Economics Principles Overview
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Questions and Answers

In a society where individuals follow the economic decision rule, which outcome is most likely?

  • The wrong answer to what and how much to produce.
  • The wrong answer to how to produce.
  • The correct answer to for whom to produce.
  • Positive net benefits to individuals and economic efficiency for society. (correct)

    • What assumption underlies the economic decision rule?

  • Both B and C are correct but not A. (correct)
  • Choices are made based on self-interest.
  • Individuals are rational in their choices.
  • Individuals must be directed by elites.

    • The Invisible Hand Theorem is founded on which assumption?

  • Individuals are rational in their choices.
  • Choices are made primarily out of self-interest.
  • Individuals require guidance from elites.
  • Both B and C are correct but not A. (correct)

    • What was Adam Smith's view on market-based economic systems?

    <p>All of the above are correct.</p> Signup and view all the answers

    What key argument is presented in Adam Smith’s The Wealth of Nations?

    <p>None of the above are correct.</p> Signup and view all the answers

    According to the Invisible Hand Theorem, what is a likely result of the market system?

    <p>Goods will be efficiently produced.</p> Signup and view all the answers

    In the context of the Invisible Hand Theorem, which statement is true?

    <p>Produces goods that match demand.</p> Signup and view all the answers

    Which statement describes the relationship between resource scarcity and allocation?

    <p>Scarcity necessitates a rationing mechanism.</p> Signup and view all the answers

    If you make decisions as assumed by economists, what is perceived as less than the marginal benefit of being a 'sales bro/gal' in Texas?

    <p>Marginal Cost</p> Signup and view all the answers

    Which word or phrase best explains what determines the average price and quantity sold per week of the iPhone 15?

    <p>The price system</p> Signup and view all the answers

    Which statement best summarizes the Invisible Hand theory?

    <p>Markets align self-interest with the social good.</p> Signup and view all the answers

    Why is the term price system often used to describe the market system?

    <p>Prices are used to allocate resources.</p> Signup and view all the answers

    In the United States, which primarily determines how cars are produced?

    <p>Market dynamics</p> Signup and view all the answers

    Which of the following could be an outcome from spontaneous order?

    <p>Artistic styles in culture</p> Signup and view all the answers

    What does a rational individual choose based on a given opportunity cost?

    <p>The option with the highest personal benefit.</p> Signup and view all the answers

    Which of the following is not one of the three economic questions faced by all societies?

    <p>How to eliminate scarcity</p> Signup and view all the answers

    Professor Bowles suggested that your educational experience is likely to be more successful if approached through which framework?

    <p>Spontaneous Order</p> Signup and view all the answers

    Which of the following will not cause a shift of the PPC outward?

    <p>Decreased labor force</p> Signup and view all the answers

    What occurs as a result of Laissez Faire policies?

    <p>Promotes increased specialization.</p> Signup and view all the answers

    For two states to benefit from specialization and trade, which is required?

    <p>Differences in both production methods and resources</p> Signup and view all the answers

    Why do farmers in Idaho produce potatoes instead of oranges?

    <p>Self-interest in crop choices.</p> Signup and view all the answers

    If the production possibility curve shows decreasing marginal opportunity costs, what shape would it likely have?

    <p>Bowed out</p> Signup and view all the answers

    Under which condition does the principle of increasing marginal opportunity cost not apply?

    <p>All inputs are equally useful in production</p> Signup and view all the answers

    What has primarily contributed to economic growth in the last 200 years?

    <p>Development of markets</p> Signup and view all the answers

    What benefit does trade provide to countries that specialize their production based on comparative advantage?

    <p>Both produce and consume more</p> Signup and view all the answers

    Which factor contributes to higher wages in the U.S. compared to Mexico?

    <p>All of the above</p> Signup and view all the answers

    Given an hourly wage of $16 in the U.S. and $4 in Mexico, where should production be located for efficiency?

    <p>In Mexico for lower cost per unit</p> Signup and view all the answers

    What primary factor led to an increase in average income per capita starting around 1750?

