Macro Midterm 1 Practice

Assume that in recent years the cost of producing microbrew beer in the U.S. has decreased largely due to technological improvements. At the same time, more and more Americans prefer microbrew beer over wine. Which best explains the effect of these events in the microbrew beer market?

Both the supply and demand curve have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price

The price of bread in terms of gallons of milk per loaf is 0.6 and the price of a gallon of milk in terms of pounds of butter per gallon is 1.2. What is the relative price of bread to butter?

0.72

A price floor set below the equilibrium price

has no effect

Economics is the study of

how people allocate their limted resources to satisfy their unlimited wants

The potential rewards that are available to an individual if a particular activity is undertaken are known as

incentives

Adam Smith's ______ refers to the process by which individuals acting in their own self-interest bring about a market outcome that benefits society as a whole

invisible hand

What are economic resources, or factors of production?

land, physical capital, and entrpreneaurship NOT money

What is a price floor?

minimum wage rates

Opportunity cost is illustrated on the production possibilities curve by a

movement along the curve

An inward shift of the production possibilities frontier represents

negative economic growth

Irene needs 1 hour to make 1 chair, and needs 4 hours to make 1 table. Greg needs 1 hour to make 1 chair, and needs 2 hours to make 1 table. Who has the comparative advantage in the production of chairs?

Irene

An increase in demand and an increase in supply will lead to

an unambiguous increase in quantity but the effect on price is indeterminate

A production possibilities frontier with a _________ shape indicates increasing opportunity costs as more and more of one good is produced

bowed outward

Pam graduates from law school and gets a position in a law firm. At the same time the price of hamburger falls while other food prices have stayed the same. She notices that she buys less hamburgers than she did before. Is she violating the law of demand?

No, since other things are not held constant, such as her income

Positive of normative statement: The minimum wage should be more than $7.25 per hour

Normative

What would be examples of transactions that would not be included in the official calculation of GDP?

1. a student buys a used textbook at the bookstore 2. firestone sells $2 million worth of tires to General Motors 3. you wash and wax your father's car as a favor to him 4. you illegally download music off the Internet to put on your new iPod INCLUDED: you buy a new iPod

To calculate opportunity cost: If a production possibilities frontier says for every 200 dozen of roses, 80 dozens of orchids can be produced. The opportunity cost of one dozen orchids equals

200 dozen roses / 80 dozen orchids = 2.5 dozen roses

Extra Credit: In the video shown in class with Milton Friedman speaking, what was the product he was discussing?

pencils

Disposable personal income is defined as

personal income - personal taxes

Every society faces economic trade-offs. This means

producing more of one good means less of another good can be produced

The prices of certain goods, such as ice and gasoline, often increase after a natural disaster such as a hurricane. The economic explanation for this observation is that

the disaster temporarily reduces the supply of the goods and increases the demand for goods

Suppose the current unemployment rate is 15 percent. If it rises to 20 percent

the economy will operate further inside the production possibilities curve

Opportunity cost is defined as

the highest valued alternative that must be given up to engage in an activity

The production possibilities curve represents

the maximum combination of goods and services that can be produced with fixed resources and technology given the efficient use of the resources

We say that the economy is at full employment if the unemployment rate is equal to

the natural rate of unemployment

If Brazil has a comparative advantage relative to Cuba in the production of sugar cane, then

the opportunity cost of production for sugar cane is lower in Brazil than in Cuba

Scalping and other black market activities arise when

the prices of goods are restricted to levels below equilibrium prices

The terms of trade refers to

the ratio at which a country can trade its export for imports from other countries

In recent years the cost of producing wines in the U.S. has increased largely due to rising rents for vineyards. At the same time, more and more Americans prefer wine over beer. Which of the following best explains the effect of these events in the wine market?

the supply curve has shifted to the left and the demand curve has shifted to the right. as a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity

Suppose the price of cheese rises. In the market for pizza, one would expect that

the supply of pizza would decrease, and price would rise

Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he'd just started looking for work again. Because Mike started looking for a new job,

the umemployment rate increased

If Norwegian workers are more productive than Albanian workers, then trade between Norway and Albania

will take place so long as each country has a comparatice advantage in a good or service that buyers in the other country want

Which of the following is correct about the economic decisions consumers, firms, and the government have to make?

Each faces the problem of scarcity which necessitates trade-offs in making economic decisions

Positive of normative statement: The minimum wage law causes unemployment

Positive

Positive of normative statement: Unemployment would be lower without a minimum wage law

Positive

Positive of normative statement: minimum wage laws benefit some workers and harm others

Positive

For each watch that Switzerland produces, it gives up the opportunity to make 50 pounds of chocolate. Germany can produce 1 watch for every 100 pounds of chocolate it produces. Which of the following is true about the comparative advantage between the two countries?

Switzerland has the comparative advantage in watches

Extra Credit: Which country appeared to have the comparative advantage in the production of cotton based on the Making a T-Shirt video shown in class?

The United States

An excess in quantity supplied is equal to:

The point on the supply curve minus the point on the demand curve

Suppose a price ceiling is currently set below the equilibrium price. How suppose that policy makers decide to lower the price ceiling? This reduction in the price ceiling will cause which of the following to occur?

