econ midterm

Economics may best be defined as the 

social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity

Noel went to his favorite hamburger restaurant with $3, expecting to buy a $2 hamburger and a $1 soda. When he arrived, he discovered that hamburgers were on sale for $1 each, so Noel bought two hamburgers and a soda. Noel's response to the decrease in the price of hamburgers is best explained by 

the income effect

The main mechanism that regulates the market system is

competition

The market system's answer to the fundamental question "How will the system accommodate change?" is essentially

"Through the guiding function of prices and the incentive function of profits."

A recent study found that an increase in the federal tax on beer in Montego Bay (which would increase the price of beer) would reduce the demand for marijuana. Based on this information we can conclude that

beer and marijuana are complementary goods

If products Coke and Dr Pepper are close substitutes, an increase in the price of Coke will

shift the demand curve for Dr Pepper to the right

Other things equal, an increase in a consumer's money income

shifts the individual's budget line rightward because she can now purchase more of both products.

Which of the following best illustrates the circular flow model in action?

	Boeing experiences a surge in orders for new airplanes, prompting the company to hire more workers
	Evan buys a new couch; the owner of the furniture store uses some of the money from the sale to pay her supplier and uses the rest to take her family out to dinner
	Bobbie goes to work and builds cars; she uses the income she receives to buy food at the grocery store.
	All of these answers illustrate the workings of the circular flow model

The use of money for exchange and trade

fosters more specialization in production

A positive statement is concerned primarily with

what is

Caleb 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

Braylon sees that his neighbors' lawns all need mowing. He offers to provide the service in exchange for a wage of $20 per hour. Some neighbors accept Braylon's offer and others refuse. Economists would describe Braylon's behavior as

rational self-interest because he is attempting to increase his own income by identifying and satisfying someone else's wants

Which of the following is a correct statement?

Although they are generalizations, economic laws are useful because they allow us to predict and therefore influence or adjust to events

What basic functions does the Entrepreneur perform for the economy

	Takes initiative
	Makes basic policy decision
	Bears risk
	All of the above

The basic purpose of the other-things-equal assumption is to

allow one to reason about the relationship between variables X and Y without the intrusion of variable Z.

A fundamental difference between the Command system and Laissez-faire capitalism is that, in command systems

the division of output is decided by central planning rather than by individuals operating freely through markets

The relationship between quantity supplied and price is ___________________

and

the relationship between quantity demanded and price is_________________

direct; inverse

The ability of a good or service to satisfy wants is called

utility

Which of the following has been a significant factor in the ability of iPads to compete effectively against laptop and desktop computers?

Many consumers perceive that iPads are superior to laptops and desktop computers for the consumption of digital media

Making choices based on comparing marginal benefits with marginal costs is referred to as Marginal analysis

True

The law of supply indicates that, other things equal, producers will offer more of a product at high prices than at low prices

True

The term "Laissez faire" mean

(Let it be)

Suppose that corn prices rise significantly. If farmers expect the price of corn to continue rising relative to other crops, then we would expect....................................

 

(the supply to increase as farmers plant more corn)

Jennifer buys a piece of a gold watch for $330, for which she was willing to pay $400. The minimum acceptable price to the seller, Nathan, was $300.

1. Jennifer experiences __________ ____

2. Nathan experiences________________

(Consumer surplus of $70)

(Producer surplus of $30)

Mention the determinants responsible for the Changes in Supply

(Taxes & Subsidies)

(Resource Prices)

(Technology)

(Changes in the prices of other goods)

(Producers Expectations)

(Number of Sellers)

What 4 basic functions does the entrepreneur perform for the economy

Takes initiative
Makes basic policy decision
Introduce or improve on products
Bears risk

The national economy grew at a 6.2 percentage rate in the last quarter
as the economy continues to recovers from the past recession

Positive

The government ought to lower taxes so people have more money

Normative

List 4 resource categories

Land, Capital, Labor, Entrepreneurial ability

List nine characteristics of the market system.

(1) Private property;
(2) Freedom of enterprise and choice;
(3) Self-interest as the major motivation for economic activity;
(4) Competition among buyers and sellers;
(5) Reliance on the market (price) system;
(6) The use of advanced technology and large amounts of capital goods;
(7) Specialization;
(8) The use of money rather than barter; and
(9) Limited role for government.

