Econ Final
Which of the following is an example of an expansionary fiscal policy?
A decrease in taxes.
What is price deflation?
A fall in the price level.
Which of the following, if true, will weaken Denise's view that the focus on exports will continue to drive economic growth in Platonia?
A group of European countries, that together account for a large proportion of Platonia's exports, have recently been hit by a severe financial crisis.
Even though Avalon's budget was in surplus the next year, the country's current account balance turned out to be negative. Which of the following, if true, can explain this outcome?
A neighboring country adopted Avalon's currency as legal tender during this year.
Indicate which of the following could cause a movement from point A to C.
A rise in vegetarianism. A fall in buyer incomes.
Briefly explain whether you agree.
Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.
That is, what step can we expect the federal government to take to control inflation in the second period?
All of the above
As the economy nears the end of an expansion, which of the following typically occurs?
All of the above occur.
Even perfectly anticipated inflation imposes costs. Why?
All of the above.
How does real GDP deal with the problem inflation causes with nominal GDP?
All of the above.
Which of the following factors brought on the recession of 2007
All of the above.
Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
All of the above.
Which of the following was the Fed's objective in using "quantitative easing" and "Operation Twist"?
All of the above.
All of the following are arguments against an explicit inflation targeting rule for monetary policy except:
An explicit target is easier to understand by households and firms which makes monetary policy more transparent.
What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"?
An increase in the money supply that exceeds the rate of growth of GDP will increase the price level.
How does a decrease in the price level affect the quantity of real GDP supplied in the long run?
Changes in the price level do not affect the level of GDP in the long run.
Indicate whether each of the following is a final good, an intermediate good, or neither.
Coffee beans purchased by a coffee shop Intermediate good One share of Google stock Neither A new pick-up truck purchased by a consumer Final good A new home purchased by a family Final good
Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?
Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.
These four categories of spending are represented in the GDP formula by
C + I + G + NX.
Which of the following is not a Federal Reserve district?
Denver
What is the general relationship between the business cycle and unemployment and inflation?
During an expansion, unemployment falls and inflation increases.
c. Would it be easier to forecast smartphone sales in mature markets or in countries such as India?
Easier in mature markets since the rate of change is more stable.
What is Costco's CEO referring to?
Efficiency wages
What are the two main categories of participants in markets?
Firms and households.
What is fiscal policy?
Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of skills, abilities, and interests. If someone asks John Q. what he does for work, he tells them that he is currently "in-between jobs." Which of the following best classifies John Q.'s unemployment status?
Frictionally unemployed
Which of the following is not a shortcoming of GDP as a measure of well-being?
GDP only counts final goods and services and not intermediate goods.
If Americans still worked 60-hour weeks, as they did in 1890,
GDP would be much higher than it is, but the well-being of the typical person would not necessarily be higher.
Which of the following equals the amount of public saving?
Government tax revenue minus the sum of government purchases and transfer payments to households.
All of the following are correct except
Gross domestic income does not include health insurance benefits received by the employees.
Which of the following can most reasonably be inferred from the information given above?
Harry thinks that the value of the government purchases multiplier is high.
The Fed changes the discount rate as a part of its policy to reach all of the following objectives except:
High unemployment.
Which of the following questions is most important to answer in order to determine the accuracy of the claim that fiscal policy can sufficiently increase aggregate demand?
How strong is the impact of government spending on the country's net exports?
Suppose the information in the following table is for a simple economy that produces only the following four goods: shoes, hamburgers, shirts, and cotton. Further, assume that all of the cotton is used to produce shirts.
If the base year is the year 2009, then real GDP for 2014 equals $8655.00 (round your answer to the nearest penny) and the real GDP for 2015 equals $9432.50 The (annual) growth rate of real GDP in 2015 is 8.98%.
Which of the following statements is true?
In the long run, changes in the price level do not affect the level of real GDP.
What changes should they make if they decide a contractionary fiscal policy is necessary?
In this case, Congress and the president should enact policies that decrease government spending and increase taxes.
If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
In this case, Congress and the president should enact policies that increase government spending and decrease taxes.
Panel (a) above shows an idealized business cycle. Panel (b) shows an actual business cycle by plotting fluctuations in real GDP during the period from 1999 to 2002. Use the graphs to help determine which one of the following statements is NOT true:
Inconsistent movements in real GDP around the business cycle peak can mean that the beginning and ending of a recession are clear-cut.
Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). What policy would the federal government likely pursue in order to move
Increase government spending
Which of the following does NOT lead to long-run economic growth?
Increase in average wages
Indicate whether each of the following transactions represents the purchase of a final good
Is not the purchase of a final good Is the purchase of a final good Is the purchase of a final good Is the purchase of a final good
The Taylor rule for federal funds rate targeting does which of the following?
It links the Fed's target for the federal funds rate to economic variables.
What are the largest asset and the largest liability of a typical bank?
Loans are the largest asset and deposits are the largest liability of a typical bank.
The Federal Reserve uses two definitions of the money supply, M1 and M2, because
M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply.
What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the $100.
M1 remains unchanged.
Which of the following is not a correct statement about M2?
M2 is the best definition of money as a medium of exchange.
Suppose the amount the federal government collects in personal income taxes increases, while the level of GDP remains the same. What will happen to the values of national income, personal income, and disposable personal income?
National income will remain the same. Personal income will remain the same. Disposable personal income will decrease.
Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?
No. The Fed cannot target both the money supply and the interest rate simultaneously.
Which of the following is not a correct comparison between a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
None of the above are correct statements about the two models.
Which one of the following is not a function of money?
Open market operation.
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move
Open market purchase of government securities
Which of the following would be included in the gross national product (GNP) of the United States?
Production from a U.S. firm that operates in Mexico.
Which of the following is not a "loanable fund"?
Real estate.
Use the graph to help determine which one of the following statements regarding unemployment and business cycles is true.
The unemployment rate usually continues to rise even after the recession has ended.
Which of the following equations below represents the saving and investment equation in an open economy?
S = I + NFI
Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.
Which of the following statements is true about the Fed's monetary policy targets?
The Fed is forced to choose between the interest rate and the money supply as its monetary policy target.
What is the Great Moderation?
The absence of severe recessions in the United States since the mid-1980s.
Monetary policy is defined as:
The actions the Federal Reserve takes to manage the money supply and interest rates.
Which of the following, if true, would strengthen Laura's argument?
The average price level in the economy remained stable over the two years.
For a country such as the United States which of the following statements is always true?
The balance of payments is zero.
Which of the following, if true, will indicate that the country may not be able to maintain this average growth over the next few years?
The central bank announced its intention to take appropriate measures to ensure that inflation stays within control.
Which of the following, if true, will support Jaime's view that an expansionary fiscal policy would be ideal in the given situation?
The current nominal interest rate is close to zero in the country.
Which one is best suited to find the quantity demanded at a price of $4.00?
The demand schedule.
Which of the following statements is Bill and Robin likely to agree with?
The discovery of oil reserves has resulted in a rightward shift of the long-run aggregate supply curve.
As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?
The federal funds rate
Who is responsible for fiscal policy?
The federal government controls fiscal policy.
Which of the following, if true, would support Mark's argument?
The firm purchased new machinery worth $50,000 for its production facility during that year.
When the interest rate was actually increased, the aggregate supply of loanable funds in the economy did not increase as much as Jonathon expected. Which of the following, if true, would explain this outcome?
The government budget deficit increased by $10 billion this year.
If the short-run aggregate supply curve (SRAS) were a horizontal line, what would be the impact on the size of the government purchases and tax multipliers
The impact of the multiplier would be larger if the SRAS curve is horizontal.
Use the graph to the right to help determine which of the following statements regarding the labor force participation rates of adult men and women since 1950 is false.
The labor force participation rates of adult men and adult women were equal in 1990.
Which of the following can be inferred from the information given above?
The net capital inflow to Rossland is expected to be $30 million next year.
Which of the following, if true, will weaken Paul's argument?
The number of foreign students enrolling in domestic universities has increased steadily in the last three years.
Which of the following, if true, would weaken Julia's argument?
The population in country Q increased.
The nominal interest rate is 10%. The inflation rate is 6%
The real interest rate is equal to 4%.
By 2011, why might some people have considered the Great Moderation to have been a delusion?
The recession that began in December 2007 was the longest and most severe since the Great Depression of the 1930s.
"The United States has run a balance of payments deficit in every year since 1982."
The statement is false; the balance of payments must always equal zero.
Which of the following can most reasonably be concluded from the information given above?
The value of the domestic currency in the foreign exchange market is likely to become more volatile if the restrictions are removed.
Which therapy would you recommend?
Therapy A.
Which of the following should not occur?
