Mid term review ECON 1202

1 Sabrina has gone out to lunch three times this week. She has some extra money, so she decides to go out to lunch a fourth time. Which economic principle does this statement BEST represent?

"How much" is a decision at the margin.

1 You decide whether to eat one more slice of cheesecake based on how hungry you feel. Which economic principle does this statement BEST represent?

"How much" is a decision at the margin.

7 A price index:

All of the above are true. is normalized so that it equals 100 in the base year. is used to measure the cost of a market basket across different years. always includes a base year.

2 (Figure: Speedboats and Pomegranates I) Use Figure: Speedboats and Pomegranates I. The figure shows the production possibility frontiers for two countries that produce only pomegranates and speedboats. The axes of the two graphs are measured in equivalent units. The United States is operating at point M, and Belarus is operating at point N. The opportunity cost of producing an additional ton of pomegranates would be greater in:

Belarus.

1 Which of the following statements describes efficiency? I. A situation in which producers make the highest profits possible. II. A situation in which we cannot produce more of one good without producing less of another good. III. A situation in which we produce the goods and services that people value most highly.

II and III

7 As our econony goes through a business cycle, what is the normal relationship between Inflation and unemployment?

In normal times we see an inverse relationship between inflation and unemployment.

6 a. What three measures of the economy tend to move together during the business cycle? b. Which way do they move during an upturn? c. During a downturn?

Industrial output Employment Inflation They rise. They fall.

5 Which scenario describes the operation of a tariff? not an example of a tarrif

Ireland taxes the import of potatoes in order to keep domestic farmers in business. increased demand

6 Before the Great Depression, the conventional wisdom among economists and policy makers was that the economy is largely self-regulating. a. Is this view consistent or inconsistent with Keynesian economics? Explain. b. What effect did the Great Depression have on conventional wisdom? c. Contrast the response of policy makers during the 2007-2009 recession to the actions of policy makers during the Great Depression. What would have been the likely outcome of the 2007-2009 recession if policy makers had responded in the same fashion as policy makers during the Great Depression?

It is inconsistent with Keynes's conclusion that government intervention in the economy was necessary to maintain full employment. The enormity of the Great Depression demonstrated that the economy was not necessarily self-regulating, and that government intervention would at times be necessary. The Great Recesssion may have approached the severity of the Great Depression.

1 Suppose everyone in a small town decided to save more and spend less. How will this affect an economy? (In macroeconomics, this is called the paradox of thrift.)

It will decrease the overall level of income, since one person's spending is someone else's income.

5 Mexico exports clothing to the United States, and the United States exports heavy equipment to Mexico. Proponents of the Heckscher-Ohlin model would explain this pattern of trade by noting that:

Mexico has a relatively large endowment of factors of production used in making clothing, while the United States has a relatively large endowment of factors of production used in making heavy equipment.

6 ______ are used to reduce the severity of recessions.

Monetary and fiscal policy

5 Although both tariffs and quotas are tools used to restrict or reduce trade, which of the statements best describes their differences?

Tariffs are a tax on imported goods, and quotas are limits on the number of imported goods.

2 The circular-flow diagram ignores a number of real-world complications in the interest of simplicity. Which of the following factors is ignored?

That many sales that firms make are not to households but to other firms.

2 Suppose Pennsylvania produces only steel and barley, with fixed amounts of land, labor, and capital resources. Which scenario BEST sets the stage for economic growth?

The percentage of Pennsylvania residents with a university degree rises from 15% to 23%.

1 When the Chicago city manager receives complaints that the municipal courts are not fully accessible to individuals with disabilities, she responds that the $1 million improvement needed to address the problem will not happen because "that money could be spent building lavatory space for people with disabilities." Which economic principle does this statement BEST represent?

The true cost of something is its opportunity cost.

1 When the economy experiences shortfalls or excesses of spending, government policies can be used to address the imbalances. Which statement does NOT address such imbalances, realized during the coronavirus pandemic?

There is fear of recession and uncertainty about the future in a post COVID-19 reality.

3 The price of good X falls and the demand for good Y decreases. We can conclude that:

X and Y are substitutes.

