econ CHAPTER 1 QUIZ

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?

It fell.

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?

It rose.

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?

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

By how much did national output fall during the Great Depression?

30%

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?

Both B and C are correct No, because printing lots of paper money will simply cause inflation. No, because wealth does not originate in the supply of paper money.

Which government agency might have helped to avoid much of the Great Depression had it acted more quickly and appropriately?

the U.S. Federal Reserve

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

Due to

Economics is sometimes called "the dismal science." Of the following big ideas in Chapter 1, which one sounds dismal—like bad news?

Economic Booms and Busts Cannot Be Avoided but Can Be Moderated

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?

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.

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?

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.

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?

Print less money.

How do specialization and trade help you to avoid boredom and ignorance?

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.

Ending hyperinflation in an economy is like an obese person trying to lose 100 pounds. Why?

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

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?

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.

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

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?

fall in supply