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Economics 101
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TEN PRINCIPLES OF ECONOMICS
#1: People Face Trade-offs #2: The Cost of Something Is What You Give Up to Get It #3: Rational People Think at the Margin #4: People Respond to Incentives #5: Trade Can Make Everyone Better Off #6: Markets Are Usually a Good Way to Organize Economic Activity #7: Governments Can Sometimes Improve Market Outcomes #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services #9: Prices Rise When the Government Prints Too Much Money #10: Society Faces a Short-run Trade-off between Inflation and Unemployment
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1. Economics deals primarily with the concept of? poverty. money.
power. scarcity. A Looming International Crisis
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2. The phenomenon of scarcity stems from the fact that
most economies’ production methods are not very good. in most economies, wealthy people consume disproportionate quantities of goods and services. governments restricts production of too many goods and services. resources are limited.
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3. Because resources are limited it is essential that society not do this.
conserve them waste them distribute them freely compete over them
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4. A society strives to get the most it can from its scarce resources
4. A society strives to get the most it can from its scarce resources. It also tries to distribute the benefits of those resources to its members in a fair manner. In other words, the society faces a tradeoff between guns and butter. efficiency and equity. inflation and unemployment. work and leisure. Efficiency means society gets the most that it can from its scarce resources. Equity means the benefits of those resources are distributed fairly among the members of society.
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5. To become more efficient, economies seek to increase productivity
5. To become more efficient, economies seek to increase productivity. Productivity is defined as the number of workers required to produce a given amount of goods and services. amount of labor which can be saved by replacing workers with machines. amount of effort workers put into an hour of working time. amount of goods and services produced from each hour of a worker’s time.
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Entrepreneurship (Ideas)
Productivity is obviously related to production. It takes four things to make other things. They are called the “Factors of Production.” Natural Resources Labor Capital (Tools) Entrepreneurship (Ideas)
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6. In economics, the cost of something is
the dollar amount of obtaining it. always measured in units of time given up to get it. what you give up to get it. often impossible to quantify, even in principle.
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7. What alternatives you give up when making a trade-off is called your
opportunity cost. explicit cost. true cost. direct cost.
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8. Making rational decisions “at the margin” means that people
make those decisions that do not impose a marginal cost. evaluate how easily a decision can be reversed if problems arise. compare the marginal costs and marginal benefits of each decision. always calculate the marginal dollar costs for each decision.
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9. When the marginal cost outweighs the marginal benefit, then the rational chooser will
pick a substitute. do without. pay the extra cost. become too confused to choose.
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10. To say that “people respond to incentives” is to say that
changes in costs (but not changes in benefits) influence people's decisions and their behavior. changes in benefits (but not changes in costs) influence people's decisions and their behavior. changes in benefits or changes in costs influence people's decisions and their behavior. tradeoffs can be eliminated by rational people who think at the margin.
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11. A synonym for benefit is “profit,” as in a student profits from putting effort into their school work. In economics, profit has a more precise meaning. What is it? Having money in the bank thanks to interest paid on the account Having more goods in the storeroom thanks to increased production Having money remaining in the ledger after paying expenses Having money to pay workers for their increased productivity
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Supply: the amount of goods and services available to meet the needs and wants of consumers
Demand: the amount of goods and services desired by consumers to meet their needs and wants The relationship between supply and demand creates a market – where goods and services are bought and sold. Their interaction is based on price – the greater the supply the lower the price and vice versa. Producers and consumers relate in a complex competition over supply and demand. The best result of the competition is presumably the most efficient use of resources and the least waste
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Import: Export: Globalization:
Some countries have a comparative advantage when producing goods and services. Explain why and give specific examples. Because countries cannot always efficiently produce all the goods and services their consumers desire they trade with other countries to get those things consumers demand. Import: Export: A good or service brought in from another country A good or service sent to another country The optimal consequence of such trade is to meet the needs and wants of all trading nations; thus it is safe to say that trade makes everybody better off. Trade has increased among nations as transportation and communications systems have become more efficient this has resulted in the phenomenon of An elimination of barriers to trade, communication, and cultural exchange, leading to greater openness and interconnection and potentially a greater standard of living for all nations Globalization:
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12. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations? There is no such thing as a free lunch. People buy more when prices are low than when prices are high. No matter how much people earn, they tend to spend more than they earn. Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes.
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13. The “invisible hand” directs economic activity through
advertising. . price. central planning. government regulations.
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14. The market is competitive. Competition leads to these two entities.
Winners and losers. Givers and takers. Lovers and haters. Sleepers and wakers.