7 Which of the following illustrates consumption?

a new car purchased for personal use

2 Saying that an unemployment rate of 8% is too high is:

a normative statement.

2 In a situation in which there are technological improvements, we generally see:

a shift in the production possibility frontier outward.

5 If the opportunity cost of producing either of two goods is constant, the production possibility frontier is:

a straight line.

5 (Figure: The Production Possibilities for Taiwan and Japan) Use Figure: The Production Possibilities for Taiwan and Japan. Japan has an absolute advantage in producing:

microchips

1 If a market is in equilibrium:

no individual will be better off doing something different.

2 (Figure: Production Possibilities and Circular-Flow Diagram) Use Figure: Production Possibilities and Circular-Flow Diagram. Assume the two figures represent the same economy. Suppose that in the circular-flow diagram, capital that used to flow to firms producing bananas now flows to firms producing pineapple. This adjustment would be BEST represented in the production possibilities diagram by a move from point A toward:

point B (a decrease in banana production and an increase in pineapple production).

7 The ____ index is likely to respond more quickly to price changes than are the other indexes, so it is regarded as a warning sign of inflation.

producer price index

5 When a market begins to engage in international trade:

producers in the exporting industry may be better off.

5 Advocates of trade barriers suggest that trade restrictions are needed for national security, job creation, and to:

protect new producers until they become more established.

7 If nominal GDP increases from one year to the next, _____ must have risen.

real GDP or prices or both

3 (Figure: Demand for Bananas) Use Figure: Demand for Bananas. If bananas are a normal good, an increase in the incomes of consumers could be represented as a:

shift from D1 to D2.

2 (Figure: Cell Phones and Automobiles) Use Figure: Cell Phones and Automobiles. Technological improvements will likely:

shift the production possibility frontier outward to PPF2.

6 Recessions tend to be _____, and expansions tend to be _____.

short; long

6 Fiscal policy involves changes in _ ___.

taxes and/or government spending

6 The view that the government should take an active role in managing the economy dates from:

the Great Depression.

2 (Scenario: The United States and Germany) Use Scenario: The United States and Germany. Given this information, the country that has the absolute advantage in barley is _____, and the country that has the absolute advantage in aluminum is _____. Scenario: The United States and Germany Two countries, the United States and Germany, produce two goods, barley (B) and aluminum (A). Each has a linear production possibility frontier in both goods. If the United States spends all of its available resources to produce barley, it can produce 500 tons of barley and no aluminum. If it uses all of its resources to produce aluminum, it can produce 250 tons of aluminum and no barley. If Germany spends all of its available resources producing barley, it can produce 400 tons of barley, and if it spends all of its resources on the production of aluminum, it can produce 400 tons of aluminum.

the United States; Germany

1 A sushi chef prepares a California roll for a customer. Which of the following factors is physical capital?

the knife use to cut the sushi

7 Which price index is used to measure changes in the prices that firms pay for goods and services?

the producer price index

6 To address severe economic downturns, such as the Great Depression, Keynesian economists favor

the use of expansionary fiscal policy.

1 Suppose one parent picks up their child from day care, while the other parent stays home to make dinner. This is an example of the principle that:

there are gains from trade.

6 What is the main goal of macroeconomic policy activism?

to reduce the severity of business cycles

2 Economists may disagree about policies because they:

use different economic models.

2 (Figure: Apple Cider and Soybeans) Use Figure: Apple Cider and Soybeans. If this economy is producing at point A and wants to produce at point B, it must:

use its existing resources more efficiently, as opportunity costs are zero.

2 A normative statement is a statement regarding:

what should be

1 You can spend $300 on either a pair of new Air Jordan sneakers or a new skateboard. If you choose to buy the Air Jordans, the opportunity cost is:

your enjoyment of the new skateboard.

2 (Table: Production Possibilities Schedule I) Use Table: Production Possibilities Schedule I. If the economy produces two planes per period, it can also produce, at most, _____ trains per period.

24

7 Which transaction is included in the nation's gross domestic product?

A college student buys a pizza and has it delivered to her dorm room.

