Common sense economics

Question 1

“Cash for Clunkers” program

Answer 1

in US required car dealers to destroy used cars.

Question 2

Reserve price

Answer 2

minimum price you will accept for something

Question 3

The 1974 Nobel Prize recipient Friedrich Hayek called the market system a

Answer 3

“marvel” because just one indicator, the market price of a commodity, spontaneously carries so much information that it guides buyers and sellers to make decisions that help both obtain what they want.

Question 4

“The Use of Knowledge in Society,”

Answer 4

F. A. Hayek

Question 5

titled Economics in One Lesson

Answer 5

In 1946, Henry Hazlitt. This economics primer, which builds on the 1850 essay by the Frenchman Frédéric Bastiat, is perhaps the all-time bestselling treatise in economics.

Question 6

Henry Hazlitt warns against

Answer 6

common economics fallacies such as the broken window fallacy, saying that we should not only look at primary consequences but also secondary and the long run results.

Question 7

“Once you start thinking about economic growth, it is hard to think about anything else.”

Answer 7

Robert Lucas, the 1995 Nobel Laureate in economics

Question 8

favoritism

Answer 8

Unfair support shown to one person or group, especially by someone in authority. Bad for the economy

Question 9

rule of law

Answer 9

The effective understanding that everyone is subject to the same laws, preventing some from creating laws that they will not have to abide by.

Question 10

The great economist Joseph Schumpeter referred to this dynamic competition as

Answer 10

“creative destruction,” and he argued that it formed the very core of economic progress.

Question 11

creative destruction

Answer 11

The replacement of old products and production methods by innovative new ones that consumers judge to be more valuable. The process generates economic growth and higher living standards. Joseph Schumpeter

Question 12

Where na you open a business the fastest?

Answer 12

New Zealand and Georgia, where the process could be completed in half a day.

Question 13

rent-seeking

Answer 13

Actions by individuals and interest groups designed to restructure public policy in a manner that will either directly or indirectly redistribute more income to themselves.

Question 14

Only 1 out of every 7 minimum wage workers (about 15 percent) is

Answer 14

the primary earner for a family with one or more children.

Question 15

occupational licensing

Answer 15

: A requirement that a person obtain permission from the government in order to perform certain business activities or work in certain occupations.

Question 16

certification

Answer 16

Confirms the education, training, and other qualifications of an individual. Unlike licensing, certification does not prohibit noncertified individuals from competing in the market.

Question 17

zero-sum game

Answer 17

The situation in game theory in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero. In the financial markets, options and futures are examples of zero-sum games, excluding transaction costs.

Question 18

The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, commonly known as

Answer 18

Fannie Mae and Freddie Mac, were chartered by Congress as government-sponsored corporations in 1968 and 1970, respectively.

Question 19

foreclosure rate

Answer 19

The percentage of home mortgages on which the lender has started the process of taking ownership of the property because the borrower has failed to make the monthly payments.

Question 20

mortgage default rate

Answer 20

The percentage of home mortgages on which the borrower is ninety days or more late with the payments on the loan or it is in the foreclosure process. This rate is sometimes referred to as the serious delinquency rate.

Question 21

crony capitalism

Answer 21

A situation where the institutions of markets are maintained, but the allocation of resources, and the profit and loss of businesses, are substantially influenced by political decision-making rather than consumer purchases and market forces. To a large degree, the activities of business firms are directed and controlled by government subsidies, contracts, and regulations. In turn, many of the business firms will use contributions and other forms of political support to compete for government favors.

Question 22

aggregated taxes

Answer 22

income tax and social tax together

Question 23

“flat tax,”

Answer 23

under which the marginal tax rate is the same for all income levels above a certain minimum.

Question 24

As Henry George noted

Answer 24

trade restraints are like a military blockade that a nation imposes on its own people. Just as a blockade imposed by an enemy will harm a nation, imposing a blockade in the form of trade restrictions also harms the nation.

Question 26

lobbyist: LOBBY (verb)

Answer 26

To “lobby” in a political context is to argue for lawmakers to adopt rules or laws that benefit a particular financial or other interest. (noun) A “lobby” is a group of people seeking to influence politicians or public officials on a particular issue. An individual member of such a group is called a “lobbyist.” The term originates because lobbyists often approached lawmakers in the vestibules or lobby of legislative buildings.

Question 27

Small countries benefit from trade more than large.

Answer 27

The poor in particular have benefited from the freer trade. Worldwide the number of people in extreme poverty fell by over 1.1 billion between 1980 and 2015, falling from 40% of the world’s population to less than 10%. Today approximately two- thirds of products exported from developing countries to the rest of the world face zero tariffs.