    <p>Both A and B</p> Signup and view all the answers

    By driving interest rates up, the Federal Reserve is trying to shift the:

    <p>AD curve left.</p> Signup and view all the answers

    What term best describes a U.S. economy increasingly controlled by a small group in a resource allocation role?

    <p>From a market toward Feudalism</p> Signup and view all the answers

    Which system is characterized by critical importance placed on individual freedom?

    <p>Market system</p> Signup and view all the answers

    Along a given Short Run Aggregate Supply Curve (SAS), the Price level (P) is ________ and Wages (W) are ________.

    <p>constant; variable.</p> Signup and view all the answers

    Which thinkers supported a society based on markets and representative government?

    <p>Locke and Smith</p> Signup and view all the answers

    As the price level (P) increases along the SAS curve, what happens to profits?

    <p>Profits improve causing firms to produce more.</p> Signup and view all the answers

    What effect does an increase in P have ceteris paribus?

    <p>Increase profits and move the economy up the SAS curve.</p> Signup and view all the answers

    Markets are effective in producing goods efficiently because they:

    <p>Harness self-interest</p> Signup and view all the answers

    If wages (W) increase, what is the most likely consequence?

    <p>Decrease profits and move the economy down the SAS curve.</p> Signup and view all the answers

    Private property is a significant element of which economic system?

    <p>Market system</p> Signup and view all the answers

    The SAS is most likely to shift to the right if:

    <p>Wages decrease.</p> Signup and view all the answers

    In terms of American institutions, which economic and political systems are aligned with Locke and Smith respectively?

    <p>Economic; Smith; political; Locke</p> Signup and view all the answers

    In 'The Wealth of Nations', what did Adam Smith advocate for?

    <p>The efficacy of the Market system</p> Signup and view all the answers

    Which of the following factors will not shift the long-run aggregate supply curve right?

    <p>An increase in the money supply.</p> Signup and view all the answers

    If the economy is in an inflationary gap, what is likely to happen eventually?

    <p>Input prices will rise and output will fall.</p> Signup and view all the answers

    What did John Locke argue regarding individual rights?

    <p>All individuals have inherent rights</p> Signup and view all the answers

    A market economy typically results in efficient production because:

    <p>Non-efficient producers are allowed to fail</p> Signup and view all the answers

    What would the Federal Reserve likely do if the economy is experiencing an inflationary gap?

    <p>Raise interest rates.</p> Signup and view all the answers

    Compared to the market system, what is a characteristic of both feudalism and mercantilism?

    <p>Decisions are made by central authorities</p> Signup and view all the answers

    In 2022, most economists placed some blame for the inflation rate on:

    <p>Both A and B are correct.</p> Signup and view all the answers

    Households in an economy are primarily found on which side of the goods and factor markets?

    <p>Supply side of factor markets and demand side of goods markets</p> Signup and view all the answers

    Which statement is not consistent with the law of supply?

    <p>Quantity supplied of a good is inversely related to the good's price.</p> Signup and view all the answers

    Graphically, a change in price causes:

    <p>A movement along a given supply curve, not a shift.</p> Signup and view all the answers

    If the price in a market is above its equilibrium level, there will be a:

    <p>Surplus and downward pressure on price.</p> Signup and view all the answers

    When quantity supplied is greater than quantity demanded, prices tend to:

    <p>Fall.</p> Signup and view all the answers

    A decrease in equilibrium price and a decrease in equilibrium quantity is most likely the result of:

    <p>A decrease in demand.</p> Signup and view all the answers

    Which of the following is not associated with Keynesian economics?

    <p>A policy prescription of Laissez Faire.</p> Signup and view all the answers

    Classical economics would argue:

    <p>All of the above are correct.</p> Signup and view all the answers

    Which contributed to the development of Keynesian economics?

    <p>All of the above are correct.</p> Signup and view all the answers

    A machinist who loses her job due to imports and cannot find another job due to the lack of jobs for machinists would most likely be classified as which type of unemployment?

    <p>Structural.</p> Signup and view all the answers

    Which of the following is the most likely cause of cyclical unemployment?

    <p>A recession.</p> Signup and view all the answers

    Following which economic event did inflation become a problem?

