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essentials of economics

Questions and Answers of Essentials of Economics

5 With the passage of time, factors such as net capital formation, discovery of additional natural resources, technological advances, improvements in the skill (and educational) level of the work
4 It is useful to divide a real aggregate supply curve into two distinct segments: (a) a Keynesian range, within which output can be fully responsive to an increase in aggregate demand, and, beyond
3 If an economy is operating at its supply-constrained output level, an increase in aggregate demand will lead to higher prices rather than to a larger sustained rate of real output.
2 The three major determinants of aggregate supply are (a) the utilization level of resources, (b) the efficiency with which the resources are applied, and (c) the current state of technology. An
1 Both aggregate demand and aggregate supply influence the levels of output, employ- ment, and prices.
5 What's Wrong with This Way of Thinking? "Keynesians argue that a budget deficit will stimulate the economy. The historical evidence is highly inconsistent with this view. A $12 billion budget
4 What are automatic stabilizers? Explain the major advantage of automatic stabilizers.
3 "In the real world, it is wrong to expect that fiscal policy will be symmetric. Politicians will be glad to run a deficit during bad times to stimulate the economy, but they will surely fail to
2 If an economy were experiencing 7 percent unemployment while prices were rising at a 2 percent annual rate, indicate your view on appropriate fiscal policy. Explain your reasons.
1 Suppose that you are a member of the Council of Economic Advisers. The president has asked you to prepare a statement on "What is the proper fiscal policy for the next 12 months?" Prepare such a
10 The burden of the national debt has long been a controversial issue. It is not true that the debt will eventually have to be paid off. Nor does the debt indicate that the federal government is
9 Unemployment compensation, corporate taxes, and the progressive income tax act as automatic stabilizers because they automatically contribute to a budget deficit during slack times and to a budget
8 Economic theory indicates that there are limitations on the expected effectiveness of discretionary fiscal policy as a stabilization tool. There is often a lag between the time when a policy change
7 The full-employment budget is a measure of what expenditures and revenues would be if the economy were at full employment. It provides a useful summary statistic on the degree to which deficits or
6 Proper timing is vital for the success of fiscal policy. If a fiscal action is not properly timed, it may be counterproductive. Restrictive fiscal policy, if applied during a reces- sion, will
5 The Keynesian view rejects the idea that the government's budget should be balanced annually. Keynesian analysis implies that general economic conditions should be the prime determinant of fiscal
4 Restrictive fiscal policy (higher taxes or reduced government expenditures) can be used to combat inflationary pressure. In the face of inflation, a planned government surplus would be in order.
3 A tax reduction can also be used to push an economy toward full employment. When taxes are reduced, the disposable income of consumers will increase, stimulating con- sumption. At the higher level
2 When an economy's resources are underutilized, an increase in government expenditures, holding taxes constant, will increase aggregate demand and push the economy to a higher level of real income
1 Fiscal policy is a tool that can be used to moderate economic disturbances that arise from fluctuations in aggregate demand.
3. "The national debt is a mortgage against the future of our children and grandchildren. We are forcing them to pay for our irresponsible and unre- strained spending." Evaluate.
2. Do we owe the national debt to ourselves? Does this mean that the size of the debt is of little concern? Why or why not?
1. Can the government or a private corporation have continual debt out- standing? Explain.
7 What is the multiplier principle? What determines the size of the multiplier? Does the multiplier principle make it more or less difficult to stabilize the economy? Explain.
6 Explain the paradox of thrift.
5 Explain in your own words how the multiplier and accelerator reinforce each other to generate cyclical business conditions.
4 "The best cure for unemployment and recession is for everybody, including the gov- ernment, to tighten their belts, cut down on unnecesary spending, and forego luxury items until the recession is
3 How will each of the following factors influence the consumption schedule? (a) The expectation that consumer prices will rise more rapidly in the future (b) Pessimism about future employment
2 When is an economy in aggregate equilibrium? Explain in your own words why an economy will return to aggregate equilibrium from a position of excess aggregate de- mand or from a position of
