Economics Revised

A pizza shop plans to sell 12,000 pizzas. Each pizza costs the shop $7 in labor and ingredients. Rent: $18,000 Utilities: $7,000 Insurance: $5,000 What is this pizza shop's expected total costs?

$114,000. The formula: 12,000 pizzas x $7 each = $84,000 of variable costs. This plus the fixed costs of $18,000 for rent, $7,000 for utilities, and $5,000 for insurance provides the correct answer.

What is the concentration index of fabric companies using the Herfindahl-Hirschman index? Lenoir Fabrics - 10% Fabrics R Us - 9% Willie Pace - 8% Eames - 7% Eleven regional fabric companies with 6% of the market - 66%

10^2 + 9^2 + 8^2 + 7^2 + 11(6^2) = 690

The market share of the top four firms was measured, and the concentration ratio score indicated that a proposed merger would draw the attention of anti-trust authorities. Which concentration ratio score was calculated? 23% 34% 49% 58%

58%. A concentration ratio score of more than 50% would be considered especially high and would draw the attention of antitrust authorities.

A country's interest rates have fallen. How will this change affect the equilibrium? The new equilibrium occurs at a lower price and higher GDP. The new equilibrium occurs at a lower price and lower GDP. The new equilibrium occurs at a higher price and lower GDP. The new equilibrium occurs at a higher price and higher GDP.

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Contractionary fiscal policy

A contractionary fiscal policy slows down economic activity as businesses decrease production and lay off workers. Workers have less money to spend on goods and services, and aggregate demand decreases.

Contractionary monetary policy

A contractionary policy, such as a sale of government securities by the Fed, pushes interest rates up, investment down, and the aggregate demand curve to the left. During a period of inflation, a contractionary monetary policy is used.

What does it mean to have a positive balance of trade? A country exports more than it imports. A country ships its excess goods to another country.

A country exports more than it imports. When a country exports more goods than it imports, it will have a positive balance of trade.

Absolute vs. Comparative Advantage

A country that has an absolute advantage can produce a good more efficiently with fewer resources. Even when a country has an absolute advantage in the production of all goods, it will still benefit from trade. Absolute advantage differs from comparative advantage, which refers to the ability to produce specific goods at a lower opportunity cost.

What causes AD shifts to the LEFT?

A decrease in any of the components of AD will shift the AD curve to the left. A decrease in AD means that at least one of these components decreased so a lesser amount of total spending would occur at every price level.

A recent recession has resulted in declining investment and consumer spending. New austerity measures have prevented the government from increasing spending. Which effect will this action have? A left shift in the aggregate demand curve A left shift in the aggregate supply curve

A left shift in the aggregate demand curve. A decrease in consumer spending and investment spending with no increase in government spending will result in lower aggregate demand.

Mixed economy

A mixed economy features a combination of traditional, command, and market economies to varying degrees. In a mixed economic system, decisions are made based on consumer demands. However, there is government involvement in making decisions about consumer safety, environmental, and other regulations.

Expansionary VS Contractionary Monetary Policy

A monetary policy that lowers interest rates and stimulates borrowing is an expansionary monetary policy or loose monetary policy. In contrast, a monetary policy that raises interest rates and reduces borrowing in the economy is a contractionary monetary policy, or tight monetary policy

A utility company is the only electricity provider in its market. The local government allows the company to determine prices and has created regulations that make it difficult for competitors to enter the market. What type of market is this company working in? Perfectly competitive Monopoly Oligopoly Monopolistic competition

A monopoly has a single firm that sells a product and is able to determine the price. There are high barriers for other firms to enter the market.

Monopoly

A monopoly is an industry structure where a single firm produces a product for which there are no close substitutes. Monopolists are price makers. Barriers to entry and exit exist, and to ensure profits, a monopoly will attempt to maintain them. Long-run profits are sustained. Equilibrium production can take place where price > average total cost > marginal revenue = marginal cost. A monopoly is the least efficient market structure.

Price ceiling

A price ceiling is a price control that limits the maximum price that can be charged for a product or service. Generally, ceilings are set by governments, although groups that manage exchanges can set ceilings as well. A price ceiling will only impact the market if the ceiling is set below the free market equilibrium price. This is because a price ceiling above the equilibrium price does not limit the market's movement toward equilibrium. The product is sold at the equilibrium price both before and after the ceiling is imposed. When the ceiling is less than the equilibrium price, normal market clearing price adjustment is prevented.

Price Floor

A price floor is a price control that limits how low a price can be charged for a product or service. Generally, floors are set by governments, although groups that manage exchanges can set price floors as well. The purpose of a price floor is to protect producers of a certain good or service. By establishing a minimum price, a government seeks to promote the production of the good or service and ensure that the producers have sufficient resources to go about their work. Perhaps the best known example of a price floor is the minimum wage.

Production possibilities frontier (PPF)

A production possibilities frontier (PPF) identifies all possible combinations of two goods or services that can be produced within the given resources and technology when the resources are fully and efficiently used per unit time. All points on the production possibilities frontier are efficient.

The national government has begun a new deficit spending program that it hopes will increase domestic spending on goods and services. Which effect will this action have? A left shift in the aggregate supply curve A right shift in the aggregate demand curve

A right shift in the aggregate demand curve. An increase in government spending would increase aggregate demand, resulting in a right shift of the aggregate demand curve.

Law of Demand

A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded. This inverse relationship between price and quantity is known as the law of demand.

Aggregate Demand

A shift in AD to the right will lead to a higher price level and inflation. A shift in AD to the left will lead to a lower price level and unemployment.

Recessions and Depression

A significant decline in real GDP is a recession, and an especially lengthy and deep recession is called a depression.

Expansionary fiscal policy

An expansionary fiscal policy encourages an increase in economic activity as businesses increase production, hire more workers, and increase investment. More workers have more income to spend on goods and services, which increases aggregate demand.

Average fixed cost equation

Average fixed cost = Total fixed cost / Output

Tools of Monetary Policy

Changing reserve requirements Changing the discount rate Open market operations Interest on reserves

Depreciation (Implicit cost)

Depreciation is the cost to the firm of using its own capital. The firm's physical assets lose value from its use in production. Depreciation measures the opportunity cost associated with this wear and tear.

Fiat money

Fiat money has no intrinsic value but is declared by a government to be the legal tender of a country. The United States' paper money, for example, carries the statement: "This note is legal tender for all debts, public and private." In other words, by government decree, if you owe a debt, then legally you can pay that debt with the U.S. currency, even though a commodity does not back it. The only backing for the money is universal faith and trust that the currency has value and nothing more

An economist is interested in identifying individuals who may have employment but who cannot access the employment they desire. Which topic is this economist studying? Hidden unemployment Frictional unemployment

Hidden unemployment. Hidden unemployment is the gap between employment that individuals have and the employment that they desire.

What is the highest weighted factor in the consumer price index (CPI)? Medical care Food Housing

Housing

A country is producing capital and consumption goods, and its resources and technology are fixed in quantity and quality. The country wants to expand production of both capital and consumption goods without changing its resources or technology. When is this goal possible? It will become possible if labor is reallocated to better production alternatives on the frontier. It is possible if there are underutilized resources, so the production point moves to the frontier.

It is possible if there are underutilized resources, so the production point moves to the frontier. This shows that a production point under the production possibility frontier would result if some resources were not in use. As resources engage in production, the production point moves to the frontier.

Which item is a factor of production for ABC Company? Wages Machinery Government regulation Bed sheets

Machinery is a capital factor of production for ABC Company in their facility in Mexico.

Macroeconomic equilibrium

Macroeconomic equilibrium occurred when the quantity of real GDP demanded equals the quantity of real GDP supplied. In the AD-AS model, the intersection of the AS and AD curves identifies the equilibrium level of real GDP and the equilibrium price level in the economy.

What does the circular flow diagram illustrate? Macroeconomic payments Production possibilities curve Opportunity cost curve

Macroeconomic payments are wages, salaries, and rents.

Marginal cost equation

Marginal cost = Change in total costs / Change in output

A supply curve is graphed with the quantity supplied on the x-axis and price on the y-axis. How does increasing the number of suppliers affect this curve? Causes the slope of the curve to increase Produces shortage of products in the market Moves the curve outward to the right

Moves the curve outward to the right. When a market experiences an increase in the number of suppliers for a product or service, the result is an increase in the overall quantity supplied in the market. Increasing the quantity of suppliers results in a shift of the supply curve to the right.

Oligopoly

Oligopoly is a market structure in which there are a few firms producing products that range from similar to highly differentiated. Each firm is large enough to influence the industry. Barriers to entry exist. Examples of oligopoly include the auto industry, cable television, and commercial air travel. Long-run profits can be sustained if firms can successfully collude, Production takes place where price > average total cost > marginal revenue = marginal cost. An oligopoly is less efficient than either a perfectly competitive market or a monopolistic competitive market.

There are a few firms providing cloud services, and these firms directly respond to each other's pricing strategies. It is expensive for other firms to enter the market. What type of market are these firms operating in? Monopolistic competition Monopoly Oligopoly Perfectly competitive

Oligopoly. An oligopoly is best characterized by firms that strategically respond to each other.

Tariff

One barrier to international trade is a tariff. A tariff is a tax imposed by a government on imported or exported goods. It is also known as customs duties. Specific tariffs levy a flat amount on each item that is imported. Ad valorem tariffs are based on a percentage of the value of each item. Compound tariffs are tariffs that are a combination of specific tariffs and ad valorem tariffs.

Steps for calculating opportunity cost:

Pick a nation and a good. Calculate what the nation gives up divided by what they get.

The economy is in a recessionary gap, so the government enacts an expansionary monetary policy. Which effect will this action have on the aggregate demand curve? Shifts to the right Shifts to the left

Shifts to the right. If the government enacts an expansionary monetary policy, interest rates are reduced. This causes consumption to increase, which shifts the aggregate demand curve to the right.

An economist is doing research to consider the total gains, both private and external, that result from making particular investments. What is this economist identifying? Social benefit Market solutions Social cost

Social benefit. Social benefit is the sum of both private and external benefits resulting from a decision.

The government imposes new safety regulations on the production of gas stoves. What will happen in the market for gas stoves? Demand decreases. Supply decreases.

Supply decreases.

What are the two methods used to calculate the monopoly power of an industry? The concentration ratio and the Herfindahl-Hirschman index The MCI monopoly index and the Myers Briggs ratio

The concentration ratio and the Herfindahl-Hirschman index.

The wealth effect (Aggregate demand)

The wealth effect holds that as the price level increases, the buying power of money is depleted to some extent by inflation.

Autarky

When a country does not trade at all with other nations and consumes only goods it produces itself, it is called autarky.

Perfectly elastic

For price elasticity of supply to be perfectly elastic for any change in price, the quantity supplied would change infinitely.

What is a reason for the downward slope of the aggregate demand curve? Poverty effect Income effect Foreign price effect Unemployment rate effect

Foreign price effect. If imports are less expensive than domestic goods, then the quantity demanded domestically will decrease.

Free trade

Free trade results in lower prices and more products for consumers, along with encouraging stronger international relationships and higher rates of efficiency for domestic producers. The work of the WTO in facilitating trade agreements has increased the level of free trade by reducing or eliminating trade barriers.

How are the aggregate demand (AD) curve and the Phillips curve related? The short-run Phillips curve is a vertical line, as is the AD curve at the natural rate of unemployment. GDP and unemployment are negatively concerned with the influence of price changes on macroeconomic performance.

GDP and unemployment are negatively concerned with the influence of price changes on macroeconomic performance. The positive relationship between output and employment means that if AD shows a negative relationship between GDP and the price level, the short-run Phillips curve will show a negative relationship between inflation and unemployment.

