Ch. 1

Question 1

Economics is best defined as the study of

Answer 1

How society manages its scarce resources

Question 2

A marginal change is one that

Answer 2

Incrementally alters an existing plan

Question 3

Adam Smith’s “Invisible Hand,” refers to

Answer 3

The ability of free markets to reach desirable outcomes, despite the self interest of market participants

Question 4

Governments may intervene in a market economy in order to

Answer 4

Protect property rights, correct a market failure due to externalities, and achieve a more equal distribution of income.

Question 5

If a nation has high and persistent inflation, the most likely explanation is

Answer 5

The central bank creating excessive amounts of money

Question 6

Why is a country better off not isolating itself from other countries?

Answer 6

Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services.

Question 7

Why do we have markets, and according to economists, what roles should government play in them?

Answer 7

Markets are a good way to organize economic activity, and governments role to protect property rights, correct a market failure due to externalities, and achieve a more equal distribution of income.

Question 8

Explain the 3 principles that describe how the economy as a whole works

Answer 8

1. Higher productivity increases the standard of living. 2. Prices rise when too much money is printed. 3. Over a short period of time, economic policy will push inflation and unemployment in opposite direction.