Essential Economics Concepts: Markets, Policy, and Global Trade
Foundations of Economic Systems
Market and Command Economies
In a market-oriented economy, the amount of a good that is produced is primarily decided by the interaction of: buyers and sellers.
In countries like _____________ the command economy predominates: Cuba and North Korea.
Which of the following best denotes the reason for the existence of substantial black markets? A command economy.
Macroeconomics and the Circular Flow
If macroeconomics looks at the economy as a whole, it focuses on which of the following? Unemployed people.
In the circular flow model diagram: Businesses buy resources from households, and households use their income from the sale of resources to buy goods and services from businesses.
Core Microeconomic Principles
Production and Cost
_____________ is a term referring to the fact that for many goods, as the level of production increases, the average cost of producing each individual unit declines: Economies of scale.
Macroeconomic Goals and Policy
Which of the following is an example of an export? A US car manufacturer sells a car to Kurt who lives in Germany.
When nations desire a healthy macroeconomy, they typically focus on three goals, one of these being: Low unemployment.
Which of the following best describes a fiscal policy tool? Government spending.
Choice, Scarcity, and Opportunity Cost
The opportunity cost of an action: A subjective valuation that can be determined only by the individual who chooses the action.
Most choices involve _________________, which involves comparing the benefits and costs of choosing a little more or a little less of a good: Marginal analysis.
Marginal thinking is best demonstrated by: Choosing to spend one more hour studying economics because you think the improvement in your score on the next quiz will be worth the sacrifice of time.
The general pattern that consumption of the first few units of any good tends to bring a higher level of _______ to a person than consumption of later units is a common pattern: Marginal benefit or marginal utility.
Scarcity exists because of: Unlimited wants and limited resources.
Which of the following is not an example of a positive economic statement? College students drink too much beer. (This is a normative statement.)
Production Possibilities Frontier (PPF)
The leader of a federal political party made the following campaign promise: “My administration will increase national defense without requiring sacrifices elsewhere in the economy.” The promise can be kept if: Either b) or c) occurs, but not as a result of a). (Implies shifting the PPF outward or moving from an inefficient point.)
In the above model, an economy is operating at full employment, and then workers in the bread industry are laid off. This change is portrayed in the movement from: C to F. (Assuming C is on the PPF and F is inside.)
Using the figure above, along the production possibilities frontier, the most efficient point of production depicted is: All points on the production possibilities frontier are equally efficient.
Demand, Supply, and Market Equilibrium
Laws and Assumptions
Economists refer to the relationship that a higher price leads to a lower quantity demanded as the: Law of demand.
Any given demand or supply curve is based on the ceteris paribus assumption that: All else is held equal.
Shifts in Demand and Supply
After widespread press reports about the dangers of contracting “mad cow disease” by consuming beef from Canada, the likely economic effect on the U.S. demand curve for beef from Canada is: A shift of the demand curve for beef to the left.
If new manufacturers enter the computer industry, then (ceteris paribus): The supply curve shifts to the right.
A severe freeze has once again damaged the Florida orange crop. The impact on the market for orange juice will be a leftward shift of: The supply curve.
Interpret the following statement: “An increase in the price of wheat will encourage farmers to increase the quantity of wheat supplied to the market.” The statement is correct. (This describes a movement along the supply curve.)
Price Controls and Efficiency
The market price of a product occurs where: The quantity demanded equals the quantity supplied.
A price ceiling set below the equilibrium price will cause a: Shortage.
A competitive market is efficient when it is in equilibrium because: The sum of consumer surplus plus producer surplus is maximized.
Surplus and Graphical Analysis
In the figure above, the movement from point a to point b could be caused by: An increase in the price of pizza. (Movement along the demand curve.)
In the above figure, the shift in the supply curve from S to S1 could be caused by: An increase in the price of mozzarella cheese used to make pizzas. (Input cost increase shifts supply left.)
In the figure above at the market price of $15, the consumer surplus equals: $10,000.
In the figure above, the equilibrium market price is $20. The producer surplus equals: $1,500 and is shown by area A.
Gross Domestic Product and Economic Measurement
Defining and Calculating GDP
GDP is: The value of all final goods and services produced domestically.
Which of the following is not counted as a part of GDP? The purchase of 100 shares of AT&T stock by your grandfather. (Financial transactions are excluded.)
Gross Domestic Product equals $1.2 trillion. If consumption equals $690 billion, investment equals $200 billion, and government spending equals $260 billion, then: Exports exceed imports by $50 billion. (Calculation: $1200B – ($690B + $200B + $260B) = $50B Net Exports.)
To compare the GDP of two different countries with different currencies, it is necessary to use: A currency exchange rate.
