Economic Principles

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Questions and Answers

What is the primary focus of microeconomics?

  • International trade agreements
  • Government fiscal policy
  • The behavior of the economy as a whole
  • Individual economic agents and specific markets (correct)

Which of the following is a key indicator studied in macroeconomics?

  • The price of apples
  • The unemployment rate (correct)
  • A single firm's output
  • Consumer preference for different brands of coffee

What condition defines a perfectly competitive market?

  • A few large firms control the market
  • A single seller dominates the market
  • Many buyers and sellers, identical products, and free entry/exit (correct)
  • High barriers to entry

Which economic concept explains why a consumer gets less satisfaction from each additional unit of a good consumed?

<p>Diminishing Marginal Utility (A)</p> Signup and view all the answers

What is the likely effect of a price ceiling set below the equilibrium price?

<p>A shortage of the good (A)</p> Signup and view all the answers

What does the Gini coefficient measure?

<p>The distribution of income (A)</p> Signup and view all the answers

What is the defining characteristic of a public good?

<p>It is non-excludable and non-rivalrous (B)</p> Signup and view all the answers

What is the main implication of the Coase Theorem?

<p>Externalities can be efficiently resolved through private bargaining if property rights are well-defined and transaction costs are low (C)</p> Signup and view all the answers

Which trade barrier involves a tax on imported goods?

<p>Tariff (D)</p> Signup and view all the answers

What does comparative advantage imply for international trade?

<p>Countries should specialize in producing goods with the lowest opportunity cost (B)</p> Signup and view all the answers

What is the effect of an increase in the reserve requirement set by a central bank?

<p>Decreases the money supply (D)</p> Signup and view all the answers

What is fiscal policy primarily used for?

<p>Influencing the economy through government spending and taxation (C)</p> Signup and view all the answers

According to the IS-LM model, what is the effect of an increase in government spending?

<p>Increases both output and interest rates (A)</p> Signup and view all the answers

What does the Phillips curve illustrate?

<p>The relationship between unemployment and inflation (A)</p> Signup and view all the answers

In game theory, what is a Nash equilibrium?

<p>A situation where no player can benefit by unilaterally changing their strategy (A)</p> Signup and view all the answers

What is meant by 'moral hazard' in economics?

<p>The risk that one party in a transaction will take on more risk because another party bears the cost of that risk (B)</p> Signup and view all the answers

Which market structure is characterized by a few firms dominating the industry?

<p>Oligopoly (B)</p> Signup and view all the answers

What is the Herfindahl-Hirschman Index (HHI) used to measure?

<p>Market concentration (C)</p> Signup and view all the answers

If the cross-price elasticity of demand between two goods is positive, what does this indicate?

<p>The goods are substitutes (B)</p> Signup and view all the answers

What is the 'time inconsistency' problem in economics?

<p>The tendency for preferences to change over time, leading to inconsistent decisions (A)</p> Signup and view all the answers

Which statement best describes the concept of 'Pareto efficiency'?

<p>An allocation where it is impossible to make one individual better off without making at least one individual worse off (B)</p> Signup and view all the answers

According to the Mundell-Fleming model, what is the effect of expansionary fiscal policy in a small open economy with flexible exchange rates?

<p>Has no effect on output (B)</p> Signup and view all the answers

What is the Ricardian equivalence proposition?

<p>Tax cuts today will be offset by higher taxes in the future, leading to no change in consumption (C)</p> Signup and view all the answers

In the context of international trade, what does the 'terms of trade' refer to?

<p>The ratio of a country’s export prices to its import prices (A)</p> Signup and view all the answers

What is meant by 'rent-seeking' behavior?

<p>Efforts to obtain economic gain through manipulation of the political or economic environment, rather than through productive activity (B)</p> Signup and view all the answers

What is the Laffer Curve used to illustrate?

<p>The relationship between tax rates and tax revenue (C)</p> Signup and view all the answers

Which of the following is a key assumption of the neoclassical growth model?