Gross Domestic Product (GDP)

GDP measures production in the economy, is used to measure economic growth, and is a measure of the prevailing standard of living in a country. Economists measure growth by the percentage change in real (inflation adjusted) gross domestic product. A growth rate of more than 3% is considered good. GDP can be calculated by summing the expenditures made to purchase all final goods and services.

Formula: GDP Per Capita

GDP per capita =GDP / population

A firm is operating in an environment where it is easy to enter and exit the market and where the firm will be a price maker. Which market environment is the firm operating in? Perfectly competitive Monopoly Monopolistic competition Oligopoly

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Which measure combines the four sources of expenditures in the circular flow model? Accumulated surplus Disposable income Structural deficit Aggregate demand

Aggregate demand. Aggregate demand is the sum of the four sources of buying and selling within the circular flow model.

An economist is conducting research on the total amount of money spent for goods and services at different price levels within a single economy. What is the economist studying? Supply curves Demand curves Aggregate demand Aggregate supply

Aggregate demand. Aggregate demand is the total amount of money spent on goods and services at different price levels within a domestic economy.

Aggregate Supply

Aggregate supply (AS) is total quantity of output (real GDP) firms will produce and sell at different price levels. Although the short-run aggregate supply (SRAS) curve slopes upward, in the long run, the AS curve is vertical. This verticality occurs because nominal prices in input markets have time to adjust. As a result, real input prices are constant along the long-run aggregate supply (LRAS) curve. There is no increase in profitability associated with changes in the general price level. Consequently, the level of real GDP supplied does not change with price.2

Expansionary monetary policy

An expansionary policy, such as a purchase of government securities by the Fed, tends to push interest rates down, increasing investment and aggregate demand. During a period of recession, an expansionary monetary policy is used.

Shifts in Aggregate Demand

An increase in AD causes a shift of the AD curve to the right. A shift of the AD curve to the left is a decrease in AD. The primary variables that shift the aggregate demand curve include income, taxes, interest rates, expectations, and exchange rates.

What causes AD shifts to the RIGHT?

An increase in any of the components of AD will shift the AD curve to the right. An increase in AD means that a higher amount of total spending would occur at every price level. Components of AD include consumption spending, investment spending, government spending, and spending on exports minus imports

Country A and Country B both produce butter and toys. Country A can produce either 5,000 pounds of butter or 10,000 toys. Country B can produce either 20,000 pounds of butter or 4,000 toys. Currently, Country A is producing 2,000 pounds of butter and 6,000 toys. Country B is producing 10,000 pounds of butter and 2,000 toys. What is the change to world production if these countries engage in free trade? An increase to 14,000 toys and 25,000 pounds of butter An increase of 2,000 toys and 8,000 pounds of butter

An increase of 2,000 toys and 8,000 pounds of butter. Each country should do what they are best at doing. Toy production increases from a combined 8,000 toys to 10,000 toys and butter production increases from a combined 12,000 pounds to 20,000 pounds of production.

Command economy (centralized)

Command economy (centralized)—A system where the government makes all the decisions

Some economists believe strongly in having gold to back up all the currency that exists. Which approach is being supported by these economists? Legal tender M1 money supply Fiat money Commodity-backed

Commodity-backed. This is a currency that is backed by a physical commodity.

Comparative vs. Competitive Advantage

Competitive advantage refers to a distinguishing attribute of a company or a product. It may or may not have anything to do with an opportunity cost or efficiency. For example, having good brand recognition or relationships with suppliers is a competitive advantage, but not a comparative advantage. In the context of international trade, comparative advantage is more often discussed.

Export subsidies

Export subsidies are production subsidies granted to exported products, usually by a government. With export subsidies, domestic producers can sell their commodities in foreign markets below cost, which makes the commodities more competitive.

An employer has agreed to give a 3% pay raise to all employees because inflation for the past year was 3%. What is the term used for this type of pay raise? Shoe leather costs Cost of living adjustment Disposable income

Cost of living adjustment

How does the economy move towards long-run equilibrium in Country C after the changes to wages? Cost of production decreases and the short-run aggregate supply curve shifts left Cost of production decreases and the short-run aggregate supply curve shifts right

Cost of production decreases and the short-run aggregate supply curve shifts right. As the wages decrease, the cost of production decreases, and the short-run aggregate supply curve will shift to the right.

Menu costs of inflation

Cost to a firm resulting from changing its prices. The name stems from the cost of restaurants literally printing new menus, but economists use it to refer to the costs of changing nominal prices in general. With high inflation, firms must change their prices often to keep up with economy-wide changes, and this can be a costly activity explicitly, as with the need to print new menus, and implicitly, as with the extra time and effort needed to change prices constantly.

Many economists support a tighter monetary policy when inflation may quickly increase and a looser monetary policy when unemployment is rising. What type of policy is being supported by these economists? Business supporting Countercyclical Increasing demand Expansionary

Countercyclical. A countercyclical policy works as a counterbalance to what is taking place in the economy.

Countervailing duties

Countervailing duties, or antisubsidy duties, are extra duties levied on imports to neutralize an export subsidy. If a country discovers that a foreign country subsidizes its exports and domestic producers are injured as a result, a countervailing duty can be imposed to reduce the export subsidy advantage. In that respect, countervailing duties are similar to antidumping duties in that they both bring an imported product's value closer to the world price.3

Which fiscal policy should the government enact to help with the issue the Federal Reserve has noted? Increase government spending Increase the money supply Decrease government spending Decrease the money supply

Decrease government spending. This will reduce aggregate demand. A contractionary fiscal policy slows down economic activity as businesses decrease production and lay off workers. Workers have less money to spend on goods and services, and aggregate demand decreases.

Which action by the Federal Reserve best helps the CFO with the funding? Increase the required reserve ratio Limit the number of security purchases from banks Decrease the federal funds rate target Raise interest paid on reserves

Decrease the federal funds rate target. Decreasing the federal funds rate target incentivizes a lower interest rate of the loan that the company must use to finance the purchase of the equipment.

Which action is taken by the Federal Reserve to increase the money supply? Sell securities to banks Increase the discount rate Decrease the interest paid on reserves Raise the required reserve ratio

Decrease the interest paid on reserves. Because banks will be receiving a lower interest rate, they will hold less cash and instead lend that money out.

What is the first step in a contractionary monetary policy? Decrease the interest rate Increase supply of money for borrowing Decrease the money supply Increase aggregate demand

Decrease the money supply. The money supply must decrease in a contractionary monetary policy.

Commodity money

Gold, silver, cigarettes, and even cocoa beans have been used as money. When used as money, these items are considered commodity money, meaning they also have a value from use as something other than money.

What is the shape of the production possibility frontier (PPF) when opportunity costs are constant? Linear and upward sloping Linear and downward sloping

Linear and downward sloping. This would indicate constant opportunity cost along with showing scarcity.

What happens to long-run aggregate supply in Country A because of the change in productivity? Long-run aggregate supply will shift to the left as the productivity decreases. Long-run aggregate supply will shift to the right as the productivity decreases.

Long-run aggregate supply will shift to the left as the productivity decreases. Because there was no increase in technology, productivity decreases and long-run aggregate supply will shift to the left.

Which cost of inflation is represented by the difference between inflation and wages in Country A? Shoe leather Redistribution of wealth Menu Loss of purchasing power

Loss of purchasing power. Loss of purchasing power refers to the fact that inflation rose by 12% but wages only rose by 3%. Therefore, the employees purchase less than they were able to purchase before.

Which benefit to society will occur if Eames is able to sell in a perfect competition market structure? Differentiated services to the furniture companies Lowered market price of fabrics used to make furniture

Lowered market price of fabrics used to make furniture. Eames would not be able to differentiate its fabrics nor its service to furniture companies, so they would have to sell at the price that customers are willing to spend among all producers of fabrics.

Which outcome stemmed from the Bretton Woods Conference? Increased exchange rates across the world Lowered tariffs to encourage worldwide trade

Lowered tariffs to encourage worldwide trade. One of the longest lasting effects of the Bretton Woods Conference was the lowering of trade barriers around the world.

What is the effect of the lumber tariff on the furniture industry? More jobs will be available in the furniture industry. Lumber prices will increase.

Lumber prices will increase.

M1 money supply

M1 money supply includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler's checks.

M2 money supply

M2 money supply is less liquid and includes M1 plus those classified as near money: savings and time deposits, certificates of deposits, and money market funds.

A consumer buys a bed for $1,000. The bed is assembled in the United States, but the manufacturer used $200 worth of materials that were imported from another country. In addition, the manufacturer used $300 of materials that were bought from suppliers in the United States. Seven hundred dollars ($700) of the purchase price is counted in consumption expenditures, and $200 of the material imported is subtracted from net export expenditures. The purchase price of $1,000 is counted in consumption expenditures, and $200 of the material imported is subtracted from net export expenditures.

The purchase price of $1,000 is counted in consumption expenditures, and $200 of the material imported is subtracted from net export expenditures.

A tire manufacturer is deciding the quantity of tires to produce over the next year. The firm is operating in a leased factory, has two years left on its lease, and has no other contractual obligations that would prevent it from altering its production technology. Which time frame should the tire manufacturer consider given this set of circumstances? The short run since it has a fixed input in the period under consideration. The long run since it has no obligations other than its current lease. The long run since average variable costs are rising.

The short run since it has a fixed input in the period under consideration. The firm can alter all of its variable inputs, but it cannot adjust its factory size since it still has two years left on its lease and is planning production over the next year.

Traditional economy

Traditional economy—A system where individuals make decisions based on traditions, beliefs, and customs

Quotas

Two types: absolute and tariff-rate. Absolute quotas are quotas that limit the amount of a specific good that may enter a country. Tariff-rate quotas allow a quantity of a good to be imported under a lower duty rate. Any amount above this is subject to a higher duty. Quotas often hurt domestic consumers and benefit domestic producers. Quotas may also provide incentives for administrative corruption and smuggling.

Unemployment rate equation

Unemployment rate = (Unemployed people / Total labor force) × 100

Stagflation

Unhealthy combination of high unemployment and high inflation.

Unitary elasticities

Unitary elasticities indicate proportional responsiveness of the quantity demanded or supply to a change in price.

When are all costs variable costs? When planning for the long run When planning for the short run

When planning for the long run. When you are long-run planning, all your costs are variable because you have opportunities to change inputs.

The price of coffee is $3 at a cafe and $0.50 when made at home. The individual drinks one coffee per day. What is the seven day opportunity cost of buying coffee each morning at a cafe instead of making it at home? $3.50 $38.50 $17.50

$17.50. Total value of buying at the café ($21) minus the total cost of making it at home ($3.50) is equal to $17.50.

What is the average daily fixed costs to produce 1,000 light bulbs? $10.50 $2.00 $2.50

$2.00. The average daily fixed costs equals $2,000 in daily fixed costs divided by 1,000 light bulbs.

What is the total daily variable cost to produce 500 light bulbs? $2,000 $6,250 $4,250

$4,250. The total variable costs equals labor ($2.50 x 500) plus material ($4.50 x 500) plus machine ($1.50 x 500).

A small farm can produce either 1,200 pounds of cheese or 700 pounds of butter. If it chooses to produce one, it must give up all of the other product. What is the opportunity cost of cheese? 1.71 pounds of butter 1.71 pounds of cheese 0.58 pounds of butter 0.58 pounds of cheese

0.58 pounds of butter.

A small farm can produce either 5,000 pounds of corn or 4,000 pounds of wheat. If the farmer produces one of the items, the other cannot be produced. What is the opportunity cost of corn? 0.8 pounds of corn 1.25 pounds of wheat 0.8 pounds of wheat 1.25 pounds of corn

0.8 pounds of wheat.

