Econ Ch. 2 Test

Question 1

What is a model?

Answer 1

a representation of something on a smaller scale than the original to help explain how it works

Question 2

Why do we have models?

Answer 2

They help explain large, complex things on a small scale

Question 3

Types of economic models

Answer 3

Table/Schedule, Line Graphs, Production Possibilities Curve (PPC), Circular Flow Model (CFM)

Question 4

T/F Line graphs show less detail than a table/schedule

Answer 4

False, Line graphs show more detail than a table/schedule

Question 5

What is a model of what/how much can be produced with different variable

Answer 5

Production Possibilities Curve

Question 6

In a PPC model, where is production efficient, inefficient, and not possible?

Answer 6

Efficient: On the Curve
Inefficient: Below the Curve
Not Possible: Above/Outside the Curve

Question 7

Illustrates economic behavior of nations

Answer 7

Circular Flow Model (CFM)

Question 8

4 main players in a CFM

Answer 8

Business Firms, Households, Government, Financial Market

Question 9

4 factors of production

Answer 9

• Land (natural resources)
• Labor (human effort)
• Capital (financial and real)
• Entrepreneurship (finds new and unique goods and services-Most important of the 4)

Question 10

4 Factor Costs

Answer 10

• Rent (payment for use of property)
• Wages (payment for labor)
• Interest (payment on borrowed money)
• Profit (difference in revenue and cost)

Question 11

Costs of producing the factors of production; paid from business firms to households

Answer 11

Factor Costs

Question 12

Produce things to be sold/bought

Answer 12

Business Firm

Question 13

Includes all things produced and sold by business firms

Answer 13

GDP (Gross Domestic Product)

Question 14

Difference in real and financial capital

Answer 14

Financial- actual money spent to produce goods

Real-tools used to produce goods

Question 15

Includes consumers who purchase things and make up the consumption expenditures that fund businesses

Answer 15

Households

Question 16

Money or goods given to people from government with no required repayment such as welfare, SS, disability

Answer 16

Transfer Payments

Question 17

Occurs when the government makes less than it spends

Answer 17

Budget Deficit (opposite-the government takes in more than it makes-surplus)

Question 18

Collection of a nation’s financial institutions that receive deposits of excess funds from households and lend them to business firms/other households

Answer 18

Financial Market (main function is to circulate money from houses to businesses)

Question 19

Know the Circular Flow Model

Answer 19

*

Question 20

When the government borrows, it lowers amount available for Business Firms to borrow which can cause an inability for BF to invest/grow

Answer 20

Crowding Out (can lead to a chain reaction in the rest of economy)