Terms in this set (631)The fallacy of composition is the fallacious view that what is true for the individual will also be true for the group. Which of the following is not scarce? air People are more likely to purchase a consumer ratings magazine that reviews new automobiles before buying a new car than they are to purchase a consumer ratings magazine that reviews pens and pencils before buying a new pen or pencil. Which of the following best explains this behavior? Because the value of the information, in terms of avoiding a mistake on the purchase, is much higher for an automobile than for a pen or pencil, it is more worthwhile to gather this information. Joe and Ed go to a diner that sells hamburgers for $5 and hot dogs for $3. They agree to split the lunch bill evenly. Ed chooses a hot dog. The marginal cost to Joe then of ordering a hamburger instead of a hot dog is $1.00 The value of a good is Subjective For the typical student, taking an introductory course in economics should help the student learn to rationally analyze social problems. The difference between microeconomics and macroeconomics is that microeconomics deals with more specifically defined units, and macroeconomics addresses highly aggregated concepts What do economists mean when they state that a good is scarce? The amount of the good that people would like exceeds the supply freely available from nature When economists say a good is scarce, they mean the human desire for the good exceeds the amount freely available from nature In economics, man-made resources such as tools, equipment, and structures that are used to produce other goods and services are referred to as capital Economic theory is a set of definitions, postulates, and principles assembled in a manner that helps make cause-and-effect relationships clear in economics is like a guidebook in that it points out what to look for provides economists with a common language and way of thinking about how the world works When economists use the term ceteris paribus, they are indicating that all other variables except the ones specified are assumed to be constant The expression, "There's no such thing as a free lunch," implies that opportunity costs are incurred when resources are used to produce goods and services In economics, the statement, "There is no such thing as a free lunch," refers to which of the following? Production of a good requires the use of scarce resources regardless of whether it is supplied free to the consumers. Economics is primarily the study of the choices people make as the result of scarcity The economic way of thinking suggests that if the government imposed a $500 tax on owners of red automobiles, fewer red automobiles would be produced and sold "If Tom had twice as much money, he could consume twice as much. If everyone had twice as much money, they could consume twice as much." This quote illustrates the fallacy of composition "As soon as I announced my 'get tough on crime' policy, criminals got scared and the crime rate went down." Suppose that the lower crime rate was actually caused by freezing cold temperatures in January--it was just too cold for anybody to be out robbing other people. Which fundamental economic mistake did the politician make? believing that association is the same as causation In economics, the benefit (or satisfaction) that an individual gets from an activity is called utility Ex-London School of Economics student Mick Jagger sang, "You can't always get what you want, but if you try sometime, you just might find you can get what you need." Another statement of the basic economic principle expressed in this lyric is that you can allocate your resources to what gives you the highest value Private property rights involve the right to exclusive use of the property legal protection against those who would seek to use or abuse the property without the owner's permission the right to transfer, sell, exchange, or mortgage the property Because private owners are held responsible for damages their property causes to the property of others, private owners have a strong incentive to take steps to reduce the chance that they will harm the property of others Which of the following is true of private ownership? Private ownership links responsibility with the right of control In Zimbabwe and Botswana, elephants can be owned by local tribes and trade in ivory is legal, while in countries such as Kenya, it is illegal to trade in ivory and elephants cannot be privately owned but are protected by the government. Which of the following is true regarding the change in the elephant populations since 1979 in these countries? In Zimbabwe and Botswana, elephant populations have more than doubled, while in Kenya, the population of elephants has fallen to less than one-third of its previous level With voluntary exchange, both the buyer and seller will be made better off According to the law of comparative advantage, both individuals and nations will be able to produce a larger joint output if each productive activity is undertaken by the low opportunity cost producer The student government associations at several universities have experimented with purchasing bicycles to leave around campus for everyone's use. Anyone who needs the bike can use it, and they are not allowed to lock the bike up or take it home, but rather must leave it on campus for someone else to use. Economic theory would predict that students will not take as good of care of these commonly owned bicycles as they do their own bicycles Which of the following is an implication of the law of comparative advantage? Countries that are low opportunity cost producers of timber products should trade those products for goods they can produce only at a high opportunity cost Entrepreneurs are profit-seeking decision makers who decide which business projects to undertake Kelly is an attorney and also an excellent typist. She can type 120 words per minute, but she charges attorney fees at $100 per hour. Todd would like some typing work but can only type 60 words per minute. According to the law of comparative advantage, Kelly should hire Todd to do her typing if and only if his wage rate is less than $50 per hour "A real estate agent is a middleman who profits from the lack of information possessed by housing buyers and sellers. A real estate agent creates nothing of value." These two statements contain one error; real estate agents create value by arranging trades and providing scarce information Todd owns a truck that he values at $2,000. Susan, who does a lot of hauling, values the truck at $6,000. If these two are allowed to negotiate, which of the following will most likely occur? The truck will be sold at a price greater than $2,000 but less than $6,000, and both parties will benefit Which of the following is true regarding private ownership? With private ownership, owners are held accountable for using their resources in a manner that harms the resources of others Which of the following sayings best reflects the concept of opportunity cost? "Time is money." Under a system of private property, could a 60-year-old owner of a tree farm benefit by planting and caring for a crop of Douglas firs, most of which will not be ready to cut for 50 years? Yes, the farmer will benefit because this action will increase the value of the land if and when the farmer decides to sell Which of the following is true of exchange? Exchange permits trading partners to expand their total output of goods and services as the result of greater specialization in areas where each has a comparative advantage In voluntary exchange, if the seller of a product gains, the buyer must also gain; mutual gain provides the foundation for exchange According to the law of comparative advantage, individuals and nations gain when they specialize in producing those items for which they are the low opportunity cost producers and exchange for other desired goods they can't produce as cheaply When property rights are clearly defined and enforced, private owners will develop and direct their property toward uses that others value highly because the market will generally reward them for doing so Don can produce 10 pens or 20 pencils in one hour while Bob can produce 15 pens or 5 pencils in one hour. Which of the following statements is correct? Bob has a comparative advantage over Don in the production of pens Which of the following would decrease the price of packaged hot dogs? an increase in the price of hot dog buns, a complement to packaged hot dogs a decrease in the price of hamburger meat, a substitute for packaged hot dogs a technological advance that lowers the cost of producing packaged hot dogs As a result of the September 11, 2001 terrorist attacks, many people became reluctant to fly in airplanes. As a result, all major airlines cut their airfares dramatically. Which of the following best explains this within the framework of supply and demand? A decrease in the demand for air travel resulted in a lower price and a smaller equilibrium quantity The invisible hand principle, as developed by Adam Smith in The Wealth of Nations, states that competitive markets will bring individual self-interest and the public interest into harmony If consumer incomes go up and you are analyzing the market for Harley Davidson motorcycles, the effect on the demand for motorcycles, ceteris paribus, will be a rightward shift in the demand curve for motorcycles According to Adam Smith, what is the primary source of a nation's wealth? The people's ability to produce products and trade in free markets Which of the following would most likely increase the demand for peanut butter? a decrease in the price of jelly, a good that is often used with peanut butter Suppose prices for new homes have risen and sales of new homes have also risen. We can conclude that the demand for new homes has risen Market prices are conveyors of information determined by the interactions of supply and demand in voluntary exchange indicators of the relative scarcity of resources and products An important assumption that is made when constructing a demand schedule is that all other determinants of demand are held constant An increase in the demand for tattoos will lead to a higher price and a larger quantity sold If Georgia experiences a late frost that damages the peach crop, we should expect the supply curve for peaches to shift to the left and the price of peaches to rise Prices direct economic activity in a market economy by influencing the actions of buyers and sellers Which of the following goods are most likely to be substitutes? bananas and apples Producers are willing to offer greater quantities for sale at higher prices because they have the incentive to pay the increasing opportunity cost of resources necessary to attract them from alternative uses The number of people willing to buy tickets to the Super Bowl is invariably greater than the number of tickets (and seats) available. This is evidence that the price of the tickets is lower than the equilibrium price If a large percentage increase in the price of a good results in a small percentage reduction in the quantity demanded of the good, demand is said to be relatively inelastic "A reduction in gasoline prices caused the demand for gasoline to increase. The lower gas prices also led to an increase in demand for large cars, causing their prices to rise." These statements contain one error; the lower gasoline prices would cause an increase in the quantity demanded of gasoline, not an increase in demand A decrease in the price of a good would increase the quantity demanded for the good If coffee and cream are complements, an increase in the price of coffee will cause the demand for cream will fall If the supply of a good decreased, what would be the effect on the equilibrium price and quantity? Price would increase, and quantity would decrease How would a decrease in lumber prices influence the home construction market? The supply of newly constructed homes will increase. An income tax is proportional if everyone pays the same percentage of their income in the form of income taxes. Refer to Figure 4-22. From this tax the government will collect a total of $125 The "incidence of a tax" is the term used to indicate who actually bears the tax burden Refer to Figure 4-17. If the government imposes a price ceiling in this market at a price of $5.00, the result would be a shortage of 20 units Refer to Figure 4-19. When the price ceiling applies in this market and the supply curve for gasoline shifts from S 1 to S 2, a shortage will occur at the new market price
of P2 Exempting teenagers from the minimum wage would probably cause an increase in the number of jobs offering on-the-job training to teenagers. Refer to Figure 4-25. Producer surplus before the tax was levied is represented by area D + E + F The excess supply created when governments impose a price floor above equilibrium is the difference between the new quantity supplied and the new quantity demanded. When a government subsidy is granted to the buyers of a product, sellers can end up capturing some of the benefit because The market price of the product will rise in response to the subsidy. If a government-imposed price floor legally sets the price of milk above market equilibrium, which of the following will most likely happen? there will be a surplus of milk The more inelastic the demand for a product, the more likely that the actual burden of a tax on the product will fall on buyers. Under rent control, tenants can expect lower rent and lower quality housing The average tax rate (ATR) is defined as tax liability divided by taxable income. When a price floor is imposed above the equilibrium price of a commodity, a surplus of the good will develop. The Laffer curve illustrates the principle that when tax rates are quite high, reducing tax rates will increase tax revenue. Suppose the market equilibrium price of corn is $5 per bushel, and the government sets a price ceiling of $4 per bushel. What is the most likely result of this action? There will be a shortage of corn. A price ceiling set below an equilibrium price tends to cause persistent imbalances in the market because Quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage. When government imposes price controls in a market, non-price factors become more important in the rationing of the good. Both price floors and price ceilings, when effective, lead to a reduction in the quantity traded. Suppose that a tax is placed on textbooks. If the buyers end up bearing most of the tax burden, this indicates that the demand is more inelastic than the supply A subsidy on a product will generate more actual benefit for consumers (and less for producers) when the supply of the product is relatively elastic. If a household has $50,000 in taxable income and its tax liability is $20,000, the household's average tax rate is 40 percent Suppose that the minimum wage was increased to $10 per hour. Which of the following would be most likely to result from the minimum wage increase? an increase in the demand for high-skill workers providing services that are a good substitute for those whose wages were pushed up by the higher minimum wage Refer to Figure 4-20. The burden of the tax on sellers is $1.00 per unit According to the Laffer curve, when marginal tax rates are high, a reduction in tax rates may increase tax revenue. If Heather's tax liability increases from $10,000 to $16,000 when her income increases from $30,000 to $40,000, her marginal tax rate is 60 percent Refer to Figure 4-10. The accompanying graph shows the market for a good before and after an excise tax is imposed. The total tax revenue generated is indicated by area A + area B. If Susan's income increases from $40,000 to $50,000 and her tax liability increases from $6,000 to $9,000, which of the following is true? Her marginal tax rate is 30 percent in this range. Refer to Figure 4-8. The supply curve S 1 and the demand curve D indicate initial conditions in the market for soft coal. A $40-per-ton tax on soft coal is levied, shifting the supply curve from S 1 to S 2. Imposing the tax increases the equilibrium price of soft coal from $50 to $60 per ton. A progressive tax is one that taxes those with higher incomes at a higher rate than those with lower incomes. A regressive tax is a tax that takes a smaller percentage of taxable income as one's income increases. If the federal government began granting a subsidy of 10 cents per apple to apple growers and as a result the price of apples to consumers falls by 8 cents, the actual benefit of this subsidy goes mostly to consumers. In the supply and demand model, a subsidy granted to buyers is illustrated by an upward shift in the demand curve, by the per unit amount of the subsidy. The loss resulting from unrealized gains from trade that occurs when a tax squeezes out otherwise beneficial transactions is called deadweight loss or excess burden
