Macro Exam #1 Chapter 2

question

circular flow diagram
answer

a visual model of the economy that shows how dollars flow through the markets among the households and firms
question

Explain how the circular flow diagram works
answer

In the factors of production market, households sell the use of their labor, land, and capital to the firms in the markets of factors of production. The firms then use that to produce goods and services. In other words, firms use money, labor, or land that we, households, give, to use for buying inputs for the factors of production market. The goods and services produced are then consumed by households. The firms use some of the revenue they receive through production to pay for the factors of production such as wages of their workers. In other words, the households spend the money they receive in wages to buy goods and services produced by firms.
question

How is economics a science?
answer

Economists try to address their subject with a scientist’s objectivity. They approach the study of the economy in much the same way a physicists approaches the study of matter and a biologist approaches the study of life by devising a theory, collecting data, and then analyzing these data in an attempt to verify or refute their theories.
question

Name a way that your family interacts in the factor market and a way that it interacts with the product market.
answer

In the market for goods and services my family purchase items for the household such as food, clothing, funiture, and entertainment. In the market for factors of production my husband works at ernst in young as an employee and submits his services to them. They in turn provide services for other households and firms.
question

Name one economic interaction that isn’t covered by simplified circular-flow diagram.
answer

Government and internatioal trade.
question

Use a production possiblites frountier to describe the idea of efficiency.
answer

An outcome is efficient if the economy is getting all it can from scarce resources it has available. . When the economy is using its resources efficiently, it cannont increase the production of one good without reducing the production of the other.
question

What are the two subfields into which economics is divided? Explain what each subfield studies.
answer

Macroeconomics and Microeconomics.
question

Microeconomics
answer

Microeconmics is the study of how households and firms make decisions and how they interact in specific markets.
question

Macroeconomics
answer

Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.
question

Why do economist sometimes offer conflicting advise to policymakers?
answer

two reasons: 1. Economist may disagree about the validy of alternative positive theories about how the world works; 2. Economist may have different values and, therefore, different normative views about what public policy should try to accomplish.
question

positive statements
answer

claims that attempt to describe the world as it is
question

normative statements
answer

claims that attempt to prescribe how the world should be
question

production possibilities frontier
answer

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
question

In what case is an outcome efficient?
answer

if the economy gets all that it can from the scarce resources it has available; points on the curve
question

In what case is an outcome inefficient?
answer

if the point is under the curve (inside)
question

opportunity cost and PPF
answer

page 24 referencing figure 2 In point E, producing an additional car will mean a substantial loss of computer output. The opportunity cost is high, and the frontier is steep.
question

An economic model is: a. a mechanical machine that replicates the functioning of the economy b. a fully detailed, realistic description of the economy c. a simplified representation of some aspect of the economy d. a computer program that predicts the future of the economy
answer

a. a mechanical machine that replicates the functioning of the economy
question

The circular-flow diagram illustrates that, in markets for the factors of production, a. households are sellers, and firms are buyers b. households are buyers, and firms are sellers c. households and firms are both buyers d. households and firms are both sellers
answer

a. households are sellers, and firms are buyers
question

a point inside the production possibilities frontier is: a. efficient, but not feasible b. feasible, but not efficient c. both efficient and feasible d. neither efficient or feasible
answer

b. feasible, but not efficient
question

feasible
answer

Because resources are scarce, not every conceivable outcome is feasible. With the resources it has, the economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier.
question

An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers’ preferences, it would: a. expand the production possibilities frontier b. contract the production possibilities frontier c. move the economy along the production possibilities frontier d. move the economy inside the production possibilities frontier
answer

c. move the economy along the production possibilities frontier. the production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the trade-off between producing hot dogs and hamburgers doesn’t change, because resources remain the same. However, the consumption point along the production possibilities frontier has changed, because consumers now prefer to consume more hot dogs. This is represented by a movement along the production possibilities frontier to a point with more hot dog production and less hamburger production.
question

All of the following topics fall within the study of microeconomics EXCEPT a. the impact of the cigarette taxes on the smoking behavior of teenagers b. the role of Microsoft’s market power in the pricing of software c. the effectiveness of antipoverty programs in reducing homelessness. d. the influence of the government budget deficit on economic growth
answer

d. the influence of the government budget deficit on economic growth This is a macroeconomic issue
question

Which of the following is a positive, rather than a normative, statement? a. law X will reduce national income b. law X is a good piece of legislation c. Congress ought to pass law X d. the president should veto law X
answer

Law X will reduce national income. Positive statements are descriptive; they make a claim about how the world is. However, normative statements are prescriptive; they make a claim about how the world ought to be. Therefore, in this case, the only positive statement is law X will reduce national income because it states what will happen if something is done rather than what should be done.
question

What does the slope of the PPF tell you?
answer

it tells you the opportunity cost of one good in terms of the other
question

Why might the PPF be bow-shaped?
answer

not all resources are equally good at producing a product; the opportunity cost varies
question

Macro or micro? a. A family’s decision about how much income to save b. The effect of government regulations on auto emissions c. The impact of higher national saving on economic growth d. A firm’s decision about how many workers to hire e. The relationship between the inflation rate and changes in the quantity of money
answer

a. Micro b. Macro c. Macro d. Micro e. Macro
question

positive or normative AND explain why. a. Society faces a short-run tradeoff between inflation and unemployment.
answer

The statement that society faces a short-run tradeoff between inflation and unemployment is a positive statement. It deals with how the economy is, not how it should be. Since economists have examined data and found that there is a short-run negative relationship between inflation and unemployment, the statement is a fact, thus it is a positive statement.
question

positive or normative AND explain why. b. A reduction in the rate of growth of money will reduce the rate of inflation.
answer

The statement that a reduction in the rate of growth of money will reduce the rate of inflation is a positive statement. Economists have found that money growth and inflation are very closely related. The statement thus tells how the world is, and so it is a positive statement.
question

positive or normative AND explain why. c. The Federal Reserve should reduce the rate of growth of money.
answer

The statement that the Federal Reserve should reduce the rate of growth of money is a normative statement. It states an opinion about something that should be done, not how the world is.
question

positive or normative AND explain why. d. Society ought to require welfare recipients to look for jobs.
answer

The statement that society ought to require welfare recipients to look for jobs is a normative statement. It doesn’t state a fact about how the world is. Instead, it is a statement of how the world should be and is thus a normative statement.
question

positive or normative AND explain why. e. Lower tax rates encourage more work and more saving.
answer

The statement that lower tax rates encourage more work and more saving is a positive statement. Economists have studied the relationship between tax rates and work, as well as the relationship between tax rates and saving. They have found a negative relationship in both cases. So the statement reflects how the world is, and is thus a positive statement.

Get instant access to
all materials

Become a Member