Exam 6 Flashcards
In economics, the pleasure, happiness, or satisfaction received from a product is called
utility
Joe sold gold coins for $1,000 that he bought a year ago for $1,000. He says, at least I didn’t lose any money on my financial investment. His economist friend points out that in effect he did lose money because he could have received a 3 percent return on the $1,000 if he had bought a bank certificate of deposit instead of the coins. The economist’s analysis in this case incorporates the idea of
opportunity costs
Macroeconomics is mostly focused on
the economy as a whole
Which of the following most closely relates to the idea of opportunity costs?
trade-offs
One reason some manufacturing companies have moved production from overseas locations back to the United States is an increasing preference by U.S. consumers for products made in the United States. If buyers have increased their preference for domestically produced goods and manufacturers believe they can increase revenues by supplying more of these goods, firms are following which key economic idea when they return production to the United States?
people respond to economic incentives
Economics is the study of the ________ people make to attain their goals, given their ________ resources.
choices; scarce
Which of the following best describes an assumption economists make about human behavior?
They assume that rational behavior is useful in explaining choices people make even though people may not behave rationally all the time
An office supply store sells a ream of printer paper at a fixed price of $4.50. Which of the following is a term used by economists to describe the money received from the sale of an additional ream of paper?
marginal revenue
The town of Harmonia gives away all 500 tickets to its annual Founder’s Day Free Concert-in-the-Park to local residents. Each year, more than 500 people wish to attend the concert, so some of the residents who receive the free tickets sell them for as much as $75 each. Is a transaction where someone pays a resident $75 for a “free ticket” economically efficient?
Yes, it was a voluntary exchange that benefited both parties
How are the fundamental economic decisions determined in Canada?
Individuals, firms, and the government interact in a market to make these economic decisions
Which of the following statements is true about profit?
Profit is the difference between revenue and cost
In economics, the accumulated skills and training that workers have is known as
human capital
Which of the following is a microeconomic statement?
the price of smartphones declines 2.8 percent last year
Technology is defined as
the processes used to produce goods and services
Households ________ factors of production and ________ goods and services
supply; demand
Which of the following statements is true about revenue?
Revenue is the total amount received for selling a good or service
The simple circular flow model shows that
Households are on the selling side of the resource market and on the buying side of the product market
Because successive units of a good produce less and less additional satisfaction, the price must fall to encourage a buyer to purchase more units of the good. This statement is most consistent with which explanation for the law of demand?
diminishing marginal utility
Which of the following is a fundamental characteristic of the market system?
property rights
The production possibilities frontier model shows that
if all resources are fully and efficiently utilized, more of one good can be produced only by producing less of another good
The points outside the production possibilities frontier are
unattainable
You have an absolute advantage whenever you
can produce more of something than others with the same resources
Bella can produce either a combination of 60 silk roses and 80 silk leaves or a combination of 70 silk roses and 55 silk leaves. If she now produces 60 silk roses and 80 silk leaves, what is the opportunity cost of producing an additional 10 silk roses?
25 silk leaves
Comparative advantage means the ability to produce a good or service
at a lower opportunity cost than any other producer
Competition means that
there are independetly acting buyers and sellers in each market
The law of demand states that, other things equal
price and quantity demanded are inversely relate
Which of the following statements is correct?
An increase in the price of C will decrease the demand for complementary product D
Suppose that tacos and pizzas are substitutes, and that soda and pizza are complements. We would expect an increase in the price of pizza to
increase the demand for tacos and decrease the demand for soda
If the amount of carbonated sodas consumed continues to decline as consumers continue to choose to buy healthier products, this will likely
increase the demand for premium water, because premium water and carbonated sodas are considered substitutes
What is the difference between an “increase in demand” and an “increase in quantity demanded”?
An “increase in demand” is represented by a rightward shift of the demand curve while an “increase in quantity demanded” is represented by a movement along a given demand curve
The income effect of a price change refers to the impact of a change in
the price of a good on a consumer’s purchasing power
The internet has created a new category in the book selling market, namely, the “barely used” book. How does the availability of barely used books affect the market for new books?
the demand curve for new books shift to the left
A(n) _________ is represented by a leftward shift of the demand curve while a(n) _______ is represented by a movement along a given demand curve.
decrease in demand; increase in quantity demanded
If the price of beef jerky rises, then the substitution effect due to the price change will cause
a decrease in the quantity of beef jerky demanded
In September, buyers of silver expect that the price of silver will rise in October. What happens in the silver market in September, holding all else constant?