Economies of scale

A firm experiences economies of scale when, as the quantity of output goes up, the cost average cost goes down. This occurs when a firm scales inputs up by a certain factor and generates an increase in output that exceeds that factor. For example, if the firm's output triples when inputs are doubled, the firm exhibits economies of scale. Doubling inputs doubles costs; however, because output more than doubles, per-unit costs fall. Economies of scale are behind the success of warehouse stores like Costco or Walmart. That is, a larger factory can produce at a lower average cost than a smaller factory.1

A new electronics company recently began selling an identical product to other competitors in a market that has many buyers and sellers. They entered the market because there are relatively few barriers to entry, and they know that they can easily leave. Which market structure is this company entering? Monopoly Oligopoly Monopolistic competition Perfectly competitive

A perfectly competitive market has many buyers and sellers of a well-understood product, and the market is easy to both enter and exit.

Double coincidence of wants

A situation in which two people each want some good or service that the other person can provide. For example, if an accountant wants a pair of shoes, this accountant must find someone who has a pair of shoes in the correct size and who is willing to exchange the shoes for some hours of accounting services.

In what way are trade barriers restricting foreign goods equivalent to subsidies for domestic producers? A trade barrier leads to higher foreign costs of production, all other things remaining the same. A trade barrier leads to lower domestic prices paid to producers of goods that are protected by the barrier. A trade barrier leads to higher domestic prices paid to producers of goods that are protected by the barrier.

A trade barrier leads to higher domestic prices paid to producers of goods that are protected by the barrier. With less competition and fewer producers providing to the domestic market, the no trade scenario would lead to a higher price received by the seller than the price received with trade. This is like the subsidy scenario when a seller receives a higher price than the price received at the allocative efficient quantity in the market.

What effect does the change in Country A's higher exchange rate have on the country's aggregate demand (AD)? AD of Country A will shift to the left as its exports increase. AD of Country A will shift to the left as its exports decrease.

AD of Country A will shift to the left as its exports decrease.

What is the relationship between the production possibilities frontier (PPF) and production and consumption in countries that engage in free trade? All countries should produce on their PPF and consume at a point above their PPF. All countries should produce and consume at points below their PPF.

All countries should produce on their PPF and consume at a point above their PPF. If countries specialize in the goods that they have comparative advantages in and trade for those goods it does not, all countries can benefit through trade. The benefit is shown in the model as being able to consume at a higher level than it could produce on its own.

Government spending (CF expenditures)

All purchases of goods and services by the federal, state, and local governments. To fund its purchases, government can tax its citizens or borrow from the financial market. If the government spends more than it gathers in taxes, it must borrow from the financial markets to make up for the shortfall. When the government is running a deficit, there is a flow of money to the government sector from the financial markets. When the government runs a surplus, there is a flow of money to the financial markets from the government sector. Expenditures by the government may go to build roads, purchase military equipment, or fund research.

Consumer price index (CPI)

Although there are several different price indices, the most cited measure of inflation in the United States is the consumer price index (CPI). The CPI is the average price of the goods and services typically purchased by consumers. Government statisticians at the U.S. Bureau of Labor Statistics (BLS) calculate the CPI based on the prices in a fixed basket of goods and services that represents the purchases of the average family of four.

Aggregate demand (AD)

Amount of total spending on domestic goods and services in an economy. Relationship between expenditure on final goods/services, and the general price level. Includes consumption spending (C), investment spending (I), government spending (G), and spending on exports (X) minus imports (M). The AD curve slopes down, which means that increases in the price level lead to a lower quantity of total spending.

Herfindahl-Hirschman Index (HHI)

Another approach to measuring industry concentration that can distinguish between these two cases is called the Herfindahl-Hirschman Index (HHI). The HHI, as it is often called, is calculated by summing the squares of the market share of each firm in the industry.

Why does a change in government purchases have more of an impact on aggregate demand than a similar change in tax levels or transfer payments? Any change in tax levels means that all the money is spent, but not on useful things. Any change in government purchases goes directly into the economy and is magnified by the multiplier effect.

Any change in government purchases goes directly into the economy and is magnified by the multiplier effect. Government purchases lead to more money going directly into the economy. In turn, this is spent by businesses to buy more equipment and materials or pay more workers.

Artificial barriers to entry

Artificial barriers to entry exist because existing companies have strategically created them to protect against the competition, the government has created them to protect existing firms, or for another societal goal. eg) patents, trademarks, government regulation, education, licensing

n individual wants to sell a car that frequently requires costly repairs. Although the car performs worse and requires more repairs than similar products, the seller hopes to get a price equal to better performing cars since the buyers will not know about the problems. Why is this seller able to charge a price equal to other sellers? Price volatility Asymmetric information Thin market Moral hazard

Asymmetric information. The seller has more information relevant to the transaction about the car than the buyer does.

What factors decrease the amount of money that can be created?

Banks may hold excess reserves; customers may withdraw cash, and individuals and firms may not spend their entire loan. All of these decrease the amount of money that can be created.

Barriers to exit

Barriers to exit are obstacles in the path of a firm that wants to leave a given market or industrial sector. These obstacles often cost the firm financially to leave the market and may prohibit it from doing so. If the barriers to exit are significant, a firm may be forced to continue competing in a market, as the costs of leaving may be higher than those incurred if they continue competing in the market.

Benefits VS Disadvantages of Specialization

Benefits of specialization include greater economic efficiency, consumer benefits, and opportunities for growth for competitive sectors. The disadvantages of specialization include threats to uncompetitive sectors, the risk of overspecialization, and strategic vulnerability.9

What does the financial market provide to the rest of the economy in the circular flow diagram? Borrowing and stock issues by firms Private and institutional savings Foreign lending and purchase of stock Wages, profit, interest, and rent

Borrowing and stock issues by firms. Firms borrow from financial markets using bonds and raise funds by selling equity.

The government of a tropical country has been completing projects to increase tourism access, but the construction has temporarily reduced tourist numbers. The government now spends more on the projects than it collects through taxes. Which budgetary situation is this country experiencing? Balanced budget Discretionary budget Budget surplus Budget deficit

Budget deficit. When a government spends more money than they take in for the year, they have created a deficit.

The government of a country has been improving the hotel infrastructure to improve the tourist experience. After all the projects were completed, the number of tourists increased, resulting in increased tax revenue. The country's income is now larger than its expenses. Which budgetary situation is being experienced by this country? Balanced budget Budget surplus Discretionary budget Budget deficit

Budget surplus. A surplus occurs when there is more income than expenses.

Which action helps the Federal Reserve increase the money supply? Raising the discount rate Increasing the required reserve ratio Buying securities from banks

Buying securities from banks. By increasing the cash with each bank, the money supply is increased.

Loss of purchasing power

By definition, inflation causes the value of an individual dollar to decrease over time. Each dollar has less purchasing power with inflation. Thus, individuals who have the same wage next year as this year will be able to purchase less. Purchasing power can be maintained if wages increase exactly at the rate of inflation, but this is not always the case. When wages increase less than the rate of inflation, people lose purchasing power.

Which key assumption is required when the aggregate supply curve is in the short run? Labor wages will decrease. Price to produce will increase. Capital equipment stock will remain constant. Buying power will increase.

Capital equipment stock should be assumed to be constant.

Which institution is primarily responsible for creating and implementing fiscal policy in the U.S.? Federal Reserve Congress Executive Branch Judicial Branch

Congress. The U.S. Constitution gives Congress the financial influence, meaning they are responsible for creating and enacting fiscal policy through legislation for taxing and spending.

Which description illustrates a monopoly's pricing strategy? Prices are low due to fear of new entrants. Monopolies are free to charge any price they want. Consumer demand constrains price. Monopolies follow prices set by competing firms.

Consumer demand constrains price. A monopoly is constrained by the highest price consumers are willing to pay at each quantity.

Which term describes the average price of goods and services most commonly purchased in the United States? Consumer price index Purchasing power

Consumer price index. This is the average price of the goods and services mostly commonly purchased in the United States.

Consumer spending (CF expenditures)

Consumer spending (consumption): This includes the value of all expenditures by households on final goods and services. Households' consumption spending depends on their disposable income, the income households have available to them after all taxes have been paid to the government and all transfers have been received. Households allocate their disposable income to either buying consumption goods or saving. Consumption includes the purchase of things like cars, food, medical care, and education.

A particular good in the worldwide market is traded at a price of $50. Country A, without trade, has an equilibrium price of $100 for the same good. What will happen in the domestic market of Country A if trade occurs and there is a tariff imposed of $30 per unit imported? Consumers would pay a market price between $80 and $100. Consumers would pay a market price equal $80.

Consumers would pay a market price equal $80. For freely traded goods, the world price would equal the price to all consumers. Here, the domestic price also must account for the tariff.

Which form of spending contributes the greatest amount to gross domestic product (GDP) in the United States? Government expenditures Investment expenditures Consumption expenditures Net export expenditures

Consumption expenditures. For the United States, consumption expenditures on final goods and services greatly exceed all other spending and accounts for around two-thirds of the value of GDP.

Country A and Country B can both produce butter and toys. Country A can produce either 5,000 pounds of butter or 10,000 toys. Country B can produce either 20,000 pounds of butter or 4,000 toys. What does this say about the countries' absolute advantage and comparative advantage? Country A has both an absolute advantage and comparative advantage in the production of toys. Country A has an absolute advantage in the production of toys and a comparative advantage in the production of butter.

Country A has both an absolute advantage and comparative advantage in the production of toys. Country A has the lowest opportunity cost in producing toys and can also produce more toys in absolute terms.

Why is Country A's standards of living better than ABC Company's home country? ABC Company's home country economy is smaller based on real GDP. Country A's economy is larger on a per capita basis.

Country A's economy is larger on a per capita basis. GDP per capita for Country A is US$63,333.33 versus US$49,777.78 for ABC Company's home country. Remember GDP per capita is found by ***

Country A has given export subsidies to certain preferred domestic producers who export their goods. Which policy is used by Country B to directly address this action? Country B will increase government procurement programs. Country B will impose a countervailing duty.

Country B will impose a countervailing duty. The idea of the duty is that it is only imposed if it is determined by customs that the product received a subsidy and thus lowered its price below the world price. This duty would be enough to counter the subsidy's effect on the price.

Two islands have begun trading goods. One island is larger than the other and has a vast forest of hardwood trees. The other island has few forests, but an abundance of iron deposits. Why should these two islands engage in trade? Political benefits Differences in factor endowments

Differences in factor endowments. The two islands have different endowments of resources, so trading would be a benefit to both locations.

A reporter is discussing current record low unemployment, and an economist mentions that the numbers being reported leave out individuals who have stopped looking for work. Which group is being referred to by the economist? Hidden workers Frictional unemployment Discouraged workers

Discouraged workers. Discouraged workers refers to individuals who have become given up finding a job and have stopped looking for employment. This group does not appear in unemployment calculations.

Which business concept is illustrated by the rate of unemployment, building permits, and GDP? Economic indicators Modern theory High inflation Forecasting

Economic indicators. Economic indicators are statistics of important economic activity. The rate of unemployment, number of building permits issued, and GDP for a country are all important statistics of economic activity.

Economic rent

Economic rent is defined as receiving excess returns or income from resources that are in short supply. Economic rent has been applied to any situation where payment is made for a scarce resource in excess of the minimum required payment for its usage.

What is a benefit of a government being able to run a deficit? Potential for deflation Decreased tax burden Economic stabilization

Economic stabilization. The government can strategically use deficits to stabilize economies. The benefits of running a budget deficit include stabilizing the economy during business cycles, enabling large scale infrastructure investments, and provide funding for wars.