3 During the Obama administration, the development of low‑cost batteries for electric cars received large amounts of federal funding via subsidies. Meanwhile, American households gave a higher priority towards minimizing their environmental impact. Consider the market for zero‑emissions electric vehicles, where there is an upward‑sloping supply curve and a downward‑sloping demand curve. In which direction will demand and supply shift? What will happen to the equilibrium price?

Both curves will shift right. The price will change ambiguously.

3 (Figure: Supply of Bananas) Use Figure: Supply of Bananas. A rise in the prices of inputs (e.g., labor, fertilizer, and fuel) used to produce and transport bananas could be represented in the figure as a movement from:

C to A.

3 The U.S. government has subsidized ethanol production since 1978. With the advent of affordable electric cars, policymakers are considering whether to allow the subsidy to expire. The accompanying graph represents the market for ethanol. Move the supply and/or demand curves to show how reducing the subsidy will affect the ethanol market.

Equilibrium price Increase Equilibrium quantity decreases

6 John Maynard Keynes believed that the government should:

actively try to mitigate the effects of recessions through fiscal and monetary policies.

1 If an economy is efficient:

all opportunities to make people better off without making other people worse off have been exploited.

7 (Figure: Circular-Flow Model) Use Figure: Circular-Flow Model. If the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of it), and there is an increase in government spending, holding everything else constant, which outcome is likely to occur?

an increase in nominal GDP

2 (Figure: Comparative Advantage) Use Figure: Comparative Advantage. Canada has an absolute advantage in producing:

apples only.

7 Goods that are sold in 2020 but produced in 2018:

are included in investment in 2018.

6 For the past several months, per capita output has grown more and more slowly, and unemployment has fallen, but both trends appear to have leveled off. Where in the business cycle is the economy?

at a peak

2 (Figure: Dreamliners and Small Jets) Use Figure: Dreamliners and Small Jets. On this figure, points A, B, E, and F indicate:

combinations of dreamliners and small jets that society can produce, using all of its factors efficiently.

7 In the circular-flow diagram, the value of household income (the sum of wages, dividends, interest, rental income, and transfer payments) equals the sum of:

consumer spending, private saving, and household tax payments.

7 The consumer price index measures the cost of the _____ of a family of ____ living in a typical U.S. city.

consumption; four

1 A trade-off involves weighing

costs and benefits.

3 If a demand curve is downward sloping, a decrease in supply with no change in demand will lead to a(n) _____ in the equilibrium quantity and a(n) _____ in the equilibrium price.

decrease; increase

6 The central mission of modern macroeconomics is to prevent:

deep recessions, like the Great Depression.

7 Intermediate goods are NOT counted in GDP because:

doing so would result in double counting.

1 An economy has achieved _____ if it has not passed up any opportunities to make some people better off without making others worse off.

efficiency

1 A decrease in efficiency means that an economy has:

made more people worse off without making others better off.

7 If real GDP rises while nominal GDP falls, then prices on average have:

fallen

6 The paradox of thrift implies that:

families may end up worse off by saving than if they had acted more "irresponsibly" by consuming.

7 The total value of all ____ goods and services produced in the economy in a given year, calculated using the prices current in the year in which the output is produced, is ____ GDP.

final; nominal

5 International trade has many tradeoffs for each country. Overall, what has been the global trend in trade policies from 1950 to 2000?

from closedness to openness

6 John Maynard Keynes developed some of his main ideas during the Great Depression of the 1930s. The Great Depression was characterized by

high unemployment and substantial deflation.

5 If the United States imposes an import quota on Portuguese port, the result in the short run is likely to be _____ profits for American wine producers and _____ profits for Portuguese port producers.

higher; lower

1 If Isabella drives to a Kansas City, 120 miles from Manhattan, Kansas (home of Kansas State University) to do her back-to-school shopping, this will:

hurt Isabella's community because Isabella's spending will be income for people in the large city.

6 If workers' nominal wages have risen by 50% over 10 years, and prices have increased by 40% during that period, then we can safely conclude that the goods and services workers can buy have:

increased in quantity.

2 Trade can be beneficial to an economy because:

it enables more goods and services to be obtained at a lower opportunity cost.

3 Spaghetti and lasagna are substitutes. Holding all other things constant, this means that if the price of spaghetti increases, the demand for:

lasagna will increase.