The demand curve shifts to the right
A firm has an incentive to decrease supply now and increase supply in the future if it expects that
The price of its product will be higher in the future than it is today
Which of the following would shift the supply curve for smartphones to the right?
a decrease in the price of an input used to produce smartphones
Let D=demand, S=supply, P=equilibrium price, and Q=equilibrium quantity. What happens in the market for tropical hardwood trees if the governments restrict the amount of forest lands that can be logged?
S decreases, D no change, P increases, Q decreases
Let D=demand, S=supply, P=equilibrium price, Q=equilibrium quantity. What happens in the market for walnuts if the Centers for Disease Control and Prevention announces that consuming a half cup of walnuts each week helps to lower levels of bad cholesterol?
D increases, S no change, P and Q increase
Which of the following would cause the equilibrium price of white bread to decrease and the equilibrium quantity of white bread to increase?
a decrease in the price of flour
Producer surplus is the difference between
the minimum prices producers are willing to accept for a product and the higher equilibrium price
Economic growth can be portrayed as
an outward shift of the production possibilities curve
Marginal cost is
the additional cost to a firm of producing one more unit of a good or service
Refer to Figure 4-1. Arnold’s marginal benefit from consuming the third burrito is
$1.50
Refer to Figure 4-1. If the market price is $1.00, what is the consumer surplus on the third burrito?
$0.50
Refer to Figure 4-1. If the market price is $1.00, what is Arnold’s consumer surplus?
$3.00
Suppliers will be willing to supply a product only if
the price received is at least equal to the additional cost of producing the product
In a competitive market equilibrium
the marginal benefit equals the marginal cost of the last unit sold
________ refers to the reduction in economic surplus resulting from not being in competitive equilibrium
Deadweight loss
Figure 4-6 shows the market for granola. The market is initially in equilibrium at a price of P1 and a quantity of Q1. Now suppose producers decide to cut output to Q2 in order to raise the price to P2. What area represents consumer surplus at P2?
A
Figure 4-6 shows the market for granola. The market is initially in equilibrium at a price of P1 and a quantity of Q1. Now suppose producers decide to cut output to Q2 in order to raise the price to P2. Refer to Figure 4-6. What area represents producer surplus at P2?
B + D
Figure 4-6 shows the market for granola. The market is initially in equilibrium at a price of P1 and a quantity of Q1. Now suppose producers decide to cut output to Q2 in order to raise the price to P2. Refer to Figure 4-6. What area represents the deadweight loss at P2?
C + E
Table 4-7 shows the demand and supply schedules for the labor market in the city of Pixley. Refer to Table 4-7. What is the equilibrium hourly wage (W) and the equilibrium quantity of labor (Q)?
W* = $10.50; Q* = 590,000
Table 4-7 shows the demand and supply schedules for the labor market in the city of Pixley. Refer to Table 4-7. If a minimum wage of $11.50 an hour is mandated, what is the quantity of labor demanded?
570,000
Table 4-7 shows the demand and supply schedules for the labor market in the city of Pixley. Refer to Table 4-7. If a minimum wage of $11.50 an hour is mandated, what is the quantity of labor supplied?
610,000
Table 4-7 shows the demand and supply schedules for the labor market in the city of Pixley. Refer to Table 4-7. If a minimum wage of $11.50 is mandated, there will be a
surplus of 40,000 units of labor
Rent control is an example of
a price ceiling
To affect the market outcome, a price ceiling
must be set below the equilibrium price
Economists refer to a market where buying and selling take place at prices that violate government price regulations as
a black market
The minimum wage is an example of
a price floor
Many economists support trade agreements, maintaining that the agreements improve economic efficiency because they result in goods being produced
at the lowest opportunity cost
Workers in industries protected by tariffs and quotas are likely to support these trade restrictions because
they believe the restrictions will protect their jobs
A tariff is a tax imposed by a government on
imports
Goods and services bought domestically but produced in other countries are referred to as
imports
Exports are domestically produced goods and services
sold to other countries
An economic principle that explains why countries produce different goods and services is
comparative advantage
If the opportunity costs of production for two goods is different between two countries, then
mutually beneficial trade is possible
Autarky is a situation in which a country
does not trade with other countries
Which of the following is the best example of a tariff?