During the Prohibition period (when the production and sale of alcohol was illegal), the quality of alcohol sold became less reliable. the murder rate increased. gangsters dominated the alcohol trade. A tax tends to reduce formal market activity because it lowers the return on such activity A legal minimum wage is an example of a price floor. Deadweight losses are associated with taxes that distort the incentives that people face. Approximately 50,000 luxury boats (priced $100,000 or more) are currently produced each year. Using the economic way of thinking, how much revenue would the government actually generate with a $10,000 excise tax on luxury boats? less than $500 million Refer to Figure 4-22. The equilibrium price in the market before the tax is imposed is $5.00 A subsidy is defined as a payment to either the buyer or seller of a good or service, usually on a per-unit basis, when a good or service is purchased. Most economists do not believe an increase in the minimum wage would significantly reduce the poverty rate. Which of the following best explains why? most minimum-wage workers are teenagers or spouses in households with incomes already above the poverty level. Kathy works full time during the day as an economist and faces a 50 percent marginal tax rate. If Kathy were to get an offer to work a second job in the evenings doing consulting work for a local business for $10,000 per year, how much of this additional income would she be able to keep as net pay after taxes? $5,000 The burden of a tax will fall primarily on buyers when the demand for the product is highly inelastic and the supply is relatively elastic. Which of the following characterizations is correct? Rent control is an example of a price ceiling and the minimum wage is an example of a price floor. A $10 per unit government subsidy paid directly to sellers of heaters will result in a downward shift in the supply curve for heaters by $10. Rent controls generally fix the price of rental housing below market equilibrium. Economic analysis suggests these controls Reduce the future supply of rental housing Refer to Figure 4-13. The supply curve S and the demand curve D 1 indicate initial conditions in the market for flu shots. A new government program is implemented that grants buyers a $25 subsidy when they buy a flu shot, shifting the demand curve from D 1 to D 2. Which of the following is true for this subsidy given the information provided in the figure? All of the above: $65 represents the net price a buyer must pay for a flu shot after taking into account the subsidy payment. Buyers of flu shots will receive an actual benefit of $10 from the subsidy, while sellers of flu shots will receive an actual benefit of $15 from the subsidy. Refer to Figure 4-24. The amount of tax revenue received by the government is equal to the area P3 A C P1. A free-rider problem exists when a good that has the following characteristic? Nonexcludable The key explanation for the prevalence of waterway pollution is that waterways are often an open access, commonly owned resource. The problem created when it is difficult to exclude nonpaying customers is called the Free-rider problem How does an additional individual's consumption of a good that is nonrival-in-consumption, such as a radio broadcast, affect the amount of the good available to other consumers? The amount available to others is unaffected Consider two goods - one that generates external benefits and another that generates external costs. The actual market outcome would result in a price that is lower than the efficient price for both goods. Which of the following is a valid reason for government provision rather than market provision of certain economic goods and services? Public goods tend to be undersupplied through the market since it is difficult for potential suppliers to withhold such goods from nonpaying consumers, while the government can use taxes to overcome this problem Which of the following provides the best example of a public good? An unscrambled television signal Which of the following will most likely help the consumer make better-informed choices when choosing among goods that are seldom purchased? all of the above: franchising consumer ratings magazines Competitive markets generally give consumers and producers correct incentives when property rights are well-defined and enforced. In a market that lacks sufficient competition, output will generally be less than the output that is ideal from the standpoint of economic efficiency Which of the following is the best example of a public good? national defense
Which of the following correctly describes the external benefit resulting from an individual's purchase of a winter flu shot? The flu shot reduces the likelihood others will catch the flu Many external costs occur because people do not pay the true cost of using a resource Because the benefits derived from an activity decline as it is expanded, it is generally wise to stop the activity before perfection is reached In which of the following markets are information problems likely to be most serious? used cars Which of the following most clearly indicates why the franchiser of a product has a strong incentive to monitor the quality of the product among all of the franchised sellers? If quality is not maintained, the franchiser will be limited in his ability to sell other franchises and collect franchise fees. Criteria of ideal economic efficiency requires that (I) all actions generating more social benefit than cost be undertaken and (II) no actions generating more social cost than social benefit be undertaken. Both I and II are true. Which of the following is an example of a public good? an effective antimissile system that defends a country against a nuclear attack When externalities are present, competitive market outcomes may be inconsistent with ideal economic efficiency. When consumers cannot tell the difference at the time of sale between high-quality products and those with defects, strong sales of the low-quality products will tend to depress price and drive the high-quality products from the market. Economists call this the imperfect information problem. Which English philosopher argued that people own themselves and, as a result, own the fruits of their labor, and thus, the role of government is to protect these natural rights of individuals? John Locke There is substantial agreement among scholars that at least two functions of government are legitimate. These two functions are the protection of the rights of individuals to their person and property and the provision of goods that cannot easily be provided through markets. As more and more resources are dedicated to an activity the benefits will become smaller and smaller while the costs will rise. A car sells at different prices at different dealerships in a local market. If a consumer has imperfect information about the price of a car at each dealership, he should gather information about prices until the expected marginal benefit of more information equals the marginal cost of gathering it. A good is considered nonrival-in-consumption if many individuals can share in the consumption of the same unit of the good. In the case of an inelastic industry demand for an individual good, such as potatoes, an increase in supply serves to reduce the volume of goods received by the producers in the industry concerned. both (a) and (b) Consequently, there is a reduction in the real demand for the products of this industry as the result of the increase in their supply. There is nonetheless an increase in aggregate real demand that is precisely equivalent to the increase in aggregate supply in the economy as a whole. When a good is nonexcludable, it is impossible or very costly to exclude nonpaying customers from receiving the good. individuals will have an incentive to become free riders. it will be difficult for a private firm producing the good to generate revenue sufficient to cover the cost of production. Sellers will tend to be most concerned with customer satisfaction when they depend on repeat customers for most of their business People who receive the benefit of a good without contributing to its costs of production are called free riders. Suppose the firms in the chemical industry are allowed, free of charge, to dump harmful products into rivers. How will the price and output of the chemical products in a competitive market compare with their values under conditions of ideal economic efficiency? The price would be too low, and the output would be too large. The efficient level of output of a good with an externality occurs when the true marginal cost of production equals the true marginal benefit of the good. If the consumption of a good by one individual does not change the amount of the good available to others, the good is considered to be Nonrival-in-consumption An individuals freedom of press is violated when When a newspaper or publisher is willing to publish his views but is prevented from doing so by the government Suppose that an MBA degree creates no externality because the benefits of an MBA are captured by the student in the form of higher wages. If there are no government subsidies for MBAs, then which of the following statements is correct? The equilibrium quantity of MBAs will equal the efficient quantity of MBAs. If government taxes a firm which pollutes this will Decrease the supply of the good produced Which of the following is the best example of an action that imposes an external cost? water pollution from an upstream factory that increases the cost of providing clean water to downstream residents Externalities are due to which of the following? poorly defined or enforced private property rights Economic efficiency indicates that it nearly always makes sense to stop an activity well before perfection is achieved. If a group of sellers that can restrict entry into a market, they will often be able to enlarge their total profit by raising price and reducing output. It is difficult for the market process to provide public goods because it will be difficult to get potential consumers to pay for such goods because there is not a direct link between payment for and receipt of the good. According to most of today's textbooks, what a producer produces is the difference between his actual product and the previously produced means of production he uses up in producing it - for example, the difference between bread and flour or the difference between automobiles and steel sheet. When the actions of the producers of a good impose an external benefit, the price of the good will be lower, and output lower, than would be consistent with economic efficiency. Suppose the actions of the producers of a good impose an external cost which results in the actual market price of $25 and market output of 1,000 units. How does this outcome compare to the efficient, ideal equilibrium? The efficient price would higher than $25 while the efficient output would be less than 1,000 units. Markets may have difficulty providing the proper quantity of a public good because individuals will tend to become free riders, and private firms will have difficulty generating enough revenue to produce an efficient quantity of the good If production of a good creates external benefits, a competitive market may produce less output than is efficient. According to most of today's textbooks, when it comes to determining GDP only the bread will be counted Suppose external benefits are present in a market which results in the actual market price of $62 and market output of 3,000 units. How does this outcome compare to the efficient, ideal equilibrium? The efficient price would be higher than $62. Which of the following would be considered a repeat-purchase item for most people? toothpaste A quantity of wheat is produced that sells for $100 and is used to produce a quantity of flour that in turn sells for $150. The flour is then used to produce a quantity of bread that sells for $225. What is the total value of what is produced? $475 Which of the following are ways in which the private market provides consumers with valuable information to help them make better decisions? brand names franchising private sector certification firms and consumer report magazines Ginny is the owner of a small business, and she is 35 years old. She doesn't smoke cigarettes, and she often spends her weekends with her family camping at the local Greentree state park. According to public choice theory, which of the following four politicians for a public office would Ginny be most likely to vote for in the upcoming election? Politician C proposes increasing the excise tax on cigarettes and using the money to improve the camping facilities at Greentree state park Which of the following factors weakens the case for government provision of goods and services relative to private-sector provision? the special-interest effect Dairy farmers hold an annual Capitol Hill ice cream social that provides free ice cream for congressional staffers during which time representatives from the industry discuss issues with, and provide information to, congressional staff. This is an example of rent seeking. Which of the following is an example of a good that is produced by a government enterprise and is paid for by taxpayers and provided to consumers free of charge? public schools The fact that voters perceive their votes as unlikely to actually change the outcome of an election causes voters to have little incentive to become informed about candidates and political issues A local government operates a city recreation center with a pool and tennis courts. The center is financed through $50 annual membership fees (required for members to use it). This type of financing is an example of a User charge Public choice analysis suggests that bureaucrats and public-sector managers have a strong incentive to expand their budgets to sizes beyond what would be considered economically efficient. Restrictions that limit sugar imports, subsidies for the construction of sports stadiums, and federal spending on programs like the construction of an indoor rain forest in Iowa all provide examples of government programs that reflect the political attractiveness of special-interest issues. Direct income transfers account for approximately what percentage of total government spending? 40 percent In which of the following situations is representative democracy most likely to lead to the adoption of an inefficient government program? The program provides substantial benefits to a small interest group, and the costs are widespread among voters. Which of the following is an example of a good that is produced by the public sector but consumers purchase it in proportion to the benefit received? first-class mail delivery from the U.S. Post Office The theory of public choice analyzes the likelihood that various public sector alternatives will be instituted. assumes that economic incentives influence the choices of voters. applies the tools of economics to the collective decision-making process. Measured as a share of national income, government expenditures on income transfers during the last 70 years have grown rapidly Which of the following explains why elected representatives will find borrowing to be an attractive method of financing current government programs? the shortsightedness effect People who spend more time and effort investigating the advantages and disadvantages of different automobile models when they go to purchase one than they do investigating the strengths and weaknesses of presidential candidates are saying, in effect, that they expect to use the information on the merits of alternative cars to greater personal advantage than they could information on the merits of alternative presidential candidates.
