Economics Module 4 and 5

Which of the following are possible causes of a higher unemployment rate? (choose all that apply)

1. changes in the skills needed by employers 2. people changing jobs 3. cyclical fluctuations in the level of national spending

What percentage of student loans are given out by the government?

92%

According to Hazlitt, what were the main arguments for parity prices for agricultural products? (choose all that apply)

Agriculture is the most basic and important of all industries. Correctly checked The prosperity of everybody else depends upon the prosperity of the farmer. Correctly checked If the farmer doesn't have enough purchasing power to buy industrial products, then industry will suffer.

During the Great Recession, the federal government employed fiscal policy to try to stimulate the economy. Which of the following are examples of legislation that Congress passed to try to turn around the economy during the Great Recession? (choose all that apply)

American Recovery and Reinvestment Act of 2009 Economic Stimulus Act of 2008

Why do consumers reduce their buying after an economic downturn has started? (choose all that apply)

Because they fear they may lose their jobs. Because prices of goods have already fallen, and they fear a further fall.

Hazlitt writes about an example of government spending where bureaucrats want to build a new bridge connecting two towns, even when existing bridges can easily handle the current traffic. What are the arguments made for building the bridge even though it isn't needed? (choose all that apply)

Building the bridge will provide employment. The bridge will exist thanks to government spending, when otherwise it wouldn't have.

Great Recession

Caused by subprime mortgage crisis, leading to bank credit crisis

Oil Crisis Recession

Caused by the introduction of wage and price controls

Which school of economic thought holds close to the theories of Adam Smith and believes that the prices of products are largely a function of how much they cost to produce?

Classical

Short Answer: In one sentence, define the term contractionary fiscal policy.

Contractionary fiscal policy is meant to slow down the economy during periods of high inflation, which decreases government spending and increases taxes.

Short Answer: In one sentence, define the term deficit.

Deficit is a budget where the expenditures exceed the revenues.

Short Answer: In one sentence, define the term expansionary fiscal policy.

Expansionary fiscal policy is meant to stimulate economy by increasing government spending and lowering taxes which creates employment and additional production.

The Panic of 1893

Failure of the Philadelphia and Reading Railroad

What happens when providing employment becomes the primary reason (the end instead of the means) for government spending? (choose all that apply)

Government projects have to be invented. Need becomes a subordinate consideration.

Which of the following scenarios would likely result in demand-pull inflation?

Increased government spending Correct! Increased government spending creates additional demand, and positive changes in demand increase prices. Higher production costs would cause inflation, but it would be cost-push inflation rather than demand-pull inflation. Decreased government spending and fewer consumers in the market would both result in less demand, which would lower prices.

In one sentence, define the term inflation.

Inflation is an increase in the general level of prices.

Cost-push inflation

Inflation that occurs when businesses raise prices to cover increasing costs

Demand-pull inflation

Inflation that occurs when demand for goods and services becomes greater than supply

According to Hazlitt, which of the following are true about hoarding? (choose all that apply)

Irrational hoarding of cash is harmful in most economic situations. Dishoarding, as people die and their hoards are discovered by others, likely offsets new hoarding.

According to Hazlitt, which of the following are effects of keeping interest rates artificially low? (choose all that apply)

It increases the demand for capital. It encourages highly speculative ventures. It decreases the supply of real capital.

Who popularized the theory of the paradox of thrift?

John Maynard Keynes

Consumer Price Index (CPI)

Measures the average change in the prices of a selection of consumer goods over time

Which of the following taxes is considered a proportional tax?

Medicare payroll tax

Rational and uses Marginal utility

Neoclassical school

Which school of economic thought introduced the idea that consumers act rationally and attempt to maximize their marginal utility?

Neoclassical school

The largest stock market in the world is the _______________.

New York Stock Exchange

Which of the following are arguments made against OSHA? (choose all that apply)

OSHA's regulations disrupt the market forces of supply and demand. OSHA creates many superfluous regulations that do little to improve worker safety. OSHA regulations hurt both workers and consumers.

