rational decisions "at the margin" means that people

compare the marginal costs and marginal benefits of each decision.

Economics deals primarily with the concept of

scarcity.

In building economic models, economists often omit

details

Economists use the word equality to describe a situation in which

each member of society has the same income.

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.

A company that formerly produced software went out of business because too many potential customers bought illegally-produced copies of the software instead of buying the product directly from the company. This instance serves as an example of

inadequate enforcement of property rights.

Trade between countries tends to

increase both competition and specialization.

According to Adam Smith, the success of decentralized market economies is primarily due to

individuals' pursuit of self-interest.

Benefits from trade would not include

less competition

One thing economists do to help them understand how the real world works is

make assumptions.

When a single person (or small group) has the ability to influence market prices, there is

market power.

The adage, "There is no such thing as a free lunch," is used to illustrate the principle that

people face tradeoffs

The "invisible hand" directs economic activity through

prices

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

productivity

The fact that different countries experience different standards of living is largely explained by differences in those countries'

productivity levels

The mainstream view among economists is that

society faces a tradeoff between unemployment and inflation, but only in the short run.

When studying the effects of public policy changes, economists

sometimes make different assumptions about the short run and the long run.

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

the Federal Reserve Bank is worried about unemployment.

In most societies, resources are allocated by

the combined actions of millions of households and firms.

Mallory decides to spend three hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is

the enjoyment she would have received had she watched the video.

Which of the following is not generally regarded by economists as a legitimate reason for the government to intervene in a market?

to protect an industry from foreign competition

In economics, the cost of something is

what you give up to get it.