By definition, economics is the study of
the choices people make to attain their goals, given their scare resources.
Economists assume that individuals
are rational and respond to incentives.
In Estonia, the government pays working women who take time off after having baby their entire salary for up to 15 months, and women who do not work receive $200 per month after having a baby. How will these benefits affect a woman’s decision to have children?
These incentives will encourage women to have children and increase the birth rate.
In economics, the term _________ means “additional” or “extra”.
Making optimal decisions “at the margins” requires
weighing the costs and benefits of a decision before deciding if it should be pursued.
The extra costs associated with undertaking an activity is called
Mars Cafe, a small cafe near campus, sells cappuccinos for $3.00 and iced teas for $2.00. What is the opportunity cost of buying a cappuccino?
1.5 iced teas.
When productions reflects consumer preferences, ________ occurs.
Which of the following is motivated by an efficiency concern?
The United Network for Organ Sharing advocates a system of rationing scarce kidneys that would favor young patients over old in an effort to wring more life out of donated organs.
If a graph has a line that shows the amount of outsourcing in the last ten years, it is known as
a time-series graph.
Which of the following statements is false?
A straight line has a slope of zero.
Calculate the area of the triangle in A.
________ is a problem that occurs when one concludes that a change in variable X caused a change in variable Y when in actual fact, it is a change in variable Y that caused a change in variable X.
In a production possibilities frontier model, a point _______ the frontier is productively inefficient.
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 and additional 10 silk roses?
25 silk leaves
The slope of a production possibilities frontier
measures the opportunity cost of producing one more unit of a good.
Which of the following statements is true?
Individuals who have never been the best at doing anything can still have a comparative advantage in producing some product.
Olive oil producers want to sell more olive oil at a higher price. Which of the following events would have this effect?
research finds that consumption of olive oil reduces the risk of heart disease
Suppose that when the price of raspberries increases, Lonnie increases his purchases of papayas. To Lonnie,
raspberries and papayas are substitutes.
Which of the following is evidence of a surplus of bananas?
The price of bananas is lowered in order to increase sales.
if the market price is $1.00, what is consumer surplus?
Suppose that when the price of hamburgers decreases, the Ruiz family increases their purchases of ketchup. To the Ruiz family,
hamburgers and ketchup are complements.
Assume that the graphs in Figure 3-7 represent the demand and supply curves for bicycle helmets. Which panel best describes what happens in this market if there is a substantial increase in the price of bicycles?
How does the increasing use of MP3 players affect the market for compact discs?
The demand curve for compact discs shifts to the left.
If Red Bull and Monster Energy are considered substitutes, then, other things equal, an increase in the price of Red Bull will
increase the demand for Monster.
The __________ demonstrates the roles by households and firms in the market system.
circular flow model
When you purchase a new pair of jeans you do so in the
When you purchase a new pair of jeans you do so in the
a worker hired by Dell.
“Figure 3-3 shows the supply and demand curves for two markets, the market for original Picasso paintings and the market for denim jeans. Which graph most likely represents which market?”
Graph B represents the market for original Picasso paintings and Graph A represents the market for denim jeans.
“From Figure 3-4, if the price is $10,”
there would be a shortage of 600 units.
Lucinda buys a new GPS system for $250. She receives a consumer surplus of $75 from the purchase. How much does Lucinda value her GPS system?
“In recent years the cost of producing organic produce in the U.S. has decreased largely due to technological advancement. At the same time, more and more Americans prefer organic produce over conventional produce. Which of the following best explains the effect of these events in the organic produce market?”
Both the supply and demand curves have shifted to the right. As a result there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price.
The demand by all consumers of a given good or service is the _______ for the good or service.
When the price of a good falls, consumers buy a larger quantity because of the _______ effect and the _______ effect.
A change in all of the following variables will change the market demand for a product except
the price of a product
“Let D=Demand, S=Supply, P=Equilibrium Price and Q=Equilibrium Quantity. What happens in the market for tropical hardwood trees is the government restricts the amount of forest lands that can be logged?”
“S decreases, D no change, P increases, Q decreases”
“In Figure 3-4, if the current market price is $10, the market will achieve equilibrium by “
“a price increase, increasing the quantity supplied and decreasing the quantity demanded.”
“To affect the market outcome, a price ceiling”
must be set below the equilibrium price.
“In Figure 4-5 shows the market for apartments. Recently, the government imposed a rent ceiling of $1,000 per month. With rent control, the quantity supplies is 200 apartments. Suppose apartment owners ignore the law and rent the quantity for the highest rent they can get. What is the highest rent they can get per month? “
“In Figure 4-5 shows the market for apartments. Recently, the government imposed a rent ceiling of $1,000 per month. What is the value of consumer surplus after the imposition of the ceiling? “
“In Figure 4-5 shows the market for apartments. Recently, the government imposed a rent ceiling of $1,000 per month. What is the value of producer surplus after the imposition of the ceiling? “
“In Figure 4-5 shows the market for apartments. Recently, the government imposed a rent ceiling of $1,000 per month. What is the value of the portion of producer surplus transferred to consumer surplus as a result of the rent ceiling? “
“In Figure 4-5 shows the market for apartments. Recently, the government imposed a rent ceiling of $1,000 per month. What is the value of deadweight loss after the imposition of the ceiling? “
“In May 2009, the U.S. auto industry experienced a 34 percent decline in sales compared to May 2008. The automobile industry was experiencing the effect of”
the business cycle.