a $150 fee imposed on all imported residential air conditioners
The main purpose of most tariffs and quotas is to
reduce the foreign competition that domestic firms face
Which of the following is the best example of a quota?
a limit imposed on the number of sport utility vehicles that the United States can import from Japan
Which of the following is the best example of a voluntary export restraint?
a limit set by the Korean government on the number of cell phones that the United States can import from Korea
Dumping refers to
selling a product for a price below its cost of production
It is difficult to determine if foreign companies are selling their products for prices below their costs of production because
the true costs of production are difficult to calculate
Absolute advantage is
the ability to produce more of a good or service than competitors when using the same amount of resources
A numerical limit imposed by a government on the quantity of a good that can be imported into the country is called a
quota
An agreement negotiated by two countries that places a numerical limit on the quantity of a good that can be imported by one country from another country is called
a voluntary export restraint
Protectionism
is the use of trade barriers to protect domestic firms from foreign competition
Economists believe that most persuasive argument for protectionism is to protect infant industries. But the argument has a drawback. What is this drawback?
Protection lessens the need for firms to become productive enough to compete with foreign firms; this often results in infant industries never “growing up.”
Suppose that American firms claim that protectionism in Canada is on the rise as the Canadian government attempts to protect its infant industries. This protectionism will cause the greatest harm to
manufacturers who export to Canada
Macroeconomics as opposed to microeconomics, includes the study of what determines the
average price levels of goods and services in the economy
Macroeconomics seeks to understand
economic growth, business cycles and inflation
Which of the following headlines would be more closely related to what macroeconomists study than what microeconomists study
real GDP grows by 2.3% in the second quarter
Which of the following is not directly counted in GDP?
intermediate goods
Value added equals the market price of the firm’s product minus
the price of intermediate goods
In the circular flow model, the value of total income for an economy ________ the value of total production
equals
The purchase of a new automobile is included in
consumption expenditures on durable goods
To calculate GDP by the expenditure method, one must add
consumption spending, investment spending, government purchases, and net exports
CANOES-R-US makes canoes. It buys the shell of the canoe from another local firm for $300 and uses its labor and intermediate goods to make the canoe. It sells the finished canoe to a retail canoe store for $800. The retail canoe store then sells the canoe to a consumer for $1,200. Refer to Scenario 19-1. The value added of CANOES-R-US for each canoe equals
$500
An example of a final good would be
a soy latte sold by Starbucks to a student
To calculate GDP using the value-added method, one would add up
the value added by each firm involved in the production of final goods and services
The informal sector can be a significant drag on the economies of developing countries because the firms in the informal sector
do not pay taxes to the government
Nominal GDP is GDP in a given year
valued in the prices of that year
Real GDP is GDP in a given year
valued in the prices of the base year
The GDP deflator is a measure of the
average level of prices of final goods and services in the economy
When the BEA calculates real GDP using the average of prices in the current year and the year preceding it, and this average changes from year to year, this is called calculating GDP using
chained-weighted prices
The GDP deflator is equal to
nominal GDP divided by real GDP, multiplied by 100
Gross national product (GNP) of the United States is the market value of all final goods and services
produced by citizens of the United States anywhere in the world
Depreciation is
the value of worn-out equipment, machinery, and buildings
The best measure of the income households actually have available to spend is
disposable personal income
The Bureau of Labor Statistics would categorize a person as ________ if they were temporarily away from their job because they were ill
employed
The unemployment rate equals the number of unemployed divided by the ________, all times 100
labor force
Someone who is available for work but has not actively looked for work in the previous four weeks would be classified as
not in the labor force
Which of the following labor market statistics best indicates the amount of labor that is available to the economy from a given working-age population?
labor force participation rate
Which of the following explains the changes in the U.S. adult male labor force participation rate since 1948?
