Lec/HW Pre Test 2 Flashcards
Generally, define elasticity. How is it used in economics?
Sensitivity to a change in a variable.
In economics, elasticity is a measure of how sensitive demand is to a price change.
There is an _____ relationship between price and quantity.
Inverse
If E<1, the price is ______.
Inelastic
If E = 1, the price is ________.
Unitary
If E>1, the price is _______.
Elastic
What is the formula for elasticity?
abs{P1(Q1-Q2) / (Q1(P1 - P2))}
What are the determinants of Elasticity?
- Substitutes
- Price
- Income
- Luxuries vs. Necessities
- Time
If a product were perfectly inelastic, the Quantity vs Price curve would be _____.
Perfectly vertical
If a product were perfectly elastic, the Quantity vs Price curve would be _____.
Perfectly horizontal
In its ideal form, a price system allows all resources to move from ______ to ____ via voluntary exchange.
Low valued uses
Higher valued uses
What are the three most important institutions to economic growth?
- Rule of law
- Private property
- Political stability
Where does “rule of law” fit in with respect to the economic prosperity pyramid.
Bottom to top
Rule of law – Voluntary exchange systems –Human capital–natural resources—jobs–wealth and prosperity
What is meant by a “market failure?”
Too few or too many resources in a specific economic activity.
What are the two types of market failures?
- Micro
2. Macro
What is the main drawback of market failure and how is it usually addressed?
- It prevents economic efficiency and individual
freedom. - Government policy
In a pure market system, economic efficiency occurs when _______.
Individuals know and must bear the true opportunity cost of their actions.
What are the economic functions of government with respect to micro failures?
- Legal framework (institutions)
- Maintain competition
- Providing public goods
- Reallocation of resources (property rights)
What are the economic functions of government with respect to macro failures?
Stabilize the economy
The legal framework includes various _______ that administer policy on behalf of congress. Give examples.
institutions
FAA, FDA, EPA, etc.
What is the general definition of a monopoly?
Too much market power held by a single entity.
What are the three types of income redistribution?
- Income tax
- Transfer payments
- Price controls
What is a “private good?”
A good that can only be consumed by one person.
e.g., soda, medicine, etc
What is a “public good?”
A good in which consumption by one person does not exclude consumption by another.
(e.g., national defense, parks, emergency services, etc)
What is the free-rider problem?
A person who benefits but does not contribute to the payment for the benefit.
Define “externality” with respect to economics.
Something that occurs when the consequences of an economic activity spills over and affects 3rd parties.
Note: 3rd parties generally refer to people or entities that are not directly involved in an activity or transaction.
What are the two types of externalities?
- Negative (Spillover costs)
2. Positive (Spillover benefits)
Describe externalities with respect to market over and under allocations.
- Market Over-allocates –> Increases external costs —> Negative externality.
- Market under-allocates —> Mixed external benefits–> Positive externality.
A negative externality shifts the supply curve _____.
Left
Can government correct negative externalities? If yes, explain.
Yes
Special taxes and regulations on things that cause negative externalities (e.g. carbon tax)
Does education result in generally positive or negative externalities?
Usually positive
Degree, job, social, better thinkers
A positive externality shifts a demand curve ____.
To the right
What are some examples of macro failures?
- Unemployment
- Inflation
- National debt
- Global trade deficit.
What is the definition of inflation?
An increase in the average level of prices.
What is the consumer price index (CPI)?
The cost of todays market basket of goods expressed as a percentage of the cost of the same market basket during a base year.
Price Index = Cost of market basket today/ cost of market basket in base year
How do you calculate percent change in CPI?
(P_new - P_old)/P_old *100
What is the difference between core and headline inflation?
Core = no food/energy Headline = everything
What are some general problems from inflation?
- Pricing signal is difficult to interpret.
- Long term planning is very hard
- Chips away at purchasing power
- Transfers wealth away from lenders
What is a COLA adjustment?
Cost of living adjustments
Clauses in contracts that allow for increases in specified nominal values to take account of changes in the cost of living.
Market failure occurs because ______.
The market system does not make individuals responsible for the social costs/benefits of their actions.
HW4
Cigar smoke could be considered a _____ externality.
Negative
HW4
If the negative externality of cigar smoke were factored into supply and demand:
- What would happen to the supply curve for cigars?
- In the absence of any government involvement in the market for cigars, will to few or too many be produced?
- From society’s point of view, will the market price of cigars be too low or too high?
- The supply curve will shift left.
- Too many
- Too low
HW4
Suppose that repeated application of a pesticide used on orange trees causes harmful contamination of groundwater. The pesticide is applied annually in virtually all of the orange groves throughout the world. Most orange growers regard the pesticide as a key input in their production of oranges.
Which of the following government policies might be effective in achieving the amount of orange production that fully reflects all social costs?
- A tax on growers commensurate with the cost to third parties.
- Government financing or production of oranges
- Regulations that limit the use of pesticides
- Both 1 and 3
Both 1 and 3
HW4
A nation’s government has determined that mass transit, such as bus lines, helps alleviate traffic congestion, thereby benefiting both individual auto commuters and companies that desire to move products and factors of production speedily along streets and highways.
Nevertheless, even though several private bus lines are in service, commuters in the city are failing to take the social benefits of the use of mass transit into account.
The socially efficient use of bus services may be achieved by which of the following government policies?
