Economics Class Quiz

In a market economy, resources are allocated through the interactions of numerous businesses (firms) and consumers (households) in the marketplace.

A market failure occurs when the market fails to effectively distribute resources, leading to an inefficient allocation of goods and services.

The circular flow of the economy illustrates the relationship between households and firms. Households provide factors of production (labor, capital, land) to firms, who use these to create goods and services. Households then purchase these products and services. This flow is represented by a circular diagram.

The diagram represents the flow of money from firms to households in the form of payments for factors of production (like wages).

The letter B in the circular flow diagram represents the factors of production used by firms to create goods and services. These include labor, land, and capital.

The opportunity cost of producing one item is the amount of another item that must be given up in order to produce it.

In this context, the opportunity cost of producing one automobile in Country A is 10 TVs. This means that if Country A chooses to produce one more automobile, it would have to forgo the production of 10 TVs.

Absolute advantage occurs when a country or individual can produce more of a good or service than another country or individual using the same resources.

Comparative advantage refers to the ability of a country, individual, or firm to produce a good at a lower opportunity cost than another country, individual, or firm.

When someone's income increases, the demand for a normal good also increases. This is because they have more money to spend on that good.

When the price of a good increases, the quantity demanded of that good decreases. This is because people are less willing to buy something that is more expensive.

A perfectly inelastic demand curve means that the quantity demanded remains constant regardless of the price change. In this scenario, an increase in supply will only lead to a lower market price.

The price elasticity of demand measures the responsiveness of the quantity demanded of a good to changes in its price. It is calculated using the formula: (Change in quantity demanded / original quantity demanded) / (change in price / original price).

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the actual price they pay. It represents the benefit consumers get from a purchase.

When a good's production causes pollution, the market equilibrium quantity produced is higher than what would be socially optimal. This is because the market doesn't consider the negative externality of pollution.

In monopolistic competition, businesses sell differentiated products, meaning they have unique features or qualities that make them different from competitors' products.

The firm's equilibrium quantity is the point where the marginal cost (MC) curve intersects the marginal revenue (MR) curve. This signifies where profit is maximized.

Fixed costs are those costs that do not change with the level of output produced. They are constant regardless of the quantity produced.

Economic profit is the difference between total revenue and total costs, including both explicit and implicit costs. Explicit costs are actual cash outlays, while implicit costs are opportunity costs.

In a competitive market, the short-run market supply curve is determined by the sum of all individual supply curves of the firms operating in the market. Each firm's supply curve shows the quantity they are willing to supply at different prices.

In the long run, competitive markets tend to reach an equilibrium where economic profits are zero. This is due to the entry and exit of firms in response to profit opportunities. If firms experience economic profits, new firms will enter the market, increasing competition and driving down prices until profits are zero.

GDP (Gross Domestic Product) does not include unpaid services like housework. GDP only measures goods and services that are bought and sold in the market.

Inflation rate is calculated by dividing the change in the price index by the original price index and multiplying by 100. In this case, the inflation rate is (360-320)/320 * 100 = 12.5%.

New products can lead to an underestimation of real GDP growth because it is difficult to accurately measure the value of new products in relation to older products.

Productivity is a key factor in determining a country's standard of living. Countries with higher productivity tend to have higher standards of living.

In a closed economy, national saving equals income minus consumption and government expenditures. It also equals private saving plus public saving.

When the government increases tax on interest income, the supply of loanable funds decreases. This is because people are less incentivized to save and lend money when they receive less interest income.

An increase in the size of the labor force can explain both an increase in employment and an increase in the unemployment rate. This is because a larger labor force means more people are looking for jobs, increasing the pool of potential unemployed workers.

The natural unemployment rate includes both frictional and structural unemployment. Frictional unemployment is due to temporary job transitions, while structural unemployment is due to a mismatch between workers' skills and available jobs.

The money multiplier decreases as the reserve ratio increases. This is because a higher reserve ratio means banks hold more of their deposits in reserve and lend out less, reducing the overall expansion of the money supply.

The amount of currency held by the people in Sylvania would be $5 million. Since they keep half of their money in currency and half in deposits, the total amount of currency they hold would be half of the total money supply. To calculate the total money supply, we can use the money multiplier: Money Multiplier = 1/Reserve Ratio = 1/0.2 = 5. Since the total money supply is $10 million, the amount of currency held by people is $10 million / 5 = $2 million.

If the money supply is MS2 and the value of money is 2, there is excess supply of money because the quantity supplied of money exceeds the quantity demanded at that price. The distance between points A and C represents the excess supply of money.

When the money supply curve shifts from MS1 to MS2, the equilibrium price level increases. This is because an increase in the money supply reduces the value of money, causing prices to rise.