Central Problems and Production Possibility Curve

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Questions and Answers

How does the shape of the Production Possibility Curve (PPC) typically reflect the economic principle of increasing opportunity cost?

A PPC that is convex to the origin shows decreasing opportunity costs, reflecting specialization benefits as production shifts.
A linear PPC indicates constant opportunity costs, meaning resources are perfectly adaptable between the production of different goods.
A PPC that is concave to the origin illustrates increasing opportunity costs, as resources become less suitable for producing alternative goods when shifting production. (correct)
A vertical PPC demonstrates that opportunity costs are irrelevant, and any combination of goods can be produced without trade-offs.

Under what conditions would a central bank be most likely to implement a contractionary monetary policy, and what would be the expected effects?

During periods of high inflation and rapid economic growth, to decrease the money supply and dampen aggregate demand. (correct)
During periods of deflation and decreasing economic activity, to lower interest rates and encourage borrowing.
During periods of stable prices and moderate economic growth, to maintain the current economic trajectory without intervention.
During periods of low unemployment and stagnant economic growth, to stimulate investment and increase consumer spending.

In the context of international trade, what is the 'infant industry' argument, and what are its potential limitations?

The argument that all industries, regardless of age or location, should receive equal levels of protection to ensure fair competition; its limitation is distorting comparative advantages.
The argument that new industries in developing countries need temporary protection to grow and become competitive globally; its limitation is the difficulty in removing protection later, leading to inefficiencies. (correct)
The argument that only industries producing essential goods should receive protection to ensure national security; its limitation is creating dependencies on protected industries.
The argument that established industries in developed countries need protection from competition by new firms in emerging economies; its limitation is fostering complacency.

How does the concept of 'moral hazard' manifest within the context of banking and financial markets, and what measures can be implemented to mitigate it?

Moral hazard occurs when insured entities take on more risk knowing they are protected, potentially leading to excessive risk-taking and financial instability; it can be mitigated by stricter regulations. (A) Signup and view all the answers

What are the key differences between 'cost-push' and 'demand-pull' inflation, and how do these differences influence policy responses?

Cost-push inflation is caused by increased production costs, requiring supply-side policies, while demand-pull inflation is caused by increased aggregate demand, requiring contractionary monetary or fiscal policies. (B) Signup and view all the answers

How might changes in income tax rates affect both aggregate supply and aggregate demand, and what are the potential trade-offs?

Decreasing income tax rates will likely increase both aggregate demand and aggregate supply, potentially boosting economic growth but risking inflation if demand increases too rapidly. (C) Signup and view all the answers

If a country's central bank is committed to maintaining a fixed exchange rate, how does this commitment constrain its ability to use monetary policy to address domestic economic issues such as inflation or recession?

Maintaining a fixed exchange rate requires the central bank to align its monetary policy with that of the country to which its currency is pegged, limiting its ability to respond to domestic economic conditions. (C) Signup and view all the answers

How do changes in government spending and taxation policies affect the 'multiplier effect,' and under what conditions is the multiplier effect likely to be more pronounced?

Increased government spending and decreased taxation tend to increase the multiplier effect, especially when there is low import leakage and high consumer confidence. (A) Signup and view all the answers

In the context of market structures, how does the Herfindahl-Hirschman Index (HHI) measure market concentration, and what HHI thresholds typically indicate high levels of concentration?

The HHI measures market concentration by summing the squares of the market shares of all firms; an HHI above 2,500 indicates high concentration. (A) Signup and view all the answers

How do 'automatic stabilizers' function within an economy, and what are some examples of policies that act as automatic stabilizers?

Automatic stabilizers are built-in mechanisms that moderate economic fluctuations; examples include progressive tax systems and unemployment benefits. (D) Signup and view all the answers

What are the primary mechanisms through which quantitative easing (QE) is intended to stimulate an economy, and what are some potential drawbacks?

QE stimulates the economy by increasing bank reserves and lowering long-term interest rates, with the drawback of potentially causing inflation and asset bubbles. (B) Signup and view all the answers

How do differences in savings rates across countries affect the global balance of payments, and what implications do these imbalances have for exchange rates and trade?

Countries with higher savings rates tend to have trade surpluses and appreciating exchange rates, making them net exporters of capital to other nations. (D) Signup and view all the answers

What are the key assumptions underlying the Ricardian equivalence theory, and under what conditions might this theory not hold in practice?

Ricardian equivalence assumes that consumers are rational and fully anticipate future taxes to repay government debt, which may not hold true if consumers are myopic, liquidity-constrained, or uncertain about the future. (C) Signup and view all the answers

How does asymmetric information between borrowers and lenders lead to adverse selection and credit rationing in financial markets?

Adverse selection leads lenders to attract riskier borrowers, while credit rationing results in some borrowers being denied loans even if they are willing to pay higher interest rates. (C) Signup and view all the answers

Within the context of behavioral economics, how do concepts such as 'loss aversion' and 'framing effects' influence consumer decision-making, and how can these biases be leveraged in marketing and policy design?

Loss aversion makes consumers more risk-averse when faced with potential losses, while framing effects influence their decisions based on how choices are presented. (A) Signup and view all the answers

Flashcards

Economics

The study of how societies allocate scarce resources to produce valuable commodities and distribute them among different people.

Central Problems of an Economy

What goods/services to produce, how to produce them, and for whom to produce.

Production Possibility Curve (PPC)

A curve showing the maximum possible production combinations of two goods, given resources and technology.