There will be an increase in government purchases as the economy has more income.
Which of the following is not one of the conditions someone needs to meet to be counted as unemployed?
They had worked only one hour per week during the previous four weeks.
Fiscal policy refers to:
The government's use of taxes and expenditures to achieve macroeconomic policy objectives.
What is the relationship between the federal funds rate falling and the money supply increasing?
To decrease the federal funds rate, the Fed must increase the money supply.
How does lowering the target for the federal funds rate "pour money" into the banking system?
To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.
If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.
True
The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.
True
The unemployment rate is calculated as follows:
Unemployment Rater = Number of unemployed/Labor Force x 100
Which of the following questions is most relevant to answer in order to determine the accuracy of the CEO's claim?
What are consumer expectations of future growth?
Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.
How do the banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
Which equation represents the relationship between GDP and the four major expenditure components?
Y = C + I + G + NX
Indicate which component of GDP will be affected by each of the following transactions involving the Ford Motor Company.
You purchase a new Ford Escape Hybrid from a Ford dealer. Consumption Expenditure You purchase a 2011 (preowned) Ford Escape Hybrid from a friend. Not included in GDP calculation Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana. Not included in GDP calculation Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer in Shanghai, China. Net Export Expenditure Ford purchases new machine tools to use in its Missouri Escape factory. Investment Expenditure The state of Missouri builds a new highway to help improve access to the Ford Escape plant. Government Expenditure
Suppose that the inflation rate LOADING... turns out to be much higher than most people expected. In that case,
a borrower will gain from the situation while a lender will lose.
A government that collects more in taxes than it spends experiences
a budget surplus.
Which of the following factors does not cause the aggregate demand curve to shift?
a change in the price level
Expansionary monetary policy on the part of the central bank of the United Kingdom will cause:
a decrease in interest rates in the United Kingdom and a decrease in the value of the pound relative to other currencies.
Which of the following events would shift the supply of smartphones to the right?
a decrease in the price of inputs used to produce smartphones
If the government cuts taxes in order to increase aggregate demand, the action is called
a discretionary fiscal policy.
An insurance company is
a financial intermediary because they take premiums and use them to purchase financial securities.
Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")?
a high foreign exchange rate of the U.S. dollar relative to other currencies
According to the Taylor Rule, if the Fed reduces its target for the inflation rate, the result will be
a higher target federal funds rate.
Which of the following causes the short-run aggregate supply curve to shift to the right?
a positive technological change
The diagram in panel b is an example of
a supply curve.
In the United States, a high government budget deficit may lead to
all of the above.
Why are independent courts important for a well-functioning economy? Independence is necessary for courts:
all of the above.
Government unemployment payments can increase the unemployment rate by
allowing the unemployed to be more picky about taking a new job.
When a firm pays a wage that is higher than the market wage in order to increase worker productivity, the wage is called
an efficiency wage.
By "housing bubble" President Obama referred to an increase in the price of housing caused by
an increase in the demand for housing based on the expectation that prices will continue to increase.
Which of the following causes the short-run aggregate supply curve to shift to the left?
an increase in the expected price of an important natural resource
The aggregate demand curve is downward sloping because
an increase in the price level reduces real money holdings, which reduces the amount of expenditures.
The movement from point A to B on D 1 is caused by
an increase in the price of baskets of traditional wings.
In the figure to the right, the exchange rate equilibrium occurs at the point where the quantity demanded equals the quantity supplied,
appreciated against the yen.
Excess reserves
are reserves banks keep above the legal requirement.
Changes in taxes and spending that happen without actions by the government are called
automatic stabilizers.
Which of the following are financial securities that represent promises to repay a fixed amount of funds?
bonds
What role do they play in the working of a market system? Private property rights:
both a and b.
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to
buy U.S. Treasury securities from the public.
Quantitative easing involved the Fed's
buying longer term Treasury securities that are not usually involved in open market operations.
How can government policies shift the aggregate demand curve to the right?
by increasing government purchases
A movement from point A to point C could be the result of a
change in the expectations of households.
A movement from point A to point B on AD1 could be the result of a
change in the price level.
A movement from point A to point B on SRAS1 could be the result of a
change in the price level.
Microeconomics is most likely to include the study of
consumer choices.
After the Civil War, U.S. GDP
could have been higher if the farmers did not reduce their work hours.
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier.
decreases
As the first baby boomers become older than 65, the
demand curve for medicine will shift to the right.