    <p>Covid Pandemic.</p> Signup and view all the answers

    The total labor force is 100,000 out of a possible working-age population of 300,000. The total number of unemployed is 5,000. What is the unemployment rate?

    <p>5.0 percent.</p> Signup and view all the answers

    The General Theory supported __________ ; Wealth of Nations argued _________.

    <p>Active government fiscal policy; against a policy of Laissez Faire.</p> Signup and view all the answers

    The business cycle consists of several stages or phases. Which is the accurate sequence?

    <p>Recession, trough, upturn, peak.</p> Signup and view all the answers

    Who ultimately determines what to produce in a market economy?

    <p>Households and consumers</p> Signup and view all the answers

    Which is an example of the government fulfilling its role as an actor in the economy?

    <p>Establishing labor laws regulating employment practices</p> Signup and view all the answers

    What is a role of the government as a referee in the U.S. market-based economy?

    <p>Prosecuting cases of corporate fraud</p> Signup and view all the answers

    Which of the following logically follows a cause-and-effect relationship?

    <p>20th century socialism; inefficient economy</p> Signup and view all the answers

    What economic justification does the U.S. government have for producing public goods?

    <p>To provide services that the market fails to deliver</p> Signup and view all the answers

    According to Professor Bowles, what is a major consequence of the development of the market system in Europe?

    <p>Economic growth based on enlightenment ideas</p> Signup and view all the answers

    Which concept is directly related to John Locke's views on individuals being free and equal?

    <p>Rule of law and democratic governance</p> Signup and view all the answers

    In a Mercantilist system, what primarily determines production?

    <p>Political decisions and government control</p> Signup and view all the answers

    In the market system, how do prices inform consumer purchasing decisions?

    <p>They establish the quantity of goods for purchase.</p> Signup and view all the answers

    What happens to labor demand as it becomes more scarce in a market system?

    <p>Labor becomes more valuable, increasing wage rates.</p> Signup and view all the answers

    What is a likely implication of increasing prices of new cars?

    <p>Increased demand for used cars.</p> Signup and view all the answers

    When consumer incomes increase, what is expected to happen to the demand for normal goods?

    <p>Demand for normal goods will increase.</p> Signup and view all the answers

    According to the law of supply, what happens when the price of a good increases?

    <p>The quantity supplied increases.</p> Signup and view all the answers

    If the price of gas decreases, what is the expected outcome?

    <p>Quantity demanded will increase.</p> Signup and view all the answers

    Which of the following options describes the effectiveness of the invisible hand in a market economy?

    <p>It effectively limits the problem of unemployment.</p> Signup and view all the answers

    What does Robinson Crusoe produce annually in his one-person economy?

    <p>80 fish and two fishing poles.</p> Signup and view all the answers

    What is a likely outcome if Robinson Crusoe breaks one fishing pole during the year?

    <p>Depreciation is one fishing pole.</p> Signup and view all the answers

    Which represents an economy's overall output or income?

    <p>Total production of final goods and services.</p> Signup and view all the answers

    Which equation correctly represents GDP?

    <p>GDP = C + I + G + X - M.</p> Signup and view all the answers

    What is the NDP calculation for the economy if GDP is $290 trillion and depreciation is $15 trillion?

    <p>$275 trillion.</p> Signup and view all the answers

    What can be the effect of a recession in Europe on U.S. exports?

    <p>Decrease in U.S. exports.</p> Signup and view all the answers

    If nominal GDP doubles while prices also double, what happens to real GDP?

    <p>Remains constant.</p> Signup and view all the answers

    What happens to the aggregate demand curve if the U.S. dollar depreciates against the Mexican Peso?

    <p>It shifts right.</p> Signup and view all the answers

    Which component is NOT included in Aggregate Income?

    <p>Transfer payments.</p> Signup and view all the answers

    What is the price index (GDP deflator) when nominal GDP is $10 trillion and real GDP is $5 trillion?

    <p>2.00.</p> Signup and view all the answers

    Which option would likely shift the aggregate demand curve to the right?

    <p>Increase in government spending.</p> Signup and view all the answers

    What defines inflation?