Economics

Economics studies human actions and decisions related to the production and distribution of scarce resources.

Frictional unemployment

Economists call the unemployment that occurs as workers move between jobs as frictional unemployment. Frictional unemployment is not inherently a bad thing. It takes time to match those looking for employment with the correct job openings. For individuals and companies to be successful and productive, you want people to find the job for which they are best suited, not just the first job offered.

Who is included in the labor force participation rate? Employed persons minus those who are retiring within the next calendar year Employed persons plus those who are unemployed and actively seeking a job

Employed persons plus those who are unemployed and actively seeking a job. The labor force participation rate is the fraction of people who are either employed or active job seekers.

What do most long-term projections predict about the status of the federal budget deficit in the United States? Enormous surpluses Enormous deficits

Enormous deficits

What are the largest areas of government spending? Entitlements and mandatory spending Judicial services and correctional spending

Entitlements and mandatory spending. Entitlements and other mandatory spending compose about two-thirds of government spending.

Balance of trade

Exports minus imports. Difference between the monetary value of exports and imports in an economy over a certain period, measured in the currency of that economy. It is measured by finding the country's net exports. A positive balance of trade is known as a trade surplus since exports are greater than imports. A negative balance of trade is referred to as a trade deficit or, informally, a trade gap since imports are greater than exports.

What is a disadvantage of exporting goods and services to other countries? Companies retain ownership of production instead of licensing the manufacturing of their products. Exports potentially add another layer in the chain of distribution through wholesalers.

Exports potentially add another layer in the chain of distribution through wholesalers. Wholesalers, importing companies, and other intermediaries are part of international trade distribution chains. Their existence facilitates trade across borders but adds costs to international trade transactions.

What are firms paying for when they make payments to households in the circular flow model? Goods and services Factors for production Dividends from investments Wages and salaries

Factors for production, primarily capital and labor, flow from households to firms.

Some economists support the use of currency that provides governments and central banks with more control, even though it is not backed by any physical goods. Which form of money is supported by these economists? M1 money supply Fiat money Commodity money

Fiat money. Fiat money is money declared to be legal tender by a country that has no commodity backing.

Fiscal policy

Fiscal policy is the use of government spending and taxation to influence the economy. The United States Constitution gives Congress the financial control, making it responsible for enacting fiscal policy. The president can influence the process and has veto power, but Congress must author and pass the necessary bills. Through these bills, Congress sets its fiscal policy objectives by changing the level of taxation or by changing the level of government spending in various sectors of the economy.

The market price of a product is lower than the average total cost to produce the product. Which outcome stems from this type of market? Firms will leave the market. Firms will enter the market.

Firms will leave the market. This happens in a perfectly competitive market. When the price drops below the average total cost, firms will leave the market.

Budget Deficit VS Surplus

Government spending covers a range of services provided by the federal, state, and local governments. When the federal government spends more money than it receives in taxes in a given year, it runs a budget deficit. Conversely, when the government receives more money in taxes than it spends in a year, it runs a budget surplus. If government spending and taxes are equal, the government is said to have a balanced budget.

Which benefit is gained by the U.S. and Canada when they trade with each other? Greater efficiency Reduced labor wages Overspecialization Lower prices for U.S. lumber

Greater efficiency. Using the production possibilities frontier (PPF) model, if the U.S. specializes in making fine furniture and Canada specializes in producing maple lumber, efficiencies are created that can help lower the average cost of production.

How can protectionist policies in one industry negatively impact other industries? Firms buying protected products will improve their competitive positions. Higher prices for protected products result in decreased demand for other products.

Higher prices for protected products result in decreased demand for other products. Protectionist policies in one industry can negatively impact other industries because consumers pay higher prices for protected products, which decreases the available spending for other, nonprotected products. This results in a decrease in demand for nonprotected products.

Short Range Aggregate Supply

Higher productivity shifts the SRAS curve to the right because firms can produce a higher quantity of output at every price level. The SRAS curve shifts with changes in the cost of inputs. When input costs rise, SRAS shifts to the left. When input costs fall, SRAS shifts to the right. Every time there is a shift in the LRAS curve, the SRAS curve will also shift in the same direction because what affects LR production also affects SR production.

When will a country consider imposing import quotas? If it is concerned that prices are too high for consumer If it is concerned about increasing levels of competition in domestic markets If it is concerned about increasing levels of domestic production

If it is concerned about increasing levels of domestic production. By limiting the amount of imports, the price levels and profits of domestic producers are increased leading to more domestic production.

Diseconomies of scale

If the firm's output increases by a factor of one and a half when inputs are doubled, the firm exhibits diseconomies of scale. A firm or a factory can grow so large that it becomes challenging to manage. This results in unnecessarily high costs as many layers of management and bureaucracy try to communicate with workers and with each other and as failures to communicate lead to disruptions in the flow of work and materials. Firms that shrink their operations are often responding to finding themselves in the diseconomies region, thus moving back to a lower average cost at a lower output level.

Prices Above or Below Equilibrium

If the price is below the equilibrium level, the quantity demanded will exceed the quantity supplied. Excess demand or a shortage will exist. If the price is above the equilibrium level, the quantity supplied will exceed the quantity demanded. Excess supply or a surplus will exist.

Implicit costs

Implicit costs represent the opportunity cost of using resources already owned by the firm and do not require an outflow of money. Often these resources are contributed by the firm's owners. There are four primary sources of implicit cost: forgone wages, forgone interest, depreciation, and normal profit.

Absolute advantage

In 1776, Adam Smith offered a new trade theory called absolute advantage, which focused on the ability of a country to produce more of a good than another nation. A country with an absolute advantage can sell the good for less than a country that does not have the absolute advantage. For example, the Canadian economy, which is rich in low-cost land, has an absolute advantage in agricultural production relative to some other countries. China and other Asian economies export low-cost manufactured goods, which take advantage of their much lower labor costs.

What is the first step in an expansionary monetary policy? Decrease the interest rate Increase the interest rate Increase the money supply Decrease the money supply

Increase the money supply.

Long Range Aggregate Supply

In the long run, the most important factor shifting the LRAS curve is productivity (how much output can be produced with a given quantity of labor or capital and is measured by output per worker or GDP per capita).

Inflationary Gap

In the short run, equilibrium can occur when real GDP is above potential GDP, and an inflationary gap exists. In the long run, increases in wages will move the economy toward the full employment equilibrium.

Recessionary Gaps

In the short run, equilibrium can occur when real GDP is below potential GDP and a recessionary gap exists. In the long run, decreases in wages will move the economy toward the full employment equilibrium.

Law of Diminishing Marginal Returns

In the short run, firms experience the law of diminishing marginal returns. The marginal product of labor decreases as additional units are added to the fixed input. Based on the law of diminishing marginal returns, the variable cost rises at an increasing rate as firms increase the output. Any time one input is fixed, adding additional units of the variable resources will result in smaller and smaller gains in the output. This is demonstrated in the following table where the marginal product of labor decreases as the third and fourth lumberjacks are added:

What will the Phillips curve tell Chris about inflation in this economic environment? In the long-run, inflation could decrease. In the short-run, inflation could increase.

In the short-run, inflation could increase. The relationship between inflation and unemployment is inverse. Unemployment is low so inflation could increase.

Steel sellers are facing inelastic supply, and the price of steel increases by 7%. What will happen to the quantity supplied of steel? Decreases by more than 7% Increases by less than 7% Decreases by less than 7%

Increases by less than 7%. "Inelastic" tells us that the price and quantity will change in the same direction. In order to stay "inelastic" ...Price / Quantity needs to remain under 1.

A country focuses its national production in textile manufacturing because of abundant access to raw materials and textile expertise. What is a potential risk of this decision? Production inefficiencies Industry overspecialization Higher costs of supplies Lower gains from global trade

Industry overspecialization. A country that focuses its national production in textile manufacturing faces the potential risk of industry overspecialization. If demand for textiles shifts, the country will be vulnerable and experience significant decreases in GDP.

What is the term used when the equilibrium real gross domestic product (GDP) is larger than the potential GDP? Inflationary gap Contractionary gap Nominal GDP Net GDP

Inflationary gap. When the economy is above its potential, it leads to an expansionary gap.

Which key assumption does the aggregate supply curve require in the short run? Labor wage increases Buying power increases Capital equipment decreases Input prices remain constant

Input prices remain constant. The assumption that the prices of factors of production remain constant is required when looking at the short-run aggregate supply curve.

Expanded Circular Flow Diagram

Interactions between households, firms, governments, and the rest of the world, as well as the financial, factor, and goods and services markets. The firm's component includes elements associated with flows into and out of the business sector. The household component summarizes the behavior of private individuals in their roles as consumers, savers, and suppliers of the factors of production. Also includes exports, imports, and borrowing from other countries.

Which effect contributes to the downward slope of the aggregate demand curve? Domestic price level effect Interest rate effect Business optimism effect Consumer optimism effect

Interest rate effect. The interest rate effect causes changes in interest sensitive spending, which causes movement on the aggregate demand curve.

Which of the following will increase as a result of the monetary policy enacted by the Federal Reserve? Money available for borrowing Aggregate demand Real GDP Interest rates

Interest rates. A contractionary monetary policy pushes interest rates up, investment down, and the aggregate demand curve to the left. During a period of inflation, a contractionary monetary policy is used.

What is the payment of production for ABC Company if it buys the additional machinery for its production facility? Wages Interest Profit Rent

Interest. The payment for the use of capital is interest.

Technological advancements have made weather predictions more accurate and improved shipping efficiency. How does this change impact international trade? International trade will increase because shipping costs have decreased. International trade will decrease because the new technology is expensive.

International trade will increase because shipping costs have decreased. Cheaper transportation has increased the availability of international trade.

Investment (business spending) (CF expenditures)

Investment (business spending):This refers to the purchase of goods and services that, in one way or another, help produce more output in the future. Firms borrow from the financial market to fund their investment spending. Investment includes the purchase of things like trucks, computers, desks, or buildings.

How does the expanded circular flow diagram incorporate interactions with other countries? It calculates tariffs and quotas. It illustrates taxes and subsidies. It incorporates imports and exports.

It incorporates imports and exports. Imports and exports are a direct component of GDP measured as part of macroeconomics. These flows include exports, imports, and borrowing from other countries.

To manage the economic crisis in the European Union, the euro was depreciated compared to the dollar. How did this change affect international trade between the United States and the European Union? It increased European exports to the United States, and this reduced the U.S. positive trade balance with the European Union. It increased European exports to the United States, and this increased the U.S. negative trade balance with the European Union.

It increased European exports to the United States, and this increased the U.S. negative trade balance with the European Union. The appreciation of the dollar will make European products cheaper in the U.S., increasing EU exports to the U.S.

A firm has estimated the levels of production it will need in the future. It has determined that over its likely range of output, long-run average costs will decrease up to a point and afterward remain constant. It will remain in the constant returns to scale range without change. It will remain in the economies of scale range without change.

It will remain in the constant returns to scale range without change. A profit-maximizing firm will produce at a minimum long run average cost in the long run, which puts the firm in the range of constant returns to scale.

Labor force participation rate

Labor force participation rate = (Total labor force / Total adult population) × 100

Market economy (decentralized)

Market economy (decentralized)—A system where businesses make decisions based on consumer demand

Retail stores operating in a country with high inflation experience added costs and must keep changing their prices to account for the effects of inflation. Which factor is being managed by these retail stores? Shoe leather costs Menu costs Substitution bias Quality goods bias

Menu costs. This is the cost firms pay because they must keep changing their prices to reflect inflation's impact.