The shortage in the market will increase

Which of the following statements are false? 1. not all individuals in both countries are make better off as a result of international trade 2. within each country, some individuals are made better off as a result of international trade, but one of the countries will be worse off overall 3. although some individuals may not be made off as a result of international trade, both countries may be made better off overall

Within each country, some individuals are made better off as a result of international trade, but one of the countries will be worse off overall

Which of the following is the best example of a tariff?

a $5,000 per-car fee imposed on all sports utility vechiles imported into the United States

When Tesla, a U.S. company, purchases Italian-made Pirelli tires for its automobiles, the purchase is

a U.S. import and an italian export

A straight line production possibilities curve has

a constant opportunity cost between two goods

If, in response to an increase in the price of pineapples, the quantity of pineapples demanded decreases, economists would describe this as

a decrease in quantity demanded

The term "market" refers to

a group of buyers and sellers of a product and the arrangment by which they come together to trade

What will cause, other things being equal, a movement along the supply curve for LED televisions?

a reduction in the price of LED televisions

A decrease in the price of pork will result in

a smaller quantity of pork supplied

Macroeconomics often relies on microeconomic analysis because

all aggregates are made up of individuals and firms

If demand increases while supply decreases, then the equilibrium price

always increases

Assume coffee and tea are substitutes. Given a downward sloping demand curve for tea, a rise in the price of coffee leads to

an increase in the demand for tea

Which of the following would cause an increase in the supply of cheese?

an increase in the number of firms that produce cheese

Which of the following will not shift the demand curve for a good?

an increase in the price of the good WILL SHIFT DEMAND CURVE: 1. increase in population 2. a decrease in the price of a substitute good 3. an increase in consumer incomes

Suppose that goods X and Y are substitutes and the price of good Y falls. We would then expect

an increase in the quantity demanded of good Y and a decrease in the demand for good X

An increase in demand and a decrease in supply will lead to an

an unambigious increase in price, but the effect on quantity is indeterminate

In a market economy, who decides what goods and services will be produced?

consumer and producers

GDP includes:

consumption expenditures + investment expenditures + government purchases + exports - imports

If you have trouble finding a job because of slowdown in the overall economy, we would say that you are

cyclically unemployed

Domestically produced goods and services sold to other countries are referred to as

exports

The law of demand implies, holding everything else constant, that as the price of yogurt

increases, the quantity of yogurt demaned will decrease

The branch of economics which studies how households and firms make choices, and interact in markets is called

microeconomics

The purchase by a foreign government of an airplane produced in the United States is included in U.S.

net exports

Positive or normative statement: An economy with high unemployment can be worse off than an economy with high inflation

normative

If the quantity demanded for a product exceeds the quantity supplied, the market price will rise until

quantity demanded equals quantity supplied. the market price will then equal the equilbrium price

Suppose the labor force stays constant, and the working-age population stays constant, but a greater number of persons who were unemployed become employed. The labor force participation rate will

remain constant

What is considered a price ceiling?

rent controls, college tuiton caps

A critical function of the government in facilitating the operation of a market economy is

setting up and enforcing private property rights

Increasing opportunity cost along a bowed out production possibilities frontier occurs because

some factors of production are not equally suited to producing both goods or services

Suppose the demand for cornflakes is downward sloping and the price of a packet of cornflakes increases from $6 to $8. We would then expect

the quantity of cornflakes demanded falls

If the point of production falls outside the production possibilities curve:

there must be more resources than were assumed available in constructing the graph or it is unattainable

Examples of comparative advantage how trade between two countries can make each better off. Compared to their pre-trade positions, trade makes both countries better off because in each country

total consumption of goods is greater

Examples of comparative advantage show how trade between two countries can make each better off. Compared to their pre-trade positions, trade makes both countries better off because in each country

total consumption of goods is greater

Which of the following is a macroeconomic topic?

ANSWER: What factors determine the nation's inflation rate? OTHER OPTIONS: 1. Why has the price of a personal computer fallen over time? 2. How does a rise in the price of cheese affect the pizza market? 3. How does a consumer decide how many tacos to consume?

Which of the following statements is FALSE about the demand curve?

ANSWER: an increase in demand shifts the demand curve to the left, closer to the price axis OTHER OPTIONS: 1. when only the price of a good changes, there is movement along the demand curve but no change in demand 2. a change in demand is graphically shown by shifting the entire demand curve 3. when demand decreases, there is a drop in the quantity demand at each price

Increases in real GDP would overstate the increase in the well-being of a country over time if, over that time period, the

ANSWER: average hours worked per week increased OTHER OPTIONS: 1. amount of pollution decreased 2. price level increased 3. crime rate decreased

Which of the following is an example of spending on factors of production in the circular flow model?

ANSWER: the "lucky ducky" casino buys a new craps table for the casino floor OTHER OPTIONS: 1. Tuan purchases a cappuccino at the student inion 2. Laurence rents a car to drive to a wedding in San Diego 3. Yvette pays $50 to join a softball league

According to the production possibility model, if more resources are allocated to the production of physical and human capital, then all of the following are likely to happen except

ANSWER: the country's total production will fall OTHER OPTIONS: 1. fewer goods will be produced for consumption today 2. the production possibilities frontier will shift outward in the future 3. future economic growth is enhanced

Which of the following must occur as a result of ceilings on apartment rents that are set below market clearing rental rates?

There is a decrease in the quantity of apartments that property owners offer for rent

Which of the following best describes an assumption economists make about human behavior?

They assume that rational behavior is useful in explaining choices people make even though people may not behave rationally all the time