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Economics 101 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 1. Economics deals primarily with the concept of? A. poverty. B. change. C. power. D. scarcity. A Looming International Crisis 2. The phenomenon of scarcity stems from the fact that A. most economies’ production methods are not very good. B. in most economies, wealthy people consume disproportionate quantities of goods and services. C. governments restricts production of too many goods and services. D. resources are limited. 3. 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 A. guns and butter. B. efficiency and equity. C. inflation and unemployment. D. 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. 5¢ Lodging, New York (1890s) The Breakers Mansion, Vanderbilt Family Newport (1890s) 19. To become more efficient, economies seek to increase productivity. Productivity is defined as the A. number of workers required to produce a given amount of goods and services. B. amount of labor which can be saved by replacing workers with machines. C. amount of effort workers put into an hour of working time. D. amount of goods and services produced from each hour of a worker’s time. 4. In economics, the cost of something is A. the dollar amount of obtaining it. B. always measured in units of time given up to get it. C. what you give up to get it. D. often impossible to quantify, even in principle. 7. To say that “people respond to incentives” is to say that A. changes in costs (but not changes in benefits) influence people's decisions and their behavior. B. changes in benefits (but not changes in costs) influence people's decisions and their behavior. C. changes in benefits or changes in costs influence people's decisions and their behavior. D. tradeoffs can be eliminated by rational people who think at the margin. 5. What you give up to obtain an item is called your A. opportunity cost. B. explicit cost. C. true cost. D. direct cost. http://tutor2u.net/quiz/econom ics/jbc_econ_ppf_1.htm 6. Making rational decisions “at the margin” means that people A. make those decisions that do not impose a marginal cost. B. evaluate how easily a decision can be reversed if problems arise. C. compare the marginal costs and marginal benefits of each decision. D. always calculate the marginal dollar costs for each decision. 8. Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations? A. There is no such thing as a free lunch. B. People buy more when prices are low than when prices are high. C. No matter how much people earn, they tend to spend more than they earn. D. Households and firms interacting in markets are guided by an “invisible hand” that leads them to desirable market outcomes. 9. The “invisible hand” directs economic activity through A. advertising. . B. price. C. central planning. D. government regulations. 11. A rationale for government involvement in a market economy is as follows: A. Markets sometimes fail to produce a fair distribution of economic well-being. B. Markets sometimes fail to produce an efficient allocation of resources. C. Property rights have to be enforced. D. All of the above are correct. 12. Government policies can change the costs and benefits that people face. Those policies have the potential to A. alter people’s behavior. B. alter people’s decisions at the margin. C. produce results that policymakers did not intend. D. All are correct. 13. When the government prevents prices from adjusting naturally to supply and demand, A. it stabilizes the economy by reducing market uncertainties. B. it adversely affects the allocation of resources. C. the improvement in equity justifies the reduction in efficiency. D. the improvement in efficiency justifies the reduction in equity. 14. Prior to the collapse of communism in Europe, communist countries worked on the premise that economic well-being could be best attained by A. a market economy. B. a strong reliance on prices and individuals’ self-interests. C. a system of large, government-operated, privately-owned firms. D. the actions of government central planners. 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 10. For markets to work well, there must be A. property rights. B. market power. C. a central planner. D. abundant, not scarce, resources. Summary of Economic Systems Communism Socialism Mixed Economy Laissez-faire Economy Government controls all aspects of the economy – “Command Economy” Governments owns major industries Government regulates industries for the protection of workers and consumers The market controls the economy, following Adam Smith’s idea of the “Invisible Hand” of supply and demand No Private Property Private Property Exists Private Property Exists Private Property Exists Soviet Union Red China Cuba North Korea Sweden and most of Western Europe Venezuela United States Canada Japan Chile No countries currently operate as purely laissezfaire economies 17. The primary determinant of a country's standard of living is A. the country’s ability to produce goods and services. B. the country’s ability to prevail over foreign competition. C. the total supply of money in the economy. D. the average age of the country's labor force. 20. 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 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. 22. The business cycle is the A. relationship between unemployment and inflation. B. irregular fluctuations in economic activity. C. positive relationship between the quantity of money in an economy and inflation. D. predictable changes in economic activity due to changes in government spending and taxes. Unemployment Inflation 23. Most economists believe that an increase in the quantity of money results in A. an increase in the demand for goods and services. B. lower unemployment in the short run. C. higher inflation in the long run. D. All of the above are correct. 24. Which of the following is most likely to reduce the amount of money in an economy? A. high fuel prices B. high interest rates C. high national debt D. high corporate taxes 25. Which of the following benefits most from an increase in the amount of money in an economy? A. creditors B. debtors C. multinational corporations D. 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. 26. From an economic standpoint, what is the most important action a government can take to reduce the irregular fluctuations in economic activity? A. allow markets to determine supply and demand B. breakup monopolies to enhance competition C. eliminate taxes on capital gains D. regulate the amount of money in the economy 27. Which of the following regulates the amount of money in the U.S. economy? A. Congressional Budget Office B. Federal Reserve Board C. Office of Economic Advisers D. Government Accounting Office 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 in reserves to ensure deposits 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. 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 The End