Some large hardware stores, such as Home Depot, boast of carrying as
many as 20,000 different products in each store.

What motivated the producers of those individual products to make them and offer them for sale?
b. How did the producers decide on the best combinations of resources to use?
c. Who made those resources available, and why?
d. Who decides whether these particular hardware products should continue to be produced and offered for sale?

Explanation
• The quest for profits led firms to produce these goods.
• Producers looked for and found the least-cost combination of resources for producing
their output.
• Resource suppliers, seeking income, made these resources available.
• Consumers, through their dollar votes, ultimately decide on what will continue to be
produced.

Which of the following statements about self-interest in a market system is false?

Self-interest applies to consumers as they seek the highest price for the products they want

List six basic determinants of market supply

List six basic determinants of market supply

Resource prices;
b.Changes in technology;
c. Taxes and subsidies;
d.Prices of other related goods;
e. Producer expectations;
f. Number of sellers

Mention the basic determinants of Demand

TRIBE

“taste in preference”

“related goods”

“income”

“buyers”

“expectations”

If products Coke and Dr Pepper are close substitutes, an increase in the price of Coke will

shift the demand curve for Dr Pepper to the right

Market failures

Result in overproduction or underproduction of a good

Amanda buys a ruby for $380 for which she was willing to pay $440 to
Tony. The minimum acceptable price by, Tony was $300.

What is Amanda
experiencing?

What is Tony experiencing?

Consumer Surplus of $60

Producer Surplus of $80

Jennifer buys a piece of costume jewelry for $33, for
which she was willing to pay $42. The minimum
acceptable price to the seller, Nathan, was $30.
Jennifer experiences __________ and Nathan
experiences_______________

A consumer surplus of $9, and Nathan
experiences a producer surplus of $3

What is a Consumer Surplus?

the difference between the maximum price consumers are willing to pay for a product and the lower equilibrium price

When does a Negative externalities occur

Negative externalities occur when a third person, or persons, external to the transaction is affected from the transaction in a negative way

Give examples of Negative Externalities

Dogs barking
• Cigarette Smoking
• Automobile Exhaust
• Loud Stereo noise form a car/apartment

What are the TWO characteristics of a Public Goods?

Non-excludability
Public goods are non-excludable, which means that individuals cannot be effectively
excluded from using or benefiting from the good. Once the good is provided, it is available
to all members of the public, and it is difficult or economically infeasible to prevent anyone
from using it. For example, street lighting or national defense are public goods because it is
challenging to exclude people from using them
Non-Rivalry
Public goods exhibit non-rivalry, meaning that one person's consumption or use of the good
does not reduce the amount available for others to use. In other words, the consumption of
a public good by one individual does not diminish its availability to others. Clean air or
public parks are examples of public goods with non-rivalrous characteristics.

The two topics of primary concern in macroeconomics are

short-run fluctuations in output and employment and long-run economic growth

The business cycle depicts

short-run fluctuations in output and employment.

The term "recession" describes a situation where

output and living standards decline

When did modern economic growth begin?

During the Industrial Revolution in the late 1700s.

There is a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future because

households must save today if they want to increase their future consumption, thus providing funds for investment

If the demand for a firm’s output unexpectedly decreases, you would expect its inventory to

increase or remain the same, depending on whether or not prices are sticky

Why are high rates of unemployment of concern to economists

There is lost output that could have been produced if the unemployed had been working

The National Income and Product Accounts (NIPA) help economists and policymakers
to

follow the long-run course of the economy to determine whether it has grown or
stagnated

The agency responsible for compiling the National Income Product Accounts for the
U.S. economy is the

Bureau of Economic Analysis

The system that measures the economy's overall performance is formally known as

national income accounting

A nation's gross domestic product (GDP)

is the dollar value of all final output produced within the borders of the nation during a
specific period of time

A nation's gross domestic product (GDP)

can be found by summing C + Ig + G + Xn

GDP is the

monetary value of all final goods and services produced within the borders of a nation in a particular year

Suppose Smith pays $100 to Jones.