Figure 6-2 illustrates the four possibilities of the structure of production and consumption for a good or service. In which case is the incentive of producers to be efficient and the incentive for consumers to economize the weakest? D Senator Dogood is pushing for the construction of a new military base in his state even though, from the standpoint of national security, it is clear that there are better places to locate the new military base. Economic theory would suggest that Senator Dogood is acting rationally; he realizes that constructing the base in his state will increase his chances of getting reelected. Which one of the following is a major difference between market and collective action through government? In the market sector, there is generally a one-to-one link between payment and consumption; this link is often absent in the government sector. According to the shortsightedness effect, politicians tend to favor projects with Short-run benefits and long-run costs. Government decisions tend to be biased toward actions that have future costs that are difficult to identify and current benefits that are easily observable Special-interest legislation is characterized by concentrated benefits and widespread costs Which of the following is a predictable side effect of increased government activity (e.g., taxes and subsidies) designed to redistribute income among citizens? an increase in rent-seeking activity According to the special-interest effect, which of the following groups is least likely to have a significant influence on the political process? nonunion employees The rational-ignorance effect refers to the lack of incentive voters have to become well-informed about candidates and issues because their vote is unlikely to affect the outcome of an election. When goods are produced privately, but the cost of their purchase is paid for by the taxpayer or some other third party, a. the invisible hand will direct consumers and producers toward an efficient level of output. b. consumers have little incentive to search out and patronize low-cost suppliers. c. private producers of such goods will have a strong incentive to keep prices low. d. goods and services will only be supplied if consumers are willing to pay an amount sufficient to cover their production costs. consumers have little incentive to search out and patronize low-cost suppliers. When goods are produced privately, but the cost of their purchase is paid for by the taxpayer or some other third party, a. consumers have a strong incentive to search out those firms offering them the best deal. b. goods and services will only be supplied if consumers are willing to pay an amount sufficient to cover their production costs. c. private producers of such goods will have little incentive to control costs and provide them at low prices. d. the invisible hand will direct consumers and producers toward an efficient level of output. private producers of such goods will have little incentive to control costs and provide them at low prices. Joella is a third-grade public school teacher who doesn't own a car and uses public transportation. According to public choice theory, which of the following four politicians for a public office would Joella be most likely to vote for in the upcoming election? Politician A proposes increasing the property tax on personal automobiles and using the money to increase teacher salaries by 10 percent. Which of the following refers to when legislators trade votes on legislation? logrolling Economic theory indicates that the behavior of voters, government employees, and public officials is best understood by applying the same basic principle we use to predict the behavior of people in the private sector--that incentives matter. In which case is the political process most likely to result in the acceptance of efficient projects and rejection of inefficient projects? Both the benefits and costs are widespread among voters. Which of the following is true? When voters pay in proportion to benefits received, all voters will gain if the government activity is productive. Figure 6-1 illustrates the four possibilities of the distribution of costs and benefits among voters for a government project. For which type would the government most likely undertake many projects that would be considered inefficient or counterproductive (in other words, do too many of them relative to economic efficiency)? type B Public choice theory indicates someone who spends more time evaluating which tennis racket to buy than deciding which U.S. Senate candidate to support is behaving rationally, given the structure of incentives confronted When the government both provides a service and covers its costs through taxation, consumers are in a weak position to either discipline the suppliers or alter the quantity or quality of the service provided. A special-interest issue is one that benefits a small, well-organized interest group at the expense of taxpayers or consumers. Which of the following is an example of political action that reflects the shortsightedness effect? the promise of future benefits without providing for their funding Assume that you are a member of the U.S. House of Representatives from your home state and district. Which of the following best explains why you have a strong incentive to get the federal government to finance pork-barrel projects in your district? most of the benefits of pork-barrel projects within your district will accrue to your constituents, whereas most of the costs will be imposed on voters from other districts. Public choice analysis is the study of the decision making of individual actors (such as voters, politicians, and bureaucrats) in the public sector. Which of the following statements is False? Political activities consistent with economic efficiency tend to emerge naturally from the unconstrained democratic political process. Public choice theory assumes each voter will tend to support the political candidate who offers to provide the voter with the most PERSONAL benefits at the least personal cost Which of the following increases the political power of special interest groups and makes counterproductive government action more likely? both
a and b, but not c (NOT: public goods) the rational-ignorance effect Which of the following is true about the market and public sectors? Competitive behavior is present in both sectors In 2006, the American Association of Retired Persons (AARP) spent over $70 million on lobbying-related expenses in an attempt to get policies enacted that would benefit retirees. In economics, the term used to describe such activity is rent-seeking. Legislation that offers immediate and easily recognized benefits, at the expense of uncertain costs that are in the distant future (such as financing by government debt), is often enacted even when economic inefficiency results. This can be expected because of shortsightedness effect. From the standpoint of society as a whole, rent seeking is counterproductive because it takes resources away from the creation of wealth in the private sector. Which of the following is true? The reality of the aggregate consumption-aggregate payment link imposed by scarcity is present in both the market and public sectors. The major categories of federal government spending are health care, national defense, Social Security, and other income transfers. In 2008, the combined expenditures of federal, state, and local governments in the United States were approximately 35 percent of GDP. Which of the following is true regarding government expenditures in the United States? Government expenditures as a share of GDP grew rapidly between 1930 and 1980. Public choice theory suggests politicians will be most likely to favor redistribution of income from unorganized taxpayers to well-organized interest groups Refer to Figure 4-23. In which market will the tax burden be most equally divided between the buyer and the seller? market (c) If the government wants to generate large revenues from placing a tax on the consumption of a particular good, it should choose a good for which the demand is price inelastic A tax is levied on products A and B, both of which have the same price elasticity of supply. The demand for A is more inelastic than is the demand for B. Other things constant, how will this affect the incidence of an excise tax on these products? Producers will bear a smaller share (and consumers a larger share) of the tax burden on A than B. After the ban on the production and sale of alcohol ended in 1933, the murder rate declined. Rent control applies to about two-thirds of the private rental housing in New York City. Economic theory suggests that the below-equilibrium prices established by rent controls would result in poor service and quality deterioration of many rental units. A progressive tax is one that taxes those with higher incomes at a higher rate than those with lower incomes. A tax on the buyers of coffee will increase the price of coffee paid by buyers, decrease the net price of coffee received by sellers, and decrease the equilibrium quantity of coffee. The deadweight loss (or excess burden) resulting from levying a tax on an economic activity is the loss of potential gains from trade from activities forgone because of the tax. If a household has $40,000 in taxable income and its tax liability is $20,000, the household's average tax rate is 50 percent A new law requiring plumbers to pass strict certification tests that reduce the number of plumbers would increase the wage rate of plumbers. The average tax rate is defined as tax liability divided by taxable income. A regressive tax takes a higher percentage of the income of those with lower incomes than for those with higher incomes. Because of price controls in the former Soviet Union, people often waited in long lines for food and other necessities. Modern economic theory would indicate that, relative to price rationing, waiting in line is less efficient because the time spent waiting in line imposes an opportunity cost on the buyer that does not generate revenue for the seller. The term "deadweight loss" or "excess burden" is used to describe the loss from the elimination of mutually beneficial exchanges that results from the imposition of a tax in a market. During the imposition of price controls in the 1970s, long gasoline lines were common. In the absence of price controls, markets would have eliminated such excess demand by allowing the price to rise, so gas was rationed to those willing to pay the most for it. Other things constant, a decrease in the demand for computers will decrease the demand for computer manufacturing workers. A legal system that provides secure private property rights and unbiased enforcement of contracts enhances the efficiency of markets. When a tax is levied on the sale of an item, less of the item will generally be bought and sold. When a supply and demand model is used to analyze the market for labor, both b and c. When a price ceiling is imposed below the equilibrium price of a commodity, a shortage of the good will develop. A public good is defined as a good with which of the following characteristics? non-rivalry, non-excludability A college has found that during every home football game, a group of students sits on a hillside next to the stadium and watches the game without purchasing tickets. In economics, the problem that this college is facing is referred to as a free rider problem. A good is considered nonrival-in-consumption if many individuals can share in the consumption of the same unit of the good. Which of the following is the most fundamental function of government? protection of individuals and their property The primary cause of air and water pollution is that air and water are often not priced. When production of a good provides external benefits, there will be too few resources devoted to its production. Which of the following "goods" is the best example of a pure public good? national defense If an economic action generates more costs than benefits, the action should not be undertaken from an efficiency standpoint. A market transaction causes an externality if someone not directly involved in the transaction receives uncompensated benefits or costs from it. The problem created when it is difficult to exclude nonpaying customers is called the free-rider problem. If the consumption of a good by one individual does not change the amount of the good available to others, the good is considered to be nonrival-in-consumption. Does economic efficiency indicate that all pollution should be eliminated? No, at some point, the benefits of still lower levels of pollution will not be worth the additional cost. People who receive the benefit of a good without contributing to its costs of production are called free riders. Which English philosopher argued that people own themselves and, as a result, own the fruits of their labor, and thus, the role of government is to protect these natural rights of individuals? John Locke A free-rider problem exists when a good that has the following characteristic? Nonexcludable. Manny's Bar-n-Grill is next door to a franchised fast-food restaurant near a busy freeway exit. Essentially, the menus, food quality, atmosphere, and service are equal at the two restaurants. Nevertheless, the nationally franchised restaurant can attract more customers, even though its prices are higher. This situation is one in which the national franchise provides uninformed consumers with valuable information that reduces their risk of being unsatisfied with the purchase. Competitive markets generally give consumers and producers correct incentives when property rights are well-defined and enforced. A car sells at different prices at different dealerships in a local market. If a consumer has imperfect information about the price of a car at each dealership, he should gather information about prices until the expected marginal benefit of more information equals the marginal cost of gathering it. A good is considered nonexcludable if it is impossible or very costly to exclude nonpaying customers from receiving the good. When economists say that an activity meets the criterion for economic efficiency, they mean the benefits that result from the activity exceed the costs. A local government operates a city water system and finances it through fees that it charges to water consumers. This type of financing is an example of a user charge. A special-interest issue is one that benefits a small, well-organized interest group at the expense of taxpayers or consumers. According to the economic way of thinking, personal benefits and costs influence the actions of consumers, producers, voters, and politicians in both the private and the public sectors. Between 1930 and 1980, government expenditures as a percent of GDP in the United States more than tripled. Despite being a college graduate, Jack Adams cannot name any of his representatives in Congress and he has no idea which issues are being debated and voted on this week in Congress. According to public choice analysis, Jack is making a rational personal choice because knowing these things gives him little personal benefit. From the standpoint of society as a whole, rent seeking is counterproductive because it takes resources away from the creation of wealth in the private sector. Government action will often result in the counterproductive use of resources because there is often a conflict between winning political elections and adoption of only productive programs. Government decisions tend to be biased against actions that have current costs that are easily observable and future benefits that are difficult to identify. In 2006, government income transfers redistributed what percentage of national income? 13.4 percent In 2008, the combined expenditures of federal, state, and local governments in the United States were approximately 35 percent of GDP. In economics, actions by individuals and interest groups designed to influence public policy in a manner that will either directly or indirectly redistribute more income to themselves are known as rent seeking. Joella is a third-grade public school teacher who doesn't own a car and uses public transportation. According to public choice theory, which of the following four politicians for a public office would Joella be most likely to vote for in the upcoming election? Politician A proposes increasing the property tax on personal automobiles and using the money to increase teacher salaries by 10 percent. Logrolling refers to vote trading among legislators. Pork-barrel legislation typically bundles the pet projects of several special interest groups. Such legislation is frequently enacted, even though the overall benefits to society are less than the overall costs to society. Public choice analysis assumes individuals in the public sector act in their own self-interests. Public choice theory suggests that politicians will be most likely to favor redistribution of income from unorganized taxpayers to well-organized interest groups. Senator Blacklung represents a state that grows a significant amount of tobacco. Not only do many of his constituents work for businesses in this industry, but the tobacco firms also make generous contributions to his reelection campaign. According to public choice theory, which of the following bills would Senator Blacklung be most likely to support? a bill that would provide substantial subsidies for tobacco growers The branch of economics that applies the principles and methodology of economics to the operation of the political process is known as public choice analysis. When goods are produced by private firms and purchased by consumers with their own money, all of the above are true.
