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essentials of economics

Questions and Answers of Essentials of Economics

9 The LRATC reflects the costs of production for plants of various sizes. When economies of scale are present (that is, when larger plants have lower per unit costs of production), LRATC will
8 The ability to plan a larger volume of output often leads to cost reductions. These cost reductions associated with the scale of one's operation result from (a) a greater opportunity to employ mass
7 The law of diminishing returns explains why a firm's short-run marginal and average costs will eventually rise as the rate of output expands. When diminishing marginal returns are present,
6 The firm's short-run average total cost curve will tend to be U-shaped. When output is small (relative to plant size), average fixed cost (and therefore ATC) will be high.However, as output
5 Economic profit (loss) results when a firm's sales revenues exceed (are less than) its total costs, both explicit and implicit. Firms that are making the market rate of return on their assets will
4 Since accounting procedures often omit costs, such as the opportunity cost of capital and owner-provided services, accounting costs generally understate the opportunity cost of producing a good. As
3 Economists employ the opportunity cost concept when figuring a firm's costs. Therefore, total cost includes not only explicit (money) costs but also implicit costs associated with the use of
2 The demand for a product indicates the intensity of consumers' desire for the item.The (opportunity) cost of producing the item indicates the desire of consumers for other goods that must now be
I The business firm is used to organize productive resources and transform them into goods and services. There are three major business structures- proprietorships, partnerships, and corporations.
7 What's Wrong with This Way of Thinking?"Economics is unable to explain the value of goods in a sensible manner. A quart of water is much cheaper than a quart of oil. Yet water is essential to both
6 In 1971, residential electricity in the state of Washington cost about 1 cent per kilowatt-hour. In nearby Montana, it cost about 2 cents. In Washington, the average household used about 1200
5 Do you think that television advertising-as it is conducted by the automobile industry, for example-is wasteful? If so, what would you propose to do about it?Indicate why your proposal would be an
4 What are the major factors that influence a product's price elasticity of demand?Explain why these factors are important.
3 The following chart presents data on the price of fuel oil, the amount of it demanded, and the demand for insulation. (a) Calculate the price elasticity of demand for fuel oil as its price rises
2 "As the price of beef rises, the demand of consumers will begin to decline. Economists estimate that a 5 percent rise in beef prices will cause demand to decline by I percent."Indicate the two
I What impact did the substantially higher gasoline prices of the 1970s have on (a) the demand for big cars, (b) the demand for small cars, (c) the incentive to experiment and develop electric and
8 The precise effect of advertising on consumer decisions is difficult to evaluate. The magnitude of advertising by profit-seeking business firms is strong evidence that it influences consumer
7 Both functional and subjective factors influence the demand for a product. Some goods are chosen because they have "snob appeal." Goods may also have a "bandwagon appeal," fulfilling a consumer's
6 Price elasticity reveals the responsiveness of the amount purchased to a change in price. When there are good substitutes available and the item forms a sizable component of the consumer's budget,
5 Time, like money, is scarce for consumers. Consumers consider both time and money costs when they make decisions. Other things constant, a reduction in the time cost of consuming a good will induce
4 Consumers usually gain from the purchase of a good. The difference between the amount that consumers would be willing to pay for a good and the amount they actually pay is called consumer surplus.
3 In addition to price, the demand for a product is influenced by the (a) level of consumer income, (b) distribution of income among consumers, (c) price of related products (substitutes and
2 The market demand curve reflects the demand of individuals. It is simply the horizontal sum of the demand curves of individuals in the market area.
I The demand schedule indicates the amount of a good that consumers would be willing to buy at each potential price. The first law of demand states that the quantity of a product demanded is
12 Why was the unemployment rate so high during the 1970s? Was the high unemployment rate indicative of a sluggish demand for labor? What do you think will happen to the unemployment rate in the late
I I Why do you think that the economic growth rate of the United States has been so slow compared to that of other industrial nations? Should we be concerned about our sagging growth rate? Why or why
10 How does the microeconomic approach to the problems of unemployment and economic growth differ from the traditional emphasis on monetary and fiscal policy?Is the microeconomic approach a
9 "The economic events of the 1970s illustrate the failure of macroeconomic policy.If economists were as smart as they let on, we would have experienced neither the high rate of unemployment nor the
8 The early part of this chapter outlined the economic conditions present when Ronald Reagan became president. How have conditions changed? Has his program effectively combated inflation,
7 The chairman of the Council of Economic Advisers has requested that you write a short paper on how we can permanently reduce the rate of unemployment. Be sure to make specific proposals. Indicate
6 Outline the major economic problems that plagued the U.S. economy during the 1970s. How would each of the following explain these problems: (a) Keynesians,(b) monetarists, (c) supply-side
5 The analysis summarized by Exhibits 7 and 8 assumes adaptive expectations. How would the outcome differ if people adjusted quickly to changes in macropolicy, as the rational expectations hypothesis
4 "The high rates of interest during the 1970s are reflective of the Fed's tight money policies. If the Fed would loosen monetary growth a little more, lower interest rates and more rapid economic
3 Compare and contrast the rational expectations hypothesis with the adaptive expectations hypothesis. If expectations are formed "rationally" rather than "adaptively,"will it be easier or more
2 State in your own words the adaptive expectations hypothesis. Explain why adaptive expectations imply that macroacceleration will only temporarily reduce the rate of unemployment.