1 Explain why it sometimes may be impossible for the plans of savers and investors to be fulfilled simultaneously.
11 Interaction between the multiplier and accelerator enhances the potential for eco- nomic instability. During expansion, an increase in investment serves to increase con- sumption, which in turn
10 The Keynesian model suggests that an increase in planned aggregate saving could cause problems. Higher planned saving would mean a reduction in planned consump- tion. Other things constant,
9 When resources are idle, each round of additional spending generated by the multi- plier will expand real output and employment. When there are few idle resources, the increased spending will be
8 It takes time for the secondary effects of the multiplier to be felt. It is usually thought that approximately one half of the multiplier effect will be felt during the first six months after an
7 According to the multiplier principle, independent changes in planned investment, government expenditures, and consumption have a magnified impact on income. Income will increase by some multiple
6 Aggregate demand determines income, output, and employment in the Keynesian model. Until the full-employment capacity is reached, increases in aggregate demand will generate higher levels of real
5 In the Keynesian model, there are many potential equilibrium levels of income, depending on the level of aggregate demand. Equilibrium may exist at an income level less than or greater than full
4 When an economy is in equilibrium, planned aggregate demand will be just equal to aggregate supply. If planned aggregate demand is temporarily less than output, busi- nesses will be unable to sell
3 In the Keynesian model, which includes government, planned aggregate demand is the sum of the planned consumption, investment, and government expenditures. Ag- gregate demand is the moving force in
2 The major determinants of investment are (a) current sales relative to the produc- tive capacity of the existing productive facilities, (b) expectations about future sales, and (c) the interest
1 The primary determinant of consumption is disposable income. As disposable income increases, consumption expenditures will rise, although in the short run they will gen- erally rise less rapidly
7 Explain why it matters whether inflation is accurately anticipated.
6 "My money wage rose by 6 percent last year, but inflation completely erased these gains. How can I get ahead when inflation continues to wipe out my increases in earn- ings?" Evaluate. Do you agree
5 Explain why even an efficiently functioning economic system will have some un- employed resources.
4 Why might the GNP be a misleading index of changes in output between 1900 and 1980 in the United States? Why might it be a misleading index of differences in output between the United States and
3 Indicate which of the following activities are counted as part of GNP and why: (a) The services of a housewife (b) Frank Murry's purchase of a 1979 Chevrolet (c) The purchase of 100 shares of AT&T
2 What is real GNP? How is it determined? Calculate the change in real GNP be- tween 1972 and 1981.
1 Why does a pound of beef add more to GNP than a pound of wheat? Does it reflect demand or costs? Comment.
13 Inflation is a general rise in the level of prices as measured by a price index. The rate of inflation in the 1970s for almost all Western nations was substantially higher than the rates during
12 Full employment resu lts when the rate of unemployment is normal, given the dynamic change and structural characteristics of the economy. Both public policy and changes in the composition of the
11 Cyclical unemployment re sults because aggregate demand for labor is insufficient to maintain full employment. A primary concern of macroeconomics is how cyclical unemployment can be minimized. If
10 Even an efficient exchange economy will experience some unemployment. Frictional unemployment resu lts because of imperfe ct information about available job openings and qualified applicants.
9 When GNP increases, the unemployment rate usually declines and output increases rapidly. Declining GNP is characterized by increasing unemployment, declining business conditions, and a low rate of
8 Economists frequently refer to four other income measures that are related to GNP:net national product, national income, personal income, and disposable income. All of these measures of income tend
7 Despite all its limitations, GNP is of tremendous importance because it is an ac- curate tool enabling us to identify short-term economic fluctuations. Without such a reliable indicator, economic
6 GNP is an imperfect measure of current production. It excludes household produc- tion. It fails to account for such negative side effects of current production as air and water pollution, adverse
5 GNP may increase because of an increase in either output or prices. Price indexes are used to measure the impact of price changes. Real GNP can be determined by ad- justing money GNP to account for
4 The major components of GNP as calculated by the resource cost-income approach are (a) wages and salaries, (b) self-employment income, (c) rents, (d) interest, (e) cor- porate profits, and (f)
3 When the expenditure approach is utilized, there are four major components of GNP: (a) consumption, (b) investment, (c) government, and (d) net exports.
2 Dollars act as a common denominator for GNP. Production of each final product is weighted according to its selling price. Alternatively, GNP can be calculated by add- ing up the dollar factor cost
1 Gross national product is a measure of the market value of the final goods and ser- vices produced during a specific time period.
7 "Political organization cannot reform human beings. We should not expect it to.The public sector is an alternative to the market. Political organization will influence the direction of human action
6 Which of the following are public goods: (a) an antimissile system surrounding Washington, D.C., (b) a fire department, (c) tennis courts, (d) Yellowstone National Park, (e) elementary schools?
5 "Economics is a positive science. Government by its very nature is influenced by philosophical considerations. Therefore, the tools of economics cannot tell us much about how the public sector
4 Do you think that special interest groups exert much influence on local government?Why or why not? As a test, check the composition of the local zoning board in your community. How many real estate
3 Do you think that real-world politicians adopt political positions in order to help their election prospects? Can you name a current political figure who consistently puts"principles above
2 If producers are to be provided with an incentive to produce a good, why is it important for them to be able to prevent nonpaying customers from receiving the good?
1 Explain in your own words what is meant by external costs and external benefits.Why may market allocations be less than ideal when externalities are present?
