Exam 4

When price controls push the price of a good or resource above the market equilibrium,

A surplus of the good will develop.

Celina worked her way through law school as a typist. She now makes $200 per hour as a lawyer. As the result of a heavy workload, she hires a typist at $25 per hour, but Celina discovers she can type twice as fast as her new employee. Should Celina do her own typing?

No, even though Celina types faster than her new employee, her opportunity cost of doing any given amount of typing will exceed that of her new employee.

Are jobs the key to economic progress and the achievement of high income levels?

No, it is not just employment, but employment that expands production of goods and services that others value highly relative to cost.

Which of the following is true?

The Great Depression re-enforces the view that raising taxes in the midst of a severe recession is not an economically sound idea.

From an economic standpoint, when a seller advertises, Buy one, get one free, what is actually taking place?

The cost of the free product has been shifted to other products or services

Which of the following statements about voting is true?

The incentive of voters to be well informed on candidates and issues is weak.

Which of the following is true regarding the per person income of the world during the past 1000 years?

The per person income of the world was not much different in 1800 than a thousand years earlier, but since 1820 income per person has soared by approximately tenfold.

Which one of the following popular expressions best reflects the economic way of thinking?

There is no such thing as a free lunch.

Some economists argue that rent controls are "the best way to destroy a city, other than bombing." Why would economists say this?

They anticipate that rent controls will eliminate the incentive to maintain buildings, leading to a deterioration in the quality of housing available in the city.

Which of the following is the best indication that a project is economically productive?

Total benefits exceed total costs

If higher tariffs, such as those enacted by the Smoot-Hawley trade bill, reduce the imports of the United States, which of the following will be most likely to occur?

U.S. exports will decline because foreigners will be earning fewer of the dollars needed to purchase goods and services from Americans.

Which of the following would be most likely to reduce budget deficits and special interest federal spending?

a constitutional rule requiring the approval of three-fourths of the members of both Houses of Congress before the federal government is permitted to run a budget deficit

A monopoly is an example of

a market failure.

Which of the following is the best example of a public good?

an aerial fireworks display

The value of the best alternative given up when a decision is made is called

an opportunity cost

Lobbying efforts that erect roadblocks that limit entry into markets,

are necessary to ensure fair trade and competition.

Governments are most likely to discourage plunder and promote economic prosperity when they

are neutral among the citizenry, protect property rights, and enforce contracts in an evenhanded manner.

According to Walter Lippmann, history teaches that when there are no limitations on the power of government, the government will

become oppressive, reactionary, and corrupt.

Jamie produces a free podcast, but charges a fee for special bonus episodes. Listeners who buy the bonus episodes are

better off, because they get episodes that they value more than the money they gave up.

In an informed and voluntary exchange,

both parties receive something they value more than what they gave up

Rent-seeking behavior refers to the practice of

businesses and other groups using resources to obtain favors from the government.

The main postulate of economics is based on the premise that

changes in personal benefits or costs of an action influence behavior in predictable ways.

The economic way of thinking assumes that

changes in the personal benefits and costs associated with an activity will exert a predictable influence on the behavior of both those who are selfish and those who are unselfish.

A private owner of a resource has a strong incentive to

conserve the resource for the future, particularly if it is expected to increase in value.

Private ownership allows owners to

decide how the property will be used as long as they do not invade or physically damage the property of others.

If a country with a centrally planned economy (such as Cuba or North Korea) were to convert to a market-based economy, the country would have to

develop a system of clearly defined property rights.

In order to obtain support for favored political proposals, special interest groups have an incentive to

exaggerate the perceived benefits and understate the expected costs of a proposal.

A nation benefits from international trade if it

exports goods for which it is a low opportunity cost producer.

If an individual faces a marginal tax rate of 40 percent and earns an additional $1,000, the taxpayer

gets to keep only $600 of the additional earnings.

Increases in per capita GDP are

important, because they generally improve our living standards

Which of the following would be most likely to improve the efficiency of government?

increased competition among decentralized governments and among private firms seeking government contracts

When the money supply of a nation increases faster than the growth of the economy, the result is

inflation.

Federal spending is something like a common pool resource, because

interest groups will figure that if they do not grab more of the federal budget, other groups will.

When the federal government runs a budget deficit, it will

issue additional U.S. Treasury bonds.

As the price of a good rises, the quantity produced increases. This relationship is known as the

law of supply.

According to the law of supply,

more of a good will be offered by suppliers as the price rises

The directors and managers of government-operated firms will be primarily driven

obtaining larger budgets and other favors from the legislative bodies that oversee their operations.

Capital markets will channel funds efficiently into productive projects and bring counterproductive projects to a halt, because

private investors will insist on an accounting of their investments and monitor projects using their funds

Which of the following institutional arrangements will provide people with the strongest incentive to serve others and use resources efficiently?

private ownership

Gains from trade are highest when:

producers trade freely and on the basis of comparative advantage.

When policy makers are constantly shifting back and forth between expansionary and restrictive monetary policy, this is most likely to

promote instability because the time lags of monetary policy are long and unpredictable.

In a market economy, you will likely earn a high income if you find a way to

provide others with goods and services that they value highly.

Middlemen are individuals who

provide services that reduce the cost of transactions and help achieve additional gains from trade.

As a result of the 1930 Smoot-Hawley trade bill,

Both the volume of U.S. trade and the tariff revenues derived from trade decreased

The special-interest effect is important because it

results in counterproductive government action.

According to the law of supply, as the price of a good falls,

sellers will produce less of the good.

