Chapter 5 | Are Your Smart Choices Smart for All?

Question 1

scarcity

Answer 1

the problem that arises from our limited money, time, and energy

Question 2

economics

Answer 2

how individuals, businesses, and governments make the best possible choices to get what they want, and how those choices interact in markets

Question 3

opportunity cost

Answer 3

cost of best alternative given up

Question 4

incentives

Answer 4

rewards and penalties for choices

Question 5

production possibilities frontier

Answer 5

maximum combinations of products or services that can be produced with existing inputs

Question 6

absolute advantage

Answer 6

the ability to produce a product or service at a lower absolute cost than another producer

Question 7

comparative advantage

Answer 7

the ability to produce a product or service

Question 8

opportunity cost formula

Answer 8

give up / get

Question 9

Circular Flow of Economic Life

Answer 9

Individual Households -> Input Markets -> Businesses

Businesses -> Output Markets -> Households

Government

Question 10

model

Answer 10

a simplified representation of the real world, focusing attention on what’s important for understanding

Question 11

inputs

Answer 11

the productive resources – labour, natural resources, capital equipment, and entrepreneurial ability – used to produce products and services

Question 12

positive statements

Answer 12

about what is; can be evaluated as true or false by checking the facts

Question 13

normative statements

Answer 13

about what you believe should be; involve value judgements

Question 14

microeconomics

Answer 14

analyzes choices that individuals in households, individual businesses, and governments make, and how those choices interact in markets

Question 15

macroeconomics

Answer 15

analyzes performance of the whole Canadian economy and global economy; the combined outcomes of all individual microeconomic choices

Question 16

key 1

Answer 16

opportunity costs rule

Question 17

key 2

Answer 17

Look Forward Only to Additional Benefits and Opportunity Costs

Question 18

key 3

Answer 18

Implicit Costs and Externalities Count, Too

Question 19

marginal benefits

Answer 19

the additional benefit from a choice, changing with circumstance

Question 20

marginal opportunity costs

Answer 20

additional opportunity costs from the next choice

Question 21

implicit costs

Answer 21

hidden opportunity costs of what business owner could earn elsewhere with time and money invested

Question 22

negative externalities (external costs)

Answer 22

costs to society from your private choice that affect others, but that you do not pay

Question 23

positive externalities (external benefits)

Answer 23

benefits to society from your private choice that affect others, but that others do not pay you for

Question 24

economic disasters

Answer 24

The Global Financial Crisis

(2008–2009)
involved housing bubbles that
burst, falling asset prices, and failures of banks and financial institutions

Great Depression
(1929–1933)
involved financial bubbles that burst, high unemployment, falling living standards, bankruptcies, and government policy mistakes

Question 25

Fallacy of Composition

Answer 25

what is true for one is not true for all; the whole is greater than the sum of the individual parts

Question 26

Paradox of thrift

Answer 26

attempts to increase saving cause total savings to decrease because of falling employment and incomes

Question 27

Say’s Law

Answer 27

supply creates its own demand

Question 28

Market Failure

Answer 28

market outcomes are inefficient or inequitable and fail to serve the public interest

Question 29

Government Failure

Answer 29

government policy fails to serve the public interest

Question 30

Yes – Left Alone, Market Self-Adjust – Hands Off camp believes

Answer 30

• Macroeconomic and microeconomic outcomes are the same
• External events or government policy cause business cycles
• Government failure is more likely than a market failure
• Government should be hands-off

Politicians on the political right tend to be in Yes – Left Alone, Market Self-Adjust camp, so government hands-off

Question 31

No – Left Alone, Market Fail Often – Hands on camp believes

Answer 31

Fallacy of composition - macroeconomic and microeconomic outcomes are different

Markets cause business cycles through connection failures between input and output markets, roles of money, banking and expectations

Market failure is more likely than government failure

Government should be hands-on

Politicians on the political left tend to be in No – Left Alone, Market Fail Often camp, so government hands-on

Question 32

agreements between camps

Answer 32

Some role for government

Markets eventually adjust, but how long do they take?

Question 33

Outcomes

Answer 33

Good Outcomes:
Higher gross domestic product (GDP)
Lower unemployment
Low and predictable inflation

Question 34

Players

Answer 34

Consumer choices
- Spend income or save
- Buy Canadian products and services, or imports

Business choices
- Investment spending - business purchases of new factories and equipment
- Hiring workers or not
- Buying inputs domestically or importing
- Selling outputs domestically or exporting

Government choices
- Buying products and services
- Fiscal Policy - government purchases, taxes/transfers to achieve the macroeconomic outcomes

Bank of Canada and banking system choices
- Monetary Policy - Bank of Canada changes interest rates and supply of money to achieve the macroeconomic outcomes

Question 35

Your personal economic success is affected by:

Answer 35

GDP - higher GDP per person allows higher living standards

Unemployment - affects odds of finding a job

Inflation - reduces living standards if income does not rise as fast as the prices of what you buy

Interest rates, exchange rates, and government taxes and transfer payments

Question 36

Monetary Policy

Answer 36

Bank of Canada changes interest rates and supply of money to achieve the macroeconomic outcomes

Question 37

Fiscal Policy

Answer 37

government purchases, taxes/transfers to achieve the macroeconomic outcomes

Question 38

Investment spending

Answer 38

business purchases of new factories and equipment
Hiring workers or not