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Question 1

Economics

Answer 1

The study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.

Question 2

Macroeconomics

Answer 2

The part of economics study that looks at the operation of a nation’s economy as a whole.

Question 3

Microeconomics

Answer 3

The part of economics study that looks at the behavior of people and organizations in particular markets.

Question 4

Resource development

Answer 4

The study of how to increase resources and to create conditions that will make better use of those resources.

Question 5

Examples of ways to increase resources

Answer 5

New energy sources
New ways of growing foods
New ways of creating goods and services

Question 6

Thomas Malthus and the dismal science

Answer 6

Malthus believed that if the rich had most of the wealth and the poor had most of the population, resources would run out.
This belief led the writer Thomas Carlyle to call economics “the dismal science.”

Question 7

Population as a resource

Answer 7

Contrary to Malthus, some macroeconomists believe a large population can be a resource.
An educated population is highly valuable.
Business owners provide jobs and economic growth for their employees and communities as well as for themselves.

Question 8

Adam Smith and the Creation of Wealth

Answer 8

Smith believed that:
Freedom was vital to any economy’s survival.
Freedom to own land or property and the right to keep the profits of a business is essential
People will work if they believe they will be rewarded.

Question 9

What might motivate you to start your own business?

Answer 9

Business owners are motivated to work hard because they know they will earn, and keep, the rewards. When they prosper, they are able to grow, indirectly helping the community and the larger economy grow in the process.

Question 10

Invisible hand theory

Answer 10

As people improve their own situation in life, they help the economy prosper through the production of goods, services and ideas.
Invisible hand — A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.

Question 11

Understanding the invisible hand theory

Answer 11

A farmer earns money by selling his crops.
To earn more, the farmer hires workers to produce more crops.
When the farmer produces more, there is plenty of food for the community.
The farmer helped his employees and his community while helping himself.

Question 12

Capitalism

Answer 12

An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit.

Question 13

Countries with capitalist systems:

Answer 13

United States
England
Australia
Canada

Question 14

State capitalism

Answer 14

A combination of freer markets and some government control.

Question 15

Capitalism’s Four Basic Rights

Answer 15

The right to own private property
The right to own a business and keep all that business’s profits
The right to freedom of competition
The right to freedom of choice

Question 16

Roosevelt’s Four Additional Freedoms

Answer 16

Freedom of speech and expression
Freedom to worship in your own way
Freedom from want
Freedom from fear

Question 17

Free market

Answer 17

Decisions about what and how much to produce are made by the market.
Consumers send signals about what they like and how they like it.
Price tells companies how much of a product they should produce.
If something is wanted but hard to get, the price will rise until more products are available.

Question 18

How Prices Are Determined

Answer 18

A seller may want to sell shirts for $50, but only a few people may buy them at that price.
If the seller lowers the price, quantity demanded increases.

Question 19

Supply

Answer 19

The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time.

Question 20

Demand

Answer 20

The quantity of products that people are willing to buy at different prices at a specific time.

Question 21

Market price (equilibrium point)

Answer 21

The price determined by supply and demand.

Question 22

Perfect Competition

Answer 22

is the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product. Sellers produce products that appear to be identical. There are no true examples of perfect competition, but agricultural products are often used as an example.

Question 23

Monopolistic Competition

Answer 23

is the degree of competition in which a large number of sellers produce very similar products that buyers nevertheless perceive as different

Question 24

PRODUCT DIFFERENTIATION

Answer 24

making buyers think similar products are different, is a key to success. The fast-food industry is an example.

Question 25

Oligopoly

Answer 25

is a degree of competition in which just a few sellers dominate a market. The initial investment required to enter the market is usually high. Prices among competing firms tend to be close to the same. Examples include breakfast cereal and soft drinks.

Question 26

Monopoly

Answer 26

is a degree of competition in which only one seller controls the total supply of a product or service, and sets the price. U.S. laws prohibit the creation of monopolies, but do permit approved monopolies in markets for public utilities. New laws have ended the monopoly status of utilities in some areas, creating intense competition among utility companies. Deregulation is meant to increase competition and lower prices for consumers.

Question 27

Benefits and Limitations of Free Markets

Answer 27

Benefits:
It allows for open competition among companies.
It provides opportunities for poor people to work their way out of poverty.
Limitations:
People may start to let greed drive them.

Question 28

Socialism

Answer 28

An economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be more evenly distributed among the people.

Entrepreneurs run smaller businesses.
Citizens are highly taxed.
Government is more involved in protecting the environment and the poor.

Question 29

Benefits of Socialism

Answer 29

Social equality
Free education
Free health care
Free child care
Longer vacations
Shorter work weeks
Generous sick leave

Question 30

Negative Consequences of Socialism

Answer 30

Few incentives for businesspeople to take risks.
Brain drain — The loss of the best and brightest people to other countries.
Fewer inventions and less innovation because the reward is not as great as in capitalistic countries

Question 31

Communism

Answer 31

An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production.