Which of the following do we subtract from GDP to obtain national income?
depreciation
Purchases of which types of goods are business cycles most likely to affect?
durable goods
Concept Question 29.5.03 Both interest rate and exchange rate will be increased by
expansionary fiscal policy and contractionary monetary policy.
The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called
expansionary monetary policy.
What do economists mean by the word "marginal"?
extra or additional
Businesses demand loanable funds because
firms need to borrow funds for new projects, such as building new factories or carrying out new research projects.
Aggregate demand (AD) is comprised of expenditure components that include:
government spending, consumption, investment, and net exports.
Evidence shows that the quantity equation is correct over the long run, which implies that the
growth rate of the money supply determines the rate of inflation.
Which of the following is not a service that the financial system provides for savers and borrowers?
guaranteeing savers high rates of return
With this shift, equilibrium price will decrease and equilibrium quantity will decrease.
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About 10 times as many U.S. copies of Amazing Fantasy No. 15 have survived as U.K. copies. Yet in auctions that occurred at about the same time in 2013, a U.S. copy sold for $29,000, while a U.K. copy in the same condition sold for only $10,755.
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Consider the market for college textbooks illustrated in the figure to the right.
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Which one of the following choices shows how data on nominal wages for 2007 to 2013 and data on the consumer price index for the same years can be used to calculate the real wage for these years?
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The labor force participation rate is calculated by
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Suppose the government decreases taxes. Use the aggregate demand and aggregate supply model to show the effects of the decrease in taxes on the economy.
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Which of the following accurately defines the government purchases multiplier and the tax multiplier?
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Use a dynamic aggregate demand and aggregate supply graph to illustrate the change in macroeconomic equilibrium from 2017 to 2018, assuming that the economy experiences deflation during 2018.
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There is a strong link between changes in the money supply and inflation
in the long run.
The short-run aggregate supply curve slopes upward because of all of the following reasons except
in the short run, an unexpected change in the price of an important resource can change the cost to firms.
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
Higher interest rates strengthen a currency because they
increase the demand for the currency.
Government unemployment insurance tends to
increase the unemployment rate by lowering the opportunity cost of job search.
If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then
inflation will be higher than if the Fed had not acted.
Graft can affect economic growth in India because it
inhibits the efficient functioning of a market economy.
Households supply loanable funds because of the
interest income received from the borrowers.
The rule of 70
is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double.
The real-world money multiplier
is smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash.
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves.
A countercyclical policy is one that
is used to attempt to stabilize the economy.
This conclusion is flawed because
it assumes that firm F is the only producer of good X.
When sellers are willing to accept money in exchange for goods and services, money is acting as a
medium of exchange.
Current account deficits
must be funded through a financial account surplus which is facilitated by higher interest rates.
Personal income is
national income minus retained corporate earnings plus government transfer payments and interest on government bonds.
When a foreign investor buys a bond either a U.S. firm or the federal government issues, or when a foreign firm builds a factory in the United States, the transaction is recorded in the balance of payments as
only a capital inflow.
The purchases Fed Chairman Bernanke is referring to are
open market purchases of government securities.
The article also states that "the hope is that India's politicians will finally be more serious about fighting graft and enacting reform." Graft is
payments to officials to look the other way or provide some special service.
The dynamic AD-AS model assumes
potential GDP increases continually, while the AD-AS model assumes the LRAS does not change.
The payment of government unemployment insurance reduces the severity of recessions by
preventing a huge drop in income and spending for the unemployed.
Mature markets are markets where
products have reached mainstream customers and annual industry revenue growth slows.
When the articles refers to a "weakening currency," it means that the Indian rupee will
purchase less foreign currency.
At the new long-run equilibrium,
real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.
Over time, prices may change relative to each other. To take this change into account, the Bureau of Economic Analysis calculates
real GDP using chain weights.
The end of the housing bubble can bring on a recession because
reduced demand for housing lowers investment, which in turn lowers aggregate demand and income.
Potential GDP is
sometimes greater, sometimes less, and sometimes equal to actual real GDP.
In calculating GDP, which levels of government spending are included in government purchases?
spending by federal, state, and local governments
Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called
structural unemployment.
The Federal Reserve is divided into two bodies:
the Board of Governors and 12 regional districts.
The year 1991 is an important date in the history of India's economy because in this year,
the Indian government decided to scale back central planning, reduce regulations, and introduce market-based reforms.