1 "In order to achieve the nonperfectionist's goal of high enough output to give us no more than 3 percent unemployment, the price index might have to rise by as much as 4 to 5 percent per year."
18 Exemption of youthful workers from minimum wage legislation and the institution of youth work scholarships are two reforms that many economists believe would effectively combat the high rate of
17 The unemployment compensation program was designed to minimize the hardship of unemployment. Unfortunately, the system also encourages unemployment, since it(a) induces employers to make more
16 During the 1970s there was a rapid growth in the number of people under age 35 and over age 65. These demographic changes increased the normal rate of unemployment, retarded the growth of real
15 If the United States wants to accelerate its sagging growth rate, most economists believe that a higher rate of capital formation will be necessary. Currently, the U.S.tax structure tends to
14 Unemployment in the 1980s differs from that of the 1930s in several respects. In the 1930s, unemployment generally involved the loss of jobs by prime-age workers who were solely responsible for
13 In recent years, there has been an upsurge in interest in microeconomic policy designed to deal with problems of sluggish economic growth, high unemployment, and inflation. The microapproach
12 During the 1970s, the economy of the United States was plagued by a declining growth rate and an accelerating inflation rate. The growth rate of the U.S. economy was poor not only by historical
II Incorporation of expectations into our macroeconomic thinking indicates the limitations of macropolicy. To the extent that decision makers adjust to demand-stimulus policies, persistent
10 Expectations as to the future rate of inflation will influence money interest rates.During a time of inflation, money interest rates will include an inflationary premium.Although expansionary
9 The critics of the rational expectations view argue that it is unrealistic to assume that people possess the knowledge necessary to respond consistently to changes in macropolicy.Thus, they believe
8 Given rational expectations, the anticipated impact of a macropolicy change is unpredictable. Discretionary macropolicy is likely to be a major source of instability.The implication of this theory
7 According to the rational expectations hypothesis, people will (a) comprehend the impact of macropolicy changes on prices and employment and (b) adjust their choices accordingly and rapidly. For
6 Collective choice theory indicates that strong political pressures exist that are likely to lead to a stop-go macropolicy with an inflationary bias. Such a policy will cause the annual
5 In the long run, there is no evidence that inflationary policies can reduce the unemployment rate- that inflation can be "traded off'' for unemployment. Thus, the long-run Phillips curve is
4 The initial effects of macrodeceleration, according to the adaptive expectations hypothesis, will also be on output rather than on prices. The macrodeceleration will cause output to slow and the
3 According to the adaptive expectations hypothesis, individuals base their expectations on the immediate past. The expectations in the short run lag behind actual events. In this view, if an
2 Expansionary macropolicy may be able to reduce temporarily the rate of unemployment, because decision makers are (a) unsure whether the increase in current demand is temporary or permanent, (b)
I Prior to the 1970s, there was evidence to suggest that higher rates of inflation were associated with lower rates of unemployment. This relationship could be mapped out on a curve, known as the
3. If the highest marginal rates could be reduced 10 percent without any loss of tax revenue to the Treasury, would you favor the reduction? Why or why not?
2. Do you think that the marginal earnings of persons with high incomes should be taxed at rates of 50 percent or more? Why or why not?
!. Do you think the rich should pay a higher percentage of their income in taxes than do the poor? Why or why not?
6 Indicate why you either agree or disagree with the position that economic instability would be reduced if a monetary rule requiring the Federal Reserve to increase the money supply at a constant
5 Indicate how monetarists and Keynesians differ on the following issues: (a) The impact of monetary policy on the level of output and employment (b) The impact of fiscal policy on the level of
4 "Inappropriate monetary and fiscal policy was the major cause of economic insta- bility during the 1930s, and it is the major cause of economic instability in the 1970s." Evaluate this view,
3 Suppose that you have just been appointed chairman of the Council of Economic Advisers. Prepare a press release outlining your views on unemployment, inflation, and proper macropolicy, both
2 Will a budget deficit be more expansionary if it is financed by borrowing from the Federal Reserve or from the general public? Explain.
1 What impact do Keynesians believe that an increase in the supply of money would have on (a) interest rates, (b) the level of investment, (c) aggregate demand, (d) employ- ment, and (e) prices?