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Competition may seem to be the most efficient way to avoid waste of scarce factors of production, but it is not without costs to society. Thus some further regulation of the economy has been deemed necessary. The challenge becomes how much.
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15. A rationale for government involvement in a market economy is as follows:
Markets sometimes fail to produce a fair distribution of economic well-being. Markets sometimes fail to produce an efficient allocation of resources. Property rights have to be enforced. All of the above are correct.
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16. Government policies can change the costs and benefits that people face. Those policies have the potential to change people’s behavior. change people’s decisions at the margin. produce results that policymakers did not intend. All are correct.
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17. When the government prevents prices from adjusting naturally to supply and demand,
it stabilizes the economy by reducing market uncertainties. it adversely affects the allocation of resources. the improvement in equity justifies the reduction in efficiency. the improvement in efficiency justifies the reduction in equity.
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18. Prior to the collapse of communism in Europe, communist countries worked on the premise that economic well-being could be best attained by a market economy. a strong reliance on prices and individuals’ self-interests. a system of large, government-operated, privately-owned firms. D. the actions of government central planners.
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19. For markets to work well, there must be property rights.
Where an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions. Where there is an excess of liberty, the effect is the same, tho' from an opposite cause. Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own. James Madison 19. For markets to work well, there must be property rights. market power. a central planner. abundant, not scarce, resources.
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Summary of Economic Systems
Mixed Economy Government regulates industries for the protection of workers and consumers Private Property Exists United States Canada Japan Chile Laissez-faire Economy The market controls the economy, following Adam Smith’s idea of the “Invisible Hand” of supply and demand Private Property Exists No countries currently operate as purely laissez-faire economies Communism Government controls all aspects of the economy – “Command Economy” No Private Property Soviet Union Red China Cuba North Korea Socialism Governments owns major industries Private Property Exists Sweden and most of Western Europe Venezuela
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20. Which of the following most determines a country's standard of living is
The country’s ability to produce goods and services. The country’s ability to prevail over foreign competition. The total supply of money in the economy. The average age of the country's labor force.
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21. The health (growth or decline) of a country’s economy is measured by comparing GDP over time. GDP stands for A. General Domestic Production B. Generational Depreciation of Productivity C. Gross Domestic Product D. Greater Determinant of Production
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Gross Domestic Product measures the total value of goods and services produced within a country in a year. Gross National Product measures the total value of goods and services produced by a country in a year.
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22. The business cycle is the
relationship between unemployment and inflation. irregular fluctuations in economic activity. positive relationship between the quantity of money in an economy and inflation. predictable changes in economic activity due to changes in government spending and taxes.
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23. Most economists believe that an increase in the quantity of money results in
an increase in the demand for goods and services. lower unemployment in the short run. higher inflation in the long run. All of the above are correct.
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24. Which of the following is most likely to reduce the amount of money in an economy?
high fuel prices high interest rates high national debt high corporate taxes
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multinational corporations unionized industrial workers
25. Which of the following benefits most from an increase in the amount of money in an economy? creditors debtors multinational corporations unionized industrial workers You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
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26. From an economic standpoint, what is the most important action a government can take to reduce the irregular fluctuations in economic activity? allow markets to determine supply and demand breakup monopolies to enhance competition eliminate taxes on capital gains regulate the amount of money in the economy
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27. Which of the following regulates the amount of money in the U. S
27. Which of the following regulates the amount of money in the U.S. economy? Congressional Budget Office Federal Reserve Office of Economic Advisers Government Accounting Office
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The Federal Reserve can control the money supply via three main mechanisms:
1. Raising or lowering interest rates (i.e. the “Discount Rate”) 2. Buying or selling currency on the open market (i.e. to banks) 3. Increasing or decreasing the amount of money banks must keep on hand to ensure deposits (Reserve Ratio)
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28. If the reserve ratio is 10 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves A. increase by $20 million and the money supply eventually increases by $200 million. B. decrease by $20 million and the money supply eventually increases by $200 million. C. increase by $20 million and the money supply eventually decreases by $200 million. D. decrease by $20 million and the money supply eventually decreases by $200 million.
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TEN PRINCIPLES OF ECONOMICS
#1: People Face Trade-offs #2: The Cost of Something Is What You Give Up to Get It #3: Rational People Think at the Margin #4: People Respond to Incentives #5: Trade Can Make Everyone Better Off #6: Markets Are Usually a Good Way to Organize Economic Activity #7: Governments Can Sometimes Improve Market Outcomes #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services #9: Prices Rise When the Government Prints Too Much Money #10: Society Faces a Short-run Trade-off between Inflation and Unemployment
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