When goods are produced privately, but the cost of their purchase is paid for by the taxpayer or some other third party, private producers of such goods will have little incentive to control costs and provide them at low prices. "The U.S. standard of living will continue to rise as long as real per capita income continues to increase." This statement is essentially correct Use the table below to choose the correct answer. Table 7-7 $4,480 National income is employee compensation, self-employment income, interest, rents, plus corporate profits The price index in the first year is 110, in the second year is 100, and in the third year is 96. The economy experienced 9.1 percent deflation between the first and second years, and 4 percent deflation between the second and third years The nominal salary paid to the president of the United States and the Consumer Price Index (CPI) are given for various years below. Refer to Table 7-9. During which of the above years was the purchasing power of the president's salary highest? 1940 A price index is designed to measure the cost of buying a market basket of goods at a point in time relative to the cost of buying the same market basket during an earlier time period New residential housing is counted in GDP as a(n) investment good If the consumer price index (CPI) at the end of year one was 100 and was 108 at the end of year two, the inflation rate during year two was 8 percent A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move necessarily raises GDP Simon Kuznets, winner of the 1971 Nobel Prize in economics, is famous for his contributions in
developing the basic concepts and measurement procedures used in national income accounting. A price index like the CPI, which uses a fixed basket of goods from one year to the next, will tend to overstate inflation because consumers will tend to substitute away from goods that become more expensive If Honda (a Japan-based firm) produces a car in Ohio and exports it to Japan, in which country's GDP will the car be counted? The GDP of the United States because that is where it was built If nominal GDP increased 2 percent during a year, while real GDP increased 4 percent, the price level must have decreased approximately 2 percent compared to the prior year A business produced $10 million of goods in 2007 but sold only $9 million. Is the $1 million increase in inventory counted as part of the 2007 gross domestic product? Yes, because these inventories are part of the output of the economy in 2007 A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result, U.S. investment and GDP increase, but German GDP is unaffected. General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and sells it in the United States. In which country's GDP is it included? Sweden because it was produced there One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for $4.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three transactions into account, what is the effect on GDP? GDP increases by $6.00 Double counting in the resource cost-income approach to GDP statistics is avoided by counting only the value added at each stage of a good's production process "The U.S. standard of living will continue to rise as long as per capita money income continues to increase." This statement may be incorrect because it fails to distinguish between money and real income Double counting in the resource cost-income approach to GDP refers to counting the total value of a final output in addition to the value of the inputs used to make it High and variable rates of inflation will distort the information delivered by market prices. Consider an economy made up of 100 people, 60 of whom hold jobs, 10 of whom are looking for work, and 15 of whom are retired. The number counted as unemployed is: 10 Higher unemployment insurance benefits tend to increase unemployment because they reduce the opportunity cost of job search and, hence, increase the search time. During a boom, the actual rate of unemployment will be less than the natural rate of unemployment If the consumer price index (CPI) was 125 at year-end of 2008 and 132.5 at year-end 2009, inflation during 2009 was 6.0 percent. In Figure 8-1, the recession phase of the business cycle can be represented by point(s): CDE In Figure 8-1, point E represents: recession and a trough. Brian Vargo, an auto repair mechanic who remains unemployed because he refuses to work for less than $1,000 an hour, is not counted as part of the labor force. Actual GDP is less than potential GDP during recessions. A person is considered unemployed if she is not working but is actively looking for work. Full employment will always include some unemployment The current U.S. unemployment insurance program tends to raise the unemployment rate. A decrease in aggregate demand and the subsequent cutbacks in production lead to cyclical unemployment Frictional unemployment is present even when labor markets are working well. In a properly operating, dynamic economy, we would expect to have some unemployment due to normal structural and frictional factors The labor force participation rate is defined as the number of unemployed individuals plus employed individuals divided by the number of individuals in the working-age population. Potential GDP is the output an economy could produce at full employment. Cyclical unemployment is caused by changes in the business cycle A person who argues that inflation "robs us of the purchasing power of our paychecks" should also consider that inflation will increase the size of paychecks as well as the prices of goods. Suppose that the consumer price index at year-end 2008 was 140 and by year-end 2009 had risen to 150. What was the inflation rate during 2009? 7.1 percent Americans needing foreign currencies get those currencies from a bank. The ultimate source of these currencies is U.S. sales to foreign countries. A trade surplus is when exports are greater than imports of goods and services. As prices rise, consumers and businesses will want to hold larger money balances. This will lead to a reduction in the supply of loanable funds and an increase in the interest rate. Fiscal policy is the use of government taxation and expenditures to achieve macroeconomic goals Which of the following would generate a dollar demand for the euro? American demand for European real estate For a major country with extensive capital flows, what is the effect of a decrease in interest rates? There will be an outflow of capital, a currency depreciation, and increased net exports. As prices rise, people will buy fewer goods and services because the purchasing power of the fixed quantity of money has declined In Figure 9-1, which of the following correctly labels the curves in the aggregate demand/aggregate supply model? (1) is LRAS, (2) is SRAS, and (3) is AD. If the dollar appreciates relative to the Yen, it can be said that the Yen depreciates relative to the dollar. Imagine that there are only two nations in the world, the United States and Mexico. If Americans buy more goods made in Mexico, other things constant, the U.S. demand curve for Mexican pesos will shift rightward (I) Fiscal policy involves altering government tax and spending policies. Both I and II are true. If the dollar price of the English pound goes from $1.50 to $1.75, the dollar has depreciated, and Americans will find English goods more expensive. A vertical long-run aggregate supply curve indicates that an increase in the price level will not expand an economy's output capacity in the long run. As prices rise, a fixed money supply will be able to buy fewer goods and services. This effect is due to a(n) decline in the purchasing power of money. If the quantity of euro demanded were greater than the quantity supplied, then the price of the Euro would rise Falling interest rates cause the market value of previously issued bonds to rise Which of the following is true? a.an anticipated increase in demand will lead to higher resource prices, which will cause firms to expand their output. b.An unanticipated increase in demand will increase prices and improve profit margins in the goods and services market, leading firms to expand output. c.The long-run aggregate supply curve slopes upward to the right. d.The aggregate quantity demanded of goods and services slopes downward to the right because it is simply the sum of the demand curves for each individual product. An unanticipated increase in demand will increase prices and improve profit margins in the goods and services market, leading firms to expand output. If net exports are negative, then net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets bought by Americans. If U.S. citizens decide to save a larger fraction of their incomes, the real interest rate decreases, the real exchange value of the dollar depreciates, and U.S. net capital outflow increases. Suppose that British incomes rise relative to incomes in the United States. Then, in Figure 9-3 the supply curve will shift from S1 to S2 If a market economy was in a recession, which of the following would help direct it back toward the full employment rate of output? lower resource prices and lower real interest rates From mid-year 2006 to year-end 2008, housing prices fell by approximately 30 percent, leading to a sharp reduction in aggregate demand. Which of the following is the best example of a supply shock? a decline in agricultural output due to a summer drought Other things constant, an increase in the real interest rate will cause consumers to reduce their purchases of durable items like appliances and automobiles.
