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Macroeconomics: Chapter 1

Terms in this set (30)

The overriding reason as to why households and societies face many decisions is that
resources are scarce
In most societies, resources are allocated by
the combined actions of millions of households and firms
Sophia is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that
People face tradeoffs
Economists use the word equality to describe a situation in which
each member of society has the same income
Efficiency means that
society is getting the maximum benefits from its scarce resources
When the government attempts to improve equality in an economy the result is often
a reduction in efficiency
Senator Green argues that replacing the income tax with a national sales tax would increase the level of output. Senator Brown objects that this policy would benefit the rich at the expense of the poor.
Senator Green's argument is primarily about efficiency, while Senator Brown's argument is primarily about equality.
When computing the opportunity cost of attending a concert you should include
the price you pay for the ticket and the value of your time
Denise decides to spend three hours working overtime rather than watching a video with her friends. She earns $10 an hour. Her opportunity cost of working is
the enjoyment she would have received had she watched the video.
Ellie decides to spend two hours taking a nap rather than attending her classes. Her opportunity cost of napping is
the value of the knowledge she would have received had she attended class.
Rational people make decisions at the margin by
comparing marginal costs and marginal benefits
After much consideration, you have chosen Cancun over Ft. Lauderdale as your Spring Break destination this year. However, Spring Break is still months away, and you may reverse this decision. Which of the following events would prompt you to reverse this decision?
The marginal cost of going to Ft. Lauderdale decreases.
Suppose the cost of operating a 100 room hotel for a night is $10,000 and there are 5 empty rooms for tonight. If the marginal cost of operating one room for one night is $30 and a customer is willing to pay $60 for the night, the hotel manager should
rent the room because the marginal benefit exceeds the marginal cost.
Rick buys a 1966 Mustang for $3,000, planning to restore and sell the car. He goes on to spend $9,000 restoring the car. At this point he can sell the car for $10,000. As an alternative, he can spend an additional $3,000 replacing the engine. With a new engine the car would sell for $13,000. Rick should
be indifferent between (i) selling the car now and (ii) replacing the engine and then selling it.
People are likely to respond to a policy change
if the policy changes either the costs or benefits of their behavior.
Which of the following is not an example of a group responding to an incentive?
Correct: Universities offer fewer online classes when they generate more revenue than traditional classes.

Incorrect:
• Students attend class because of an attendance policy that reduces their grade for absences.

• Consumers but more of a product when it is on sale at a reduced price.

• Employees work harder to earn higher commissions.
Which of the following statements about trade is false?
Correct: With trade, one country wins and one country loses.

Incorrect:
• Trade increases competition.

• Bulgaria can benefit, potentially, from trade with any other country.

•Trade allows people to buy a greater variety of good and services at lower cost.
Suppose Country A has a high average wage level and a high level of output per person, while Country B has a low average wage level and a low level of output per person. Which country can benefit from trade?
Both Country A and Country B can benefit.
In communism, central planners decide which of the following?
• What goods and services will be produced
• How much will be produced
• Who produced and consumed the goods and services
One advantage market economies have over centrally-planned economies is that market economies
are more efficient
The basic principles of economics suggest that
government should become involved in markets when those markets fail to produce efficient or fair outcomes
In a market economy,
• Households decide which firms to work for and what to buy with their incomes
• Firms decide whom to hire and what to make
Prices direct economic activity in a market economy by
influencing the actions of buyers and sellers
A company that formerly produced software went out of business because too many potential customers bought illegally-produced copies of the software instead of buying the product directly from the company. This instance serves as an example of
inadequate enforcement of property rights.
Which of the following can lead to market failure
externalities and market power
The term "productivity"
refers to the quantity of goods and services produced from each unit of labor input
Almost all variation in living standards is attributable to differences in countries'
productivity
Suppose a typical worker in India can produce 32 units of product in an eight-hour day, while a typical worker in Bangladesh can produce 30 units of product in a 10-hour day. We can conclude that
the standard of living will likely be higher in India than in Bangladesh
To raise productivity, policymakers could
• increase spending on education
• provide tax credits to firms for capital improvements
• fund research and development.
Which of the following is an important cause of inflation in an economy?
growth in the quantity of money in the economy
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