Menu costs are
the costs to firms of changing prices. The Internet has reduced the size of menu costs.
The primary reason for this change in the sources of mortgage finance was _____; the consequence of this change was also _____ in mortgage rates.
the development of a secondary mortgage market; a decrease
If government unemployment insurance payments did not rise during a recession,
the economy would suffer as purchasing power of consumers would suffer.
The 2007-2009 recession was a clear example of
the effect that a decrease in aggregate demand can have on the economy.
When the demand curve shifts to the right,
the equilibrium price and quantity will both increase.
From a trough to a peak, the economy goes through
the expansionary phase of the business cycle.
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the other one has.
Purchases of assets a country has made abroad and foreign purchases of assets in the country are recorded in
the financial account.
The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country is called
the financial account.
The federal funds rate is
the interest rate that banks charge each other for overnight loans.
A movement from point A to point C could be the result of a change in
the labor force.
Which of these variables are the main monetary policy targets of the Fed?
the money supply and the interest rate
Concept Question 29.2.02 Real exchange rate is
the price of domestic goods in terms of foreign goods.
Which of the following is included in the economist's definition of investment?
the purchase of new machines, factories, or houses
Real GDP is
the value of goods and services evaluated at base year prices.
The average number of times each dollar in the money supply is used to purchase goods and services is called
the velocity of money.
"Operation Twist" refers to
the Fed's program to purchase $400 billion in long-term Treasury securities while selling an equal amount of shorter-term Treasury securities.
The quantity theory of money is better able
to explain the inflation rate in the long run.
The goal of expansionary fiscal policy is
to increase aggregate demand.
Additionally, the federal funds rate is
very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.
Which component of gross domestic income is the largest?
wages
The distinction between a normal and an inferior good is
when income increases, demand for a normal good increases while demand for an inferior good falls.
When a minimum wage is enacted or increased across a country, the unemployment rate
will increase some but the impacts will be much larger for some groups of workers.
The farmers' well-being
would not have been higher as a result of working these additional hours because value of an individual's well-being is not included in GDP calculation.
The four components of aggregate demand are
consumption, investment, government purchases, and net exports.
Assume that the required reserve ratio is 10%. The maximum total increase in the money supply that can result from the Fed's discount loan is
$100 million.
What are the four major components of expenditures in GDP?
Consumption, Investment, Government Purchases, and Net Exports
What are the four major categories of expenditure?
Consumption, investment, government purchases, and net exports.
b. Sales of iPhones would likely be slower in mature markets than in countries such as India because
India's market for smartphones is growing as population and income levels increase.
Which of the following best explains how the economy will adjust back to long-run equilibrium?
Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level.
A "premature tightening" of the "pace of purchases" would slow down the economic recovery because this action would be
contractionary, reducing lending and economic activity.
Recessions cause the inflation rate to _________, and the unemployment rate to _________.
decrease; increase
India has a "tricky political climate" because
ethnic, religious, cultural, and geographic divisions often make it difficult for the government to successfully implement policy.
Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, and reduce their loans, the money supply __________.
expands; contracts
By raising the discount rate, the Fed leads banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply.
fewer; decrease
When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.
low; high
Two important trends in the labor force participation rates of adults aged 20 and over in the United States since 1948 are the _________ labor force participation rate of adult women and the __________ labor force participation rate of adult men.
rising; falling
Goods and services that can be used for the same purpose are ________, and goods and services that are used together are ________.
substitutes; complements
Since World War II, the federal government's share of total government expenditures has been between
two-thirds and three-quarters.
A production possibilities frontier:
shows the maximum attainable combinations of two goods that may be produced with available resources.
This reasoning is flawed because it assumes that
similar tastes and preferences translate into similar willingness and ability to pay.
The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity.
smaller
The production possibilities frontiers depicted in the diagram to the right illustrate
technological advances in the tank industry.
In a market system, how does society decide what goods and services will be produced?
Consumers, firms, and the government determine what goods and services will be produced by the choices they make.
A good for which demand increases as income rises is ________, and a good for which demand increases as income falls is ________.
a normal good; an inferior good
Indicate which of the following statements represent positive analysis and which represent normative analysis.
a. A 50-cent-per-pack tax on cigarettes will reduce smoking by teenagers by 12 percent. This represents positive analysis. b. The federal government should spend more on AIDS research. This represents normative analysis. c. Rising paper prices will increase textbook prices. This represents positive analysis. d. The price of coffee at Starbucks is too high. This represents normative analysis.