In the aggregate demand/aggregate supply model, an economy operating below its long-run potential capacity will experience falling real wages and resource prices that will increase SRAS, moving the economy back toward full employment. A large grain crop resulting from favorable weather conditions would shift which of the following curves? only short-run aggregate supply Over the last 60 years, the average annual growth of real GDP in the United States has been approximately 3 percent. A currency appreciation will be most likely to reduce net exports and therefore decrease aggregate demand. For the following question(s), assume that the economy is in long-run equilibrium in the aggregate demand/aggregate supply model and that some sort of event takes place. In each case, mark the most likely impact of the event on the aggregate demand/aggregate supply diagram given below. Refer to Figure 10-19. Good weather allows agricultural output to double. The short-run aggregate supply curve would shift to the right. When an economy is temporarily operating at an output that is beyond its full-employment rate, Excess demand in resource markets will lead to higher resource prices, which will increase costs and direct the economy toward full employment. Which of the following is most likely to accompany an unanticipated increase in short-run aggregate supply? an increase in real GDP During 2003-2007, the price of crude oil increased substantially on the world market. Other things constant, how will an unanticipated increase in oil prices influence the general level of prices and real output of oil-importing nations such as the United States and Japan? real output will decrease, and the general level of prices will increase During the 1990s, a financial crisis spread throughout Asia causing those economies to drop into recessions. Other things constant, how would such a decrease in the income of foreign trading partners have influenced the price level and output of the United States? Both real output and the price level would have fallen. If the U.S. price level decreased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves? the aggregate demand curve would shift outward and the aggregate supply curve would remain unchanged During the crisis of 2008 housing prices ________ and stock prices ________. fell sharply; fell sharply When an economy is in a recession, the unemployment rate will rise above its natural rate. Which of the following, other things the same, would make the price level decrease and real GDP increase? long-run aggregate supply shifts right The stability of consumption over the business cycle and the ability of changes in the real interest rate to redirect aggregate demand indicate that a market economy has a self-correcting mechanism that will help guide it toward full employment. What impact did the soaring oil prices of 2007 and the first half of 2008 have on the economy? They reduced SRAS, causing real output and employment to decline. When the U.S. dollar appreciates, aggregate demand shifts leftward. The fallacy that saving is hoarding a. appears in the financial press when fears are expressed that a rise in saving portends a recession or depression b. is accompanied by the belief that investment spending comes virtually out of nowhere and is expansionary c. is present in contemporary economics texts when they describe saving as a "leakage" from the spending stream d. all of the above e. none of the above. appears in the financial press when fears are expressed that a rise in saving portends a recession or depression It is often believed that in buying a consumers' good one also buys the factors of production that were used up to produce the consumers' good one buys the factors of production that the sellers of the consumers' good will buy with the pieces of money received in exchange for the consumers' good one buys the products into which the good one buys will be made all of the above all of the above The net product of the economic system is a. the gain from production b. equal to the final product c. the difference between the gross product and productive consumption d. all of the above e. none of the above all of the above Productive expenditure is expenditure for the purpose of making subsequent sales A rise in the demand for consumers' goods at the expense of the demand for factors of production increases the proportion of the demand for factors of production that is made by the consumers' goods industries while reducing the overall size of the demand for factors of production in the economy as a whole. True What leads to the conclusion that a final product, such as bread, counts all the intermediate products whose production is necessary to its production is viewing the final product as though it consisted of a bundle of abstractions, i.e., the conceptual product differences that each producer allegedly produces at the various states leading up the the final product The view that one's product is not one's actual physical product but an abstraction, i.e., the conceptual difference between one's product and the previously produced means of production one uses up to produce it implies that the total product of the economic system is essentially just the production of consumers' goods, i.e., of "final products" that the total production of the economic system is measured by the sum of values added to the previously produced means of production that the total production of the economic system is measured by the value of the final product all of the above all of the above "Hoarding" a. comes about after inflation and credit expansion have created the potential for a sudden rise in the demand for money for holding by first causing an undue decline in the demand for money for holding and the consequent creation of a state of illiquidity b. operates to increase the degree of liquidity in the economic system—i.e., the ratio of the quantity of money to such magnitudes as current liabilities—and finally to put an end to the desire further to increase cash holdings c. can be prevented from having harmful consequences by means of avoiding inflation and credit expansion d. all of the above e. none of the above all of the above According to the prevailing concept of gross product, to claim that both bread and flour or both automobiles and steel are produced is to claim that more is produced than is in fact produced and thus to commit the error of double counting. True The volume of spending in the economic system is a measure of the quantity of money that exists, not of the volume of wealth that is produced. True People of limited education and with no business experience are especially prone to confuse saving with hoarding because they have no first-hand familiarity with productive expenditure and thus conclude that if funds are not consumed, they are simply not spent. True According to most of today's textbooks, what a producer produces is the difference between his actual product and the previously produced means of production he uses up in producing it - for example, the difference between bread and flour or the difference between automobiles and steel sheet. The concept of gross product properly includes the production of capital goods such as flour and wheat and steel and iron ore. True Saving is nonconsumption In buying a consumers' good, one pays for the seller's research and development outlays and for his political and charitable contributions. False The belief that wheat and flour are in bread because the bread was made from flour that was made from wheat implies that ice is in steam if the steam came from water that came from ice. True Productive consumption is consumption for the purpose of production. True The difference between a real purchase of bread, flour, and wheat and a "shadow-entity" type purchase is that in the first case one leaves the store with three distinct items, while in the second one leaves only with bread. True When it occurs on a significant scale, "hoarding" a. has nothing fundamentally to do with any at- b. does not originate with consumers c. represents the attempt of business firms and investors to convert previously accumulated savings from their usual form of investments in physical assets or claims to physical assets, into cash, in an effort to become more liquid d. all of the above e. none of the above. all of the above The proposition that "the demand for A is the demand for A" means, for example, that the purchase of an automobile is the purchase simply and only of that automobile and not the purchase of the automobile and the steel used to make it is a restatement of John Stuart Mill's proposition that "demand for commodities is not demand for labor," in a positive and more extended form serves to prevent confusing real entities and real purchases with "shadow entities and shadow purchases" all of the above all of the above The belief that the value of the final product counts the value of the intermediate products in addition to its own value entails a double counting of the value of the final product. True The belief that the value of the final product counts the value of the intermediate products in addition to its own value rests represents a twofold violation of the laws of arithmetic. True When large-scale hoarding, i.e., an increase in the demand for money for holding, actually occurs it a. causes a decline in sales revenues, profits, and business net worth b. causes unemployment and dissaving by the unemployed c. is the cause of an overall reduction in savings d. all of the above e. none of the above all of the above The proposition that saving is the source of most spending in the economic system is implied a. by the fact that profit margins are typically on the order of ten percent or less b. costs and thus productive expenditure relative to sales are typically on the order of ninety percent or more c. a substantial portion of costs and the productive expenditure that gives rise to them are for capital goods, behind which there are further substantial costs and productive expenditure d. all of the above e. none of the above all of the above In wealthy businessmen decide to withdraw funds from their firms in order to consume in the form of buying yachts, say, the effect will be an increase in the demand for capital goods and labor by the yacht-building industry a decrease in the demand for capital goods and labor by the industries producing capital goods a decrease in the overall demand for capital goods and labor in the economic system to the extent that the purchase of yachts takes the place of the purchase of capital goods and labor all of the above all of the above A rise in the rate of saving raises the demand for houses and expensive consumers' goods in general. True Saving is the foundation of a. the demand for goods at wholesale b. the demand for all capital goods, i.e., the demand for all buildings, machinery, materials, components, and supplies by business firms c. the demand for labor by business firsms d. the demand for expensive consumers' goods e. all of the above f. none of the above all of the above If someone in fact bought flour and paid the wages of bakers and then were charged for the resulting bread, he would be in the position of a man forced to buy his own property. True An individual grows richer through productive expenditure The notion that in buying the final product one buys the labor and capital goods necessary to its production is consistent with the fact that businessmen need capital in order to buy the means of production False The belief that saving is hoarding a. can apply to a given individual in certain circumstances b. represents the fallacy of composition when it is applied to the economic system as a whole c. both (a) and (b) d. neither (a) nor (b) both (a) and (b) The belief that in buying a consumers' good one buys everything necessary to its production supports the belief that saving is hoarding. True In buying a consumers' good simply and only the consumers' good A quantity of wheat is produced that sells for $100 and is used to produce a quantity of flour that in turn sells for $150. The flour is then used to produce a quantity of bread that sells for $225. What is the total value of what is produced? $475 According to most of today's textbooks, wheat farmers and flour millers respectively produce only wheat and flour, not bread. False The use of price indexes to adjust the volume of spending for changes in the price level makes possible a precise measure of what is produced. False What is saved is not only spent, but is the source of most spending in the economic system inasmuch as saving is the foundation of all of the productive expenditure that is made out of business sales revenues. True The fact that one buys the output is proof that one has not bought the inputs. True Most present-day economics textbooks describe the macroeconomic effects of taxes and government spending as the same as saving and investment, i.e., the one as representing hoarding and the other as representing new and additional spending, virtually out of nowhere. True The only income of any significance that could be increased by virtue of the repeated rounds of consumption expenditure depicted in the multiplier process would be profit income The notion that in buying the final product one buys the labor and capital goods necessary to its production does not imply that in eating a loaf of bread one eats flour, wheat, and tractor parts. False "The demand for consumers' goods is not only not a demand for factors of production, but is in competition with the demand for factors of production." True The belief that the value of the final product counts the value of the intermediate products in addition to its own value rests on a. expressing the value of the final product in various mutually exclusive alternative formulations b. ignoring one or more terms in all but one of the alternative formulations c. adding up the remaining elements of the mutually exclusive alternative formulations d. all of the above e. none of the above all of the above According to most of today's textbooks, when it comes to determining GDP only the bread will be counted In buying a consumers' good, one buys the consumers' good one buys According to contemporary economics, the production of the final products already counts the production of all the products leading up to their production, which is why it represents double counting to count them again, separately. True If the sellers of consumers' goods used the whole of their sales proceeds to consume, their demand for factors of production would a. rise to infinity, according to the Keynesian multiplier analysis b. fall to zero c. both (a) and (b) d. neither (a) nor (b) both (a) and (b) In reporting both so many million automobiles and so many million tons of steel as being produced in the United States in a given year, The Statistical Abstract of the United States must be judged guilty of the alleged error of double counting. True What contemporary economics describes as the gross product of the economic system is actually a highly netted product. True Hoarding is: An increase in the demand for money. Contemporary economists, like the Classical economists, define GNP as the total output of the economic system, but with one major difference. What is the difference? They only count consumption goods. In the Keynesian aggregate expenditure model, the 45-degree line indicates all income levels at which the planned spending of decision makers equals total output. If the MPC is 3/4, the simple expenditure multiplier is 4.00 A balanced budget is present when government revenues equal government expenditures. The 1930s were a period of depressed economic conditions and prolonged high rates of unemployment. "If there is unemployment, the average wage rate will decline as the unemployed workers choose lower wages rather than going without a job. The demand curve for labor slopes downward and to the right so that more workers would be hired at the lower wage rate, restoring full employment." According to the Keynesian view, this quote is incorrect because wages and prices tend to be highly inflexible downward. Within the framework of the Keynesian model, which of the following would most likely occur if the federal government increased its spending and enlarged the size of the budget deficit during a period of full employment? The rate of inflation would rise. According to Keynesian analysis, which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment? increase in government purchases and reduction in taxes The consumption function shows the relationship between planned consumption expenditures and disposable income. The primary tool of fiscal policy is the federal budget. In the Keynesian view, equilibrium takes place when the level of total spending in the economy is equal to current output Discretionary fiscal policy involves an intentional change in taxation or government spending. The marginal propensity to consume (MPC) is additional consumption expenditures divided by additional disposable income. If output is less than full employment in the Keynesian model, what is needed to restore full employment? an increase in aggregate demand The expenditure multiplier indicates that changes in investment, government, or consumption spending can trigger much larger changes in output. Automatic stabilizers will shift the government budget toward a surplus during an expansion and a deficit during a contraction. Keynesian economists believed that the prolonged unemployment of the 1930s was the result of insufficient aggregate demand and the failure of market forces to direct the economy back to full employment. If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to prolong the recession and increase its severity. Which of the following best describes the Keynesian view of the interrelationships among spending, real output, and the general level of prices? Spending and real output are directly related until full employment is reached; once full employment is reached, increases in spending lead only to a higher price level. In the midst of the Great Depression in 1932, Congress and the Hoover administration increased tax rates substantially. According to the Keynesian view, this tax increase was inappropriate because it would depress economic activity and lead to further increases in unemployment. Refer to Figure 11-7. When the economy's full-employment output is $4.8 trillion, if planned aggregate expenditures were AE 2, the economy would experience equilibrium at the full-employment output level. The Keynesian macroeconomic model was highly popular for several decades following World War II because it provided an explanation for the prolonged unemployment of the 1930s. Prior to the Great Depression, most economists believed that a recessionary downturn would be reversed by lower wages that would increase the quantity of labor demanded and reduce unemployment. Refer to Figure 11-10. If aggregate expenditures were AE 1, which of the following would occur? Output would be less than the economy's long-run potential As the marginal propensity to consume (MPC) decreases, the spending multiplier decreases. Prior to the time of John Maynard Keynes, most economists stressed that market adjustments would automatically direct an economy to full employment within a relatively brief period of time. Refer to Figure 12-3. If an economy is currently operating at Y 1, which of the following would a Keynesian economist be most likely to favor? a shift in the federal budget toward a deficit "Expansionary fiscal policy will tend to substantially increase current real output." Which of the following models would tend to support such a statement? the Keynesian model, but not the crowding-out and new classical models During 1960-1980, those with the highest incomes confronted federal marginal tax rates between 70 and 90 percent. Since 1986, the highest federal income tax rate has been less than 40 percent. Since 1986, the share of the personal income tax collected from the top one-half of one percent of earners has been higher than during the 1960s and 1970s. The Japanese experience during the 1990s indicates that increases in government expenditures financed by borrowing may not promote recovery The new classical model implies that the effect of government increasing expenditures by debt financing has the same effect as if it was financed by raising current taxes Since the mid-1980s, the debt-to-income ratio of American households has rapidly increased Other things constant, a reduction in marginal tax rates will tend to increase aggregate supply because the lower taxes will increase the attractiveness of productive activity relative to leisure and tax avoidance. Other things being constant, countries with higher rates of saving will have higher rates of investment and growth Supply-side economics stresses that high marginal tax rates discourage people from working harder and using their resources productively. According to many non-Keynesian economists, the Japanese experience during the 1990s indicates that the increase in government spending in Japan failed to promote recovery and adversely affected long-term growth. Public choice analysis indicates that politicians will find budget deficits more attractive than budget surpluses Rosa's annual income increased from $30,000 to $40,000. If Rosa is in the 40 percent marginal tax bracket, the $10,000 increase in income will expand her disposable income by $6,000 Is saving good or bad for the economy? Good, because saving provides the investment capital required for businesses to expand and the economy to grow In 2007, the debt-to-income ratio of American households was approximately double the level of the mid-1980s According to new classical economists, the most appropriate policy during a recession would be for the government to do nothing According to the new classical view, budget deficits will fail to stimulate aggregate demand because people will save more in order to pay the higher future taxes implied by the expansion in government debt "Unless widespread unemployment is present, expansionary fiscal policy (deficit spending) generates secondary effects that substantially reduce its impact on aggregate demand and real output."
