EPFL Midterm Study Guide

Traditional Economy

An economic system dictated by traditions and customs with minimal surplus, currency, and technology. There are strong social bonds, but people tend to live in poverty

Command Economy

An economic system dictated by the central government controlling all factors of production. It promotes the good of the state. Everyone is provided for, but there is little technology and innovation.

Mixed Economy

An economic system where the factors of production are owned both publically and privately. The role of government is to regulate markets; the market sets prices but the government can step in and change them if needed.

Market Economy

An economic system dictated by people in the free market, relying on competition to create financial incentives. It guarantees property rights for everyone. Technology is innovative and high quality but it only provides for some./

How does a decrease in supply affect the price of a good?

The price of the good will go up.

How does an increase in supply affect the price of a good?

The price of the good will go down.

What effect will a decrease in price have on demand?

The demand for the good will go up.

What effect will a increase in price have on demand?

The demand for the good will go down.

How does a change in supply affect the equilibrium price?

When supply increases, the equilibrium price decreases. When supply decreases, the equilibrium price increases.

How does a change in demand affect the equilibrium price?

When demand increases, the equilibrium price increases. When demand decreases, the equilibrium price decreases.

Perfect Competition

Many small firms produce identical products, with no single entity controlling prices. No barriers to entry.

Monopolistic Competition

Many firms offer different products, giving them some pricing control. Low barriers to entry.

Oligopoly

A handful of large firms dominate an industry. These firms have significant market power, often leading to price stability or collusion. Nearly total barriers to entry.

Monopoly

A single firm dominates an industry, controlling supply and pricing. Total barriers to entry.

Surplus

A surplus happens when supply outnumbers demand. A company may have a surplus of goods because the price is too high.

What role does competition have in the marketplace?

Competition drives innovation and high-quality goods and can lower prices in a market.

How do profits affect what manufacturers produce?

The more profit the more goods and services they produce

Why do nations specialize in producing certain goods? How does this benefit a nation?

Specialization means that the opportunity cost of production is lower, which means that globally more goods are produced and prices are lower.

How can Fiscal Policy affect economic growth?

Fiscal policy can stimulate economic growth (expansionary) or reduce inflation/address budget deficits (contractionary)

What is the role of the Federal Reserve in the U.S. economy?

The Federal Reserve sets U.S. monetary policy to promote maximum employment and stable prices in the U.S. economy.

What is the role of Federal Government Agencies?

Federal Government Agencies are meant to protect the public's health, safety, property, and overall interests.

What is the relationship between education and potential job earnings?

Those with a higher level of education in a field will make more than those will lower levels of education.

Why might someone want to go into the military?

Job Training, Money for College, Vacation, Healthcare, Life Insurance, Retirement Benefits, Veteran Benefits

What is the GI Bill?

A law that provides benefits for military veterans.

How does the government generate revenue? What is the tax that gives the government the majority of its revenue?

The government makes its revenue through taxes (income, payroll, sales, property, etc). Income taxes make the government the most money.

W-2

Employers fill out to record an employee's pay and how much was withheld for taxes.

W-4

Employees fill out when hired to let employers know how much to withhold from their paychecks.

I-9

Verifies the identity and employment authorization of people for employment in the U.S.

1099

Reports payments that aren't from an employer (gambling winnings, rents, royalties, etc.)

Gross Income

What employees earn before taxes, benefits, and other payroll deductions are withheld from their wages.

Net Income

The amount of money remaining in a paycheck after all withholdings are accounted for.