Which costs of inflation is represented by the 5% change that is being made by businesses in Country A every two months? Menu Redistribution of wealth Loss of purchasing power

Menu. The costs of having to change prices every two months by 5% represents menu costs for the businesses in Country A.

Which economic framework would a student use to explain past price changes in a specific industry? Normative analysis Economic indicators Microeconomics Macroeconomics

Microeconomic analysis focuses on pricing as it relates to a specific company or industry.

Which economic system is represented by the government's actions to regulate the production of ABC Company's products? Traditional Market Mixed Command

Mixed. Mixed economies have characteristics of all the economic systems, with market systems being the most prevalent.

Monopolistic competition

Monopolistic competition is a market structure in which there are a large number of firms, each having a small portion of the market share and slightly differentiated products. There are close substitutes for the product of any given firm, so competitors have slight control over price. There are relatively insignificant barriers to entry or exit, and success invites new competitors into the industry. Firms face a downward-sloping demand, so the quantity they produce will affect the price. Because of this, the price charged will be greater than the marginal cost.

A new fast food restaurant owner recently opened a location in a town with low costs to open that type of establishment. There are many other restaurants in the town that sell a variety of food types. What type of market type is the owner entering? Monopolistic competition Perfectly competitive Monopoly Oligopoly

Monopolistic competition is when there are many buyers and sellers in a market that is easy to enter or exit. In that market, the products are similar but still a bit different from each other.

The Eames company sells fabric to furniture companies in the southeast of the United States. There are many other companies that sell fabric to the furniture companies in the United States as well. The larger fabric companies can provide fabric to furniture companies no matter where they are located.Which market structure does Eames sell in? Monopolistic competition Perfect competition Monopoly Oligopoly

Monopolistic competition. A monopolistic competition market structure is characterized by having a large number of firms with products that are differentiated but that can be easily substituted.

A firm is operating in an environment with other firms who differentiate their products with advertisements. The firm finds that its long-run economic profits equal zero. Which market environment is this firm operating in? Oligopoly Monopoly Monopolistic competition Perfect competition

Monopolistic competition. Consumers view products of firms in a monopolistic competitive market environment as close substitutes with some differentiation between competitors' products. This enables them to have some market power, but not enough to prevent driving long-run economic profit to zero.

A firm is operating in an environment where consumers view its product as highly substitutable but differentiated by branding compared to its competitors' products. The firm finds that its long-run economic profits equal zero. Which market environment is this firm operating in? Monopoly Oligopoly Perfect competition Monopolistic competition

Monopolistic competition. Consumers view products of firms in a monopolistic competitive market environment as close substitutes, which enables them to have some market power, but not enough to prevent firms from entering or exiting the industry and driving long-run economic profit to zero.

Which type of market is the least efficient? Perfectly competitive Monopoly Monopolistic competitive Oligopoly

Monopoly. The least efficient type of market is a monopoly since the monopolistic firm will produce less output and sell at higher prices to maximize profit.

Natural barriers to entry

Natural barriers exist because of the characteristics of the industry. -The need for capital, such as equipment, building, and raw materials -The increase in efficiency of production as the number of goods being produced increases due to economies of scale -Ownership or control of a natural resource that limits availability to competitors

What are the four factors of production?

Natural resources, labor, capital, entrepreneurship

Which element is included in the calculation for government spending as a component of gross domestic product (GDP)? Medicare insurance Social Security benefits Unemployment benefits New highway construction

New highway construction. Building a new highway is considered a good or service expenditure for the calculation of GDP.

Nominal GDP

Nominal GDP is the value of all the final goods and services produced in a given year calculated using the prices from that same year. The nominal value of GDP identifies the actual number of dollars spent. If prices change from one period to the next, the nominal GDP changes even if output remains constant. Because changes in either output or price affect nominal GDP, it is difficult to glean information about economic growth by watching its movements.

The short-run aggregate supply curve has shifted to the left. What is the effect, if any, on nominal wages? Nominal wages will decrease their purchasing power. There is no change in nominal wages. Nominal wages will increase their purchasing power. The nominal wages will be determined by the price level.

Nominal wages will decrease their purchasing power.

Normal profit (Implicit cost)

Normal profit is the return to the entrepreneur for taking risks and making decisions. There is no formal salary associated with the challenge of entrepreneurship. Instead, the owner expects to be rewarded with profit.2

Which tool does the Federal Reserve use to increase the money supply? Open market purchase of securities Open market sale of securities

Open market purchase of securities. An open market purchase of securities by the Federal Reserve increases the money supply.

Which statement represents an implicit cost? Owner's time and effort Employee salaries and benefits

Owner's time and effort

Perfectly Competitive Market

Perfect competition is a market structure in which there are many firms, none large enough to influence the industry, producing homogeneous products. Firms are price takers. There are no barriers to entry. Agriculture comes close to being perfectly competitive. Firms are price takers. Economic profits cannot be sustained in the long run. Production, in the long run, will be at the minimum of the average total cost curve. Most efficient market structure.

A bakery operates in an industry with many competitors and easy entry and exit. The firms in the industry are price takers. What is the price elasticity of demand for the bakery's bread? Relatively inelastic Perfectly elastic Relatively elastic Perfectly inelastic

Perfectly elastic. In a perfectly competitive market, the price elasticity of demand is infinite.

The average price of a pair of shoes increases from $70 to $84, and the quantity demanded falls from 150 to 125 pairs of shoes in response. Both quantity demanded and price change by 20%. How should the elasticity of demand for shoes be described? Unit elastic demand Perfectly elastic demand Inelastic demand Perfectly inelastic demand

Perfectly inelastic demand

Which action should policymakers take as a long-run response when both inflation and unemployment increase? (Philips Curve) Immediately enact fiscal policy measures to address both situations in the long run Policymakers must choose to target just one aspect of the crisis since no fiscal policy solution addresses both

Policymakers must choose to target just one aspect of the crisis since no fiscal policy solution addresses both

Price elasticity

Price elasticity measures the responsiveness of quantity demanded or quantity supplied to a change in price in percentage terms.

Subsidy

Price floors are sometimes called a subsidy, or price supports, because they prevent a price from falling below a certain level.

What are the governmental objectives of attempting to regulate the level of aggregate demand in the economy through its fiscal policy actions? Curtail consumer spending, increase GDP, and lower exports Price stability, full employment, and economic growth

Price stability, full employment, and economic growth

Which principle of economics does the $6 price from the China vendor represent if the company decides to produce the sheet sets in its Mexico facility? Principle 7: Governments have the ability to improve market outcomes. Principle 1: Everyone faces trade-offs. Principle 2: Cost is determined by what is given up. Principle 4: People respond to incentives.

Principle 2: Cost is determined by what is given up. The $6 price represents the cost that is given up, also known as the opportunity cost.

Which input flow component of circular flow model that was shown by the economists to the ABC company has the ability to cause the financial markets to stagnate in Country A? Investment spending Foreign lending Private savings

Private savings. ABC company should note that both private savings and foreign lending contribute to the availability of funds in the financial market. Financial market stagnation is possible, even with large amounts of foreign lending.

Which statement describes a market that is in equilibrium? Quantity demanded is equal to quantity supplied by firms. Total quantity demanded is fulfilled for all consumers.

Quantity demanded is equal to quantity supplied by firms.

How does international trade affect an economy's labor force? Increases costs of high-skilled workers Raises average wage levels

Raises average wage levels. International trade causes an economy's average wage levels to rise. Companies are able to produce goods and services with a comparative advantage and increased demand. With increased demand, the labor force is able to earn, on average, higher wages.

Real GDP

Real GDP is the total value of all the final goods and services that an economy produces during a given year, accounting for inflation. It is calculated using the prices from a selected base year. Using prices from a chosen year allows government statisticians to hold prices constant from year to year. This removes the influence of inflation. Any observed changes in real GDP can be attributed to changes in output. Converting to real GDP transforms the money value measure, nominal GDP, into an index for quantity of total output.

An economist wants to compare the standard of living between different countries. Which measure should be used for this purpose? Aggregate demand Real GDP per year Real GDP per capita

Real GDP per capita provides an estimation of inflation adjusted GDP for each citizen. This is a reasonable measure for standard of living.

Rent-seeking

Rent-seeking includes using political means to seek an economic advantage.

Discount rate

Set by the Fed and is important because it radiates throughout the economy: If it becomes more expensive to borrow at the discount window, interest rates will rise and borrowing will become more expensive economy wide. In this way, the Fed can use the discount window to affect interest rates and the money supply. Raising the discount rate can reduce the money supply, and lowering the discount rate can increase the money supply.

A new immigration policy has increased the number of skilled immigrants who can legally come to the country, and this increases the economy's productivity. How will the long-run aggregate supply (LRAS) curve respond to this situation? Shifts to the left Becomes horizontal Remains the same Shifts to the right

Shifts to the right. Increase in productivity shifts the LRAS curve to the right.

Individuals living in a country experiencing hyperinflation are spending much of their time traveling back and forth to the bank so they can hold less cash to battle the effects of inflation. Which term describes what this group is experiencing? Shoe leather costs Menu cost Cost of living adjustments Substitution cost

Shoe leather costs. This is the total cost in dollars and time that people spend trying to avoid the negative effects of inflation. This is often managed by traveling back and forth to the bank.

Production possibilities curve

Shows the combinations of goods and services, which utilize efficient production with the existing factors of production and state of technology. Points on the curve are efficient, points inside the curve are inefficient, and points outside the curve are unattainable without trade. With specialization and trade, the overall production levels of any pair of goods are higher than any single country can produce alone.

Phillips Curve

Shows the trade-off between unemployment and inflation in an economy. The Phillips curve should slope down so higher unemployment means lower inflation and vice versa. However, a downward-sloping Phillips curve is a short-term relationship that may shift after a few years. It can eventually shift so unemployment and inflation are both higher or both lower. The long-run Phillips curve is a vertical line at the natural rate of unemployment, but the short-run Phillips curve is roughly L shaped.

What is a disadvantage of the United States and Canada trading using the production possibilities frontier (PPF) model? Increased labor wages Strategic vulnerability

Strategic vulnerability. If the U.S. relies too much on Canada for maple lumber, it becomes dependent on Canada.

Which set of factors is the primary reason that the Phillips curve shifts? Rising prices and rising demand Increasing GDP and increasing imports Technology innovations and job creation Supply shocks and inflation expectations

Supply shocks and inflation expectations. Supply shocks and inflation expectations cause the Phillips curve to shift since prices or behavior are adjusted. These adjustments make the curve move in ways that contradict traditional curve movements.

Which description illustrates the nature of an oligopoly? Tacit collusion is possible. Explicit collusion is impossible.

Tacit collusion is possible. Oligopolies often practice collusion which is when firms act together to reduce output and keep prices high.

There are three tools governments use to restrict the flow of free trade:

Tariffs, import quotas, and nontariff barriers. These barriers are put in place to protect domestic producers from losing sales due to lower prices offered by foreign importers. The end result of protectionist behavior will be to raise the price of the protected good in the domestic market, which increases the price charged to domestic customers but allows domestic producers to earn more.

What are the major policy tools used to direct fiscal policy? Discount rates Taxes and spending Reserve requirements Buying and selling treasuries

Taxes and spending. Congress creates legislation that raises and lowers both of these in response to the health of the economy and other factors.

Which two developments have made it increasingly difficult to define markets for the purpose of determining concentration of market power? Technology advances and globalization of markets Traditional media and creative accounting

Technology advances and globalization of markets. Communication and the internet have made it possible for companies and consumers to access resources and markets that were once difficult to access.