Both the new classical and crowding-out models indicate this statement is correct. Supply-side economic policies are best viewed as a long-run strategy to promote economic growth. Supply-side economics stresses that Marginal tax rates exert important incentive effects that influence real output. Ricardian Equivalence maintains that an increase in government spending financed by debt will result in a corresponding increase in Savings, in anticipation of future taxes Higher standards of living are the result of an increase in the availability of goods and services that people value Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that you cannot have a strong economy if all or most households are spending just about everything they earn. "A reduction in marginal tax rates will increase the incentive of individuals to (1) save and invest and (2) apply their productive energy in a manner that yields taxable income, while (3) reducing the incentive of individuals to engage in wasteful tax-avoidance activities." Which of the following groups would most likely stress the importance of these factors? supply-side economists The new classical model states that a budget deficit will have no impact on real interest rate According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery? Higher future taxes and interest rates will be required to finance the larger debt and this will weaken the recovery Productionism is closely connected with The quantity theory of money Say's Law of Markets The proposition that a general or absolute overproduction in impossible All of the above all of the above Increases in production and supply are essential to create more real demand, because increases in monetary demand taken by themselves serve merely to raise prices in the same proportion, with the result that the larger monetary demand buys no more, i.e., constitutes no more real demand, than did the smaller monetary demand before it only to the extent that there is an increase in production and supply will an increase in monetary demand be able to represent an increase in real demand, because only to that extent will prices not rise by as much as the increase in monetary demand both (a) and (b) both (a) and (b) To those concerned only with a particular industry, it correctly appears that because any given industry, at one time or another, could experience an increase in demand by virtue of the need or desire for its product gaining in priority relative to the need and desire for the products of other industries, that all industries might gain in this way at the same time. This statement describes a case of adding up as additional demands what are in fact a series of mutually exclusive alternatives, each of whose individual existence is predicated on an equivalent decline in demand in the rest of the economic system. This situation is an example of what logicians call the fallacy of composition, that is, invalidly generalizing from what occurs in part of a system to the system as a whole. both (a) and (b) both (a) and (b) Monetary demand is the amount of expenditure of money Capitalism a. is a social system based on private ownership and control of the means of production b .is characterized by the pursuit of material self-interest under freedom c. rests on a foundation of the cultural influence of reason d. all of the above all of the above Examples concerning the potato industry are provided to convey information about the potato industry as an illustration of the conditions faced by any industry with an inelastic demand for its products both (a) and (b) both (a) and (b) Consumptionism's notion of a limited need and desire for goods lead to the belief that the presence of great wealth in a country is a liability, in that it represents the using up of the allegedly limited stock of needs and desires for wealth, thereby leaving the country relatively poor in terms of its remaining stock of unmet needs and desires for wealth and thus in its ability to support employment and production the absence of wealth in a country is an asset, in that it represents a correspondingly limited using up of the allegedly limited stock of needs and desires for wealth, thereby leaving the country relatively rich in terms of its remaining stock of unmet needs and desires for wealth and thus in its ability to support employment and production both (a) and (b) neither (a) nor (b) both (a) and (b) Businessmen who think of the effect of things exclusively on their own company or industry and not, at the same time, on the rest of the economic system, are easily led to the conclusion that what is required to increase demand in the economic system is the creation of additional needs and desires what explains low profits in the economic system is too much production are often led to accept a consumptionist view of things on the basis of misinterpreting their experience all of the above all of the above Productionism is closely connected with a series of further propositions, among them that man s nature as a rational being underlies a limitless need and desire for wealth that the division of labor is essential for a high and rising productive of labor the law of comparative advantage that real wages and thus the average worker s standard of living are determined by the productivity of labor all of the above all of the above Consumptionism holds that man s need and desire to consume are essentially fixed and given, and that the ability to produce threatens constantly to outrun them, with the result that the fundamental problem of economic life is not the production of wealth, but the production of consumption. True Contemporary Keynesianism most closely resembles Mercantilism Consumptionism claims that the gain from foreign trade is in the exports, not the imports the gain from an increase in population is in the additional people s need and desire to consume, not in their contribution to production nonproducing consumers are a source of benefit to producers by providing an excess of consumption over production equal to the producers alleged deficiency of consumption all of the above all of the above Which of the following is the case? The leading philosophic basis for Consumptionism, that has become increasingly more influential in recent decades, is the belief that man is fundamentally no different than the lower animals and thus does not have fundamental needs that extend beyond theirs. When confronted with the fact that man s desires obviously do extend beyond the range of an animal s, consumptionists can be expected to reply that this is the result of social and cultural conditioning and the work of advertisers and that the desires are unnatural, artificial, and created. both (a) and (b) neither (a) nor (b) both (a) and (b) The belief, at the core of consumptionism, that mans need and desire for wealth is fixed, implies that there is only a fixed stock of work to be done in the world that improvements in machinery reduce the work available to be done by people that to the extent that the members of some groups obtain additional employment, equivalently less employment remains for the members of other groups that it is necessary and valuable to make work all of the above all of the above The cause of a steadily rising aggregate monetary demand is an increase in the quantity of money Productionism is closely connected with the proposition that the productive process generates an aggregate real demand that is equal to aggregate supply and grows precisely as aggregate supply grows the productive process generates an aggregate monetary demand that in the absence of government interference is sufficient to buy the aggregate supply at a profit what is saved is spent saving is the source of most spending in the economic system and underlies both a growing aggregate real demand for goods and services and a growing aggregate monetary demand for them all of the above all of the above Productionism holds that the fundamental problem of economic life is how steadily to increase the ability to produce in the face of a limitless need and desire for wealth. True Overproduction is never partial and relative, but always general and absolute. False The schools of economic thought that have been the main supporters of capitalism are the British classical school and the Austrian school In the case of an inelastic industry demand for an individual good, such as potatoes, an increase in supply serves to reduce the volume of goods received by the producers in the industry concerned. Consequently, there is a reduction in the real demand for the products of this industry as the result of the increase in their supply. There is nonetheless an increase in aggregate real demand that is precisely equivalent to the increase in aggregate supply in the economy as a whole. both (a) and (b) both (a) and (b) Say's Law most closely relates to aggregate real demand as determined by aggregate supply The potato growers, who initially lose as the result of the doubling of the supply of potatoes, will gain from the improvement in the ability to produce potatoes once enough potato growers leave potato growing and move into other lines of production Real demand is the monetary demand adjusted for the wage and price level the quantity of goods and services that the monetary demand, whatever it is, is capable of actually buying both (a) and (b) both (a) and (b) In a monetary economy, once again the supply of a good confronted with an inelastic demand, such as potatoes, doubles. The result is that this time the money price of the good falls by more than half, again, for the sake of simplicity, say, to one-third. The result is the potato growers take in two thirds the money they previously took in producers in the rest of the economy take in equivalently more money, as the buyers of potatoes now spend one-third of the money they used to spend in buying potatoes in buying goods other than potatoes the same total aggregate monetary demand is now a larger real demand to the extent that the increase in the supply of potatoes constitutes an increase in total aggregate supply all of the above all of the above In a barter economy, the producers of potatoes, a good faced with an inelastic demand, double their production and supply, with the result that the exchange value of potatoes falls by more than half, say, to one-third. All elements of the matter considered, the doubled supply of potatoes is accompanied by a precisely equivalent increase in economy-wide, aggregate real demand Capitalism is characterized by the freedoms of economic competition and economic inequality the price system economic progress a harmony of the material self-interests of all the individuals who participate in it all of the above all of the above A prohibition on arbitrarily shouting fire in a crowded theater should not be construed as any kind of limitation on the freedom of speech, let alone a justified limitation. On the contrary, in the case of a live theatrical performance, the freedom of speech is violated precisely when someone does arbitrarily shout fire. " True The anarchic concept of freedom is present in the assertion of Communists and socialists that their freedom of speech is violated because they are threatened with arrest for attempting to disrupt the speech of an invited speaker by shouting him down or by speaking at the same time. True The unpopularity of capitalism and economic activity are evident in the various attacks that are frequently made on the profit motive, economic competition, economic inequality, money, saving, and virtually every other feature of their existence, and in the numerous laws and regulations that have been imposed to restrain them. True Knowledge of economics is a powerful antidote to unfounded feelings of being the victim or perpetrator of exploitation is a powerful antidote to all feelings of alienation based on the belief that the economic world is immoral, purposeless, or chaotic cannot help but support the conviction that the fundamental nature of the world is benevolent and thus that there is no rational basis for feelings of fundamental estrangement from the world all of the above all of the above The belief that science must be value free is contradicted by the fact that science itself presupposes such values as rationality, honesty, integrity, and the freedom of inquiry, without which science could not be pursued. True An individuals freedom of press is violated when A newspaper or publisher refuses to publish his views When a newspaper or publisher is willing to publish his views but is prevented from doing so by the government Both a and b Neither a nor b When a newspaper or publisher is willing to publish his views but is prevented from doing so by the government The existence of the social security system is a leading consequence of the belief that in order to achieve economic security, one must violate economic freedom and establish a welfare state. True The economic freedom of the United States led to a vast increase in private ownership of the means of production as settlers appropriated land and natural resources from nature the development of new and improved means of transportation the development of new and improved products and methods of production the founding and growth of new towns and cities all of the above all of the above Freedom should be defined not merely as the absence of the initiation of physical force, but, in addition, in order to highlight its most crucial aspect, the absence of the initiation of physical force specifically by, or with the sanction of, the government. True Social security deprives the individual, to the extent of his contributions to the system, of the power to decide how his savings are invested diverts the individual s savings into the financing of current government expenditures rather than capital investment makes the individual dependent on the choices of future legislators and future taxpayers as the source of his actual support all of the above all of the above The anarchic concept of freedom leads to the belief that freedom of speech is incompatible with the communication of thought. The rational concept of freedom, on the other hand, establishes freedom of speech precisely as the safeguard of the communication of thought. True An individuals freedom of speech is violated when a radio or television station refuses to invite him to speak when a radio or television station is willing to invite an him to speak but is prevented from doing so by the government when a radio or television station is willing to invite an him to speak but is prevented from doing so by the government Freedom of speech is fully implied in the property rights of the owner of a piece of land, or of a meeting hall, to invite speakers of his choice onto his property and an audience of his choice to listen to the speakers. True To the degree that they exist, freedom and the pursuit of material self-interest, operating in a rational cultural environment, are the foundation of private ownership of the means of production saving and capital accumulation the development of the division of labor the development of exchange and money all of the above all of the above Fraud represents the initiation of physical force in that it entails the taking of property