    <p>The change in a price index.</p> Signup and view all the answers

    Study Notes

    Economic Decision Rule

    • Individuals choose the option that benefits them the most.

    Invisible Hand Theorem

    • This theory depends on individuals being rational and self-interested in their choices.

    Adam Smith

    • Adam Smith, author of "The Wealth of Nations", believed that a market-based economic system is superior to mercantilism for national wealth.
    • He argued that a market system promotes efficient production of goods and results in the right mix of goods being produced.

    Invisible Hand Theorem

    • The market system operates based on individual choices and competition.
    • The market system will produce goods people want and demand efficiently.

    Scarcity

    • Scarcity of resources leads to rationing, a mechanism to distribute scarce goods.

    Law of Demand

    • As price increases, the quantity demanded decreases.

    Law of Supply

    • As price increases, the quantity supplied increases.
    • The supply of a good will increase if there’s new technology, input cost reduction, or more businesses enter the market.
    • The supply of a good will decrease if there is less technology, input cost increase, or if less businesses enter the market.

    Market System

    • The market system uses prices to allocate resources and determine the quantity of goods produced.

    Trade

    • The market system allows for voluntary trade based on comparative advantage.
    • Trade increases efficiency in the distribution of goods.

    Opportunity Cost

    • Opportunity Cost is the value of the best alternative foregone.
    • Rational individuals maximize their benefits by choosing the option with the lowest opportunity cost.

    Laissez-Faire

    • Laissez-Faire policies promote specialization and trade.
    • They lead to gains for both individuals and the economy.

    Production Possibility Curve (PPC )

    • The PPC illustrates the potential production combination of goods that an economy can produce with given resources.
    • An outward shift in the PPC means increased production potential, often resulting from better technology, more labor, or more capital resources.

    Comparative Advantage

    • When a country specializes in producing goods with a lower opportunity cost, they gain a comparative advantage.
    • This specialization and subsequent trade can benefit both countries involved.

    Market-Based Economy

    • In a market-based economy, the government acts as a referee for fair play, enforcing contracts and property rights.
    • The government also provides public goods, promotes competition, and tackles issues like fraud and corruption.

    Mercantilism

    • Mercantilism characterized economies where the government controlled production, trade, and resources to generate wealth.

    Socialism

    • Socialism emphasizes collective ownership and government control over production and resources, typically with the goal of a more equitable distribution of wealth.

    Market System and Price System

    • The market system heavily relies on prices to communicate information about supply and demand.
    • Prices determine the quantity of goods purchased, the jobs workers choose, and what firms produce.

    Labor Market

    • Labor is a key factor of production.
    • The price of labor, known as the wage rate, is determined by the supply and demand for labor.
    • When labor becomes scarcer, the price of labor, the wage, is likely to increase.

    Surplus and Shortage

    • A surplus occurs when the quantity supplied exceeds the quantity demanded.
    • A shortage occurs when the quantity demanded exceeds the quantity supplied.
    • In a functional market system, surpluses and shortages tend to be temporary as prices adjust to balance the supply and demand.

    Changes in Demand

    • A decrease in the price of a substitute good will cause a decrease in demand for the original good.
    • An increase in consumer income will cause an increase in demand for normal goods but a decrease in demand for inferior goods.

    Changes in Supply

    • An increase in the cost of production will decrease the supply of a good.
    • An improvement in technology used for production can increase the supply of a good.

    Market Equilibrium

    • Market equilibrium is achieved when the quantity supplied equals the quantity demanded at a specific price.
    • When the current price is above the equilibrium price, a surplus results.
    • When the current price is below the equilibrium price, a shortage results.

    Government Role in the Market System

    • The government has an important role in regulating the market system to ensure fairness and prevent negative externalities.
    • The government typically regulates markets by setting basic rules, enforcing contracts, preventing fraud, and providing public goods.

    Role of Enlightenment Ideas

    • Enlightenment ideas of individual freedom and reason played a key role in the development and adoption of the market system.
    • The market system is built upon the concept that individual freedom allows for rational choices that contribute to social wealth.

    Key Figures in Market Economy

    • John Locke's ideas about individual rights and freedom provided a philosophical foundation for the development of market systems.
    • Adam Smith further developed the theory of the free market, advocating for limited government intervention and allowing the market to dictate production and distribution of goods.

