Economics Concepts Quiz

Normative vs. Positive Statements

• Positive statements describe the world as it is, while normative statements describe how the world should be.
• Statement i ("We ought to take public transportation more often") and iv ("All restaurants should sell healthy-choice meals") are normative, expressing opinions on how things should be.
• Statement ii ("The United States imports more than it exports") and iii ("Hurricanes cause damage to the Gulf Coast every year") are positive, describing factual observations.
• Correct answer: d. Statements ii and iii are positive, while i and iv are normative.

Laptop Purchase

• Mike is willing to pay different prices per GB for different blocks of memory. The Campus Store offers a constant price of $8 per GB.
• Mike will buy 150 GB of memory.
• The given price bands & constant offer allow to determine the optimal memory quantity Mike will purchase.

Production Possibilities

• Joe's opportunity cost of producing 1 more chocolate banana is 3 chocolate strawberries, and Jill's is 10 bananas.
• Given the table, the production cost is shown.
• Correct answer: a. Joe: 3 strawberries; Jill: 5/3 strawberries

Comparative Advantage

• Joe has a comparative advantage in chocolate bananas, and Jill in chocolate strawberries.
• To trade in a Pareto-improving way, a relative price of 1/4 chocolate strawberry per chocolate banana is required.
• Correct answer: a. Chocolate bananas, chocolate strawberries, ¼.

Equilibrium Price and Quantity

• Demand: Qd = 100 – 2P (quantity demanded = 100 - 2 times the price)
• Supply: Qs = 10 + P (quantity supplied = 10 + the price)
• Equilibrium occurs when Qs = Qd. Solving for price and quantity, we get a price of P=30 and a quantity Q=40.
• Correct answer: b. P=30; Q=40

Demand Curve Shift

• An increase in the price of eggs from 3to3 to 3to4 per dozen, with fewer consumers buying eggs, indicates a movement up and to the left along the demand curve.
• Correct answer: c. A movement up and to the left along the demand curve.

Illegal Market Profit Motive

• The temptation to sell goods at a profit in an illegal market increases significantly if there's a price ceiling below the equilibrium price, allowing for a higher profit margin.
• Correct answer: d. there is a price ceiling at a level lower than the equilibrium price.

Intermediate Goods

• Intermediate goods are used in the production of other goods. Vegetables bought by a restaurant fall into this classification.
• Correct answer: c. Vegetables bought by a restaurant

Gross Domestic Product (GDP) Calculation

• Total GDP = Value of apples consumed (10*3)+valueofpies(3∗3) + value of pies (3*3)+valueofpies(3∗12)+ Value of police wages(7)+retireespensions(7) + retirees pensions(7)+retireespensions(10)+exports(12)−importcost(12) -import cost(12)−importcost(8).
• GDP = $70
• Correct answer: c. $70.

GDP and other Economic indicators

• Net exports are negative meaning the country has a trade deficit.
• The bakers value added is 6fromtheapples+6 from the apples + 6fromtheapples+6 from labor ($12).
• The GDP includes the value added from the production of goods and services, not intermediate values used in production..
• Correct answer: b. The baker’s contribution to GDP is an added value of $36.

Real vs. Nominal GDP

• Real GDP per capita growth rate equals Nominal GDP per capita minus inflation rate minus population growth.
• Correct answer: d. Real GDP per capita grows at 2% per year.

Malthus and Economic Growth

• The Malthus theory argues that in pre-industrial societies, population growth limits income per capita, preventing sustainable improvements in the standard of living.
• Correct answer: d. In preindustrial societies, gains in living standards are temporary because they trigger rapid population growth, and this lowers income per capita back down to initial, subsistence levels.

Labor Force and Unemployment

• The labor force includes unemployed workers.
• Correct answer: a. The labor force includes unemployed workers.

Nominal GDP Calculation 2000/2001

• Nominal GDP for 2000 is $150.
• Nominal GDP for 2001 is $215.
• Correct answer: b. 150; 215.

Inflation Rate Calculation

• Inflation rate in 2001 is calculated by taking the percentage change in nominal GDP relative to the previous year.
• Correct answer: d. 15%

Labor Supply and Investment

• An increase in labor supply and increase in capital stock will increase the amount of labor, but the effect on real wages is uncertain and depends on the relative magnitude of these changes and the nature of economic growth.
• Correct answer: d. increase; may increase, decrease, or stay constant.

Aggregate Demand

• Aggregate demand increases if expected future income, inflation, or profits increase and if fiscal policy increases government expenditure.
• Correct answer: a. increase; increases

Money Wage Rate and Aggregate Supply

• A rise in the nominal wage rate does not directly change the short-run aggregate supply; it's a shift of the aggregate supply curve.
• Changes in the money wage rate impact short-run aggregate supply by shifting the aggregate supply curve.
• Correct answer: d. does not change the LAS curve because along the LAS curve a rise in the money wage rate is accompanied by an equal percentage increase in the price level.

Real Business Cycle Theory

• The real business cycle theory suggests fluctuations in productivity and technological change are the main factors driving business cycle fluctuations.
• Correct answer: c. fluctuations in productivity; fluctuations in the pace of technological change

Fiscal Deficit

• A cyclical deficit arises during a period of recessionary gaps, with lower tax revenues and increased spending compared to full-employment levels.
• Correct answer: b. deficit; a recessionary.

Federal Reserve Objective

• The Federal Reserve's primary objective is the dual mandate to maintain price stability and maximum employment.
• Correct answer: a. The dual mandate of price stability, which means keeping inflation close to the 2% target, and maximum employment.

Monetary Base and Money Supply

• The monetary base includes physical currency held by the public plus the reserves of banks.
• The money supply is the total amount of money available in the economy, determined by the money multiplier and the monetary base.
• Correct answer: b. 10,000,d.10,000, d. 10,000,d.12,000.

Canadian Balance of Payments

• The result of the Canadian importer buying fish from Iceland is a CA debit (imports), and a KFA credit (capital), because the Canadian importer would have to acquire foreign currency to make payment .
• Correct answer: d. CA debit (under imports) and a KFA credit.

Exchange Rates

• In a fixed exchange rate system and free capital flow, a significant interest rate differential will lead to an unsustainable fixed exchange rate .
• The forward exchange rate is not necessarily an indication of the future spot rate.
• Absolute purchasing power parity does not usually correspond to observed data.
• Correct answer: d. Absolute PPP does not hold in the data, not even long term. Relative PPP does have some traction in the medium/long run.

Interest Rate Parity

• Uncovered Interest Parity predicts that the exchange rate between two currencies will adjust to reflect the interest rate differential between them due to arbitrage opportunities.
• Correct answer: a. 432

Relative Purchasing Power Parity

• Relative PPP explains the relationship between inflation and exchange rate changes. It will predict that if one currency inflates considerably while another does not, then the currency that inflates less will appreciate relative to the currency with the higher inflation rate.
• Correct answer: c. we shall expect the EGP to depreciate by 20%, from E = 30 to E’ = 36 EGP per Dollar.