ECO 201 Exam #1

market economy

An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. Firms decide whom to hire and what to make. Households decide which firms to work for and what to buy with their incomes

Why is the production possibilities frontier bowed outward?

Because the trade-offs between the production of any two goods are not consistent

T/F An individual farmer is likely to have market power in the market for wheat.

False. A single farmer is too small to influence the market

T/F Workers in the United States have a relatively high standard of living because the United States has a relatively high minimum wage.

False. It's because workers in the US are productive

T/F When the government redistributes income with taxes and welfare, the economy becomes more efficient.

False. The economy becomes less efficient because it decreases the incentive to work hard

T/F If an advanced country has an absolute advantage in the production of everything, it will benefit if it eliminates trade with less-developed countries and becomes completely self-sufficient.

False. Voluntary trade benefits all traders

Adam Smith's "invisible hand" refers to

It's the ability of free markets to reach desirable outcomes, despite the self-interest of market participants (households and firms)

Normal goods vs inferior goods

Normal good: A good for which an increase in income leads to an increase in demand Inferior good: A good for which an increase in income leads to a decrease in demand

Positive vs. Normative

Positive statements: Are descriptive. They make a claim about how the world is Normative statements: Are prescriptive. They make a claim about how the world ought to be

Production possibilities frontier

Shows the combinations of output that the economy can possibly produce given the available factors of production & the available production technology - Economy cannot produce at points outside the frontier b/c resources are scarce - Economy can produce at any point on or inside the frontier - Outcome is efficient at points on the frontier, meaning the economy is getting all it can from the scarce resources it has available - Outcome is inefficient at points inside the frontier

Substitutes vs. Complements

Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other. Ex: hot dogs and hamburgers. Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other. Ex: peanut butter and jelly.

T/F The gains from trade can be measured by the increase in total production that comes from specialization

True

Economic growth is depicted by... a. a movement along a ppf toward capital goods b. a shift in the ppf outward c. a shift in the ppf inward d. a movement from inside the curve toward the curve

b. a shift in the ppf outward

Which of the following will not shift a country's ppf outward? a. an increase in the capital stock b. an advance in technology c. a reduction in unemployment d. an increase in the labor force

c. a reduction in unemployment

Which of the following statements about trade is true? a. unrestricted international trade benefits every person in a country equally. b. people who are skilled at all activities cannot benefit from trade. c. trade can benefit everyone in society because it allows people to specialize in activities in which they have an absolute advantage. d. trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.

d

What do economists generally agree on?

- A ceiling on rents reduces the quantity & quality of housing available - Tariffs & import quotas usually reduce general economic welfare - Flexible & floating exchange rates offer an effective international monetary arrangement - Fiscal policy has a significant stimulative impact on a less than fully employed economy - The US should not restrict employers from outsourcing work to foreign countries - Economic growth in developed countries like the US leads to greater levels of well-being - The US should eliminate agricultural subsidies - An appropriately designed fiscal policy can increase the long-run rate of capital formation - Local & state governments should eliminate subsidies to professional sports franchises - If the federal budget is to be balanced, it should be done over the business cycle rather than yearly

Ten Principles of Economics

1. People face trade-offs 2. The cost of something is what you give up to get it 3. Rational people think at the margin 4. People respond to incentives 5. Trade can make everyone better off 6. Markets are usually a good way to organize economic activity 7. Governments can sometimes improve market outcomes 8. A country's standard of living depends on its ability to produce goods and services 9. Prices rise when the government prints too much money 10. Society faces a short-run trade-off between inflation and unemployment

T/F An auto manufacturer should continue to produce additional autos as long as the firm is profitable, even if the cost of the additional units exceeds the price received.

False. A manufacturer should produce as long as the marginal benefit exceeds the marginal cost

Raising taxes and increasing welfare payments... a. proves there is such a thing as a free lunch b. reduces market power c. improves efficiency at the expense of equality d. improves equality at the expense of efficiency e. does none of the above

d. improves equality at the expense of efficiency

How do you find the slope of the demand curve?

first y-coordinate - second y-coordinate / first x-coordinate - second x-coordinate. When the slope curves down it's negative

circular flow diagram

households are sellers, and firms are buyers. The circular-flow diagram simplifies the economy by including only two types of decision makers: firms and households. Firms produce goods and services using inputs, such as labor, land, and capital. These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce. Therefore, in the markets for the factors of production, households are sellers, and firms are buyers.

In the short run, a reduction in inflation tends to cause a ______ in unemployment

raise