against its owner s actual will. True The science of economics is necessary, because division of labor does not exist in nature. True Physical force means physically doing something to or with the person or property of another against his will is exercised through advertising is present in irresistible logical argument all of the above physically doing something to or with the person or property of another against his will Peace as the accompaniment of freedom means peace at any price means giving in to the threats of aggressors, in order to avoid conflict is in sharpest contrast to the peace of slaves and cowards all of the above is in sharpest contrast to the peace of slaves and cowards In a division-of-labor society, the individual lives by producing or helping to produce just one or at most a very small number of items, almost all of which are consumed by others; at the same time practically all that he consumes is produced by the labor of others. True The importance of the study of economics derives from the importance of: Wealth Human life and well-being World peace All of the above All of the above The foundations of capitalism and economic activity, without which they could not develop or only minimally develop, include peace and tranquility respect for individual rights limited government and economic and political freedom all of the above all of the above Economics is controversial in part because of the inherent difficulties present in any science of reconciling scientific theory with unscientific personal observations the prevailing pre-scientific worldview in the realm of economics the fact that economics casts the pursuit of self-interest in a positive light and thereby appears in conflict with the received morality of altruism economics presupposes a willingness to follow chains of deductive reasoning and to regard the results of logical reasoning from true premises as binding all of the above all of the above On the basis of the anarchic concept of freedom, it is claimed that freedom is violated any time there is anything that, for whatever reason, a person cannot do, from flying to the moon, to being able to afford a house or a college education that is beyond his reach, to committing murder. True The freedom of the press is violated and censorship exists not when a newspaper refuses to publish a story or a column that, for any reason, it regards as unworthy of publication, but when it is prepared to publish a piece and is stopped from doing so by the government. A private newspaper cannot commit censorship. Only the government can commit censorship. True The schools of economic thought that have been the main supporter of capitalism are a.Marxism and Keynesianism b.the British classical school and the Austrian school c.both (a) and (b) d. neither (a) nor (b) the British classical school and the Austrian school The Manchester, Currency, and Chicago schools have been among the principal allies of the classical and Austrian schools. True The most important members of the classical school were Adam Smith, David Ricardo, and John Stuart Mill. True The most important members of the Austrian school were Carl Menger, Eugen von Bohm_Bawerk, Ludwig von Mises, and F.A. Hayek. True Among the leading critic(s) of capitalism or various major aspects of it have been Karl Marx John Maynard Keynes Joan Robinson Edward Chamberlin all of the above all of the above Malthus and Sismondi were important members of the classical school. False J. B. Say, James Mill, J. R. McCulloch, and Nassau W. Senior were important members of the classical school. True The schools of economic thought that preceded the classical school included the Scholastics, the Mercantilists, and the Physiocrats. True The Mercantilists were intellectually closer to the classical school than were the Physiocrats. False Contemporary Keynesianism most closely resembles mercantilism The most important members of the Austrian school are a. Alfred Marshall b. Milton Friedman c. Leon Walras d. all of the above e. none of the above none of the above The leading difference between classical economics and Austrian economics pertains to the theory of value and price and centers on the theory of diminishing marginal utility. True Classical economics was abandoned a. in part because it came to be viewed as implying the leading ideas of Marxism and the case for socialism b. in part because it's espousal of the wages-fund doctrine offered fundamental opposition to essential aspects of the case for socialism c. both (a) and (b) d. neither (a) nor (b) both (a) and (b) The abandonment of classical economics in the nineteenth century contributed to the success of anti-capitalist ieas in the twentieth century a. insofar as the abandonment of the classical economists' ideas on the role of saving prepared the ground for the acceptance of Keynesianism in the 1930s b. insofar as the abandonment of the classical economists' ideas on the role of cost of production as a determinant of prices paved the way for the acceptance of the doctrines of pure-and-perfect competition and oligopoly and monopolistic competition in the 1930s c. both (a) and (b) d. neither (a) nor (b) both (a) and (b) According to George Reisman, classical economics makes possible a far more fundamental and thoroughgoing critique of the Marxian exploitation theory than that provided by Bohm-Bawerk and the Austrian school, despite the prevailing mistaken belief that it implies the exploitation theory. True The schools of economic thought, which had been opposed to capitalism or essential features of it, include the German historical school and the American institutionalist school, both of which denied the very possibility of a science of economic laws. True The leading members fo the German Historical school were Wilhelm Roscher (1817-1894), Gustav Schmoller (1838-1917), Lujo Brentano (1844-1931), and Werner Sombart (1863-1941. True Sombart began his career as a Marxist and later became a leading supporter of Nazism. True The leading members fo the American institutionalist school were Thorstein Veblen (1857-1029), John R. Commons (1862-1945), and Wesley Mitchell (1874-1948). True Alfred Marshall's doctrine of the representative firm led to the conclusion that large-sized firms usually cannot gain by cutting their prices, because it viewed all competitors as perfectly equal. True The partial equilibrium approach of Alfred Marshall focuses on the individual firm and industry divorced from the rest of the economic system. True The general equilibrium approach of classical and Austrian economics studies economic phenomena from the point of view of their effects on all members of the economic system, not just on those directly involved. True
The partial equilibrium approach led to the breakup of economics into "microeconomics" and "macroeconomics," the one studying the individual consumer and firm apart from connection with the rest of the economic system, and the other studying the economic system as a whole, apart from its connection to the actions of individuals. True According to Reisman, the theoretical substance of most textbooks on "microeconomics" is that the great bulk of business activity is tainted with an element of monopoly and that the only exception is the domain of pure and perfect competition, which is virtually monexistent. At the same time, little of nothing of the sound price theory developed by the classical and Austrian economists is presented in these textbooks. True According to Prof. Reisman, the theoretical substance of most textbooks on "macroeconomics" is the elaboration of the doctrines of Keynes that capitalism causes depressions and mass unemployment through overproduction and excess saving and that what is needed to counteract or prevent these evils is inflation of the money supply and deficit-financed government spending. True Prof. Reisman claims that a shortcoming of mathematical economics is that a. "It leads to an undue concentration of attention on states of final equilibrium, which are all that its differential equations are capable of describing. It thus takes attention away from the real-world operation of the profit motive and of the market processes by means of which the economic system continually tends to move toward a state of full and final equilibrium without ever actually achieving such a state. The economic system never actually achieves such a state because of continuous changes in the fundamental economic data." b. "The use of calculus and differential equations to describe economic phenomena represents a Procrustean bed, into which the discrete, discontinuous phenomena of actual economic life are mentally forced, in order to fit the mold of mathematically continuous functions to which the methods of calculus can be applied." c. "One major consequence [of mathematical economics] is the aid given to the perpetuation of a false theory of the determination of the prices of the factors of production: namely, the theory that the prices of the factors of production are directly derivable from the value of the consumers' goods they help to produce." d. all of the above e. none of the above all of the above According to Prof. Reisman, the theoretical substance of most textbooks on "microeconomics" is "that with a few, limited exceptions, such as wheat farming, the whole of a capitalist economic system is tainted by an element of monopoly. The solution for this alleged state of affairs is supposed to be a radical antitrust policy, which would fragment all large businesses, or else the nationalization of such businesses and/or government control over their prices - and further policies that would force firms in the same industry to produce identical, indistinguishable products." True
Ludwig von Mises a. is almost alone in the development of a systematic defense of capitalism in all of its leading aspects b. is the leading critic of socialism and Marxism c. both (a) and (b) d. neither (a) nor (b) both (a) and (b) Ludwig von Mises a. developed answers to virtually all of the accusations made against capitalism - from its alleged exploitation of labor and responsibility for unemployment and depressions to its alleged responsibility for monopoly, wars, and racism b. developed a social philosophy of capitalism which demonstrates the benevolent operation of all of capitalism's leading institutions, especially private ownership of the means of production, economic competition, and economic inequality c. exponded a procapitalist interprettion of modern economic history, and provided a devastating cirtique of socialism and government intervention in all of its forms d. all of the above all of the above Ludwig von Mises demonstrated that a socialist economic system lacks the ability to engage in rational economic planning because of its lack of a price system and thus the ability to perform economic calculation. True In Prof. Reisman's view, "what von Mises undertook, and which summarizes the essence of his greatness, was to build a systematic intellectual defense of capitalism and thus of material civilization." True Ludwig von Mises' major criticism of socialism is that it is impossible to practice a perfect system in an imperfect world. False An economist's acceptance of the proposition that unemployment can be eliminated by a fall in wage rates and prices implies opposition on his part to labor legislation and all other government intervention that stands in the way of wage rates falling in he face of unemployment. True The fall in wage rates to their equilibrium, i.e., full-employment level is in fact almost certain to be accompanied by a rise in total payroll spending and in productive expenditure as a whole, because it brings out the investment expenditures which had been postponed, awaiting the fall in wage rates. Thus, in actuality, it is accompanied by a rise in the aggregate monetary demands for labor and for goods, both consumers' goods and capital goods. both (a) and (b). The claim of many union leaders that wage rate reductions result in proportionate reductions in consumer spending both (a) and (b). The Keynesian aggregate demand curve is identical to the consumptionist aggregate curve presented in Reisman's Chapter 13 except for the horizontal axis representing employment as well as output, and the use of the letter Y to denote output. True The Keynesian doctrine of the unemloyment equilibrium is the claim that both (a) and (b). As presented by Samuelson and Nordhaus, what remains of the Keynesian position is merely an obstinate refusal to challenge the government intervention that is responsible for mass unemployment and an insistence that the problem of unemployment be dealt with by means of still more government intervention. True Choose the answer which is most completely true. all of the above. When they say that the classical economists preached "that persistent unemployment was impossible," Samuelson and Nordhaus ignore the fact that the classical economists' proposition was intended to apply only to a labor market free of government interference, not to one in which such interference prevents a fall in wage rates. True When they say, "The classical approach holds that prices and wages are flexible, so the economy moves to its long-run equilibrium very quickly," Samuelson and Nordhouse both (a) and (b). Samuelson and Nordhaus depart both from Keynesianism and traditional neo-Keynesianism in their explanation of unemployment as being caused by wage-rate rigidities rather than by the alleged perfect inelasticity or at least extremely high inelasticity of the aggregate demand curve. True Pigou's doctrine is even weaker than the Keynesians themselves recognize, because if the money supply of the economic system rests on a fractional reserve, and if it were the case that there must be some significant drop in total spending accompanying the fall in wage rates and prices, then there would be substantial business failures, which would result in substantial bank failures and in a reduction in the quantity of money. In such a case, the "Pigou effect" would be reduced to depending on the ability of a fall in wage rates and prices to raise the purchasing power, not of a fixed stock of money (which would not be fixed, but falling), but of a much more limited fixed monetary base. True Neo-Keynesianism all of the above. The neo-Keynesians are led to conclude that reductions in wage rates and prices can have only a relatively modest impact on the increase in employment and output, because the only mechanism they can imagine by which a fall in wage rates and prices can increase the quantity of goods and labor demanded is by virtue of its effect in increasing the buying power of the stock of money and on that basis increasing the demand for consumers' goods and there creating additional employment. True The success of Keynesianism in overcoming opposition was the result in large part of the unnecessary abandonment two generations earlier of the main body of classical economic thought in the mistaken belief that it supported Marxism, in particular the abandonment of classical economics' views on the wage fund doctrine and the role of saving in spending. True Keynesianism all of the above Such ideas as that pyramid building and budget deficits are economically