Younger men are remaining in school longer as compared to the past
Using a broader measure of the unemployment rate where discouraged workers and part-time workers who wished to work full time were counted as unemployed, the BLS estimates the unemployment rate in April 2017 would have ________ compared to the measured unemployment rate
almost doubled
An advantage of the household survey over the establishment survey of the labor market is that the household survey
includes the number of self-employed persons
Discouraged workers are classified by the BLS as
not in the labor force
The short-term unemployment arising from the process of matching workers with jobs is called
frictional unemployment
Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called
structural unemployment
The percent increase in the CPI from one year to the next is a measure of the
inflation rate
To reduce the bias in the consumer price index, the Bureau of Labor Statistics
updates the market basket every two years, rather than every 10 years
The producer price index measures the prices that firms
receive for the goods and services they use at all stages of production
The real interest rate equals the nominal interest rate ________ the inflation rate
minus
The stated interest rate on a loan is the
nominal interest rate
Deflation occurs when
there is a decline in the price level
The costs to firms of changing prices are called
menu costs
The natural rate of unemployment is
that rate of unemployment occurring when the economy is at its potential output
Part-time workers who want full-tome work are counted as
fully employed, and therefore the official unemployment rate may understate the level of unemployment
The entry of women into the workforce since the 1960s resulted in
a shift outward in the productions possibilities curve of the United States
If competitive industry Z is making substantial economic profit, output will
expand in industry Z, as more resources will move into that industry
Which of the following is an example of a public good?
a weather warning system
As it relates to corporations, the principal-agent problem is that
the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals)
If the prices of all goods and services rose, but the quantity produced remained unchanged, what would happen to nominal GDP?
nominal GDP would rise, but real GDP would be unchanged
If real GDP per capita measured in 2009 dollars was $6,000 in 1950 and $48,000 in 2018, we would say that in 2018, the average American could buy _______ times as many goods and services as the average American in 1950.
8
The quantity of goods and services that can be produced by one worker or by one hour of work is referred to as
labor productivity
Human capital refers to which of the following?
the accumulated knowledge and skills workers acquire from education and training or from their life experiences
One difference between stocks and bonds is that
stocks do not involve a promise to repay a purchaser of the stock, while bonds represent a promise to repay the purchase price of the bond
The Congressional Budget Office reported that federal budget deficits in the United States were likely to increase during the next decade, and due to these higher deficits, “the nation’s capital stock ultimately would be smaller, and productivity and income would be lower than would be the case if the debt was smaller.” This higher budget deficit would be represented graphically by
a shift in the supply curve for loanable funds to the left
Refer to Figure 21-5. “Crowding out” of firm investment as a result of a budget deficit is illustrated by the movement from ________ in the graph above
A to B
Refer to Figure 21-6. The loanable funds market is in equilibrium, as shown in the figure above. An increase in the supply of loanable funds could result in which of the following combinations of the real interest rate and quantity of loanable funds at a new equilibrium?
The real interest rate is 3 percent, and the quantity of loanable funds is $150 million
The period between a business cycle peak and a business cycle trough is called
recession
The economic effects of a recession are likely to have the smallest impact on the sales of which of the following businesses?
a fast-food restaurant
GDP is the
monetary value of all the final goods and services produced within the borders of a nation in a particular year
Which of the following is an intermediate good?
the purchase of baseball uniforms by a professional baseball team
Economic growth is best defined as an increase in
either real GDP or real GDP per capita
The rapid growth of the Chinese economy should
benefit U.S. consumers as they have access to less-expensive consumer goods
Refer to Table 22-1. Based on the table above, which country has a higher standard of living and why?
Ireland has a higher standard of living because their GDP per capita is higher
Refer to Figure 22-1. Using the per-worker production function in the figure above, the largest changes in an economy’s standard of living would be achieved by a movement from
B to C to D
Knowledge capital is nonrival in the sense that
two people can use the same knowledge to develop and produce a product
Refer to Figure 22-3. Technological change is shown in the figure above by the movement from
B to E
Refer to Figure 22-3. Which of the following would cause an economy to move from a point like A in the figure above to a point like B?
an increase in capital per hour worked
Refer to Figure 22-5. Based on the “catch-up line” drawn above, poorer countries are more likely to be at a point like ________, where growth in GDP is relatively ________, while richer countries are more likely to be at a point like ________, where growth in GDP is relatively ________.
A; high; B; low
Which of the following best explains why productivity growth in the United States has been faster than in other leading industrialized nations?