9 Given the economic complexities of properly timing macropolicy and the short- sighted bias of the collective decision-making process, monetarists are very pessimistic about the likelihood that
8 Monetarists believe that, if erratic monetary policy were eliminated, the economy would be relatively stable. They stress that consumption, the major component of na- tional income, is a function
7 Monetarists do not believe that a pure fiscal policy has much effect on income and employment. Since a pure fiscal action must be financed by borrowing from private investors, monetarists believe
authorities will inevitably decelerate monetary growth. This deceleration will lead to an economic slowdown. Monetarists argue that the major economic recessions of the past were the result of
6 Monetarists believe that economic instability is almost exclusively the result of er- ratic fluctuations in the money supply. Monetary acceleration initially leads to a higher real income, but
5 Monetarists believe that there is a direct link between the money market and other basic aggregated markets. Thus, an increase in the supply of money will create an ex- cess supply of money
4 There are two ways in which the Treasury can finance a deficit: by borrowing from the public and borrowing from the Fed. The former method will increase the supply of bonds (and reduce the
3 According to the modern Keynesian view, expansionary monetary policy will reduce the interest rate, thereby stimulating investment and leading to an increase in aggre- gate demand. A restrictive
2 Many early Keynesians, influenced by the Great Depression, thought that an in- crease in the supply of money would be completely offset by a reduction in its velocity. Under these conditions,
1 The early classical economists thought that the velocity of money was constant and that real output was independent of monetary factors. Therefore, an increase in the stock of money meant
6 What's Wrong with This Way of Thinking?"When the government runs a budget deficit, it simply pays its bills by printing more money. As the newly printed money works its way through the economy, it
5 How will the following actions affect the money supply?(a) A reduction in the discount rate(b) An increase in the reserve requirements(c) Purchase by the Fed of $ 1 0 million of U.S. securities
4 Explain how the creation of new reserves would cause the supply of money to increase by some multiple of the newly created reserves.
3 "People are poor because they don't have very much money. Yet central bankers keep money scarce. If poor people had more money, poverty could be eliminated."Explain the confused thinking this
2 What makes money valuable? Does money perform an economic service? Explain.Could money perform its function better if there were twice as much of it? Why or why not?
1 Why can banks continue to hold reserves that are only a fraction of the demand deposits of their customers? Is your money safe in a bank? Why or why not?
9 The Deregulation and Monetary Control Act of 1 980 (a) dismantled many of the regulations that restricted competitiveness among depository institutions and (b) imposed uniform reserve requirements
8 The Federal Reserve and the U.S. Treasury are two distinct, different agencies.The Fed is concerned primarily with the money supply and the establishment of a stable monetary climate. The Treasury
7 At the beginning of each year the Fed announces a target range for the growth of monetary aggregates. In a dynamic setting, monetary policy can best be judged by the rate of change in the money
6 The Fed has three major tools with which to control the money supply.(a) Establishment of the Required Reserve Ratio. Under a fractional reserve banking system, reserve requirements limit the
5 The Federal Reserve System is a central banking authority designed to provide a stable monetary framework for the entire economy. It establishes regulations that determine the supply of money. It
4 Recent legislation and regulatory changes have altered the structure of the banking industry. Currently, savings and loan associations, mutual savings banks, and credit unions offer services,
3 Banking is a business. Banks provide their depositors with safekeeping of money, check-clearing services on demand deposits, and interest payments on time deposits.Banks derive most of their income
2 There is some debate among economists as to precisely how the money supply should be defined. The narrowest and most widely used definition of the money supply (M- 1 ) includes only (a) currency in
l Money is anything that is widely accepted as a medium of exchange. It also acts as a unit of account and provides a means of storing current purchasing power for the future. Without money, exchange
7 Given current economic conditions, how would an increase in aggregate demand influence output, employment, and price? Discuss.
6 When the Reagan administration took office, its fiscal strategy was to cut taxes and government expenditures. The administration believed that this strategy, with time, would effectively combat the
4 Empirical studies indicate that males in their prime earning years do not adjust their work time significantly in response to a change in their after-tax wage rates. Do these findings indicate that
3 If unemployed resources are present, an economy is not operating on the vertical portion of its aggregate supply curve. True, false, or uncertain? Discuss.
2 "An increase in aggregate expenditures will always lead to more income because one person's spending is another person's income. Maintenance of a high level of expenditures is the key to
1 Indicate the impact of each of the following on aggregate supply in the United States: (a) An increase in the world price of wheat, a major export product of the United States (b) The discovery of
11 The critics of the Reagan plan charged that the loss of tax revenues would be sub- stantial, leading to huge budget deficits. They believed that the plan would exert little impact on aggregate
10 When the Reagan administration took office in 1981, its fiscal strategy was to reduce government expenditures and tax rates. Since the proponents of the Reagan plan believed that lower tax rates
9 The economic policy of the 1970s was characterized by budget deficits and rising marginal tax rates. The budget deficits added to aggregate demand, while the higher tax rates reduced aggregate
8 When fiscal policy alters marginal tax rates, it will thus exert an impact on aggregate supply as well as on aggregate demand. Other things constant, higher marginal tax rates tend to reduce
7 Changes in marginal tax rates alter the incentive of individuals to work, invest, save, and pay taxes. Other things constant, an increase in marginal tax rates will (a) decrease the supply of labor
6 Factors such as unfavorable weather conditions, a decline in capital assets, a decline in the average skill (or educational) level of the labor force, higher prices for imported goods, and falling

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