<p>Diminishing returns to scale (C)</p> Signup and view all the answers

What is adverse selection?

<p>One party has different information than another (B)</p> Signup and view all the answers

Which of the following is an example of expansionary monetary policy?

<p>Lowering the federal funds rate (A)</p> Signup and view all the answers

If the nominal exchange rate is fixed, what happens to the real exchange rate when domestic inflation is higher than foreign inflation?

<p>The real exchange rate appreciates (A)</p> Signup and view all the answers

What is an externality?

<p>The effect of a decision on a third party not involved in the decision (B)</p> Signup and view all the answers

What is meant by 'quantiative easing'?

<p>Large scale purchases of government bonds or other assets to increase the money supply (A)</p> Signup and view all the answers

What is the 'Paradox of Thrift'?

<p>Increased saving, during a recession, leads to decreased overall economic activity (A)</p> Signup and view all the answers

What is the efficient market hypothesis?

<p>That stock prices reflect available information and are impossible to predict (B)</p> Signup and view all the answers

In the Solow growth model, what is the 'steady state'?

<p>When capital per worker, output per worker, and consumption per worker are constant (A)</p> Signup and view all the answers

What does the Heckscher-Ohlin model predict about international trade patterns?

<p>Countries will export goods that use their relatively abundant factors of production (D)</p> Signup and view all the answers

Suppose a firm operates in a perfectly competitive market. What happens to the firm's individual demand curve if the market price increases?

<p>It becomes horizontal at the new, higher market price. (C)</p> Signup and view all the answers

In an economy, the marginal propensity to consume (MPC) is 0.8. What is the value of the Keynesian multiplier?

<p>5 (C)</p> Signup and view all the answers

What is 'hysteresis' in the context of unemployment?

<p>Long-term or structural unemployment caused by prolonged periods of high unemployment (A)</p> Signup and view all the answers

In a two-country model, if one country imposes a tariff, what is the likely effect on the other country's terms of trade?

<p>The effect on the other country's terms of trade is uncertain (D)</p> Signup and view all the answers

Flashcards

Microeconomics

Examines the behavior of basic elements in the economy, including individual agents (e.g., households and businesses) and markets, their interactions, and the outcomes of interaction.

Macroeconomics

Studies the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. Includes national, regional, and global economies.

Monopoly

A market dominated by a single seller, known as a monopolist, who controls the supply and price of a good or service.

Oligopoly

A market structure in which a small number of firms dominate, leading to limited competition and the potential for strategic interaction among competitors.

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Monopolistic Competition

A market structure in which many firms sell differentiated products, allowing for some price-setting power but experiencing intense non-price competition.

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Perfect Competition

A market structure in which many firms sell identical products, and no single firm has the power to influence the market price.

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Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than another producer.

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Absolute Advantage

The ability to produce more of a good or service than another producer, using the same amount of resources.

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Import Quota

Government-imposed limitations on the quantity of a good or service that may be imported into a country.

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Tariff

A tax imposed by a government on goods and services imported from other countries.

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Protectionism

Government policies aimed at restricting international trade to protect domestic industries from foreign competition.

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Dumping

A situation where a country exports goods or services at a price below their cost of production or below the price in their domestic market.

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Gross Domestic Product (GDP)

The total value of all final goods and services produced within a country's borders during a specific period.

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Business Cycle

The recurring and fluctuating levels of economic activity that an economy experiences over a period of time.

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Inflation

A sustained increase in the general price level of goods and services in an economy over a period of time.

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Deflation

A decrease in the general price level of goods and services in an economy, typically occurring during periods of economic contraction

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Unemployment

A situation where individuals who are willing and able to work are unable to find employment, representing underutilization of labor resources.

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Fiscal Policy

Government use of spending and taxation to influence the economy.

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Monetary Policy

Central bank actions to manipulate the money supply and credit conditions to stimulate or restrain economic activity.

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Federal Reserve (The Fed)

The central bank of the United States, responsible for conducting monetary policy and regulating the banking system.

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