Real vs. Nominal GDP
The difference between nominal GDP and real GDP is: Real GDP adjusts for inflation.
If the nominal GDP is $20T and the GDP price deflator is 105, what is the value of real GDP? 19T. (Approximation of $19.05T.)
Per Capita GDP and Trade
If imports exceed exports, as in recent years in the United States, then __________ exists: A trade deficit.
Calculate per capita GDP for Ethiopia and Costa Rica:
- Ethiopia (GDP $8B / Pop 55M) = $145.00
- Costa Rica (GDP $9B / Pop 4M) = $2,250.00
Business Cycles
The name given to the top of the business cycle where it changes from growth to a decline is a: Peak.
Unemployment and Labor Economics
Types and Measurement
If the unemployment rate is 6 percent and the number of persons unemployed is 6 million, then the number of people employed is equal to: 94 million. (Labor force = 100 million.)
If the unemployment rate is 8 percent, then this means: 8 percent of the labor force is unemployed.
A welder who quits his job and moves from Pittsburgh to Madison to try to get a better welding job is said to be: Frictionally unemployed.
The type of unemployment that occurs because of a recession is called: Cyclical unemployment.
In November 2010 the labor force in Siouxtown was 14,800. There were 14,483 persons employed. The local unemployment rate was: 2.1%.
Freelife, New Hampshire has a labor force of 78,567 persons and employment of 74,382. The unemployment rate for the city is: 5.3%.
Policy and Costs
Insofar as government public policy is concerned, the best way to battle unemployment would be: To minimize recessions.
The most significant real economic cost of high unemployment is: The potential goods and services that might have been produced but weren’t.
During the Great Depression of the 1930s, the unemployment rate reached more than _________ of the labor force: 25%.
______________________ argues that the productivity of workers will increase if they are paid more, and so employers will often find it worthwhile to pay their employees somewhat more than market conditions might dictate: Efficiency wage theory.
Inflation and Price Indices
Defining Inflation and Deflation
A payment is said to be ________________ if it is automatically adjusted for inflation: Indexed.
A lender demands an interest rate in part to compensate for any expected ___________, so that the money that is repaid in the future will have at least as much buying power as the money that was originally loaned: Inflation.
The effects of inflation are seen in: Goods, services, wages, and income levels.
With regard to the economy, the term negative inflation is synonymous with which of the following? Deflation.
The situation where the buying power of money in terms of goods and services increases is called: Deflation.
What distinguishes the real value of a statistic from the nominal value of a statistic? Adjusting for inflation.
Price Indices
The Producer Price Index is based on prices paid for supplies and inputs by: Producers of goods and services.
What name is given to the index based on the prices of exported or imported merchandise? International Price Index.
One of the reasons that a rise in the price of a fixed basket of goods over time tends to overstate the rise in a consumer’s true cost of living, is: Substitution bias.
Real Gain Calculation
An analyst needs to adjust the nominal GDP for the years 2000 and 2010 into real terms… What is the real gain? 18.34%.
International Finance and Trade Balances
Financial Flows and Identities
Which of the following involves a financial outflow from the U.S. economy? U.S. firms buying logging rights to China’s forests.
Which of the following represents a financial inflow to the U.S. economy? Returns paid on U.S. financial investments in Switzerland.
What is the most common method of measuring flows of trade? Comparing exports of goods, services, and financial capital between countries.
If a country’s current account balance is zero and the financial payments flowing in and out of the country’s economy are equal, then which of the following must be a true statement? It is not an overall or a net investor in other countries.
The national saving and investment identity teaches that the rest of the economy can absorb an inflow of foreign financial capital by: Leaving domestic saving and investment unchanged using any of the above.
Under what circumstances would it most likely be considered beneficial for a government to be a large borrower of foreign investment capital? When those funds are invested in a way that sustains economic growth over time.
Trade Balance Calculations
The term _____________ describes circumstances where a country’s exports exceed its imports: Trade surplus.
An economics professor is discussing a measure of trade that involves a comparison of exports and imports of goods for the year just ended. What name is given to this measurement? Merchandise trade balance.
A country finds itself in the following situation: government budget deficit of $800; total domestic savings of $1800; total domestic physical capital investment of $1300. According to the national saving and investment identity, what is the current account balance? Deficit of $300.
What was the country’s current account balance for 2010? $159 billion.
Monetary Policy and Banking Operations
Central Bank Tools and Money Supply
Which of the following terms is used to describe the proportion of deposits that banks are legally required to deposit with the central bank? Reserve requirements.
A central bank that desires to reduce the quantity of money in the economy can: Raise the reserve requirement.
Atlantic Bank is required to hold 10% of deposits as reserves. If the central bank increases the discount rate, how would Atlantic Bank respond? By increasing its reserves.