beneficial, marks Keynesianism as an enemy both of common sense and the love of liberty (ile., the freedom from excessive government, which excess is fostered by the policy of budget deficits). True Keynesianism was a source of intellectual relief for many economists, because his ideas filled what perhaps the majority of economists experienced as a vital need - it gave them a way out of conflict with the rest of the intellectual world and with a good portion of their own convictions. For if Keynes were right, economists need not oppose labor legislation. Indeed, they could join in the calls for expanded government intervention. True According to Keynesianism, the more the government spends for any purpose - even for the least valuable programs imaginable, such as pyramid building - the more prosperous must the economic system become. True According to Keynesianism, the solution for mass unemployment is "fiscal policy," by which, in essence, is meant that the government must adopt a policy of budget deficits. True A leading implication of Keynesianism is that there is no need for economists to oppose government interference raising or maintaining wage rates, since the abolition of such interference would not serve to eliminate unemployment in any case, and thus that there is no reason for economists to have to be in a state of conflict with the prevailing opinion of virtually all other intellectuals. True The essential claim of Keynesianism is that a free market in labor and fall in wage rates is incapable of eliminating unemployment, and that mass unemployment is an inescapable feature of a capitalist economic system in modern conditions. True In view of the influence of the Marxian exploitation theory, opposition to government interrvention on the side of raising and maintaining wage rates all of the above All trade is NOT: What is Capitalism? An economic system based on private ownership and control of the factors of production. What is Socialism? An economic system based on government ownership and control of the factors of production. When a creditor makes a loan, what happens to his cash balance? His cash balance decreases. His cash balance decreases. How will an increase in the demand for money tend to affect the money costs of gold mining? Raise it. Lower it. What is Socialism? An economic system based on government ownership and control of the factors of production. An economic system based on government ownership and control of the factors of production. People keep cash balances, because they are: Uncertain of the future. Uncertain of the future. Using the "t-account" above of a loan bank, what has happened the money supply when a new partner added his $10,900? Money supply increased by $10,900 There was no change in the money supply. Central Banks are established to Protect the individuals from the bankers. Remove the limitations placed by free banking on monetary and bank credit inflation. When Bastiat claimed that it was, not true that job opportunities within a country may be choked off by the competition of more favored countries, he was referring to what economic concept? Absolute advantage. Comparative advantage. If one ounce of silver will buy 25 kilograms of butter and one ounce of gold will buy 50 kilograms of butter, but one ounce of gold at this moment happens to exchange for three ounces of silver, it would pay you to, If you had an ounce of silver, to buy three ounces of gold, then use the gold to by 50 kilograms of butter, and trade that for 1.5 ounces of gold. If you had an ounce of gold, to buy three ounces of silver, then use the silver to buy 75 kilograms of butter, and trade that for 1.5 ounces of gold. Under central banking, a demand for cash and the subsequent issue of new cash has the paradoxical effect of lowering the money supply. Why is this so? The issuance of cash by
the central bank lowers the amount of money in the hands of the public. Banks need to maintain their reserve/deposit ratios. Which of the following can only be rented on a free market? Land. Labor Hoards as we use them in economics means: A stockpile of goods usually accumulated during shortages. All of the above. To purchase money means To buy other goods. To sell commodities and/or one's labor. Unlike other commodities, not all money is owned by someone. At any given moment some of it is flowing between owners. Always True Always False At any given moment: Some money is in circulation and some
is in hoards. All money is in hoards. What will happen to the price level if the demand for money increases all other things equal? Price level will increase. Price level will fall. If worn coins are set equal in value to new coins by the government, which coins will circulate and which will be hoarded? (Assume that the worn coins have less gold.) They will circulate equally, because they have the same name. The old coins will circulate and the new coins will be hoarded. What is Capitalism? An economic system based on government ownership and control of the factors of production. An economic system based on private ownership and control of the factors of production. What is a fungible commodity? One that is soft and fuzzy. One where each unit is identical to every other. What is another name for the price of money? Price. PPM or the purchasing power of money. What happens in the economy when there is an increase in Money supply (M to M ) to bring about equilibrium again at PPM = B? (Hint: Draw a chart of demand and supply for money.) Individuals
would want to reduce their cash balances. All of the above. If a currency is undervalued by the government, then it will behave as if a price control had been placed on it. Which type of price control? It is not the same as price controls. Maximum price control. Economics, as the science which studies the production of wealth under a system of division of labor, is actually the science which studies the production of wealth under capitalism. Which of the following best describes this statement? Almost every essential feature of capitalism underlies the division
of labor, and several of them are profoundly influence by it in their own operation. Almost every essential feature of capitalism underlies the division of labor, and several of them are profoundly influence by it in their own operation. The unlimited demand for money is limited by: How much one can produce. All of the above. Which of the following is not a limit on free banking? A buildup of trust. Eagerness to accept government paper money. Under a 100% reserve rule banks could earn profits by: Borrowing money at higher rates and lending them out at lower rates to take advantage of the spread. Charging storage fees for deposits. Under free banking, if one bank were to gain the entire market, why wouldn't that bank be able to expand the money supply without limit? It would be able to expand without limit, because there would be no day-to-day redemption from other banks. The flow of goods and the flow of money among countries would limit the banks credit expansion. An increase in the supply of money whose commodity use is negligible causes: An increase in prices. Why is the temptation to embezzle greater for the warehousing of fungible commodities? It is just easier. It is a general deposit rather than a specific deposit. Post hoc, ergo propter hoc means what? Begging the question. After this; therefore, on account of it. What is a system of free banking? Where banks can do anything they want and get away with it. Where banks are treated like any other business on the free market. What two different operations does modern banking mix with very different economic effects? Consumption and investment. Loan banking and deposit banking. What is the most effective limit on free banking? The bank run. The bank run.
What we call money expenditures for an individual, we call what for a nation? Exports. Imports If economy is on a gold standard, how would an increase in the demand for money tend to affect the money supply? It would leave the money supply unchanged, because general prices would increase. It would increase the money supply, because general prices would decrease What is often interpreted as an unlimited demand for money is really. Unlimited supply of the factors of production. An unlimited desire for the goods that money buys. What is the definition of the total money supply? Savings + Investments + Consumption. Demand deposits held by the public + central bank notes. A general desire to increase cash balances in a free economy: Will always lead to an increase in the pure interest rate. Will lead to an increase in the pure interest rate if the cash is drawn from savings-investment. If a currency is overvalued by the government, then it will behave as if a price control had been placed on it. Which type of price control? It is not the same as price controls. Minimum price control. Hoarding is: A vicious antisocial act. An increase in the demand for money. Monetary Policy would be what form of intervention? Autistic. Binary A fractional reserve bank creates new money to an amount equal to the inverse of its reserve requirement: Without regard to the existence of other banks. Only if there is an official central bank to coordinate new money creation. Two major components of the demand for money are: Total demand and exchange demand. Exchange demand and reservation demand. What is loan banking? The institution of channeling savings into productive loans and investments. The institution of channeling savings into productive loans and investments.
What is the gain or loss in social welfare from an increase in M to M ? There is gain, because an economy needs more money to grow. There is no gain, because each level of money supply is optimal. Total gross savings in the economy is The aggregation of all present goods supplied to owners of future goods during the production process The aggregation of all future goods supplied to owners of presents goods during the production process What is different about the demand for money and the demand for any other product? The demand for money is a function of its own price. The demand for money is a function of its own price. Which of the following pairs of statements about the pre-income money-demand curves of non-labor and labor production are true? Non-labor: vertical; Labor: vertical. Non-labor: vertical; Labor: downward toward the right. Why do we use a t-accounts?
Because assets must always equal equity and liabilities. In order to make any sense out of the banking system. Refer to Table 13-1. If $1,000 is deposited into the First Bank of Mason City, and the bank takes no other actions, it's total reserves will increase by $200 assets will increase by $1,000. Refer to Table 13-1. If someone deposits $400 into the First Bank of Mason City, the bank will be able to make additional loans totaling $320 all of the above are correct. Refer to Table 13-1. The reserve ratio is 0 percent 20 percent Refer to Table 13-2. If the Last Bank of Cedar Bend is holding $10,000 in excess reserves, then the reserve requirement is 5 percent 10 percent Refer to Table 13-2. If the reserve requirement is 10 percent, then this bank is in a position to make a new loan of $15,000 has excess reserves of less than $15,000. Refer to Table 13-2. If the reserve requirement is 20 percent, this bank needs $10,000 more reserves to meet its reserve requirements needs $5,000 more reserves to meet its reserve requirements. Refer to Table 13-2. The reserve requirement is 10 percent and then someone deposits an additional $50,000 into the bank, then if the bank takes no other action it will have $65,000 in excess reserves have $55,000 in excess reserves. A barter economy is one in which money serves as a medium of exchange goods are traded directly for other goods. Demand deposits are deposits of individuals that can either be withdrawn or made payable on demand to a third party by a check deposits of individuals that can either be withdrawn or made payable on demand to a third party by a check Excess reserves are savings deposits that are included in the M2 money supply but not the M1 actual reserves held by banks that exceed the legal requirement. If a sizeable amount of U.S. currency is held outside of the United States, the money supply figures, particularly those for M1, will be less reliable the money supply figures, particularly those for M1, will be less reliable. If a customer deposits $1,000 cash into her checking account, the bank's assets and liabilities both rise by
$1,000 assets and liabilities both rise by $1,000. If money were not used as a medium of exchange, our standard of living would probably improve the gains from trade would be severely limited. If people decide to hold less money as currency and more as checking deposits, this will most likely cause a(n) increase in the money supply increase in the money supply. If the Fed wants to use "open market operations" to decrease the money supply, it would increase the required reserve ratio sell U.S. government securities (bonds) to the general public. If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably encouraging banks to exchange their Fed deposits for currency buying government securities from the public. If you deposit $100 of currency into a demand deposit at a bank, this action by itself does not change the money supply does not change the money supply. In the United States, the control of the money supply is the responsibility of the the president Federal Reserve System (the Fed) In the United States, the purchasing power of money is determined by the value of U.S. treasury bonds that back each unit of currency Federal Reserve policy, which controls the money supply. Modern bankers hold only a fraction of their assets in the form of reserves against their deposits hold only a fraction of their assets in the form of reserves against their deposits.
Open market operations is the tool used by the Fed to regulate stock market activities tool most often used by the Fed to alter the money supply. Open-market purchases by the Fed make the money supply increase,
which tends to decrease the value of money increase, which tends to decrease the value of money Ordinary commercial banks can expand the supply of money by reducing their vault cash and increasing their deposits with the Fed using a portion of their deposits to extend additional loans. Prior to 2008, the primary tool used by the Fed to control the money supply was the manipulation of the required reserve ratio banks must hold against their checking deposits the buying and selling of U.S. Treasury securities. The Federal Reserve System is owned by anyone who buys stock over the counter the banks that are members of the Federal Reserve System. Sets with similar termsAP Macroeconomics Review134 terms RayTheFourth Macroeconomics Sierra College Final223 terms quizlette6997135 Econ - Macroeconomics70 terms gilbelil000 Economics (Demystified)154 terms Shannon_Brandao Other sets by this creatorUnit 66 terms FourCheese9PLUS Unit 56 terms FourCheese9PLUS Unit 45 terms FourCheese9PLUS Unit 311 terms FourCheese9PLUS Verified questionsECONOMICS Give three reasons that a budget deficit might be a good policy choice. Verified answer
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