Increased taxes reduce the economic incentives for business success. Which of the following are consequences of these reduced incentives? (choose all that apply)

People are deterred from starting new enterprises. Correctly checked Existing businesses don't give new employment. Correctly checked Potential entrepreneurs decide not to become new employers. Correctly checked Improved machinery and technology are developed more slowly. Correctly checked Real wages are held down. Correctly checked Consumers are prevented from getting better and cheaper products.

Short Answer: In one sentence, explain the economic consequences of people not being free to use their possessions as they choose.

People without property rights will be discouraged from acting in ways that creates wealth and efficiency.

Carl Menger, considered to be the founder of Austrian economics, wrote ________________ in 1871.

Principles of Economics

According to Hazlitt, which of the following are true about new capital? (choose all that apply)

Producers invest in new capital goods because they reduce the costs of production. Even if a greater quantity of goods isn't needed, new capital can create goods of improved quality. There is essentially no limit to the amount of new capital that can be absorbed.

Short Answer: In one sentence, define the term progressive tax.

Progressive tax is a fixed tax paid by an individual based on their income. The higher one's income is, the more in taxes they will pay.

In one sentence, explain why roads are built by the government.

Roads are built by the government because they benefit society as a whole. Privatizing roads would only benefit people who can pay for the service.

In one sentence, explain why roads are built by the government.

Roads are built by the government because they benefit society as a whole. They facilitate trade. Privatizing roads would only benefit people who can pay for the service.

What United States president initiated an unprecedented spending spree during the Great Depression?

Roosevelt

In the United States, the bulk of spending by the federal government goes to which of the following areas? (choose all that apply)

Social Security payments national defense Correctly checked interest payments on the national debt Correctly checked goods and services, such as medical costs

Which of the following taxes are considered regressive taxes? (choose all that apply)

Social Security payroll tax sales tax

The most famous work written by John Maynard Keynes was _______________.

The General Theory of Employment, Interest, and Money

In one sentence, explain the two primary downsides of supply-side policies.

The downsides of supply-side policies are that it takes a long time to see the effects and how effective it will be.

According to Hazlitt, what is the end result when the government provides loans or subsidies to business?

The government taxes successful businesses in order to support unsuccessful businesses.

What does Hazlitt say about the rate of tax imposed by inflation?

The rate is not a fixed one and cannot be determined in advance.

According to Hazlitt, the fact that parity pricing for agricultural products was "merely a device for subsidizing a special interest" is proven by which of the following? (choose all that apply)

The refusal to universalize the principle of parity pricing. When agricultural prices go above parity, there is no demand that the prices be decreased back to parity.

Why does Hazlitt say that advocates of parity pricing for farmers picked the years 1909-1914 as the basis of parity?

The years were one of the most favorable periods for agriculture in history.

According to Hazlitt, which of the following are true, in general, about the individuals selected for government loans? (choose all that apply)

They will be poorer risks than the individuals selected for private loans. Correctly checked More money will be lost by loans to these individuals. Correctly checked There will be a higher percentage of failures, or defaults, on these loans. Correctly checked These individuals will be less efficient and waste more resources.

Great Depression

Unemployment reached 24.9%

According to Hazlitt, what happens when the government tries to save a particular industry (Hazlitt calls it the "X industry") by giving it a direct subsidy? (choose all that apply)

Wealth is transferred from other industries to the subsidized industry. The average standard of living is lowered. Capital and labor are driven out of efficient industries and into less efficient industries.

What is price stickiness?

a condition in which market prices change slowly in reaction to changes in supply and demand

Austrian economists argue that contractionary phases are made worse by government intervention because that intervention results in _______________.

a malinvestment of capital

Emergency services provided by the government include which of the following services? (choose all that apply)

firefighting police protection emergency medical services

Proportional tax is another name for _________.

flat tax; charged regardless of income

According to Hazlitt, the whole economic progress of mankind has consisted in ______________.

getting more production with the same labor

What are the results of contractionary fiscal policy rarely being used? (choose all that apply)

high inflation increased government debt

n the United States, state governments are mostly funded by which of the following types of taxes? (choose all that apply)

income taxes sales taxes

Hazlitt admits that inflation might sometimes be able to correct the causes of an economic depression, but that it is a "dangerous method" because ____________.

it makes its corrections not openly and honestly, but by the use of illusion

In the United States, local governments are primarily funded through __________.