If the central bank sells $25 million in bonds to Southern Bank (which holds no excess reserves), which of the following will result? The money supply in the economy decreases.
When the Central Bank acts in a way that causes the money supply to increase while aggregate demand remains unchanged, it is: Following an expansionary monetary policy.
When banks hold excess reserves because they don’t see good lending opportunities: It negatively affects expansionary monetary policy.
The quantitative easing policies adopted by the Federal Reserve are usually thought of as: Temporary emergency measures.
Velocity and Equilibrium
If GDP is 1800 and the money supply is 300, then what is the velocity? 6. (Velocity = GDP / Money Supply)
In a private closed economy, the equilibrium GDP is: $180 billion.
If the economy is at equilibrium as shown in the diagram above, then an expansionary monetary policy will: Reduce unemployment, but have little effect on inflation.
Exchange Rates and International Currency
Currency Valuation and Policy
If 112 Japanese yen purchased $1.00 U.S. in 2008 and 83 Japanese yen purchased $1.00 U.S. in 2009, then: The dollar depreciated against the yen.
If 1000 Mexican pesos could buy 100 U.S. dollars in 2006 and 87 U.S. dollars in 2010, then: The dollar strengthened against the peso.
How much was 1 U.S. dollar worth in Japanese yen, in 2010 and 2013?
- 2010: 113.6 yen
- 2013: 107.5 yen
If a nation merges its currency with another nation to create a single currency, what must it give up? The ability to determine its own nationally-oriented monetary policy.
When a government uses a ______________ exchange rate policy, it usually allows the exchange rate to be set by the market: Soft peg.
What do the economies of Greece, Ireland, and Germany all share? A common currency.
Monetary Policy and Exchange Rates
A ______________________ monetary policy can be used to decrease aggregate demand because it _____________ exports and _________________ imports: Tight; stimulates; reduces.
If a government uses monetary policy to alter the exchange rate, then it cannot at the same time use monetary policy to address issues of: Inflation or recession.
A central bank must be concerned about whether a large and unexpected ___________________________ will drive most of the country’s existing banks into bankruptcy: Exchange rate depreciation.
Suppose investors in the US are looking to Japan for high returns, while Japanese investors are lowering US investments. The combined effect will: Shift the supply curve out, the demand curve shifts in, and the value of the dollar decreases.
Fiscal Policy, Debt, and Aggregate Demand
Budget and Debt
If the state of Washington collects $65.8 billion in tax revenues in 2013 and total spending is $74.8 billion, the result will be: A budget deficit.
By June 2010, the U.S. government owed $13.6 trillion dollars ________________ that, over time, has remained unpaid: In accumulated government debt.
Types of Fiscal Policy
When the government passes a new law that explicitly changes overall tax or spending levels, it is enacting: Discretionary fiscal policy.
The government can use _____________ in the form of ____________________ to increase the level of aggregate demand in the economy: An expansionary fiscal policy; an increase in government spending.
A typical ____________________________ fiscal policy allows government to decrease the level of aggregate demand, through increases in taxes: Contractionary.
Stabilizers and Effects
If an economy moves into a recession, causing that country to produce less than potential GDP, then: Automatic stabilizers will cause tax revenue to decrease and government spending to increase.
If Canada’s economy moves into an expansion while its economy is producing more than potential GDP, then: Automatic stabilizers will decrease government spending and increase tax revenue.
During a recession, if a government uses an expansionary fiscal policy to increase GDP, the: Aggregate demand curve will shift to the right.
When increasing oil prices cause aggregate supply to shift to the left, then: Unemployment and inflation increase.
Assume that laws require a balanced federal budget. During a recession, the government will want to implement _____________________, but may be unable to do so because such a policy would ____________________________: Expansionary fiscal policy; lead to a budget deficit.
Interest Rates and Crowding Out
From a macroeconomic point of view, which of the following is a source of demand for financial capital? Government borrowing.
An increase in government borrowing can: Crowd out private investment in physical capital.
A country’s economic data indicates a substantial reduction in financial capital available to private sector firms. Which factor most likely influenced this? Especially large and sustained government borrowing.
When the interest rate in an economy decreases, it is most likely as a result of: An increase in the government budget surplus or a decrease in its budget deficit.
An increase in the government’s budget surplus will cause the interest rate to: Decrease.
When the interest rate in an economy increases, it is likely the result of either: A decrease in the government’s budget surplus or an increase in its budget deficit.
If the government initiates an expansionary monetary policy at the same time that its budget deficit decreases, then the interest rate will: Decrease.
Ricardian equivalence means that: Changes in private savings offset any changes in the government deficit.
When government policy moves from a budget deficit to a budget surplus and the trade deficit remains constant: Investment will increase if savings remain constant.