8 Public sector action may sometimes improve the market's efficiency and lead to an increase in the community's welfare, all individuals considered. However, the political process is likely to
7 Successful political candidates will seek to offer programs that voters favor. Voters, in turn, will be attracted to candidates who reflect the voters' own views and interests.In a democratic
6 The public sector is an alternative means of organizing economic activity. Public sector decision-making will reflect the choices of individuals acting as voters, politicians, financial
5 The public sector can improve the operation of markets by providing a stable economic environment.
4 Public goods are troublesome for the market to handle because nonpaying customers cannot easily be excluded. Since the amount of a public good that each individual receives is largely unaffected by
3 The market will tend to underallocate resources to the production of goods with external benefits and overallocate resources to those products that generate external costs.
2 Lack of competition may make it possible for a group of sellers to gain by restricting output and raising prices. There is a conflict between (a) the self-interest of sellers that leads them to
1 Two conditions must be met to achieve economic efficiency: (a) All activities that produce more benefits than costs for the individuals within an economy must be undertaken, and (b) activities that
7 A severe frost hit Brazil in July 1975, damaging the coffee crop. The 1976 harvest was 9.5 million bags, down from the 1975 harvest of 23 million bags. Since Brazil is the world's leading coffee
6 What's Wrong with This Way of Thinking?"Economists argue that lower prices will necessarily result in less supply. However, there are exceptions to this rule. For example, in 1970 ten-digit
5 "We cannot allow the price of gasoline to go any higher because it is as essential to the poor as to the rich. We cannot allow the rich to bid gasoline away from the poor. I would prefer to ration
4 (a) "The motivating force behind a market economy is individual self-interest."(b) "Cooperation among individuals is the keystone of a market system. Without cooperation there would be no exchange
3 Which of the following do you think would lead to an increase in the current demand for beef: (a) higher pork prices, (b) higher incomes, (c) higher feed grain prices,(d) a banner-year com crop,
2 How many of the following "goods" do you think conform to the general law of supply: (a) gasoline, (b) cheating on exams, (c) political favors from legislators, (d) the services of heart
1 What is the purpose of prices? Do prices do anything other than ration goods to those with the most dollar votes? Explain. What factors determine the price of a good?
12 Market prices communicate information, coordinate the actions of buyers and sellers, and provide the incentive structure that motivates decision-makers to act. The information provided by prices
1 1 The pricing system answers the three basic allocation questions in the following manner.(a) What goods will be produced? Additional units of goods will be produced only if consumers value them
10 When a price is fixed above the market equilibrium level, sellers will want to supply a larger amount than buyers are willing to purchase at the current price. A surplus will result.
9 When a price is fixed below the market equilibrium, buyers will want to purchase more than sellers are willing to supply. A shortage will result. Nonprice factors such as waiting lines, quality
8 The constraint of time temporarily limits the ability of consumers to adjust to changes in prices. With the passage of time, a price increase will usually elicit a larger reduction in quantity
7 Changes in input prices, technology, and other factors that influence the producer's cost of production will cause the entire supply curve to shift. An increase (decrease) in supply will cause
6 Changes in consumer income, prices of closely related goods, preferences, and expectation as to future prices will cause the entire demand curve to shift. An increase(decrease) in demand will cause
5 When a market is in long-run equilibrium, supply and demand will be in balance and the producer's opportunity cost will equal the market price. If the opportunity cost of supplying the good is less
4 Market prices will bring the conflicting forces of supply and demand into balance. If the quantity supplied to the market by producers exceeds the quantity demanded by consumers, price will decline
3 The law of supply states that there is a direct relationship between the price of a product and the amount supplied. Other things constant, an increase in the price of a product will induce the
2 The law of demand holds that there is an inverse relationship between price and amount of a good purchased. A rise in price will cause consumers to purchase less because they now have a greater
1 Because people want more of scarce goods than Nature has made freely available, a rationing mechanism is necessary. Competition is the natural outgrowth of the necessity for rationing scarce goods.
7 (a) Do you think that your work effort is influenced by whether or not there is a close link between personal output and personal compensation (reward)? Explain.(b) Suppose that the grades in your
6 Is exchange productive? If so, what does it produce? Who gains when goods are voluntarily exchanged?
5 Explain why parking lots in downtown areas of large cities often have several decks, whereas many of equal size in suburban areas usually cover only the ground level.
4 Explain why the percentage of college-educated women employed outside of the home exceeds the percentage of women with eight years of schooling who are engaged in outside employment.
3 It takes one hour to travel from New York City to Washington, D.C., by air but five hours by bus. If the airfare is $55 and the bus fare $35, which would be cheaper for someone whose opportunity

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