We need more information to determine whether GDP has changed

Suppose the total monetary value of all final goods and services produced in a
particular country in 2015 is $500 billion and the total monetary value of final goods and
services sold is $450 billion. We can conclude that

GDP in 2015 is $500 billion

National income accountants can avoid multiple counting by

only counting final goods

Gross domestic product (GDP) measures and reports output

in dollar amounts and percentage growth

By summing the dollar value of all market transactions in the economy, we would

obtain a sum substantially larger than the GDP

Final goods and services refers to

goods and services purchased by ultimate users, rather than for resale or further processing.

If intermediate goods and services were included in GDP

the GDP would be overstated

Economic growth is best defined as an increase in

either real GDP or real GDP per capita

Real GDP per capita is found by

dividing real GDP by population

Real GDP per capita

can grow either more slowly or more rapidly than real GDP

Which of the following best measures improvements in the standard of living of a
nation

growth of real GDP per capita

If a nation's real GDP increases from 100 billion to 106 billion and its population
jumps from 200 million to 212 million, its real GDP per capita will

remain constant

For a nation's real GDP per capita to rise during a year

real GDP must increase more rapidly than population

Growth is advantageous to a nation because it

lessens the burden of scarcity

Given the annual rate of economic growth, the "rule of 70" allows one t

calculate the number of years required for real GDP to double

At an annual growth rate of 7 percent, real GDP will double in about

10 years

Under what circumstances do rates of economic growth understate the growth of
economic well-being?

Product quality has improved

Recurring upswings and downswings in an economy's real GDP over time are called

business cycles.

In the United States, business cycles have occurred against a backdrop of a long-run trend of

rising real GDP

Most economists agree that the immediate determinant of the volume of output and
employment is the

level of total spending

As it relates to economic growth, the term long-run trend refers to

the long-term expansion or contraction of business activity that occurs over 50 or 100
years

In which of the following industries or sectors of the economy will business cycle
fluctuations likely have the greatest effect on output

capital goods

The industries or sectors of the economy in which business cycle fluctuations tend to affect
output most are

capital goods and durable consumer goods.

During a severe recession, we would expect output to fall the most in

the construction industry

The aggregate demand curve

shows the amount of real output that will be purchased at each possible price level

The aggregate demand curve is

downsloping because of the interest-rate, real-balances, and foreign purchases
effects

The interest-rate effect suggests that

an increase in the price level will increase the demand for money, increase interest
rates, and decrease consumption and investment spending.

The real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and
therefore reduce spending

The foreign purchases effect suggests that an increase in the U.S. price level relative to
other countries will

increase U.S. imports and decrease U.S. exports

The determinants of aggregate demand

explain shifts in the aggregate demand curve

Other things equal, if the national incomes of the major trading partners of the United
States were to rise, the U.S.

aggregate demand curve would shift to the right

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of
labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of
raw materials, $4; and each unit of labor, $3. If the per-unit price of raw materials rises
from $4 to $8 and all else remains constant, the per-unit cost of production will rise by about

30 percent.

Graphically, cost-push inflation is shown as a

leftward shift of the AS curve.

The downsloping aggregate demand curve can be explained by

the interest-rate effect, the real-balances effect, and the foreign purchases effect

The explanation for a downsloping aggregate demand curve differs from the explanation
for the downsloping demand curve for a single product becaus

a downsloping, single-product demand curve assumes constant prices such that
changes in income cause a substitution of a now relatively cheaper product for
those whose prices have not changed.

The multiplier

causes an initial change in spending to generate an even larger change in the
aggregate demand curve

According to the "real-balances effect," if prices

decline, the purchasing power of assets will rise, so spending at each income level
should rise

According to the "wealth effect," a change in consumer wealth causes

a shift in consumer spending and a shift of the aggregate demand curve

Which of the following statements is true concerning the real-balances effect and the
wealth effect

The real-balances effect explains the shape of the aggregate demand curve,
whereas the wealth effect causes shifts of the aggregate demand curve.

The decline in consumption spending while lockdowns were in place would be
represented by _________ in aggregate demand

a leftward shift

The decline in labor employment during the lockdowns would be represented by
_________ in aggregate supply

a leftward shift

The net result of the changes in AD-AS would be _________ in the amount of
equilibrium GDP

a definite reduction

Also, the changes in AD-AS would result in ________ in the price level

either an increase or decrease (depending on the magnitude of each shift)

A higher price level increases the cost of borrowing, which causes people to buy fewer
cars

Interest-rate effect