Microeconomics is the study of
how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
Tom's lawn service specializes in mowing lawns and trimming bushes. Tom has 4 hours to devote to lawn services. In 1 hour, he can mow 4 lawns or trim 5 bushes. Use the line drawing tool to graph Tom's production possibilities frontier given he has 4 hours to devote to lawn services. Properly label this line. Carefully follow the instructions above, and only draw the required objects.
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Tom's lawn service specializes in mowing lawns and trimming bushes. Tom has 4 hours to devote to lawn services. In 1 hour, he can mow 4 lawns or trim 9 bushes. Use the line drawing tool to graph Tom's production possibilities frontier given he has 4 hours to devote to lawn services. Properly label this line. Carefully follow the instructions above, and only draw the required objects.
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The equilibrium price and quantity of a product was $100 and 1,000 units per month in 2015 and is $150 and 800 units per month in 2016. 1.) Use the line drawing tool to draw new demand and supply curves illustrating the changes described above. 2.) Use the point drawing tool to plot the 2016 equilibrium. Carefully follow the instructions above, and only draw the required objects. From 2015 to 2016,
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The production possibilities frontier will shift outward
if resources are used to produce capital goods.
Economists use the word marginal to mean an extra or additional benefit or cost of a decision. An optimal decision occurs when
marginal benefit equals marginal cost.
When does allocative efficiency occur?
Allocative efficiency occurs when production is in accordance with consumer preferences.
Why are models based on assumptions?
Because models have to be simplified to be useful.
Consider the following statement: "The problem with economics is that it assumes that consumers and firms always make the correct decisions. But we know that everyone makes mistakes." What is the most correct response to this statement?
Economics assumes that consumers and firms are rational, not that they always make the right decisions.
Which of the following, if true, would suggest that the firm is operating on its PPF?
Even though the demand for both liquor and dark chocolates has increased, the company can increase the production of only one variety.
In a market system, what determines how goods and services will be produced?
Firms determine how goods and services will be produced.
Which participants are of greatest importance in determining what goods and services are produced?
Households.
What does increasing marginal opportunity costs mean?
Increasing the production of a good requires larger and larger decreases in the production of another good.
What is the effect on the price of health-care services over time?
It increases because demand increased by more than supply.
Which of the following areas of economics studies issues such as whether government intervention is capable of reducing the severity of recessions?
Macroeconomics
Which of the following statements about microeconomics and macroeconomics is correct?
Macroeconomics is the study of the economy as a whole.
Suppose initially that the United States is consuming 2 boots and 12 shirts and Canada is consuming 8 boots and 4 shirts, as indicated in the figure. Then, suppose the United States and Canada specialize by each only producing the good for which they have a comparative advantage and then trade. In particular, suppose the United States trades Canada half of its production for half of what Canada produces.
The United States will have 0 additional shirt(s) after the trade (enter a numeric response using an integer) and 10 additional boot(s). At the same time, Canada will be able to consume 8 additional shirt(s) as a result of the trade and 4 additional boot(s).
What is comparative advantage?
The ability to produce a good or service at a lower opportunity cost than other producers.
What is absolute advantage?
The ability to produce more of a good or service than competitors using the same amount of resources.
Which of the following, if true, would suggest that the firm is operating at a point inside its PPF?
The firm believes in maintaining a certain amount of excess capacity to meet unexpected changes in demand.
Which of the following statements about the idea that people are rational is correct?
The idea assumes that consumers and firms use all available information as they act to achieve their goals.
Evaluate the following argument: "Adam Smith's analysis is based on a fundamental flaw: He assumes that people are motivated by self-interest. But this isn't true. I'm not selfish, and most people I know aren't selfish."
This statement is based on the misconception that following your self-interest and being selfish are the same thing.
Which of the following best describes scarcity?
Unlimited wants exceed the limited resources available.
If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights?
an independent court system
Relative to a market economy, a centrally-planned economy would be expected to be
better at neither productive efficiency nor allocative efficiency because the absence of market-imposed competition negates the need of firms to satisfy consumer wants or produce using the lowest-cost methods.
Scarcity is central to the study of economics because it implies that
every choice involves an opportunity cost.
If Tesla Motors expends resources to expand its supercharger network, then an opportunity cost would be
fewer resources that could be devoted to car production.