Question 28

Smoot-Hawley tariff

Answer 28

Legislation passed in the United States in June 1930 that increased tariff rates by approximately 50 percent. Other countries retaliated and international trade fell sharply. The legislation was a major contributing factor to the Great Depression.

Question 29

socialism

Answer 29

The set of beliefs that states that all people are equal and should share equally in a country’s money, or the political systems based on these beliefs.

Question 30

economic institutions

Answer 30

The legal, regulatory, and monetary rules, laws, and customs that affect the security of property rights, enforcement of contracts, and the volume of exchange. They exert a major impact on transaction costs between parties, particularly when the trading partners do not know each other.

Question 31

Countries with most economic freedom

Answer 31

Singapore, Switzerland, Ireland, Taiwan, New Zealand

Question 32

Countries with least economic freedom

Answer 32

Venezuela, Zimbabwe, Syria

Question 33

Extreme poverty means

Answer 33

living on $1.90 per person per day while moderate poverty means less than $3.20 a day (U.S. dollars adjusted for price differences).

Question 34

special-interest issue

Answer 34

An issue that generates substantial individual benefits to a small organized minority while imposing a small individual cost on many other voters.

Question 35

logrolling

Answer 35

The exchange between politicians of political support on one issue for political support on another. Exchange of favours for example voting for each other

Question 36

pork-barrel legislation

Answer 36

Government spending projects that benefit local areas but which are paid for by taxpayers at large. The projects typically have costs that exceed benefits; the residents of the district getting the benefits want these projects because they do not have to pay much of the costs.

Question 37

pork-barrelling

Answer 37

Government projects or appropriations yielding rich patronage benefits. Often included in legislation unrelated to the use of these funds.

Question 38

Keynesians argued that rather than balancing the budget

Answer 38

the government should run budget deficits during periods of recession and shift toward a budget surplus when there was concern about inflation.

Question 39

shortsightedness effect

Answer 39

Misallocation of resources that results because public sector action is biased (1) in favor of proposals yielding clearly defined current benefits in exchange for difficult-to-identify future costs; and (2) against proposals with clearly identified current costs but yielding less concrete and less obvious future benefits.

Question 40

There are two ways individuals can acquire wealth

Answer 40

production and plunder.

Question 41

plunder

Answer 41

The act of acquiring things by taking them from others.

Question 41

subsidiarity

Answer 41

An organizing principle that matters ought to be handled by the smallest, lowest, or least centralized competent authority. Political decisions should be taken at a local level if possible, rather than by a central authority.

Question 41

decentralization (of government)

Answer 41

The transfer of authority from central to local government.

Question 42

Possible systems

Answer 42

Parliamentary, Presidential, semi – presidential

Question 43

The philosopher John Locke, writing in the late seventeenth century, claimed that

Answer 43

the right to own and use private property was a “natural right” and that the “preservation of property” was the “great and chief end” for which human beings created governments.

Question 44

zero-sum game

Answer 44

The situation in game theory in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero. In the financial markets, options and futures are examples of zero-sum games, excluding transaction costs.

Question 45

treasury bill

Answer 45

A form of short-term government debt on which interest is paid at the end of the borrowing period. They are used for managing fluctuations in the government’s short-run cash needs.

Question 46

certificates of deposit (CD)

Answer 46

A Savings certificate with a fixed maturity date and specified fixed interest rate, which can be issued in any denomination aside from minimum investment requirements. Such instruments restrict access to the funds until the maturity date of the investment. Certificates of Deposit is the term used in the United States. Similar instruments exist in most countries although the name may differ. In the EU these are known as “Fixed Rate” or “Fixed Deposit” accounts.

Question 47

housing crisis of 2008–2009

Answer 47

A major decline in housing prices in many countries at around the same time. Between 2007 and 2010 house prices in Ireland fell by approximately 35%, while in the US housing prices fell by about 16% during the same period. These declines led to many borrowers having negative value in their houses (market price less outstanding mortgage). Many borrowers chose to default on their mortgage, causing problems for banks around the world and leading to various forms of government “bailouts.”

Question 48

Coverage

Answer 48

the maximum amount the insurance policy will pay in the event of a loss.

Question 49

An auto policy is typically structured with a few basic coverages, or types of loss.

Answer 49

Collision pays for damages to your car in the event of an accident.

Comprehensive pays for non-collision damages such as theft, vandalism, and acts of nature like a tree branch falling on your windshield.

Liability coverage, sometimes known as Motor Third-Party Liability (MTPL), comes in two forms. First, it pays others for damages to their person or vehicle caused by the operation of your automobile.
Second, it pays damages to you and your passengers for medical expenses and death benefits.