The Herfindahl-Hirschman Index (HHI) is calculated using the sum of the squares of the market share of each firm in an industry. Then the Federal Trade Commission (FTC) historically uses the results to decide whether there is an antitrust concern. Which statement accurately describes how the FTC determined the presence of a concern in the 1980s? The FTC would try to halt a merger if the merger would put the HHI under 1,000. The FTC would try to halt a merger if the merger would put the HHI over 1,800.

The FTC would try to halt a merger if the merger would put the HHI over 1,800. An HHI between 1,000 and 1,800 would draw scrutiny, and a result over 1,800 would likely be halted.

How can The Fed can change the amount of money available?

The Fed can change the amount of money available by changing the reserve requirement, changing the discount rate, changing the interest rate on reserves, or buying and selling securities. Increasing the reserve requirement, increasing the discount rate, increasing the interest rate on reserves, and selling securities decrease the money supply and vice versa.

How does the change in investment spending in Country A affect equilibrium GDP and price level in the short run? The GDP increases and price level falls. The GDP decreases and price level falls.

The GDP decreases and price level falls. A decrease in aggregate demand (AD) reduces equilibrium GDP and price level in the short run.

A manufacturer is producing its product in two different plants that are located in two different countries. The main difference between the two countries is that labor cost is lower in one of the countries. Which statement is true of the lower labor cost country? The LRAC for the plant will be vertically higher. The LRAC for the plant will be vertically lower.

The LRAC for the plant will be vertically lower. Since the only difference between the two locations in terms of production is the cost of labor, the location with the lower labor cost would have lower average costs for all of its production technologies.

What will happen to aggregate demand for machinery (AD) in Country A due to a 0.5% change in interest rates? The aggregate demand (AD) curve will shift to the right, showing an increase in the investment for machinery. The aggregate demand (AD) curve will shift to the left, showing a decrease in the investment for machinery.

The aggregate demand (AD) curve will shift to the left, showing a decrease in the investment for machinery. A rise in interest rates will cause a decrease in the investment of machinery, and the curve will shift to the left.

The University of Michigan's "Surveys of Consumers" has shown a sharp decline in consumer confidence. How will this change affect aggregate demand? The aggregate demand curve will shift to the right. The aggregate demand curve will shift to the left.

The aggregate demand curve will shift to the left. Consumer confidence is a principal component of aggregate demand. Declining consumer confidence will reduce consumption, so aggregate demand will decrease, shifting the curve to the left.

What happens when an economy experiences an adverse supply shock? The aggregate demand curve shifts to the right. Aggregate demand is increased because prices go down. Aggregate supply is increased because costs go down. The aggregate supply curve shifts to the left.

The aggregate supply curve shifts to the left. Because adverse supply shocks increase prices for that component, the aggregate supply curve shifts to the left.

Concentration ratio

The concentration ratio measures the share of the total sales in an industry of the top four to eight firms. If the top four firms' market shares were measured and had a score of less than 50%, a proposed merger would not draw the attention of antitrust authorities.

What are the concerns of running a budget deficit?

The concerns of running a budget deficit include crowding out private sector investment, redistribution of wealth from future to current generations, and inflation.

Which country is experiencing a negative balance of trade? The country that only imports goods when it needs them The country that imports more than it exports

The country that imports more than it exports. Negative or positive balance of trade is the relationship between importing and exporting goods.

Nominal wages increase across the country. How does this change the short-run aggregate supply (SRAS) curve? The curve shifts to the left. The curve shifts to the right.

The curve shifts to the left. An increase in the cost of labor will cause the curve to shift to the left since labor is a key input for other products.

What is the result if a contractionary budget is approved for the upcoming year? The debt would increase, but the deficit would decrease. The debt would decrease, but the deficit would increase.

The debt would increase, but the deficit would decrease. The government would spend $3.1 trillion and collect $3 trillion in taxes leaving a deficit of $100 billion. This is a decrease from the previous deficit of $500 billion but still adds to the debt.

What is the employment situation when the economy is operating to the left of potential gross domestic product (GDP)? The economy is experiencing full employment. The economy is experiencing cyclical unemployment.

The economy is experiencing cyclical unemployment. Cyclical unemployment occurs when the economy is producing less output because of a recessionary gap.

Crowding out

The effects of fiscal policy can be limited by crowding out. Direct crowding out occurs when government spending simply replaces private sector output instead of adding additional output to the economy. Indirect crowding out can occur if government spending exceeds tax revenues, an expansionary policy that leads to a budget deficit. The government borrowing needed to fund the deficit can raise interest rates, limiting private investment.

An entrepreneur is considering opening a fast food restaurant that is similar to various fast food restaurants in the area. The entrepreneur researches the other restaurants and learns that they are producing the same quantity of output. What does this suggest about the constant returns to scale range of restaurants in this industry? The range of the flat area is likely to be very different for each of the restaurants. The flat area of their long-run average cost curves is very small.

The flat area of their long-run average cost curves is very small. All of the restaurants appear to be using the same technology and producing at a similar operating level.

The foreign price effect (Aggregate demand)

The foreign price effect points out that if prices rise in the United States while remaining fixed in other countries, then goods in the United States will be relatively more expensive compared to goods in the rest of the world, which tends to reduce exports and increase imports.

Reserve ratio

The fraction of deposits that a bank must hold as reserves rather than loan out is called the reserve ratio (or the reserve requirement) and is set by the Fed. If, for example, the reserve requirement is 1%, then a bank must hold reserves equal to 1% of its total customer deposits. These assets are typically held in the form of physical cash stored in a bank vault and in reserves deposited with the central bank. When a deposit is made at a bank, the bank can lend out all of the deposit except the required reserve ratio.

The interest rate effect (Aggregate demand)

The interest rate effect means that as prices for outputs rise, the same purchases will cost more money or need credit. This pushes interest rates higher, which reduces borrowing by businesses for investment and by households for purchases—thus reducing consumption and investment spending.

What does the Phillips curve show economists and government policymakers? The inverse relationship of inflation and unemployment in the short run The inverse relationship of inflation and unemployment in the long run

The inverse relationship of inflation and unemployment in the short run. The inverse relationship of inflation and unemployment in the short run is the definition of the Phillips curve.

Standard of living

The level of GDP per capita captures some of what is meant by the phrase standard of living. Most of the migration in the world, for example, involves people who are moving from countries with relatively low GDP per capita to countries with relatively high GDP per capita. Standard of living includes all elements that affect people's well-being, whether or not they are bought and sold in the market.

The long-run average cost (LRAC) curve

The long-run average cost (LRAC) curve identifies the lowest possible average cost for any level of output. While in the short run, firms are limited to operating on a single average cost curve (corresponding to the level of fixed costs they have chosen), in the long run—when all costs are variable—firms can choose to operate on any average cost curve. Thus, the LRAC curve is based on a group of SRAC curves, each of which represents one specific level of fixed costs.

Which factor is part of production in a furniture manufacturing business? Profit for entrepreneurship Lumber for making products Wages for front-line staff Business loans

The lumber used for making chairs is a natural resource that is used in the production of the chairs.

Marginal Cost

The marginal cost is the additional cost you incur from consuming that additional unit—the hour of TV you are giving up.

How should the the four-firm concentration ratio be calculated? The market share of the four smallest firms in an industry are added together. The market share of the four largest firms in an industry are added together.

The market share of the four largest firms in an industry are added together.

In 20 years from now, Eames captures the 11 other regional fabric companies' market share. Which outcome will occur if Eames increases their prices by 10% at that time? Eames will eventually reduce its price to match the other three. The other three companies would eventually raise their prices by 10%.

The other three companies would eventually raise their prices by 10%. With only four companies supplying performance fabrics, the market becomes an oligopoly market structure. Eames, being the largest, would be considered the market leader, and the others would follow what they do.

Which description illustrates a business cycle that starts from a trough? The output of the economy moves from a trough to a recession, followed by a peak until it returns to another trough. The output of the economy moves from a trough to an expansion, then to a peak followed by a recession until it returns to another trough.

The output of the economy moves from a trough to an expansion, then to a peak followed by a recession until it returns to another trough. All phases of the business cycle are captured. It begins with its first low point (the first trough), moves to its next high point (the peak), then there is downward movement (the recession), and finally moves to its next low point (the second trough).

Which description characterizes national debt? Net spending from previous year minus forecasted surpluses The sum of previous years' deficits minus any previous years' surpluses

The sum of previous years' deficits minus any previous years' surpluses

The price of steel has increased by 5%, which leads to an increase in quantity supplied by 8%. Which outcome can be concluded from the demand and supply of steel? The supply of steel is inelastic. The demand for steel is elastic. The supply of steel is elastic.

The supply of steel is elastic. Remember Price / Quantity... If greater than 1 than inelastic, if less than 1 elastic?

The price level has increased, expected inflation remains constant, and aggregate demand has shifted to the right. What is its effect on the short-run aggregate supply (SRAS) curve? The SRAS curve will shift right. There is a movement up the SRAS curve. The SRAS curve will shift left. There is a movement down the SRAS curve.

This is a positive aggregate demand shock that results in an upward movement on a SRAS curve.

Net exports (CF expenditures)

This is equal to exports minus imports and measures the expenditure flows associated with the rest of the world. Exports are goods and services produced in one country and purchased by households, firms, and governments of another country. Imports are goods and services purchased by households, firms, and governments in one country but produced in another country. Exports add to the overall level of spending on domestic products, and imports decrease total spending on domestic products. Oil purchased from Saudi Arabia is an import. Soybeans sold to China is an export. Money and financial assets also flow between countries as countries borrow from each other and invest in each other.

Structural unemployment

This is long-term, persistent unemployment. The structurally unemployed are individuals who have no jobs because they lack skills valued by the labor market, either because demand has shifted away from the skills they do have or because they never learned any skills. An example of the former would be the unemployment among aerospace engineers after the U.S. space program downsized in the 1970s. An example of the latter would be high school dropouts.

Shoe leather costs of inflation

This refers to the cost of time and effort that people spend trying to counteract the effects of inflation, such as holding less cash, investing in different currencies with lower levels of inflation, and having to make additional trips to the bank. The term comes from the fact that more walking is required (historically, although the rise of the internet has reduced it) to go to the bank and get cash and spend it, thus wearing out shoes more quickly. A significant cost of reducing money holdings is the additional time and convenience that must be sacrificed to keep less money on hand than would be required if there were less or no inflation.

Double counting

To avoid double counting, government statisticians exclude intermediate goods (goods that go into producing other goods) from GDP calculations. From the example above, the statisticians will only count the truck's value. In its decentralized, market-oriented economy, calculating the more than $18 trillion U.S. GDP—along with how it is changing every few months—is a full-time job for a brigade of government statisticians.

Total Cost Equation

Total Cost = Total Variable Cost (Price X Units) + Total Fixed Cost

Which equation reflects total economic profit?

Total Revenue - (Explicit Cost + Implicit Cost)

Which equation reflects accounting profit?

Total Revenue - Explicit Cost

Protectionism

When a government legislates policies to reduce or block international trade, it is engaging in protectionism. Protectionist policies often seek to shield domestic producers and domestic workers from foreign competition. Protectionism takes three primary forms: tariffs, import quotas, and nontariff barriers.

General Rules of Elasticity

When demand is inelastic (price elasticity less than one), price and total revenue move in the same direction. When demand is elastic (price elasticity greater than one), price and total revenue move in opposite directions. When demand is unit elastic (price elasticity exactly equal to one), total revenue remains constant when the price changes.