A __________________ often results in an outflow of financial capital leaving the domestic economy and being invested in the global economy? Trade surplus.
Global Economics and Development
Measuring Development
By measuring and comparing per capita GDP data, economists can determine the extent that per capita GDP differs between the nations of the World. A valid criticism of comparing per capita GDP for this purpose is that it: Fails to capture the precise standard of living.
Factors like health, education, human rights, crime, personal safety, and cleanliness of environment all: Have a large impact on the standard of living of a country.
When per capita GDP is used as a rough measure to compare the economic regions of the World, the richest region is _________________ and the poorest region is ________________: The United States, Western Europe, and Japan; Sub-Saharan Africa.
Trade and Capital Flows
A trade balance can be quickly defined as the gap between _____________, which are also included in the current account balance along with ______________________: Exports and imports; investment income and unilateral transfers.
Why do smaller economies around the world typically face more volatile inflation? They can be unsettled by international movements of capital and goods.
With regard to trade imbalances, why should smaller countries around the world take some steps to limit flows of international capital? To reduce susceptibility to economic whiplash.
Policy and Technology
Many _____________ countries have a legacy of government economic controls: Converging.
What do Africa, southern Mexico, and tropical areas of Central America and Brazil all share in common? Technological exclusion.
Growth policies that mainly focus on both finding appropriate technology and on getting connected through communications and transport infrastructure are generally associated with: Technologically disconnected nations.
A foreign aid donor has provided technology to help farmers in an undeveloped country to be more productive. If that country’s government reacts to political pressure by urban food consumers by imposing price ceilings on farm products, the farmers receiving the technology will: Still be unable to make a living.
Comparative Advantage and Trade Protectionism
Specialization and Gains from Trade
The reasons that nations trade includes the fact that: No one country produces all of what citizens within the country want.
When nations increase production in their area of _________________ and trade with each other, both sides can benefit: Comparative advantage.
According to international trade theory, a country should: Import goods in which it has a comparative disadvantage.
The idea behind comparative advantage reflects the possibility that one party: May be able to produce something at a lower opportunity cost than another party.
The slope of the production possibility frontier is determined by the ________________ of expanding production of one good, measured by how much of the other good would be lost: Opportunity cost.
Opportunity Cost Calculations
Alternate Outputs from One Day’s Labor Input:
- USA: 12 bushels of wheat or 3 yards of textiles.
- India: 3 bushels of wheat or 12 yards of textiles.
The opportunity cost of one bushel of wheat in India is: 4 yards of textiles.
Alpha can produce either 18 oranges or 9 apples an hour, while Beta can produce either 16 oranges or 4 apples an hour. The opportunity cost of producing 1 orange for Alpha and Beta, respectively, are: 0.5 apples; 0.25 apples.
If the USA could produce 1 ton of potatoes or 0.5 tons of wheat per worker per year, while Ireland could produce 3 tons of potatoes or 2 tons of wheat per worker per year, there can be mutual gains from trade if: The USA specializes in potatoes because of its comparative advantage in producing potatoes.
Suppose that Canada can produce 100,000 hockey sticks or 10,000 gallons of maple syrup, while Germany can produce 90,000 hockey sticks or 10,000 gallons of maple syrup. From these numbers, we can conclude: Canada has a comparative advantage in the production of hockey sticks.
If Argentina transfers 2 units of labor from wine to cloth and Chile transfers 1 unit of labor from cloth to wine, the increase in combined output by those two workers will be: 8 wine; 16 cloths.
Trade Barriers and Protectionism
The acronym GATT stands for: General Agreement on Tariffs and Trade.
Tariffs are taxes imposed on: Imported products.
Tariffs result in a decrease in consumer surplus because: The price of the protected good increases and quantity consumed decreases.
After the USA introduces a tariff in the market for gigastraps, the price of gigastraps in the USA will: Increase.
Raising an existing tariff on grapes from Argentina will: Increase American consumption of domestically produced grapes.
Import tariffs generally ________ the output of domestic producers of the affected products and also _________ the output of domestic exporters: Increase; decrease.
If tariffs are increased to reduce dependence on imports, the long-run effect is most likely to be: A decrease in both American imports and exports.
The infant industry argument for protectionism suggests that an industry must be protected in the early stages of its development so that: Domestic producers can attain the economies of scale to allow them to compete in world markets.
Why would foreign firms export a product at less than its cost of production? This may be part of a long-term strategy in which foreign firms would sell below cost in the short-term, and when they have driven out the domestic U.S. competition, they would then raise prices.
Which of the following is not a short-run impact of imposing quotas on the American industries they seek to protect? Government tax revenues increase. (Quotas do not generate tax revenue like tariffs do.)