- Regulations
- Government finance or production
- Subsidies
- Any of the above
- Any of the above
HW4
A cost or benefit of an economic activity that has an impact on an individual’s well-being, even though the individual was not directly involved in the activity, is known as an ______.
Externality
HW4
A true public good must be provided by the government. Which of the following goods provided by the government is a true public good?
- Postal Service
- Flood control
- Tollways
- Tax Collection
- Flood control
HW4
Other than correcting externalities, other economic functions of government include _____. (Hint, can include macro and micro functions)
- Providing a legal system (micro)
- Allocating public goods (macro)
- Promoting competition (micro)
- Stabilizing the economy. (Macro)
HW4
For each of the following goods or services, select whether it is a public or a private good.
Lighthouse
Magazine
Paved Street
Lighthouse = Public Good
Magazine = Private good
Paved Street = Public Good
HW4
In many countries, education is either wholly provided by the government or is heavily subsidized.
How would an economist explain this?
Since education has a spillover benefit, private markets will under provide for it.
HW4
Which of the following is not an economic function of government?
- Ensuring economy-wide stability.
- Income Redistribution
- Providing a legal system
- Promoting competition.
Income redistribution – This is a political function of government, not an economic one.
HW4
Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as _____.
Transfer payments
HW4
Which of the following is a common example of a government-sponsored good?
- Museums
- Alchohol
- Illegal Drugs
- Gambling
Museums
HW4
Public schools provide educational services at a price _____.
Below the market price.
HW4
According to economic theory, the employees of microsoft and the city of new york will act differently due to _____.
Different incentive structures.
HW4
The type of unemployment that rises as the economy goes into a recession is called _____.
Cyclical unemployment.
HW5
Sean is a lobster fisherman, and can only work six months out of the year. What type of unemployment is this?
Seasonal
HW5
Consider an economy where the natural rate of unemployment is equal to 5%. If the actual unemployment rate is equal to 8%, then _____
The cyclical unemployment rate is 3% .
HW5
Full employment means _____.
There is a level of unemployment consistent with “normal” frictions in the labor market.
HW5
A price index is computed as ____.
(cost of market basket today/cost of market basket in base year)*100.
HW5
Which of the following is most likely to gain from unanticipated inflation?
- A restaurant that has printed menus.
- A bank that specializes in mortgage lending
- A consumer with a 5 year auto loan
- A senior citizen who received social security payments.
- A consumer with a 5 year auto loan
HW5
Typically during a recession, incomes ____ and unemployment _______.
Fall
Rises
HW5
In the circular flow of income ________demand goods and services that are supplied by firms, while _____.
Households
supplying resources that are demanded by firms.
HW6
Is the following included or excluded from the nation’s GDP?
Mr. King performs the service of painting his own house instead of paying someone else to do it.
Excluded
Is the following included in GDP?
Mr. King Paints houses for a living.
Included
Is the following included in GDP?
Mrs. King earns income from parents by taking baby photos in her home photography studio.
Included
Is the following included in GDP?
Mrs. King takes photos of planets and stars as part of her astronomy hobby.
Excluded
Is the following included in GDP?
E*Trade charges fees to process Internet orders for stock trades.
Included
Is the following included in GDP?
Mr. Ho spends $10,000 on shares of stock via an Internet trade order.
Excluded
Is the following included in GDP?
Mr. Ho pays a $10 brokerage fee for a purchase of $10,000 worth of Microsoft stock.
The 10 dollars is included. The purchase of the stock is not.
Is the following included in GDP?
Mrs. Ho receives a Social Security payment.
Excluded
Is the following included in GDP?
Ms. Chavez makes a $300 payment for an Internet-based course on stock trading.
Included
Is the following included in GDP?
Mr. Langham sells a used laptop computer to his neighbor but does not report it as income.
Excluded
True or False
GDP is a good measure of a nations welfare.
False
GDP
- does not include transfer payments or financial transactions.
- does not include the transfer of second-hand goods.
- only includes “final” goods and services to avoid double counting.
- All of the above.
All of the above
Which of the following transactions would not be included in GDP?
- Gordon hires a painter to make a sign for his business.
- Nancy mows her own lawn.
- Ruth buys a chair for her house.
- The state of Texas has snow removed from highways.
Nancy mows her own lawn.
The largest component of GDP is _____.
Personal consumption expenditures.
If a household purchases a new car and a new refrigerator, this would be classified as spending on _______.
Consumer durables.
Using the expenditures approach to national income accounting, which of the following would be counted as government spending?
- The city of Dallas provides a police and fire department.
- The State of New York levies an additional tax on gas.
- The federal government makes a social security payment to someone.
- A resident of California pays state taxes.
- The city of Dallas provides a police and fire department.
What is the difference between nominal GDP and real GDP?
Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year.
Real GDP is computed by adjusting nominal GDP for ______.
Changes in price level.
If real GDP increases in any year, we know that ______.
- Nominal GDP must have risen.
- Inflation has raised the value of the output.
- Both inflation and output have increased.
- The output of goods and services produced this year has increased.
- The output of goods and services produced this year has increased.
True or False
To go from personal income to disposable personal income, personal income taxes must be subtracted.
True
If nominal GDP increases, it is possible that ____
- Output has increased
- Both prices and output have increased
- prices have increased
- any of the above might have happened.
Any of the above might have happened.
When comparing per capita GDP across countries, GDP should be adjusted for____
Purchasing power parity.