A used car dealership is trying to specialize in selling exceptionally well-maintained used cars. However, the maintenance of its used cars is unverifiable to buyers. The dealership would like to convince buyers to pay a higher price than found in the market for its used cars based on the idea that they will last longer. Is it possible for the dealership to convince buyers of this fact? Yes, if the dealership offers a low-cost service contract to overcome the asymmetric information problem No, the dealership will have to settle on the same price as the rest of the market

Yes, if the dealership offers a low-cost service contract to overcome the asymmetric information problem. This will help to assure a buyer prior to the transaction that the used car is likely to be of superior quality.

cost-of-living adjustments (COLAs)

cost-of-living adjustments (COLAs), which guaranteed that wages would keep up with inflation. These contracts were sometimes written as, for example, COLA plus 3%. Thus, if inflation was 5%, the wage increase would automatically be 8%, but if inflation rose to 9%, the wage increase would automatically be 12%. COLAs are a form of indexing applied to wages.

SRAC curves

the LRAC curve is built from a group of SRAC curves. Five SRAC curves appear on the diagram. Each SRAC curve represents a different level of fixed costs. A family of SRAC curves can be thought of as representing different choices for a firm that is planning its level of investment in fixed-cost physical capital—knowing that different choices about capital investment in the present will cause it to end with different SRAC curves in the future.

When the price of football jerseys was marked down at the end of the season, there was an increase in quantity demanded. In particular, when the price of Team A's jersey was marked down 50%, quantity demand for that jersey increased by 75%. What is the price elasticity of demand for Team A's football jersey? Elastic Inelastic

Elastic. The price elasticity of demand is greater than one (75% / 50% = 1.5), therefore it is elastic.

What is the opportunity cost of producing one ton of bananas in a country that can produce either five tons of bananas or 10 tons of flowers in a season? 0.5 tons of flowers 0.5 tons of bananas 2 tons of flowers

2 tons of flowers. The value of what is given up divided by what is gained is how you calculate opportunity cost. For example, giving up 10 tons of flowers for five tons of bananas has an opportunity cost of two tons of flowers.

It was determined that to make another light board, the company has to give up production of four light bulbs. What is the opportunity cost to make a light board? 5 light bulbs 0.2 light bulbs 4 light bulbs 0.25 light bulbs

4 light bulbs. Four (the value you are giving up) divided by one (the value you gain) equals four.

Dairy producers have recently experienced a sharp decrease in demand for their product. Which factor explains this decrease? A higher price for an unrelated product A lower price for a complementary product A lower price for a substitute product

A lower price for a substitute product. A lower price for a substitute product leads to a decrease in demand.

A market for a product has only a small number of sellers and an equally small number of buyers. Buyers have trouble determining market quality. What will be the outcome of this situation? A thick market with stable market prices A thin market with stable market prices A thin market with volatile market prices A thick market with volatile market prices

A thin market with volatile market prices. Imperfect information will leave both buyers and sellers unwilling to participate.

Adverse selection

Adverse selection results when sellers of high-quality or medium-quality goods opt to leave the market. Asymmetric information can lead to adverse selection. This is a process by which uneven knowledge causes a decrease in the quality of either the goods provided or the type of buyer. This can happen in the health insurance market. Imagine that an insurance company sets a single price for an insurance plan and makes that plan available to a pool of interested buyers. Because there is imperfect information on the seller's side about the health of any particular buyer, the plan is priced based on the average medical expenses of people in the pool.

Equilibrium

An equilibrium exists when there is no tendency for the market to change. This happens when market price reaches the level that equates the quantity demanded with the quantity supplied. On a graph, the point where the supply curve (S) and the demand curve (D) intersect is the equilibrium. The price at this intersection is called the equilibrium price (PE), and the quantity is called the equilibrium quantity (QE)

Heterogeneous (PPF)

As additional units of resources are used to produce a specific output, smaller amounts of additional output are produced. In other words, the input's productivity is not uniform. When this occurs, inputs are considered heterogeneous. Heterogeneous inputs generate a curved/bowed-out shape caused by increasing opportunity cost.

What is the relationship between price and quantity supplied? As price remains constant, quantity supplied goes down. As price goes down, quantity supplied goes up. As price goes up, quantity supplied goes up.

As price goes up, quantity supplied goes up. As the price for a good moves up, it becomes more attractive for sellers to offer products at the higher price, so the quantity supplied will also move up.

Why do economists refer to all resources as scarce even though many of the factors of production are plentiful in regard to the production possibility frontier?

Because resources are finite, there are trade-offs that must occur when companies or individuals make decisions regarding their wants or needs with their given resources to buy things. Resources are finite, so all people and businesses must make choices and trade-offs because they have finite money to buy or make what they want.

Which statement accurately illustrates the condition of people who are very rich and those who are very poor in relation to scarcity? Both the very rich and the very poor must make trade-offs because of scarcity. The very rich will not face scarcity, while those who are very poor will have problems.

Both the very rich and the very poor must make trade-offs because of scarcity. Both groups will still need to make trade-offs due to scarcity. This is a factor that does not change with income.

Imperfect Information

Buyer, the seller, or both are uncertain about the qualities of what is being bought and sold. When confronted with imperfect information, buyers will rely on price to indicate the quality of products. As a result, markets may have difficulty reaching an equilibrium price and quantity. In high-quality or medium-quality goods markets with imperfect information, sellers find it difficult to demonstrate the quality of their goods to buyers. Since buyers cannot determine which goods have higher quality, they are likely to be unwilling to pay a higher price for such goods. Imperfect information can lead to riskier behavior due to moral hazard. Guarantees, warranties, and service contracts are used to mitigate the risk of imperfect information.

The electronics company understands the speed of the line workers for light boards versus light bulbs. What is the shape of the production possibilities frontier based on these line workers? Curved Bell-shaped Straight Horizontal

Curved. Since the line workers are not as fast as the skilled workers, the outputs are less, creating a curve.

What is expected to happen if production costs increase for a particular good in a competitive market? Increase in the number of suppliers Decrease in the price of the good Decrease in the supply of the good

Decrease in the supply of the good. An increase in costs would lead to a shortage of supply for the good from decreased supply.

What is a consequence of a government printing more money? Decreased inflation Decreased unemployment Decreased standard of living Increased value of money

Decreased unemployment. The printing of more money causes inflation. In the short run, this can lead to more jobs.

In the market for hats, the absolute value of the price elasticity of demand in the relevant price range is equal to 2, and the market price increases by 5%. What happens to the equilibrium quantity in the hat market under these conditions? Decreases by 10% Increases by 2.5%

Decreases by 10%. Using the price elasticity formula, the price increase gives a decrease of 10%. (10% change in demand / 5% change in price) = 2

An economist is trying to identify how consumer appetite for a particular good is influenced by the price of the good. The researcher hopes to produce a table that will list how much of the good consumers desire at several specific price points. What is the economist producing? Demand schedule Quantity supplied

Demand schedule. A demand schedule is a table that displays quantity demanded for a product at several specific price points.

Elasticity

Elasticity measures the responsiveness of one variable to changes in another variable. Suppose you drop two items from a second-floor balcony. The first item is a tennis ball, and the second item is a brick. Which will bounce higher? Obviously, the tennis ball. You would say that the tennis ball has greater elasticity.

Explicit costs

Explicit costs are payments made to cover the firm's bills and are sometimes called out-of-pocket costs. Examples of explicit costs include the wages paid to a firm's employees and the rent a firm pays for its office.

The current market price for soybeans is $8 per bushel. Legislators are considering imposing a $10 price support and buying the surplus soybeans. How will this action impact soybean farmers' sales? Farmers will sell more soybeans since the government will be buying the surplus. Farmers will sell more soybeans since consumers will buy more soybeans.

Farmers will sell more soybeans since the government will be buying the surplus. At the higher price, soybean farmers will make more soybeans available in the market. Consumers will buy fewer soybeans, but the farmers will sell more soybeans because the government will buy any soybeans that are not purchased in the market.

Forgone interest (Implicit cost)

Forgone interest is the opportunity cost of using the owner's money for the business. When people us all of their savings to start a business, they sacrifice the interest this money would have earned.

Forgone wages (Implicit cost)

Forgone wages are used to measure the value, or opportunity cost, of the time owners dedicate to supporting their business. In using their time, they give up the opportunity to earn money in a different job.

A family has recently experienced an increase in household income. Which outcome results from this increase? Increase in demand of inferior goods Increase in demand of normal goods Decrease in supply of inferior goods Decrease in supply of normal goods

Increase in demand of normal goods

The production possibilities frontier for Electrical Technologies is curved. What happens to the opportunity cost as the firm increases the production of one good? Remains constant Increases Decreases Cannot be calculated

Increases. Opportunity cost will increase along a curved production possibilities frontier.

Which market is most likely to have the highest absolute value for its price elasticity of demand around its relevant range of prices? Food because food is a necessity of life. New houses because the price of a new house would represent the largest portion of a consumer's budget.

New houses because the price of a new house would represent the largest portion of a consumer's budget.

A country is producing on its production possibility frontier (PPF) with respect to capital and consumption goods. Policy makers are considering policies to help the country grow and produce combinations of goods that it currently finds unattainable. Which policy will be successful in meeting this goal? Restricting access to labor markets to only the highly productive people in the population Increasing skilled labor in public and private sectors through relaxed immigration laws

Increasing skilled labor in public and private sectors through relaxed immigration laws. This situation would lead to a larger labor force and shift out the PPF. This would allow the country to grow and produce at points that currently represent unattainable combinations of goods as the PPF shifts out.

What was the price elasticity of supply for the college basketball team's jersey? Inelastic Elastic

Inelastic. Price elasticity of supply was inelastic because the percentage change in quantity supplied was less than the % change in price (10% / 15% = 0.67).

An industry is operating in an inelastic range of the market demand curve. What happens to the total revenue in the industry if the market supply increases? It increases because the market price decreases, but the quantity demanded increases. It decreases because the market price decreases in an inelastic portion of the demand curve.

It decreases because the market price decreases in an inelastic portion of the demand curve. The supply curve shifts to the right, and the equilibrium price decreases. Due to the inelastic response, this would result in a relatively small change in quantity to a larger change in price and would cause a decrease in total revenue in the industry.

Which criterion must be satisfied to include capital as a physical good or intellectual discovery? It constitutes a tangible item that can be created instead of an intangible concept. It has been produced already and is used for producing other goods and services.

It has been produced already and is used for producing other goods and services. Two keys to the use of an economy's factors of production are technology and, in the case of a market economic system, the efforts of entrepreneurs.

An individual moves to a city that imposes rent control on apartment rentals. If rental controls were not imposed, the market price would be $800 per month. The rent control price is $600 per month. What is the likelihood that an individual will easily find an apartment for rent under these conditions? It is very unlikely because a surplus will persist, but the rent-controlled price being lower will make less apartments available. It is likely because a surplus will persist. It is unlikely because a shortage will persist in the market.

It is unlikely because a shortage will persist in the market. With a shortage, there would more people looking for an apartment than there were apartments available for rent at the rent-controlled price.

Two countries have entered into a mutually beneficial trade agreement. What will happen to production technology and the mix of goods produced in these countries? It will generate less innovation in production technologies and decrease the amount of attainable combinations of goods produced. It will generate greater innovation in production technologies and increase the amount of attainable combinations of goods produced.

It will generate greater innovation in production technologies and increase the amount of attainable combinations of goods produced. This situation will lead to greater innovation and an increase in the amount of goods produced.

How will the arrival of a new company that generates high levels of pollution affect the economic environment? It will generate negative externalities and decrease social costs in the local community. It will generate negative externalities and increase social costs in the local community.

It will generate negative externalities and increase social costs in the local community. Levels of pollution emitted into the community are characteristic of negative externalities and additional costs to society.

A country has a recent innovation in energy production that is leading to low cost renewable energy. What will happen to this country's production of both capital and consumption goods? Its production possibility frontier will shift out, and more combinations of goods will be attainable. There will be a movement on the country's production possibility frontier towards capital goods.