Prices don’t reflect demand, which may lead to shortages of items, including food and clothing.
Most communist countries today suffer severe economic depression.

Question 32

Two Major Economic Systems

Answer 32

Free-market economies — Economic systems in which the market largely determines what goods and services get produced, who gets them, and how the economy grows.
Command economies — Economic systems in which the government largely decides what goods and services will be produced, who will get them, and how the economy will grow.

Question 33

Neither free-market nor command economies have created sound economic conditions.

Answer 33

Communist governments are disappearing.
Socialist governments are cutting back on social programs, lowering taxes, and moving toward capitalism.
Capitalist countries are increasing social programs and moving more toward socialism.

Question 34

Mixed economies

Answer 34

Economic systems in which some allocation of resources is made by the market and some by the government.

Question 35

Gross domestic product (GDP)

Answer 35

The total value of final goods and services produced in a country in a given year.
As long as a company is within a country’s border, their numbers go into the country’s GDP (even if they are foreign-owned).
When the GDP changes, businesses feel the effect.

Question 36

Gross output (GO)

Answer 36

A measure of total sales volume at all stages of production.

Question 37

Unemployment rate

Answer 37

The number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks.

Question 38

Four Types of Unemployment

Answer 38

Frictional
Structural
Cyclical
Seasonal

Question 39

Inflation

Answer 39

A general rise in the prices of goods and services over time.

Question 40

Disinflation

Answer 40

A situation in which price increases are slowing (the inflation rate is declining)

Question 41

Deflation

Answer 41

A situation in which prices are declining.

Question 42

Stagflation

Answer 42

situation when the economy is slowing but prices are going up anyhow.

Question 43

Consumer price index (CPI)

Answer 43

Monthly statistics that measure the pace of inflation or deflation.

Question 44

Core inflation

Answer 44

CPI minus food and energy costs

Question 45

Producer Price Index (PPI)

Answer 45

An index that measures the change in prices at the wholesale level.

Question 46

Productivity in the United States

Answer 46

Productivity in the U.S. has risen due to the technological advances that have made production faster and easier.
High productivity through computers and robots can lead to high unemployment

Question 47

Productivity in the Service Sector

Answer 47

New technology adds to the quality of the services provided, but not to the worker’s output.
A new form of measurement needs to be created to account for the quality as well as the quantity of output.

Question 48

Business cycles

Answer 48

The periodic rises and falls that occur in economies over time.

Question 49

Four phases of long-term business cycles:

Answer 49

Economic Boom
Recession — Two or more consecutive quarters of decline in the GDP.
Depression — A severe recession, usually accompanied by deflation.
Recovery — When the economy stabilizes and starts to grow, eventually leading to an economic boom.

Question 50

Fiscal policy

Answer 50

The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.
Tools of fiscal policy:
Taxation
Government spending

Question 51

National deficit

Answer 51

The amount of money the federal government spends beyond what it collects in taxes for a given fiscal year.

Question 52

National debt

Answer 52

The sum of government deficits over time.

Question 53

National surplus

Answer 53

When the government takes in more revenue than it spends.

Question 54

Monetary policy

Answer 54

The management of the money supply and interest rates by the Federal Reserve Bank.
The Fed’s most visible role is raising and lowering of interest rates.
When the economy is booming, the Fed tends to raise interest rates.
When the economy is in a recession, the Fed tends to decrease the interest rates.

Question 55

The Functions of the Federal Reserve Board

Answer 55

To control the money supply with monetary policy
To regulate financial institutions
To manage regional and national check-clearing procedures
To supervise the federal deposit insurance of commercial banks in the Federal Reserve System

Question 56

Open Market Operations:

Answer 56

the decision to buy or sell U.S. Treasury bills, which are short term debt issued by the U.S. Government, and other investments in the open market.
Buy government securities The money supply increases; economic activity increases.
Sell government securities The money supply decreases; economic activity slows down.

Question 57

Reserve Requirements:

Answer 57

the percentage of deposits that banking institutions must hold in reserve, these funds are not available for lending
Increase reserve requirements Banks make fewer loans; the money supply declines; economic activity slows down.
Decrease reserve requirements Banks make more loans; the money supply increases; economic activity increases.

Question 58

Discount Rate:

Answer 58

the rate of interest the Fed charges to loan money to any banking institution.
Raise discount rate Interest rates increase; the money supply decreases; economic activity slows down.
Lower discount rate Interest rates decrease; the money supply increases; economic activity increases.

Question 59

Credit Controls

Answer 59

Relax credit controls More people are encouraged to make major purchases, increasing economic activity.
Restrict credit controls People are discouraged from making major purchases, decreasing economic activity.