When will people search harder for substitutes for oil?

a. when the price of oil is low

b. when the price of oil is high

c. people are not incentivized to search for substitutes for oil

b

When the price of Apple computers goes down, what probably happens to the demand for Windows-based computers?

a. The demand for Windows-based computers increases

b. The demand for Windows-based computers decreases

c. A change in the price of Apple computers does not affect the demand for Windows-based computers

b

When the price of olive oil goes up, what probably happens to the demand for corn oil?

a. The demand for corn oil increases

b. The demand for corn oil decreases

c. A change in the price of olive oil does not affect the demand for corn oil

a

When the price of petroleum goes up, what probably happens to the demand for natural gas?

a. The demand for natural gas increases

b. The demand for natural gas decreases

c. A change in the price of petroleum does not affect the demand for natural gas

a

If everyone thinks that the price of tomatoes will go up next week, what is likely to happen to demand for tomatoes today?

a. The demand for tomatoes increases

b. The demand for tomatoes decreases

c. Expectations about the price of tomatoes do not affect the demand for tomatoes today

a

Along a supply curve, if the price of oil falls, what will happen to the quantity of oil supplied?

a. it will decrease

b. it will increase

c. it will not change

a

If the price of cars falls, are carmakers likely to make ___________.

a. more cars

b. fewer cars

c. the same amount of cars

b

If the price in a market is above the equilibrium price, this creates ___________.

a. a shortage

b. a surplus

c. neither a shortage nor a surplus

a

When the price is above the equilibrium price, greed (in other words, self-interest) tends to _________.

a. push the price down

b. push the price up

c. do not affect price

b

Jon is on eBay, bidding for a first edition of the influential Frank Miller graphic novel Batman: The Dark Knight Returns. In this market, who is Jon competing with?

a. The seller of the graphic novel

b. The other bidders

c. eBay’s stakeholders

b

Now, Jon is in Japan, trying to get a job as a full-time translator; he wants to translate English TV shows into Japanese and vice versa. He notices that the wage for translators is very low. Who is the “competition” that is pushing the wage down?

a. Businesses who hire translators

b. Other translators

c. Prospective clients

b

How does a free market eliminate a shortage?

a. By letting the price fall.

b. By letting the price rise.

c. By creating quotas.

d. By creating a price ceiling.

b

Business leaders often say that there is a “shortage” of skilled workers, and so they argue that immigrants need to be brought in to do these jobs. For example, an AP article entitled “New York farmers fear a shortage of skilled workers,” points out that a special U.S. visa program, the H-2A program, “allows employers to hire foreign workers temporarily if they show that they were not able to find U.S. workers for the jobs.” (Source: Thompson, Carolyn. May 13, 2008. N.Y. farmers fear a shortage of skilled workers Associated Press.) How do unregulated markets cure a “labor shortage” when there are no immigrants to boost the labor supply?

a. Let the price of labor increase.

b. Let the price of labor decrease.

c. Contract production.

d. Expand production.

a

In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes). Where will it be easier to find parking: in Freedonia or Meterville?

a. Freedonia

b. Meterville

c. Indeterminate with the given information.

b

In the town of Freedonia, the government declares that all street parking must be free: There can be no parking meters. In an almost identical town of Meterville, parking costs $5 per hour (or $1.25 per 15 minutes).

One town will tend to attract shoppers who hate driving around looking for parking. Which one?

Meterville

A review of the jargon: Is the minimum wage a “price ceiling” or a “price floor?”

Price Floor

Who is impacted most by a change in the minimum wage?

a. unionized workers

b. senior citizens

c. stay-at-home parents

d. teenagers

d

Imagine that you can hire four low-skilled workers to move dirt with shovels at $5 an hour, or you can hire one skilled worker at $24 an hour to move the same amount of dirt with a skid loader. Who will you hire if the minimum wage increases from $5 per hour to $6.50 per hour?

a. 4 low-skilled workers

b. 1 high-skilled worker

b

Suppose you’re doing some history research on shoe production in ancient Rome, during the reign of the famous Emperor Diocletian. Your records tell you how many shoes were produced each year in the Roman Empire, but it doesn’t tell you the price of shoes. You find a document that says that in the year 301, Emperor Diocletian issued an “edict on prices,” but you don’t know whether he imposed price ceilings or price floors—your Latin is a little rusty. However, you can tell from the documents that the number of shoes sold in markets fell dramatically and that both potential shoe sellers and potential shoe buyers were unhappy with the edict. With the information given, can you tell whether Diocletian imposed a ceiling or a floor? If so, which is it? (Yes, there was an edict of Diocletian, and Wikipedia has excellent coverage of ancient Roman history.)