Its production possibility frontier will shift out, and more combinations of goods will be attainable. This is the response that occurs when an innovation in energy production leads to low cost and renewable energy for businesses.

The price elasticity of demand equation

The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in price of that good or service.

Which economic reasoning is involved when someone wants to study a country's output of gross domestic product (GDP)? Tax policy Market analysis Macroeconomic theory Microeconomic theory

Macroeconomic theory deals with the country as a whole, including measuring output via GDP.

Macroeconomics VS Microeconomics

Microeconomics and macroeconomics are two different perspectives on the economy. The microeconomic perspective focuses on parts of the economy: individuals, firms, and industries. The macroeconomic perspective looks at the entire economy, focusing on goals like growth in the standard of living, unemployment, and inflation.1

Moral hazard

Moral hazard is also a result of asymmetric information. A moral hazard is a situation in which a person or firm is willing to take more risks because they are protected against the potential cost of risky decisions. Like adverse selection, moral hazard occurs in insurance markets and is caused by asymmetric information. The two problems differ in the type of information unknown to the insurer. In the case of adverse selection, the buyer's type is unknown. Is the buyer healthy or not? In the case of moral hazard, it is the buyer's behavior that is unknown. Will the buyer be cliff diving or leaving the stove on all day? Behaviors like these increase the likelihood of a claim.

A salesperson is salaried and is not evaluated based on the number of sales closed; he is evaluated on customer satisfaction. The sales manager assigns him to contact a startup business to introduce the product line and secure a sale by the end of the month. He chooses to wait until the following sales cycle to contact the business. Which behavior is the salesperson exhibiting? Adverse selection in decision-making Moral hazard related to performance

Moral hazard related to performance. The salesperson chooses to wait until the following sales cycle to contact the business. This behavior represents a moral hazard related to performance due to compensation structure.

A supply curve is graphed with quantity supplied on the x-axis and price on the y-axis. How does technology affect this type of curve? Increases the slope of the curve Moves the curve outward to the right Causes the price to move up the supply curve

Moves the curve outward to the right. Technology affects the supply curve. New technologies will increase the amount of supply. When the supply for a product or service increases as a result of new technology, the supply curve will shift to the right.

Just like budget constraints that can be observed when trade-offs are applied between two items for an individual, companies that use the production possibility frontier model also use certain assumptions to simplify the analysis. What is one of the assumptions? Any good can be produced. No resources are wasted. Resources are infinite. Technology is always changing.

No resources are wasted. Resources are limited and are not wasted in the process, so no surplus can alter the analysis.

Farmers are ready to sell soybeans, and the current market price is $8 per bushel. Legislators are considering imposing a $12 per bushel price floor on the soybean market. Will this action help the farmers sell more soybeans? Yes, a surplus would emerge, and farmers will be motivated to sell more soybeans. No, a surplus would emerge, and more soybeans will be produced than are sold.

No, a surplus would emerge, and more soybeans will be produced than are sold. With the price floor price being set at a higher price than the efficient market price, the market's quantity supplied would be greater than the quantity demanded. Because of the downward sloping demand curve, the new quantity demanded and sold would be less than the efficient market quantity.

The unskilled labor market wage rate equilibrium is $7 per hour. Legislators are considering imposing a $20 per hour minimum wage. Will this action help unskilled workers who want to work more hours? Yes, since the higher wage will motivate more workers to work more hours. No, since this will motivate employers to hire fewer workers for less hours.

No, since this will motivate employers to hire fewer workers for less hours. A dramatic increase in wages due to the minimum wage of $20 will create a surplus in the market, and the number of hours worked would decrease.

Normative statements

Normative statements are opinions that express value or normative judgments about economic fairness. They focus on what the outcome of the economy or goals of public policy should be. Many normative judgments are conditional. An example of a normative economic statement is that the price of milk should be $6 a gallon to give dairy farmers a higher living standard. It is a normative statement because it reflects an opinion—a value judgment stating what should be done. Normative statements cannot be tested as people cannot prove opinions to be right or wrong.

Which economic reasoning is used in deciding among public policy goals? Positive statements because fairness of outcomes should be considered Normative statements because fairness of outcomes should be considered Positive statements because opinions should be used Normative statements because facts should be used

Normative statements because fairness of outcomes should be considered

A consumer is deciding between shopping in-store or online for a personalized sweater that will require the consumer to identify size, type of image, and style of stitching desired without seeing the final product before production. All purchases are final. Which venue will present the greatest level of uncertainty for the consumer? Neither would experience information problems Both venues would present the level of same uncertainty Online retail venue In-store retail venue

Online retail venue. Since the consumer would not be able to try on the sweater, feel the clothing material, or see the fabric, the online consumer may face more purchase risk when using an online retailer than if the consumer was able to see the material in the store.

What is an example of a heterogeneous resource? People who have differing experience in producing one good People who are equally good at producing a variety of goods People who have limited experience in producing many goods People who are about average at producing all goods

People who have differing experience in producing one good. Experience is one reason labor is a heterogeneous resource.

Which type of economic thought involves the review of economic indicators? Microeconomic theory Positive analysis Normative analysis Scarcity theory

Positive analysis. Positive analysis is based on facts, which are reported as economic indicators.

A few major companies recently announced plans to move to a midsized city. Homeowners in that city, who are not connected to any of the new companies, recognized an immediate increase in home values. What have the homeowners experienced? Negative externality Positive externality

Positive externality. A few major companies recently announced plans to move to a midsized city and homeowners recognized an immediate increase in home values. The homeowners have experienced a positive externality because they received a benefit for a decision that they were not involved in making.

Positive statements

Positive statements focus primarily on facts, and they can be tested. As a social science, economics focuses on analyzing economic behavior and avoids economic value judgments. For example, "the unemployment rate in France is higher than that in the United States" is a positive economic statement. It gives an overview of an economic situation without issuing a value judgment or opinion on the information.

A seller has 10 hours to either bake cakes or make holiday ornaments to sell at the local farmers market. The seller is currently producing at a point on their production possibility frontier. Which decision is both attainable and efficient? Producing less of one good and the same quantity of the other good Producing less of one good and more of the other good

Producing less of one good and more of the other good. This is the correct mix that is both attainable and efficient.

The company is currently producing on the frontier of its production possibilities. The company has decided to increase the production of light boards. Which trade-off must be made to accomplish this goal? Production of light bulbs would remain constant. Production of light boards would be inefficient. Production of light boards would be unattainable. Production of light bulbs would decrease.

Production of light bulbs would decrease. Because labor is limited, the trade-off for increasing the output of light boards means the output of light bulbs decreases.

Rent control

Rent control is an example of a price ceiling. In some cities, such as Albany, renters have pressed political leaders to pass rent control laws.

In the relevant price range, the market for gasoline has an absolute value of the price elasticity of demand equal to 0.5 and an absolute value of the price elasticity of supply equal to 0.8. Which side of this market is more responsive to price changes? Sellers that are price inelastic Buyers that are price elastic

Sellers that are price inelastic. The absolute value of the price elasticity of supply is greater than the absolute value of price elasticity of demand. In addition, the price elasticity of supply is less than one.

When analyzing economic problems, especially when confronted with models of choice, economic models use simplifying assumptions to let them focus on choice. Which simplifying assumption is important for analyzing consumer behavior? Unlimited time Specific prices Flexible budget One product

Specific prices. The consumer must know the price of each good being considered, and the prices must be fixed so the decision is not clouded by things like quantity discounts, price changes, negotiation, and so on.

What is the outcome when the price is above the equilibrium? The quantity supplied will go down because the point of equilibrium is above the market price. Suppliers will produce more than the quantity demanded, and a surplus will exist.

Suppliers will produce more than the quantity demanded, and a surplus will exist. Suppliers will overproduce if they think they can get a higher price.

Which demand factor is represented by the sale of the apparel for the small college basketball team? Price of substitutes Tastes and preferences Price of complements Composition of the population

Tastes and preferences. As the team advances, more fans would be wanting to purchase apparel representing the smaller college.

What is the effect, if any, on the supply curve because of the change in transportation cost? The curve flattens out. The quantity will move along curve. The curve will shift to the right. The curve will shift to the left.

The curve will shift to the left. Transportation costs are input costs for the online company. As these costs increase, the supply will decrease.

Which response should be expected if a competitive coffee market is in equilibrium and consumers in the market see an increase of income across the board? The supply curve shifts to the left, signaling to suppliers that they should produce more. The demand curve shifts to the right, implying a willingness for consumers to pay more.

The demand curve shifts to the right, implying a willingness for consumers to pay more. Higher incomes for buyers of a normal good indicates that buyers will pay more at all quantities.

Which characteristic of the production possibility frontier is most directly related to scarcity? The upward (positive) slope of the frontier The downward (negative) slope of the frontier The convex or bowed in shape of the frontier The U-curve showing that goods are attainable but not efficient

The downward (negative) slope of the frontier.

A supply curve is graphed with quantity supplied on the x-axis and price on the y-axis. What happens to the supply curve when there is a decrease in supply? The line shifts to the left or inwards. The line shifts to the right or outwards. The line does not move and gets shorter.

The line shifts to the left or inwards. When there is a decrease in supply of a product or service, the line shifts to the left or inwards. When the supply changes, the entire supply curve will shift. When the supply decreases, the line will move to the left.

Marginal Benefit

The marginal benefit is the additional benefit you gain from consuming one more of something—the higher test grade you get from studying one more hour.

Electrical Technologies decides to produce at a point that is below the production possibilities frontier. What is the impact of this decision? The output is attainable. The output is efficient. The output is not affected. The output is not attainable.

The output is attainable. Options below the production possibilities frontier are attainable.

What is the price elasticity of demand for Team A's football jersey? Elastic Unitary elastic Inelastic Perfectly inelastic

The price elasticity of demand is greater than one (75% / 50% = 1.5), therefore it is elastic.

A small business owner wants to add a new product to its current product line, but the business can only produce 10% of what it wants. What describes this scarcity situation? To increase production of the new good, a trade-off is necessary given the available resources and their current production possibilities frontier. Scarcity will not be an issue because the business did not commit to any trade-off with its current production line.

To increase production of the new good, a trade-off is necessary given the available resources and their current production possibilities frontier. The scenario implies that the firm is constrained in the amount of its new product that it can produce by its current resources, so a trade-off is necessary because of scarcity.

Opportunity Cost

What you're giving up divided by the amount that you have gained. -Constant along a linear production possibilities frontier. -Increases along a bowed out production possibilities frontier. -Countries trade goods for which they have the lowest opportunity cost to produce.

General Rules Of Total Revenue and Price Elasticity

When demand is inelastic (price elasticity less than one), price and total revenue move in the same direction. An increase in price causes an increase in total revenue. When demand is elastic (price elasticity greater than one), price and total revenue move in opposite directions. An increase in price causes a decrease in total revenue. When demand is unit elastic (price elasticity exactly equal to one), total revenue remains constant when the price changes.

What causes a change in a market's equilibrium? When customers buying goods in a competitive market decide to buy from other current suppliers, the market equilibrium will move. When market events shift either the supply or demand curves, the market equilibrium will shift.

When market events shift either the supply or demand curves, the market equilibrium will shift. One of the determinants of supply or demand must occur in the market, such as a change in the number of business suppliers or customers and buyers, for the equilibrium to shift.

Homogeneous (PPF)

When the factors of production are homogeneous, the PPF is a straight line.

Assume the price of restaurant meals increased by 10%. In response, the quantity demanded of restaurant meals decreased by 23%. What is the elasticity of demand for restaurant meals?

ed = 23% / 10% = 2.3