Question 50

If you choose a higher deductible

Answer 50

your premiums will generally be lower.

Question 51

deductible is

Answer 51

the amount of money that the insured person must pay before their insurance policy starts paying for covered expenses.

Question 52

The payments made for healthcare insurance come in four forms.

Answer 52

First, premiums (or taxes) are paid to obtain the coverage offered by the plan. Second, a deductible may apply. Third, there is the copay, which is a fee for a particular service such as a doctor office visit or prescription. Fourth, coinsurance is the percent of the medical bill the customer must pay. For example, a plan may require the customer to pay 20 percent of the bill for a hospital stay or medical procedure. In some countries, supplementary private insurance is available to cover the copay or the coinsurance.

Question 53

Who can gain most from appropriate insurance?

Answer 53

The poor

Question 54

recognized the crucial connection between exchange and productivity

Answer 54

Adam Smith

Question 55

First, the productive cooperation of the marketplace depends on

Answer 55

freedom, and second, freedom depends on the productive cooperation of the marketplace.

Question 56

Austrian economist F. A. Hayek pointed out

Answer 56

“The benefits I derive from freedom are . . . largely the result of the uses of freedom by others.”(2) For example, those who suffer the most when people lose their freedom to become barbers without having to pass state exams on the chemical composition of hair are not aspiring barbers, but people who need haircuts.

Question 57

So government commonly becomes the means by which people can gain private advantage through

Answer 57

confiscation(taking away someones property) rather than through cooperation

Question 58

One of the most important insights in economics was made by F.A. Hayek in a famous article titled “The Use of Knowledge in Society” (American Economic Review, September 1945). Hayek’s insight was simple, but powerful

Answer 58

the information necessary for making sensible economic choices is far too dispersed and difficult to articulate ever to be possessed by any one person or group of experts. Hayek emphasized in his article that only through market prices can people become sufficiently informed to direct resources into their most valuable uses. Eliminate market prices, or distort them with politically imposed ceilings or floors, and you systematically destroy the information that people need to avoid wasting resources.

Question 59

In presidential democracies

Answer 59

the chief of the executive branch of government (the president) is elected independently of the legislative branch of government (the parliament). The Parliament thus does not have the power to vote down the president, except via impeachment, under exceptional circumstances.

Question 60

In a parliamentary system

Answer 60

the executive (the prime minister) is voted in by the parliament, which also has the power to bring down the government via a failed vote of confidence. Thus there is no constitutional separation of executive and legislative power in parliamentary systems.

Question 61

parliamentary parties tend to be more

Answer 61

disciplined and cohesive than parties in a presidential system.

Question 62

In majoritarian people vote for politicians and in proportional people vote for

Answer 62

political parties(if party gets 20% of votes then it gets 20% of seats in the parliament)

Question 63

Presidential majoritarian elections

Answer 63

Pros - strong separation of powers possible
Cons
* excessive concentration of powers in hands of president
* less party discipline,
* more pork barrel politics
* possible paralysis of government

Question 64

Parliamentary majoritarian elections

Answer 64

Pros - fast and efficient decision-making strong party discipline
Cons –
* no separation of powers between executive and legislature
* minorities can be durably excluded from government
* some minorities and localities may be too favored

Question 65

Presidential proportional elections

Answer 65

Pros - strong separation of powers possible
Cons –
* excessive concentration of powers in hands of president
* less party discipline, more pork barrel politics
* possible paralysis of government
* more fragmentation gives more power to the president and makes clientelism even worse

Question 66

Parliamentary proportional elections

Answer 66

Pros –
* inclusive majorities
* strong party discipline
* universalistic public goods
Cons
* no separation of powers between executive and legislature
* slower and less efficient decision-making
* excess power to minority government partners
* less government stability

Question 67

Alt-A loans

Answer 67

Loans extended with little documentation and or verification of the borrowers’ income, employment, and other indicators of their ability to repay. Because of this poor documentation, these loans are risky.

Question 68

money market certificate

Answer 68

A type of savings product in which a bank or lending institution invests your money in a variety of investments.

Question 69

principal

Answer 69

The amount of funds borrowed. The borrower will pay interest on this amount.

Question 70

As a rule of thumb, economists define a recession as

Answer 70

two consecutive quarters in which there is a decline in real GDP.

Question 71

shortsightedness effect:

Answer 71

Misallocation of resources that results because public sector action is biased (1) in favor of proposals yielding clearly defined current benefits in exchange for difficult-to-identify future costs; and (2) against proposals with clearly identified current costs but yielding less concrete and less obvious future benefits.