property taxes

When soldiers are discharged from the military and become private citizens, it will increase total national production because _______________.

the soldiers will become self-supporting and get paid for producing additional goods and services

According to Hazlitt, the belief that government loans for farmers are beneficial comes from which of the following "acts of shortsightedness"? (choose all that apply)

thinking only of the first half of the transaction Correctly checked looking at the matter only from the standpoint of the farmers that borrow

What organizations are responsible for regulating financial markets in the United States? (choose all that apply)

1. Federal Reserve System 2. Securities and Exchange Commission

According to Hazlitt, many proponents of inflation realize that it will decrease the purchasing power of money and increase the prices of goods and services. What are reasons these proponents of inflation want inflation anyway? (choose all that apply)

1. They believe it's an essential measure to cure a depression. 2. They believe it will jump-start industry and lead to full employment. 3. They believe it will stimulate imports and discourage exports. 4. They believe it will improve the position of creditors as compared with debtors.

Inflation has a positive impact on which of the following groups? (choose all that apply)

1. people who own homes 2. people who've borrowed money at fixed rates

Inflation has a negative impact on which of the following groups? (choose all that apply)

1. people with a lot of savings 2. people living on a fixed income

In the United States, the highest level of inflation since the Great Depression occurred in 1979. What was the percentage of inflation in 1979?

13%

At the height of the Great Depression in 1933, the unemployment rate reached a high of ________.

24.9%

What happens when new capital and new labor are forcibly kept out of a particular industry?

Both capital and labor are less efficiently employed.

One potential cause of unemployment is seasonal fluctuations in _________.

Demand

Monetary inflation can create a chain reaction that results in even more inflation. This occurs because monetary inflation can cause ___________ inflation when people recognize that the value of their money is going to decline in the future.

Demand-pull

According to Hazlitt, which of the following are necessary for the health of a dynamic economy? (choose all that apply)

Dying industries should be allowed to die. Growing industries should be allowed to grow.

What committee is responsible for conducting monetary policy?

Federal Open Market Committee

In one sentence, explain why higher interest rates reduce inflation.

Higher interest rates cause more people to save money and spend less, which decreases demand and brings down prices, hence reducing inflation.

Which school of economic thought believes the government's role in the economy is to control inflation through monetary policy but rejects the idea that the government can control demand?

Monetarist school (Milton Friedman)

When the money supply increases more than the output of goods and services increases, it results in _________.

Monetary inflation

Name at least three reasons that the American national debt has risen to such high levels.

National debt is the total sum of money the government owes. The major reason for the rise in national debt is government spending and a decrease in taxes. This tactic is used to stimulate the economy, increasing employment and production. An increase in taxes is not generally supported by politicians or voters, so the government cannot offset periods of increased taxes with decreased taxes. The government paying off interest payments rather than investing in several areas creates even more national debt.

Short Answer: In one sentence, define the term negative externality.

Negative externalities are externalities in which individuals pay a cost they had no control over the creation of.

One major financial regulator in the United States is the Securities and Exchange Commission. What are the three most common types of violations that are punished by the Securities and Exchange Commission? Define or explain each type of violation.

Since the Securities and Exchange Commission oversees financial markets, they must punish any violation made companies and individuals. One common violation is insider trading, where a security is traded in a public company by an individual who has confidential knowledge of the security. Lying about the condition of a company or security is also a violation. Another violation is accounting fraud, where companies might manipulate their records to hide profits or losses.

FICA tax is a payroll tax that funds which of the following government programs? (choose all that apply)

Social Security Medicare

Compare and contrast the Keynesian and Austrian schools of economic thought. Who were the founders of these schools, and what are the main ideas of each school?

The Keynesian school was founded by John Maynard Keynes. The school believes government intervention can solve recessions caused by decreased aggregrate demand. They also believe that market prices react slowly to changes in supply and demand, and use this to defend their idea of increased money supply. The Austrian school was founded by Carl Menger. The school believes that government intervention creates a malinvestment of capital. They focus more on efficiency.

Compare and contrast the Keynesian and Austrian schools of economic thought. Who were the founders of these schools, and what are the main ideas of each school?