There are fewer government regulations in the United States regarding the way firms can hire and fire workers
The term “brain drain” refers to
highly educated individuals who leave developing countries for high-income countries
Disease, poor nutrition, and substandard health care in developing nations can reduce growth in an economy by
reducing human capital
Enforcing property rights in an economy will
raise the level of investment
The most important determinate of consumption and saving is the
level of income
The greater is the marginal propensity to consume, the
smaller is the marginal propensity to save
At the equilibrium GDP for a private open economy,
net exports may be either positive or negative
Other things equal, an improvement in productivity will
shift the aggregate supply curve to the right
In macroeconomic models, prices are assumed to be completely inflexible in
the very short run only
Refer to Figure 24-1. Ceteris paribus, an increase in personal income taxes would be represented by a movement from
AD2 to AD1
Refer to Figure 24-1. Ceteris paribus, an increase in households’ expectations of their future income would be represented by a movement from
AD1 to AD2
Refer to Figure 24-2. Ceteris paribus, an increase in the labor force would be represented by a movement from
SRAS1 to SRAS2
Refer to Figure 24-2. Ceteris paribus, a decrease in the capital stock would be represented by a movement from
SRAS2 to SRAS1
Refer to Figure 24-2. Ceteris paribus, an increase in the price level would be represented by a movement from
point A to point B
Refer to Figure 24-3. Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long-run equilibrium be?
A
Refer to Figure 24-4. Given the economy is at point A in year 1, what will happen to the price level in year 2?
it will rise
Refer to Figure 24-4. Given the economy is at point A in year 1. What will happen to the price level in year 2?
it will remain constant
Purchasing groceries using a debit card best exemplifies money serving as a
medium of exchange
In the United States, the money supply (M1) includes
coins, paper currency, and checkable deposits
Most modern banking systems are based on
fractional reserves
In economics, money is defined as
any asset people generally accept in exchange for goods and services
Economies where goods and services are traded directly for other goods and services are called ________ economies
barter
Commodity money
has value independent of its use as money
Bank reserves include
vault cash and deposits with the Federal Reserve
Open market operations refer to the purchase or sale of ________ to control the money supply
U.S. Treasury securities by the Federal Reserve
The three main monetary policy tools used by the Federal Reserve to manage the money supply are
open market operations, discount policy, and reserve requirements
Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of
$5 million
The process of bundling loans together and buying and selling these bundles in a secondary financial market is called
securitization
In 2008, the Fed and the Treasury began attempting to stabilize the commercial banking system through the Troubled Asset Relief Program (TARP) by
providing funds to banks in exchange for stock
The discount rate is
the interest rate the Fed charges to banks for loans from the Fed
In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience
hyperinflation
The US Federal Reserve, the Bank of Japan, the Bank of England, and the European Central Bank are all in charge of what for the countries they represent?
monetary policy
Which of the following would reduce the money supply?
Commercial banks sell government bonds to the public
The securities held as assets by the Federal Reserve Banks consist mainly of
Treasury bills, Treasury notes, and Treasury bonds
The interest rate that banks charge one another on overnight loans is called the
federal funds rate
The Federal Reserve System’s four monetary policy goals are
price stability, high employment, economic growth, and stability of financial markets and institutions
Which of the following is a tool of monetary policy?
open-market operations
Federal Reserve Board Chairmen Paul Volcker, as well as later Fed chairs, focused on which of the following as their main goal of monetary policy?
price stability
The Fed’s two main monetary policy targets are
the money supply and the interest rate
The federal funds rate is
the interest rate banks charge each other for overnight loans
An increase in interest rates
decreases investment spending on machinery, equipment, and factories, consumption spending on durable goods, and net exports
Expansionary monetary policy refers to the ________ to increase real GDP
Federal Reserve’s increasing the money supply and decreasing interest rates
When the Fed increases the money supply
the interest rate falls and this stimulates investment spending
Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________
lower; lower
Expansionary fiscal policy is so named because it
is designed to expand real GDP
The amount by which federal tax revenues exceed federal government expenditures during a particular year is the
budget surplus
Fiscal policy refers to change in
federal taxes and purchases that are intended to achieve macroeconomics policy objectives
Automatic stabilizers refer to
government spending and taxes that automatically increase or decrease along with the business cycle
From the 1960s to 2016, transfer payments
have risen from 25 percent to about 49 percent of federal government expenditures
The three categories of federal government expenditures, in addition to government purchases, are
interest on the national debt, grants to state and local governments, and transfer payments
Government transfer payments include which of the following?
Social security and Medicare programs
President Trump’s proposed increase in spending on infrastructure projects is an example of discretionary
real GDP and employment
Fiscal policy is defined and changes in federal ______ and ______ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment.
taxes; expenditures
Fiscal policy is determined by
Congress and the president
An increase in individual income taxes ______ disposable income, which _____ consumption spending
decreases; decreases
Crowding out refers to a decline in ______ as a result of an increase in _______
private expenditures; government purchases
The federal government equals
the total value of U.S. Treasury bonds outstanding