    Price System and the Market

    • Prices change based on changes in supply and demand
    • Prices help to allocate resources
    • Prices help to answer the question of what to produce

    Supply and Demand

    • Better technology causes an increase in supply, leading to lower prices
    • A change in the price of a good causes a change in quantity demanded
    • Quantity supplied of a good is directly related to the good's price
    • A change in price causes a movement along a given supply curve, not a shift
    • If the price is above the equilibrium level there will be a surplus and downward pressure on price
    • When quantity supplied is greater than quantity demanded, prices tend to fall
    • The phrase "price system" is often used to describe the market system
    • A decrease in equilibrium price and a decrease in equilibrium quantity is most likely the result of a decrease in demand

    Classical Economics

    • Classical economics was interested in economic growth
    • Classical economics was also interested in technological innovation

    Keynesian Economics

    • Keynesian economics is most interested in recessions
    • Keynesian economists suggest that the best response to a recession is to increase aggregate demand with higher government spending
    • The Great Depression contributed to the development of Keynesian economics
    • Keynesian economics is focused on the short run and the idea that markets do not always clear quickly
    • Keynesian economics argues that markets do not always clear

    Unemployment

    • The 2008 Financial Crisis resulted in the loss of more full-time jobs than the COVID pandemic
    • A machinist who loses her job due to imports and cannot find another job due to the lack of available jobs would likely be classified as having structural unemployment
    • Technological innovation and competition from imports are causes of structural unemployment
    • A recession is the most likely cause of cyclical unemployment
    • The COVID pandemic resulted in the fastest recovery of unemployment to its pre-event level

    Inflation

    • Inflation became a problem following the COVID pandemic
    • The 2024 Financial Crisis is the most recent event to which inflation can be attributed

    Economic History

    • John Maynard Keynes wrote The General Theory while Adam Smith wrote Wealth of Nations
    • The General Theory supported the idea that the labor market would not clear quickly
    • Wealth of Nations argued in favor of the "invisible hand" theory
    • The business cycle consists of several stages or phases; recession, peak, trough, upturn.

    GDP

    • GDP represents an economy’s output or income
    • GDP is the market value of an economy's production of final goods and services
    • GDP is equal to Aggregate Income
    • GDP = C + I + G + (X - M)
    • NDP (Net Domestic Product) is GDP less depreciation

    Price Indexes and Inflation

    • The GDP Price Deflator is used to calculate real GDP from nominal
    • Inflation is the percentage change in a price index

    Aggregate Demand

    • Aggregate Demand (AD) = C + I + G + (X - M)
    • An increase in government spending shifts the AD curve to the right
    • A decrease in exports, as a result of a recession in a major trading partner, shifts the AD curve to the left.
    • A depreciation of the U.S. Dollar against foreign currencies shifts the AD curve to the right
    • The U.S. government responded to the COVID-19 recession with increased spending and lower interest rates
    • The Federal Reserve’s decision to raise interest rates is an attempt to shift the AD curve left

    Short Run Aggregate Supply (SAS)

    • The SAS curve assumes that input prices are fixed
    • An increase in the price level (P), while wages are fixed, causes an increase in profits and a shift up the SAS curve
    • An increase in wages causes a decrease in profits and a shift left of the SAS curve

    Long Run Aggregate Supply (LAS)

    • The LAS curve assumes that all inputs are fully employed
    • Factors that shift the LAS curve to the right include:
      • An increase in the size of the labor force
      • Improvements to institutional arrangements
      • Increases in productivity

    Recessions and Inflation

    • An economy in an inflationary gap will experience rising input costs which, in turn, will cause output to fall and move the economy down the SAS curve.
    • The Federal Reserve can help to solve an inflationary gap by raising interest rates

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    Description

    Test your understanding of key economic principles such as the Invisible Hand Theorem, the Law of Demand and Supply, and the role of scarcity. This quiz covers fundamental concepts introduced by Adam Smith and how individual choices impact market outcomes. Challenge yourself to apply these theories and increase your economic literacy.

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