To develop a model that will answer economic questions, economists typically:
first make simplifying assumptions, then formulate a hypothesis, test the hypothesis, and finally revise the model if necessary.
A portion of microeconomics examines:
how individual firms make choices, such as how they decide what prices to change.
Scarcity implies that every society and every individual face trade-offs because scarcity means that
human wants are greater than what available resources can produce.
What is the outcome of enforcing contracts and property rights in a market system?
increased economic activity
The term "psychic rewards" refers to
nonmonetary forms of remuneration that are psychologically uplifting.
When economists develop models designed to explain the choices people make, they generally assume that
people are rational.
The Scottish philosopher Adam Smith argued in 1776 that
prices would do a better job of coordinating the activities of buyers and sellers than guilds could.
One of the basic facts of life is that people must make choices as they try to attain their goals. This unavoidable fact comes from a reality an economist calls
scarcity
Macroeconomics examines:
the economy as a whole, such as how rapidly the economy grows.
Equity is
the fair distribution of economic benefits.
A freelance singer-songwriter is planning the restoration of a recently purchased civil war-era farmhouse. While he professes an enjoyment of, and talent in the construction trades, the theory of comparative advantage implies that
the income lost while away from music will likely exceed the savings realized by doing the work himself, thus, he should hire professionals to do the restoration work.
Prepping for a next-day exam over the course of an evening (and possibly into the wee hours of test day) poses increasing costs since
the longer you choose to study will result in an increase in the number and value of foregone activities.
Economists believe that an activity should be continued up to the point where
the marginal benefit from the activity is equal to the marginal cost.
Psychic rewards that an entrepreneur might receive include (check all that apply):
the pride of self-accomplishment. status within the community. being one's own boss.
What are private property rights? Private property rights are:
the rights individuals and firms have to the exclusive use of tangible, physical property and intellectual property.
Macroeconomics is
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
Macroeconomics is most likely the study of
unemployment.
We can show economic inefficiency:
with points inside the production possibilities frontier.
In the circular-flow diagram showing how a market system works,
. income flows to firms through product markets.
Imagine that the next time the Indianapolis Colts play the New England Patriots at Lucas Oil Stadium in Indianapolis, Colts star quarterback Andrew Luck has a temporary lack of judgment and plans to sell Colts memorabilia during the game because he realizes that he can sell five times more Colts products than any other player. Likewise, imagine that you are a creative and effective manager at work and that you tell your employees that during the next six months, you plan to clean the offices because you can clean five times better than the cleaning staff. You shouldn't necessarily do what you are better than anyone else at doing
Both you and Andrew are making an error in judgment by assuming that specialization should be based upon absolute advantage. unless your advantage in that activity is greater than advantages you possess in other activities.
Using the same amount of resources, the United States and Canada can both produce lumberjack shirts and lumberjack boots, as shown in the production possibilities frontiers in the figure to the right.
Canada has a comparative advantage in producing lumberjack boots. The United States has a comparative advantage in producing lumberjack shirts.
How do market economies ultimately determine what goods and services are produced, how the goods and services will be produced, and who will receive the goods and services?
Consumers determine what goods and services are produced, firms determine how to produce them, and markets determine who will receive them.
Two neighbors, countries A and B, produce books and blankets, among other goods and services. However, Country A produces more of both goods than country B. A student of economics, Maya, also notes that in both countries, these industries individually employ 30 percent of the population. She concludes that country A has an absolute advantage in the production of books and blankets over country B. Which of the following, if true, would weaken Maya's conclusion?
Country A employs more capital per unit of labor in all industries than country B.
Which of the following, if true, would weaken Maya's conclusion?
Country A employs more capital per unit of labor in all industries than country B.
Is it necessary for the chief executive officer (CEO) of BlackBerry to know this information?
Generic knowledge about the product is certainly to be expected. But a CEO is more of a strategist and, ideally, a visionary, who orchestrates the conception, design, production, and marketing of an innovative product.
XYZ firm, the leading producer of leather goods in its country is planning to expand its business. Industry experts identify Asia as a potential target market. They report that substitute products, particularly in India, are highly priced. Darren, the operational head, feels that exporting their product to India is a good idea. According to him, their price advantage alone will ensure good sales. However, his colleague, Mark, who is also the head of product development, feels that Darren is too optimistic, and that this venture may not turn out to be as profitable as Darren expects it to be. Which of the following, if true, would support Mark's point of view?