Private owners will gain by conserving resources for the future, when

the expected future value of a resource exceeds its current value.

Henry Hazlitt believed that when analyzing an economic proposal, the most common source of economic error was

the failure to consider long-run results and secondary consequences.

The popularity of trade restrictions, tariffs, and quotas often reflects that

the immediate benefits are highly visible, while the secondary effects of lost jobs in other industries are less visible.

A rational decision-maker will act only if

the marginal benefit of an action is greater than the marginal cost of the action.

Once the criterion for receipt of an income transfer is established,

the net gain derived by the transfer recipients will exceed the spending on transfer program.

When property is owned in common, i.e. not owned by anyone, then

the property will be used less productively.

If people work fewer hours, retire early, or forego risky business ventures because of high marginal tax rates,

the size and productivity of the labor supply will be reduced and output will decline.

The price of a good will tend to rise when

there is excess demand for the good.

Fannie Mae and Freddie Mac held a competitive advantage over other mortgage lenders primarily because

they could borrow funds cheaper than other lenders because their bonds were perceived to be backed by the federal government.

The protective function of government includes I. imposition of taxes in order to expand government investment. II. enforcement of the law in an unbiased manner. Ill. protection of people and their property against aggressors.

• Il and III

Which of the following is the best example of citizens voting with their feet?

Citizens choose where to live based on the services offered and the level of taxation

Which of the following is most necessary for a market economy to efficiently satisfy consumer demand?

Competition and open entry into markets

Which of the following best describes the relationship between economic freedom and the growth rate of real per capita Gross Domestic Product (GDP)?

Countries with more economic freedom tend to grow more rapidly than those that are less free.

Which of the following statements is/are true about voluntary trade? I. Trade moves goods from people who value them less to people who value them more. II. Trade lowers costs because it allows firms to use large-scale production methods. IlI. Trade allows people to specialize in what they do best.

I, IL, and III

Which of the following does the law of demand specifically imply?

If the product price increases, quantity demanded will decrease.

Clear Waters Snorkeling Equipment Company has had major losses for the last few years. U.S. Representative Snow has introduced a bill in Congress to provide government subsidies to the company for two years so it can get back on its flippers. Use the economic way of thinking to evaluate this situation. I. The subsidy program should be an effective method to rescue the company. I. The major losses indicate that the company is making a product that consumers value less than the value of the resources required to produce it. IlI. If Clear Waters Snorkeling Equipment goes out of business, the future total output of the economy will fall below its potential.

Il only

Which of the following economic environments is most consistent with economic growth and prosperity?

Open markets and a legal system that enforces contracts in an even- handed manner

Harold, a delivery man, washes and irons his own shirts. Sarah, his boss, sends her clothes to a laundry. Which is the most plausible economic explanation for this difference?

Sarah has a higher opportunity cost of laundering her clothes than Harold does.

Which of the following is most clearly an example of an externality?

When you drive to school or work, your car releases harmful pollutants and greenhouse gases, but most of the costs of these emissions fall on other people not you.

Which of the following most clearly performs the function of a middleman?

eBay

How do marginal tax rates influence consumption decisions?

As marginal tax rates rise people will purchase more tax-deductible goods.

Monetary policy in the United States is conducted by

Federal Reserve

If a business firm continues to sustain losses, what usually happens in a market economy?

It goes out of business and the resources it was using become available for use in other areas.

Steve and Jada work in a restaurant making meals consisting of a sandwich and a salad. For every sandwich Steve makes, he gives up making two salads. For every sandwich Jada makes, she gives up making 1 salad. Which of the following is correct?

Jada has a comparative advantage in producing sandwiches.

If students who earn an A in a class were asked to transfer some of their points to low-performing students, which of the following would be most likely to occur?

Neither high nor low-performing students would work as hard to earn additional points

Which of the following is true of profits and losses?

Profits direct entrepreneurs toward production of goods that are highly valued relative to their cost, while losses direct them away from wealth-reducing activities.

What effects do specialization and trade have on the allocation of resources and the level of production of a society?

They create a more efficient allocation of resources and an increase in the level of production.

Which of the following is the best example of a protective function of government?

Unbiased enforcement of contracts and protection of property rights.

If the price of a good or service is below the equilibrium price

consumers will want to purchase more than producers are willing to supply.

According to the economic way of thinking, personal benefits and costs influence the actions of

consumers, producers, voters, and politicians in both the private and the public sectors.

When markets are used to allocate resources, the prices of goods, services, and resources

direct producers and suppliers toward production of the goods and services consumers value highly relative to the cost of their production.

The Economic Freedom of the World index indicates that countries with more economic freedom

grow more rapidly than those that are less free

In recent decades, every country that has experienced rapid inflation over a lengthy period of time

has followed a policy of rapid growth in the money supply.

Generally speaking, countries that grow faster tend to

have greater economic freedom, as measured by the Economic Freedom of the World index.

From the consumers standpoint, the price of a good

helps consumers decide among scarce goods and allocate resources toward the things they value most.

Consider two goods--one that generates external costs and another that generates external benefits. The actual market outcome will generally

result in output that is lower than the efficient output for the good with an external benefit and output that is higher than the efficient output for the good with an external cost.

Which of the following results because the desire for goods and services is far greater than the production capacity of an economy?

scarcity

As the outstanding debt of a nation becomes very large relative to the size of the economy,

the risk of loaning funds to the highly indebted country will increase, and therefore it will have to pay higher interest rates on borrowed fund.