The Keynesian school was founded by John Maynard Keynes. The school believes that government intervention can solve recessions created by decreased aggregrate demand. They also believe that market prices slowly react to the changes of supply and demand (known as price stickiness), which supports their belief of increased government spending and expansion of money supply. The Austrian school was founded by Carl Menger. It focuses more on the efficiency of money and believe that government intervention won't solve recessions and will only create a malinvestment of capital.

In one sentence, define the term business cycle.

The business cycle shows economic activity in intervals of expansion and contraction (with peaks and troughs) over a period of time.

In one or two sentences, describe the paradox of thrift.

The paradox of thrift is a theory that suggests saving money doesn't actually benefit the economy, but instead harms it.

Which of the following are arguments made in defense of OSHA? (choose all that apply)

Workplace injuries and deaths have declined dramatically since OSHA was created in 1971. Workplace injuries and deaths create negative externalities. Workers don't fully understand the risks of certain jobs.

Which of the following are ways that the United States government provides ongoing economic support? (choose all that apply)

assuring the nation's financial institutions remain healthy promoting innovation and invention supporting jobless workers with unemployment insurance

According to the video, one factor that affects the different phases of the business cycle is consumer-producer _____________.

confidence

Hazlitt writes, "The most obvious . . . error on which the appeal of inflation rests" is _________________.

confusing money with wealth

The period of the business cycle where growth slows down and unemployment increases is called the ____________ phase.

contractionary

In the United States, the federal government is mostly funded by which of the following types of taxes? (choose all that apply)

corporate income taxes individual income taxes tariffs fees excise taxes payroll taxes

Hazlitt writes, "Government 'encouragement' to business is sometimes as much to be feared as government hostility." This "supposed encouragement" often takes which of the following forms? (choose all that apply)

direct grant of government credit a guarantee of private loans

The rate of interest that the central bank charges on its loans is called the ____________.

discount rate

The period of the business cycle where economic growth increases and unemployment decreases is called the _____________ phase.

expansionary

What factors affect the different phases of the business cycle? (choose all that apply)

fiscal policy technological change monetary policy consumer-producer confidence

Hazlitt argues that "nothing is easier to achieve than full employment" when it's "taken as an end to itself" instead of being tied to the goal of _______________.

full production

What is the solution for the market failure of public goods?

government control over public goods

When the Federal Reserve sells securities to banks, it leads to ___________ interest rates.

higher

If the discount rate is low, the overall money supply will __________.

increase

Which of the following are examples of monetary policy strategies the government can use to encourage economic growth and lower unemployment? (choose all that apply)

increasing money supply lowering interest rates

Which of the following are examples of supply-side policies the government can use to encourage economic growth and lower unemployment? (choose all that apply)

job training programs deregulation

Which of the following are consequences of the government getting deep into debt? (choose all that apply)

less fiscal flexibility less economic opportunities

One consequence of high government debt is reduced investment. The government will have to spend much of its budget on interest payments instead of making investments in areas such as infrastructure, education, and research. Which of the following are ultimately consequences of reduced investment? (choose all that apply)

less tax revenue increased debt increased deficits slower economic growth

One argument made against reducing the bureaucracy is that it would hurt the economy by reducing the purchasing power of the dismissed officeholders. What fallacy causes this argument to be made?

looking only at the effects on one group, the dismissed officeholders, instead of the effects on everyone

In the United States, the bulk of spending by local and state governments goes to which of the following areas? (choose all that apply)

public welfare public safety road construction and repair public education

A long economic contraction, defined by some economists as a contraction lasting more than six months, is called a(n) ____________.

recession

A tax in which people with lower incomes pay a higher tax rate is called a(n) ___________.

regressive tax

According to Hazlitt, saving is merely a different form of ___________.

spending

Which of the following are ways that the United States government provides ongoing economic support? (choose all that apply)

supporting jobless workers with unemployment insurance assuring the nation's financial institutions remain healthy promoting innovation and invention

Which of the following describes the concept of parity pricing in the 1930s and 1940s?

the desire to raise the prices of agricultural products to "parity" with the prices of the products that the farmer buys

The government protects consumers by enforcing standards of measurement called ______________.

weights and measures