India has high import tariffs.
Harry Fletcher is a market analyst at an automobile firm. He formed a hypothesis that an increase in advertising would increase demand for the firm's cars. The ad campaign ran for a period of six months. However, the results were not as positive as Harry had anticipated. Which of the following, if true, can explain this outcome?
Interest rates increased substantially during this period.
Which of the following is not a step economists follow when developing an economic model?
Make value judgments to be proven or disproven.
Which of the following areas of economics studies issues such as ways to reduce teenage smoking?
Microeconomics
A primary difference between macroeconomics and microeconomics is
Microeconomics examines individual markets while macroeconomics examines the economy as a whole.
Which of the following statements about microeconomics and macroeconomics is correct?
Microeconomics involves the study of how households and firms make choices.
Does either country have an absolute advantage in producing both goods?
Neither country has an absolute advantage in both goods because Canada can produce more boots but the United States can produce more shirts.
What type of economic analysis is concerned with the way things ought to be?
Normative Analysis
Which of the following statements about normative analysis is correct?
Normative analysis is concerned with what ought to be.
Is it necessary for all of the managers in all of these firms to know how all of the components of the Torch are manufactured and how the components are assembled into a smartphone?
Of course not. Any given manager need only command the knowledge necessary to produce the component for which s/he has responsibility.
Trade-offs force society to make choices, particularly when answering the following three fundamental questions:
One, what goods and services will be produced? Two, how will the goods and services be produced? Three, who will receive the goods and services produced?
Use the following production possibilities frontier for a country to answer the following questions. Which point(s) are unattainable? Briefly explain why.
Point A because it is outside the production possibilities frontier.
At which point is the country's future growth rate likely to be the highest? Briefly explain why.
Point B because it is where the most resources are used to produce capital goods.
Which point(s) are inefficient? Briefly explain why.
Point B because it is where the most resources are used to produce capital goods.
Which point(s) are efficient? Briefly explain why.
Points B, C, and D because this is where maximum output is produced with available resources.
Which of the following statements about positive analysis is correct?
Positive analysis is concerned with what is.
When does productive efficiency occur?
Productive efficiency occurs when a good or service is produced at the lowest possible cost.
What are the implications of this idea for the shape of the production possibilities frontier?
The production possibilities frontier will be bowed outward.
Suppose the president is attempting to decide whether the federal government should spend more on research to find a cure for heart disease. What is the opportunity cost of spending more money to find a cure for heart disease?
The reduction in funding for research to cure other diseases.
What factors should the federal government take into account in making its decision of which therapy it will allow Medicare funds to be used to pay for?
The relative cost of each therapy.
The primary difference between absolute and comparative advantage is
absolute advantage refers to the ability to produce more of a good or service using the same amount of resources and comparative advantage refers to the ability to produce a good or service at a lower opportunity cost.
In economic terminology, the inputs used to make goods and services are referred to as
factors of production.
If country ABC can produce a unit of good 1 by sacrificing fewer units of good 2 than can country XYZ, it is correct to say that country ABC
has a comparative advantage in producing good 1.
If a country has a comparative advantage in the production of a good, then that country
has a lower opportunity cost in the production of that good.
Microeconomics is most likely the study of
household choices.
It is important for Tesla Motors to address the issue of long-distance travel because
people are less likely to buy a car that does not allow them the freedom to take longer trips.
Absolute advantage is the ability of an individual, a firm, or a country to
produce more of a good or service than competitors using the same amount of resources.
The difference between a change in supply and a change in the quantity supplied is that the latter is
produced by a change in the product's own price while the former is caused by a variety of variables other than the products price.
The primary difference between product markets and factor markets is that
product markets are markets for goods, while factor markets are markets for factors of production—labor, capital, natural resources, and entrepreneurial ability.
Opportunity cost is
the highest valued alternative that must be give up to engage in an activity.
These individuals would see their position weakened most by the knowledge that
the substitution of domestic steel for foreign steel absorbs resources that would otherwise produce goods of greater value.
How should policymakers determine the amount of money that should be allocated for research curing heart disease? They should base their decision on
whether the last dollar devoted to research on heart disease results in more benefit than the last dollar spent on research for curing other diseases.
Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country without an absolute advantage in producing a good
will have a comparative advantage if it has a lower opportunity cost of producing that good.
We can show economic efficiency:
with points on the production possibilities frontier.