Which of the following goods is directly counted in GDP?
a 12-inch Subway sandwich purchased by a student
What is the largest component of spending in the United States?
“When consumers are less confident about their jobs or incomes, they are more likely to”
reduce purchases of durable goods and nondurable goods.
Gross domestic product understates the total production of final goods and services because of the omission of
“Suppose BOB works for Mary as a professional proofreader. Mary and Bob fall deeply in love, marry, and have eight children. Bob stops working for Mary in order to care for the children. What will be the effect on GDP?”
GDP will decrease
Which of the following is likely to increase measured GDP?
Marijuana becomes legal to grow and sell.
“Increases in real GDP would understate the well-being of a country over time if, over that time period, the”
amount of pollution decreased.
Nominal GDP is GDP in a given year
the price level in 2009 was less than the price level in the base year.
“Which of the following could cause nominal GDP to increase, but real GDP do decrease?”
The price level rises and the quantity of final goods and services produced falls.
Real GDP will increase
only if the quantity of final goods and services produced rises.
The average price of goods and services in the economy is also known as
the price level.
“If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation rate over those years would”
Which of the following is true about the consumer price index?
It assumes that consumers purchase the same amount of each product in the market basket each year
Which of the following would be the best measure of the cost of living?
consumer price index
The consumer price index is the
average of the prices of the goods and services purchased by a typical urban family of four.
“The substitution bias in the consumer price index refers to the idea that consumers ________ the quantity of products they buy in response to price, and the CPI does not reflect this and _______ the cost of the market basket.”
“The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to _______ the cost of the market basket.”
“The “”new product bias”” in the consumer price index refers to the idea that”
“new products’ prices often decrease after their initial introduction, and the CPI is adjusted infrequently and overestimates the cost to consumers.”
Most economists believe that the biases in the consumer price index cause the CPI to overstate the true inflation rate by about
one-half to one percentage point.
“If your nominal wage (what you are paid in dollars) rises faster than the price level, we can say your real wage has _______ and the purchasing power of your income has _______.”
“You earned $30,000 in 1980, and your salary rose to $80,000 in 2006. If the CPI rose from 82 to 202 between 1980 and 2006, which of the following is true?”
The purchasing power of your salary increased between 1980 and 2006.
The nominal interest rate equals the real interest rate _______ the inflation rate.
“If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest?”
“Suppose you lend $1,000 at an interest rate of 10% over the next year. If the expected real interest rate at the beginning of the loan contract is 4%, then what rate of inflation over the upcoming year would be most beneficial to you as the lender? An inflation rate”
equal to 0%.
“When prices are rising, which of the following will be true?”
The real interest rate will be lower than the nominal interest rate.
“Suppose that in 2010, all prices in the economy double and that all wages and salaries have also doubled. In 2010, you”
are no better off or worse off than you were in 2009 as the purchasing power of your salary has remained the same.
“Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is currently 6%. If actual inflation turns out to be 7% over the loan period, then”
borrowers gain 1%.
“When actual inflation is less than expected inflation,”
borrowers lose and lenders gain
Technological advances generally result in
increase life expectancy.
“If real GDP per capita measure in 2000 dollars was $6,000 in 1950 and $48,000 in 2000, we would say that in the year 2000, the average American could buy ______ times as many goods and services as the average American in 1950.”
“If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from”
23.3 years to 17.5 years.
“If real GDP grows by 3% in 2005, 3.2% in 2006, and 2.5% in 2007, what is the average annual growth rate of real GDP?”
Actual real GDP will be above potential real GDP if
firms are producing above capacity.
“Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth of the economy.”
Liquidity refers to
the ease in which a financial security can be traded for cash.
“Borrowers are ________ of loanable funds, and lenders are _______ of loanable funds.”
Which of the following would you expect to increase the equilibrium interest rate?
an increase in the budget deficit
The response of investment spending to an increase in government spending is called
How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax?
The equilibrium quantity of loanable funds would rise.
“During the expansion phase of the business cycles, which of the following eventually increases?”
all of the above
A period of expansion ends with a _______ and the period of recession ends with a ______.
What is the name of the organization that defines business cycles peaks and troughs in the United States?
the National Bureau of Economic Research
Purchases of diapers should
remain fairly constant over the business cycle
Inflation tends to _______ during the expansion phase of the business cycle and _______ during the recession phase of the business cycle.
“Since the 1950s,”
U.S. business cycle fluctuations have become milder.
“The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming _______ is constant.”
total spending; real GDP; the price level
“The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by”
the level of aggregate expenditure.
A decrease in consumer confidence can put your job at risk if
aggregate expenditures fall.
An unplanned increase in inventories results from
actual investment that is greater than planned investment
The difference between GDP and taxes is
Spending on the war in Iraq is essentially categorized as government purchases. How do increases in spending on the war in Iraq affect the aggregate demand curve?
They will shift the aggregate demand curve to the right.
Which aggregate supply curve has a positive slope?
short run only
“If, due to the recession, foreign workers begin to leave the United States to search for temporary work in their home countries until the recession has ended, this will”
shift the short-run aggregate supply curve of their home country to the right.
“When the price level rises from 110 to 115, the aggregate level of GDP supplied rises from $80b to $120b. This ________ relationship represents the ________ relationship between the quantity of real GDP firms are willing to supply and the price level.”
Which of the following is considered a negative supply shock?
an unexpected decrease in the refining capacity for oil
Stagflation occurs when
inflation rises and GDP falls.
“In the dynamic aggregate demand and aggregate supply model, if AD shifts faster than AS”
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