a. Price ceiling

b. Price floor

c. Neither- it was a government shoe ration.

d. Indeterminate with the given information.

d

Which of the following is true about opportunity costs?

a. An individual’s opportunity cost is not affected when explicit costs decrease.

b. An individual’s opportunity cost decreases when an alternative becomes more valuable.

c. An individual’s opportunity cost decreases when explicit costs increase.

d. An individual’s opportunity cost increases when the next best alternative becomes more valuable.

d

Which of the following most accurately identifies the opportunity cost of a cafe manager considering opening a new cafe location?

a. The additional revenue gained from the new location

b. The cost of rent at the original location

c. The value of the next best alternative to their time and money spent on the new location

d. The shorter wait time for customers due to the opening of the new location

c

Which of the following best describes the trade-offs involved in increasing animal welfare requirements for egg-laying chickens?

a. Increasing animal welfare requirements will decrease the cost of eggs

b. Increasing animal welfare requirements will increase the cost of eggs

c. There are no tradeoffs.

b

You purchased non-refundable plane tickets to travel to Tampa this weekend for $200. Your friend just called and won 2 free concert tickets for this weekend to see your favorite artist and wants to know if you will join them. What is the minimum amount you can value the concert to cancel your travel plans to Tampa?

a. $1

b. $101

c. $201

d. You should not cancel your travel plans, since your tickets are non-refundable.

c

1. The government hires 2000 workers for new infrastructure projects. Over half of the newly hired construction workers, however, were employed in other sectors of the economy and quit their jobs to take this better-paying opportunity.

a. Expansionary fiscal policy.

b. Contractionary fiscal policy.

c. Crowding out.

d. Fiscal multiplier.

e. a and c only.

f. a and d only.

e

2. The government increases taxes on corporations.

a. Expansionary fiscal policy.

b. Contractionary fiscal policy.

c. Crowding out.

d. Fiscal multiplier.

e. a and c only.

f. a and d only.

b

3. During a recession, the government increases spending by $300B, which in turn increases GDP by $350B.

a. Expansionary fiscal policy.

b. Contractionary fiscal policy.

c. Crowding out.

d. Fiscal multiplier.

e. a and c only.

f. a and d only.

f

4. During a recession, the government sends $500 checks to every American family. 70% of American families save the money or use it to pay off their debt.

a. Expansionary fiscal policy.

b. Contractionary fiscal policy.

c. Crowding out.

d. Fiscal multiplier.

e. a and c only.

f. a and d only.

e

1. The Federal Reserve is considered a powerful institution because it has the power to:

a. Act as a lender of last resort, control money supply in the long term, and print money.

b. Create money, buy government bonds, and control long-term economic growth.

c. Buy government bonds, act as a lender of last resort, and create money.

d. Control short-term growth, create money, and buy government bonds.

b

2. The Federal Reserve can control short-run growth better than long-term growth but even then, there are limits to its powers to influence short-term growth, in part because:

a. It cannot buy bonds, cannot use executive orders, and cannot control the supply of money.

b. It has a lack of direct control, incomplete data about the economy, and a lack of executive order.

c. It has incomplete data about the economy, lagged results from policy to growth, and limited control.

d. It cannot increase the money supply, has incomplete data about the economy, and can buy bonds.

c

3. How does the Quantity Theory of Money help us understand the limitations of the Federal Reserve’s power to control economic growth?

a. The velocity of money does not adjust to monetary policy.

b. Increases in the money supply result in increases in output in the long run.

c. Increases in the money supply result in increases in velocity in the long run.

d. Increases in the money supply result in price increases in the long run.

d